Keeping Technology on Track

The recent Bank Administration Institute (BAI) retail delivery conference in New Orleans was a good metaphor for how bankers are being flooded with a bewildering array of technology opportunities and choices. It was fascinating. It was exciting. It was, for many, overwhelming.

There was too much information to be able to take it in and make sense of it. There were too many vendors (over 400) to be able to get a fair idea of what is available. Some bankers got sidetracked by the sheer niftiness of some of the display technology. Others could not find out who was displaying the products they had come to review.

Bankers got numerous warnings that their future depended on their technological savvy from heavyweights in the banking and technology industries. There was a consensus among vendors and speakers that technology determinations are now “make-or-break” decisions. First Union Corp. CEO Ed Crutchfield, Jr. said in his opening remarks that he feels like he works for a computer. Consultants told the audience that the speed of technological change was going to get progressively faster and that its scope was going to get wider. Speakers regularly referred to technology expenditure figures usually associated with top-tier merger deal values.

One banker walked into the front of the dazzling display area that was described as “five acres of state-of-the-art technology” and said to no one in particular, “Where would you even begin?” He then walked out.

Unfortunately bankers can not turn their backs on the technological choices before them. Doing so would mean forfeiting the future of their banks not only to the countless competitors within the banking industry, but also to the many nonbank financial services companies that are anxious to take their place. Because there is no turning back, the challenge is to find a method of focusing on the needs of the individual institution and matching those needs with the wide array of potential solutions. Each institution must have an organizational structure that is concrete enough to get the process of technological change started without being so rigid that the process of change is unachievable.

Focusing on customers

Many experts believe the optimal method of linking technology development to the goals of an institution involves implementing a series of specific strategic plans that outline how the bank is preparing to grow. Each plan identifies the bank’s most desirable customers and the financial relationships the bank wants to provide to those customers. Technology plans then can be developed that support the business objectives of the bank. Solid technology plans help prioritize expenditures, limit the scope of the options that have to be understood and reviewed, and allow the bank to implement changes more quickly.

The biggest barrier to linking technology decisions and strategic plans is that, to be truly effective, a bank’s plan must identify its high-priority customers. According to the commonly used 80/20 rule of customer profitability, 20% of an institution’s customers are creating shareholder value. In banking, many consultants believe that 20% of customers are responsible for 100% of the profit and the other 80% either cost the bank or are “break-even” customers. Many banks don’t know which customers are responsible for their profits and therefore have a tough time identifying which customers should be their first priority.

Scott Birnbaum, director of Mercer Management Consulting, suggests that “a board should demand information on profitability based not by product but by customer relationship. What makes money is customers, not channels or products, and yet [this] is something that most bankers understand the economics of the least.”

Call centers are an example of putting technology innovation in front of the bank’s business objectives. Many banks hoped that the highly responsive call centers would move telephone transaction requests out of the branches and into a more economically viable central location. What has happened in most institutions is that call volume has gone up but branch inquiries have not decreased. As Lawrence A. Willis, executive vice president of First Manhattan Consulting points out, “The call center didn’t replace previous transactional activity; instead it created a new transactional interest.” In fact, many of the bank’s least-profitable customers are frequent transactors and are more likely to use the call center. According to Willis, “Essentially, you’ve just added another element of cost to an already unprofitable customer group.” Some banks may have to rethink the use of this technology; by using customer information they will have to reposition their call centers to increase service to their profitable customers and reprice the services they provide for their frequently transacting, unprofitable customers.

High hopes and disappointments

There are many reasons why some technology investments don’t achieve their expected results. For example, when a technology creates an environmental change, sometimes customers react to the new environment in ways that were not predicted. In the case of the call centers, for instance, the ease and convenience offered to customers in monitoring their own bank accounts increased the number of inquiries that high-transacting customers made.

Another element that factors into disappointing technology resultsu00e2u20ac”and one that many bankers don’t like to acknowledgeu00e2u20ac”is the fact that the “James Bond” quality of some new innovations is too hard to resist. At the BAI retail delivery show, one vendor was demonstrating retinal scan technology for identification of customers. Bankers lined up in droves to check it out. It is doubtful that many of the waiting bankers actually believed they would use this technology in their banks, but such gadgetry is just too interesting to pass by. Likewise, some of the nifty new technology that banks do plan to use in their banks will not be fully utilized by their employees or accepted by their high-priority customers.

Also contributing to poor technical planning is a “me too” mentality. Some bankers fear being left behind and blindly embark on implementing technical solutions that have not been paired with customer profitability information or a strategic plan. Not only is the technology itself hard to resist, it is hard to resist going along with a trend.

The solutions being developed in wide numbers of banks may or may not be appropriate for each specific institution. Without thoroughly understanding an individual institution’s customer base, the value of any technological solution, however widely accepted, is hard to evaluate.

