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Charting a Course for the Future

The age-old ritual of hashing out the annual corporate budget soon may be a thing of the past. New ways of doing business and new competitive pressures are forcing banks and other financial institutions to rethink this odious, time-consuming task.

The age-old ritual of hashing out the annual corporate budget soon may be a thing of the past. New ways of doing business and new competitive pressures are forcing banks and other financial institutions to rethink this odious, time-consuming task. To devote time and resources to a process that often yields inaccurate results is unacceptable in an age when speed to market and efficiency are critical to success. The goal of transformation is a more fluid, dynamic procedure for allocating money companywide. Of course, this switch cannot happen overnight, but it is becoming clear to many that there simply has to be something better out there.

IT often absorbs a large chunk of banks' funds. In the United States alone, banks spent $38.5 billion on IT this year, according to Boston-based Celent Communications. Since technology is such a huge cost center at financial institutions, one would think that senior executives would pay especially close attention to how that money is used. This, however, has not always been the case, according to industry insiders. The reason? People on the business side at banks often did not understand technology.

"Ten years ago, management just left IT to the IT people," comments Julie Mabberly, director of London-based consultancy Global FS. "Today, everyone thinks they understand it," she adds.

"IT budgets are typically ... handled by the IT department," explains Virginia Garcia, research director, financial services strategies, TowerGroup (Needham, Mass.). "IT tries to make the best match of IT to business without much input from the business people. They try very hard to be in line with where they think the senior executives see the business going, but it doesn't always work so well."

Yet, according to Garcia, this process is changing dramatically. Now, non-tech people are taking on a greater role in allotting money to their banks' technology efforts. Budgeting is becoming more of a collaborative affair in which the aim is to align the goals of business and IT as closely as possible.

"Today, there's a new dynamic," Garcia says. "Vendors find they're not selling exclusively to technology people anymore. Business and IT people are sitting down at the negotiating table. They need to work together on IT strategy and growth."

Global FS' Mabberly agrees. "The IT budget is part of the common court - everyone feels it's part of their budget," she says. "Technology is the enabler; no one can do anything without it anymore."

Taking Ownership

Bank of Oklahoma, a $14 billion-asset bank based in Tulsa, began overhauling its budgeting process about two years ago, when it implemented a solution from Toronto-based INEA. [INEA recently was purchased by Paris-based Cartesis, a business performance solutions provider.] The financial institution was looking for a more dynamic way of planning and forecasting, according to Bill Allen, vice president, planning manager for the bank. What BofO found was a Web-based solution that is accessible to all the important players who need to track spending and planning throughout the year, he notes.

"We wanted a forecasting, budgeting and reporting solution that we could roll out over the Web," explains Allen. "This solution allows all our managers to get to information more efficiently. Instead of looking at static reports, they can drill down the data by units and view data on different hierarchical structures. It's a lot more flexible."

BofO now houses all the information in a central reporting location so that people do not have to pull reports into Excel and perform different calculations. "It has created a standard format for reporting in the bank," Allen says.

Forward-thinking banks like BofO are creating an ownership environment in which each department plays a role in the technology budgeting process. Given the vast impact of technology on everything the business does, this mind-set will enable banks to capitalize on their IT resources better.

"We're seeing increasingly the IT budgeting process becoming much more connected with the strategic plan of the organization," says Mark Ruddock, senior vice president and chief product officer for Cartesis. "Budgeting is no longer about adding up pencils - it's about seeing how the business operates."

A 'Spirit of Accountability'

The move toward cooperation and alignment between IT and the business is not driven by resource allocation alone. There are other drivers at work as well. "Institutions are not just looking at ROI but at more abstract things, like corporate governance and reputational risks," says TowerGroup's Garcia. "These are drivers that haven't factored into IT decisions in the past."

According to Garcia, enterprise risk management and compliance are the biggest drivers of IT spending and investment. These issues force banks to rethink their IT strategy and eventually can lead to better customer insight, she says.

"The budgeting process can't operate in a manner separate from everything else," says Cartesis' Ruddock. "That's where compliance comes in. Budgeting and forecasting are being tied to compliance in the SOX [Sarbanes-Oxley] world. It's creating a desire to integrate systems that are delivering planning and reporting with those that deliver compliance objectives," he explains. "There should be one single place in the bank where a loan is defined, and it should mean the same thing to everyone. There's a real spirit of accountability in organizations that use this approach."

According to Jim Scott, CTO of Cincinnati-based Fifth Third Bank ($102.7 billion in assets), stricter enforcement of regulations and new compliance legislation, in part, contributed to the bank's transformation of its budgeting process.

"As an organization, Fifth Third has grown significantly over the last four years," says Scott. "We hit a point where we needed more discipline and structure because we're now a bigger ship. With regulations, you have to standardize your budget practice and demonstrate that you're fiscally responsible. So we needed to mature our budgeting process in order to meet regulatory demands."

Fifth Third implemented its current method for forecasting and budgeting about two-and-a-half years ago. As with the traditional process, the decision makers at the bank establish a baseline for their budget and are given a target to which they may increase this number. According to Scott, managers from each line of business - wholesale, retail, enterprise applications, enterprise data and technology services - report to him with their needs. Once these strategic business drivers are worked out, they are blended with IT drivers to establish the overall objectives for the budget.

The company used to handle its budget through individual spreadsheets. Now, Scott says, Fifth Third has a centralized process for its entire technology portfolio that drills down to individual IT businesses and individual managers, for example.

As the aforementioned attests, keeping one's ducks in a row yields other benefits aside from staying out of trouble - namely greater organization of data and efficiencies in how that data is accessed and used. Transparency is another of these advantages. The more aware a bank is of exactly what its IT assets are, the easier it will be to create a technology budget, plan projects, upgrades and more.

