Booklet: Management Section: IT Risk Management Process Subsection: Planning IT Operations and Investment

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Action Summary

Planning involves preparing for future activities by defining goals and the strategies used to achieve them. Information technology is an integral part of financial institution operations. Therefore, financial institutions should integrate IT resources and investments into the overall business planning process. Major investments in IT resources have long-term implications on both the delivery and performance of the institution’s products and services. Independent data centers also should plan effectively, so they can provide quality and cost effective service to client financial institutions. Institution management should monitor any changes in the current strategies and plans of independent data centers that provide services.

Plans may vary significantly depending on the size and structure of the organization. Every organization should strive to achieve a planning process that constantly adjusts for new risks or opportunities and maximizes the value of IT to the organization. Management should always document plans, however a written plan does not guarantee an effective planning process. Management should measure specific plans by whether they meet the organization's business needs. For all plans, the examiner should evaluate the process as well as the written product. A sound plan requires the board of directors, senior management, and user involvement in the planning process. The board of directors should review and approve the plan. Senior management participates in formulating and implementing the plan. The individual departments and functional areas identify specific business needs and, ultimately, implement the plans.

STRATEGIC IT PLANNING
Strategic IT planning focuses on a three to five year horizon and helps ensure the institution’s technology plans are consistent or aligned with its business plans. If effective, strategic IT planning can ensure delivery of IT services that balance cost and efficiency while enabling the business units to meet the competitive demands of the marketplace.

Strategic planning should address long-term goals and the allocation of IT resources to achieve them. Tactical plans outline specific steps and timetables to achieve the strategic goals. These should include hardware and software architecture, end-user computing resources, and any processing done by outside vendors. The strategic plan should address the budget, periodic board reporting, and the status of risk management controls.

The board of directors and management should consider a number of factors when planning the institution’s use of technology, including:

All of these factors should also align with the organization’s business plans. Well-implemented technology plans provide the capability to deliver business value in terms of market share, earnings, and capital growth to the organization. The information technology steering committee’s cross-functional membership makes it well suited for balancing or aligning the organization’s IT investment with its strategic and operational objectives. In fact, effective steering committees will constantly work to align the organization’s information technology, both strategically and operationally with its business units. Typically, institutions that are better at keeping IT aligned with changing business goals and objectives are positioned to compete more effectively.

Some institutions will spend too aggressively on technology that business lines cannot fully utilize. Also, IT departments or business units can over invest in specific technology that provides inadequate enterprise-wide value, introduces new incompatibilities, or produces unnecessary excess capacity.
On the other hand, institutions can spend too conservatively and delay investments in infrastructure or new products that business lines need to compete and maintain market share and profits. In addition, business units without a full understanding of the available technology can fail to update processes and products or to achieve productivity gains or increased revenues. The lack of knowledge may also result in increased security risks. To create the appropriate balance, institutions should link strategic and operational plans between IT and the business units.

The four key factors of IT planning that management should address are:

The board should oversee management’s efforts to create and maintain an alignment between IT and corporate-wide strategies by:

	Confirming IT strategic plans are aligned with the business strategy;
	Determining that IT performance supports the planned strategy;
	Ensuring the IT department is delivering on time, within budget, and to specification;
	Directing IT strategy to balance investments between systems that support current operations, and systems that transform operations and enable business lines to grow and compete in new areas; and
	Focusing IT resource decisions on specific objectives such as entry into new markets, enhanced competitive position, revenue growth, improved customer satisfaction, or customer retention.

OPERATIONAL IT PLANNING
Operational plans should flow logically from the strategic plan. Management should review and revise them at least annually. Operational planning focuses on short-term actions and incorporates the annual budget process. Management should reference the strategic plans and adjust operational plans based on changes in the underlying business needs.

Operational planning addresses the near-term support for business operations. Specifically, operational planning focuses on immediate concerns such as adequate IT resources, sufficient budget, and appropriate risk identification.

IT Resources
Management should ensure that IT resources are adequate to meet the current operational needs of the organization. Operational planning should consider the adequacy of IT resources and the impact of any changes on critical business processes. Business processes are the integration of people, technology, and procedures used to accomplish a task or complete a transaction. Changes in business processes require coordination or alignment with the available IT resources. IT resources that require management coordination include:

Budgeting
Budgeting is another step in the operational planning process. The board should assess management's plans and its success in defining and meeting budgetary goals as one means of evaluating the performance of the data processing and operations management. The budget is a coordinated financial plan used to estimate and control the organization's activities. By assessing future economic developments and conditions, management creates an action plan and records changes in the balance sheet accounts and profitability (predicated on implementation of the plan). The budget not only projects expected results, but also serves as an important check on management.

Management, when considering new technology projects, should look at the entry costs of the technology and the post implementation support costs. Increasingly institutions are demanding, and vendors are providing, information regarding the total cost of ownership (TCO) beyond the initial entry costs. Technology projects often have undocumented costs including the resources required to configure, maintain, repair, support, upgrade, and manage the technology over its lifetime. Readily available TCO models, as well as historical data, provide management with tools to incorporate these hidden costs into the selection and budgeting process.

Some financial institutions budget IT as a separate department of the institution. A financial analysis of an IT department should include a comparison of the cost-effectiveness of the in-house operation versus contracting with an outside servicer. It may also include a peer group comparison of operating costs and ratios with a peer group of institutions. Depending upon its size and complexity, the institution may or may not allocate costs to the user departments. Where cost allocation exists, management should ensure equitable assignment of the costs to each user department. This is often accomplished by use of a chargeback system that records usage of resources based upon a performance metric such as Central Processing Unit cycles. In some instances, a separate subsidiary of the holding company manages the IT function. Ideally, an IT subsidiary of a holding company should have a positive affect on consolidated earnings performance. It can provide essential services at costs below external providers or individual financial institutions. However, some relationships may not result in a cost savings. To avoid a preferential arrangement with an affiliate, the contracts between the holding company or its subsidiary and the serviced financial institutions should ensure "arms-length" transactions. Institution management should assess these relationships to ensure they are fair and equitable to all parties. The IT Handbook’s “Outsourcing Technology Services Booklet” has additional information on contract considerations.

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