February 2018 | Point of View

Successful cloud strategies in financial services: Collaboration is the missing ingredient

In the financial services industry, the possibility of moving key applications and functions to the cloud was once an aspirational goal. Today, it is an industry reality.

In the financial services industry, the possibility of moving key applications and functions to the cloud was once an aspirational goal. Today, it is an industry reality.

There are two factors behind the push for cloud migration in the financial services sector: changing customer expectations and consistent pressure to increase efficiency. On the customer side, financial services customers expect a highly accessible and continuously improving user experience. By providing a highly adaptable platform, the cloud helps financial services organizations keep pace with the evolving expectations of the marketplace.

On the financial side, the cloud enables faster speed to market and rapid growth potential. Perhaps more importantly, cloud computing frequently reduces costs – an important advantage for an industry where leaders often focus more internally on controllable expenses than top-line revenue lift. For example, by simply migrating to the cloud-based Office 365, World Bank drove down its platform management costs by a whopping $8 million. At DBS Bank in Singapore, moving its data center to the cloud reduced the costs of running it by 75 percent.

Financial services organizations that prioritize a cloud migration can gain more engaged customers and outperform across key metrics, including the efficiency ratio. But across the financial services sector, institutions are entrenched in traditional processes that create roadblocks, whether real or perceived, to adopting a cloud-forward approach. Additionally, finance and IT departments can sometimes be at odds, but when aligned and working together can produce remarkable results.

The financial services industry faces unique cloud migration challenges 

Cloud platforms enable organizations to keep pace with customer expectations, most of which relate to timely and transparent service. They also help integrate data analytics, machine learning, and business intelligence into existing enterprise infrastructure.

Because of its elasticity, cloud infrastructure offers an optimal environment for testing and implementing new services and digital technologies that improve the customer experience. The agility of the cloud plays a key role in helping organizations continuously bolster engagement through new customer-facing solutions.

Faced with mounting customer expectations and cloud advancements in other industries, financial institutions are under pressure to migrate quickly – a task that is complicated by several unique challenges:

  • Resistance to new technologies: The financial sector’s entrenched resistance to the adoption of new technologies can impede executive buy-in for cloud initiatives.

  • Security concerns: Security is a top-of-mind concern for IT and C-suite decision makers tasked with protecting customer data and IT systems.

  • Compliance challenges: The regulatory environment in the financial sector brings an added layer of complexity to new technology initiatives. 

Security in the cloud should not be seen as the biggest roadblock to migrate, given the advancements in technology and their corresponding level of compliance.

From a security perspective, major cloud providers such as Microsoft Azure and Amazon AWS are FedRamp- certified, which is a federal government level of scrutiny and certification on hosting data in the cloud. This is seen as a huge step forward in compliance and security in the financial sector. Furthermore, the adoption of the National Institute of Standards and Technology (NIST) framework with industry regulators is providing a standardized approach to managing security risk for data and cloud use.

However, one of the most significant hurdles to cloud migration in the financial sector is competing priorities between IT, finance, and other business units across the organization. Cloud migration is never exclusively an IT initiative. It is an initiative that requires the buy-in and participation of CFOs and other business stakeholders.

To successfully migrate to the cloud, financial organizations should recognize the win-win for both IT and finance. CFOs and other financial decision makers have an opportunity to collaborate with IT on optimizing the financial benefits of cloud infrastructure for their organization. In our experience, when finance and IT work together, cloud migrations post positive results.

THE BOTTOM LINE: Financial organizations are under pressure to rapidly migrate key applications to the cloud. But industry-specific roadblocks- including silos with competing priorities- threaten abilities to achieve successful cloud migrations.

Efficiency ratios provide incentives for CFOs to collaborate with IT on cloud migration

CFOs have a vested stake in collaborating with IT on cloud migration. Increasingly, financial organizations rely on cloud-based services and solutions to achieve financial efficiency. Emerging examples of online-only banks demonstrate how a cloud-focused model can significantly lower efficiency ratios. Bank of Internet USA and Synchrony Financial (both online banks), reported 2016 efficiency ratios of 34.5 percent and 29.5 percent, respectively. By contrast, traditional banks tend to report efficiency ratios between 55 and 60 percent.

By migrating to the cloud, banks and credit unions free up capital and create the flexibility needed to generate and accommodate growth. But just as importantly, cloud migration allows banks and credit unions to take advantage of faster and more efficient processes, which in many cases reduce labor requirements and other costs.

For example, TAB Bank in Utah and Square 1 Bank in North Carolina have leveraged the cloud to streamline loan origination and significantly reduce loan closing times. In fact, Square 1 Bank’s cloud presence had reduced its average time to close a loan by more than 20 percent. For both organizations, cloud migration resulted in efficiency rate improvement through fewer labor hours per loan and higher interest revenue.

