Like a butterfly emerging from its chrysalis, banks that learn to shed the complexity of maintaining legacy systems can embrace innovation and soar.
There’s a stunning calculation done by the Banking Industry Architecture Network (BIAN) which estimates that 80% of banks’ IT budgets are spent on running legacy systems. Of the remaining 20% for new projects, 80% of this is spent on reactive obligatory compliance projects. This leaves only 4% of the average bank’s IT budget for innovation! Yet, Gartner recommends that banks ramp up to spend 35 to 40% on digitalization in 2018.
Of course, it’s been 10 years since the beginning of the financial crisis. Ever since then, banks have been consumed by responding to a tsunami of new regulations, sometimes in a tactical manner in order to meet imposed deadlines. At the same time, a new breed of competitors has been nipping at the banks’ heels, particularly in retail banking and payments. In some parts of the world, the amount of net new regulation is abating and banks have some breathing room to act more strategically.
This is a huge opportunity for banks to take a more strategic approach to reducing IT complexity – while preparing for the brave new world of open banking. There are some banks that are succeeding in reducing IT complexity and cost, while concurrently accelerating innovation. Their secret? An enterprise commitment to strategic IT planning and portfolio management.
In research conducted by Aite Group in 2016, they found that “organizations that support ITPM with software designed specifically for this task benefit from increased alignment among their senior management teams, their strategic outcomes, lines of business, and IT.”
This finding is acutely relevant to banks, many of which have grown through acquisition (and not rationalized redundant systems) and have histories of independently governed siloes, geographies, and lines of business which have had various degrees of maturity over time. The result is sprawling structures, poor documentation, and loose alignment with senior management’s goals and objectives.
This has complicated the challenges facing banks from a compliance point of view. Requirements to identify data lineage for risk and privacy purposes, and in the US be able to satisfy “living will” Dodd Frank requirements and demonstrate how a bank could be dismantled in the event of a catastrophe add an extra burden to gain increased transparency in banks’ IT landscapes.
And looking forward to creating ecosystems with third parties where data can be shared – and then compliance with GDPR and ensure that data be erased – is a huge challenge.
Aite said that automating the IT portfolio management practice is critical in order to support rapid change. By having transparent insight into architecture and an understanding of the interdependencies of systems within the organization, teams are able to work more confidently and swiftly to deliver innovation. Success in delivering quick hits in innovation leads to increasing strategic boldness. When teams have the ability to minimize risk at the project level, banks that have automated ITPM are more likely to ramp up the number of projects they tackle.
And, of course, there is the extreme pleasure of being able to finally rationalize redundant systems and see IT budget dollars move from legacy over to innovation. Would you like to read more about how other organizations manage IT complexity and accelerate innovation? Get the full Aite report here.