Banking Disruption

Internet access, mobile phones, and social media have fundamentally changed the way people interact with businesses. Banking is no exception. How people conduct banking has changed fundamentally in the last decade.

Unprecedented connectivity and access to information has put the consumer in the control and not the bank. Consumers are able to seek a better deal and service providers have to work hard to get their business. If a bank does not offer ‘right’ mortgage, with a mouse click consumers can go to another bank. Consumers routinely expect control, efficiency, and choice.

Brett King, bestselling author and banking futurist of Bank 2.0, has recently published Bank 3.0. Here are some themes explored in Bank 3.0.

Four waves of digital disruption

Digital disruptionIn June 2011, the UN declared Internet access to be a basic human right. Today there are more people with mobile phones than bank accounts. It is expected that by 2016 more than half the planet will own a Smartphone with Internet access. More people are accessing Internet via mobile phones than on PCs. Pervasive Internet access (via mobiles) is becoming an everyday experience for millions of people.

Major waves of digital disruption are hitting the banking business since the arrival of the Internet. Each wave is potentially a game-changer:

Internet

The advent of the Internet has fundamentally changed many businesses. Stockbroking, music, and book selling are obvious examples. Similarly, the Internet has changed banking. Consumers have now begun to choose where, when, and how they access their money. The need to visit a branch has diminished. Within 10 years, we have gone from over 50% transactions being performed at the branch to over 95% of the transactions being performed online.

Smartphones (and tablets)

Smartphones are driving a revolution in portable banking. Many countries like the US and Australia have near 100% penetration of mobile phones. China has more than 950 million mobile phones and this number has been growing by 20% annually. An increasingly large proportion of these mobile phones are smart devices with Internet access. Consumers are regularly using mobile phones for day to day transactions such as balance checking, transfers, and bill payments. Consumers can do almost everything (except cash withdrawals) on a mobile that they could do at an ATM.

 Mobile wallets and NFC (Near Field Communication) capabilities are already here. Many banks have recently launched mobile (person-to-person) payments. This sets the stage for the third wave of disruption.

Convergence of credit/debit cards and phones

Digital walletIn the UK, two thirds of payments are done on credit / debit cards. With wider acceptance of NFC and mobile wallets, it is conceivable that within a few years these payments would be done by a mobile with a built in card. With this wave the phone will become the everyday bank account.

Prepaid debit cards were the fastest growing form of payments in the US in 2012. The prepaid debit card business has grown from $2.7bn in 2005 to $202bn in 2012. This includes general purpose reloadable cards, payroll cards, and Internet based payday lending cards. In 2011, the prepaid card business was worth $250bn in China.

With pre-paid and stored value cards, many non-banking institutions (e.g. telecom or transport providers) are providing accounts. Technology is making it possible to de-link everyday transaction accounts from the banks.

Story of M-Pesa

mpesaKenya has millions of people without access to banking services. M-Pesa is a low-cost mobile payments system launched by a local mobile phone company. It started off to support repayment of microfinance loans using air-time credit as a payment. With its popularity it was relaunched as a way to send remittances across Kenya, and to make payments. Today, millions of Kenyans use M-Pesa, including many without bank accounts. It is simple, low cost and has a vast distribution network. Mobile money transfers exceeded $1 trillion shillings in 2011. For many Kenyans, the mobile has become their everyday bank account.

In the near future, any major provider will be able to provide everyday banking with mobile phone/ wallet and mobile payments. This has a potential to create a major disruption to the financial services industry.

Banking as a utility

Soon banking will become something we do, rather than somewhere we go.

Banking products will be available whenever and wherever a consumer needs the utility of a bank. Banking will become embedded into financial products. For example, home buying would include a mortgage, and car purchases would have a car lease bundled in, eliminating the need to see a banker or make a separate application. This wave threatens to split banking distribution apart from product manufacturing in a fundamental way.

“Banking is necessary but banks are not”. Bill Gates, 1994.

While we all need the services provided by the banks (e.g. payment systems, access to money/ credit) increasing number of people are obtaining these services from non-bank service providers such as PayPal or mobile telephony companies.

