A Plan of Attack for Cutting Information Technology Costs
Pressures to cut spending and rebuild earnings in the retail-banking sector are not going to ease soon, which means all information technology projects and operations will remain on the chopping block in the months ahead.
Cost cutting alone can be a daunting task for many senior executives, including chief information officers. The bigger challenge is to tighten information technology budgets - which are a significant portion of their noninterest expense - without threatening the future competitiveness of the business.
Our experience suggests that a focused, collaborative effort among senior business and information technology executives to pare expenses and improve efficiency in information technology programs can set the stage for them to confront more complex issues.
In one case of efficiency-led IT transformation, a large retail bank pared roughly 7 percent of its pre-2001 information technology costs within nine months. The leadership team that produced these initial successes was then entrusted with aligning information technology more directly with the bank's three-year strategic priorities. The goal: lowering annual technology budgets by 20 percent from the pre-2001 level.
As at many large banks, information technology activities in this enterprise were highly decentralized. Each business unit managed its information technology independently. Data and insights on technology spending were not shared systematically across the organization. Top management had no way to quickly determine most attractive targets for cutting information technology expenses. A five-step program developed answers to these and related questions.
Step 1: Form a task force of senior executives to pursue immediate efficiencies.
Most senior executives agree that information technology can add business value. The challenge has always been in creating meaningful ways for business and information technology leaders to decide on business and technology tradeoffs.
A group focused in the early stages on cost cutting provides a sensible, results-oriented forum for leaders of the business and technology camps to dig into the immediate budget problems.
Step 2: Initiate an effort to establish IT transparency.
One of the first steps for the senior team is to assemble groups of executives with the drive and skills to drill deep and search broadly across the enterprise. Their job is to prepare an accurate view of how much is being spent on information technology, for what purpose, and with what results.
The checklist encompasses several dimensions, such as expense categories, resource utilization, infrastructure/application portfolio, and total spending by vendors. These data are surprisingly hard to find in most big businesses, including banks. Information technology activities often are isolated within different business units, which use inconsistent methods and categories to measure costs and performance.
Step 3: Identify and go for quick wins.
Once achieved, transparency in information technology provides ammunition for teams to begin identifying best practices, finding opportunities to consolidate activities for scale and broader impact, and targeting inefficiencies.
In the private banking unit of our main case example, inquiry produced a detailed assessment of opportunities in project portfolios, maintenance expenses, vendors' expenses, and infrastructure utilization.
In other examples, first-year savings achieved in information technology efficiency programs totaled 15 percent in overall personnel costs at an investment bank, 9 percent in costs for development personnel in a wholesale bank, 6 percent in infrastructure costs at a global investment bank, and 8 percent in total vendor spend at a large wholesale bank. In each case, projected savings over three years were comfortably in double digits.
Step 4: Design a multiyear information technology strategy.
Collaboration between business and information technology leaders to improve information technology's performance within months can open the door for a bigger agenda with a longer horizon. As business leaders become more comfortable with key elements that drive information technology spending, they gain confidence to dig into thornier, bigger-ticket technology questions that naturally result from their long-term strategy choices and commitments.
Senior executives who lack this confidence typically require information technology leaders to budget their programs annually. This widespread practice inevitably limits how technology programs can support business strategy.
Step 5: Set an opportunistic agenda to exploit efficiency-led momentum.
Identifying long-term initiatives that are natural extensions of ongoing efficiency programs is a basic step for leading and managing a relatively smooth transition to a large-scale transformation of information-technology operations.
In the case noted earlier, the large bank set several follow-on targets. In addition to the target to reduce expenses by 20 percent over three years, executives decided to reinvest part of the savings to build new strategic technology capabilities and plan to manage these with a set of disciplined, return-on-investment criteria. The rest of the savings went straight to the bank's bottom-line.
Joachim Ackermann, Ajit Agrawal and Ranjit Tinaikar
American Banker
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