Bank IT investment can play an important role in helping financial institutions reduce operating expenses while supporting opportunities for long-term revenue growth. During difficult economic periods, however, technology projects can become vulnerable to budget cuts as banks shift resources toward more immediate priorities.
Moving repeatedly between cost reduction and revenue generation can create additional challenges, particularly when projects are delayed before their benefits are realized. Financial institutions may be better served by evaluating technology initiatives according to both their potential efficiencies and their ability to strengthen the bank’s competitive position.
In their attempt to cut costs in difficult times, banks often cut back on revenue-enhancing IT projects, which harms long-term growth.
In the fall of 2008, for example, with the credit crisis creating fear across the industry, the immediate reaction was to slash spending. Many approved projects – new branches, new technology and new technology integrations – were put on ice, along with hiring and compensation. The watchword was, “No unnecessary expenditures.”Not long after that, in anticipation of fees being decimated by Reg E and Dodd-Frank, the almost universal rallying cry swung to: “Quick, find new sources of organic revenue.” Pushed to the back burner were enhancements to existing IT systems that would have automated manual activities and also core systems optimizations. The explanation often went, “We will get to those later, but right now we need to focus our resources on revenue.”
Not to exaggerate – neither strategy was ever exclusive. But definite swings in focus were and remain detectable, alternately consuming the focus of decision-making executives while diverting the concentration of their IT project teams.These swings are costly in their very nature, sometimes gutting expense initiatives just when they are about to produce results, and almost always causing employees to question the relevance of initiatives to which top management had only recently expressed its full commitment. Today, in some of those banks, we see a top-heavy emphasis on expense reductions threatening the gains of last year’s emphasis on organic revenue.
Confusion, distraction, uncertain commitment – not likely ingredients for success in difficult times. But more harmful than the inconsistency is the fact that the swings in management attention are at odds with financial wisdom: revenue and expenses are not opposites. They are yin and yang, seemingly polar opposites but interconnected, interdependent and complimentary. For best results, short-term and long-term alike, it is important that the bank’s chief information officer (CIO) and the businesses IT supports make sure that their initiatives take both sides of the spectrum fully into account.
As financial institutions review their annual and longer-term budgets, they will continue to look for projects that provide high levels of value and a strong return on investment. Investments in IT projects can be one area where greater efficiencies are obtained. These efficiencies can be achieved through in-house investments, as well as outsourcing with third-party vendors. Ignoring promising opportunities, however, can reduce the overall competitiveness of an FI.
Financial institutions reviewing their technology budgets should consider the relationship between cost reduction and revenue growth rather than treating the two objectives as competing priorities. Automation, core system optimization, integration projects, and strategic outsourcing can potentially improve efficiency while also supporting better products and services.
A disciplined approach to bank IT investment can help institutions prioritize projects that deliver measurable value and a strong return on investment. Maintaining a balanced, consistent technology strategy can also help banks avoid sacrificing promising long-term opportunities in response to short-term shifts in business priorities.
