Making the Right Amount of Investment in Technology

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So it happened again. A company underinvested in technology, the numbers looked great for years, and then it came back and bit them in the rear.... hard!

RBS (Royal Bank of Scotland), the British bank, had a major failure that left customers unable to access accounts and withdraw cash, and this was less than 18 months after their last such glitch.

Unlike most cases, the (newly installed) CEO of RBS, Ross McEwan, came out and openly apologized. They had underinvested in technology for decades, and it was their fault. I do not know if that sort of apology would occur in the US; the lawyer- and litigation-heavy climate takes any such apology as an excuse to sue the company on behalf of customers and management on behalf of shareholders.

Nonetheless, one must give credit to Mr. McEwan for openly admitting the problem and working to fix it. Personally, I would love to be involved with the team that fixes it. I have spent most of my career fixing business and technology processes and investments; the challenges in a turnaround are great fun.

So if RBS underinvested, how does any company know how much to spend?

The simplest way is to look at peers - RBS can look at NatWest or even JPMChase - but peers may be at different stages in technology lifecycle development, may be able to cut back on investment due to heavy investment in previous years, or may be overinvesting due to low earlier investment, new market opportunities or different segments. If RBS suddenly decides to focus more heavily on servicing the hedge fund industry (prime brokerage), it would need to invest significant capital in technology that an otherwise similar firm not servicing prime brokerage or already there for years would not need to invest.

Part of the answer is to ask your IT team. The problem, of course, is that the IT team never says it has enough. I have consulted with and worked at literally dozens of companies over the last 20 years, and I have never ever seen the software engineers, operators or infrastructure people say that they have enough budget (capex or opex), people or time. For the most part they are correct, for the most part to a lesser degree than they say.

The real challenge, then, is hiring the right technology executives.

Budgeting for technology is, fundamentally, no different than budgeting for marketing; it just requires a different skill set to translate those needs into financial numbers.

When the CEO asks the VP Marketing for her needs, the experienced head of marketing says, "tell me what you need to get done, I will tell you what it takes." The marketing department never has enough money, but the marketing department's job is to translate business requirements and targets into marketing actions and budgets to achieve those.

The job of the CIO, CTO or VP Technology is fundamentally the same. The head of technology should be saying, "tell me what you need to get done, I will tell you what it takes." However, for a few reasons, this sort of interaction does not take place with technology:

  1. Technology is viewed as voodoo. CEOs - even those of technology companies - are either overconfident or underconfident in their abilities to understand the technology and ask relevant but not micromanaging questions.
  2. Heads of technology lack financial and sales skills. For some reason, companies follow the Peter Principle and promote technologists to their level of incompetence, rather than first training them in hard-core business skills, and only then promoting them to executive roles.
  3. CEOs believe technologists are more supermen/women than other departments. When the head of technology actually does say, "given the budget and your needs, here is what we can do, please prioritize," the CEO often will say, "I'll take all of that and raise you 50%."

There are rules of thumb to follow, but every single company is different: a different stage in the lifecycle, a different size, a different culture, different markets, different needs to change.

The right amount of investment in technology and systems is the amount that a trusted and experienced technology executive with hands-on technology experience coupled with financial and business knowledge and acumen tells the CEO s/he needs to achieve the business goals.

I don't know what McEwan's definition of "underinvestment" is, but chances are very good that the real issue is lack of solid relationship, and possibly leadership, between the CIO and CEO over the years.