Aligning and rationalizing your business applications: How to simplify the IT portfolio and reduce costs in financial services

In financial services, even as revenues stagnate and overall costs increase, spending on IT for the banking industry has ballooned. This is compelling banks and financial services companies to undertake large initiatives for “application rationalization”: consolidating and improving the ways in which IT systems are used. This white paper describes proven strategies for banks to successfully execute application rationalization programs, combining bottom-up organizational design with top-down guidance. This approach will cut costs and allow your business to grow stronger.

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Aligning and rationalizing your business applications
How to simplify the IT portfolio and reduce costs in financial services

Ajay Nayar Principal +1-404-271-3890 [email protected]

Florham Park
Ramesh Nair Partner +1-973-410-7673 [email protected]

Volkmar Koch Partner +49-69-97167-412 [email protected]

This report was originally published by Booz & Company in 2013.
Strategy& 2

Executive summary
Banks are placing significant emphasis on operating efficiency as revenues stagnate and costs increase. In particular, IT spend for the banking industry has ballooned, compelling banks and financial services companies to undertake large initiatives for “application rationalization”: consolidating and improving the ways in which IT systems are used. This document describes proven strategies for banks to successfully execute application rationalization programs. At the heart of this approach is bottom-up design along with top-down guidance. This approach allows you to address not just the symptoms, but the root causes of portfolio incoherence. Further, it will cut costs and allow your business to grow stronger.



During the last 10 years, stagnant revenue and increasing costs have diminished the operating efficiency for many banks
Efficiency ratio of top 15 mid-cap banks (Asset size between US$50 billion and $350 billion)
63 61 59 57 55 53 51 49 47 45 2004 2005 2006 2007 2008 2009 2010 2011
Average efficencyRatio ratio Average Efficiency

2004–08: 60% average efficiency ratio

2008–11: 63% average efficiency ratio

The typical bank would need to save $1 billion (-26%) or grow revenue by $2 billion (33%) over the next two years to return to a 60% efficiency ratio median
Efficiency ratio calculation: Non-interest expense/operating revenue. Lower efficiency ratios are more desirable; in effect, this measure describes the percentage of revenue consumed by overhead and other spending. Source: SNL Financial



Among selected technology-intensive industries, the banking industry spends the most on information technology
IT spending
As percentage of revenue As percentage of operating expenses


Banking & financial services


Software publishing Education Media & entertainment Professional services Telecom Pharma

Source: Gartner IT Metrics Report; IT spend, operating expense, and profit data collected between 2009 and 2011



A major factor in rising IT expense is the cost of applications, which are often highly fragmented at major banks
Total cost of ownership (TCO) (Millions) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Rank by TCO (Appropriately scaled applications, touching multiple customers or business units, are probably only those at the far left)

IT applications for a typical large U.S. bank

Top 10 applications

Lower 44 applications

Disguised data—a composite from multiple projects Source: Strategy&



To improve operating efficiency by decreasing IT spend, banks have pursued different application rationalization strategies
Application rationalization strategies
Strategic cost reduction •  Reducing TCO for the application portfolio by cutting expenses in people, processes, and technology •  Focusing on core business, reducing non-related IT expenses •  Aligning the IT architecture with the portfolio of products and services

Repositioning for future growth

•  Improving speed-to-market and agility through organizational restructuring and process improvements •  Improving scalability through automation

Simplification and modernization

•  Consolidating IT infrastructure •  Making use of new technologies such as virtualization and cloud sourcing

Regulatory compliance

•  Combining policies, rules, and practices •  Spreading compliance practices across multiple systems



But as banks execute these strategies, they may need to pay more attention to the root causes that contribute to portfolio incoherence
Root cause
Decentralized technology selection processes Inadequate integration before and after M&A

Impact to the application portfolio
Redundant IT practices, with limited reuse of technologies across products and services Absorption of incoming application portfolios on nearly an as-is basis; barriers to interoperability among IT systems • 

Live asset management database, regularly updated and monitored, to provide a better view of the IT portfolio and options for reusing the technology Comprehensive pre-merger integration plan, mapping existing applications between parties— including a plan to eliminate redundancies

Application portfolio incoherency



Inconsistent governance of technology standards


Overlapping platforms with ambiguously defined or inconsistently enforced standards


Clearly defined technology standards that eliminate redundancies Comprehensive breakdown of TCO for the entire portfolio Enterprise demand management process that determines a “home” for each functionality that is needed—and a norm oriented toward minimal modification of plans Unified and clearly defined asset management process


