How Much Should Banks Spend On IT?

Banks need to formalize the process of IT project funding, so it is easier to put some business cases on the back burner.

Wall Street is facing a myriad of business, regulatory and technology demands that are all competing for IT's time and attention. These demands compete across equities, fixed income, asset management, investment banking, and across the major departments supporting the business, such as risk management, compliance, legal, and human resources.

These demands include responding to major market pressures such as: reducing costs of duplicate business processes due to margin compression and product standardization, growth of high frequency trading, rise of 'dark' liquidity pools, collateral management, capital optimization, continuous new product innovations, and the challenges of generate basis point spreads on near zero interest rates loans and issuances.

These demands also include responding to major regulatory requirements such as Dodd-Frank, the Volcker rule, Basel III, the Consolidated Audit Trail for US exchanges, and Consumer Information Protection. Similar to most main street firms, these demands include leveraging major technology innovation trends such as mobility, data visualization, big data, data center consolation, cloud computing, and consumerization.

Yet, almost all bank IT departments are repeatedly faced with the problem of having more demand for scarce IT resources than they have available budget or capacity. This leaves senior managing directors and business heads asking, 'How much should we spend on IT and on which priorities?'

The Challenge

Within any bank, this demand for IT resources can arise from a variety of sources, each with potentially different needs, priorities and politics. As a result, in some cases 'shadow-IT' technology projects are initiated, funded, resourced and run entirely outside of IT. The problem is further complicated when it comes to having a common means to evaluate and measure the cost/ benefit of the specific requests.

[Funding a project is sometimes the easy part. Finding skilled IT workers to develop the technology is often more difficult. For more on how financial firms are finding skilled talent, read: Don't Fall Into The Technology Skills Gap.]

Classic finance theory says that Net Present Value (NPV) is the best measure to use to select and rank among competing business projects because it always ranks projects by optimal financial impact. Yet, NPV, and similar financial analysis techniques, are silent on how to rank projects where benefits cannot be comparably expressed in financial terms, e.g., risk management and regulatory compliance. Where strategic factors, such as competitive advantage, business agility and locking in business relationships are often the currency of value, traditional financial analysis simply won't meet the need.

Goals for Prioritization and Selection

A consistent project prioritization approach can be implemented to select the optimum mix of projects that will maximize the business value, meet legal and regulatory requirements and keep IT running given real-world capacity constraints such as limited funding, talent and management attention. If the bank's senior managing directors can agree on a simple ranking hierarchy and criteria, then the resulting project prioritization and investment roadmap will be clear.

The top nine design goals for project prioritization are:

• Simple yet Practical – Easy to understand and execute
• Transparent – Process can be traced from beginning to end
• Defensible – It is immediately clear why any project ranks higher than any other
• Repeatable – Different individuals following the same process with the same data and assumptions will arrive at the same ranking and selection
• Recognizes Mandatory Demands – Projects that must be done regardless of quantified benefits (e.g., regulatory compliance, end-of-life refresh) are first
• Drives Economic Impact – Where discretion exists, the most financially attractive projects (e.g., more revenue, cost savings) take precedence
• Accommodates non-economic factors – In some cases, business heads reserve the right to pick certain projects for a variety of reasons that cannot be pre-determined or quantified
• Value of Adding Capacity – The opportunity cost of not doing the next set of the most attractive projects because of capacity constraints
• Maturity – Being realistic about what change the organization can absorb given how people work today

NEXT: A Practical Prioritization Process