The Financial Crisis:

Issues and Answers

VIEWPOINT PAPER

The economics of technology will influence recovery

The global economic crisis is irreversibly transforming how banks and other
financial institutions conduct business. It is compelling them to rethink business
models and make exceedingly hard choices. Even then, some will not survive. To
weather today’s storm, institutions will need to rethink their operating models with
respect to how they acquire, use and sustain information technology resources.
Table of Contents

Introduction 1
The days ahead 1
Exploring new ways to operate 2
What to do 2
What really needs to change? 3
Looking to the future 4
 The Financial Crisis: Issues and Answers EDS Viewpoint Paper

Introduction
Unprecedented in modern times. Breathtaking losses. Precipitously falling. The adjectives and adverbs being used to describe
the global financial crisis are words often dismissed as hyperbole. But there’s no overstating the gravity of this situation.

The financial crisis is reshaping country economies, industries, regulations, governmental oversight and the very way in which
financial services institutions conduct business. The classic Wall Street as we’ve known it is gone. Some countries are near
default, while others have expanded debt with little discussion of how it will be repaid.

EDS, an HP company, shares the widely held view that today’s financial turmoil is historic. It has yet to play out, and its effects
will last for years to come.

While a time of great trouble, though, the crisis is also a unique moment for economic transformation of technology. The deep,
enduring concerns of governments, the public and shareholders, combined with the imperative to return the financial industry
to health, are dictating a profound restructuring of the global financial industry.

A key element of this makeover will be a new industry approach to buying, deploying and using technology resources. By this,
institutions can take smart steps to overcome the economic and technology constraints of legacy systems. They can capture
immediate savings by shifting spending from fixed to variable costs, and, most importantly in the eyes of regulators and
investors, they can uphold their capital positions by preserving cash and avoiding sizable capital expenditures.

The days ahead

The leaders of the financial services industry recognize that
enduring changes are needed for institutions, and the industry
itself, to survive. Even banks in Asia and South America, far
less directly affected, are experiencing slowdowns and
feeling the impact of the wave of credit defaults.

Despite the ongoing problems, rebirth already is occurring.

New institutions are springing to life with clean balance
sheets and utilizing leading technologies, services and
processes to self-regulate. Lawmakers and regulatory
bodies are working diligently and quickly through 2009 to
oversee government investments and determine how (or
whether) they will be repaid and embarking on reforms
not seen since the Great Depression.

Industry leaders have pledged legislative bodies, regulators

and the public that they will reform and that government
investments – loans – will be repaid. To accomplish this,
many have already begun selling assets, eliminating staff
and dramatically reducing both capital expenditures and
operating expenses.

