They’re household names, staples in local communities and worth billions. PetSmart raked in nearly $7 billion last year. Foot Locker has revenue streams totaling $6.5 billion. Barnes & Noble revenue came to $6.8 billion in 2014.
The biggest U.S. commercial banks, on the other hand, have IT budgets alone on part with the revenue at these firms.
IT spending in the banking and financial services industry is second only to the software/internet industry, according to estimates from Gartner Inc. So, in terms of cash control, a number of CIOs at banks control bigger budgets than CEOs of large firms in other industries.
Gartner research indicates that Bank of America’s $101 billion in annual revenue would translate into an IT budget of approximately $6.4 billion; Citigroup’s IT budget would be almost $6 billion; and J.P. Morgan & Chase’s IT budget would be nearly $7 billion.
Run it like a business
With such budgets, it is time for banking and financial services CIOs to start running IT departments like a Fortune 500 CEO, identifying money pits and ruthlessly eliminating them from the bottom line.
A recent McKinsey report found that banks that relentlessly standardize their IT infrastructure and application architecture spend an average of 41% less on day-to-day IT operations. Yet, CIOs spend 55% of the applications budget on maintenance and support, according to Forrester Research’s most recent “State Of Enterprise Software And Emerging Trends” report.
Connect the dots: Commercial banking CIOs can find their IT money pit in valueless and unused applications. For organizations spending billions on technology, the amount of wasted money can be both daunting, and an opportunity for improvement.
A working example
The significance becomes easier to understand when experimenting with a hypothetical situation. The median commercial bank in the Fortune 500 is U.S. Bancorp, which pulls in $21 billion in revenue.
• Based on Gartner industry estimates showing banking organizations spend an average of 6.3% of revenue on IT, U.S Bancorp’s IT budget is roughly $1.3 billion.
• Forrester statistics then break down IT budgets even further, showing that companies tend to spend an average of 34% of enterprise technology budgets on software. That means U.S. Bank may be spending an estimated $442 million on software.
• Forrester then suggests 55% of software budgets on maintenance and support. If that’s the case, then U.S. Bank spends an estimated $243 million just on application maintenance—not new applications or new projects, but just keeping existing IT running smoothly.
What if the CIO audited his or her application portfolio and discovered that valueless software was consuming even just 15% of his budget? By weeding out these applications, this mere 15% would translate to a savings of $36 million in maintenance fees alone.
Digging into legacy choices
Identifying applications and their associated business functions enterprise-wide will reveal redundancies, as well as applications that do not justify the high overall costs.
Start by categorizing enterprise applications with metrics such as:
• Total cost of ownership.
• Number of unique functionalities.
• Number of applications that depend on it to function.
• How many other interfaces the application interacts with.
Banking IT leaders should also rank each application with risk and security metrics.
Beyond dollars: time and IT’s image
This newfound understanding of the organization’s IT portfolio also allows the enterprise to trash a number of applications that have completely lost their value.
These valueless IT assets can prove harmful for executives’ perception of IT’s role, as they perpetuate the idea that IT is only “keeping the lights on,” consistently maintaining status quo projects rather than introducing new digital capabilities.
The C-suite needs to regard IT as a strategic business partner, but it simply is not there yet.
Forrester Research experts surveyed more than 3,700 IT leaders in late 2013, and respondents estimated that an average of 72% of the money in their budgets was being spent supporting ongoing operations—“keeping the lights on.” Only 28% went toward new projects.
CIOs must think like a CEO, taking a strategic approach to their budget and department.
About the author
Bob Dvorak is president of KillerIT, a division of Forsythe Technology, Inc. KillerIT is an IT program and portfolio management software suite that provides a data-driven roadmap to optimize IT and accelerate digital business.