Measuring Today’s Capabilities Against Tomorrow’s Needs

Measuring Today’s Capabilities Against Tomorrow’s Needs

          
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Measuring Today’s Capabilities Against Tomorrow’s Needs

A Survey of IT Leaders at European Banks
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  • In This Article
    • A recent BCG survey asked IT leaders of European banks to rank the current importance of their respective IT capabilities, gauge the current strength of those capabilities, and identify the capabilities they expect to be most critical in 24 months.

    • The leaders identified performance shortfalls in several of the capabilities they expect will be most important in 24 months.

    • Based on survey responses and BCG analysis, BCG believes that Europe’s IT leaders in banking are likely to focus most heavily on three specific capabilities over the next two years: IT innovation management, lean advantage, and customer excellence. 

     

    In the near to intermediate term, Europe’s banks face sizable challenges, including mounting pressures on both the revenue and cost fronts and a pending wave of new regulations. What IT capabilities do banks need to negotiate this environment today—and how robust are they now? Which IT capabilities are likely to be the most critical 24 months from now?

    The Boston Consulting Group’s recent survey of CIOs and IT managers from the European banking sector posed these questions; this article summarizes the responses. (For more about the survey, see “Methodology,” below.) It also offers thoughts on which capabilities BCG expects to be CIOs’ primary areas of focus over the next two years and the requirements for success in those areas.

    Methodology

    In 2011, as in 2010, BCG conducted an online survey of Europe’s banks to gain insights on their IT practices. The 2011 survey, which was open to all European banks, had two parts: a quantitative section focused on IT costs, and a qualitative section that asked CIOs and IT managers to weigh in on a range of topics. The respondents represented 34 banks—most of which were small and midsize retail or universal banks. This article summarizes results from the qualitative section.

    Since 2003, BCG has published an annual IT benchmarking study for a select group of large European banks. For the results, see "Key IT Cost Ratios for European Banks."

    IT Needs for Today—and Tomorrow

    Leveraging the Innovation Value Institute’s IT Capability Maturity Framework, BCG divided banking’s IT function into 20 distinct capabilities. (See the sidebar “The IT Capability Maturity Framework.”) We then grouped them into three categories: managing IT like a business, managing IT capabilities, and managing IT for business value. (See Exhibit 1.) (For an overview of the Innovation Value Institute’s IT Capability Maturity Framework, see “Managing IT for Business Value: The New Gold Standard,” BCG article, Fall 2010.) Respondents were asked to rank the current and future importance of the IT capabilities on a scale of 1 (not important) to 5 (very important). They were also asked to rank the current strength of those capabilities on a five-point scale, with 1 denoting rudimentary skills and with 5 indicating mastery.

    exhibit

    Which capabilities did respondents flag as being most critical in today’s banking environment? Capabilities that enable managing IT like a business were the predominant choices, accounting for the top three capabilities identified (IT project-portfolio planning and prioritization, business-continuity and IT-risk management, and the IT budget, respectively) and seven of the top ten. All 20 capabilities were deemed of medium to high importance, however.

    A different picture emerged when respondents were asked to name the capabilities that they expect to be most crucial in 24 months. Components of the managing IT capabilities category moved up considerably in importance, with IT architecture and application landscape optimization deemed the two most critical. Customer excellence, IT cost controlling and allocation, and application development productivity rounded out the top five. Again, none of the future capabilities were identified by respondents as insignificant—all 20 capabilities were expected to be of medium to high importance.

    The survey revealed a pronounced gap between the capabilities that CIOs and other IT managers think that their banks will require in 24 months and the capabilities that they currently have in their arsenal. There is no overlap, for example, between the five capabilities expected to be most essential 24 months from now and the banks’ five strongest capabilities today. And only two capabilities—application landscape optimization and application development productivity—rank among the top ten on both the current and future lists. Hence the banks’ IT leaders have a considerable amount of work to do if they hope to position themselves optimally for tomorrow’s world as they envision it.

    The IT Capability Maturity Framework

    The IT Capability Maturity Framework (IT-CMF) is an assessment framework designed to help IT organizations maximize their contribution to business value. It takes a highly systematic, granular look at IT. The framework covers the full scope of IT’s activities, dividing them into 32 critical capabilities and breaking each of those down into capability building blocks.

    For each block, the IT-CMF defines five maturity levels. Assessing the maturity levels of these blocks helps the IT organization understand its current position, make comparisons with benchmarks and peers, and define a target level that will maximize the business value generated for the company. From there, a wealth of strategies, tools, and best-practice examples are available to help the company determine the best way to reach that level.

    The IT-CMF was developed by the Innovation Value Institute (IVI), a global consortium of leading industry, government, not-for-profit, and academic organizations that aspire to establish a gold standard for managing IT for business value. Established in 2006 by Intel, The Boston Consulting Group, and the National University of Ireland, Maynooth, the IVI now has more than 75 members, including Cisco, Ernst & Young, Merck, Microsoft, and SAP.

    The CIO’s Shortlist—and Key Requirements for Success

    Given the tall order before them, where are CIOs and IT managers most likely to concentrate their efforts over the next 24 months? Based on the survey’s results and on BCG’s own assessment of the European banking landscape, we expect the main focus to be on three capabilities: IT innovation management, lean advantage, and customer excellence. (See Exhibit 2) Currently, these three are ranked at the absolute bottom of the banks’ capabilities assessment; they also stand to deliver outsized benefits to any banks that get it right. Below we highlight facets of each challenge and ideas about what it will take to succeed.

    exhibit

    IT Innovation Management. As the digital revolution progresses, technology stands to be an increasingly critical enabler and source of competitive advantage for banks. It promises to enable new products and services, allow banks better use of customer information, and help lower costs. But it will also have to be optimally leveraged to deliver on those promises.

