A Business Technology Place

Technology profit leaks

Managing a technology budget for an IT group is an activity that is full of opportunity to help the bottom line of a business. It’s a cost center, not a profit center. But while the game may not be about maximizing top line revenue, any money removed from the IT budget directly impacts the bottom line or the overall profit of the company. Unlike the revenue equation which is reduced by variable and fixed costs, the expenses in the IT budget affect the net income bottom line dollar-for-dollar.

 What’s in your budget?

The IT budget is often bloated with expenses that become forgotten. A prime example is maintenance contracts for equipment and software. Providers love the maintenance contracts which often account for 20% of the original sales price of a product. Do the math. If the lifespan of the product is five years then the provider has doubled their income. The danger for the IT budget is when the product is retired from service but the maintenance agreement is not cancelled. This is a prime example of a profit leak!

Another example of a profit leak is an agreement for a recurring service that could be renegotiated for better rates. Cell phone bills, data lines, data center services are services with ongoing recurring charges. Just like we can often negotiate a better price or find a better price in the open market for home services, these types of business services present the same opportunity.

 The capital expense game.

Capitalizing expenses is another way to help the bottom line for a reporting period. The isn’t quite the same as reducing costs since capitalizing is spreading the cost of a product or service over time. I often think of this as a game since the finance group has choices if they want to expense or capitalize an item as long as they stay within accounting rules.

 Recouping costs.

Another key way to reduce expenses is to recoup costs by charging for value-added services. For example, if the IT programmers are creating a service for a client that provides value such as reducing internal costs (for the client) then the IT services may be billable. The expense of the programming effort can be reclassified as cost of goods sold. The cost still factors into the bottom line, but the top line revenue increases to offset the overall expense.

Play the game.

So as a technology leader, there is ability to influence the bottom line results by controlling expenses. It’s the game of business. The game of profits.

A case for customer focus in the midst of financial regulation


Banks are reacting to loss of fee income by creating new fees and dropping services.

Financial institutions across the country are reacting to the impact of Regulation E changes and the Durbin Amendment to the Dodd-Frank Act. The Regulation E changes of 2010 prohibit financial institutions from charging consumers fees for overdrafts on ATM and debit card transactions unless the consumer consents to be charged a fee.  The Durbin Amendment states that interchange fees for debit card transactions must be “reasonable and proportionate” to the actual processing costs incurred by the issuer.  The proposed interchange fee cap is 12 cents per transaction, well below today’s average of 44 cents per transaction.

Many banks are reacting by making changes to fee structures, checking programs, and rewards programs. Chase,  Wells Fargo, and PNC have already announced that they will stop enrolling some customers in debit card reward programs.  Chase, PNC, and HSBC are among the banks experimenting with higher ATM fees and Bank of America is  testing revised fee structures for checking accounts in some markets.

The irony of “consumer protection legislation.”

So while the government is creating legislation with the banner to protect consumers, you have to ask yourself is it really working? What we are seeing is that banks are shifting fee structures in an effort to maintain that level of income.  It’s just forcing financial institutions to look elsewhere for profits. The banks after all are a business. They protect the interests of their stakeholders and employees by making a profit. So at the end of the day, the consumer is still paying fees and depending on how they structure their financial relationships and behaviors, they may pay more fees than before the recent regulation started.

With the newly developing  account fee structure, financial institutions will in-effect spread their fees  among more consumers. Maybe that was the idea in the first place. Instead of taking from the few to pay for the masses (free checking), banks will now take a little from everyone.

The hunt for the most profitable customers.

A side effect of the increased account fees is that many customers will close account that don’t meet the minimum requirements for no fees.  In the past, it didn’t cost the consumer anything to leave dormant accounts open. With new fee structures, consumers are likely to consolidate their accounts to one or two financial institutions.  So where is the most profitable customer? Is it the one that is prone to live outside the boundaries of the account programs such that they are paying regular monthly fees for service and overages?  Or is it with the customer that doesn’t pay any fees for account services but that may hold secondary accounts such as auto or home loans that pay interest? The financial institution surely values both types of account holders.

