#Transformation and TCO | Numerix Video Blog Series

Understanding FinTech #Transformation: 

In this FOURTH of a five part video blog series Jim Jockle, CMO of Numerix sits down with Paul Rowady, Director of Research at Alphacution to discuss the concept of #Transformation. Jim and Paul provide their perspectives on the latest examples of transformation they’re observing in the financial services industry specifically around the cross section of IT spending trends, software vs hardware investment, human capital expense, IT infrastructure, data management and risk analytics innovations. The five segments cover:

  • Defining #Transformation within Financial Services
  • Quantifying #Transformation
  • The Cost of #Transformation
  • #Transformation and TCO: Hewlett Packard Enterprise & Deutsche Bank Case Study
  • Investing in #Transformation: What’s the ROI?

Video 4: #Transformation and TCO: Hewlett Packard Enterprise & Deutsche Bank Case Study

Jim Jockle (Host): Hi, welcome back to Numerix video blog, I’m your host Jim Jockle. Joining me today, Paul Rowady Director of Research at Alphacution. Hey Paul.

Paul Rowady (Guest): Thanks, Jim. Good to be here.

Jockle:  Continuing our conversation on quantifying transformation. So we’ve talked about the good, the bad, and now maybe a little bit of the ugly. So, widely reported in the news, some of the challenges that’s been happening around Deutsche Bank. Last month, Co-CEO in the terms of a paper. Quoted in the German paper saying “The inefficiencies of our IT was the price we’ve had to pay to catch-up with the fast growing Wall Street banks.” so, a lot of investment, a lot of change. Even just the personnel, bringing in more Silicon Valley types, into the management structure as part of their transformation. So, from the TCO perspective, specifically around some of the work they’ve done with Hewlett Packard enterprise, where is Alphacution seeing the Deutsche Bank today?

Rowady: So the first point I would make with this is this is not a Deutsche Bank phenomenon. Every bank adopted the sentiment where catching up with some perceived leader and some business segment was something that was going on across the major banks that had this global spectrum that had this super market mentality. The whole modern capital markets were acquiring businesses left and right and bolting on new capabilities product level, business level, regional, geographic, and there is no, while the party and profitability was going on, there is never any incentive to rationalize and make it totally. As long as money, as long as that margin is there, you don’t want to stop the wheel from turning. Then the global financial crisis came along, and things really changed. The market has changed and a lot of these opportunities has changed. There’s cost involved with all the reporting, there’s a lot more checks and balances. The economic environment, the yield curve, for gosh sake is at unprecedented, never before in 500 years of banking history, do you have rates like we have today. So this is all impacting the margins, the so-called party, and now it’s time to go and start to clean up because the opportunities are no longer, and I’m speaking in broad brush strokes, the opportunities are no longer as fat as they were. And obviously, that’s the time that you go back and say where can we eliminate redundancies, eliminate complexities, eliminate fragmentation because all those things cause cost to happen and cause less than optimal performance to happen. So this has been a theme that we’re trying to model by looking at well what are these banks spend on technology? The way that we do that is we normalize across all enterprises looking at per employee or a head count metric, which allows us to normalize not only a bank in 2005 relative to itself in 2015, but also a bank in Europe, relative to a bank in Singapore, or in Japan, or in Brazil, or in New York.

Jockle: Well, I want to jump in on that question. Last time when we spoke, we were sitting and we were chatting, about the revenue per employee. And when we think of the TCO, not just on the technology, but the human capital, at some point how difficult is it getting to attract people to come to banking? When you think of the profitability of traditional tech firms, as compared to the more financial institution type employers.

Rowady: Well so this is why I got into the concept of not so much worrying about what the TCO is, but something called return on technology which we can debate what’s in that. It could actually be the return on human capital or the return on technology depending on your perspective. But to answer your question, it’s not really what you spend on technology, it’s what you get from technology. So, this is what got into the benchmarking exercise, there are some firms that spend more than anybody else on technology on a per head basis, but their revenue per employee justifies the TCO per employee. And this gets us to a metric we’re calling the T-Spread, the technology spread, that is looking at what is the difference between those two. Because, you want to maximize that. You don’t want to make one absolutely low, and then try and figure out how to get the revenue. You actually want to maximize that which means that you may pay more for head count. There are some firms that pay noticeably more for their IT personnel because they’re trying to attract the best in the business to deal with that spread, not the deal with just the TCO by itself.

Jockle: Well, there was a great article I saw on LinkedIn the other day, and it was talking about JPM attracting talent and now all of a sudden, it’s like ping pong tables and all these gimmicks. It terms of the button down, the white collar and tie, are people going to feel comfortable going to work?

Rowady: Ping pong tables are great if you’re twenty-something, just your first job out of school, and you want to get paid in ping pong balls and ping pong time. For serious players, that’s not part of the compensation matrix. Serious players, serious innovators have to see what’s in it for them, their own lifestyle, you can’t take the ping pong table home. You can’t take the extra tickets; this is all fluff that attracts the younger folks that value that kind of thing. But for folks that have families, that have kids, and have to pay for homes and vacations and college, they care about what the money is. So, this gets down to the brass tacks of what they’re actually spending for that. Now, I don’t know do you still want me to answer the Deutsche Bank question?

Jockle: Yes I do, let’s jump right into it.

Rowady: I was fascinated with whether the deal with HPE, Hewlett Packard Enterprise with Deutsche Bank, late February 2015 was having any impact yet. And so I looked into that, and I guess on a short term basis you could say yes, that the spending that I had detected at Deutsche Bank was

[cut to graphic] about $95,000 per year, per employee. That’s all employee, that’s all employees, that’s all 100,000 employees globally. And that seemed to be up-ticking from a low in 2010 of about $70,000 per head. And so clearly there was some significant up-tick in spending TCO basis, they needed to address it. They’re already down from $95,000 a head per year to $88,000 per year, per head. I know I’m throwing a lot of numbers out here. Early indication is that it could be working, it could also be a false positive here that are other things at play. The Hewlett Packard arrangement is not the only thing that Deutsche Bank is doing to address cost. However, it is compelling as a message and as a strategy to consider, it’s an awful radical one to think of, you’re going to outsource your entire infrastructure. So, I’d say the jury’s still out, but early indications are worth paying attention to.

Jockle: Paul, well thank you so much. We’re going to continue our conversation with Paul Rowady Director of Research at Alphacution in just a minute.

By | 2018-02-28T16:36:57+00:00 May 10th, 2016|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, the first digitally-oriented research and strategic advisory platform uniquely focused on modeling and benchmarking techno-operational dynamics, and the business impacts of those decisions, in and for the global financial services (FSI) ecosystem. He is a 30-year veteran of the proprietary, quantitative / automated and derivatives trading arenas with specific expertise in strategy research / implementation, risk management, and technology development. Contact: feedback@alphacution.com; Follow: @alphacution.