October 24, 2010

Most institution management teams in the U.S. are in some stage of planning and budgeting for 2011 for both capital expenses and operating budgets. The extra wrinkles for this year's process have been added legislation, which leads to more regulation, and continued business pressures from a weak economy and the mortgage market malaise, to name a few hot spots. Innovation is not dead, fortunately. Given this mix of ingredients, let's review some useful approaches to the annual budget-crunching process. Hopefully, a thoughtful process is possible and not a reaction to "Hold the line on IT spending" or "No more than inflation" or worse, "Cut wherever possible."

One well-established concept is to think of IT operating expense as either (1) sustain and maintain or (2) invest (strategic, innovation, R&D). Many institutions have a pretty good idea what the ratio is between these two alternatives. For underinvested institutions the ratio for sustain and maintain could well be 85 percent to 90 percent. Aggressive investing institutions have a much lower S&M ratio that falls below 70 percent. But before deliberating any further on the right ratio for any institution, each one can benefit by thinking about all of its IT assets, solutions, staff, etc., in the context of an IT portfolio. This can be constructed by allocating what IT does for the institution into four basic components: infrastructure, transactions, information, and innovation. Management should have a good view of what sits in each component and a solid understanding of the costs.

Infrastructure covers a range of needs from data centers and networks that are foundational to running the institution. Also included in infrastructure are applications that are shared across many to most end users, such as e-mail and intranet portal(s). Transactions covers the wide range of business transactions involving customers, accounts, and other third parties involved in transactions. Information relates to making decisions, analytics, compliance, and gathering the necessary data to do so. Innovation is about making investments, including in one of the first three components or in new or significantly enhanced capabilities. Readers of BS&T's e-newsletter get a steady diet of some innovation initiatives and there is no shortage of established and start-up vendors that want to engage institutions with their latest capabilities. Rather than just look at innovation separate from the rest of the three components, a healthier perspective is to look at all the priorities across all components that need to be considered.

Once the portfolio is identified, then the business and IT teams need to roll up their sleeves and get serious about how to move their institution forward. Careful consideration of any projects (in whatever component) that constitute a new or improved capability should be rigorously examined for any possible improvement(s), such as reducing the time or tasks needed to complete any process. Ultimately, this type of effort will lead to tangible benefits -- which are critical to building for the future. One institution's efforts lead to identifying how many fewer keystrokes were needed to board accounts and complete more time-consuming transactions. At 15 minutes per account and three to five minutes faster for longer transactions, better customer experiences occur, staff becomes more productive and yes, the institution has taken an important step forward.

At the end of August, my column focused on "Smart IT Decisions Matter," which is relevant to this column. The annual "prioritize and budget" process should make a difference to every institution's future. If the process is grind it out, crunched line by line, then an important management moment will have been missed. However, there are a number of examples where bank management teams get the value of this process and leverage it so successfully they create competitive advantages and build market-leading franchises. And, the process never stops -- a constant review of progress against plan is part of the journey for every successful institution. Good luck preparing for a challenging 2011.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.

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