The real goal here should be to focus on value services not fees.

With all the attention and press on financial industry regulation and fees, have the banks lost site of what really drives profits in the first place? Is it possible that banks could replace lost fees by adding more value services rather than increasing existing or creating new fees? I have  to wonder.

An area that I think is ripe for this to happen is online banking. Many financial institutions have already started making the online banking control panel a portal to related financial services.  There’s money to be made in third-party integrations that provide value services to customers.  Financial institutions can create structures to keep part of the retail price paid by consumers for some services. Here are a few ideas:

  • Tax preparation software. I list this one because my credit union already provides an integration to Turbo Tax.  Launching Turbo Tax from within online baking, my name, address, and interest income are automatically transferred to the program.  The retail price to me is comparable to buying this product at a retail store.
  • Credit bureau services? Consumers can purchase credit reports, credit scores, and monitoring services directly from the credit bureaus. But it makes sense that your financial institution would facilitate this transaction as well.  When consumers think about their financial picture their financial provider ban be part of the equation.
  • Identity monitoring and protection services – These services are also offered directly by third parties.  But giving out personal information to a brand such as your financial institution is much easier for consumers to trust.
  • Personal to person payments – Today PayPal is the leader in this space.  I know there’s a huge push in the industry to define standards and leaders in mobile-to-mobile payments, but why not extend online bill pay to include more person-to-person payment options by integrating with a service such as PayPal?  The value to the customer is the ability to electronically send a payment to another person rather than having a check mailed from online bill pay.  It’s all about timing , ease of use, and faster accessibility to funds.  Consumers are already use to paying a fee for this service so financial institutions could leverage a part of the fee already in place as their part of being the “finder” for the transaction.

UPDATE: After I published this post, I found Serve from American Express. It’s another example of extending electronic payment options to consumers and a good candidate for online banking integrations.

    What’s your take? Can you think of other ways for financial institutions to increase income through value services and customer focus?


    Business decisions: customers, profits, and the golden rule

    Building from your roots

    I continually digest a steady diet of business related materials to see what others are doing that is successful and to generate ideas for my work routine both in business and hobbies. These business materials are in various formats, including books, blogs, published articles, and pod casts. Call me crazy, but I think about putting theory into practice at work to gain the benefits of the knowledge.  One area where I see a disconnect between popular business theory and popular business practice is the fundamental basis for making business decisions. In my experience, its becoming more common placed to see individuals making business decisions solely on the basis of money. It gets me thinking about life lessons you teach your kids, “there’s more to life than money”, and the relevance it has in the business world.

    I often hear statements like:

    “Will it make us a million?”

    “How do I make practice ‘abc’ turn into profits?”

    “What’s the contribution margin of that?”

    Now, I’m not saying these aren’t legitimate business questions. From an operational perspective and in consideration of financial stakeholders they are very valid. The disconnect I see is that business leaders are not considering the mission and purpose of their business. At some point in the past each company started with an entrepreneur who had a passion to create some product or deliver some service. He or she knew that if they created that product/service and it was valuable to someone then they would buy it and become a customer. The entrepreneur did want and need the profits from their work to make a living. But profits were a by-product of creating a valuable product/service. My point is, a company needs to make money and profits to survive, but profits are not the purpose of the business. They can often lead to short sighted decisions at the expense of their most valuable asset; customers buying their product/service.

    Which gets back to my observation. Why are so many business decisions made now without consideration of the customer, the product/service, the mission?

    Do you agree that true profits come when you fulfill the original purpose of the company? Do companies profit more in the long term (life time value of a customer) by focusing more on the customer, product/service, and retention?

    Outside of business everyone seems to respect the golden rule; treat others as you would like to be treated. Maybe that’s not in business theory or practical business use because it doesn’t optimize profits. But then again, maybe following the golden rule does optimize profits for the long term by retaining customers longer.

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