Global Headquarters: 5 Speen Street Framingham, MA USA P F

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1 L e an IT: The Time for Transformation I s N o w W H I T E P A P E R Sponsored by: CA Global Headquarters: 5 Speen Street Framingham, MA USA P F David Potterton August 2009 E X E C U T I V E S U M M A R Y In today's economic environment, reducing costs and increasing efficiency should be priority one for financial institutions. To assist in this process, many institutions are investigating opportunities to create more value for customers by eliminating or reducing non-value-adding activities. Lean processing, long a staple in manufacturing, provides this opportunity for increasing efficiency within financial services. Despite the lack of acceptance to date, there is in fact much that financial services companies can learn from Lean methodologies and more specifically Lean IT. With Lean IT, technology can lead the way in providing value across the enterprise, but it is the alignment with business strategy and the proper governance model that will ensure success and achieve measurable results. Forward-thinking organizations are already well along this path. For others, economic conditions should be driving them to look at the benefits of Lean IT, which begins, proceeds, and ends with a foundation built on a disciplined approach to enterprise IT management (EITM). While most financial services IT environments are destined to remain multivendor and heterogeneous for the foreseeable future, selecting an IT management partner with a broad solution base and proven history of integrated EITM solution implementations will be critical for Lean IT success. SITUATION OVERVIEW A New Reality for Financial Services It should be no surprise that the economic upheaval during the past 18 months continues to weigh heavily on financial services. From a technology perspective, the current economic uncertainty has obviously put a major damper on IT spending overall, and we at Financial Insights have predicted an overall decline of 3.7% for North American banks in Hardware and software as well as internal IT August 2009, Financial Insights #FIN219550

2 spend will be hit the hardest, but even in this environment, we believe banks and other financial institutions will continue to invest in key technologies, albeit at a slower pace. What spending there will be, however, will be based on a new reality for financial services in 2009 and beyond. At Financial Insights, we see this new reality as centering on four key themes: mergers and acquisitions, risk management, client acquisition and retention, and expense reduction (see Figure 1) FIGURE 1 Four Key Financial Services Themes in 2009 Source: Financial Insights, 2009 Mergers and Acquisitions While merger activity seems to have moved off the front pages, it is still taking place as the FDIC continues to close banking institutions by merging them with stronger rivals. There have been 64 bank closings as of July 31, 2009, compared with 25 for all of 2008, and we at Financial Insights expect this trend to continue. While additional forced marriages by the Treasury may or may not be in the offering for banks, financial institutions of all types that lack sufficient capital must decide on a strategy to ensure survival. Potential strategies run the gamut and include identifying potential merger partners, negotiating with current bondholders or private equity firms, seeking foreign capital, and exiting/selling lines of business. The goal of many Page 2 #FIN Financial Insights, an IDC Company

3 mergers is to take out as much cost as possible as quickly as possible, usually in redundant people and systems. Major cost take-out areas include overlapping applications in HR, payroll, accounting, treasury, marketing, and CRM. Merging institutions, however, also have an opportunity to look strategically at the non-value-generating areas of a combined IT organization for additional savings including the costs to power, manage, secure and operate their applications and infrastructure. In short, M&A provides financial institutions with a golden opportunity to "go Lean" with IT. Risk Management The proper identification and management of risk will determine not only a financial institution's survival but its long-term success. With the very public lapses in risk management at some high-profile financial institutions over the past year, new/additional regulation and oversight is and will be forthcoming. In this environment, security and compliance management will be key factors for success. Financial institutions should therefore include among their strategic imperatives a review of their current risk and compliance processes to make sure they can map and monitor risks across the organization. A key opportunity with emergent enterprise risk technologies is to visualize and understand cross-organizational risk interactions. The ability to see potential impacts of risks in one area of the organization on other business segments, and to manage these risks cost effectively, will be critical in the future. In addition, recent events within financial services are making it imperative to view risk holistically across the enterprise and particularly by counterparty. Such near-real-time "risk management" visibility cannot happen without a significant investment in IT capabilities. Client Acquisition and Retention In our new economic banking reality, clients are key and, while many financial institutions will say that has always been the case, actions have not followed words. Today, it is critical to not only understand but more importantly deliver on client expectations about products and channels. Those who can execute both successfully will be the leaders in financial services. Technology plays a critical role in helping organizations get back to basics and connect with their customer base, and investments will focus on new customer on-boarding, cross-selling, risk-based pricing, and refreshing Web channels. Web 2.0 technologies will also play a strong role as well as banks continue to look for ways to enhance the client experience. In fact, IT overall will play an increasingly important role in the move from classic customer "experience" and "loyalty" to the newer benchmarking standards of customer "delight" and "willingness to recommend." 2009 Financial Insights, an IDC Company #FIN Page 3

