Crisis is not the time to stop all IT projects, but to double down on the ones that really matter.
For many, ourselves included, the extent of the current crisis came as a bit of surprise. At first, we thought we had a MERS or SARS-like crisis: a novel virus, but which would be limited to one region of the world. Now it’s clear that we have something that, although less deadly than some predecessors, is far more widespread — a global pandemic. As a result, we will see a profound economic impact and companies should prepare for this.
However, this is not an article about how businesses should face up to the crisis or conduct contingency planning. There are already plenty of articles out there that already do that — like this one from Sequoia Capital for startups and this one from BCG for more established firms.
Instead, we want to look at one small aspect of the crisis: how financial services companies should look to rationalize their ongoing technology projects.
Don’t pull up the drawbridge
The normal, knee-jerk response of most companies in a crisis is to issue an immediate moratorium on all new projects. The email comes from the CEO or CFO and it says: until we have more visibility on how the crisis will impact the business and, in order to conserve liquidity, all new projects are on hold.
The intentions are good — let’s take a temporary pause on spending and restart projects when we have money and bandwidth— but the outcome is inevitably sub-optimal. Why? Because it’s an arbitrary cut-off point. The projects you kicked off in 2019 might be of very marginal value to the company’s future success whereas the projects you were about to start in April — and which have now been indefinitely deferred — might have been game-changers.
All projects should be considered in the light of the new situation, not just future ones. If it had been possible to anticipate the current crisis, how many projects would not have been given the green light in order to conserve cash for later? And so, rather than just stopping all new projects, a company should revisit the business case for all projects and move forward with those — existing and new — that pass the criteria set now, even if stopping some projects may incur penalties. Sunk cost bias can be especially dangerous in a crisis.
So here are some of our tips for prioritizing the right projects.
Beware risk and opportunity cost
Most the large banks we have consulted over the last year are undertaking one or more transformation projects, such as implementing a new lending, core banking or payments system. These are the kinds of projects that should be heavily scrutinized in this kind of environment.
Firstly, the payback from these projects is inherently difficult to predict.
Secondly, these are long projects that tie up critical resources — money, of course, but many of the best internal people too — and so have massive opportunity cost.
Thirdly, as with any long and complex project, there are significant risks and, in our experience, when these are properly factored into the financial model, the return on investment often turns negligible or even negative. But, the most important reason for considering slowing down or pausing some of the projects is that, increasingly, there is a quicker, safer and cheaper route to the same outcome.
Bag some quick wins
In a crisis, when the management team is under pressure, creating some quick wins earns important buy-in from internal and external stakeholders as well as creates the financial circumstances — freeing new flows — for new or follow-on projects.
This is why we recommend that, even when a bank wants to embark on a significant project like modernizing its lending technology, it tackles the project in chunks targeting the highest impact/lowest risk areas first.
This doesn’t mean progressive renovation — which is normally shorthand for staging the rollout of a monolithic system — but building out a new platform use-case by use-case using modern, microservices-based systems whose APIs allow for easy integration with the rest of a bank’s IT estate.
In addition to modern systems that allow for complex projects to be truly decomposed into dozens of small projects with separate, predictable (and positive) RoI, the IT enterprise stack is splitting into three layers, which gives more options for deciding which projects to undertake, when and why.
Consider Impact on the future
As custodians of the company they run, management’s first priority in a crisis is to ensure the survival of their company. But crises never last forever and in addition to riding out the storm, management need to be mindful of the future and weigh up the actions they take now on the future of the business, especially when — as now — the future looks so different.
What can we already surmise about the post-pandemic world? Probably the safest bet is that speed of digitization in banking, already rapid, will accelerate from here. Making this statement slightly more concrete, we predict:
- faster translation of lower costs into lower spreads and fees
- a decline in face-to-face interaction coupled with a greater tendency to embed banking functions — credit, payments, hedging, etc — into third-party channels (with higher engagement)
- a rapid switch in value creation from transaction provision to utility and convenience: essentially removing any friction in customer interactions at the same time as using customer data to help customers make better financial and commercial decisions
Against this future picture, should a bank still go ahead with a 5 year project to replace one monolithic back office system with another?
And this is where the split in the enterprise IT stack also matters.
Not only can banks tackle IT projects in much smaller increments than before thanks to new microservices-based systems, but they can address interaction, intelligence and record-keeping independently of each other.
In our view, and as we have written about before, it is the intelligence layer that requires most urgent action. As product manufacturing splits from distribution and as interaction moves increasingly to non-banking channels, value will move to orchestration — connecting customers (channels) with product manufacturers.
This a data play. It requires understanding customer context (interaction preferences, financial situation, needs) and be able to match to the right offering. In the first instance, financial services companies will do this for their own labelled services, but increasingly — to maximize utility and convenience — they’ll need to do it for third-parties services as well (requiring an extensible product catalog) and intermediating and bundling if necessary (which necessitates managing real-time risk). As a third phase, these same institutions can then orchestrate value between the different parties on the platform, stepping back from intermediating and becoming a system of collective intelligence.
Given the changing role of financial institutions, should a bank still go ahead with a 5 year project to replace one monolithic back office system with another?
Don’t waste a crisis
As Machiavelli said
“Never let a good crisis go to waste.”
During a crisis, management has an infallible pretext and the tacit permission of the organization to push through major change — to ensure continuity and the ongoing success of the business. Stopping all new projects and hunkering down on the initiatives already in flight is almost the antithesis of this. It is a defence of past decisions, a protection of the status quo ante, when we all know that the post-crisis world will look dramatically different.
The best leaders are those who capitalize on a crisis to overcome the corporate immune system. They recognize that a crisis gives a unique chance not just to renovate IT systems, but to reshape culture and business model. All the opposition to change — the internal IT team that wants to build all of their own systems, the board that wants you to buy systems from the industry dinosaurs, the product owners who fear cannibalization and block any kind of ecosystem move— should dissolve against the rallying cries of a crisis.
Articulate the change narrative
Kick-starting systemic business model change is never easy and the ease of change is normally inversely proportionate to the size of the organization.
Crisis gives the pretext, but management still needs to make the argument if it is to carry the organization with it. Furthermore, a powerful narrative for change, which marries the company’s existing strengths — such as large customer numbers and a trusted brand — with a cogent justification for doing things differently in the new world, will also buy management a lot of time and goodwill beyond the company itself, with customers and investors who may exercise more than their normal patience.
Use stop/go triggers
One of the reasons why so many existing IT projects are overrunning in time, budget and scope is because the conditions for success weren’t narrowly defined enough — or weren’t enforced tightly enough. They were justified on dubious economic grounds and they’ve been allowed to run in the hope of one day achieving this uncertain pay-off.
We now need to do things differently. We need to break down the mega projects. We need to prioritize projects that are relevant to future operating models. But we also need to conduct more experimentation. We are moving to a trial-and-error economy where firms, as adaptive ecosystems, need to enter into more experiments. This may seem daunting but needn’t be if companies put in place clear and regular stop/go triggers on all projects.
Essentially, as we’ve written before, governance needs to pivot from making long, well-considered yes/no decisions about projects to one that introduces the conditions for agility and experimentation at scale.
We don’t know how deep the economic impact of the new coronavirus will be, but there will be a profound hit to many businesses. The temptation is focus on the short term, defer decisions and conserve cash. But the much smarter move is to capitalize on crisis to introduce change, to take the steps that will underwrite the company’s future competitive advantage and, ultimately, enable it to prosper in the post-pandemic world.
In short, instead of bedding down for winter, renovate instead.