Strategic IT Cost Reduction Can Preserve Core Strengths

The pressures on bank IT budgets will continue into 2009 as institutions look to execute broad cost-reduction programs to preserve capital and improve profitability. CIOs have been asked not only to cut discretionary spending, but to drive additional savings out of their baseline technology operational run rates as well.

Without a comprehensive business and technology operations strategy and a "value-add IT cost reduction" approach, however, such efforts often fall short of achieving sustainable savings, cause increased service disruption, and prevent IT from delivering improvements to drive revenue growth and profitability. Banks must take a more long-term approach and should view IT-focused spending for what it really is -- an investment in business effectiveness and shareholder value that drives high performance. Such a mind-set opens the way to a more strategic approach to IT costs, enabling the development of a strong IT core that promotes competitive advantage while reducing overall IT costs.

The IT budget at most banks typically represents roughly 15 percent of the total operating costs. But more important, the IT budget is critical to taking costs out of the other 85 percent of the cost base. So initiatives to reduce technology costs must be undertaken within the context of how such initiatives facilitate cost reduction more broadly across the business.

In summary, with pressures mounting, CIOs need to go on the offense to effectively deliver sustainable IT cost reductions that contribute to profitable growth. The good news is that value-add savings remain available:

• Reduce third-party vendor spending. Many CIOs overpay vendors for products and services, including telecom, hardware and software. They also provide and pay for service levels greater than the business requires. Reviewing vendor spend and demand management with the business can deliver significant and quick savings to the bottom line.
• Improve testing quality. Banks can reduce software-testing costs and accelerate throughput -- either internally or with a partner -- by implementing a testing center of excellence and leveraging leading methodologies and applied statistics-based tools. Centralizing the full testing function under the IT organization's responsibility (including the business analyst role) dramatically improves testing results.
• Transform application outsourcing. Although application outsourcing programs have delivered 10 percent to 20 percent labor arbitrage savings, most banks have yet to contractually require their outsourcing providers to deliver ongoing efficiency, savings and business ideas to drive long-term growth and profitability.
• Outsource infrastructure. Many banks have not explored infrastructure outsourcing, where savings can reach 30 percent to 40 percent.
• Rationalize applications. Banks should consolidate and rationalize application portfolios and infrastructure platforms where feasible to drive additional savings.