A fork in the road

The underlying objective for CIOs of financial services companies is to manage IT investments to generate value. Given the difficulty of maintaining parity, it is perhaps understandable that managers often forget the business value of IT investment and instead consider it to be part of general overhead costs.

This may lead to a splitting of the IT function, with one arm dedicated to managing the infrastructure and the other to exploiting information assets. The split may be replicated at the senior management level, with the CIO’s role becoming divided or shared by several individuals.

The IT function at major financial services firms is, broadly speaking, dividing into two distinct parts. The first is operating according to a project-driven agenda that focusses on unit cost reduction through infrastructure improvements. The other is seeking to create value from IT; now that the automation boom is fading, this means creating value from better information science and analytics. This part is underdeveloped at most financial services firms, implying a pressing need to accelerate management skills in portfolio theory, real options, simulation and behavioral tools to reflect project and business risks.

The CIO group needs to be staffed by people who claim deep insight into the microeconomics of the businesses they support – business analysts, information architects, decision analytics – and of the competitive environment.

Financial institutions need to assess what might happen in the future and decide where they need to be focusing their attention in the coming years. Key questions for the CIO include:

– What parts of IT is my firm best at managing?

– How can I best manage external relationships: outsourcing, offshoring, alliances, vendors, and so on?

– Where will the value associated with IT migrate to, if anywhere?

– Who will win strategic control of IT value creation in a given service?

– What management model allows businesses to control IT investments most effectively

Essentially, there are two keys to generating value from IT in today’s financial services market. The first is to distinguish between IT as a business component and IT as a support function. The second is to understand how IT projects interact and support the key value drivers of each business line. Those firms that successfully upgrade their IT management to do both will lead the market in tapping into the vast stock of untapped value from information technology.

look beyond the technology

Information technology has now been integrated into most companies’ basic business platforms. Indeed, the automation phase has ended and the connectivity phase has begun. However, while IT has matured, the tools used to measure and manage its use have not; they are largely antiquated relics of the Industrial Age.

CIOs of large financial services companies can field more than a hundred requests for new $1 million-plus projects every year. Prioritizing these projects, along with thousands of smaller requests, is a formidable task. CIOs are burdened by the need to maintain the existing infrastructure, because more than 80% of today’s typical IT budget is spent on the legacy systems that run existing operations, leaving a small share for new development and innovation for new products or lines of business.

CIOs have to manage a variety of product life cycles at the same time. They have to understand when to develop new IT, and when to scale back on IT for a product that is becoming a commodity. Managers need far greater transparency about their IT initiatives, so that they can effectively challenge the business benefits offered by a costly legacy system and whether the system is “earning its keep”, or could it safely be scaled back. CIOs should also be able to say with confidence which innovations deserve discretionary funds, rather than making a leap of faith.

think strategically

CIOs look beyond cost management of IT because it is tactical and clouds the strategic challenges that face today’s financial services firms. Not only are financial providers competing against each other, they are also increasingly competing against their suppliers, too.

CIOs of financial institutions have important decisions to make about the future of their information technology assets. Their first priority must be to ensure that they understand how their different businesses fit into the increasingly complex IT environment. Once this is done, they will better understand the immediate issues they face and their possible resolutions: (1) spinning off successful IT businesses that are commoditizing quickly; (2) using successful, but non-commodity, IT businesses for competitive advantage; and (3) unlocking the value of sub-scale businesses by partnering or outsourcing.

This briefing note was prepared by risk management and financial services strategy consultants Mercer Oliver Wyman. The company has offices in Toronto and 25 other locations throughout North America, Europe and Asia. Their Web address is www.merceroliverwyman.com.

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