In Bank IT, 'Discretionary' Doesn't Always Mean 'Disposable'

Like Frank Sinatra, I order bread from my neighborhood baker. (Fear not-this is going to get to banking.) But first, I want to take you back to 1967 during the LBJ administration. A new commissioner of the FDA showed up, James L. Goddard. I was a project manager at the consulting firm of Booz, Allen & Hamilton. Commissioner Goddard was an outside-the-box thinker so he hired Booz, Allen to transform the way FDA inspectors did their jobs. Also it was the era of PPBS (Planning Programming & Budgeting Systems). To put it bluntly, and Commissioner Goddard was one very blunt guy. His orders to us were: I don't give a damn how many rat droppings our inspectors find in bakeries because they get sterilized in the baking process and don't matter. I want to know if our programs are reducing the incidents of salmonella. That's when I stopped eating bread produced by anyone other than Luigi.Goddard's idea of funding by objective was a good one. In the banking industry it would be akin to the hugely competent FDIC Chairwoman Sheila Bair saying something like, "I don't care how many billions of DDA transactions you processed last night. What kind of early warning signals are you getting about your loan portfolios?"

Banks spend 10 percent to 20 percent of their operating budgets on technology. Is it paying off? Every bank CEO and CFO should know. Most don't have a clue. So what I want to do is take the first step and define how much they are spending for each major application. Then the tough part begins. Is it worth it?

Some things a bank must do. For example, every core applications transaction must be processed as it is created. Can you imagine a bank CFO telling a CIO he wants to cut back on processing costs and says, "Each night, select a different letter of the alphabet and skip the customer accounts whose names begin with that letter."

I identified 13 major pieces of the technology pie and measured the cost impact of each one. Here's the bad news. The essential piece (core processing) represents about 62 percent of the total IT budget. It doesn't matter how large or small the bank is, or whether it uses in-house processing or outsource. Core is indeed the largest piece and it's somewhere in the 60-something portion of the total. You're stuck with that.

Other pieces must be processed as well bringing the must-do share to 78 percent-EFT transactions, electronic payments, corporate services and Internet banking. Now here's the rub. The discretionary applications (22 percent of the IT total) are the ones that make money or prevent losses for a bank. So a stingy banker could turn off platform automation, fraud prevention, data security, risk management, business continuity, disaster recovery, imaging, sales & marketing, and internal bank management. The savings would be real. But the bank could go under.

I'm told by a lot of smart people in this business that banking has changed forever. Will bank technology change with it? I'll let you know when I finish this project, but so far, it has been a humbling learning experience. The average share of IT expense that most banks in my database spend on internal management processes, compliance procedures and controls is about 5 percent. One bank spent a very high 11 percent, and wouldn't you know, that was the bank that the regulatory agencies charged with money laundering. Ooops!

Maybe eating sterilized rat droppings isn't so bad for your health. Stick with me as I continue to discover more surprises in this analysis.