Digitalization of Financial Services in the Age of Cloud

Chapter 1. Strategy and Digitalization

“Strategy is the art of manipulating an environment to gain a desirable outcome.”

—Simon Wardley, researcher and creator of Wardley Mapping

This book helps you build a successful technology strategy for digitalization in a financial services organization. When I (Russ) hear the word strategy, I tend to think of a blurrily defined set of ideas, often captured on PowerPoint slides that simultaneously manage to have too much and too little information on them. Strategies of this sort are usually combined with a power lunch, handwaving and applause, and lots of nodding followed by a concerted effort to ignore those slides for another year of manic work activity. I used to think strategy was where bad ideas go to die.

Not anymore. Strategy can be the difference between an organization’s life and (slow) death. For organizations that have almost entirely nailed their colors to technology, such as financial services, a technology strategy becomes not where good ideas go to die but where crucial discussions and actions go to live.

What Is Strategy?

At the risk of explaining one hard-to-pin-down term with a set of others, strategy is situational awareness and anticipation of the future, combined with decision making, packaged up in a healthy loop of learning. Strategy is what you use to decide how to play a game, in our case the game of investment in technology. Your technology strategy captures your complex environment from a technology perspective and then your decisions about how you want to use it and what moves you want to make, smartly spending your precious resources.

To build your strategy, you need to ask:

What’s the purpose of the game?

What does winning look like? Who are you trying to satisfy? Usually this is some sort of important stakeholder, like your customer.

What does the situation look like?

What is the context-specific environment? What is the value stream, or components, that satisfies the needs of the stakeholders? What are the different stages of evolution for each component (genesis, custom build, product, commodity)? What forces of nature or economic drivers, sometimes called climatic patterns, influence the situation?

What can be expected from the future?

Are there any technology trends, new requirements, or changing customer expectations in play? Will the business, the organization, or the technology budget grow or shrink? Are we confronted with new regulations? Do we see new competition? New partners?

Where should you direct yourself?

Are there any general rules or guidance that help you play the game smarter? Are there any general principles you can follow to point yourself in the right direction, setting the frame for what questions need to be answered?

What do you need to decide?

What are the key decisions you need to make to get things moving? How will you define the priorities? What do you need to decide in order to…

Act!

In addition to capturing the situation, getting pointed in the right direction, and deciding to act, it’s important to use your work on strategy to learn and adapt. A strategy shouldn’t be a once-a-year document to be prettied up in PowerPoint and used at annual meetings; although it can be used for those purposes, it is a living document, a continual draft. It is a capture of the game and the decisions you make at a point in time that you continually revisit as the game progresses, refining and learning from so that you can become a better player and give yourself the best chance of winning.

The Purpose of Digitalization

If strategy is how you explore the game space and plan to play, all questions start with “How do we win?” What would success look like? What’s the purpose of digitalization? What’s the goal of the game?

In financial services, as in many sectors, the purpose is to satisfy your customer’s needs. By looking carefully at what a customer needs, you can begin to explore the resources, activities, and components (see Part II) that will come into play to meet those needs. You can construct value streams that meet those needs, mapping out the components that make it all possible. This may sound simple. However, it rarely is because the list of stakeholders in financial services, particularly for regulated institutions, is quite complicated—made up of the shareholders, customers and, of course, regulators.

The difficulty is that these stakeholders, and their needs, are constantly jostling for a place at the top of the priority list. Frequently, customer needs are displaced by other goals, such as operational efficiency, the promise of cost savings, etc. Cloud vendors understand this jostling for position in your priorities, which has led to wild promises of easy deliverables of all of the above and more. Hype has led to overpromising and underdelivering and to widespread disillusionment with cloud adoption.

Cloud Adoption Disillusionment

It was somewhat inevitable that we’d become disillusioned with cloud adoption when the expectations, and the promises, were so high. It’s complex and therefore difficult to sell a new approach to technology on the basis of being able to meet customer needs more effectively. Much easier is to explain how you will generate massive cost savings by moving away from incumbent data centers. “Shift everything from CapEx to OpEx and save a fortune” was the rallying cry, until it became a whimper.

Another frequent misconception is that applications automagically become modern, cloud-native apps when they are moved to the cloud. But if you move technical debt to the cloud, you will have technical debt in the cloud. That’s why most successful cloud adopters accompany their cloud strategy with an app modernization strategy.

Like many overly simplistic strategies, the wholescale movement (and often accompanying redefinition) of existing systems to the cloud has been extremely painful and often yielded little real return on investment—at least within the expected ROI timelines. So much so that whole new terms have been invented, such as “hybrid cloud,” to convey that you are doing “cloud,” even if you still have some parts of your system residing happily in your own CapEx data centers.

Could this disillusionment have been avoided? Probably, yes. Cloud, like any other technology, comes with advantages and disadvantages. One-size-fits-all works only on PowerPoint slides.

