What Differentiates FSI CIOs Who Successfully Drive Digital Transformation

North Stars of Digital Transformation for FSIs

What Differentiates FSI CIOs Who Successfully Drive Digital Transformation

In working for and advising to 100+ FSIs over the years, it’s often the same story: CIOs complain about business executives who don’t trust them while business executives complain about CIOs not having the desire to learn about business. This disconnect was more of a nuisance during the “waterfall” era, but it carries a heavy price tag with the advent of digital transformation. Last week’s newsletter discussed a temporary role of a digital transformation head. CIO’s role is permanent and, thus, much more important for FSIs to get right.

In the context of digital transformation, there are three types of CIOs:

• techy-process defender: “IT works great, my team could run circles around business counterparts, we regularly launch new tech, and Business should trust our suggestions and just provide more specific requirements”

• end-to-end owner: “There are huge money-making opportunities from leveraging technology, and if the business is not stepping up, I will show them how it’s done”

• business enabler: “I first need to optimize IT, so it reactively meets business needs, and then selectively lean in to jointly develop new operating muscles”

A majority of CIOs fall into the first category. CIOs in the second category usually get fired after 3-5 years once business executives discover how much money was wasted on their behalf. The last group is where CIOs are the most effective. There are even examples of such IT executives being promoted into the business leadership role:

Such CIOs mastered three unique operating muscles related to a nuanced engagement as opposed to a common reductive approach. First, they are capable of communicating in business, impact-driven terms when engaging with colleagues. They don’t talk about the top-down benefits of the Cloud, AI, or some other cool technology. Instead, they focus on understanding the needs of end users and on clarifying business trade-offs. These CIOs also embrace a wide spectrum of technology needs across business counterparts and range the intensity of their engagement with each business head accordingly. Finally, instead of evangelizing, these CIOs nudge business counterparts to take small steps in jointly developing more advanced operating muscles. They show up with proven examples of more impactful use of technology by key competitors, and these CIOs offer their personal time to business counterparts in order to learn and practice new muscles together.

A recent Harvard Business Review publication provided examples of such IT executives: Monica Caldas, CIO of Liberty Mutual, and Jikin Shah, head of global RBC tech infrastructure and of City National technology. Notice Monica and Jikin’s respective focus:

“You have to be a strategic adviser with a deep understanding of each part of the business. It’s not just about solving the problem and saying, ‘Here are the tools and processes we need to enable change and transform.’ If you are willing and comfortable to wear many hats and do a lot of context switching, you can play a really important role.”

“It’s going to be more about coming back to [the] basics of business. Digital capabilities and talent are now table stakes. It’s having a sound business strategy and a business model in which you’re leveraging technology and innovation capability to provide exponential value to customers so that in return you can expect a better value proposition for yourself.”

This type of CIO will eventually be dominant across FSIs. The traditional CIOs would have to overcome their egos and acknowledge their lack of sufficient business knowledge and of consultative orientation. This operating model is more complex and stressful, but it also creates more impact and drives similar self-selection among CIO reports. In the end, solving for unique business needs is the job of everyone in IT.

North Stars of Digital Transformation for FSIs

As we discussed a couple of weeks ago, digital transformation in FSIs is often measured by using vanity metrics or, at best, by hard savings. A performative Agile mindset offered FSI executives a convenient excuse from painful deliberation and accountability for the P&L impact of new digital initiatives. It might seem counterintuitive to someone outside of the industry, but you would be hard-pressed to find a financial service or an insurance company where digital transformation impact is measured based on the change to P&L and ROI:

Avoiding these two North Star metrics results in egregious overspending on digital initiatives that either leak value or add an immaterial impact. There are three reasons why FSI executives avoid these metrics:

• lack of business & IT collaboration: colleagues from different siloes are not skilled at helping with and challenging each other assumptions

• fear of accountability: most of the FSIs allocate superficial top-down targets, discouraging a nuanced approach by more advanced organizational units

• smaller kingdom: FSI executives prefer overspending company money rather than receiving a smaller spending budget even if it produces the same impact

In short, many FSI executives prefer incomplete metrics because those are easier to estimate while minimizing personal risk and avoiding conflicts with colleagues. Such natural human behavior also creates a unique competitive opportunity for more driven FSIs. Only a few FSIs could launch as many digital initiatives as JPMorgan, Fidelity, or State Farm; but prioritizing higher ROI initiatives would result in a comparable impact even with a much smaller budget. Conversely, we discussed in the past that even the best fintechs and insurtechs struggled to gain market share when they launch too many concurrent initiatives.

When done routinely, the initial estimate of the North Star metrics takes about an hour and requires 3-5 stakeholders across business and technology, led by a product analyst. A simple rule of thumb is to prioritize initiatives that, at scale, would create a 1+% of P&L improvement in LOB, with 20+% ROI. Each use case within digital transformation has its own methodology nuance, but there are some common elements:

About half of these initial estimates would be significantly refined as a prioritized initiative moves through the pilot and scaling phases, hence, there is no need to get it perfect upfront. By the way, this methodology is directly connected to the concept of “KPI trees” from the most advanced level of the operating model, KPIs-driven. It might be overwhelming to read now, but Wise (formerly, Transferwise), one of the most effective fintechs worldwide, provides transparency about their evolution in scaling KPIs-based management. Feel free to compare Wise’s 2018 vs. 2022 levels.

The sooner your FSI starts the farther ahead of the competitors you would get.