Simplify to Succeed - IBM

Up to 70% of IT
spending by FIs goes
toward maintenance
and redevelopment.
Simplify to Succeed—Retail financial institutions in 2005
This can be seen in the fragmentation of their processes. For example, on the product delivery side,
they have tended to target one channel at a time (e.g., Internet or voice), leaving them with separate
channel silos, each with its own front-to-back operations for servicing, marketing and product design,
but with little lateral contact with other parts of the business. Similar structures have emerged in
manufacturing and operations, where business units have added new fulfilment processors incrementally.
So, while large FIs may have reached their desired operating scale, many have also lost the agility
of their smaller competitors.
From our extensive studies of performance improvement and cost reduction, we estimate that as much
as 60% to 80% of the functionality in silos may be redundant or duplicated in other parts of the
business. This weakens FIs’ performance and makes it harder for them to respond to fresh demands
for change.
Despite the reduction in barriers to cross-border commerce, hurdles to growth via
international expansion remain
As trade barriers fall through initiatives like NAFTA and the EU single market, FIs have sought
opportunities to expand beyond their domestic markets. But protective regulations and customs still
make it difficult for FIs, even world-class FIs, to establish themselves in other countries.
Cross-border differences in regulation and competition also influence the investment community’s view
of the balance of risk and reward in the financial service industry: Only the proven players tend to get
rewarded for taking the risk of moving abroad. Even for those FIs that have overcome the political,
financial and cultural differences, success is not guaranteed.
Nonetheless, the saturation of home markets creates pressure for international expansion, meaning
that new ways of addressing these hurdles need to be found.
Technology is making life more complex, not simpler
As technology opens up new ways of reaching customers, the strategic choices facing FIs become
steadily more complex: telephone, Internet, iDTV, 3G and PDA. And the channels that cannot be
supported by existing technology require the creation of more standalone applications.
Many FIs are also working with legacy systems that are expensive to maintain and hamper innovation.
Nor do their operations provide the advantages of straight-through processing: They often rely on
manual intervention. The cost in terms of inefficient business processes and volume of IT applications/
support can be huge.
Recent advances in integration middleware technology have provided some relief by making it possible
for FIs to move customer information across channels. But in many cases the technology has been laid
over flawed legacy architecture, and has merely created more duplication.
The cost of such an approach is reflected in our research, which shows that up to 70% of IT spending
by FIs goes toward maintenance and redevelopment. Furthermore, the problem seems to grow with
size: The largest banking institutions (with assets more than $60bn) spend 50% to 100% more on IT
relative to their smaller (under $2bn) counterparts. Despite this spend, virtually every business
manager in large FIs bemoans the organisation’s lack of speed and institutional inflexibility.
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