How much are your Bank’s systems worth?
Most Banks have a pretty good idea how much their systems cost. Too much is the general perception! At about £0.5BN per annum for a typical large UK Banking Group it certainly appears a lot of money. Furthermore there is often much frustration caused by the perception that these Bank systems are highly inflexible to change despite their cost.
This combined perception of high cost and inflexibility is the cause of much friction between IT departments and their users.
A typical argument goes along the lines:
Business: “Why does it cost so much and take so long to make a simple change?”
IT: “Because when we first built the system we had to compromise the design to fit in with your predecessors, budget and timescales.”
Business: “What can we do to rectify the problem?”
IT: “Spend money to restructure the legacy.”
Business: “We can’t justify spending serious money on just straightening out the system.”
This is where our ‘Value Model’ may help. The model we have created values a Bank’s systems in terms of the equivalent cost that would be incurred if all automated processes were undertaken manually. The total value of a Bank’s systems is estimated according to the total cost of FTEs (man years) saved. Table One shows the key activities undertaken by the systems of a typical UK Clearing Bank and estimates that for a typical UK Bank it’s systems base may be valued at around £5.8billion per annum.
Of course, the model could be criticised for not being based on an optimal manual process (it is based on how Banks used to work prior to the advent of computers so it is at least a proven manual model). On the other hand it also vastly underestimates the amount of work modern banking systems do (e.g. loan repayment calculations, automated decision making on overdrafts and credit applications, production of management information to name but a few).
Our written description of the model explains in more detail the assumptions and calculations that underpin this model.
Table Two provides an overview of the assumptions used to estimate the value of the systems of a typical UK Clearing Bank (the example shown in Table One). Assumptions more relevant to your own Bank can be entered in the Value Model (see below) to estimate the value of your own Bank’s systems more closely.
The ‘Value Model’ has revealed that for a typical Bank the IT spend is about 10% of output value and similarly about 10% of a typical Bank’s income before costs.
Of this £0.5Bn only a few million (or less than 1% of value or income) is usually dedicated to maintaining or restructuring the Bank’s systems. The root cause of complaints about inflexibility and the high cost of change may therefore be the small amount of money dedicated to maintaining a Bank’s core systems.
Realising the Value of Your Systems
The ‘Value Model’ can be adapted so that you can estimate the value of your Bank’s systems too. Simply download the Excel file by clicking on the icon below. Instructions for use are included but if you have any further questions please contact us.
How to use the Value Model
The Value Model is very simple to use.
- Enter relevant statistics in the ‘Assumptions’ spreadsheet (e.g. assumptions about the number of accounts and branches your bank has, assumed cost per FTE, estimated efficiency levels and so on)
- The ‘Calculations’ spreadsheet is then automatically updated
- The ‘Summary’ spreadsheet will automatically display the cost for each of the key processes undertaken by bank systems in terms of the FTEs that would be required if the system were replaced by a manual process. These costs are totalled to give you an idea of just how valuable your banking systems are.