Challenges for the banks

In order to survive these waves of disruption, banks will need to change their technology strategies. There are several challenges they would need to address. These are:

  • Customer service via technology;
  • Usability and ease of on-boarding;
  • Mobile Presence; and
  • Power of Crowds

Customer Service depends on Technology

Increasingly, most of our interactions with a bank take place via the Internet, mobiles, or the ATM. A customer may do several hundred online interactions, but visit a branch or use a call-centre only a handful of times. Hence, customer experience is defined by Internet banking support, ease of use, the ease of signing up for new products and services, and day-to-day problem resolution. The branch is no longer central to this experience, but technology investment is.

Customers interact with the bank in multiple ways (online, mobile, ATM, and Twitter). However, the information regarding these interactions is often stored in multiple places and departments. As a result, customer service suffers. Providing a seamless customer experience across channels remains a challenge.

Usability and Ease of On-boarding

Customer ExperiencePoor usability remains a primary reason why customers leave a website and go to a competitor’s website. Very few banks have a dedicated usability or customer experience team to design critical customer interactions and online processes. Brett King believes that the overall utilisation of the web-channel in retail banks is appalling. The problem is further compounded by cumbersome customer identification and on-boarding processes. Consumers research, make transactions and buy non-banking goods and services on the web, but they generally don’t purchase new banking products on the internet. This remains a huge opportunity and challenge for the banks.

Mobile Banking

Mobile bankingThe potential for the mobile network in the sphere of banking is huge. It provides convenient access to money anytime and anywhere. With smartphone adoption rates exceeding 50%, mobile banking has become a must for the banks. As seen from the M-Pesa case, non-bank mobile payments are quickly gaining traction in many developing countries.

Power of Crowds

With the advent of social media, consumers are expecting to be engaged in a dialogue with other consumers and brands. Consumers are increasingly relying on the voice of crowds for advice and recommendations. This means that the power of the brands to influence customers via traditional advertising is diminishing. For strong brand advocacy, the whole organisation needs to be in tune with what consumers are saying, and engage in a dialogue. Most banks don’t even have a social media executive and appear to be underprepared for this challenge. Talking to their customers and solving their problems in an open and transparent way without making the customers jump through the hoops, will remain a challenge for the banks.

Summary

The growth in technology and the digital economy will disrupt the way banking will be done from now on. The banks will need to leverage technology more effectively to improve service, the usability and product purchase experience, and accessibility via mobile devices.

A Case for Simplifying IT

What is the problem?

Many companies are finding that 60-80% of their IT budget is required just to ‘run’ the business. As a result, growth and innovation initiatives struggle to get the required funding. Most CIOs know this high costs is a result of complexity in the IT environment. Because of this complexity, it costs a lot to support current IT, and costs of implementing new projects increase.

Simplifying technology environment is necessary to create the financial capacity to support growth initiatives.

Why is IT so complex?

ComplexityMost CIOs struggle to answer a simple question like ‘how many applications do you have? A typical IT shop can have hundreds of applications.  Large application portfolios result from legacy systems, mergers and acquisitions, organisational silos, urgency leading to tactical solutions, and vendor over promising.

The issue is then further complicated by multiple technology platforms, some new and others legacy. There is usually a proliferation of servers with unique configurations to run these applications.

Strategies such as ‘best of breed’ can also increase complexity. As different solutions from different vendors (using different technologies) are acquired and integrated over time, the overall complexity keeps growing.

Duplicate or multiple systems

Companies go through mergers and acquisitions. Each acquired company brings some unique business processes, and rules and systems, which support these. This invariably creates an increase in applications that do similar functions, but are different or need a different technology platform.  New interfaces are needed to bring the information together from these systems. In these cases getting accurate stock information is very difficult. Complexity thus leads to reduced accuracy.

At other times, different departments have their own sales tracking or customer management systems, which largely do the same function. In large organisations, due to silo decision-making processes there can be multiple such duplications. A company I worked in had 26 different payroll systems.

