Are Australian banks crumbling from within?

Juggling the need to innovate with the shackles of legacy

A recent study by Gartner found that 47 per cent of CEOs face pressure from the board to digitally transform, a term used to describe the integration of digital technology into business models. Whether spurred on by changes in customer expectations, increased competition from new entrants or regulatory changes like the open banking initiative, ultimately we now know, as explained in the DevOps book Accelerate, that an organisation’s ability to make software positively impacts profitability, productivity and market share.

In this emerging paradigm, how do the established banks remain relevant and deliver new offerings to customers whilst taking care of the 30-year technical debt that underpins their operations? We call this the CIO’s Dilemma: juggling the need to innovate with the shackles of legacy.

The French château dilemma

Large financial institutions are a bit like French châteaus: from the outside, they have a facade of majestic grandeur. Yet, they are perched upon outdated, legacy software systems – and as we saw with the banking Royal Commission, often reinforced by erosive profit-seeking practices – that require costly and labour-intensive upkeep, causing the buildings to crumble from within. Despite tactical investments in patching and manual workarounds, vulnerabilities remain that can lead to embarrassing and costly reputational damage and serious breaches of privacy.

Conversely, the past decade has seen nimble fintech startups drive digital innovation, demonstrating a mix of agile processes to increase developer productivity, building and moving applications to the cloud, automating infrastructure and creating compelling customer experiences.

While you may think all this is the purview of technologists, the reality is that successful digital transformation at enterprise-scale means challenging many of the established processes surrounding technology, such as budgeting, organisational structures and systems of work. These norms need to be broken down and then rebuilt to achieve agility, autonomy and accountability, laying the foundation for sustainable transformation and future value-creation.

Benchmarking the banks’ position globally

Pivotal and research firms Longitude and Ovum recently conducted a survey of more than 1,600 IT executives across six countries and five industries, including banking, to gauge how well organisations are achieving transformation through building and operating software. The results underscore some of the common challenges that arise on the path to digital transformation – and some of the mistakes made along the way.

Of the global banks surveyed, 36 per cent claim to be spending more on maintaining old IT systems than spending on new software development, and only 34 per cent are able to access cloud-native scale, stability and speed to market. While it’s unrealistic for financial institutions to modernise their legacy systems overnight, maintaining older applications presents ever-increasing risks and eats away at static IT budgets that should be going to innovation.

Yet, amongst the disrupter hype, it’s sometimes easy to forget these banks have years of institutional and consumer banking know-how, plentiful resources and big budgets to tap into. So the question is, how can they maximise this advantage?

The traditional software development model is broken

When asked how long it takes to move a new business-critical application from deployment to production, IT respondents from Australian banks said seventeen days, compared to UK, US and German respondents whom all said one day.

Furthermore, only four per cent of Australian banks polled can claim that they are continuously deploying code enhancements, which seriously impedes their ability to deliver customer-facing innovation.

Banks and other enterprises across Australia that are keen to compete on a global stage must advance their software development techniques (such as XP Agile, Lean & DevOps), and leverage the automation and abstraction offered via the cloud. If in doubt, read the 2018 State of DevOps Report to understand what can be achieved, and how this can translate into $22 million of NPV according to research from Forrester.

Maximising the advantage is about new ways of working and leveraging cloud-native practices to meet customers’ evolving expectations quickly. It’s also about democratising decision-making to build the right products. Do your highest-paid people dictate solutions and projects or do you follow an informed practice of experimentation and insight gathering from customers for product development?

The truth about systemic transformation is that it’s a slow and tedious process filled with significant non-technical obstacles, like annual funding cycles and hierarchical decision-making frameworks. These will derail even the best-executed change program and often, the problem lies with senior leadership failing to align their people to the transformation vision, or even worse, chasing KPIs that actively work against the transformation goals.

If you’re a financial institution is struggling with digital transformation, consider this: what is the problem you’re trying to solve today? Break it down. Start small, start something. Learn.

It is no easy task to transform decades’ worth of outdated systems and inefficient waterfall deployment. The good news is, there is now a strong body of knowledge around patterns that can be followed and pitfalls to be avoided.

We don’t need to gut the châteaus overnight. While pressure to transform quickly remains, the reality we’re seeing is that most transformation journeys span over the course of several years, and that’s not a sign of failure. These organisations are building - from the ground up - new practices that change their culture over time. They acknowledge they don’t have all the answers at the start but are creating learning organisations that can adapt and grow with the changing market into the future.

Roz Gregory is Pivotal’s Director of Customer Success and Digital Transformation for APAC. 

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Tags banksdigital transformation

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