Technology Advances Make Systems Decisions That Much Harder
Diogo Teixeria. American Banker (pre-1997 Fulltext). New York, N.Y.: Jul 1,
1996.Vol.161, Iss. 125; pg. 12.A
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Abstract (Document Summary)
U.S. commercial banks will spend nearly $18 billion on information technology this year.
For an industry that is required to produce reams of financial reports, it is perhaps
incongruous that there is no public information on where all this money goes.
From surveys, we know that banks invest about a quarter of their technology dollars on
new technologies and applications. That $4.4 billion is typically aimed at increasing
revenue or reducing expenses, either by improving existing systems or automating
manual tasks.
To gauge the advantages of applying new systems, information technology decision
makers theoretically use cost-benefit analyses. They take each business problem and
weigh different solutions that could require changing operational procedures or investing
in systems. But a cost-benefit analysis has some well-known limitations.
Full Text (1201 words)
(Copyright American Banker Inc. - Bond Buyer 1996)
U.S. commercial banks will spend nearly $18 billion on information technology this year.
For an industry that is required to produce reams of financial reports, it is perhaps
incongruous that there is no public information on where all this money goes.
From surveys, we know that banks invest about a quarter of their technology dollars on
new technologies and applications. That $4.4 billion is typically aimed at increasing
revenue or reducing expenses, either by improving existing systems or automating
manual tasks.
To gauge the advantages of applying new systems, information technology decision
makers theoretically use cost-benefit analyses. They take each business problem and
weigh different solutions that could require changing operational procedures or investing
in systems. But a cost-benefit analysis has some well-known limitations.
*The costs of the information technology solution are often indeterminable, especially
when extensive development or new technologies are involved.
*One-time costs are considered, not life-cycle costs.
*The benefits, even if clearly defined, may not be quantifiable, especially when future
revenue estimates depend on competitors' actions or when the benefits are somewhat
qualitative.
*Those responsible for implementing the benefits are usually not those who make the
cost-benefit calculations.
*Postmortem analysis to hone the organization's cost-benefit techniques is almost never
done.
All these limitations are described in textbooks. The point is that bankers should be as
accurate and complete as possible in estimating benefits. They must also work to
improve techniques by adopting follow-up procedures.
But there are other reasons why cost-benefit analysis is difficult to achieve and apply.
We call these hard, harder, and hardest.
*Hard Choices: Individual decisions are linked together and cannot be made in a
vacuum.
Banks are expected to spend at least $2 billion to rewrite computer code to properly
account for years beyond 2000. However, the cost for a bank is proportional to the
amount of code it has, since each line of code must be searched for date fields and
corrected wherever one is found. Thus, a bank with multiple application systems will
incur more costs than a bank with a single system. That creates a dilemma: Should the
bank regard this as an opportunity to replace those duplicate systems?
BankAmerica Corp., for example, uses a large proprietary deposit system in California;
its Seafirst unit uses a Hogan deposit system; in other states, it outsources deposits to
Marshall & Ilsley; and in other countries it is installing Fiserv's core accounting software.
Chase Manhattan uses the Alltel deposit system for retail banking in New York and a
different, proprietary deposit system for its commercial customers and its Texas
Commerce affiliate. First Chicago NBD Corp. has three commercial loan systems.
Each of these banks may have sound reasons, such as organizational independence or
unique features and functions, for supporting multiple applications systems. But making
the year 2000 compliance decision will surely be harder when the extra costs of
converting those multiple applications are considered. Chase, for example, is expected
to combined 40 commercial lending systems into two, in part because of 2000
compliance.
*Harder Choices. Sometimes a new technology is a potential information technology
solution looking for a problem.
New technologies, such as the smart card embedded with computer chips, don't arrive
because of business problems for which they are the obvious solution. Rather, they
emerge because of underlying progress in scientific knowledge.
Visualization technologies, for example, can create high-quality graphics from digital
data. This is useful in making animated films - but can it be used in financial services?
One potential use is to create four- dimensional arrays - that's three spatial dimensions
plus color - from real-time spreadsheets. On a trading floor, each cell could define two
currencies, the bar height could equal the foreign exchange spread between them, and
the bar color could represent the current profitability of the position.
All major U.S. dealers are experimenting with this technology, and about 750 desks use
the technology.
This is interesting because the normal relationship between problem and solution are
reversed. The application is technology-driven and this is what makes making the
decision harder.
*Hardest Choice. Trying to match a new technology with an old, intractable problem.
Some 40% of banks' noninterest expense base goes to the retail delivery channel. For
decades, technology investments have tried to reduce costs or increase revenue. The
result has been a profileration of retail channels, from branches and automated teller
machines to home banking. Yet benefits are elusive, which brings into doubt the wisdom
of the decisions. Each successive round of delivery channel investments has seemed to
create more problems than it solved.
One reason is that each channel seems to merit its own systems, including separate
channel-specific clients and servers, each with their own interfaces to the different
mainframe or departmental core systems. Each channel has gotten out of sync with the
others. So, a new information technology need has arrived - for an enterprise delivery
architecture based on a wide area network and a messaging service that sits between
the channels and the core applications.
A second "hardest" example is a problem presented by banks' general ledger systems.
To transfer data for roll-up from specialized applications on second-tier general ledgers
to holding company general ledgers, they may be relying on "SneakerNet." They may
combine data with incongruent time periods, and these data may frequently conflict.
Profit as measured by the general ledger may not equal profit from the profitability
system because of timing and definition differences, backdating, or calculation
differences. In short, the roll-up sequence isn't streamlined.
One solution would be to use a new client/server general ledger system. The benefits
would be larger code block sizes, auditable reversal capability, and collection of
nonmonetary data, such as head count, CUSIPs, or transaction volumes. Yet the
decision is complicated because new general ledger systems may well be optimally
placed behind, not in front of, a bank's data warehouse. If the bank doesn't have a data
warehouse, it may need to rethink its entire decision support infrastructure, thereby
complicating the decision enormously.
Finally, it pays not to invest in a cost-benefit analysis of the wrong problem. Information
technology investments are sometimes driven by the marketplace, not by the individual
bank. For example, in 1986 and again in 1993, mortgage-backed security issuance
reached a cyclical peak. New technological capabilities came on the market at those
times - such as Fannie Mae's systems to give lenders direct agency access for loan sale
and delivery or private vendors' systems to manage interest rate risk. To maintain
technological parity at those times, mortgage players had to move with the herd whether or not they were prepared.
Information technology decisions are growing in importance but so is the difficulty of
making those decisions. The traditional cost-benefit analysis is useful for easy choices,
but care should be taken to cope with the limitations. For hard, harder, and hardest
decisions, deep analysis and industry insight is required. Banks must stay educated
about the impacts of information technology and must follow the trends. The new
banking paradigm must be imagined, but realistically. Bank executives who make better
information technology decisions will inevitably pull ahead of those who don't.
Diogo Teixeira is president of the Tower Group, Wellesley, Mass. Bill Bradway
contributed to this article.