This is the third article in a four part series, where the authors share their experiences and insights on ushering technology fueled innovation in incumbent financial services organizations. Here are the first, second and fourth articles in this series.
For financial services organizations, technology will determine who wins and who loses. To win, leaders must care less about where technology capabilities sit in an organization, and more about how this powerful capability is implemented, managed and measured.
Business leaders in large financial companies regularly complain that their IT organizations are slow and ineffective at driving value-creating change. They repeat the mantra that their companies must become digital businesses to survive the monumental shift in customer expectations.
Internal IT is not up for the challenge. Yet, those complaints and mantras, even from the top, rarely lead to changes in the organizational structure and culture that would facilitate the introduction of new and market-focused measurement criteria.
The impact? IT in such organizations ends up subtracting more value than it creates. The customers end up paying the price: they’re forced to set up multiple accounts with separate log-ins across regions and business channels. We have all experienced homepages of traditional brokerage websites filled with 80+ links, with zero regard for what services a customer actually wants.
Employees are also not spared - internal compliance staff spend countless hours contending with manual audits and paper reviews of technology commits, the outcome of tremendous technical debt. In these environments, leadership and Project Management Offices (PMOs) stay preoccupied with tracking effort across multiple initiatives, instead of focusing on outputs and outcomes of high priority forays. This leads to command and control management methods, instead of the highly autonomous teams required to drive true innovation forward.
To be successful, the entire organization needs to make a paradigm shift and reframe technology as a strategic capability drives the growth agenda. This means organizations must employ new measures of success for technology spend. You cannot measure a hockey player by the number of goals she has saved, and then complain that she isn’t scoring any goals. If she isn’t scoring goals, you are the reason she is wasting time being a goalkeeper.
Traditional IT is Losing Ground to Digital
IT organizations in traditional financial services firms are not currently measured and managed using market-focused success criteria. In fact, the strategic value of technology and ability to contribute to top line growth is undermined at most of these firms.
IT is being managed as a defensive function, not a value-creating one. As a defensive function, its goal is to mitigate risk, not to foster innovative capability. In this environment, innovation means automating internal manual tasks and maintenance practices, not transforming the customer experience.
IT has traditionally been measured on its cost to deliver services, and its ability to cut costs in other parts of the business. Although IT leadership generally pushes for closer alignment with functional partners across the enterprise value stream, most large financial service organizations do not measure IT’s direct impact on the top line growth. CIOs and CTOs have been pushed to focus more on internal efficiency over business effectiveness, resulting in the growth of new technology roles such as Chief Digital Officers. This has shifted the balance of power for technology budgets.
New Measurements For IT
It’s time to kill traditional models of how IT is managed. Instead, let’s use a new lens to measure strategic technology. Strategic, value-creating technology functions cannot be managed or measured by the same metrics as utility functions. Utility functions are maintenance activities that do not drive competitive positioning or enable regulatory compliance.
Strategic technology enables and informs change, adapting to the accelerating pace of market and regulatory changes. Utility IT delivers consistent services designed to remain stable over time.
Strategic technology harnesses competitive advantage and needs different talent and different success metric. Utility IT is a cost lever to keep the lights on.
Therefore, the primary measure of strategic technology’s success is the acceleration of the company’s ability to address change. For example, how quickly can a retail bank roll out a new portfolio management tool that gives its customers the same capabilities as Mint? How quickly can a brokerage firm offer its clients a simple, easy-to-use visualization of the risk versus return that a client’s portfolio exhibits? Success is offering customers what they want, how they want it.
Outcome-Based Measurement Criteria
On the surface, the distinction between strategic and utility is simple, but executing on this bi-directional vision requires hard examination. For example, is IT infrastructure a strategic enabler, or a cost center to be levered down?
Five years ago, IT infrastructure was clearly a cost to be run as cheaply as possible as a utility. Today, with the mainstreaming of the DevOps movement, companies that don’t adapt to continuous delivery by running infrastructure as code will lose to their faster-moving competitors who can accelerate time to market for new digital-fueled ideas and concepts.
Smart companies use changing market conditions to rethink what is strategic. For example, in the wake of the 2008 financial crisis, regulatory requirements changed rapidly. We helped a global hedge fund introduce Continuous Delivery practices, including test automation and continual production release, to help their compliance staff automate the audit process of software changes. Here, using technology strategically enabled this hedge fund to resolve regulatory requirements rapidly, while using the same spend and methods to accelerate their ability to dynamic market conditions.
Managing Change
How can companies manage the change from utility IT to strategic technology?
According to John P. Kotter in the Harvard Business Review, the Two Structures: One Organization model is the most viable model for innovative companies to capitalize on rapid changes while still making the numbers.
John argues that the existing structures and processes in a current organization’s operating system need an additional hierarchy-free element to address the challenges created by mounting complexity and rapid change. The new system should be devoted to the design and implementation of innovation, and it must have adequate freedom from rote management control and existing measurement systems to deliver the intended outcome.
Similarly, we suggest treating the strategic technology organization—free from legacy enterprise constraints—as the primary strategic business accelerator. Use it as fuel for future growth, and the focus of your capital investment.
As for the utility IT organization? That’s what outsourcing is for.
Budget for Success
Because strategic technology and utility IT are distinct capabilities with different metrics and measurements of success, they must be funded through separate budgets. Sharing an “IT budget” inevitably leads to false tradeoffs, and in most cases propagates a defensive culture running a growth operation. This is a recipe for technical mediocrity, leading to land grab of technology mindshare by other units within the organization.
Separating the two operational focuses will alleviate prioritization conflicts, while enabling each organization to focus on its core strengths and eventually complement each other. While Service Level Agreement-style metrics may be sufficient for utility IT, strategic technology may require KPIs such as customer-centric measures that tightly integrate its functions across the customer value stream.
Create a Win-Win
We believe that strategic technology and utility IT are not at odds with one another. Once the right metrics and management are in place, both technology functions can work together and harmoniously share lessons learned from each other. If utility IT teams have incentive to produce savings that fuel strategic technology, their contributions will be clear, their purpose meaningful.
At a global financial institution, one of the largest in the world, we helped senior leaders conduct an IT application portfolio analysis to visualize existing spend on innovation initiatives (> 20%) vs. maintenance-related project work (< 80%). This exercise allowed the leadership team to focus on the highest value investments and restructure their resources based on three horizon planning cycles.
Become a Responsive Enterprise
Ultimately, the companies that will lead any industry impacted by technology, are the ones who can embed responsiveness deeply into their DNA.
In their new book, Lean Enterprise, our colleagues Barry O’Reilly and Joanne Molesky discuss how transformational this journey must become. Companies that intend to deliver market-leading offerings and customer experiences will need to fundamentally rethink how they budget, how they prioritize, and how they empower their teams to deliver outcomes.
This thinking must drive the management of any strategic technology function. The shifts in measurement and management that we have illustrated can help any financial services company contending with fast-changing customer expectations rise up to the challenge and overcome latent organizational inertia.