As a consultant, I have worked for 4% of all small banks, 5% of all medium size banks and 14% of the 111 large banks in the U.S. My consulting practice includes 16 services. The second most popular one is an analysis of a bank's IT expense.A significant part of every project for all banks has been performed in the departments that the CFO covers - all functions having to do with accounting. I understand the reason for that client-directed emphasis because after all the rhetoric about how wonderful the new system will be as presented by the bank's IT study team, the vendor of choice, and me, it comes down to an accurate calculation of what the new system will cost. But I never met a cost accountant in any of those banks, and thus I have concluded, bankers don't care much about the cost of anything (except funds) the way manufacturing companies do. I'll bet Mr. Campbell knows exactly how many peas, kernels of corn, pieces of carrots, pieces of potatoes, green beans, macaroni, and all those weird preservatives that go into each can of vegetable soup. When the can is scanned at the checkout, Mr. Campbell knows, to the fraction of a penny, how much of the $1.15 dropped into his company's net profit bucket. He even knows that the difference between his retail price and that of the generic brand (25¢) is the amount he has to recover from his enormous advertising budget. "Mm good, mm good, that's what Campbell's soups are, mm good." I know the jingle is dated, folks, but the tune still plays in my head whenever I think about Campbell's soup.
Here are some things I have discovered about IT costs in the banking arena:
• Whenever I ask a banker what his IT costs are, he answers with an amount that is at least 20% lower than the true costs which I accumulate using the Sherlock Holmes approach. A lot of IT costs never get coded the way the Chart of Accounts intended. Also there are bootlegged IT resources in every bank that department heads have coded as some innocent category like "Office Support." Who can blame them after being told by the CIO it will be three years before the user department's project gets to the top of his "to do list."
• When I asked the Investor Relations department at Citigroup what the IT cost was for the company, I got the typical cleansed response of "That information is not disclosed." I looked at Citi's 2006 annual report, which I believe everyone would agree is designed to disclose, and right there on page 124, it said $3.762 billion for "Technology/communication expense." That number was an increase of 6.8% over 2005's number. I reported the disclosure back to the lady with the protective canned answer as if I were performing a good deed, and her idea of recovery from embarrassment was to send me a copy of the annual report. I now have two Citi annual reports that muddy the waters of IT costs. Citi's IT expense is more like $7 to $8 billion not $3.762 billion. Why they are reporting a partial number is something you'll have to ask the CFO or Citi's auditor, KPMG.
• When I solicit proposals from vendors in the conduct of a client assignment, I usually get price list data. That's as useless as the sticker price in an auto showroom. I bought a new Jeep recently. By the time I left the showroom, I got a $1,500 rebate from Chrysler, a $1,500 credit for paying cash, and $500 if I could prove I was a veteran. When I receive vendor price data, I pour it through my "neutralizer spreadsheets" to arrive at true bank P&L costs. I also ask vendors to submit a pro forma invoice showing what the total charges to the bank will be six months after the go-live date. They never send it to me. What does that tell you? They've got the best lawyers in town.
• The true IT cost is not in itself a measure of good or bad. As a percent of total operating costs, the number can range from 6% to 20%. I would be happy to support the 20% if I knew it was reducing labor intensive bank operations costs by a significant measure. The 6% guys may think they're getting a bargain, but they could be throwing employee-related costs out the window by not spending more on technology. It's not about just doing the math. It's also about measuring the payback.
• The real culprit in reporting IT costs is the fact that we don't have any standards as to what should be included in IT Costs. Bank regulators don't define it. The SEC doesn't define it. The National Institute of Standards & Technology doesn't define it. The American Institute of Certified Public Accountants doesn't define it. And even though I haven't asked the wonder boy of creative accounting, Andy Fastow, I don't believe he ever defined it either. There are 84 line items in my spreadsheets that identify true IT costs for any bank, and it's OK if some cells are blank. For example, some banks do not offer trust services so there is no IT cost.
Now what is the point of all this ranting and raving about reporting a true number? I will tell you in next week's blog.
Art Gillis www.artgillis.comAs a consultant, I have worked for 4% of all small banks, 5% of all medium size banks and 14% of the 111 large banks in the U.S. My consulting practice includes 16 services. The second most popular one is an analysis of a bank's IT expense. A significant part of every project for all banks has been performed in the departments that the CFO covers - all functions having to do with accounting.