Controlling IT Expenses

by Wayne Barnett

If you think you're spending too much on information technology, you're probably right

Spending on information technology (IT) is a large expense at all banks. And it grows every year.

Most of the money you spend on technology is for annual licensing and maintenance fees, and there's little you can do to reduce that. However, some spending can be controlled. The best way to do this is (1) know and avoid common over-expenditures that banks make; and (2) have a formal strategy for making IT purchases over $10,000.

In the rest of this article I'll describe common purchasing mistakes. I'll also offer suggestions that you can include in your purchasing strategy.

Common IT purchasing mistakes:

When banks need new laser printers for a department or branch, they tend to buy top-of-the-line units that cost $4,000 (or more). Such printers are designed to print 50,000 pages a month. However, most branches and departments print less than 5,000. You can buy suitable printers from the same manufacturer for 50% less.
When banks purchase a new system, they often purchase a new server to run it on. There's no need to do this. Windows NT is designed to operate multiple systems on a single server. Also, a lot of banks only purchase high-end, fault-tolerant servers that cost $15,000-$25,000. You don't need computers this sophisticated to run e-mail or a new account/new loan system. They will do just as well on units that cost $5,000-$7,000.
A lot of banks purchase "Business->
A lot of vendors have lowered the purchase price of their systems. However, the cuts are offset by large increases in the license and maintenance fees.

For example, a bank I recently worked with was considering a check-imaging system. Management was pleased with the purchase price; it was $120,000 less than a comparable bid from the previous year. However, their sense of accomplishment turned to aggravation when I pointed out that the vendor had raised the annual license and maintenance fee by $45,000.

Another bank was considering a similar system, from a different vendor. They too were pleased with the price, until I pointed out it would cost an additional $40,000 if they wanted all employees to have access to the system. Also, the first year's license and maintenance fee was not included in the purchase price; the bank did not realize that. These two add-ons increased the cost by $61,000.

Big companies usually provide good service, but that's not always the case. A bank bought four ATMs from such a company, and junked them three years later because they couldn't get them serviced. The company had just one technician assigned to the bank's region, and often it took him 2-3 days to answer a service call. The write-off was $60,000.

Prudent IT purchasing strategies:

Comparison shop for all IT purchases above $10,000. Just mentioning to the vendor that you're doing so will often yield discounts of 5-10%.
Remember that everything is negotiable, until you sign the contract. I've helped banks shave as much as 30% off initial proposals.
Write down all promises and representations of the salesman, and have the vendor sign it. I've helped banks recover as much as $20,000 from vendors, after it was determined their system did not perform as promised.
Do not buy factory reconditioned equipment.
For hardware, if the technician's office is more than two hours drive-time away, be hesitant to purchase the equipment.
Make sure the technology you're buying is the newest and most current available. For example, don't buy new PCs with anything other than Windows XP-Pro.
When comparing prices, estimate the total costs over five years. The system that's cheapest in the first year is often much more expensive in the long run.
Be skeptical of systems that promise to save you money. If you don't see savings in the first or second year, it's unlikely you ever will.

Wayne Barnett owns a CPA firm that specializes in providing EDP auditing and consulting services to banks. He is also President and Chief Systems Architect of Wayne Barnett Software, Inc.(www.barnettsoftware.com). He can be reached at 800-680-8692, or via e-mail at wbarnett@barnettcpa.com.

First published on BankersOnline.com 4/29/02