Major world banks have been at the forefront of using IT and technology services for 20 years. They have developed sophisticated procurement functions such as smart sourcing; they were early adopters of the offshoring model as captive owners and users of third parties; they engaged in transformation projects to deliver business process change; and they have tried to manage contracts efficiently by creating large governance teams and innovative scorecards to measure performance.
But at the end of the day have they captured as much value as they could have done from these initiatives? Has being at the forefront and being early adopters of many technologies led to better value for money than other industry sectors?
From my perspective as an adviser to many banks over the years, the key problem has been in the lack of clarity about what banks want to use their technology for and, more importantly, in sharing a consistent vision with their suppliers. This goes to the very heart of the outsourcing dilemma of what is core and what is non-core. JP Morgan Chase's cancellation of its ITO with IBM six years ago on the basis of a change in CEO was not an isolated case and demonstrates perfectly how subjective the question is as to which services should be outsourced and which should not. The issue of core versus non-core continues to dog the strategic direction and the day-to-day tactics of the use of IT by banks.
The use of wholly-owned ‘captives' in locations like India and China is another example of the confusion about what is core. Was a captive needed to protect proprietary data or applications, or was it a deliberate plan to set up a successful captive and then sell it to another services provider in due course. In most cases, captives have not generated much value once sold and it would have been cheaper to have gone for an arms' length offshoring service in the first place. Too often, a strict analysis was not carried out and a decision to set up a captive seemed the easiest option even though the costs and time needed- to manage a captive are considerable.
The inability to adopt shared services within banking groups, let alone with other entities, means that banks have not managed to use technology as effectively as some manufacturing or retail groups. Costs per user remain too high in financial services and many banks still have multiple systems stemming from mergers carried out more than 10 years ago.
Suppliers also know that bankers are high-maintenance and powerful investment banking units will often try and unscramble any attempt at standardisation. This encourages suppliers to work with vested interests within banks to ensure that costs remain high, that technology remains complex and that the levels of duplication and redundancy are higher than at other organisations.
Changing business priorities have also meant that banks sometimes shift strategic direction during a project, which means that the initial procurement objectives are changed or that the team managing a supplier is removed or downsized, leaving the supplier with the only real knowledge of what the deal was meant to deliver. This means that suppliers can continue with ‘business as usual' which becomes a self-fulfilling prophecy of banks not deriving many of the cost savings or transformational benefits of a well planned and carefully executed technology project.
The turmoil of the last 20 months, when many banks struggled to survive and others had survival mergers foisted on them by government and senior management, forced many in the sector to re-evaluate their sourcing programmes. Many of our largest UK banking groups need to improve efficiency across a number of different business units, many of which were inherited by recent mergers. This need to consolidate systems and deliver value for money is also a top priority for senior management and will help achieve the Financial Services Authority's goals of shrinking their balance sheets at the same time.
I am seeing a positive trend towards planning an overall strategy this time rather than just focusing on a few business units, something which tended to happen during the years of plenty. Some banks are realising that the whole lifecycle of the deal needs to be considered and that it is no use just concentrating on hard-nosed procurement or interactive governance models. In addition, banks are sharing more of their vision with their core suppliers and are also asking their suppliers to co-operate more with each other and to learn the lessons which well-run construction projects like Terminal 5 have demonstrated. Customers need to manage their suppliers and ensure that their suppliers have an incentive to work with each other and not engage in unnecessary finger-pointing when projects go wrong or milestones are delayed.