CEOs — the new IT champions in financial services
There are major opportunities available to CEOs who can shake off the old view of IT as a utilitarian cost center and instead recognize it as a powerful tool that shapes their strategic agenda and underpins capability creation, driving more cost-efficient operations and higher revenue. CEOs need to act now or risk falling permanently behind aggressive adopters such as State Street and JPMorgan Chase.
CEOs — the new IT champions in financial services
Boston John Plansky Senior Partner +1-617-521-8800 john.plansky @strategyand.pwc.com Chicago Kelley Mavros Partner +1-312-578-4715 kelley.mavros @strategyand.pwc.com
Frankfurt Dr. Peter Gassmann Partner +49-69-97167-470 peter.gassmann @strategyand.pwc.com London Alan Gemes Senior Partner +44-20-7393-3290 alan.gemes @strategyand.pwc.com
Munich Dr. Johannes Bussmann Partner +49-89-54525-535 johannes.bussmann @strategyand.pwc.com New York Suresh Nirmal Principal +1-212-551-6704 suresh.nirmal @strategyand.pwc.com
São Paulo Ivan de Souza Senior Partner +55-11-5501-6368 ivan.desouza @strategyand.pwc.com Tokyo Vanessa Wallace Partner +61-2-9321-1906 vanessa.wallace @strategyand.pwc.com
About the authors
John Plansky is a senior partner with Strategy& based in Boston. He specializes in IT strategy, IT restructuring, large-scale transformations, and outsourcing initiatives for financial services firms. Roman Regelman was formerly a partner with Strategy&. Kelley Mavros is a partner with Strategy& based in Chicago. She specializes in technology strategy and business transformation programs for financial services and consumer companies. Suresh Nirmal is a principal with Strategy& based in New York. He specializes in IT efficiency and effectiveness and large-scale IT transformations for financial services companies.
This report was originally published by Booz & Company in 2011.
The authors would like to thank Scott Ellis, Carl Drisko, and Caitlyn Truong for their contributions to this report.
Today, the sweeping scope of technology both inside the institution and in the larger business environment demands sustained attention and active involvement from the CEO. Three developments in particular are radically changing business: the insatiable global demand for information and real-time transactions, the profusion of consumer services and devices to access and interact with information, and the new paradigm of cloud computing. There are major opportunities available to CEOs who can shake off the old view of IT as a utilitarian cost center and instead recognize it as a powerful tool that shapes their strategic agenda and underpins capability creation, driving more costefficient operations and higher revenue. Likewise, there are real competitive risks for organizations whose CEOs don’t immediately embrace the broad and complex technology issues unique to their own institutions. CEOs need to act now or risk falling permanently behind aggressive adopters such as State Street and JPMorgan Chase, whose leaders are already doing the time-consuming, difficult work necessary to align their strategy and operations from top to bottom with the new technology-directed business paradigm. For CEOs looking to similarly shape their futures along the technology curve, Strategy& has identified several best practices.
CEOs have heard for years about the need to integrate information technology more closely into their strategy — to approach it not just as a utilitarian necessity for running operations, but as a linchpin for innovating and differentiating the institution. Some have made progress against this more ambitious agenda. However, many CEOs remain largely removed from the nuts and bolts of the technology that underpins their institutions and have considered its relationship to innovation and corporate strategy only at the 30,000-foot level. This form of aloof engagement by the CEO is increasingly inadequate. IT issues can’t simply be delegated to a CIO or CTO, or cordoned off within the institution, because the technology innovations affecting financial institutions increasingly take place outside the company’s walls and beyond its control. CEOs must craft their strategies and marshal their operations to take full advantage both of the proliferation of information and the profusion of devices to interact with this information, and of the growing ecosystem of Internet-based, ondemand products and services commonly known as “the cloud.” Ten years ago, the pressing technology concern facing financial institutions was choosing and implementing a standard technology platform (Oracle, SAP) on which to run their operations. Today, CEOs should be asking questions like these: How is technology changing the business environment and consumer expectations? What will that business environment look like in five years? How can our institution leverage those changes to differentiate itself and thrive? Is the company’s current IT function adequate to capture these emerging opportunities? If not, what precise steps are necessary to adapt our IT infrastructure and skills, and at what cost? This level of inquiry and engagement requires that CEOs truly understand the technology and grasp with some depth the difficulty in answering those questions. Only with this deeper understanding of technology inside and outside the company can a CEO make intelligent investment decisions, confidently lead the institution through complex IT initiatives, and convincingly explain these strategic decisions to employees, shareholders, and Wall Street.
