18 June 2009 Comments

 

Comment: From crunch to burn

Jim Close, Software AG

Financial services organisations have learned a harsh lesson in efficient IT. Over the latter half of 2008, the rate of organisational change across the industry was swift - as a tightening economy resulted in forced mergers and divestitures, and a scramble for efficiency and transparency not seen since the post-Millennium bubble finally burst.

Many market watchers concentrate on the doom and gloom of job cuts, a shrinking marketplace and the inevitable arrival of new legislation driven by governments desperate to ensure they retain control of national economies. But the eventual outcome of the changes, post credit crunch, is hardly discussed.

In reality, any tough period for business will be accompanied by quick changes to processes, systems and approaches to service and product development. This time things will be no different. So what changes are forward-thinking financial services organisations putting in place now, and how will this affect IT strategies now and for years to come?

New competition

Some views on IT in global financial institutions are clear. According to TowerGroup, firms have two options in the face of the economic slowdown: choose to throw themselves into IT innovation and focus on radical change, or cut spending to survive the crunch.

"In 2009, IT strategies will be challenged by industry volatility, forcing financial services institutions to retract or postpone previously planned IT projects. However, cost-cutting done in desperation may be so deep that it permanently cripples IT structures and jeopardises business lines," said Virginia Garcia, senior research director in the Cross Industry practice at TowerGroup.

If the analysts are right, this will be a critical time for IT - not just in improving efficiency and ultimately saving on cost and boosting productivity, but to defend the markets the firms have spend so long building. The technology vendors that can prove they have a strategic place in those seeking innovation will find themselves in great demand.

It's now down to the business leaders inside the institutions to work out which technologies are the ones that will add value and ensure the flexibility to change quickly with market demand.

Risk and compliance

There is no doubt that new regulation is on the way for the financial services industry. The laws themselves will extend existing legislation such as Sarbanes-Oxley, Basel II and MiFID, and be geared towards ensuring reporting, trading and data security continue to be at the heard of financial strategy. As the economy turns, there is already no room left for error. Every process and system must be watertight to ensure nothing goes unaccounted for, and fraud and operational, credit, and market risks are reduced to a minimum.

To compound the issue, the November 2008 G20 meeting in Washington highlighted the primacy of post-crisis national regulation, regulation that will place diverse demands on one of the most globalised parts of the world economy. This will create an extremely complex compliance challenge, and one that IT will be specifically tasked with for a solution. Financial institutions with a flexible and adaptable IT infrastructure will find it easier to implement and comply with differing new regulations at a time of economic recession. 

The burden on financial IT, therefore, is immense. In an industry that relies on technology to identify risk, trade seamlessly and report quickly, technology is key. Risk management systems, which are both mission critical to financial organisations and represent an opportunity for differentiation, will come under even more scrutiny.

Risk management will need to be placed at the heart of dynamic IT infrastructures, and be flexible enough to integrate with new systems - such as messaging platforms, e-trading tools and web 2.0 technology - while remaining stable enough to keep businesses running and communicate with legacy systems. Could this be too much to ask?

Cherry pickers

Technology approaches such as SOA enable IT to look forward at new developments and backwards at legacy systems simultaneously. This is one technological revolution already occurring in financial services firms across Europe and North America. But the pressure to improve processes has brought another plus - the ability for IT management to cherry pick the best applications for them. The innovation then occurs as films look to their legacy infrastructure to create and deliver those applications.

One organisation that successfully shifted its use of technology to address these issues was National City Corporation (NCC), a large US-based financial services firm. The pressure to respond to the changing pace of regulation had forced NCC into a project-by-project IT development cycle, with solutions being developed to solve issues rather than as an integrated strategy.

Realising that time-to-market and reusability of infrastructure would improve efficiency, NCC reorganised its IT operation around an Integrated Delivery Centre (IDC), which focused specifically on deploying central, coordinated solutions to company-wide problems. Using SOA, the IDC was able to reduce cost and improve the sharing of IT assets across projects including integrated voice recording, fraud detection and transactional, interbank messaging for funds transfer - all representing not just improved service but a six-figure savings per project.

The road to flexible IT

So how does a senior IT leader inside a financial services firm - currently facing an unprecedented level of change inside and outside the organisation - begin the process of adopting IT approaches that will ensure his or her firm emerges from the downturn stronger and more competitive?

Firstly, they should look to Gartner's advice and make the decision between ‘innovation' and ‘hibernation'. This is a key choice, and one that will drive the strategy through the crunch and out the other side.

Secondly, they should look at the exiting IT systems in place inside the organisation - which have often been built up over a long period and are therefore unnecessarily complex and siloed - and see where there are opportunities to rework processes and free resources.

Thirdly - and most importantly - they should be realistic about the technologies they implement. Is there a clear path to ROI? Does the technology of a partner or recently acquired competitor represent a more sensible solution to a problem? Will a technology choice that seems like a quick fix now be able to cope with a change in legislation in a year's time?

Overall, there is no argument against this being time for pragmatism. But as the economy tightens further and the financial services community continues to push for more value back from years of IT investment, the outcome can only be good for process and service efficiency.

Jim Close is UK country manager at Software AG