Ill-defined “strategies” such as “digitization” and “cloudification” are of this one-size-fits-all ilk. Digitization is the digital conversion of existing processes and artifacts; cloudification is similar in that it is the conversion of existing resources to execute and be stored on the cloud. Digitization’s blind transference of existing processes and data into computers, and cloudification’s similar approach, just with the destination being other people’s computers, has made it hard not to become cynical about the whole sorry mess.

The answer is not to forget who should be at the top of your list of priorities: your customer. The needs of your existing customers, and the future needs of your future customers, are the anchor at the heart of your technology strategy. How to evolve your systems to better meet those needs is the first question you need to ask. That’s not to say the other priorities, such as cost savings, are not important; they are firmly on the list, and you will see how to factor them into your strategy and roadmaps in the coming chapters. But if we displace the customer as the anchor of our strategies, we run the risk of ending up again with a highly polished system but no real net gain. We end up with disillusionment, again.

Digitalization Versus Digitization (and Cloudification)

If digitization is the digital conversion of existing processes and data, digitalization is the digital transformation of your processes and data to make them more effective. Digitization and cloudification may have contributed to disillusionment and disappointment; digitalization should not.

Note

Don’t you have to digitize in order to digitalize?

While digitalization completely relies on digitization, and often cloudification, to conduct the target transformations, the focus is not on simply whether a set of activities, or jobs, can be digitized. Instead digitalization focuses on what a more effective set of processes might be when a stakeholder’s need can be met using digital technologies.

Digitalization encourages us to create a strategy and resulting roadmaps that transform our existing investment in technology rather than merely mimic what happened before. By asking what is important to better serve your digitalization strategy anchor points, you can transform your existing systems toward better serving those anchor points.

Digitalization, Strategy, and Cloud

Digitalization is transformation, but transformation into what? The “cloud, of course” answer has been shown to lead to disillusionment through blind cloudification. Cloud gives us meaningful advantages in the right contexts, and for specific reasons, and strategy is the tool that helps us explore those reasons and contexts.

Asking hard questions, exploring complex options, and understanding what this all could mean in your unique context, all while looking through the lens of what matters to you and your organization, are the components of a great digitalization strategy. Doing this hard thinking is the difference between real value and sunk cost, and this is the hard work that this book is going to help you do.

Getting Started: Parts of a Digitalization Strategy

Earlier we mentioned that a strategy is developed by exploring several questions:

• What’s the purpose of the game?

• What does the situation look like?

• What’s ahead?

• Where could you direct yourself?

• What do you need to decide?

• Act!

Let’s now make that more digitalization-centric:

• What’s the purpose of your digitalization?

• What does the situation currently look like?

• Where could you direct your resources?

• What do you need to decide, and when?

• Go do it, and gather feedback regularly so you can learn, improve, and refine every facet of your strategy, including your purpose.

Savvy strategists may have noticed that these questions are a rephrasing of John R. Boyd’s OODA loop, as shown in Figure 1-1.

Figure 1-1. A simplified view of John Boyd’s OODA loop

Observe

Observe the game you are building a strategy for. Gather as much knowledge from as many parties as possible to help quickly describe the current situation. What does the landscape look like, and what forces out of your control are acting on that landscape?

Orient

What plays in the playbook could you apply to the situation? Are there any quick wins, now that you have a grip on the game board you’re playing on?

Decide

It’s time to get specific and decide what actions you are going to take, factoring in the appropriate plays you recognize you could make along with the situation you’ve surfaced.

Act

Go do it! And, just as importantly, learn from what happens and build your knowledge of the situation so you can go around the loop again.

Starting from your purpose (i.e., what success looks like for your digitalization transformation), each of these phases of your strategy cycle has a focus:

Observe → Landscape and climate

What is the current state of your systems? Who matters most—who are you trying to serve according to the purpose of your digitalization? How do the systems currently collaborate and depend on one another to provide those services and meet those needs?

Orient → Doctrine

Are you focusing on real users, stakeholders, and needs? Is cost the primary priority? What is your approach to quality? How should you balance your risks?

Decide & Act → Leadership

Could shifting a system to a third party deliver real benefits? How fast does a system need to adapt, and under whose control? Do the benefits of cloud really matter to this system component or value stream?

In this book, you are going to learn to do all of the above to create a successful digitalization strategy, utilizing cloud where appropriate, for your system and business. You’ll explore how to capture your current situation, the hard-earned lessons that you can consider applicable doctrine for your situation, and how to navigate the various important questions you will face when deciding exactly how to transform your situation.

In the coming chapters, we’ll look to eliminate the danger of cloud disillusionment, instead building a digitalization strategy that you are confident will deliver the benefits of cloud, where appropriate, to your unique context. The first step is to capture your current situation: your market landscape and your business climate.