    Skillful management of IT innovation will play a key part in successful banking strategies. (For more on this topic, see “(Technology-Enabled) Innovation: A Weapon to Win the Battle for Competitive Advantage,” BCG article, Fall 2010; and “Technology Trends: Deciding Which Ones Will Matter,” BCG article, Spring 2011.) Innovation efforts will have to be wisely targeted. An innovation pipeline will have to be defined and rigorously managed. And a culture of continuous IT innovation will have to be instilled throughout the entire institution, since IT innovation often happens beyond the confines of the IT organization.

    April 2014
    Interactive: Key IT Cost
    Ratios for European Banks
    European banks kept IT costs largely in check from 2003 through 2011—but costs have been trending higher for the last few years.
    But those are only some of the challenges. In our experience, banks seeking to maximize their return on IT innovation will need to move simultaneously on seven fronts—strategy, opportunity identification, incubation, commercialization, governance, performance management, and risk management. Some of the key questions that CIOs and IT leaders will need to ask themselves include the following: Where should we focus our innovation efforts, and what criteria should we use to make that decision? How much should we invest in innovation, and how should we finance it? Do we have a process for maximizing the commercial impact of our innovations? Are we measuring the right things, and do we have the right metrics in place? 



    Lean Advantage. In response to the economy’s ongoing woes, banks have placed a growing premium on reducing costs and improving operational efficiencies. As part of this focus, many banks have turned to lean transformational programs that are modeled on the example set in the 1970s by Toyota, which first embraced the “lean” concept that operations are a strategic asset to be leveraged rather than merely a cost to be managed. Such programs can deliver both considerable cost savings and significant improvements in quality and speed. But more than a few have been disappointed with the results. The near- and longer-term impacts on costs have proved far less than expected, and there has been no fundamental, lasting change in the way the banks conduct their operations—and hence little impact on their long-term performance.

    Lean initiatives can indeed deliver significant, sustainable value to banks. (For more on lean, see “Lean Banking: A Holistic Approach to Significant and Sustainable Value,” BCG article, Spring 2010.) They can be applied across many areas within banks and translate into a range of benefits. Applied to IT optimization, lean programs can be particularly useful, as they can eliminate many common sources of IT waste, including:

    • Overprocessing—for example, unnecessary functionality or overengineered software design

    • Overproduction—due, for example, to incorrect project prioritization or weak program management

    • Suboptimal asset utilization—for example, a lack of required specialist resources or ineffective handling of change requests

    But the right approach and implementation must be employed if lean is to deliver. We believe that lean should be viewed not simply as a tool for process improvement but rather as one that is applied broadly. It should be applied to structural elements, such as organization, interfaces, and systems. It should also be applied to sociological factors that can underpin success, such as cooperation among departments. In short, getting lean to work means casting a wide net, taking a truly end-to-end perspective, and staying focused on delivered impact and continuous improvement.

    Implementation of lean brings its own challenges. Our perspective—in contrast to viewpoints held by many others—is that lean should be phased in incrementally rather than through a big-bang approach. A series of well-targeted and well-sequenced pilot programs, whereby success breeds success, will lay the groundwork for the necessary organizational and cultural changes to stick and for lean’s benefits to last.

    Customer Excellence. Banks have collected and continue to collect rich information on customers. This knowledge provides them with excellent opportunities to enhance the targeting and effectiveness of their marketing and to strengthen their ties with customers via an improved customer experience. Properly collected and mined, customer data can help banks design and deliver the right products and services, at the right time, via the right channel. And this can lead to significantly increased customer satisfaction, loyalty, and trust—which can, in turn, result in higher revenues per customer and greater customer retention.

    But translating customer data into financial results is proving elusive for many banks. Many institutions lack a single master database for customer information and hence cannot deliver messages in one voice across all channels. Other banks have not figured out how to use their data to design winning products and services.

    Designing and executing a holistic, enterprisewide solution to managing customer data is a multifaceted challenge. IT must provide the tools and system support necessary to ensure that the right customer information is in the right hands, at the right point in time, within the bank. Simultaneously, it must provide the support necessary for the bank to collect relevant customer input and feedback via social-media websites and other external sources.

    To develop these capabilities, we recommend an approach that is collaborative, fast-moving, iterative, and led by a cross-functional team tasked with identifying opportunities that have clear value propositions for both customers and the bank. An agile approach such as this will allow for short development cycles and immediate feedback from stakeholders—and will result in earlier releases of new IT capabilities.

    Once an initiative has been given the green light, the technical requirements should be defined and the application built, tested in a series of rapid iterations, and finally migrated to a standard platform. In parallel, efforts should be made to reduce IT complexity through the consolidation of historically siloed front-end operations, implementation of consistent middleware, and the streamlining of customer information files on the back end.

    The rapid delivery of customer information by these means will increase a bank’s value per customer, help the institution target and win new customers, and optimize use of the bank’s resources.



    Admittedly, the challenges facing European banks in the near to intermediate term are large, but for most institutions, they are not insurmountable. Inevitably, of course, there will be winners and losers. CIOs and IT managers who can deliver on the objectives described above can give their banks a substantial competitive advantage over peers—and magnify their banks’ odds of not only surviving but thriving.


    Acknowledgements

    The authors would like to thank the IT managers and CIOs who participated in the benchmarking survey. Their views made an invaluable contribution to BCG’s own perspective of the IT environment in the European banking industry.

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