Shuttle Diplomats for the Board

Dan A. Fisher, chief information officer (CIO) at $5.8 billion Community First Bankshares in Fargo, North Dakota, sees himself as a diplomat of sorts, shuttling between the boardroom and the back office, making certain that technologies and processes used by the bank are in line with its strategic objectives.

“It’s the CIO’s job to take the board’s vision for the bank and convert it into elements the technology staff can understand and work with,” says Fisher. “I see it as shuttle diplomacy.”

Over the last few years, the demand for technology gurus has been escalating in community banking. The Independent Community Bankers of America (ICBA) last year reported that 39% of its member banks had CIOs, chief technology officers (CTOs), or other designated staff members devoted full time to technology. In 2002, just 29% had on-staff technology specialists, according to ICBA’s annual technology survey.

The titles CTO and CIO are pretty much interchangeable, although the CIO moniker appears to be more commonplace these days due to the increasing importance of information in banking. While technology is obviously crucial for banking operations, the real value of technology arises from the information it providesu00e2u20ac”critical intelligence about customers, their habits, a bank’s risk exposure, and other matters.

Several factors, including an intensified regulatory focus on risk assessments, marketplace competition, and performance goals, are driving the increased demand for in-house technology/information experts.

“There’s a remarkable difference in how community banks think about technology now,” says Roger Bishop, practice manager with Brintech, a management consulting firm in New Smyrna Beach, Florida. In the past, community banks tended to look at technology in terms of one-time purchases, notes Bishop, who spent four years as CIO of United Community Bank, a $4.1 billion bank headquartered in Blairsville, Georgia. All too often those banks relied on vendors to make their technologies work. The focus these days, he explains, is on getting more value for technology investments by developing a long-term plan.

“We think it’s critically important that a bank have a definitive technology plan that supports the overall strategy of the bank,” says Geri Forehand, director of Brintech’s financial services group. “You cannot have a successful strategic plan without the successful integration of technology.”

It’s not just about strategies, though. Regulators are asking tough questions about banks’ technology implementations, making it imperative that board members have a handle on the associated benefits and risks of the technology their bank is using. “Regulators really want directors to understand the risks in doing business with technological processes,” says Ken Proctor, Brintech’s director of risk management.

It’s not just in-house technology operations that warrant close attention, either. Banks that outsource technology-rich operations (like transaction processing) have an equal, if not more compelling, responsibility to put a high-ranking staff member in charge of technology. “The outsourcer is just running the operations. The critical technology decisions still need to be made by the bank,” explains Proctor.

There’s a potential downside for some banks, though: finding the right people to fill these positions. “It’s really tough for some community banks to attract the kind of talent they need to fill these roles, especially for banks in rural markets,” says Bob Stevenson, managing director, Sheshunoff Management Services, Austin, Texas. “These folks can find jobs fairly easily” and may not, for example, be eager to move to smaller towns or outlying areas. What’s more, Stevenson adds, small banks often can’t match the wages technology experts can get from larger companies.

That wasn’t the case for Fisher, a 25-year veteran of banking, who says he jumped at the chance to move his family to Fargo, a city of about 100,000. “It was a lifestyle decision,” explains Fisher, who entered banking as a loan officer in Honolulu and followed a career path that took him through most areas of banking and across the Pacific. “I knew I could bring value to them, and they brought value to me.”

The value Fisher brought to the bank had a lot to do with his experience with bank technologiesu00e2u20ac”he had headed up operations at a bank in Texas, and most recently had been overseeing operations for a five-state region of processing centers on behalf of a major outsourcing company. But the breadth of his experience in banking was equally important, he notes. “I’ve worked in just about every area of banking,” Fisher says.

Stevenson believes scope of experience should be a key factor in a bank’s CTO or CIO selection. “Skill set is critical,” Stevenson says, adding that the position generally requires understanding a broad range of areasu00e2u20ac”from branch operations to the Internet, to lending and compliance. “CIOs are just as critical, in some cases, as senior lending officers,” he notes. “They need to be seen as advisers to their boards.”

In recent years, the CIO/CTO position has been growing in importance with greater bank asset size. ICBA’s survey, for example, found at banks with assets of $100 million or less, only 18% last year had on-staff technology experts, compared to 62% of banks with assets in excess of $100 million.

This doesn’t mean the benefits of having a CIOs or CTOs are lost on smaller banks. In fact, several technology consulting firms are addressing this need at smaller banks with services that are likened to a “virtual CIO.” These services allow banks to tap into the kind of expertise necessary for the evaluation and implementation of technology purchases. Sometimes a consulting firm will even provide a mentor who can help an existing bank staff member grow into a CIO-type role. When a bank reaches a certain sizeu00e2u20ac”somewhere between $100 million and $300 million in assetsu00e2u20ac”it becomes more critical to have someone on staff who acts as the board’s point person on technology.

The proof is in the numbers. The best-performing community banks spend a lot more on technology than other banksu00e2u20ac”about 12% of noninterest expenses compared to 9.5% at average banks, according to Brintech’s analysis.

Clearly, technology has become a huge expense item on banks’ balance sheets, making the management of technology decisions more important than ever for boards. The TowerGroup, a research advisory firm in Needham, Massachusetts, estimates U.S. banks will spend $35 billion on technology this year; between $10 billion and $12 billion of that money will be spent by banks with less than $20 billion in assets.

ICBA’s survey, meanwhile, found better than a third (36%) of its members expecting to spend more on technology this year than they did in 2003. Going forward, TowerGroup forecasts that bank technology budgets will grow 5% a year over the next several years.

Data from Boston-based Celent Communications, a research and consulting firm, suggests that this prediction may be conservative. Celent predicts that in 2005 banks will spend 25.3% more on technology than was spent in 2001.

Much of the technology integrated into banks these days is customer-focused. Research by TowerGroup, done in conjunction with the American Bankers Association (ABA), indicates that worldwide, the bulk of banks’ technology dollars target branch delivery systems. ATMs, call centers, and relationship sales technologies are also budget hogs; internationally, spending on these technologies is expected to exceed $14 billion next year, according to the TowerGroup/ABA study.

One common thread among these studies is that banks’ reliance on technology will continue to increase, meaning that CTOs/CIOs will have a more important a role to play in monitoring technology decisions. Proctor says he uses a simple test to help bank managers and directors determine if bank technology decisions align with strategies. First, list your bank’s three most critical business objectives. Next, list the bank’s three most critical technology objectives. Now, describe how the technology objectives support the business objectives. If you can’t, Proctor warns, your bank could be in trouble.

“In the boardroom, the need to understand technology is greater than ever before,” says Fisher. He’s not speaking of the bits and bytes of technology, but rather how different technology investments can be leveraged to achieve the company’s performance and growth goals. “A good CIO is someone who can create practical applications from visionary concepts.”