Reducing Total Cost of Ownership for banks' IT operations

A large pile of American dollar banknotesBanks are spending more on IT this year than ever before. Budgets are on the rise and there is more money for financial technology projects.

Figures vary but total IT spending by banks across North America, Europe, and Asia-Pacific could reach $200 billion this year, while fintech investment has trebled to more than $12 billion.

While this is trumpeted as a ‘good thing’ for the industry as it means innovation and transformation, it’s not as simple as that. Pouring money into IT is not everyone’s idea of a profitable business.

Alongside this investment in new systems, banks are naturally looking to reduce their IT operation total cost of ownership (TCO).

Balancing costs with investments in the appropriate systems is crucial - which makes being able to cut the TCO for particular parts of the bank’s operations all the more important.

Reducing TCO is all about improving efficiency - doing more for less. It can be duplication of data, unused software licenses, or an overlap of vendors. The important thing when it comes to TCO reduction is to look at what banks consume as customers and figure out what’s needed and what isn’t. Breaking down the IT operation into a shopping list of products makes it easier to see what the bank needs and what it doesn’t.

The point is that high IT budgets do not increase the business value the bank gets from information technology, Deutsche Bank noted in a 2012 study. “Amazingly, the top performing institutions derived the greatest business efficiency from a level of IT spending below that of their peers,” said the bank, adding that “the quality of IT management is even more important than the spending level in achieving the desired results”.

Deutsche Bank also noted a paper based on data from German savings banks that showed how IT efficiency and the competitiveness of banks are positively correlated. “Increasing IT budgets only improves a bank’s competitiveness if IT management is sufficiently efficient,” the bank added.

It confirms how alongside the necessary investment in IT systems - updated core systems, managing the legacy tail, etc - it’s important to make savings wherever possible.

In fact investment is a smaller area for banks than running existing systems. In Europe, banks invest almost one-third of their IT budgets in “change-the-bank” projects. “Run-the-bank” costs account for about 70 per cent of total IT expenses. This figure remained pretty well stable between 2003 and 2010, according to Boston Consulting Group.

This gets to the heart of TCO reduction as it shows that when we talk about IT spending rising, it may not be because banks are willingly forking out extra cash on innovation. Any increase in budgets may be a necessary evil that banks would like to remedy by reducing the TCO.

For example, the rising cost of meeting regulatory compliance could be hampering investment in innovation. With banks spending perhaps 40 per cent of their IT budgets just to comply with regs, there is more emphasis on cutting costs wherever possible.

As an example, JPMorgan, Barclays, Goldman Sachs and Credit Suisse signed an agreement with the Depositary Trust and Clearing Corporation in 2013 to create a global reference data platform in order to lower costs.

Whether banks cooperate in this way or simply look to their own systems to find savings, the importance of keeping a hold on IT expenditure is more important than ever.

Where could TCO reduction take place? Some of the main areas we’re seeing with banks are outlined below.

•        Data Management – Reducing recurring costs through rationalisation of data usage.

•        Connectivity – Strategies for complexity reduction.

•        Trading Systems – Managing the Legacy Tail and regulation as an opportunity.

•        Risk, Compliance & Regulation – Reducing regulatory compliance risks and costs.

 

Get the highlights of the Hatstand briefings on Reducing Total Cost of Ownership.