The average front office employee is currently costing large investment banks $485.4k. This is not down to performance prowess that generates large bonuses, nor can it be pinned on hiking base salaries. This cost is on technology spend alone.
Front office staff comprise just 10% of total headcount among large U.S. and European banks, but consume 49% of all technology spend, according to exhaustive new research by TABB Group on the total cost of IT in financial services. Of the $112bn spent on technology during the last five years by these large banks, 76% is spent on ‘human capital’, suggests its research.
Investment banks are fast-becoming technology companies, employing armies of technologists, competing with large IT firms for talent and increasingly demanding coding skills from their traders. In fact, suggests Tabb, 50% of headcount within the 10 large capital market firms it analysed work in technology or data analytics. The next biggest proportion is back office staff, but they only make up 19% of the total.
The chart below should make front office employees – particularly those in struggling business areas – acutely aware of just how much their ‘seat’ in the organisation cost compared to other business areas. This figure doesn’t even include compensation – or pension, bonus, healthcare etc – but dwarfs that of other business areas.
Let those figures wash over you for a minute and consider how easy it seems for investment banks to cut costs by paring back expensive bankers in the front office. Let’s not even bring up the report this week from the Bank for International Settlements which suggest retail bankers were better value for money than the masters of the universe in the front office of investment banks.
Fear not, however, as the research suggests that “all benchmark categories” should be targeted for cuts and singling out the expensive front office, which has all the ‘secret sauce’ resource-heavy trading and clearing platforms behind it, is unfair.
Instead, the problem lies with banks’ reluctance to embrace new methods of working or take up the services offered by external vendors and instead rely on too much proprietary development. Add in the fact that most different business areas are operating in silos and suddenly it’s apparent why IT costs so much.
“Inherent challenges embedded in affecting culture shift to a more symbolic enterprise mindset – think, politics and cults of personality getting in the way – is symbolic of a lack of operational 'grease' that prevents rationalisation, and other agile benefits, to accrue more quickly,” says the report. “Job preservation by hands-on IT decision makers is often at the centre of this inertia.”
TABB is opening up the buy-versus-build debate in capital markets technology, but suggests that despite the huge tech budgets within these firms their working methods certainly don’t scream innovation, but instead hark back to an era when cost wasn’t an issue.
“The luxury of widespread and unfettered proprietary development maintenance of information technology solution is no longer supported by current market conditions,” it concludes. “Business models (and the cultures that promote them) need to change towards much more efficiency.”
In other words, it’s the front office that’s costing so much, but banks could do with shrinking their tech teams and buying off the shelf solutions.