Despite Banks’ IT Spending, Productivity Gains Lacking
While many industries have turned to information technology to boost labor productivity and lower the costs of doing business, many retail banks are awaiting the payoff following an era of big investment in technology.
That's the thrust of a new report from management consultants McKinsey & Company, “Banking: The IT Paradox,” by Nedda Gabriela Olazabal (in The McKinsey Quarterly, 2002 Number 1). Gabriela Olazabal finds that during the late 1990s the productivity growth rate in retail banking fell despite costly investments in technology initiatives, while other industries' productivity grew.
Part of the reason has to do with the type of IT investments banks have focused on in the past several years — much of it on IT that helps support customer information management and marketing tools (call management, customer support, marketing analytics, and sales automation) relating to accounts, credit cards and loans.
The report says that in many cases where banks have instituted CRM tools, they have not boosted the profitability of accounts. Also, banks that offer “more complex, IT-enabled product bundles” have not necessarily increased consumer satisfaction, according to Gabriela Olazabal.
(In what could be construed as a sign of possible disconnect between banks' IT spending and the resulting performance, she cites a 1999 study in which 63% of bank IT execs did not know whether CRM tools increased or decreased profitability, 20% said it increased profits, 4% said it decreased profits, and 13% said there was no change.)
Though it appears to be a paradox in a world where IT spending cuts labor costs, speeds business processes and spreads knowledge, Gabriela Olazabal writes that the relationship between IT and labor productivity “is more complicated than merely adding the former to lift the latter.”
In banking, part of the problem results from the focus of IT spending. In many industries, IT initiatives are undertaken to improve specific internal processes and productivity. Retail banking has spent large sums on IT that improves consumer satisfaction, offering more products and services, adding online banking and support and giving bankers a more global view of their customers — areas not always reflected in productivity reports. Gabriela Olazabal writes, “Many post-1995 technology investments were designed less to reduce labor costs than to increase revenue.”
The report states that it all has resulted in a significant cost for PCs for branch employees and call center reps, the integration of complex banking systems, and back-office changes in operating systems and servers. Other heavy IT investments at banks have resulted from the rash of giant bank mergers in recent years — not all of which yield productivity gains.
There are areas of bank IT spending that have resulted in higher productivity. For example, the author writes that check-imaging technology, a replacement for microfilm, has reduced labor and storage costs by up to 40% and check retrieval time by as much as 75%. Automated customer-service technology handled 55% of all phone inquiries in 1999, cutting call-center staffs almost in half.
While Gabriela Olazabal says productivity levels in retail banking are still high, there is room for improvement. Her suggestions: reengineering bank-office processes, migrating customers to more efficient sales channels, and increasing electronic-payment transaction online and via debit and credit cards.
Reprinted from CIN
David Needle is an experienced technology reporter, based in Silicon Valley. He covers big data, mobile, customer experience, social media, and other topics. He was previously the news editor for Enterprise Apps Today, TabTimes editor, and West Coast bureau chief of Internet.com.
