The Vicious Cycle - Part 1 - Single vendor policy
Welcome to the jabuticaba.app blog. We will discuss some of the current (and not so current) issues and challenges that banks face, talk a bit about why that is and share what we see as a way out.
Chapter 1. The single vendor policy
When an organization (we are talking in general, but our focus will be financial institutions), chooses to rely on a single vendor for all (or a large, strategic part of) its technological needs, it runs the risk of vendor lock-in, lack of flexibility, and facing great difficulties when upgrades or changes are required.
When you ask people why they prefer a single vendor strategy, you usually get one, some or all of these as reasons...
Simplicity and Convenience: Working with a single vendor can simplify the procurement process and make technology management easier. It reduces the need for dealing with multiple suppliers, each with different requirements and processes.
Integration: One of the biggest advantages is that all the systems and processes will likely be fully integrated and compatible with each other, which can significantly streamline operations and improve efficiency.
Cost savings: There may be financial benefits in the form of volume discounts, bundled services, or reduced administrative costs when working with a single vendor.
Reliability: If the vendor has a strong reputation for reliability and good service, the organization may choose to concentrate its resources with them. Trust in the vendor's stability and ability to deliver can be a significant factor.
Single point of contact: A single vendor provides one point of contact for all issues, which can simplify communication and problem resolution.
Specialized Expertise: The vendor might offer specific, advanced or proprietary technologies that meet the organization's unique needs better than a mix of different solutions from various vendors.
These are all reasonable arguments, and should be considered, but as banks grow bigger and more complex, there are as well some downsides:
Simplicity and Convenience: While a single vendor simplifies procurement and management, it introduces a single point of failure. If the vendor experiences a major issue or goes out of business, the organization's operations could be seriously disrupted. There is also the risk of complacency, where the vendor may not strive for innovation or improvement due to lack of competition.
Integration: While having fully integrated and compatible systems can improve operational efficiency, it could also lead to vendor lock-in. The organization may find it difficult to change vendors or systems in the future, which could prevent it from adopting newer or better technologies. It also limits the organization's flexibility to adjust its technology infrastructure to evolving needs.
Cost savings: Although there can be initial cost savings, the long-term costs could be higher if the organization becomes too dependent on a single vendor. For instance, the vendor could increase prices over time knowing the organization is locked in. Also, if the organization needs to switch vendors, the transition costs (such as data migration, system reconfiguration, and staff retraining) could be significant.
Reliability: Relying heavily on a single vendor's reputation and reliability also means tying the organization's fortunes to that of the vendor. If the vendor's performance declines, or if it faces financial or operational difficulties, the organization could be negatively affected. This puts the organization in a vulnerable position.
Single point of contact: Although having one point of contact can simplify communication, it also means all queries, issues, and requests must go through this single point. This can create delays and bottlenecks, especially if the vendor has many clients to manage or if it has internal issues.
Specialized Expertise: If the vendor offers unique or proprietary technologies, the organization could become overly reliant on these. This could limit the organization's ability to adopt different technologies or work with other vendors, even if they offer better solutions. In addition, if the vendor discontinues the technology or ceases to support it, the organization could face significant operational challenges.
From a perspective of personal interests, job security, and internal politics, there are still a few roles in the bank that might prefer large, monolithic software:
IT Management: Large, monolithic software systems can require extensive knowledge and skills to manage effectively. IT management personnel who have specialized in such systems can enhance their job security because their skills are critical to the bank's operations.
IT Operations Staff: Similar to IT management, IT operations staff might also prefer these systems because of job security. The complexity and specific knowledge required to operate these systems could make their roles more secure.
Procurement Personnel: Dealing with a single, large vendor might consolidate their role as the key liaison with that vendor, providing them with a degree of job security and potential influence within the organization.
C-Suite Executives (CEO, CTO, CFO, etc.): Large software purchases can be seen as significant strategic decisions. Executives who successfully advocate for and implement such systems could potentially enhance their prestige and power within the organization.
Risk and Compliance Staff: These personnel might see their roles as more secure if they are well-versed in the compliance features and risk management aspects of a monolithic system.
A decision on a single vendor or multiple vendor strategy should ideally be based on a balanced evaluation of the costs, benefits, risks, and opportunities associated with the various software options, taking into account the organization's specific needs, strategy, and risk tolerance. But personal interests can sometimes unduly influence decision-making in organizations, and the structure and culture of the organization can play a significant role in this.
Kodak, as an example, can be used to illustrate this phenomenon. Its downfall is often attributed to its inability to adapt to the rise of digital photography, despite having invented the digital camera themselves. Many factors contributed to this, but one key aspect was the company's organizational structure and culture, which was heavily invested in film photography. Certain organizational structures can potentially allow personal interests to prevail over the organization's best interests:
Hierarchical Structures: In highly hierarchical organizations, decision-making is often centralized among a small group of top executives. If these executives' personal interests lie in maintaining the status quo (for job security, or due to resistance to change), they can block innovations or changes that could benefit the organization. Worse yet, as we will explain a bit later, even if the C-level is committed on doing the best for the overall business and its stakeholders (owners, employees and clients), entrenched middle management can make the executives lives very difficult.
Silos: Organizations structured in silos, where departments operate independently and communicate little with each other, can foster an environment where departmental or personal interests override the organization's overall interests. If a department (say, IT or Procurement) benefits from a particular vendor relationship, they may resist changes even if they could benefit the organization as a whole.
Culture of Fear or Complacency: If the organizational culture discourages dissent or punishes mistakes, employees may be reluctant to propose innovative ideas or challenge the status quo. This can lead to stagnation and inhibit the organization's ability to adapt to changes or seize new opportunities.
Short-term Focus: If the organization's structure or culture prioritizes short-term gains over long-term success, decisions may be made that provide immediate benefits (like hitting quarterly targets or boosting stock prices), but harm the organization in the long run.
Drawing a parallel to Kodak, one could say the company had a hierarchical structure and a culture heavily invested in the existing film business. This, combined with a short-term focus on the profits from film sales, led to a resistance to shift towards digital photography. Even though many in the company recognized the potential of digital, the personal and departmental interests in maintaining the profitable film business prevailed, contributing to Kodak's eventual downfall.
Software and IT middle management have a vested interest in maintaining the large, monolithic software systems they're familiar with. This interest is primarily driven by job security, as their expertise in managing these complex systems makes their roles crucial to the organization. This can apply to banks, system integrators and software providers.
When a new executive comes into the picture, they may not immediately grasp the intricacies of the organization's IT infrastructure. The IT managers, leveraging their institutional knowledge, might present information in a manner that favors the continuation of the existing system. The new executive, lacking complete information and possibly seeking quick wins in their early tenure, might accept these recommendations, leading to strategic decisions that are influenced more by personal interests than by the overall benefit to the organization.
Furthermore, IT managers might resist changes proposed by the new executive, especially if they feel these changes threaten their job security. This resistance could manifest as overt opposition or more subtle forms of inertia or non-compliance.
In an environment of high executive turnover, these dynamics can result in a situation where strategic IT decisions are primarily driven by the personal interests of middle management, rather than what is best for the organization. This could lead to continued reliance on potentially outdated, inflexible, or costly systems, and hinder the organization's ability to innovate or adapt to changing needs and technologies.
As with American car manufacturers in the 70s, this status quo can continue until there is a serious disruption in the business. In the next article we will go over how the advent of cloud computing has changed the environment drastically and the first signs have been with us for a while now.