Ultimately, the financial benefits of cloud migration extend well beyond decreased capital expenditures. Although a cloud migration can potentially lead to additional annual maintenance and operating costs, gains in efficiency, scalability, and captured revenue can generate financial and efficiency rate improvement.

Like other major technology initiatives, the key to achieving financial benefits from cloud migration involves a collaborative process where both IT and finance play a role.

THE BOTTOM LINE: The financial benefits of cloud migration should incentivize CFOs to take a more active role in cloud migration decisions and roll-outs. By collaborating with IT, finance can use cloud migration to steamline processes, cut costs, increase revenue opportunities, and improve efficiency ratios.

A three-step process for cloud migration in financial services

To resolve key migration pain points, financial institutions should identify a cloud strategy that is secure, optimized, and aligned with their specific challenges and goals. In practice, this financial services-specific strategy boils down to three key steps:

1. Forge a strategic alliance between the CFO and CIO 

Across industries – but especially in banking and credit unions – the relationship between CFOs and CIOs can be challenged by competing priorities. In a traditional environment, CFOs and CIOs may have fundamentally different objectives and areas of focus, but when aligned can create a win-win situation.

To successfully launch a cloud transformation initiative, CFOs and CIOs should embrace a collaborative approach to cloud migration. This collaborative relationship between finance and IT can involve a wide range of activities, including:

  • Financial validation: financial analysis to determine the financial impact of cost reallocations and other migration issues.
  • Application analysis: evaluation of the organization’s IT portfolio to identify the feasibility of migrating specific applications to the cloud
  • Financial modeling: a comprehensive financial framework for migration that takes into account all aspects of the transition to future state (i.e., the people, processes, and technology requirements associated with cloud migration). 

A successful cloud migration provides benefits to both parties, giving CIOs a more elastic platform to develop and test new tools, while offering CFOs an opportunity for financial improvement. It’s a win-win for both parties, but banks can only realize these outcomes when CIOs and CFOs take a joint and equal stake in facilitating a cloud migration. This partnership, along with alignment of the rest of the executive team, is vital in laying the foundation for long-term success in the cloud.

2. Prioritize application-specific migrations

As a function of application analysis, bank and credit union leaders should start prioritizing the best candidate applications to move to the cloud. This process requires CFOs and CIOs to work together to identify the application-specific migrations that make the most technological and financial sense.

The conversation between IT and finance requires careful vetting of a financial institution’s existing IT environment. The key is to look for applications that are most cloud- ready, based on the potential for seamless migration, limited risk, and ROI.

In some instances, applications that are not immediately cloud-ready may benefit from partial re-platforming or modernization to enhance business value. In other instances, the process will unearth functions that are simply not cloud-priority, such as monolithic systems running on old architecture, which would potentially involve financial and tech enablement issues.

Ideally, CIOs and CFOs should emerge from this strategic dialogue with a per-application cloud suitability report– an easily digested document that can be presented to other C-suite leaders for quick approval and implementation. Cloud suitability reports usually contain several common elements, including:

  • Alignment with business objectives
  • Reduction in time to market
  • Enhancement in risk management
  • Return on investment
  • Increase in cross-functional collaboration 

3. Prepare for the change

While some financial institutions may need to consider new IT hires to fulfill their cloud needs, many organizations will be able to accomplish the required evolution by retraining existing workers. The next step is to prepare teams for change. Business leaders, including the CIO and CFO, should implement change management procedures to equip all employees with the skills they need to thrive in a cloud-driven environment.

Additionally, CIOs need to deconstruct silo mentalities and help teams approach cloud migration from a more holistic perspective. For example, if the logic behind the prioritization of specific applications for migration is not immediately apparent to stakeholders, leaders must help employees understand the underlying considerations behind the prioritization process – financial or other.

CFOs also play important roles in change. In addition to supporting the CIO’s efforts to encourage buy-in through transparency in the decision-making process, the CFO must contribute to the success of the project by supporting the retraining and hiring initiatives that require funding.

THE BOTTOM LINE: Without creating strategic alignment between CFOs and CIOs, prioritizing application-specific migrations, and readying IT for the major shift that cloud migration brings, financial services organizations will find it challenging to realize the efficiency ratio and customer experience benefits of a cloud migration.

Conclusion 

Financial services organizations face an industry-wide imperative to adopt a cloud-forward approach. But as organizations approach the need to adapt, they’re up against unique challenges, including industry resistance to new technology, regulatory and security requirements, and need for more collaboration between finance and IT.

Finance and IT are not at odds in cloud migration – in fact, they are natural partners. By developing a strategy rooted in a finance-IT partnership, creating an application- specific migration plan, and positioning IT as a strategic business partner, financial institutions can lay the foundation for lasting cloud success that benefits both customers and stakeholders across the organization.

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