Banks must make IT a priority

By Djoko Suryoko Ruslan

JAKARTA (JP): The role of information technology (IT) in accelerating the recent regional economic crisis, through paving the way for the stampede of electronic bears, has been well- publicized.

The foundation for this was set many years ago in the banking industry with the fast growth of both the customer base and branch distribution networks.

On the other hand, the IT infrastructure was not sufficiently developed to support the operations.

Some of the key reasons were the large investment required, a scarcity of skilled resources and a lack of understanding among senior bank executives on the critical role of IT.

As a result, there has been an underinvestment in IT; that is, the IT infrastructure is not developed or integrated.

As a double-edged sword, information technology has an equally important role in the reconstruction of the Indonesian financial sector through its ongoing bank restructuring process.

In the short term, the rationalization and optimization of information technology will minimize further exposure to financial risks.

In the medium to longer term, information technology will play an enabling role in the development of new financial service capabilities, and the reduction of operational costs in the delivery of these financial services to its customers.

Primary among the short-term objectives of the restructuring process in Indonesian banks is the minimization of further financial risk exposure through capital expenditures rationalization.

For example, in Bank Rakyat Indonesia (BRI), the treasury operation needs to be able to better manage risk based on accurate and timely information.

The bank recently implemented a new treasury application and organization, which enables the treasury division to perform under international standards.

Ongoing and planned IT investments need to be reviewed against a bank's refocused business strategy; IT investments are prioritized accordingly, with some planned IT initiatives deferred or canceled altogether.

Again using BRI as an example, short-term IT investments will be rationalized in terms of their contribution to the implementation of new core retail banking capabilities.

A significant IT investment was made by Indonesian banks during the rapid expansion of the financial services industry in the late 1980s and early 1990s as they raced toward capturing a growing customer base.

In many cases, this has led to the underutilization of existing IT infrastructures, including network and service delivery channels, such as automatic teller machines (ATMs).

In order to achieve the operational efficiency expected of its existing IT investments, an IT infrastructure optimization strategy needs to be developed before the banks commit to additional significant investment in the same area.

For example, instead of installing more ATMs, a bank should consider reallocating underutilized ATMs to other places or closing them altogether. To expand its ATM network, the bank should also consider sharing ATMs with other Indonesian banks.

IT capabilities tend to evolve from pockets of IT agendas and skills embedded deep in different business units within a business organization, and this is no different among some Indonesian banks.

While some progress has been made in some Indonesian banks in the centralization of IT organization and capability, more effort needs to be made toward developing a lean and responsive IT organization.

Key outcomes of the optimization of IT organization include the centralization of IT skill bases, partnership of the centralized IT organization with various business units and justifiable use of outsourcing alternatives.

For instance, the ongoing restructuring effort in BRI includes the definition of the target IT organization structure to support the IT needs of all business units, including the retail and micro-banking business units which currently maintain independent IT organizations.

While BRI has been judicious in outsourcing certain technical support and implementation functions to external vendors, additional opportunities for outsourcing may be identified.

The deployment of an appropriate information technology infrastructure is critical in supporting the cost effective implementation of Indonesian banks' refocused business requirements.

This may include the implementation of new or enhanced existing core banking applications, service delivery systems, risk management systems and financial management reporting systems.

Contrary to the prevailing practice of Indonesian banks in implementing in-house developed applications, the new applications targeted for implementation tend to be vendor-driven packaged systems that incorporate current best practices in their respective areas.

In BRI, for example, the selection of a new core retail banking system to support both retail and micro-banking business requirements is currently underway.

The new core retail banking system will provide consolidated customer information and tighter integration in the business process flow, and hence support operational efficiency and minimize operational risks inherent in manual processes.

The target information technology infrastructure of the restructuring banks must be future proof.

In addition to meeting the medium term needs of enabling the delivery of cost effective business solutions, it must be sufficiently flexible to incorporate the future demands of Indonesian banks.

This includes support for additional electronic delivery channels (e.g. electronic and mobile commerce), enhanced customer relationships and further integration with other financial services partners.

In the ever-increasing information technology-rich financial sector, Indonesian banks must take advantage of the ongoing restructuring process to refocus the IT investment priority, drive out the utilization of the existing IT infrastructure, realign the IT organization to the business and develop strategic business capabilities with information technology. These steps are vital to remain competitive in the Indonesian and regional postcrisis economy, and in order to be invulnerable to the next bear run stampede.

The writer is BRI's chief operations officer of information system technology and management information systems.