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EDS Viewpoint Paper The Financial Crisis: Issues and Answers
We are already seeing results. AIG has initiated asset
disposition, and numerous banks around the world have
been either fully or partly nationalized.1 While the crisis has
resulted in overcapacity and significant underutilization of
technology in most banks, steps such as these will result in
formerly world-leading banks becoming much smaller but
potentially more efficient.
While some of the less-affected banks such as those in Asia and
South America will move up in global rankings, in aggregate,
the market capitalization of all banks is down, in some cases
significantly. This will limit banks’ options as they rebuild
reserves, attempt to raise capital and prepare to re-emerge
wholly owned without reliance on governmental intervention.
Exploring new ways to operate
Today’s troubled financial landscape will inevitably affect
how banks view technology expenditures. Research firms
have reduced IT expenditure estimates by 50 percent for
2009-2011 and predict flat or negative growth in spending
in some regions.2
Several factors are driving this extreme belt-tightening. Many
banks are now focusing solely on their core competencies
and basic banking products such as deposits and payments.
Repaying government investments – loans – while gaining a
better understanding of risk and restructuring balance
sheets are the highest priorities.
What to do
Expansion plans are on hold. The limited merger and
acquisition activity under way is driven mostly by govern-
ment intervention and ensuing market consolidation.
In this environment, technology restructuring and changes to
operating models are accelerating. Institutions are trying to
come to grips with the problem of significant excess capacity
and what to do with it. Many have equipment, people and
infrastructure far exceeding their needs now or anytime in
the reasonable future.
Complicating the situation, problems of the past still need to
be addressed. Costly, noncompetitive legacy systems, some
dating back to the ’70s and ’80s, continue to consume between
60 and 80 percent of nondiscretionary spending. The highly
experienced personnel who staff these systems are expensive
to keep on the payroll, yet replacing their institutional
knowledge will be difficult as they begin to retire en masse.
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Meanwhile, an emerging generation of banking customers is
expecting to do business with institutions in new ways, such as
using mobile phones and other edge devices. The globalization
of financial services will forge onward. And new regulations
are inevitable in the wake of today’s problems.
As a result of these changes, financial institutions are rapidly
looking to change the manner in which they access and use
technology, focusing on strategies that rapidly turn fixed
costs into variable costs. For example, institutions are
considering the purchase of services, in some cases based
on variable pricing, rather than buying assets or further
increasing capacity. Some are selling assets and having
them assumed by other parties tied to service level
agreements (SLAs), all with the intent of significantly
limiting capital expenditures.
In truth, the technology that underpins banking operations
is very much common to all banks, making it difficult to
create and maintain differentiation. The financial services
industry historically copies new products and services,
usually in a matter of days or months. Thus, differentiation
is found in rates, service, skills, risk management and
arbitrage execution. The ability to rapidly adapt is also
important, as is an understanding of customers, their
associated product risks and the experiences they want
to have with their financial institutions.
At the highest level, the approaches to addressing financial
services institutions today are straightforward and in many
cases obvious. They include:
• Reduction in the number of providers, systems,
applications and redundancies in the enterprise
• Standardization, consolidation and virtualization of the
IT environment
• Purchase of IT services including business process
outsourcing (BPO), tied to SLAs
• Rededication and acceleration of transformation and
simplification
However, these changes bring with them significant
challenges by upending established norms. These include
the perceived pain of change, fueled by historical thinking;
the elimination or transition of sacred systems and projects;
 The Financial Crisis: Issues and Answers
and the acknowledgement that it is not necessary for the
bank to own its technology. In addition, institutions must
grow to understand that the basic economic relationships
they have with their providers and partners will change
significantly.
The devil is in the details, of course, when it comes to
gaining acceptance of radical changes in how a bank thinks
about technology. Prior to this crisis, the vast majority of
banks were quick to avow that technology was their leading
competitive edge in the marketplace. But the dramatic
changes in the marketplace are challenging this idea.
For example, some years ago, a major U.S. bank was convinced
that imaging checks would bring in new customers and
increase loyalty. It invested heavily. Within six months,
surrounding banks had the same technology; millions had
been spent on it and all parties were, in effect, back to
parity – at higher levels of cost. And, in the end, it neither
attracted new customers nor increased loyalty.
As a result of experiences like these, many financial
institutions now view the need to purchase/own technology
in defined areas as unwise and unnecessary. Allowing
others to purchase the technology and then buy it as a
service is a far better strategy for capital preservation.
Certainly some aspects of technology ownership, such as
defined applications and processes, may indeed provide an
institution with an enduring, leading-edge position.
IT leaders must focus on business issues and business
outcomes. They must challenge the notion that past
investments and existing technology will keep them in a
significantly sustainable and competitive position in the
market moving forward.
What really needs to change?
Working around the edges will not conquer today’s critical
challenges. As the financial crisis has attacked the heart of
the industry, solutions must be equally profound.
A fundamental new business model, accompanied by
complementary operating and technology models, will be
required to fully emerge from the crisis and be positioned
for future growth. Here are three key steps in making such
a transformation:
EDS Viewpoint Paper
Create a back-office “manufacturing” environment.
Much of what a bank does in the back office can be conducted
in a common, shared environment without losing competitive
positioning. In retail banking, for example, regulations dictate
a great deal of what can be sold to the public. Therefore,
what is processed, modified, maintained and preserved has
a great deal in common within and between institutions and
can be shared across multiple lines of business.
Further, the economies of scale available through a shared,
or leveraged, BPO utility can offer far better economics
than a stand-alone institutional initiative. It’s been clearly
demonstrated that this type of solution can meet an
institution’s processing requirements and provide significant
savings, while not degrading its individuality.
Such a capability mirrors the thinking behind the physical
approach to data center and server consolidation where
aspects of the business share capabilities and capacity to
improve ROI and ROA.
Convert fixed costs to variable costs and actively
manage assets tied to business levels.
Capital expenditures can be significantly reduced by
shifting from the purchase of fixed assets to the purchase
of services. Assets would be owned by the service provider,
rather than purchased by the bank, and would be provided
as a service. For example, assets such as all ATMs, desktops,
branches and printing resources can be placed in a virtual
environment using modern, low-cost technology and be
utilized and paid for on a per-use basis.
Criteria for success would be measured by cost per
transaction, quality of service, adherence to service level
agreements (SLAs), business flexibility, execution of the
transformation, and ongoing provision of innovation and
deep industry expertise to the bank.
To the extent a bank will still own such assets, it should critically
review standardization. As many have learned, front-end
savings from buying PCs from multiple manufacturers can
be lost many times over due to the cost and complexity of
maintenance, redundant legal and purchasing costs, and
costs associated with unique upgrades.
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EDS Viewpoint Paper The Financial Crisis: Issues and Answers
Undertake the long-needed transformation process
in a proven and programmatic manner.
Today’s crisis has not negated the need to address the
inefficiencies of legacy systems and legacy thinking noted
earlier. Rather, it has made it more urgent. The journey
should start with a new business model and be based on
true industry standards. It will be executed in a multivendor
environment. At the same time, a clear line of sight should
be maintained to achieving cost reduction, standardization,
rapid time to market for products and services, and
establishment of a single view of risk and of the customer
across the entire enterprise.
Though it seems overwhelming, one way to begin this
journey is to wrap a legacy environment in service-oriented
architecture (SOA), a standard technology that
• Provides standard interfaces (with no changes to
existing interfaces)
• Utilizes existing commodity technology
• Implements an industry standard schema and semantic
• Provides an operational datastore (ODS) prepopulated
with industry standard data elements to begin the
externalization of logic
• Offers a testing environment with a large number of test
cases already in place and a proven governance process
This solution will allow for rapid creation of new products
and services, as well as reuse of those same products and
services in different market configurations. Implemented
properly, it can also provide the basis for rapid fulfillment
of regulatory requirements and significant reduction of
ongoing costs.
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This approach should be the first step for institutions
considering any type of large replacement and/or consolidation
program over time, such as core banking transformation or
merger & acquisition (M&A) integration. With this approach,
institutions can avoid the suboptimal financial results and
reduced flexibility that can result from attempting to place
modern applications within existing complex and outdated
legacy environments.
For those institutions in a position to make acquisitions
right now, this approach provides an added opportunity to
expense integration costs, including SOA/ODS, thereby
removing them from ongoing discretionary spending.
Looking to the future
Clearly, solutions to the financial crisis will require dramatic,
decisive moves. It may require a program of change that
begins with significant cost savings – instead of incremental
quick hits – that may take years to show positive effects.
Difficult and sometimes uncomfortable questions will need
to be asked, and answered.
But the bottom line is that if the answers are the same as
they have been in the past, then results are not likely to
change. The smart path to improving institutional economics
and customer satisfaction is by rethinking the role of
technology and the use of partners, improving governance,
adhering to standards, and challenging the status quo on
utilization and technology ownership questions.
 The Financial Crisis: Issues and Answers EDS Viewpoint Paper

