About half of IT transformation projects at European banks exceed budgets by more than 25% largely because early success stories lead to additional scope as the business increases its demand.
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There is no shortage of transformations as banks address several key areas including meeting regulations, improving customer experiences and making underlying technology more efficient.
According to Forrester, while 50% see budgets increase by over 25%, about 30% go over budget by less than 25%. Only 20% complete projects to budget.
Financial services analyst at Forrester, Jost Hoppermann, said:“I think one of the reasons for going over budget is scope increases that occur because of the early success of projects.” He said there are a few examples of projects running 100% over budget.
“The transformation plans of European banks seem to be either slightly optimistic or not reflecting reality."
Hoppermann said in North America banks are less likely to run over budget and some even run under budget. “I do not believe the transformation teams in North America are better than those in Europe but they could be better at managing scope.”
The main business challenges prompting IT projects include the need to comply with regulations; manage costs; and improve customer experiences, said Hoppermann.
The key IT areas that banks are focusing on are: managing multichannel environments; core banking platforms, covering loans, deposits and new products; analytics and business intelligence; and enhancing the underlying infrastructure to support all of this.
Mobile and internet banking platforms are a major part of multichannel developments. “Traditionally mobile has been less important in Europe than the US, although some regions such as the Nordics have quite advanced mobile banking.”
Daniel Mayo, financial services analyst at Ovum said: “It has taken a long time for European banks to realise that mobile banking is important, compared to Asia and North America, where there is real innovation.”
He said that so far UK banks that offer mobile banking functionality have tended to replicate online banking services, which themselves are quickly growing out of date. “Mobile banking in Europe is currently just a repetition of what you can do online but next year we will see a lot more from the European banks.”
For example, Barclays is in the process of developing mobile apps using a private cloud as part of its Mobile Money platform. Barclays’s Pingit app is an example of an app that has been developed in the private cloud. The bank has added over a dozen updates this year and is now expanding internationally.
“Our deployment speed for updates is 12 times faster than the old systems which would have required us to re-write from scratch,” a Barclays spokesman recently told Computer Weekly.
In core banking Hoppermann said banks are increasingly looking for off-the-shelf technologies, as oppose to in-house developed systems. According to Gartner, banks spend about 6% of their revenue on IT. This compares with the retail and wholesale sectors that spend 1.1% of revenue on IT, utilities 2.8%, industrial manufacturing 1.8% and a sector-wide average of 3.6%. The only sector that spends a larger proportion of revenue on IT is the software and internet sector, at 7.6%.
Only 18% of banks' total software expenditure is external and for banking-specific apps, this drops to 5%; and for core banking software the figure is even lower.
He said banks fall into three camps. There are banks using a mix of off-the-shelf and in-house software, those that pick the best of breed from different suppliers and some smaller banks that use off-the-shelf platforms for everything. Companies including SAP offer end-to-end off-the-shelf banking platforms.
“It makes sense to custom-build in certain areas but not for the majority of the bank,” said Hoppermann.
Last year the Banking Industry Architecture Network (Bian) called for the adoption of a service-oriented architecture (SOA) framework across the banking and industry and its software and services suppliers to support the move to off-the-shelf software in banks.
Bian, which promotes a common banking architecture, has created a framework for software suppliers to create systems compatible with a bank’s SOAs.
If adopted, banks will be able to buy any Bian SOA-compliant software off the shelf, in the knowledge that it will be compatible with their infrastructure and will not require a major integration project.
Research of 24 Bian members, including banks and suppliers, revealed that 78% believe SOA standards will reduce IT costs by 25%. A massive 44% expected savings to be as high as 50%.
Hoppermann said SOA is under used in banks although it is increasing. Forrester research shows that about 25% of finance firms have half of business applications SOA enabled. “Overall there has been some kind of improvement and clearly banks want to increase the share od SOA enable business applications.”