Obsolete systems

In some companies there are many applications, but only a limited funding for maintenance. As a result of budget and inertia, most applications are not upgraded for years. They become unsupported, and the company must rely on old technologies. By avoiding or deferring the upgrades, we create a ‘technology debt’, which increases over time like a snowball. This means that when upgrades are required (e.g. year 2000) these become expensive. Application functionality also gets out of date and new functionality cannot be quickly leveraged. Newer applications and more interfaces are then created, thus compounding the problem.

Abundance of Interfaces

SpaghettiNo CIO intentionally wants to increase the complexity of IT. New applications are acquired for new initiatives and business expansion. Many start as stand-alone applications, however, over time interfaces are built between new and existing applications.

As the increase in interfaces is proportional to the square of the number of applications, the total number of interfaces quickly multiples. Many of these interfaces are inefficient, as they are trying to connect two systems with different processing rules, data structures. and data meaning. As the number of interfaces increases, their quality decreases further. Daniel Lebeau – Group CIO of GlaxoSmithKline has called interfaces the ‘cancer’ of IT.

High cost of complexity

Other than the high IT cost to run a company’s business, complexity brings about other costs. When business processes are fragmented across multiple applications, it becomes difficult to get right data. Unsupported technologies increase the risks of failure.

Perhaps the biggest cost of complexity is the reduction in a company’s ability to take advantage of new opportunities presented by the new digital economy. Taking advantage of these opportunities needs streamlined business processes, accurate master data, and a robust foundation of systems. An IT environment that is complex and fragmented with a mix of technologies, and applications is vulnerable to hackers.

Complexity can be justified in some cases. It is usually justified when complexity allows the business to differentiate its offerings to create value.

Why simplify?

Three benefits of simplicity include reductions in operating costs, increases in agility, and the lowering of risk. As Tim Schaefer, CIO at Northwest Mutual, explains:

“There are actually three types of value that we are generating out of the simplification effort. First and foremost, we want to create dollars that can be invested in growth opportunities. Second is the value we get around risk reduction, and in particular, how we can increase the agility of the company. Finally, by simplifying our technology environment, we are actually opening up room and capacity for newer technologies.”

Strategies for the Simplification of IT

It is not easy to cut IT complexity, a sustained and multi-pronged approach is needed.  We recommend three key strategies. These are

1)      Rationalisation of applications;

2)      Standardisation of infrastructure; and

3)      Effective governance.

1. Rationalisation of Applications

For many companies scope for application rationalisation is large.  Boston Consulting Group (BCG) estimate that reductions of up to 40% in the number of applications, and 15-20% of IT costs is often possible.

Application rationalisation involves consolidating duplicate/redundant applications and the progressive decommissioning of replaced applications. Without decommissioning, the cost reductions will only be minor.

Successful rationalisation has three prerequisites:

  1. Top team agreement – As the rationalisation is a longer term initiative and not a quick fix, strong commitment from the top team for the simplification agenda is necessary.
  2. Proper funding for the job – Often the business case for the rationalisation does not seem attractive in the short-term. Ensuring proper and sustained funding is necessary.
  3. Tracking progress – Disciplined measurement of progress is necessary to make sure that goals of rationalisation are being achieved. Aligning IT Executive incentives to the reduction in applications is also recommended (e.g.  5% reduction each year).

2. Standardisation of Infrastructure

BCG suggest that reducing “infrastructure patterns” (configurations of software, hardware, and middle-ware) should be reduced to a smaller number of standard configurations.  Typically the patterns can be cut down by more than half. The recent growth in the adoption of virtualization technologies has broken the ‘one application, one server’ rule, which makes the rationalisation process somewhat simpler. Reductions in these patterns cut maintenance costs, enable better deals from the vendors, and cut provisioning time.

BCG reports that one company had 9,000+ applications and over 1,700 technology patterns. All of these required maintenance. This company eventually determined that just 7 patterns would support 80% of the application needs. This level of standardisation enabled cost savings of 40% over three years.

3. Effective Governance

Effective IT governance is needed to make sustained reductions in complexity. If  business units continue to make decisions in a silo way, and little thought is given to impact on other systems or other business units, complexity will start to grow again.

