September 24, 2013

We've all heard the mantra that CIOs need to "run IT like a business." It's a common saying in technology organizations in almost every industry.

However, don't tell that to David Reilly, technology infrastructure executive for all of Bank of America. "One of the things that frustrates me is when somebody says that IT needs to run like a business, it suggests that IT isn't a business," Reilly says. The budget for "technology infrastructure at Bank of America is the size of some publicly traded companies. We don't run IT like a business -- IT is a business."

Reilly says, for example, that companies in other industries know the price at which their competitors sell cars or televisions. And they know what it costs to make those products. IT has to do the same.

"It is absolutely central that our product managers know and understand the cost of our compute ... or cost of databases, as opposed to what it costs our competitors to provide the exact same product, whether that is a JPMorgan, Citi" or even other IT providers, Reilly says.

Being a business for Reilly and his team means understanding the demands of the entirety of Bank of America, which includes eight major business lines across the globe, including all of Merrill Lynch and U.S. Trust. In addition, the infrastructure team also needs to understand the requirements and costs associated with each type of technology in the bank's infrastructure portfolio.

In order to determine if Bank of America's technology infrastructure costs are appropriate for the bank, Reilly and his team are doing what finance professionals have done with financial assets for years: mark to market. "When you look at the economics of finance, it goes back thousands of years," Reilly says. "At best, IT economics is 30 years old. We apply the same financial principles to technology."

Instead, Bank of America is looking at labor, maintenance, upgrade and any costs associated with IT spend. The bank then takes the metrics and compares them directly with other banks' IT spend. Although Bank of America doesn't have access to specific numbers for other firms, it does work with a consultant who analyses spend across the industry and "anonymizes" the results for an apple-to-apple comparison. (Editor's note: Bank of America, along with many of large financial institutions, works with Dr. Howard Rubin, founder and CEO of Rubin Worldwide. Rubin assists technology organizations with analysis of technology economics. Rubin is also a contributing editor for Wall Street & Technology.)

Bank of America goes through the mark-to-market evaluation every six months, Reilly says, so it can determine how costs are changing over time. The process helps the bank's technology product managers make sure their products are the best and most cost-effective tools available in the market. "We work with all of our [technology] products, and we look at how the price unit per element stacks up against the industry."

The in-depth analysis allows managers on Reilly's team to make recommendations to the business when it comes to IT usage. "The level of visibility allows our product managers to make their products as commercially viable ... as possible," stressing that Bank of America looks more at the long-term costs of a technology than the up-front purchase price. "We know more about our business than many of our internal consumers. Therefore we can help internal consumers lower their expenses by giving them informed choices," Reilly says. For instance, perhaps a business application could move to a cheaper form of storage, or an application may not need as much processing power.

The analytics are resulting in benefits to the bank. The team is 13 months into a 36-month program. "We are on track to deliver a 19% reduction in operating expense over the life of a 36-month period," Reilly says.

Growing Pains

While providing detailed cost measurements on IT products can help the infrastructure team run more efficiently, the overall technology economics discipline is difficult to implement, admits Reilly. "No one wants to be told they aren't the best at what they do," when the analysis shows that a certain project has higher costs than acceptable, he says. "No one wants to be told that they aren't doing a good job, especially when you show them the information about how their product stacks up against others. It really is a jarring experience at first."

In addition, technology projects at the bank aren't only measured against other financial services' technology economics metrics. Bank of America is starting to measure its projects against pure technology providers as well. "It is tough for our teams. They are also being marked against companies that are not in financial services, but offer the same technology and services that our internal teams provide," Reilly notes.

Marking against any company makes sense in the long run, Reilly comments, since a company outside of financial services may have better ideas. "When you look at the technology infrastructure across any type of enterprise, there is more that is similar than is different," such as networking, storage or hosting. "It is shortsighted to only compare against financial services," Reilly adds. "How do we compare against telecom or retailers?"

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The bank has recently completed a mark-to-market analysis of its hosting capabilities versus external providers. Rubin works to make sure that the criteria line up correctly so the bank's capabilities are accurately compared against external providers. "We are shooting for best-in-class capabilities for any technology product," Reilly adds.

Bank of America not only does this with its internal technology team, but it's starting to reach out to its major technology partners to let them know how the bank is evaluating their products. While some technology partners "absolutely get it" when it comes to technology economics analysis, Reilly says, "some continue to struggle, especially those that have very fixed revenue models."

Getting partners to understand where technology economics is taking Bank of America, and many other enterprise buyers for that matter, is very important. "Our partners are such an important part of our expense base, so driving this thought process with them is an important part of the strategy," he says. The vendors that do understand Bank of America's strategy "realize this is an inevitable trend. ... It is becoming less viable for us to look at an individual technology or contract on its own."

To help its technology partners learn more about the bank's focus on technology economics, Reilly's boss, Catherine P. Bessant, global technology and operations executive at Bank of America, brought executives from nine key technology partners to a daylong meeting in Charlotte, N.C. "We did this to explain how we saw the future of technology," Reilly says. "It will be tough and it will require some of the [partners'] licensing models to change, ... but we are starting to see traction."