The technology innovations affecting financial institutions increasingly take place outside the company’s walls and beyond its control.
Make no mistake, information technology is becoming a frequent topic of conversation for boards, clients, shareholders, and analysts, all of whom expect answers and accountability from the CEO, not the CIO or CTO. It is not uncommon these days for CEOs to field questions about their plans to respond to IT innovations — cloud computing and social networking, for example — occurring outside their institutions, and the impact those plans will have on earnings per share. Meanwhile, boards in particular have become increasingly focused on the costs of IT, its impact on growth, and its specific role in addressing operations and regulatory challenges. And some analysts now factor the ability to leverage IT innovations into share price estimates for financial institutions. In short, technology is everywhere — including squarely in the lap of the CEO. Some forward-thinking CEOs understand this and are fully engaged in IT. They see it as an opportunity to leap ahead of rivals and are making substantial investments of time and money to realign their strategies and operations to shape their futures. JPMorgan Chase CEO Jamie Dimon, regarded as one of the most technologically savvy chief executives in financial services, spent US$1 billion in 2010 alone on innovation and technology upgrades. And in November 2010, State Street CEO Jay Hooley announced a $400 million to $450 million, four-year program to enhance service, promote innovation, and increase efficiencies using technologies such as cloud computing.
CEO opportunities and challenges
CEOs who truly engage in the IT discussion can drive significant performance improvements. By optimizing the IT operating model, several large financial institutions have cut costs by 15 to 20 percent across IT and business operations. These savings have come from technology improvements (cloud computing, virtualization, storage optimization, reusable application services), operating model strategies for IT and business operations (consolidation, shared services, low-cost locations), and transformed business processes (IT-driven lean operations). At the same time, these institutions have embraced technology to grow revenue 5 to 10 percent annually. Growth comes from product innovation (new product introductions up or down the value chain that leverage digital capabilities), client growth and retention (increasing client access and improving service), and global expansion (flexibility to adhere to regulations, access to new markets). The barriers to achieving a company’s full IT potential are well known. There are almost always cultural issues to overcome. Poor performance by past technology programs may have sown skepticism that IT can deliver real value to the company. And imprecise metrics can make it difficult to evaluate and track a project’s contribution. Perhaps most challenging, IT, operations, and innovation functions remain siloed in most organizations, making coordination among business units difficult. Integrating these silos is precisely what is necessary to create a differentiated, sustainable advantage. Some institutions have integrated these functions one level below the CEO, but very few have driven this integration further down into their organizations. Often business leaders simply don’t have the experience to exploit new technology capabilities in areas such as data management and cloud computing; they thus depend on IT to innovate both the technology and the business model for them. Despite these significant challenges, CEOs must not delay their own engagement with IT. Each company’s IT problems are uniquely complex and will take significant time and effort to solve. For example, if a company wants to cross-sell multiple products that include real-time decision capabilities while providing its customers with an integrated
By optimizing the IT operating model, several large financial institutions have cut costs by 15 to 20 percent across IT and business operations.
service experience, then it must break down internal roadblocks assembled over decades of ad hoc system implementations and acquisitions. It’s a time-consuming, even onerous, process that cuts across multiple organizations, and there are no shortcuts or quick fixes. Adding to the complexity is the growing need to orchestrate the company’s internal technology services with those of strategic third parties that support such services as social networking and mobile computing. With this degree of complexity and potential opportunity in play, CEOs who delay their own engagement run the risk that their institutions may fall significantly behind rivals.
