Few industries are as affected by changing economic market conditions as banking. Uncertain economic conditions necessitate changes in corporate strategy that directly impact the mix of IT projects and applications chosen to support the business. Within this ever-changing landscape, an IT portfolio management framework is essential to ensure IT spending supports rapidly changing business objectives. Using IT Portfolio management, a bank can identify the best project investments by analyzing the current IT portfolio in real-time-as the business environment changes.
Portfolio management is not a new concept to the banking industry-it has long been applied to balance risk and return on portfolios of loans, equities, and other asset classes. IT portfolio management derives from Dr Harry Markowitz's Nobel Prize winning Modern Portfolio Theory in economics. Similar to how fund managers balance a stock portfolio for risk, return, and to meet stated objectives, leading bank CIOs are starting to apply the same conceptual framework to managing an IT Portfolio.
During the recent 40 year low in interest rates which fueled a refinancing boom, IT spending priorities at mortgage banks shifted towards projects and systems that improved loan origination and fulfillment capacity. A 2004 MBA Technology Study found that 67 percent of IT spending supported origination functions and 33 percent supported servicing functions. In fact, not only did priorities shift, but the magnitude of spending pushed the mortgage line of business to be the second largest IT spending category within retail banks in recent years, according to TowerGroup.
Yet when it comes to future planning, how does a bank determine where to invest in IT? Looking at IT projects on a one-off basis is extremely limited. It takes a portfolio approach to determine and weight current business objectives, and then analyze and balance how the entire portfolio of projects and applications supports these objectives, accounting for risk, architecture, budget and resource constraints.
Within the context of a portfolio, the value of each IT project can be traded off simultaneously against each other project, to determine the relative priority and optimal selection of projects. Most mid to large size mortgage banks have 50 to 200 projects to select from and $10 million to $200 million discretionary IT budgets. For illustrative purposes, let's look at a simplified example in which a bank has an IT budget of $1.5 million, 12 IT people, and only four proposed projects to select from.
The four possible IT projects consist of a customer relationship management system that costs $1.3 million and requires eight people and four months to implement; a Web based loan origination system that costs $800,000 and requires six people and eight months to implement; an enterprise upgrade of 500 employees to Windows XP that costs $200,000 and requires four people and one month to implement; and a Web security system that costs $400,000 and requires six people for three months.
Where does the bank invest its limited budget and resources? It's confusing even in this simplified example that doesn't even account for dozens of other possible projects, existing systems, risk, dependencies, and architectural requirements. To start, determining and prioritizing business objectives is paramount. Will 2006 be another year of refinancing or one more skewed towards purchasing? Under a continued refinancing environment, the Web based Loan Origination System might help handle the volume of refinancing requests, and thus be rated as a higher priority project. The web security system might follow in priority to protect sensitive data and transactions. If refinancing slows down, the CRM system might be higher value given increased need to cross-sell within the existing customer base.
For one of the largest U.S. mortgage banks, IT strategic planning for 2004 began under the hypothesis that rates would increase along with growth in the economy. Higher rates suggested less refinancing volume. With a discretionary IT budget of $75 million, and 30 percent of IT projects correlated with interest rate changes, the bank used portfolio management during the fall planning cycle to weight projects that supported cross-selling, operational efficiencies and purchasing, higher than those projects conducive to large volumes of refinancing. When rates continued to stay low and heavy refinancing continued in the first quarter of last year, the bank used portfolio management software to analyze, in real-time, "middle of the road" scenarios and re-sequence certain projects towards the back-end of the year, when rates would likely increase into 2005.
This is but one example of the strategic value of portfolio management in the banking industry. There are many others. All demonstrate the importance-actually, the necessity-of banks of all stripes to integrate portfolio management into the IT strategic planning mix. This will ensure that IT spending supports banks' rapidly changing business objectives, helping them remain competitive in both the short- and long-term.
Mike Gruia is president of UMT and Daniel Theander is VP of UMT.
