Magazine article American Banker

Analyzing - and - Justifying Your Bank's Technology Spending

Magazine article American Banker

Analyzing - and - Justifying Your Bank's Technology Spending

Article excerpt

How should the chief executive of a community bank analyze and justify technology spending? This question has become more pressing in recent years.

Technology expenditures are increasing at three times the rate of inflation, and in many banks represent the largest noninterest expense after human resources. Boards of directors are asking more questions about technology, wanting to know what investment s are being made and why.

However, even with the growth in technology spending and the visibility technology has in most banks today, defining, tracking, and understanding total technology spending is very difficult in most community banks across the country.

There are many reasons, of course, but here are some of the main ones:

* There is no uniform definition of "technology spending."

Almost any two banks could agree on what constitutes personnel expenses, but you would not find the same concurrence with technology spending. A good example of this is an end-user who is devoting half of his or her time to systems support. Some banks ass ign this time as a technology cost; some do not.

* Technology expenditures are not adequately itemized.

Most banks do not have a detailed general ledger tracking system for technology spending as they do for other expense categories. Often, it is recorded under general categories such as "hardware," "software," and "furniture and equipment expense."

* Expense tracking and accountability is unclear.

One of the things that helps analysis of expenses is when a single department is accountable for almost all expenditures, and uses some kind of system for tracking and reporting. Human Resources is an example of this. No such luck with technology. Many line managers approve and pay their own technology expenses, and often no one in the bank has a mandate to track overall spending.

So analyzing technology spending takes some work. At the same time, community bank executives need a way to get better at understanding what is being spent and justifying investments. We believe that the first step in accomplishing this is to define expense categories that make sense for a community bank manager. These categories should be understandable from a banking perspective and should allow a look at total spending. Here are five categories into which we suggest community banks divide technology spending:

* Core systems cost - this is the cost to run the core deposit, loan, general ledger, and customer information file systems. It is either the hardware, software, and human resource costs associated with an in-house system or the service bureau bill.

This is a necessary investment for any bank. Increasingly, core processing services are becoming commodity priced as systems become more efficient and banks seek to use savings from reduced core costs to fund other technology initiatives.

* Telecommunications - this is the cost of data lines for your branches and automated teller machines. It is usually a part of the telephone bill or a section of your service bureau bill. Integration of voice and data lines promises future efficiency and savings, and banks should factor telecommunications upgrades into their planning. …

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