For CEOs looking to follow the example of Dimon and Hooley and shape their future along the technology curve, Strategy& has identified some best practices. Accept accountability. The first step may appear obvious, but it is critical — and too often overlooked. The CEO must understand the broad and direct role that technology can play in improving the enterprise and accept that IT is a “top of the house” issue. The board, analysts, and shareholders will increasingly press the CEO to articulate a strategy for addressing the myriad technology issues reshaping business, the impact of this strategy on the bottom line, and a time frame for implementation. All stakeholders will hold the CEO accountable. Restructure the organization. CEOs must determine what structural changes are needed in the organization to make the most of IT. We believe it’s helpful to think of business operations and technology as two sides of the same coin, with innovation on the “third side” as the edge running its circumference. All three disciplines must be integrated and work in concert. CEOs need the confidence to integrate the leadership and budgets of IT, business operations, and innovation and ensure that they are supported across the enterprise by functional leaders. Ideally, the integration goes deep, involving multiple levels within business units so that the collective operations can be put to better use in support of top-line growth. CEOs need to directly delegate these integrated roles, carefully weighing the importance of proven business leadership and experience against the need for operations and IT expertise. Look under the hood. Today’s CEOs need technology expertise of their own to look “under the hood” of the institution, understand how the technology works, recognize IT shortcomings and potential, and grasp the difficulty in solving the problems at hand. A working knowledge of IT both inside and outside the institution is critical to prioritizing and executing against investment decisions. CEOs will be called on to convincingly explain these strategic decisions to employees, shareholders, and Wall Street.
Understand the economics. CEOs must rigorously examine the economics of IT, business operations, and innovation investment. How much is the institution spending to keep existing operations up and running? On growing new business? On new innovation? Armed with this understanding, the CEO and the executive team can design financial and qualitative metrics across IT, business operations, and innovation to track where spending is helping to achieve strategic goals and where it is not. With this holistic, disciplined view, they can drive IT decisions in the context of the institution’s desired capabilities mix and bottomline goals. Institutions today too often lack these metrics and can neither adequately judge where to make investments nor track the benefits to the institution of specific programs or projects. Shape the future. The challenges for CEOs go beyond getting up to speed on technology and learning how to manage it — formidable though these challenges are — and also include innovating for future competitive advantage. This is the difference between just keeping up with technology and fully leveraging technological disruptions to differentiate the institution and shape the future. CEOs should press their executive teams to imagine what the future will look like in three to five years. What will consumers be buying, and how will they be paying for it? Where should the company place its bets — in transaction processing, consumer data management, authentication services, or somewhere else? Big institutions, with their deep talent and pockets, logically have an advantage over smaller, more resource-constrained competitors. But even the largest institutions will need a disciplined, multiyear approach to identifying and pursuing their visions of the future. Alleviate risks. There are risks to pursuing enterprise-wide IT initiatives, but CEOs can actively mitigate them. For instance, breaking down the silos that keep business units, operations, IT, and innovation apart is sure to cause a profound culture shock at some institutions. But CEOs can counter this anxiety and skepticism with forceful and frequent announcements that detail plans, rationale, and compensation structures. Another risk is a talent shortage. There might not be enough managers with the experience to lead business units that effectively leverage integrated operations, IT, and innovation groups. Realistically, CEOs will need to identify high-potential management candidates and develop their skills through rotations and challenges. Finally, investors often resist the significant up-front investment necessary to reap long-term benefits through a strategic positioning of IT. CEOs must establish these types of multiyear investments as fundamental to transforming the firm, similar to other significant initiatives such as merger integrations. CEOs will need to communicate the long-range strategy clearly, convincingly, and often.
CEOs should press their executive teams to imagine what the future will look like in three to five years.
Even as technology has assumed a greater role in financial institutions, the business environment, and society at large, many CEOs have not deeply engaged in the IT discussion and do not adequately understand the technology that underpins their companies. The level of CEO engagement and expertise must improve as institutions increasingly cope with innovations occurring inside and outside the company. In light of these changes, some forward-thinking CEOs — among them, Jamie Dimon at JPMorgan Chase and Jay Hooley at State Street — are trying to remake their institutions and alter how they interact with customers, shareholders, and regulators. The challenges involved are not for the faint of heart; indeed, few other financial institutions have adopted such an ambitious agenda. While fully acknowledging these daunting challenges, we also believe that the enormous opportunities offered by these strategies warrant a serious conversation about whether — and how — to pursue them.
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This report was originally published by Booz & Company in 2011.
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