Parlaying data into profits

Costly lessons learned in call centers and elsewhere are leading many bankers to make initial investments in technology that they believe will help them understand their high-priority customers. Many will find that, because their marketing and customer information systems do not provide the data they need, they will have to make additional capital investments in technology.

James B. Moore, CEO of Mentis Corp., a firm specializing in financial service technology research, reports that many banks are making that commitment by increasing spending on data warehousing and smaller “datamarts” that are developed for specific lines of business.

In his executive briefing at the BAI retail delivery show Moore noted that the way most banks use their data warehouses will change in the future. Currently, banks spend a little over $1 billion on data warehousing when equipment, software, and services are tallied. A typical data warehousing project, including pilot implementation, system development, and expansion can easily run as high as $25 million-$30 million or more (see figure). Moore forecasts that “data warehouses will expand from decision-support and planning tools toward production centers for new information-based products and services that establish branding.”

Many community banks have a time and expense advantage over larger institutions because of the data warehousing capability that outsourcers can bring to the bank. The best service providers have the technology and expertise to generate customer profitability information through their systems. Although the bank must still expend considerable money and effort, an outsourcer can both shorten the overall development time and offer valuable experience.

Acquiring technology or access to technology is often just the first step. The bankers that are working on customer information technology frequently don’t find the initial information generated by data warehouses as enlightening as they had hoped. Some banks discover first-hand that garbage in the front end assures garbage out the back end. The information that most banks have gathered in the past is insufficient to create an integrated view of their customers. According to Mark E. Behrens, a senior manager of accounting firm Grant Thorton, “The first thing a bank usually finds out with its data warehouse is the way they collect customer data needs to change.”

In fact, some banks have made those changes and are beginning to see results. They are using third-party demographic data, transactional information, account-opening data, and traditional contact-management programs to develop an understanding of their profitable and nonprofitable customers and are able to use that information to better refine their strategic plans.

Understanding the bank’s business

After an institution has a strategic plan that is based on customer information, the plan needs to be communicated to (and fully understood by) the people who will be making the technology decisions. Whether or not the technology plan truly supports the bank’s business objectives depends largely on how well the information technology (IT) team understands the overall strategic plan.

In one booth at the retail delivery show, a CIO and one of his managers were reviewing call center technology. When independently asked what they hoped to gain by upgrading their call center, each gave completely different answers. Similarly, when queried about what they hoped to gain from a specific technology, many technology managers attending the conference responded in terms of “speeds and feeds”u00e2u20ac”language that did not communicate any strategic objective. When pressed, a few admitted they did not know which customers were supposed to be using a specific delivery channel or which products and services were supposed to be sold through the channel. The MIS and CIO executives attending the conference did a better job of describing what the strategic goals were behind the technology decisions.

Anyone who will be significantly contributing to the technology review process needs to understand the bank’s overall business goals and the business process. A tech group that doesn’t thoroughly understand who will be using the technology and why tends to create solutions that cover any possible desire. Many times this added flexibility is never utilized, but it can significantly increase the time and capital it takes to deploy the new technology.

In smaller institutions, it is equally important to communicate business goals to the consultants, vendors, and service providers that support the bank’s internal technology function. Given strategic direction, such firms can become valuable advisers that help the bank sort through the array of possible solutions.

Creating a

technology plan

With a well-understood strategic plan in place that identifies both the customers and products on which the bank wants to focus, a meaningful technology plan can be developed. Generally a technology plan includes back-office operations, payment systems, data communications, line-of-business departmental systems, information management systems, OLTP processing systems, retail delivery systems, and training. The best technology plans are not broad and amorphous but are laid out in small, achievable steps with measurable goals. They are reviewed frequently and change every three to six months for short-term goals and at least yearly for long-term goals.

Too few banks have a technology plan in place. Many that do have plans developed by technology management with too little customer information and not enough understanding of the growth strategy of the bank. Nevertheless, any plan is probably better than none at all. In a recent survey of community banks conducted by Grant Thorton, only 40% reported having a technology plan. Interestingly, those 40% intended to spend twice as much on hardware, software, and training than their peers without plans.

A technology plan can be extremely useful for a board that is reviewing technological expenditures. If the board can see how the technology supports the business goals of the institution, it is far easier to justify the investment. A solid plan can take what might have seemed to be a big hit to the bottom line and reposition the cost as an investment in business growth. Good plans also make it easier to resist participating in technology trends for the sake of “keeping up.” They focus on what is good for the bank.

Just like at the BAI retail delivery show, the technology out there is dazzling. Technology change is so profound and fast and important, that it is hard to know where to begin. Starting with well-developed strategic and technology plans can help banks identify the real opportunities and stay on course in a bewildering environment.