How Can a Portfolio Approach to Managing IT Applications Help Banks?
The US banking sector navigated numerous challenges in 2004 but finished the year on a reasonably good note. Major banks such as Bank of America, Citigroup, Wachovia and JPMorgan Chase experienced healthy, double digit top line growth. While analysts predict that 2005 will be a year of relatively stable business, banks are nevertheless going to have to continue to face the impact of various forces. These include increased competition and further consolidation in the industry, the imperative to reduce costs to improve profitability, better understanding of customer requirements, and better managed risk according to regulations, such as Basel II Accord, Check Truncation Act and the Sarbanes-Oxley Act.
Historically, banks have relied on technology to manage business processes effectively and drive competitive advantage. However, in our view, the current technology infrastructure of a majority of banks is not equipped to handle the business challenges detailed above. A root cause of this situation is the lack of alignment of IT with business objectives, which has resulted in banks spending billions of dollars on initiatives with only short-term benefits. In the process, IT investments with the potential to deliver long-term business value have often been neglected. The impact of these short-sighted moves is quite clearly visible in application portfolios, which are the most critical components of the underlying IT infrastructure. A quick study of the current state of application portfolios in major banks across the world reveals highly heterogeneous systems.
In such environments, custom-built systems are the norm, not the exception, and most of the applications are not easily inter-connected as they are built on different standards. Many core banking systems have been in operation for over 20 years, and they are kept going by complicated add-ons and incremental enhancements implemented reactively. This has resulted in “spaghetti architecture” and an unwieldy portfolio of applications that do not facilitate rapid response to an ever-changing environment. This article paper describes how banks can overcome gaps in business and IT alignment and other limitations of conventional IT management approaches by taking a portfolio approach to managing their IT applications.
A portfolio is typically defined as a combination of assets that are expected to provide a certain return at an expected level of risk (or uncertainty) related to achieving that return. In the IT context, a “portfolio” could mean IT applications or infrastructure (platforms/servers, operating systems, networks, tools, etc.), IT projects or even a set of resources, skills and relationships (e.g. a set of vendor partnerships). Collectively, these IT asset portfolios constitute the “building blocks” that are used to deliver competitive advantage to the business (by providing various services and capabilities).
While portfolio management per se is not a new concept, its application to the IT world has not been very common – possibly because there are fundamental differences in the nature of IT and financial assets that make it practically harder to manage a portfolio of IT assets. In spite of these challenges, Infosys recommends that banks take a portfolio view of their technology assets. Doing so makes it easier to focus on strategic and operational goals, business value, risks, resource constraints, and the associated trade-offs, instead of focusing only on traditional ROI metrics (which, in the IT world, has been adherence to budgets and schedules).
The most commonly asked question by CEOs looking to improve their IT portfolio is “where do we start applying the portfolio management concept?” Focusing on all of the “building blocks” of the IT portfolio at the same time will pose a challenge from both a resource availability perspective and a management perspective. It is Infosys’ view that a bank can get the greatest benefits from its investment by starting with the portfolio of applications. This can bring significant value in a relatively short time period, since IT applications are typically directly visible to the business and contain the business functionality and rules that cater to the business needs. Therefore, managing the portfolio of applications well can bring early and measurable benefits. This also helps create buy-in for the portfolio management approach across both business and IT organizations.
The application portfolio management (APM) initiatives, in our view, should be structured and implemented in a phased manner so that costs, benefits, risks and time are balanced. Also, it is important to keep in mind that portfolio management is an ongoing process and not a one-time destination in itself. We recommend the following three phases:
While the overall approach to APM seems pretty straight-forward and the benefits quite obvious, it is our experience that banks tend to make some basic errors that prevent them from realizing the anticipated value:
As with any strategic initiative, it is important to build a strong business case before proceeding on the APM journey. Our experience shows that there is a good case for APM and the impact can be felt in the short term as well as the long term through IT and business functions respectively. APM ensures that investment and implementation of IT are in synch with changing business needs and trends. At the technology level, it improves the overall IT effectiveness, ensuring that IT is not a reactive function anymore, always playing “catch-up” with business. At the business level, this enhances a bank’s capability to meet the challenges in the external environment and achieve overall business goals.
The utility and impact of application portfolio management can be understood in the context of various strategic initiatives typically undertaken by banks:
While quantifying the business related benefits would be very specific to the context of a particular bank, the expected impact on IT can be calculated with reasonable accuracy across the industry. The primary drivers of the impact on IT are current spending, diversity of standards and platforms in application portfolio and level of maturity in global sourcing. For example, a commercial bank with a $500m IT budget can potentially expect up to $26m to be freed up from the annual application maintenance budget. These savings can be channelled to fund more strategic projects or contribute straight to the bottom line.
A complete solution for application portfolio analysis and management, in our view, should ideally consist of the following:
Our analysis of current offerings in the market shows that no single vendor offers a comprehensive solution. Broadly there are two categories of vendors with different value propositions targeting the market:
Most vendors offer either stand-alone frameworks bundled with consulting services or only general portfolio management tools, where third parties are needed to customize and implement the solution. Most frameworks adopt a one-dimensional view typically driving the end result towards offshoring applications in the portfolio. Such an approach will still deliver savings due to cost arbitrage opportunities associated with offshoring; however, the value derived may be lower than is optimal or the risk may be higher, because this approach does not make any attempt to structurally alter the underlying application portfolio.
Other portfolio analysis tools do contain some of the required components, but typically lack a mechanism to easily define and track the application portfolio metrics on an ongoing basis without dependence on external consultants or heavy investment of ongoing resources – a sort of dashboard. This reduces the utility of the tool and tends to perpetuate the incremental approach to managing IT portfolios.
For most banks, their current portfolio of disparate IT applications is an impediment to improving operational effectiveness. This article presents our view that managing applications as a portfolio will not only help banks bridge the gap between business imperatives and application portfolio strategy, but also enable them to maximize benefits even while managing the associated risks. However, what is needed is a robust approach to application portfolio management that allows the organization to not just make a one-time saving based on offshoring certain applications but also to realize the potential of recurring savings through proactive management of the portfolio.
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