Retreat From Innovation – The Loss of CIO Purchasing Power

by Christopher Keene

 

Over the last 20 years, much IT innovation has directly or indirectly been funded by Financial IT organizations. From databases to application servers, financial services have been early and significant customers, in some cases even making investments in technologies which offered clear competitive advantage.

 

Over the last few years, however, the purchasing process in many banks has changed radically, making it difficult for the bank’s IT organization to place bold technology bets. The net effect of this change in purchasing is to shift IT spending to larger, “safer” technology providers, casting a chill on the opportunity for competitive differentiation between banks.

 

The core problem is that IT spending is subject to increasingly stringent review by non-technologists in purchasing and finance departments. This has the predictable result that purchases are made not based on a balanced assessment of business risk versus technology reward, but simply on business risk alone.

 

After all, if every bank is buying the same technology from the same two or three mammoth technology providers, the opportunities to compete based on technology are very limited. In the long run, having finance and purchasing people casting the deciding vote on technology innovation is a scary scenario for bank profitability

 

The large IT vendors of course have picked up on this, and are very adapt at using fear, uncertainty and doubt to reinforce conservative purchasing trends. At the same time, these larger vendors are expert at proposing paper-ware that promises everything the innovative vendors offer today at some fuzzy date in the future. Once the small vendors are shut out of the purchasing cycle, the entrenched IT vendors have no incentive to innovate whatsoever.

 

To be fair, one reason that IT has lost control over the purchasing cycle was the excessive spending around the Y2K and .COM booms. In both cases, IT lost credibility with the business units by moving too aggressively on costly and risky technology initiatives that did not deliver the promised benefits. Smaller vendors also bear responsibility for adopting business models that were long on promises and short on profits.

 

The path forward is to craft a new partnership between IT and purchasing which balances both business risk and commercial benefits in making IT spending decisions. This requires a new level of communication between IT architects and purchasing people.

 

In particular, this means that IT architects need to be better at translating the abstract technical benefits into dollars and cents that can be used to drive a business case. Small vendors also need to be flexible in addressing the operational risk concerns of banks. For example, Persistence has created a parallel development and support center in India and we encourage our strategic customers to hire a contractor who is part of this support center.  This gives our customers the option of having an active escrow that is completely independent of our day to day business condition.

 

The conventional wisdom today in most bank purchasing groups is that being the first company to adopt a new technology is  not worth the cost and risk to the business. However, that conventional wisdom goes against everything that banks IT groups know about building competitive differentiation. Banks which learn to overcome the communications gap between IT and purchasing will gain a substantial advantage over banks where purchasing continues controls the technology roadmap.

Copyright 2005 Christopher Keene

The shift from viewing IT spending as strategic to viewing it as tactical opens opportunities for innovators

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