A clear governance framework and agreed blueprint describing target architecture are essential. Simplification principles should become part of this governance framework to prevent building new complexity. Strict governance enables effective portfolio planning and the optimisation of IT architecture. This is a key to reducing complexity in the longer term.

Summary

In most companies IT complexity grows with time. Tactical systems, mergers and acquisitions, and new technologies all lead to a more complex IT environment. The result is fragmented business processes, lack of correct business data, higher costs and risks, and lower agility. The bulk of the IT budget then gets consumed in keeping the business running.

IT simplification is not easy, but the benefits are large. It frees financial resources, reduces risk, and improves agility. Reducing the number of applications in the portfolio and reducing infrastructure patterns will simplify the IT environment. Success depends on a strong commitment from the top team and effective governance.

Written by: Hemant Kogekar

Real Reasons why IT Projects Fail

You would have probably read about the Queensland Department of Health payroll project, which ended in a debacle with costs estimated at $1.2 billion. In the US, the Expeditionary Combat Support System project was cancelled after the US Air Force spent $1 billion on its development.

The sad fact is that these failures are not isolated instances, but rather, only the most visible examples.  The failure of IT projects is very common. Per industry norms, less than 50% of IT projects finish on time and on budget.
Discussions with experienced CIOs, consultants and project managers show there are many reasons for the failures of IT projects. If you step back from the individual causes, some common themes emerge. Some are obvious, but others are not well recognised.

Fuzzy Goals

Many large projects fail, because they don’t have a clear idea of what they are trying to do. There is no clear problem definition or clarity about the project requirements. The full scope of the project is not understood. One Executive has an objective, but as the project moves forward new people, such as other executives, risk managers, and architects are introduced who add their ideas of what would be best for project implementation. The net result is unclear goals, expanding project scope, and poor project design, which lead to unending debates and sliding timelines.

Over-optimism

Over OptimismSalesmen and internal project champions both want their proposal to succeed. However, in their wish to make the ‘sell’, they often underestimate the costs and over emphasise the benefits. While preparing  business cases, there is a tendency to maximise benefits and cut costs to meet the right return on investment (ROI) At times, the under-estimation is not intentional, but a result of the CIO having a poor understanding of the current situation and requirements. The CIO does not consider, or budget for, the effort to move from installing a system to actually achieving the benefits (new products, customers, new capability).
Over optimism then results in unrealistic schedules. There often is an unjustified faith in technology (product, vendor, or internal capability). Solution complexity is not evaluated. As a result, project risks are not well understood or controlled.

Complexity

ComplexityMajor IT projects have a high degree of complexity due to new technology, the myriad of interfaces with other systems, data conversion. and due to project team having to compete for resources with other projects. Many times the legacy processes have to be replicated or supported in the new system, which adds to the complexity.
What project managers (PMs) and executives do not understand is that the project risks and effort involved in the project increase exponentially as complexity increases. Systems and processes become brittle as people try to cater for this complexity in a tight timeframe and with workarounds. The complexity eventually overwhelms the PMs, and the projects go out of control.

Weak Ownership

Large projects often have multiple executives, each with slightly different agendas as stakeholders. The executives have different expectations of the project’s benefits and options, which are at times incompatible. None of the executives fully support the project, and many projects lack an effective sponsor who is accountable for the project goals, and benefits, and can arbitrate conflicting demands. Weak sponsorship also indicates weak accountability across the project. When dates slip, tasks are not completed or roadblocks emerge, and no one is held accountable to do their job, which results in the project becoming unmanageable. Weak ownership usually results in weak project control resulting in an increased chance of the project failing.

Governance

People accept that lack of governance is a reason for the failure of a project. However, most large projects have the exact opposite problem; there is too much bureaucracy. For example, in one IT project, 80% of budgeted costs were non-productive costs or red tape. In another organisation, a 3 day change request needed justification papers, and the approval of the executive steering committee, which costed more than 10 days of effort. In large organisations, stakeholders such as risk managers, compliance staff, process experts, and architects all have their own governance demands, which greatly increases the demands on the project staff.

