Banking Efficiency: Leaner, Faster, Smarter
The banking industry's obsession with efficiency is many things, but it is not new. For at least the last seven years, banks have focused even more on their cost-to-income ratios as they seek a return to reliable and sustainable profitability. In fact, since the 2008 financial crisis, it's estimated that global banks have succeeded in taking out billions of dollars in costs. Unfortunately, all that cost reduction hasn't resulted in much actual savings.
Banks are incurring new costs just as quickly as they're able to remove old ones. The need to respond to regulatory change is constant, often tying up capital or creating new compliance expenses. Customer expectations are growing exponentially, with demands for a seamless banking experience across channels - the development of which requires significant capital investment by banks. New competitors, meanwhile, have entered the market and are putting even more pressure on banks to not only provide that better, more mobile experience, but also to reduce the kinds of fees and service charges that banks have long relied on for a healthy shot of revenue.
In other words, as banks become more efficient in running their business, the nature of their business tends to change. This puts the industry at an interesting crossroads: How do we spend more time and resources changing the bank while simultaneously running the bank in a new and more efficient way? The full answer, unfortunately, is complex. At its core, however, is one basic task: rethinking the bank's operating model.
How Banks Can Respond
A good approach starts with determining what is the fundamental business of the bank and for what markets. For example, identifying the geographies that should be served, the services that the bank provides, and how the bank differentiates itself. This process can help a bank determine what it considers core and what it considers commodity. It can then invest and divest accordingly, resulting in a more focused bank and a leaner operating model. Sounds simple to say, but much more difficult to actually do.
This is an exercise in reducing a bank's operational surface area. And as such, it begins not with applications or infrastructure, but with functions. A bank should conduct a thorough, top-down analysis of its functions and then decide which ones provide strategic value and which ones provide no differentiation. Those commodity-type functions become candidates for outsourcing, leading to fewer core functions and, subsequently, fewer applications and less infrastructure.
It is important to consider this analysis in the proper context. Every function should be viewed from both the bank's and the customer's perspective to ensure that it delivers something of value for each side. If there's a focus on reducing costs, does that mean a reduced price to the customer? If the bank achieves a faster time to deliver a service, does that mean it's also quicker and more convenient for the customer?
Following a top-down, function-based analysis, a bank should have a clear understanding of where its operational surface area can be reduced. The question then becomes: how does it rationalize and modernize its technology portfolio to reflect that reduced surface area? This is a critical step, as it bridges the gap between theoretical efficiency and actual efficiency.
Consider this three-pronged approach to realizing actual efficiency gains:
1. Attain a Critical View of Operations
Taken a step further, a bank that has a true understanding of its infrastructure can often identify predictable down-times and lease that idle infrastructure out to third parties - thus reducing its overall cost of ownership. For example, a bank performs massive computations as part of a Monte Carlo simulation. These computations require an equally large infrastructure to support them so they can be completed on time each day. On average, a computation cycle runs from four to six hours. For the remaining 18 to 20 hours in a day, that expensive infrastructure lies idle. When not performing activities for the bank, an efficiently deployed system could act as a utility - providing services to another bank from a different competitive set.
This is an example of the kind of efficiency gains a company can unearth once it has a critical view of its operations. And just as it can act as a utility, a bank can also be well-served by leveraging industry utilities in areas where it doesn't see differentiation.
Consider what happens when it's time for annual performance reviews to take place. The HR system that runs without issue for months on end is asked to suddenly scale up to meet a demand many times its usual load, which means performance begins to suffer just when people need it most. This is where "web-scale" operations, such as those run by technology titans like IBM and Amazon, come in. Their ability to scale up instantly and manage capacity bursts puts them in a strong position to offer these services to other firms that cannot achieve such scaling on their own.
Both of these examples illustrate the benefit of transitioning applications to Web-scale infrastructure that can scale up or down according to demand. Delivered "as a service" means an institution doesn't have to pay to maintain an outsize system to meet short demand peaks. Conversely, when systems are needed the most, computing power can be added to ensure that everything works smoothly when the system is fully loaded and is then scaled down when demand diminishes.
2. Streamline Technology Spend
A bank can reduce costs by reconciling its applications portfolio with the functional analysis work described earlier. This entails determining which applications are essential and which are not, using the guiding principle that all must be 'Fit for Purpose'. Consider the following three categories:
- Focus on applications that the bank already has and are essential to what have been determined as the core functions of the bank. Further, identify any of those applications that would deliver greater value through modernization.
- Add applications that are needed to deliver against the strategic functions and are critical to the operational surface area of the bank.
- Retire applications that are no longer required because they deliver functions deemed not to be part of the core strategic value of the bank.
This approach can yield exceptional results. For example, a bank that has 12 business units might maintain 12 reconciliation applications. Following the initial top-down analysis of functions, a bank might immediately identify three or four applications that can be retired easily. After an additional focus-add-retire analysis of applications, however, a bank might be able to identify two or three reconciliation applications that would cover all of the needed functionality, cutting the number of applications by 80 percent instead of 25 percent.
3. Shift to a Next-Gen Infrastructure
Just as applications must demonstrate some form of critical value to be owned and operated by the bank, so too must each component of the IT infrastructure upon which those applications sit. Most institutions consume large amounts of data storage, but that doesn't mean they always need to own and manage the infrastructure to support that requirement. Simply put, if banks do not derive competitive advantage or customer value from physical IT infrastructure, they can likely source it more efficiently from the market assuming regulations so permit.
A bank should therefore consider deploying relevant parts of its infrastructure (storage, network, computing, etc.) on an as-a-service basis. Add core applications and services on top of this layer (database capabilities for example) and a bank can employ entire platforms on an as-a-service basis. This is the essence of a next-generation infrastructure - shifting from legacy data center services to an asset-light, value-added approach to service delivery. It's not a blind outsourcing and cloud approach because it's based on the functional analysis described above. It's more of a hybrid cloud strategy that's predicated on determining the right type of infrastructure for each type of function individually, rather than using an all-or-nothing approach. It places the onus on the bank to determine what functions are best served on what infrastructure, rather than requiring a single type of infrastructure to serve several different functions.
Setting the Stage for Long-Term Success
Every enterprise has to address change, but today's banks have more to deal with than those in other industries. A period of rapid consolidation, coupled with the dramatic shift to mobile banking has left institutions with numerous underutilized physical facilities and massively complex IT estates.
It's clear that banks will be busy for years to come with new efforts to prioritize, simplify and deliver more value. The good news is that the technologies banks can employ today for these initiatives - cloud, mobility, big data and more - will help banks realize new efficiencies in the near term while setting the stage for greater agility, innovation and value over the long term.