
Identify and address overlooked expenses in your bank’s tech overhaul
Most financial institutions are now aware of the potential benefits a successful digital transformation can provide in the areas of improved customer experience, enhanced operational efficiency and increased competitive advantage through differentiation. However, the fear of falling behind the competition can sometimes lead organizations to act in haste and at the expense of long term, high value improvements for their customers and employees.
To combat this common pitfall, PRI consultant John Chappelle says financial institutions are wise to develop a sound digital strategy prior to embarking on a digital transformation journey, even if that means slowing things down at the outset.
McKinsey & Company suggests that the ability to craft a clear strategy focused on business value is critical for successful digital transformation.
“Companies should focus their transformations on specific domains (customer journeys, processes, or functions) that generate significant value for the business. The transformation should be guided by a road map that details the solutions and resources needed to deliver change to prioritized domains.” – McKinsey & Company
Chappelle agrees and notes that digital transformation is a process that often comes with hidden expenses – some tangible and some intangible – that can significantly impact the overall budget and ultimate success of the project.
“All investments a financial institution makes should be well thought out, include the hidden costs and be part of a larger organizational strategy,” Chappelle said. “Take your time, focus on quality execution, and do it right the first time rather than rushing into something you have to clean up later.”
In Part One of this blog, Chappelle discusses where to find the most common tangible hidden costs that should be uncovered and addressed when taking on a digital transformation project.
- Evaluate infrastructure upgrades. It’s crucial to know whether the institution’s current IT environment is best positioned to effectively implement the desired digital products. The organization may need to upgrade its systems to get the full benefit of new products. Some areas to consider include:
- Legacy system integration with middleware. Effective integration can be costly and may require an increased workload for employees.
- Cloud migration. There are tangible costs associated with proper data migration, storage and compliance, but it’s important to get this piece right for long-term results and benefits.
- Network and bandwidth upgrades. New technology will often need more bandwidth to run properly. Check into the costs to upgrade the network and bandwidth to get the most benefit from the digital transformation.
- Review vendor expenses. Some tangible costs are hidden in the relationships between financial institutions and vendors, and they must be considered and planned for in the digital transformation strategy.
- Customization. Anytime the institution deviates from the vendor’s standard offering, there will be an associated cost. Be sure the request for customization is necessary and beneficial to the organizational strategy or try to find another way to accomplish your goals.
- Contract gaps and hidden terms. It’s helpful to have an expert advise the institution to identify where contract costs could creep up over time as the transformation is implemented. Fully understand and negotiate the contact terms at the outset of the project to avoid surprises down the line.
- Ongoing support and scalability. If the digital transformation takes off, there are likely pricing tiers built into the contract to support more customers. The institution must be aware of these to incorporate them into its long-term planning.
- Third- and fourth-party integrations. Be aware that procuring parties may contract out with other vendors that will have their own hidden costs and pricing tiers.
- Assess regulatory and compliance needs. There will be costs associated with data security and audit risk assessments, which are crucial to comply with financial regulations.
- Investigate increased cyber security and fraud mitigation needs. Digital transformation products often require expansion of early detection fraud mitigation tools and enhanced incident response solutions to properly manage the increased propensity of fraud opportunities. New security protocols will be required to mitigate the risks of doing business in a new way, and it can be expensive.
Chappelle has several tips to overcome or mitigate hidden, tangible expenses.
- Use proven vendors with transparent pricing. Proven vendors are easier to work with and more likely to be responsive to questions and concerns. Transparent pricing ensures the financial institution can plan accurately for the future and navigate decision points with all the information available.
- Plan thoroughly and don’t just wing it! Thorough planning includes preparing a formal cost benefit analysis and a risk assessment. The plan should be evaluated periodically to assess successes and failures and to decide where to adjust.
- Always plan for problems, delays and added costs. No plan is perfect, and there will be unexpected detours. Be prepared to pivot.
- Implement incrementally. You will be more successful if you don’t try to do everything at once. Implementing in stages allows you to better allocate resources and spread costs out over time.
- Leverage resources from across the organization. Digital is not a department. It must live and breathe with the full organization, and there should be buy-in from all corners of the institution if it’s to be successful.
Digital transformation is necessary to level the playing field for community banks competing with larger competition with big budgets for future innovation. Understanding the hidden, tangible costs of digital transformation is critical to position the organization to best execute and achieve its desired outcomes and expected return on investment.
In Part Two of this blog, Chappelle will look at the intangible hidden costs of a digital transformation journey.
Resources
What is Digital Transformation? – McKinsey & Company
Going Digital: Why Getting More Can Leave You with Less – PRI
The Dos and Don’ts of Digital Transformation – PRI
PRI specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.
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