June 21, 2013

With the advent of high-frequency trading, mobile banking and online account management, you might not think of the financial services sector as being labor intensive. But when it comes to IT labor, it's very intensive.

While the average bank has about 9.5% of its staff in IT (78% are employees and 22% are contractors), some global banks certainly push the boundaries, with IT staff approaching the 15% to 20% level. That equates to an astounding 45,000 to 60,000 people in a 300,000-head count global enterprise. For a frame of reference, at 9.5% of staff being full-time IT employees, the banking sector is just about twice as IT labor intensive as the average sector. And with 15% to 20% of the staff as full-time IT employees, the banks are approaching the ratios of pure-play technology companies.

A bank of that scale (perhaps $70 billion to $100 billion of annual revenue) will have a total annual IT expense of $7 billion to $11 billion; of that 35% to 40%, and in some cases 60%, will be the IT labor force cost -- salaries, benefits, occupancy and ongoing training.

During the past five years, many firms have put their attention on the economics of the labor force. Labor arbitrage has been (and is) a major focus -- getting more labor hours and hopefully output per labor dollar. But those labor dollars are paying for certain capabilities and skills. Increasingly the cost of that labor appears to be associated with a set of skills whose relevance to current business needs is eroding. In other words, banks are paying technology workers for outdated skills.

It's because of the rapid pace of technology change that workforce skills are eroding. Historically, it's easy to see evidence of this during the big transitions over the past 50 or 60 years: mainframe (Cobol) to client-server; client-server to distributed; distributed to e-commerce; Internet to social media; and now mobile and cloud.

Gartner and other analyst firms describe the IT world of the future -- perhaps even the present - as one faced with business demands to harness the power of a nexus of technology innovations and forces. These are social media, mobile computing, big data and the cloud.

Building Bridges

The immediate and urgent issue facing most firms is bridging the multidimensional skills gap. It encompasses the technical skills needed to design, build and deploy business solutions. And that solutions frontier is continually changing, driven by technology advances and the permeable boundary between consumer technology and business technology. It also encompasses the skills needed to run the business of IT itself.

In the last category (the business of IT), firms appear to be able recruit and retain the staff needed for core IT business functions, including finance, human resources, vendor management, sourcing and PMO. However, at the fringes, security and risk management, emerging technologies and big data are typically identified as areas where firms say that they must do a better job of recruiting and retaining.

But faced with potential reduced business effectiveness and the inability to develop and deploy needed business systems, organizations are finding it difficult to build the needed skill sets for social media, cloud computing and the ever-present big data. Today these are the skills at the outer edge of the skills and capability portfolio.

As this edge moves forward, IT organizations are also faced with a skills scarcity at what might be considered the back edge of the portfolio. This part of the skills portfolio is where their legacy systems operate, and it's perhaps equally as important as the outer edge. Aging but needed skills in languages such as Cobol are in short supply and are becoming another strain on the skills portfolio. Moreover, training to develop a workforce capable of maintaining older systems is nonexistent -- though outsourcers are rising to the challenge, they, too, face the same labor issues.

[IT Talent Retention Requires Shared Ownership]

So where is the skills gap? For the IT organization, it's at the leading edge of technology that's needed to take them to the future. It's also at the trailing edge where firms are stuck to a legacy of applications and technologies that are hard to jettison and decouple.

If an IT organization can't manage the gap successfully, it will slow progress in developing needed systems, divert critical investment funding to legacy systems and ultimately constrain the businesses it supports.

If an organization has the determination to not "fall into the gap," it must enact a forward-looking program to manage its labor capabilities and skill sets (and their development) in anticipation of future needs, while actively shrinking the "tail" of its legacy environments. Finally, from a technology economic perspective, the value of doing this should be clear. With the cost of labor at both edges -- trailing and leading -- being perhaps two times that of the core, the value of jettisoning the past and investing to the future is quite apparent.

In short, organizations need to actively manage their IT capabilities and skills portfolios. They must consider what's needed to run the business, change the business and change the business of IT.

Howard Rubin is founder and CEO of Rubin Worldwide, a research and advisory firm focused on the economics of business technology. Howard.Rubin@rubinworldwide.com

ABOUT THE AUTHOR
Dr. Howard A. Rubin is a Professor Emeritus of Computer Science at Hunter College of the City University of New York, a MIT CISR Research Affiliate, a Gartner Senior Advisor, ...