Bank IT Costs - The Right Amount is an Individual Matter

Two CIOs walk into a bar at a bankers' convention. Bob says I work for a $500 million bank and we use the XYZ core system. John says ditto. How much do you spend on IT? Bob says my annual budget is $2 million. John says ditto, let's have a beer. They feel good about themselves and talk about last night's game.Two other CIOs walk into the same bar and share the same asset size and core system. But when Henry asks Tom how much he spends on IT, Tom says three-quarters of what you spend. Tom is so pleased with himself that he buys the beers while Henry cries in his.

The four men could be wrong about their comfort or discomfort levels because asset size is one of the worst yardsticks to use in reconciling IT costs. Asset size works only if several other processing-sensitive factors are examined and prove to be equal.

In the case of the three large U.S. banks that are $2+ trillion in assets, their IT budgets are about $10 billion each. Those banks pay for infrastructure and that's why their costs are the same. It's like the cost of a Boeing 787 Dreamliner trip across the pond. If the 787 ever gets off the ground, a trip will cost the same whether the load factor is 100% or 60%. Go to the other end of the spectrum. The IT cost for a de novo is out of whack with bank size because unlike a new baby on formula, de novos go for the full menu approach - every application, using the best resources investor money can buy, but low customer activity. A de novo has an annual IT budget that's fixed at about $90k per year.

There are lots of ways to assess IT costs. The most common ones, used by lazy bankers, are wrong. For example, IT cost as a percent of total non interest expense - bad idea. As a percent of revenue - very bad idea because, for a bank, revenue is not representative of operations activity. You know the old tried and true adage, "Twenty percent of our customers produce 80% of our earnings."

The only reliable way to assess IT cost is to make it bank-specific. Collect workload data about the bank. Workload data begins with these words, "how many DDA transactions/accounts does the bank process each month." Multiply these numbers by the standard cost for each application transaction. Add in pass-thru costs. Add bank staff costs of IT employees (every bank has some even if it outsources). Look for bootlegged resources that "cagey" department managers acquired to bypass central IT operations. Factor in the indirect resources that contribute to IT performance according to the "full absorption" method of cost accounting. Add them all up and you've got the real cost of IT for your bank. That's the number that counts, not what others are spending. And don't believe the number reported by the General Ledger. GL simply reports how a cagey operator coded a charge. Look at Office Supplies GL account and you'll find a few hidden IT resources.

If art is in the eye of the beholder, then IT costs are in the spreadsheets of a good analyst or cost accountant.