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The importance of technology within financial services has risen rapidly, although in recent times life has been tough for IT departments, as budgets have been under pressure in the face of challenging performance targets. IT strategy and spending has come under the spotlight and the necessity to get IT right is now critical. The need to understand IT best practice and the most effective spending has been one of the key drivers of technology research at Datamonitor. The company has been running its study on ‘Benchmarking IT in Financial Services’ since 2000, and this has helped build up a wealth of data from clients on IT spending patterns. The annual study entails data being collated from the IT operations of many major financial services institutions in Europe and the US, and involves analysing data at the group level and line-of- business level, covering key operational and IT spending metrics and other financial data.

Face-to-face interviews with senior IT budget holders and IT strategists are conducted to support the data and validate the findings. This has provided some considerable insight into current and future IT spending and strategy trends that can help IT management decide on a variety of pressing issues, such as:

Has the corner been turned from an overriding emphasis on cost reduction to one of investment?

What metrics should be used to judge the ‘right’ level of IT spending?

How should IT spending and investment requests be justified?

How robust are the measures used for value creation across the institution?

What are the IT spending attributes/patterns that best enable an institution to stay ahead of the game?

Measuring the Effectiveness of Financial Sector IT Spending

There are two key points to consider when an institution is trying to better understand the effectiveness of its IT spending. One concerns the issue of IT intensity, or the proportion of total expenditure that is directed at IT. The second is the efficiency ratio, a measure of cost against income. An interesting picture of IT effectiveness emerges when these two metrics are weighted against each other. A way to determine if an institution’s IT spending level is too high or too low is to compare these metrics against peers, competitors, and industry averages. IT management can then begin to understand the position relative to others and start to appreciate the standing of the organisation.

Figure 4.3.1: Example IT Investment Effectiveness Comparison (Source: Datamonitor)

The example matrix shown in Figure 4.3.1 shows how organisations fall into one of four effectiveness categories. The category boundaries are determined by the average or median performance of other benchmarked institutions. An organisation placed in the lower left quadrant will have a worse than median efficiency ratio, whilst one positioned in the top segments of the picture have a higher intensity ratio than the median performer.

Research reveals that many market leaders actually spend less on IT than their competitors, positioning themselves in the efficient IT quadrant (Figure 4.3.2). This indicates that the matrix is useful in measuring how well money is spent on IT, but it does not reveal how those funds are invested in order to achieve the most effectiveness for the strategy being pursued. It is commonly assumed that IT intensity is a critical barometer of success. However, research (outlined in Section 3.1) indicates that the level of IT intensity is not always the best measure of how well an institution’s IT is performing. The main conclusion drawn from this is that the amount invested in IT is not the significant factor, but key to effectiveness is where the money is spent. IT spending can be split into two categories: ‘Run the Organisation’ where funding is required just to keep the status quo, dedicated to the maintenance of applications and infrastructure; and ‘Change the Organisation’ investment which is focused on evolving the organisation, with money dedicated to new applications development. The research consistently indicates that the important measure is how much of the IT budget is spent on ‘Change the Organisation’ investments. Enterprises with successful and effective IT appear to spend a greater proportion on ‘Change the Organisation’ than other institutions. To measure the IT effectiveness and efficiency the Investment Cycle Matrix is used (Figure 4.3.3), which contrasts the IT intensity ratio against the ‘Change the Organisation’ as a proportion of total IT cost, and in this example plots the position of the performance groupings.

Figure 4.3.3: Investment Cycle Matrix (Source: Datamonitor)

Using the average or median performance levels of a group of financial services institutions, an organisation can measure its own position relative to the competition and understand its comparative ‘over-’ or ‘under- investment’ in IT and the proportion of IT spending that is used for ‘Change the Organisation’ projects. The segment in the matrix that an organisation occupies suggests certain aspects regarding current and past investments and IT projects. Research indicates that sound IT investment by financial institutions moves companies into the efficient infrastructure and applications quadrant of the matrix.

In the example matrix the best-in-class organisations have the lowest IT intensity ratio, as would be expected, but apparently a lower spend on ‘Change the Organisation’ projects as a proportion of total IT costs than the middle group. However, this is indicative of best-in-class organisations spending less on IT in total, as identified in Figure 4.3.2, where infrastructure spending is lower than peers when compared to total costs but not when contrasted with only IT costs.

Further analysis of these institutions reveals that the market leading companies tend to spend much more on new applications and much less on infrastructure than their peers. From time to time, depending on individual and market circumstances, organisations will have strategies and goals that require different spending patterns, as it is important that investment and the relevant measures always match the current value drivers of the organisation.

Conclusions

Benchmarking enables the frequent comparing of performance measures with peers, enabling the discovery of gaps in operations.

Using the technique it is possible to identify new approaches that can enable better performance and allows the monitoring of progress relative to peers.

Benchmarking in the financial sector would seem to indicate that market-leading organisations have a low IT intensity ratio combined with more investment focused on transforming the enterprise.

4.4 IT VALUE IN THE PUBLIC SECTOR

Shareholder value and some financial investment measures are not really appropriate to public sector organisations, as from a stakeholder perspective the concentration is on responsibility rather than profitability. Therefore, other measures of value are required relevant to the stakeholder. The heavy focus of both central and local government on cost suggests that a demonstration of ROI can be an important factor in IT investment selection.

With local government increasingly restricting its expenditure, technologies that reduce costs will certainly prove attractive. Solutions should always demonstrate productivity improvements and better efficiencies, as well as a reduction in the technology’s TCO. In particular, the focus within the public sector is on modernisation of processes, and the reduction in transaction costs and

maintenance. In short, solutions should take cost out of the system over time. In terms of developing the ROI calculation, the public sector tends to be reliant on consulting expertise. Unlike in the private sector, where technology can be easily tied to revenue generation, ROI calculations often risk focusing too heavily on intangible costs. Technology in local government can generate a number of soft returns, which are often difficult to measure, such as improving responsiveness to citizens through front-end solutions. Where possible, organisations should always try to attach monetary values to any cost savings and identify hard returns.

Most public sector organisations attach importance to ROI models, however theoretical they are, although any discussion relating to people is normally highly sensitive. Despite recent announcements concerning central government lay-offs, local government institutions tend not to be keen to sign up for redundancies, which can cause difficulties in positioning technology-driven process change.

Innovation in terms of ROI modelling is certainly recommended, as is using ROI in conjunction with other metrics such as NPV and other measures that take into account the discounting of costs and benefits over time. Demonstrating cost savings through new means of service delivery is one approach that can prove relatively successful. A typical example of a technology with a clear ROI is IP telephony, with converged voice and data networking reducing communication costs. Modernised accounting and payroll systems have also been deployed successfully with a strong ROI. Although these technologies can clearly demonstrate ROI, others cannot. If it simply proves too difficult, organisations possibly need to look at metrics other than just ROI and should not be discouraged if they cannot demonstrate a clear return.

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