4 Expense Reduction At its core, this is really about doing more with less; less budget, less people, and less IT (at least from a spend, but not necessarily a "capacity," perspective, as it is unlikely that IT processing power demands will decline for most financial institutions). Even capital-rich institutions are hunkering down and questioning investments across the board, including projects that have already been budgeted. From a technology perspective, sustainability continues to be the public mantra for many institutions, but that is simply the rallying cry for initiatives to drive down costs including heating, cooling, and power consumption. Cloud computing and SaaS are being reviewed in this space, with the added benefit of reducing investment and speed to market with new product offerings. In addition, IT services is expected to continue as a strong technology category for 2009 and beyond as financial institutions continuously seek to preserve capital. Outsourcing will continue to make headway as well, particularly for IT (ITO) and business processes (BPO). However, there has to be a point and a discipline to cost cutting. This is especially true for IT as cost-cutting efforts may not only take out superfluous costs but also intentionally or unintentionally cripple programs and applications needed to run the business well. In this environment then, "efficiency" rather than "cost cutting" should be the guiding principle, and financial institutions that can master this difference will separate from the pack. Fortunately, there are techniques and technologies to help. One technique in particular that financial institutions should review is Lean processing. Lean Processing Lean processing has been trying to make its way into Financial Institutions for the past 10 years or more. While success has been limited, there is much financial institutions can learn from Lean. Lean at its essence is really about creating more value for customers by eliminating activities that do not directly add to the value chain of the end product or service, and increasing efficiency of production. Many times, it is paired with elements of Six Sigma (which is based on quality improvement and defect management and is therefore more about accuracy and precision) to provide the best of both disciplines (see Figure 2). Page 4 #FIN Financial Insights, an IDC Company

5 FIGURE 2 Lean and Six Sigma LEAN Speed Waste Elimination Value System Redesign Leverage Best of Both SIX SIGMA Variation Reduction Problem Solving Methodology Stability and Accuracy Source: Financial Insights, 2009 It's not that Financial Services firms (and particularly banks) are against continuous improvement. Similar efforts have been tried in the past and some are still ongoing; however, many initiatives have failed to gain traction despite large expenditures of time, effort, and money. However, IT, with its traditionally high "keep the lights on" cost versus strategic spend ratio, represents a uniquely compelling area to apply Lean principles in financial services with immediate top- and bottom-line impact. Technology is absolutely a key player and in many cases a primary driver of Lean solutions. In fact, when technology changes are required, Lean principles allow financial institutions to be confident they are maximizing scarce IT resources to the fullest benefit of the firm. This IT focus for efficiency and value is Lean IT. Lean IT Lean IT minimizes the unproductive costs of keeping the infrastructure running, allowing the redirection of those savings (and people) to delivering and improving IT services that directly support the business. In effect, Lean IT is an approach that helps focus IT organizations on value-added activities such as reducing waste, increasing productivity, and improving the customer experience. To provide these benefits, however, Lean IT must align with business strategy. This starts by senior-level executives endorsing Lean initiatives and following through with constant reenforcement of the goals and objectives. CIOs can champion this cause by creating an IT governance structure that helps financial institutions develop realistic 2009 Financial Insights, an IDC Company #FIN Page 5

