Most financial services firms today have neither the governance regime nor the execution capabilities to make innovative IT investments pay off, claims a report released last November by Mercer Oliver Wyman. The financial services strategy and risk management consulting firm calls for a new approach to managing financial IT spending and reducing complexity. Susan Maclean spoke to Mark Rodrigues, a managing director at Mercer Oliver Wyman and the author of the report Information Technology and Financial Services: Managing Complexity, Understanding Value.
IT Focus: What do you see as the key obstacles to financial institutions’ enterprise efficiency?
Mark Rodrigues: The first thing is getting common agreement on how to keep score. There’s an old saying that it’s tough to play a game if you don’t know how goals are scored or even where the scoreboard is. Efficiency right now is a very clumpy, vague expression. In the banking industry people use things like efficiency ratios where cost is a percentage of revenue. The insurance industry has something just as clumpy… combined ratio — the total amount of payouts as well as operating costs against what you’ve collected as premiums. All of these things are extremely not helpful in trying to understand at any level of detail how efficient your operation actually is — or even more important, how sustainable that efficiency is. So the first problem we have in this is that the metrics that exist are simply not precise enough.
IT Focus: So how do they go about getting those precise metrics and what would they be?
Rodrigues: People have drilled down at the different ways you can look at it. Consumer banking is…better…at measuring costs because they have so many transactions and so many customers. They have a lot of granular data — effectiveness per product, how much profit per product, the cost every time someone walks into a branch versus use of an ATM — things like channel cost versus product cost and efficiency are reasonably understood in consumer banking and less well understood in wholesale banking and insurance. It does vary, but I’d argue that even that level of drill down is incomplete. Cost is a lagging indicator. A balance sheet and profit and loss statement tells you what happened a quarter ago or a year ago. It doesn’t give you a sense of how sustainable or uncertain that advantage or cost or efficiency is going forward. These days the world moves so fast and there are so many different options of how you can source something that I think you have to get a little more clever about measuring costs when you’re talking about head count, cost of technology, cost per product, whatever. I think you have to go introduce some kind of notion about future value.
IT Focus: That sounds very tricky, though.
Rodrigues: It isn’t easy and it will never be a crystal ball. This idea of trying to understand it from a future or sustainability value is in fact very imprecise, but we think that given the numbers and the amount of money being spent, five per cent better understanding this year versus last year would still be a lot of money.
IT Focus: I gather they would all have to find their own way through that maze of determining future value because wouldn’t it really vary from company to company?
Rodrigues: I think so. We’ve found that there are certain product businesses that while important, aren’t very strategic. They’re a commodity; something you’ve sort of got to do. Cheques and cheque processing servicing are just better served as a utility than something that needed to be done on a captive basis by each of the individual banks. I think there are other things like that. Maybe they are not as obvious but there are a variety of different things that maybe ought to be spun off in a kind of utility. Payments infrastructures are another example.
At the same time, there is a whole different category of things that are probably underserved right now that could be well served to increase investment on. That would include customer analytics, new product innovation, risk management. These kinds of things you almost can’t be too smart about. This…is pretty important to think about. Most banks are not too good at it.
IT Focus: Your report mentions different skill sets required for running the bank and changing the bank. That’s what you’re talking about now?
Rodrigues: That’s exactly right. We see a kind of bifurcation right now on information technology spending. A lot of it is for transaction processing or raw computing. That’s more of a scale kind of game. Unless you’re in the top tier, you’d better think proactively about sharing that capability with somebody else or spin it out or something. This other category at the other end of the extreme of decision analytics is more about modelling. This difference is between computing and modelling. Decision analytics and modelling is the reaction to information overload. You’ve got to build in filters to get more intelligence and get better ‘problemalistic’ thinking about customers, value, risk. We think there is a lot to be said about any management tools or management software that allows you to play the percentages a little bit better against all this information you get about your customers, competition and everything else.
IT Focus: So what are some of the skills required to do that best?
Rodrigues: That’s also a good question because here we go again on this bifurcation. All these jobs that tend to be ‘offshored’ for one end of technology skills — the coding and database management and maybe even things like call centres — ironically there’s this other end — this modelling — that you want to bring in-house. I think you’re talking about people with quantitative skills, heavy math and applied mathematical backgrounds like operational research, linear programming, regression analysis.
There are also business analysts. There’s the practical application of these things. You can get enamoured with your modelling and some of these things just don’t reflect reality. The need to know C++ and how to code databases is less relevant now as the technology becomes more plug and play and we become more familiar with the Internet and the level of computer literacy that even the most non-technical person has. Not that it isn’t important but just controlled and managed in ways that free you up to think more about the actual business usage. When you talk about redesigning a business process or applying technology or new ways of delivering a service or product, I think that you’ve got to have people that are business analysts. Maybe they’ve worked on the line before or it is part of a job rotation process. I have to say that the very best firms I’ve seen manage technology have a very business savvy person at the head.
IT Focus: You’ve been quoted as saying: “Many of the financial services industry’s recent bets on technology have not paid off because they have been dictated by fads and fashions, rather than deep-rooted analysis of value creation.” What would be some examples?
Rodrigues: There’s a whole hall of fame of these…object engineering…customer relationship management, data warehousing, enterprise resource planning. People get intoxicated with the pure technology thing when you bolt it in and it connects departments. Unless you’ve thought through how you’re going to do your business differently, just by connecting them up in a clumsy way or taking feeds from existing departments and different silos and putting them together, all you’ve succeeded in doing is confusing people faster than they used to be confused before. You’re automating alienation. Maybe what banks have done the best is risk management. There’s more risk in the world now than in 1991 and yet the banks on the whole are a lot healthier. I guess you could say there are pretty good examples of institutions rethinking things, in this case risk management.
IT Focus: Technology is very key in risk management.
Rodrigues: Yes and this would definitely fit into that analytics and modelling category. I think there’s still work to be done, probably on the consumer side. That’s where the battle is going on right now — trying to be increasingly more responsive and specialized in how you track and retain your customer base.
At the end of the day, one has to be more strategic in how one thinks about production and distribution platforms in the service business. We think that is more than just an IT problem. That’s why the overall problem should be elevated. We think the average chief information officers have got their hands full just keeping the existing environments up and running which is becoming more and more of a challenge. The ‘change the bank’ or innovation category really does have to be led from the top.