Financial institutions (FIs) are built around evaluating risk and avoiding unnecessary exposure to future macroeconomic changes. From cyber security and loan evaluation to third-party, regulatory and compliance issues, FIs have exacting processes in place to analyze and evaluate risk. When evaluating capital expenditures, however, many of these institutions focus narrowly on the ROI without a complete review of all the associated risks.
This is especially true for technology investment evaluations. The business case and ROI projection often drive the decision as to whether to move forward, while little to no attention is given to potential risks. Though the possibilities here are numerous, we’ll highlight five specific risk elements, their potential impact and suggest a potential mitigation strategy we call ‘Alternative Acquisition.’
Selected Technology Investment Risk Considerations
Technology Suitability Risk
Suitability risk impacts whether the technology will meet the ever-evolving needs of a specific FI. Is the solution right for today, yet flexible enough to meet tomorrow’s needs? Assessment of suitability risk becomes even more critical as branch transformation initiatives continue to be implemented. What is the chance that the technology you select as ‘standard’ will not closely match the actual needs of the branch in the future?
Business risks – Internal
Internal business risks include those that arise due to changes in business performance, organizational, or strategic direction of the FI. These changes can happen at various levels within the organization and are not always telegraphed in advance. How likely is it that these factors will necessitate abandonment of this specific technology solution?
Business risk – External
Beyond internal business risks are those that originate from outside of the organization. Included are changes to customer behavior and demographics, market competition, legal constraints, or regulatory changes. How likely is it that these types of factors will derail or necessitate major changes to a business initiative or involve a new technology solution?
Opportunity cost risk
With many CAPEX proposals competing in the budgeting and potential funding mix, many sound technology proposals are abandoned due to limitations of available capital. Capital that can be used for other important investment opportunities that don’t lend themselves to an alternative acquisition option – like leasing as a practicable alternative to conventional funding and purchase options. How much risk is there in funding an individual capital investment given that an FI might need that capital for other strategic opportunities or to meet regulatory requirements?
In a perfect world, capital would be unlimited and your ability to invest in new technologies would be unrestricted. Once a technology has been identified, tested and proven to provide an acceptable return on investment, capital budget timing and limitations often delay a large scale or enterprise wide deployment, leading to what we refer to as the Unrecoverable Cost of Delay. As an example, if the investment provides a positive financial return, you should want to implement it as soon as possible. But often, that deployment is done over an extended time-period, sometimes even years, and the savings opportunity is forever lost for that period of delay.
The primary concern for most FIs when making a commitment to any technology solution is whether the investment will deliver the value, savings, and return on investment anticipated. Failure to deliver the expected results could be for a variety of reasons, including the failure of the technology, or in the operational application of that technology, or the need for the technology in the future.
Leasing as an Alternative Acquisition Strategy
Most FIs default to traditional capital appropriation processes each time a technology acquisition proposal comes forward. In that process, the ROI is ranked among many other priorities and initiatives that compete for what is always limited capital. As a result, many important and even critical tech investments fall victim to competing projects and priorities.
However, there is another approach. Bankers Equipment’s Alternative Acquisition Strategy enables any financial institution to acquire and deploy more, despite capital limitations. An operating lease, for a fixed term that reduces investment risks over the long run, can provide that means!
Tech Investment and Risk Abatement
“Acquiring our recycler through an operating lease gave us the ability to replace the technology on an ongoing basis and eliminated the risk of owning technology that no longer met the needs of our financial centers and clients”. Susan Hentze, Sterling National Bank.
Utilizing the alternative investment approach of an operating lease you can increase your technology flexibility and reduce the risks of ownership.