15 September 2008 Features

 

IT & Ops: It's the efficiency, stupid

Dan Barnes

Your chief operations officer may have the wrong operations and IT model for your bank.

Efficiency is the ultimate driver for any listed company, increasing shareholder returns by delivering profits at reduced costs. While the sales force generates income, operations and IT departments are the backbone of the enterprise and for the most part they are cost centres.

Often the chief operations officer will run them and the way in which they interact determines the bank's ability to operate efficiently. Although no one model fits all, it is crucial to manage the two correctly. In this issue we examine two of the key areas within IT provision that can enable banks to manage the efficiency of the IT function within the banking environment. First we examine the data centre, a costly but necessary part of banking operations. From retail to investment banking, the growth of electronic transactions has driven the scale of data processing through the roof. Second, we look at the potential for a more economic provision of computing power through the concept of utility computing and virtualisation. This model conceives of payment for computing power being balanced according to usage.

In both cases the users are searching for increased efficiency from their resources, less cost for a matching or improved service, created by innovative use of technologies. Within the same banks there is another struggle for efficiency.

The ability of banks to automate processes - and benefit from the resulting situation - is built on the correct balancing of systems and human intervention. After all, computers cannot make mistakes - but neither can they correct them. Whether a retail bank is looking to allow customers access to their accounts through the internet or a broker is automating the settlement of trades, nothing can be done without some human oversight to manage the exceptional situation. Operations and IT therefore work in tandem to support the functioning of the front office in whatever form - trading, selling mortgages, netting a corporation's cash payments - but they must operate together. The challenge for chief officers within any financial services company is the application of a strategy that does not prevent the two from operating effectively or competitively, but still matches the needs of both internal and external customers while developing the functions' efficiency.

What's the difference?

A simple delineation that can be drawn between operations and IT separates manual and automated processes respectively. As Mike Bush, head of product development at BCS observes, it may be easy to ring fence them but there is significant crossover. "When you think of the function that IT provides in enabling a bank to process its product then it is effectively just the electronic equivalent of what operations does on a manual basis," he says.

In this discussion it is important to note that certain aspects of technology - ‘keeping the lights on' - can often be considered separately to other IT functions. As Bob McDowall, research director at TowerGroup, notes: "IT and operations often have a collective interest, a collective budget - you have to keep the infrastructure separate - but the ongoing development of applications, the design and so on, has to be a collaborative effort."

For some financial services companies there is value to be found from combining the two departments, while others find a separation allows greater focus. To determine the best route ahead, the organisation needs to demonstrate self-awareness and a realistic view of its situation. "I look at the manufacturing model, taking operations and IT together - possibly with purchasing and property - as the enablers of commercial success," says Clara Challoner Walker, associate consulting partner at IBM. "If one looks at RBS in their takeover of NatWest, Fred Goodwin conceived of this idea with the two departments considered together as ‘manufacturing'."

Challoner Walker says that the separation or unification of the two has both pros and cons, "The good thing about both areas reporting as one is that it is more pure in the manufacturing sense as you have awareness of your entire organisation's capability. However in organisations where there is a need for control - often for banks where there is a transformational situation - the division of IT and operations allows for more focused measurement of achievements and that is crucial to a board that wants to see successful, directed change."

McDowall, research director at TowerGroup agrees. "I have found that in good times an integrated model is terrific but in tough times they are often pared back," he says.

This control can only occur successfully if the board truly understands the effect of the model, as Richard Boreham, director of Financial Services IT Advisory at KPMG points out. "Organisations that prefer a central command view of the world - RBS and Santander are both successful examples - have huge levels of sponsorship from their senior management who are prepared to tolerate a certain level of aggravation, knowing the advantages that the model brings in terms of having a centralised function."

This importance of determining the bank's strategy has resulted in a change to the management of the functions. "We recently carried out a CIO survey looking at the changing role of the chief information officer. Where in the past they could just be a technologist, they are now required to fully understand what constitutes a successful business in the context of sales, service and market share," says Challoner Walker at IBM. The impact that efficient operations and IT management can have on a bank can directly enable a bank's ability to grow.

Santander, the Spanish banking giant, has absorbed Abbey in the UK, assets of ABN Amro as part of the largest financial services M&A deal in history and has now made an offer for another UK bank, Alliance and Leicester, all within the space of four years. This has been achieved through careful management of technology and operations as the bank explained to investors: "The efforts in IT and Operations contributed and will continue to contribute to the Group's efficiency improvement: from 60.3% in 2001 to 48.5% in 2006 and 44.4% in H1 2007" (see chart below).

Within Saxo Bank, an organisation that describes itself as part bank, part IT company, the COO is responsible for IT, operations, data management and IT project managers. The separation of work is made according to activity, says Henrik Alsoe, head of IT operations for the bank. "We divide the work that is to be done into new initiatives and small enhancements which are prioritised by our investment steering committee. I am then responsible for prioritising the small enhancements, determined according to our operational needs. We have a certain amount of allocated time from the IT developers so we meet monthly to discuss our requirements and they let us know what they can achieve in the next four weeks."

The bank downloads the trades that have occurred on its platform on the front office and they are then processed in the back office via a fully automated process. "On a perfect day" he says, "nobody would have to manually engage in the process."

It is clearly valuable to achieve such standards in straight through processing, but to demonstrate true efficiency, a bank must be able to compare the costs of both operations and IT efficiency. Mike West, vice president, international marketing at Broadridge, notes that although metrics such as the ‘cost per trade' model can be applied to determine effective operations, such measures are rarely simple, "An IT department might support front, middle and back office and then work across asset classes - securities, derivatives, treasury - and so cross-charging in that environment is not always the most straightforward thing."

According to Gerrit Seidel, managing director at AD Little, the ability to determine efficiency of both operations and IT is best driven through clear communication between the chief operations officer and the business they are supporting, "Banks with strong COOs really see competitive advantage through ensuring that the value of technologies and processes is widely understood and accepted within the organisation. These generally have at least a dotted line from the COO to the market facing area, and then have COOs that work within the lines of business - they have a very strong focus on cost efficiency." (see table below)

Kieran Mullaley, a partner at Capco, believes that the key to establishing any empirical measurement of efficiency in operations is through a combination of both technology and process, primarily through workflow.

"In the trading environment you can highlight bottlenecks where a trade hasn't moved from one process to another, and create automated alerts to identify where the process is slowing down. This allows you to get better measures for the ops and the manual side - you can get measures for the speed of the system, the capacity, and you can make adjustments to ensure it is working at its optimum."

Within the retail and wholesale banking environment, the advantages of automation can be significant says Mark Gunning, group strategy director of Temenos. "By setting metric targets you can generate enthusiasm and commitment within a bank - I've recently seen a report where one task achieved a 97% efficiency gain through automation - that's only one task out of 20 but that is the advantage of automating it."

Ultimately it is the front office that determines the success of its supporting functions. "To truly succeed, you  need a clear line of sight between what is happening in the IT organisation and the effect this has on the customer," says Challoner Walker. "Where this gets really exciting is when the IT and operations functions understand the impact that an application has on the income - or loss of income - for the parent organisation." BT