It is not how much you spend on IT; it is how you spend it

01 February 2016

It is not how much you spend; it is how you spend it, finds recent research by McKinsey & Company into bank IT spending. As the need to digitalise within the banking sector becomes more pressing, following FinTech, incumbent and tech-giant forays into market share, some banks are throwing money at the problem. McKinsey’s research shows however that a more targeted approach, focused on automation and data analytics is correlated with an improved bottom line.

As organisations create various digital channels and invest in a range of new digital capabilities, billions is being spent on the rapidly growing industry. According to a recent report form BearingPoint91% of surveyed banks see the need to digitalise their services, while another report, from Bain & Company, highlights the potential revenue impact banks face if they fail to embrace the power of digital and automation.

Targeting IT spending improves banks profitability

A recent article from McKinsey & Company, involving a survey conducted of a dozen regional and superregional banks in the US, finds that smart investment in IT beats more investment. The survey involved 40 executives and questioned them regarding how much they spend on application development, the level of functionality executives believe IT provides to the business (measured as an index of IT effectiveness) and banks’ overall profitability.

The data discloses that there is no significant correlation between the bottom line of a bank and the amount of money spent developing a general IT application. Specific IT functions do, according to the research, provide statistically significant improvements to banking performance. Automation in particular is highly correlated (67%) probability with improved performance, while analytics comes in at 36% probability for improved performance.

Despite the need for digitisation, according to Capgemini Consulting, only 7% of organisations have fully embraced digitalisation, while Arthur D. Little reports that across the board 80% of companies are lagging digital maturity.