ABOUT THE AUTHOR

Jim Scurlock
Jim Scurlock is a vice president in the Global Financial Services
Industry for EDS, an HP company. He leads the team’s application
and integration initiatives to help financial services companies
simplify and modernize their core systems to become more
competitive. In this capacity, he is responsible globally for sales
strategy and strategic solution development.

Scurlock has extensive financial services, consulting, research,

and international finance and banking experience. Before joining
EDS, he was with Cap Gemini Ernst & Young where he conducted
consulting engagements across the spectrum of the financial
services industry – both domestically and internationally.
Engagements were in the areas of strategy, process reengineering,
IT and new product development. While at Cap Gemini Ernst &
Young, he was responsible for sales pursuits, delivery and
development of intellectual capital.

With more than 20 years of financial services industry-related

experience spanning 40 countries, Scurlock has held many senior
management positions, including consultant and researcher at
the Tower Group and global leader of the Retail & Consumer
Banking Group at Digital Equipment. During this time, he was
located in the United States, Sweden and the UK and was
responsible for product development, consulting and delivery.
He began his career as a commercial and retail banker.

Jim Scurlock holds a bachelor’s degree and earned an MBA

degree from Suffolk University in Boston.

Endnotes

1 Boston Globe, December 12, 2008, p.1

2 Tower Group, IT Spending 2008 and Beyond

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