Why tech debt can be a drag in financial services
What is tech debt, why does it hinder growth and how can financial services companies resolve the problem? Odgers Interim Principal, Financial Services, Richard Plaistowe provides the answers.
Given the rapid pace of change in technology and IT operations, all companies are burdened by tech debt to some degree. There are several causes, including failure to update infrastructure platforms and databases; old legacy systems that are no longer fit for purpose or properly supported; highly customised and inflexible software that cannot be integrated across multiple business functions; and a non-standardised data model churning out poor quality, inconsistent information.
Tech debt resembles other forms of debt in that it can grow dangerously and is easy to mismanage or overlook. To give a more technical definition, it’s the off-balance-sheet accumulation of all the technology work a company needs to do. Financial services companies should be wary of its implications as racking up significant exposure can be a big drag on growth.
Leading management consultancy McKinsey and Co has done a lot of work in this area. According to its research, 30% of CIOs say that over 20% of their tech budget, ostensibly dedicated to new products, in fact gets diverted to resolving issues related to tech debt.
In the majority of organisations, tech debt continues to rise, and even among firms to have completed modernisation programmes, almost half failed to reduce tech debt. Using a Tech Debt Score (TDS) metric, McKinsey found that companies in the 80th percentile for TDS enjoy revenue growth 20% higher than those in the bottom 20th percentile – so there is a correlation between low tech debt and strong performance.
Despite the wave of transformation that has swept through financial services in recent years, with digital adoption unquestionably accelerated by the pandemic, most organisations still have a long road to travel. One shocking finding of the World Retail Banking Report 2022 is that 95% of banking executives say legacy systems and outdated core banking modules inhibit efforts to optimise data and customer-centric growth strategies. Data reliability and silos are a big issue for many established financial institutions, especially those facing competition from agile and disruptive fintechs.
Here are some suggestions on tackling tech debt:
1. Know the complete technology landscape of the organisation
Without awareness of your organisation’s IT infrastructure, tech debt cannot be addressed. Chief information or technology officers must have a comprehensive understanding of the systems currently in place. Which departments are they in and how many people use them? How long have they been in operation? What hardware and databases do they require?
Once you have a detailed infrastructure map, senior leaders can consider which problems need to be addressed in the short, medium and long term, and begin discussions around the optimal future state of the organisation. Identifying complications as well as aspirations allows your organisation to make well-informed decisions on resource allocation. Investing in the next stage of digital transformation should address accumulated tech debt as well as realising the digital future.
2. Focus on operational resilience and risk
The rules on operational resilience have been tightened to ensure firms and the sector can prevent, adapt, respond to, recover and learn from operational disruptions. Technology, including a reliance on third party vendors can be an operational weak spot. Financial institutions need to be aware not only of the systems required to carry out their services, but also what those systems rely on and what protocol they have in place to overcome any risks associated in the technology provision.
There is a need for vigilance with cloud technology and cybersecurity, for example. Over reliance on the former is a potential risk factor.
3. Technology leadership
Technology leadership goes beyond the management of the IT help desk. It requires someone to oversee the digital operations of every department in the organisation – maintaining the current systems but also looking ahead for what new technology the team may need to support and enhance operations. To strike the right balance, a technology leader needs to work collaboratively with heads of departments to truly understand the needs and direction of the business function and how it fits into the overall digital strategy of the organisation.
4. Develop a clear tech debt strategy
The IT team and business leaders must work together to determine the size and scope of the debt, establish specific goals and timeframe, and determine what resources will be dedicated to tackling the challenge. Throughout, there must be absolute transparency in communications and regular reporting to the board. This a business-critical agenda, not just an IT problem.