Financial services sector IT departments should look to risk mitigation and compliance to add value

Close: Don't hibernate when you can innovate

Financial services organisations have learned a harsh lesson in efficient IT. But the eventual outcome of the changes, post credit crunch, is hardly discussed.

Any tough period for business will be accompanied by quick changes to processes, systems and approaches to service and product development.

You can either throw yourself into IT innovation or cut spending to survive the crunch. If the analysts are right, this will be a critical time for IT.

New regulation is on the way for the financial services sector. Existing legislation such as Sarbanes-Oxley, Basel II and MiFID are likely to be extended, with a focus on improved reporting, trading and data security.

Every process and system must be watertight to ensure nothing goes unaccounted for, and fraud, operational, credit and market risks are reduced to a minimum.

To compound the issue, the November 2008 G20 meeting in Washington highlighted the importance of post-crisis national regulation. This will place diverse demands on one of the most globalised parts of the world economy.

Compliance to the new regime will be challenging – and IT departments will get to do this new job.

Financial institutions with a flexible and adaptable IT infrastructure will find it easier to comply with differing new regulations during the recession.

The burden on financial IT is heavy, as it also must identify risk, trade seamlessly and report quickly.

Risk management systems, which are both mission critical to financial organisations and represent an opportunity for differentiation, will come under even more scrutiny.
Risk management will need to be at the heart of dynamic IT infrastructures, and be flexible enough to integrate with new systems – such as messaging platforms, e-trading tools and Web 2.0 technology – while remaining stable enough to keep businesses running and communicate with legacy systems.

Could this be too much to ask?
Service-oriented architectures (SOAs) and similar developments enable IT to look forward at new developments and backwards at legacy systems simultaneously.

This is one technological revolution already occurring in financial services firms across Europe and North America.

But the pressure to improve processes has brought another plus – the ability for IT management to cherry pick the best applications for them. The innovation then occurs as films look to their legacy infrastructure to create and deliver those applications.

For example, National City Corporation (NCC), a large US-based financial services firm was forced into a project-by-project IT development cycle, with solutions developed to solve issues rather than as an integrated strategy.

Realising that time-to-market and reusability of infrastructure would improve efficiency, NCC reorganised its IT operation around an integrated delivery centre focused specifically on deploying central, coordinated solutions to company-wide problems.

Using SOA, it cut costs and improved the sharing of IT assets across projects including integrated voice recording, fraud detection and transactional, inter-bank messaging for funds transfer – getting a six-figure saving per project.

IT managers must choose between innovation and hibernation. This is a key choice, and one that will drive the strategy through the crunch and out the other side.

They should look at the organisation’s current IT systems–often built up over a long period and therefore unnecessarily complex and silo’ed – and see processes can be reworked or resources freed up.

Thirdly – and most importantly – they should be realistic about the technologies they deploy. Is there a clear path to RoI? Is using the technology of a partner or recently-acquired competitor more sensible? Will a quick fix now cope with a change in legislation in, say, a year’s time?

As the financial services community continues to recoup more value from years of IT investment, the outcome can only be good for process and service efficiency.

Jim Close is UK head of Software AG