6 project timelines and transparency regarding Lean IT project efforts. Only with transparency and a detailed plan will Lean IT initiatives find success (see Figure 3). FIGURE 3 IT Governance Model Source: Financial Insights, 2009 Lean IT is not just about cost cutting but providing real business value to the institution. This distinction can be drawn in today's environment, where struggling financial institutions are not only cutting superfluous costs but also intentionally or unintentionally killing programs and applications needed to run the business efficiently and effectively. The IT organization in these situations struggles to maintain a minimum level of customer value and therefore has little ability to propel the organization forward when the economic situation improves. This lesson can apply to Lean IT as well. Many companies have come to learn that if you are overzealous with Lean initiatives, you can become brittle so Lean that you are vulnerable to major changes and events. Therefore, Lean IT done right will include systems for monitoring and continuously recalibrating. Page 6 #FIN Financial Insights, an IDC Company

7 The key then is to focus on the overhead and non-value-generating areas of IT the costs to power, run, manage, and secure all the hardware, software, networks, and applications. It is estimated that 60 70% of IT budgets within financial services are currently spent on these activities. These costs could be reduced by % or more over several years with the right tools and the approach that Lean IT can provide. One of the most compelling aspects of Lean IT is that the approach, once engrained in corporate culture and committed to by executive management, can pay significant dividends regardless of whether overall spending at an organization is rising, flat, or declining. The savings gained by the elimination of unproductive technology and people costs can be redirected to strategic projects with direct value to the business, even if overall budgets are declining. However, it is clear that many financial firms today are still burdened with legacy IT infrastructures that are overly complex, siloed, fragmented, and difficult to manage. These firms will need to undertake a more significant overhaul or transformation of their infrastructure as well as their IT management environment to gain the full benefits of Lean IT. The approach to help them on this path is to adopt an enterprise IT management, or EITM, strategy. EITM demands a set of solutions that are open, extensible, and integrated to cover the three critical IT disciplines of security, management, and governance. It also includes best practices for individual solution deployment as well as multivendor, multisolution integration. A properly implemented set of EITM solutions enables Lean IT by allowing optimum processes to be supported by the IT management technology rather than having the IT management tools dictate what the processes should be. Once the optimum processes have been defined and implemented, further Lean gains can be achieved through disciplined automation and continuous process improvement. In effect, Lean IT is the end state value proposition of a proper EITM implementation (see Figure 4) Financial Insights, an IDC Company #FIN Page 7

8 FIGURE 4 Lean IT for Financial Services Powered by EITM Source: CA The six key solution "pillars" required to address EITM and enable delivery of Lean IT in Financial Services are: Application performance management. Provides visibility into the customer transaction from the Web front end through all infrastructure components Infrastructure management. Improves agility, service quality, and efficiency through automation while reducing cost of service delivery Security management. Streamlines and automates compliance processes while reducing risk and increasing efficiency Project and portfolio management. Identifies and reduces the number of redundant projects overall while also reducing the duration and costs of approved projects Service management. Manages business demands and responds to changes quickly while identifying problems before they impact customers Page 8 #FIN Financial Insights, an IDC Company

9 Mainframe 2.0. Simplifies software management for mainframe environments while also providing new programs and best practices to maximize the business value of the mainframe platform Once the prerequisite six pillars are implemented, the possibilities offered for creating new Lean IT solutions become virtually limitless. For example, a firm could: Combine multiple security solutions such as identity and access management, role management, and data loss prevention with security information management, IT governance, and risk/compliance management to create a comprehensive Lean framework for IT risk and compliance with smart provisioning. Combine solutions such as application performance management, infrastructure management, mainframe management and service management to build out highly automated end-to-end financial transaction management capabilities, from client browser through back-end mainframe. Ultimately, the modular and integrated EITM approach will enable financial institutions to deliver Lean IT with value-added capabilities such as the business-driven datacenter, and comprehensive IT service portfolio management. Composite EITM solutions such as these will enable financial services firms to minimize costs while improving IT alignment to the business. This frees capital to go to the bottom line or for investment in value-added IT services such as new applications, real-time risk management, and/or processes to bring on and integrate acquisitions rapidly. Achieving these objectives, while minimizing IT costs, is what Lean IT, enabled by EITM, delivers to the Lean financial institution of today. Copyright Notice Copyright 2009 Financial Insights, an IDC company. Reproduction without written permission is completely forbidden. External Publication of Financial Insights Information and Data: Any Financial Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate Financial Insights Vice President. A draft of the proposed document should accompany any such request. Financial Insights reserves the right to deny approval of external usage for any reason Financial Insights, an IDC Company #FIN Page 9