Over-engineered Project Management

It appears that Project Management has succumbed to the modern fetish for valuing form over substance. Simply put, there is a greater focus on how we carry out the project, than on the activities, which produce the product. Below is a quote from a CIO on this over engineering:

In the past, we spent time working out how to solve a problem. We explored different avenues of approach, different ways of meeting a target. We focused on the customer’s needs and expectations. We focussed on what was to be delivered.

Nowadays, it seems that the focus is more on planning how you are to do it, coupled with a determination to adopt methodologies and standards. The result is that we spend more time planning the method and approach to the project and not working on the technical requirements of the solution and how we can deliver it. The body of documentation has greatly increased. Now we have plan, plus risk analyses, process flows, summary timelines, and all sorts of forms showing who did what, with and to whom, and when.

That gives rise to a more formally documented meetings, implying a new breed of project administrators who manage the documentation and schedule the meetings, adding to the project overhead, both in time and cost.  A second result is that the poor people at the coal face have, in addition to actually doing the work, a welter of forms to complete.

Wrong Project Manager

The major success reason for projects – large or small – is the Project Manager (PM).  Having certification as a PM is one thing, but having the ability and know-how is another. The PM has to know how to balance the needs of the project with the needs of good governance. The PM has to use the right method, apply it at the right time and in the amounts that are really needed. A PM must have knowledge of the subject of the project. This knowledge not only helps the PM drive the right solution, but also helps them to effectively communicate this solution to the business and the sponsor The notion that a qualified PM can manage any sort and size of project is twaddle.

Failure to Recognise a Troubled Project

Projects never go from being well-managed, on-budget, and on-schedule to outright failure overnight. There is always a transition period during which time the project is “troubled”. If you can cut through the noise to see the real issues, you have a window of opportunity in which the project can potentially be rescued. It is likely that this is the last chance to save the project. Since people involved in a project generally want it to succeed, they unintentionally start ignoring or dismissing the warning signs.

Using external reviewers to detect these early signs and help the sponsor take decisive action can often help rescue a troubled project.

Conclusion

Think Big, but Act Small

As shown in this article, large IT projects fail for a variety of reasons. There is insufficient space in this article to go into the details of mitigating these failures, but one last fact is worth mentioning here.

Standish group research indicates that smaller projects (agile or waterfall) have a higher success rate (76%) than larger projects (10%). Research suggests that delivering product in small doses produces positive results. So you can think big, but you need to act small by making every big project a group of small projects.

You may also be interested in Barriers to Transformation.

Written by: Hemant Kogekar

Three Tips for a Stronger Business Engagement

Fostering strong engagement with business partners continues to be a challenge for many IT leaders. For periods of time, such as when, a major project is underway or when a strategy is being developed, relationships with business partners can improve, but in matter of months it drops again. CIOs know that effective business relationships are key to their success. What can be done to sustain business engagement in an ongoing way? What techniques do successful CIOs use? Continue reading “Three Tips for a Stronger Business Engagement”

Can CIOs avoid politics?

Typical CIO Attitudes to Politics

Many CIOs are scared of organisational politics and think it is a dirty business. Often CIOs come from a technology background and technical expertise is their forte. Politics, and wheeling and dealing are not their comfort zone. They focus their energy on finding the best technology solutions for the business’s problems. The CIO’s daily battles are about up-time  service delivery, and project delivery. They shy away from business level politics wherever they can. Many CIOs see politics as a ‘necessary evil’ or some sort of ‘game’ to play. Those who tend to look at politics in this way tend not to be very good at dealing with company politics. Continue reading “Can CIOs avoid politics?”

Understanding the Project Sponsor Role

Many executives become project sponsors, because they want a new product or a service to improve their business operations. Everyone expects the sponsors to know their role, and how they are supposed to work. While there are qualifications required to become a project manager (PM), there are none for a sponsor. The sponsor’s role is an important role, but what exactly are they meant to do? Continue reading “Understanding the Project Sponsor Role”