Do you truly understand your Technology costs?

I recently had the pleasure of accompanying my daughters to a lecture given by Scott and Mark Kelly, the twin brothers who both led inspiring careers as astronauts. They emphasized that we should do things not because they are easy, but because they are hard. Their great advice was simple. When you find something that motivates you, to accomplish something meaningful, do a few basic things. 1. Have a goal, 2. Have a plan. 3. Focus on what you can control.

What does that have to do with technology costs? As it has with so many things, technology is transforming the banking industry. Paper checks are becoming relics, channel preferences (both the customer’s and the provider’s) are evolving, self-service is in high demand by some customers and being imposed on others, economic activity is migrating away from cash transactions, and a tremendous amount of data regarding customer behavior is being collected, analyzed and acted upon. Technology is also a contributing factor to the continued M&A activity throughout the industry. Economies of scale are increasingly critical. Many institutions have experienced (or soon will) one or more mergers. Combining entities inevitably brings significant change. In fact, change resulting in efficiency is usually the point. Dealing with the combination of technologically driven change and M&A activity is the managerial equivalent of hunkering through a hurricane during an earthquake. Understanding costs can be hard and financial institutions better be motivated to do so.

Managers who are serious about strategic cost management know Activity Based Costing methodology can offer shelter by providing valuable information about the nature of your costs and high potential savings opportunities. Whether your company is embarking on an ABC implementation or utilizing an existing one it’s time to take a fresh look at your costing methodology and ask the challenging question, do we have the transparency we need to successfully manage our IT costs? Building that transparency and understanding should be your goal.

When companies first implement costing methodologies, they often focus on the non-IT costs and defer a deep dive on the IT costs for some later date which often never comes. There’s a failure to launch. Why is that? There are many reasons. Managers tend to have a strong understanding of their direct expenses (resources) and how they are used. They tend to spend a large portion of their time managing people. So when it comes to completing cost studies for non-IT groups, they are focused on and comfortable with capturing the activities that people do. They can reasonably associate those costs with particular products or customers. Once that is done, it’s not hard to start digging into the ABC results and start identifying opportunities. This is the easy part. But what about the IT costs?

Unlike the cost of personnel resources which are easily identified (in the general ledger, job class salary midpoints, etc.), capturing the cost of particular IT resources requires some work. The costs of PC support and the like are reasonably straight forward, but what about the dozens or hundreds of systems and applications they provide, how much does each one cost? Once we know that, how can we reasonably assign the costs to the appropriate products and customers? The IT folks have to model the costs of their resources (storage, processing, programing, maintenance, licenses, etc.) just to estimate the cost of each application they provide. Once the inventory of IT applications and their costs is complete, work can begin on assigning the IT application costs to products and customers. People with the knowledge to make informed judgements about how particular applications enable activities or support products/customers are harder to come by. Often there is not one person who has the knowledge to accurately assign the cost of a given IT application; a combination of IT and business folks are required. Multiply that complication by many dozens of applications and the task of assigning the costs of IT resources can seem daunting. Last but not least, companies implementing strategic cost management are usually doing so as a response to urgent pressure. Managers are often tasked with identifying cost savings opportunities with quick paybacks and create savings to, at a minimum, self-fund the costing project. That’s not great incentive to put the deeper effort into the IT costing. They want to get started on the most visible and obvious savings initiatives.

So is your strategic cost management effort doomed to provide less value than it could or in fact should? For some companies, yes. They may get stuck doing the easy part over and over. Change is hard. Others will find the motivation to do the hard thing. Break the project down into manageable pieces, and make a plan.

The incentives to make the effort are crystal clear. Technology is uprooting processes and driving change in the cost structure of financial institutions.  Processes that were labor intensive have likely been impacted by automation in some way. New processes are emerging, some are fully automated. Many redundant systems and applications survive the merger process or even organic growth. You can’t control the industry dynamics but you can control the investment you make in your costing methodology and the quality of your costing information. IT costs as a percentage of total costs are substantial and growing. They are fertile ground for strategic cost savings which are there for the taking. Take the Kelly brothers advice and do the hard thing. Have a goal, make a plan, and focus on what you can control. Get motivated to upgrade your IT costing methodology now. After all, it’s not rocket science.