For financial organisations looking to optimise processes and ensure they are as agile as possible, proactive divestment could be their next and best step towards enhanced performance and growth.
It’s a vital, but too often overlooked, component of effectively managing a bank’s IT assets.
However, the nature of a bank’s divestment strategy is fast being regarded as a litmus test of its ability to meet the fresh demands of a rapidly-changing marketplace.
A bank’s willingness to embrace the need to divest itself of obsolete paraphernalia could be the difference between enhanced performance and growth and a state of paralysis.
Too many in the sector continue to deploy a reactive divestment strategy when it comes to their infrastructure, only doing so when absolutely necessary – but such an indolent approach only hampers long-term goals.
Retail banks’ historic reluctance to divest rests on an unsustainable belief. This holds that whilst fresh investment is considered a positive action, divestment is an admission of weakness. This is simply wrong.
Indeed, postponing divestment until the point at which your organisation is overtly failing guarantees risks being seen as a panic measure rather than as the dynamic cornerstone of an organised stratagem.
The recent financial crisis provided a robust example of divestment proving to be a highly effective tool and those who escaped the worst of it were those who acted in a decisive, pre-emptive manner.
The first act of the banks when the tsunami struck was to divest themselves of all their toxic debt so that they didn’t have the drag of liability. However, they only did so due to external pressure. If they had acted earlier when the red flags first began to appear they might have escaped the worst ravages of it.
So why is the finance sector so allergic to divestment? Part of it is human nature. Our hoarding and stockpiling recalls our earliest ancestors who were never certain what the new day might bring in an unpredictable, unstable world. Such ‘protectionism’ is continuing to have a pernicious effect on the modern banking community.
The situation has been further exacerbated by the low growth environment in which retail banks operate which has bred risk-averse cultures that tend to stifle innovative thinking. Lessons must be learnt.
Let me narrate ‘The Parable of Jack Ferguson.’ Jack is a young boy whose parents want him to deploy a divestment strategy in respect of his increasing mountain of toys.
There is an incentive. His birthday is imminent, and Jack will get new toys if he frees up space and gives his old ones to other children. Yet, despite good intentions and recognition of the need to divest, he insists on parting with just one solitary, broken toy. He cites strong emotional attachment and the quality – not the quantity – of the minutes in which he still plays with them, but he also risks them falling into disrepair and thus becoming of no use to anyone.
In the financial sector, Jack’s logic often reigns. A divestment ‘Spotlight on Europe’ study last year by EY found that 48% of European companies admit they hold on to assets for too long.
Banks will give you many persuasive arguments, even emotional ones, for rebuffing divestment. They cling to expensive data centres even when they are proven to no longer be fit for purpose or to be cost-effective.
In our rapidly digitising world, increasing duplication of platforms is creating a tech legacy drag for banks. Bigger banks are getting left behind because the performance capability of their infrastructure is being bled white. The constant cost and maintenance drain of ageing infrastructure stops them getting to market quickly enough.
In the race to the cloud, those financial organisations with no early divestment strategy will become prey to FinTech start-ups and challenger banks unencumbered by such sluggishness. These agile newcomers can steal a significant march because they don’t have costly data centres and dense hardware. Organisations that divest their IT assets proactively create substantially more shareholder value than those grimly holding onto old infrastructure.
Greater urgency and focus is required if the bigger banks are to level the playing field. A vital first step forward is to engage an external specialist with a proven track record. By doing so they are opening up to a degree of logical and pragmatic insight, freed from the baggage of old loyalties and embedded thinking. This can lead to a smooth transition whereby divestment becomes a routine part of ongoing strategy and IT portfolio assessment.
If banks opt to take that vital step, they can develop a strategy and delivery mechanism that will make them more pragmatic in their divestment approach. They will also be much more capable of taming and maximising disruptive technologies as they emerge.