Limited focus on IT cost efficiencies Suboptimal demand management Suboptimal sourcing


Suboptimal portfolio planning that does not take into account the total cost of operations for different products and services Expensive and inefficient rework in application disposition plans when functional demands change Redundant licenses and underutilized capacities across the enterprise, stemming from fragmented asset management







Banks routinely use a bottom-up approach to rationalization (in which each department plots its approach), but there are limits to this method
Typical bottom-up approach

Application rationalization target state
TCO & overlap assessment •  Determine TCO for application portfolio and set target TCO •  Assess functionality overlaps among the applications and overall effectiveness of the application portfolio Portfolio cost reduction priorities •  Identify opportunities to retire, consolidate, or extend applications based on overlap analysis •  Prioritize the rationalization effort and develop a roadmap to achieve performance targets

Limits of the bottom-up approach
•  Bottom-up rationalization effort is based solely on TCO •  Overlap assessment fails to factor in long-term strategic view •  Less recognition of changes in target state architecture, driven by new technology and shifting investment priorities



Combining the typical, bottom-up approach with top-down strategies will help build new capabilities to complement rationalization efforts
Recommended combination (bottom-up and top-down) approach
•  Assess ways in which the application portfolio can support business strategy and improve differentiating enterprisewide capabilities Business capability alignment Top-down •  Understand the type of applications required and assess requirements against existing portfolio •  Define target architecture and operational processes Portfolio cost reduction priorities

Application rationalization target state
Bottom-up TCO & overlap assessment Portfolio cost reduction priorities

Strengths of the combined approach •  •  •  •  •  Clearly identified priorities ensure that the portfolio delivers strategic capabilities Enterprise-wide and local perspectives help balance long term vision and short term tactical needs Comprehensive understanding of business and IT fitness criteria for each application ensure optimal portfolio rationalization Exhaustive assessment of prospective applications and updates finds opportunities to reduce costs and support capabilities Defined target state architecture addresses the IT support needed for existing and emerging business models



The combination approach decreases the number of applications, lowers TCO, and drives the development of new capabilities
Composite example (drawn from several companies)
No. of apps Total cost (millions)

•  The top-down approach enables the identification of the key business capabilities required to achieve strategic priorities, along with the necessary IT support •  The tech projects portfolio is aligned to deliver IT support in a way that better fits the company’s strategy •  Plans for the affected applications are incorporated into the rationalization strategy •  The final TCO assessment reflects the savings from rationalizations and the incremental spend for new capabilities

600 550 500 450 400 350 300 250 200 150
Applications to Start Platform A Applications Enterprise Initiatives Doc Management BU Initiatives Platform B Applications App Consolidation Retired New Platform B Functions New Platform A Functions

0.6 0.5 0.4 0.3 0.2 0.1 0

Pricing and Underwriting

App reduction

Benefits from new capabilities

Total cost of ownership



We suggest using proprietary, accelerated models to execute these top-down and bottom-up application rationalization programs

1.  2.  3.  4. 

Identify business and IT Priorities that support business capabilities Align Target State Architecture with business strategies and capabilities Incorporate change management plans to migrate to IT operating model Analyze individual applications against developed fitness criteria

Planning & roadmapping
Migration plan development
•  Define current state application disposition •  Determine roadmap to migrate to target state


Baselining & analysis

•  Decide whether each application will be extended, maintained, consolidated with others, or retired altogether

Bottom-up Bottom up steps are done in parallel with top-down steps 1.  2.  3.  4.  Analyze TCO of the application portfolio Assess functionality overlaps across applications Perform cost/benefit analysis and integrated program-level reporting plan Identify and prioritize rationalization opportunities

Business case development
•  Assess tco impact and cost of migrating to target state architecture •  Identify benefits from new capabilities to be delivered



An effective application rationalization approach might be piloted in one part of the company, and then rolled out across the whole enterprise
Coordinated rationalization strategy
Create & establish artifacts and provide integrated reporting

Enterprise coordination

•  Communicate to each business unit the templates, artifacts, and models •  Define and/or enhance program structure and reporting requirements •  Implement and/or enhance process for data collection, review, and reporting

Communicate & coordinate process

Business unit execution

•  Each business executes its work streams, using templates provided by the enterprise •  Each BU reports back to enterprise leadership •  Targeted execution support provided by enterprise groups as needed



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This report was originally published by Booz & Company in 2013.
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