The bailout of Bankia and the general concern regarding the rest of the Spanish banking industry cannot come as a total surprise to the capital markets given that five Spanish banks failed the stress test performed a year ago. But, it is a total chock to us IT professionals working in the banking sector. For ages, we have attended seminars and read research reports where academics, management consultants and IT analysts hail the Spanish banks as innovators that use IT to transform the banking-industry. Royal Bank of Scotland (RBS) is another example. They represented the Best Practice for many Swedish banks for a while. In their eagerness to replicate their success, SEB even recruited a prior CIO from RBS. The purpose of this blog post is NOT to point finger on anyone. On the contrary, I will give my view on how to ensure continuous transformation.
The problems at Bankia and RBS were not caused by excessive IT-investments. But I think that the booming markets that eventually burst as bubbles and caused the problems may explain the innovativeness at these banks. In my opinion, most banks have to be really bullish to make IT investments that may transform their business. In a downturn, the IT-budget is reduced in order to maintain unchanged Cost/Income ratios and the favor of the capital market. Any reductions to the IT-budget will invariably affect the part of the IT-budget dedicated to transformational projects, especially when considering that 70% of the IT-budget is required for operations and maintenance (“keeping the lights on”). The CEO at Nordea refers to the “New Normal” where we have to adapt to the new regulations. So, we can probably expect that compulsory compliance project will continue to consume a majority of the project portfolio.
In a recent article, McKinsey advised readers to ensure that they dedicate a fixed share of their budget to transformational projects during as well ups and downs. They explained that the optimal balance may vary between industries and companies but an average indicate that 10% of the budget should be reserved for transformational projects, every year. I know that getting a balance in the project portfolio is a central part of any organization’s IT Governance. But we need a shift in mindset. The transformational projects are not a nice-to-have residual in the IT-budget process. Everyone understands that a pharmaceutical company cannot eliminate their R&D investments. Similarly, a bank cannot postpone their transformational projects to good times. Banking is IT and we all know that the only thing that’s constant is change.