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Making The Biggest Bang

For Your IT Bucks

inventive

Tehran, 7 January 2014

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IT spend

Banking: an IT intensive industry

3% -

10%

Income

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Compliance

Cost

reductions

Time

RO

C Automation

Front office

investments

Infrastructure

consolidation

System

simplification

Business

development

Business priorities driving IT spending

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111 140

2011 2017

Business priorities driving IT spending

Retail banks IT spend

Global, USD, billion

Source: Ovum

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0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013 2014 2015 2016

Global

Source: Ovum

Global IT spend growth will increase to 4%

Retail bank IT spend yoy change

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0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013 2014 2015 2016

MEA

Global

MEA banks have a different pattern

Retail bank IT spend yoy change

Source: Ovum

How can banks maximize the benefits of their

IT investments?

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105 banks studied in three continents

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− Deposits

− Cards

− Loans

− Payments

− Investments

− Bank assurance

Retail banking

− Lending

− Financing

− Cash management

− Payments

− Venture capital

− Custody

Corporate banking

− Equities

− Derivatives

− Fixed income

− M&A

− Treasury

Capital markets

700 KPIs collected across 3 years

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• Governance and organization

• Outsourcing / offshoring

• Application architecture complexity

• Hardware utilization

Non-quantitative attributes

• IT budget allocation method

• …

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IT spend

Income

Cost

Income

High Low

High

Low

Cross reference business and IT to find

effective banks

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IT spend

Cross reference business and IT to find

effective banks

• Opex vs capex

• Infrastructure, application, admin

• Application development vs

maintenance

• Front office vs back office

• Hardware, software, personnel

• In-house vs outsource

• Running vs changing the business

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6.4%

48.3%

IT spend

Income

Cost

Income

High Low

High

Low

Asian bank averages

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IT spend

Income

Cost

Income

High Low

High

Low

C A

D B

“A” banks relatively spend less get more

6.4%

48.3%

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More IT spend

=

Higher

profitability

Operating

country

=

Market advantage

New platform

=

Higher value

Scale

=

Cost

advantage

Common

misconceptions

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More spend on IT does not lead to more

profitability

IT spend

Income

Cost

Income

High Low

High

Low

Too much on

running

operations

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IT spend

Income

Cost

Income

High Low

High

Low

A

D

Application development spend ÷ application maintenance spend

A : D = 2x

“A” banks’ app dev vs maint. is 2x of “D’s”

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Economies of

scale • Complex environments

• Integration challenges

Scale outweighed by complexity

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Capacity

on-demand

Virtualization Help desk

outsourcing Flexible

servers

Small can get cost advantage too

Smart

sourcing

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Labor costs and skill

advantages can be

leveraged across

countries and

continents

Home country and market advantage has

no correlation

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Age of core banking system is not relevant

‘A’ bank

‘D’ bank

50%

50%

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Scalability

New product time to

market Cost of legacy

Customer centricity

Revenue growth

Common benefits realized and not realized

in core system replacement

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Translating IT investment to value

IT Investments

Business

engagement

Busines

s value

Innovation, differentiation

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Breaking time and distance limit with video

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Increase staff productivity and customer

satisfaction with hybrid self service stations

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Enrich experience with media emersion

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• Co-located bank-coffee shop

• Unviable economics

• Initiative was cancelled

Re-thinking of business economics

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IT spend

Income

Cost

Income

High Low

High

Low

Operational and

IT management

practices Leading

bank

Linkage between IT practices and results

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• Executive engagement

• Business engagement

• IT organization

• Project portfolio management

Strong

management

Good IT

governance

IT management and business integration

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Forma governance

Business IT

Demand

Supply

Value creation levers

…

…

…

…

…

…

Better business-IT cooperation

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• Span of control of IT across the banks

• Organization of the infrastructure

• Application development and application maintenance

resources

• Accountability of CIOs

• Financial ownership of IT budgets

• IT staff compensation elements

IT governance

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IT spend

Income

Cost

Income

High Low

High

Low

13%

11.7%

“A” banks scored high on governance

Profit to income ratio, European banks studied

A

D

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“A” banks drive IT agenda more directly

IT spend

Income

Cost

Income

High Low

High

Low

A

D

Outsourcing spend ÷ income

A : D = 0.25x

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IT management

Infrastructure

Application

development &

maintenance

Desktop

computing

Wholesale outsourcing restricts flexibility

Wholesale

outsourcing

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“A” banks emphasize more on innovation

IT spend

Income

Cost

Income

High Low

High

Low

A

D

% of IT budget on innovation (new services and capabilities)

A : D = 1.6x

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“A” banks run with ¼ of apps of “D” banks

IT spend

Income

Cost

Income

High Low

High

Low

A

D

Average number of applications

A : D = 0.25x

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• Less complex

application

connection

• Lower labor cost

• Flexible

architecture

• Standard

interface

• Middleware

Disciplined approach to architecture

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“A” banks customize applications less

IT spend

Income

Cost

Income

High Low

High

Low

A

D

% of applications difficult to change due to customization

A : D = 0.5x

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IT spend

Income

Cost

Income

High Low

High

Low

A

D

“A” banks utilize infrastructure more

A : D = 1.9x

Unix server utilization

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Most top performers stay at the top

IT spend

Income

Cost

Income

High Low

High

Low

Trends over several years

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IT spend

Income

Cost

Income

High Low

High

Low

Some banks can improve while some can’t

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Reduce IT spending Selectively reinvest

2 - 4 year transformation

Sustained commitment from top makes the

difference

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Principles

Transparency

Performance

management

A balance between short-term

performance gains and long-

term investments

2

1

3

Common principles of leading banks

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Governance Model

• Prioritization

• Alignment Gloves

Business

executives

− IT savvy

− Direction

Hand

IT

executives

− Business

savvy

− IT experts

Engagement from the top ranks

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• Vast physical branch network

• Decentralization of operation

• Less automation

• Less sources of revenue

Cost-income ratios in Iran: 25% to 85%

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Performance

Risk control

Quality of

service

Operational

efficiency

Innovation

IRAN Opportunities of improvement

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Other External services

External staff

Internal staff

Network equipment Hardware

Software

Europe Asia Iran

?

IRAN Need to establish Iran benchmarks

IT spend

Income

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IRAN

• How effectively are you using IT resources?

• What IT capabilities do you have to create new business?

• How should you allocate IT resources?

• What governance is required to gain advantage?

• …

Benchmarking to answer key questions

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Objective and

sound judgment

of data

• Right

participants

• Right questions

• Clear definition

• Consistent

interpretation

Benchmarking key success factors

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Hartmut Schnabel

Previously EY, Roland Burger

Miles Au Yeung

Previously EY, McKinsey

10 consulting projects in Iran since

2009

inventive

Making The Biggest Bang

For Your IT Bucks

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info@inventive-consult.com

www.inventive-consult.com