IT agility and effect on profitability of banks

I've just sat through a very interesting presentation by Associate Professor Andrea Masini from the London Business School. He's speaking today in London at the Gartner Financial Services Summit.

Andrea's thesis is that there are two kinds of IT agility. The first of these is range based agility, which enables an organsiation to react to a market change by extending its offer in the market. The second is time based agility, and is about the speed that an organisation can change an existing offering.

He proceeded to discuss how his research - in the context of banking - had looked at the effect of both kinds of agility on bank profitability, both from the perspective of a retail bank and an investment bank.

Firstly, he suggested that for a retail bank the most important type is range agility. In other words, his view is that a retail bank's response best suited to a change in the market is one that creates a new product offering. Statistically speaking, a retail bank investing in technology to achieve range agility had about a 20% probability of increasing overall bank profitability by 250%. Significant.

Contrasting this with an investment bank, Andrea went on to describe that time based agility had the best chance of increasing profitability: in this case, a 30% probability of a 250% increase.

Now, this is very interesting to me, mainly because I've been banging on in this blog and elsewhere about how technology can't drive any long term competitive advantage in banking. However, if you look at Andrea's numbers, correctly directed technology investments have a relatively significant chance of doing amazing things for a bank. It would be reasonable to conclude that for a 250% increase in profitability, there must be some kind of sustainable advantage that's been derived from the investment.

Surely, therefore, all this talk about the commoditsation of IT, especially in banking, must be rubbish. Even though there's a lot of data suggesting otherwise. For example, I often speak about the long term advantage derived from Internet banking: if we believe the averages, 7 of 10 transactions online are account balance. If anyone knows a way to derive sustainable competitive advantage from giving out an account balance, I'd like to hear it.

But wait a moment: Andrea isn't talking about a particular IT innovation or technology here. He's looking at the effect across a bank of IT capabilities. It's not the individual point solutions that matter, rather, it is how quickly the IT organisation can evolve along whatever agility axis makes sense. Who cares if every innovation is commoditised so quickly that practically no advantage is available from an investment, when you can implement the next thing more cheaply and more rapidly than anyone else?

The point, really,is that it is the capability, rather than the functionality of an IT organisation that is the source of sustainable competitive advantage in banking.

Now, if you're a vendor (I work for one, Getronics, myself) the implications of this are rather significant. Instead of selling point solutions (all of which commoditise rather quickly and don't offer anything like a 250% increase in profitability), you have to be able deliver new capabilities to a bank. And since most capabilities are essentially self sustaining once you've handed them over, the customer only stays one if you can correctly divine and deliver the next thing they need.

I suppose this is good news if you're a bank, and frankly it doesn't hurt vendors to have the bar raised. But it does kind of change the relationship between the parties a bit: if you rely on a vendor to provide you with part of your sustainable competitive advantage, what you suddenly have is not a vendor but a partner.

Update: Thanks to Mike Schoeffler for reminding me of his post on the topic of process agility. It is very relevant to this one.

Comments

[Michael Schoeffler]

There are many IT products that commoditize, but are still on the checklist for providing bank services (perfect example: checking your balance online).

The occasional IT investment can have amazing ROI, even if the entire market eventually gets access.

But I think Masini's point is solid - incorporating IT can make the entire bank more agile - which leads to large profits.

http://profitdesk.com/content/2006/07/21/switching-out-the-dies/

We're reaching the same point our management ancestors hit when they electrified factories. They began by moving from a huge steam engine driving a convoluted pulley-and-belt system to individual motors. Nice.

But when individual motors allowed work stations to be rearranged, we got the assembly line. And productivity shot through the roof.

Banks have already bolted on IT. They will hit a new level as they build IT into their processes.

Mike

[Colin]

I found this in a 2005 paper from Andrea.
- Time agility is valuable for companies in highly dynamic environments
- range (and ease) agility is more useful in stable enviroments.

What strikes me as interesting is that most vendors sell time agility, yet most companies (stable) require range agility.

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