"The consistent thing we see is that budgeting is becoming transparent and detailed," says Billy Hamilton-Stent, director of London-based Loudhouse Research. "This is being driven by compliance. Also, the requirement that IT demonstrate an ROI is becoming more critical. The need for accountability is becoming more galvanized. IT learned a hard lesson when the [tech] bubble burst." As a result, Hamilton-Stent sees greater awareness of the function of IT and how carefully departments need to fund it.

Dynamic Process, Dynamic People

"The big change [at Fifth Third] is that [budgeting] is more of a pull than a push with IT," says Fifth Third's Scott. "Within one year, our IT people were able to understand [the new process's] value, and now they want this. It's a much more disciplined, dynamic process that's revolutionizing our ability to use our resources and makes us more nimble. We create a strategy, but can change it when needed. This has given us much greater transparency."

This ability to change on the fly - to redistribute funds to other areas after the budget has been set - is what will allow banks to truly capitalize on their technology assets. "The market changes, so we have to be flexible enough to change with it," Scott says.

The market indeed is changing rapidly for businesses of all kinds. Companies increasingly are thrust onto the global stage, vying with a greater number of competitors for a piece of the pie. Businesses no longer have the luxury to devote six months to planning or two years to an IT project.

"What's new today in all industries is that the pace of volatility is increasing," comments Tony Levy, director of product marketing for enterprise planning at performance management software solutions company Cognos (Ottawa). "Competition is coming from everywhere. Product and service life cycles are shortening. The ability to anticipate market demand is becoming more difficult," he continues. "Today, you have to compete on speed and customer service rather than cost - companies have to become more agile."

Yet, a corporation cannot change unless its people do as well. This commitment to creating a living budget that evolves throughout the year must come from the top down. And nowhere is this transformation in mind-set more apparent than with IT leaders - CIOs and CTOs.

The consensus appears to be that today's technology managers need to come out of the server room and get into the thick of things at the bank. They must metamorphose into a hybrid of sorts - part techie and part businessperson who can communicate well across the lines of business.

"The CIO at leading North American banks has to be a strategic thinker and a dynamic leader," says Jacob Jegher, senior analyst with Celent Communications (Boston). "He has to understand that IT has a vast impact on the business environment. Well-managed strategic technology decisions require a diverse team of seasoned managers led by a dynamic CIO."

IT cannot operate in a vacuum any longer, stresses Cartesis' Ruddock. Since banks are such technology-rich organizations, it is vital that those charged with overseeing these systems become an integral part of the planning and decision-making process. "IT people are seen as critical enablers to the business," he says. "Their behavior has to be influenced on what the business has to do strategically."

Global FS' Mabberly sees a split occurring in the IT world where there are the straight technology people (those who manage the systems) and the hybrids (the service managers) who have to explain all these things to the rest of the company. The multifaceted technologists are the people now on banks' management boards.

Fifth Third's Scott says the IT community at banks is becoming more well-rounded. "You'll always need the nuts and bolts technology people who are helping with infrastructure, architecture, innovation. But we're seeing a greater requirement for folks who are business savvy, more horizontal. These are people who can sit down with the business managers and have a good conversation. They think beyond the code they're writing."

It is when this mind-set is adopted that the true benefits of a collaborative IT budgeting process shine. Once the tech people understand that they are integral to the success of the entire bank, they will take greater responsibility for how they spend. As accountability is key to the success of any budget, IT is coming under greater scrutiny.

"It's difficult for a CIO to go and ask for a huge amount of money these days," says Ruddock. "They will be held accountable for it. Before, no one actually tracked these investments to see if they delivered on what they said. That's uncomfortable for some because they can't hide anymore."

"People are more aware of risk today," says Global FS' Mabberly. "They have to actually manage risk and take responsibility. It's joint responsibility. People can no longer blame the IT director or finance [department] for a problem and say it's not their fault."


Organizing the Budgeting Revolution

Reshaping the way companies plan and forecast their spending priorities is the goal of the Beyond Budgeting Roundtable (BBRT). Founded in 1998, the BBRT is a consortium of businesses of all kinds, including financial services firms such as Wachovia, American Express and Charles Schwab.

Steve Player of Dallas-based consultancy The Player Group is program manager for the BBRT. He says the group is a place for members to discuss their ideas about overcoming the problems presented by traditional budgeting.

"People have been dissatisfied with budgets for a long time," Player says. "They're costly, they take a long time to plan and they're not accurate," he explains. "Rather than budgeting being a negotiated annual event, we want to replace it with a continual process. With the old way, you had an annual plan, you negotiated for three to six months and, by December, you had a plan with assumptions that were probably wrong."

The annual budget, contends Player, should be replaced with a flexible system of continuous planning and control. An adaptable process allows companies to make investment decisions more quickly.

"The problem with the annual budget is it traps you into static thinking," Player says. "You might have a good plan, but sometimes things don't always go as you thought. You can use your original strategy as a backdrop, but you must make sure you're able to adapt."-M.B.

Player outlines six principles set forth by the BBRT that are key to creating a dynamic budget:

1 Relative goals and rewards. Set goals and reward performance based on continuous improvement rather than fixed targets.

2 Continuous planning and controls. Make planning an inclusive, continuous process with relevant, open information rather than an annual, political budgeting process.

3 Resources as needed. Use resources and coordinate actions based on current customer demand rather than annual allocations and predetermined plans.

4 High-performance culture. Lead by setting clear principles, boundaries and high-performance standards rather than through detailed rules and budgets.

5 Freedom and capability to act. Transfer decision-making scope, authority and capability to small, frontline teams rather than direct and control from the top.

6 Accountability for results. Make teams accountable to improve

customer outcomes and relative performance rather than meeting internally negotiated targets.

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