Over the last few days Getronics has been hosting a forum for leading banking technologists in Europe (part of the reason I’ve not been as active here as I normally am). At this event, an interesting statistic was presented by Forrester: apparently 79% of IT budgets are dedicated to keeping the lights on, or in other words, maintaining legacy systems. Since this figure accords closely with one derived by an Accenture study (75% in 2005), it’s likely that the number is pretty close to reality.
Clearly, if most of the money is going to keeping current systems running, there isn’t a lot left over to implement much innovation. And if innovation is the key driver of sustainable competitive advantage, that is a dire situation indeed. Not only is it dire for bankers, of course, it doesn’t really bode that well for vendors either, who need their customers to be implementing innovation and change if they are to get their pay checks.
This really comes down to a very fundamental question: if IT organisations can’t pay for innovation out of their current budgets, who is left? Why, the business of course! And since it is the business that earns the money anyway, why shouldn’t they pay if they want to change the tried and true?
Here is one reason: innovative systems are invariably custom systems. And custom – as I discussed in this post previously – tends to be expensive, decrease the productivity of IT organisations, and reduce their agility over time. Ultimately, it is custom that gets bank IT into the trap of legacy: that 79% of budgets which go to supporting commodity, non-differentiated capability. Even the most differentiated system becomes commonplace over time.
Let me restate the dilemma. Banks must innovate in order to sustain competitive advantage, and invariably that means innovation in systems. IT organisations can’t afford to allow much innovation, given so much of their budget is spent paying for the innovation of yesteryear (today’s legacy). And the business, whilst it can afford to innovate and needs to do so, shouldn’t because coughing up that bit of cap-ex puts the load on IT for the next decade or longer. A pretty dilemma.
Going back to our Financial Services Forum, a quite clever solution was proposed by one of the delegates: innovate for re-usability.
Here is the basic premise: business units are allowed to drive innovation in their systems as much as they want, as long as the business case includes allowances for the system as it drives towards legacy status. Allowances for operations are, in any case, becoming common practice, so there is nothing new here.
However, if the innovation can be used by other business units – in other words, if incremental innovation can be driven on the basis of what was done previously – those other business units then defray the cost of the initial investment in the innovation, and wear some of the cost of the maintenance. Over time, reusable innovations become self funding – and might even drive a positive return – as more and more business units start to pay as they use.
Do you recognise the business model here? Yes, it is the same as that used by software companies: defray the cost of innovation by selling the same thing to many customers, and charge those customers on an annuity basis for maintenance. The license business is a profitable one and has worked exceptionally well for titans like Microsoft. It is not such a stretch to imagine that such a model would be successful even given a much smaller and closed market.
In fact, thinking about this a little more, a small closed market actually offers the opportunity for a business unit to specialise its reusable innovation to such a degree that it can achieve relatively long term customer lock in for its buyers (other business units in the company), thereby guaranteeing the future revenue to maintain its systems. It is hardly likely or sensible that the Retail Mortgage business line is going to acquire an external application to do innovative web delivery if Savings and Deposits have already built the capability with all its associated legacy integration.
Such an internal business model rewards successful innovations inside the bank, and ensures that these innovations are sustainable in the long term. It is a better way of doing things, I think, than what mostly happens today: innovations delivered in isolation which benefit individual business lines without much consideration of the benefits to the whole group, nor the long term IT costs.