Parveen Bansal talks with Mark Greene, general manager of IBM’s global banking unit, to learn more about the on-demand business vision that offers hope to the industry.While the rest of San Francisco lay basking in the sunshine, bankers attending IBM’s Global Financial Services Forum at the Ritz Carlton were being warmed up with a lesson about the ‘on-demand financial institution’, a key strategy for value creation in achieving competitive advantage – the theme of the forum.
Unsustainable cost/income ratios brought on by a decade full of mergers and acquisitions that left banks with organisational, process and systems complexity; increased regulatory legislation such as Basel II and the international accounting standards (IAS); and lack of differentiation between banks are all cited by Mr Greene as drivers for the imminent change of the historical business structures of banks. “Change in the financial services industry will need to focus on three main areas: driving operational efficiency, resilience and differentiation,” he says.
However, he notes that the challenge for banks is how to achieve a step-change in their cost base, while at the same time dealing with the regulatory requirements and achieving differentiation. “Few banks are poised to integrate credit, market and operational risk in one function according to the Basel II regulations, or offer new levels of transparency as required by the new IAS. The two mandates together require even greater investment than Y2K projects as they are more than just a technology change exercise,” says Mr Greene.
Differentiation required
He emphasises the need for differentiation. “Banking today is much more commoditised, there is not enough distinction between the products from various banks,” he comments matter-of-factly. “So the question is: how can your bank stand out?”
Improved customer service? “Yes, but improved customer service has implications on the physical infrastructure of the bank, as well as the level of customer insight,” says Mr Greene. “Differentiation is a bit of a luxury if efficiency is not there to support it.”
On the physical level, Mr Greene is talking about the need for branch transformation – repositioning branches from a transactional channel to more of a retail environment. He notes that European banks are thinking more forcefully than the US banks about the role of the bank branch.
Customer awareness
On a business level, Mr Greene talks of the need for greater customer insight: to be aware of the different needs of customers. “The level of customer insight is important to be able to target customers with more suitable and timely products.” He notes that first generation customer relationship management (CRM) systems were unsuccessfully deployed as there were two important oversights: banks did not develop any analyses around the customer data that was collected and thus were not able to deliver any customer insight across the enterprise; and there was insufficient training to support the technical implementations. “A whole service culture needs to be evolved across the bank,” he says.
Still, he is upbeat about the future. “We are beginning to see signs of recovery and growth in the financial services industry,” he says, and suggests that the industry is now at an inflection point, driven by the various economic and regulatory factors. “And we are seeing new business models that exploit technology, to support and enable new ways of growing the enterprise.” IBM’s on-demand business model is one way of addressing the above challenges – it suggests a componentised view of the core competencies within a bank.
An on-demand business is defined as an enterprise whose business processes – integrated end-to-end across the company and with key partners, suppliers and customers – can respond with speed to any customer demand, market opportunity or external threat. Mr Greene emphasises that on-demand is “a business strategy not a technology strategy”.
Mr Greene explains that there are four elements that are essential to the on-demand strategy. The first is focus on core competencies – differentiating tasks and assets, using tightly integrated strategic partners to manage non-core business activities. Second is heightened responsiveness to ongoing changes in the marketplace – being able to sense and respond to unpredictable changes in the market environment, being responsive to more empowered customers and increasingly complex demands from regulators and stakeholders.
The third attribute required is variable cost structures that allow banks to accommodate fluctuations in market demand and product preferences. Being able to adapt cost structures and business processes flexibly, to reduce risk and improve productivity, cost control, capital efficiency and financial predictability. “This is often called the utility model,” says Mr Greene.
Finally, improved resilience is essential to counteract increased internal and external uncertainty (technological, economic or political) and marketplace volatility – enabling continuous operation with consistent availability, security and privacy. “This is not just about having a defensive technical strategy, but is a wider people and process issue,” he says.
Strategic technology
According to Mr Greene, the on-demand business is all about how to use technology in a strategic way that enables wider change within the organisation. “This is different to the way that technology was used in the past decade. Technology used to be an adjunct to the business, it was used as a tool. Technology in the on-demand business has a more intrinsic part in the overall strategy.”
To support and enable the on-demand business model, it is necessary for the technologies used to have certain attributes. Open standards technology is essential, as this offers the ability to integrate with legacy systems, adapt to technology changes and modularise to leverage a range of offerings. “Open standards offers the opportunity to relatively easily connect and communicate with internal and partner systems.”
The use of such technologies as Linux as the key operating environment to enable flexibility and choice; web-services (and the use of XML standards) to enable business-to-business or application-to-application communication and collaboration; and, Java as the programming model of choice enabling code reusability and making use of the abundant skills resource and its support from many application vendors, are examples of why open standards-based technology is a key part of the on-demand business model.
Enterprise integration
Integration of enterprise systems is essential to solve the problem of the lack of single view of the customer. Integration of the transaction and processes across the bank, connectivity to partners, suppliers and customers, together with active data mining and decision support systems is key. Mr Greene notes however: “It is not plausible to rebuild a single platform across the whole enterprise – there is neither the money, nor the time.” Instead, he promotes the use of a single broad-based middleware integration platform to connect the different systems across the bank: “Integration middleware is a key success factor.”
Virtualisation technology is another crucial aspect of the on-demand business. Using standardised technology and virtualised systems across a global enterprise can lower the total cost of ownership, while at the same time leveraging existing technology investments. As such, virtualisation offers a shift to usage-based availability and costing. Mr Greene cites grid computing as one example of a virtualised system.
Supporting systems
Technologies enabling autonomic computing play an important part in the on-demand business. Comparing it to the autonomic system of the human body that is responsible for the ‘fight or flight’ reflex, Mr Greene suggests that for enterprises to be effectively resilient, the supporting systems need to be capable of self-diagnosis and self-healing. He highlights the increasing use of remote monitoring and management systems, and the need for embedded security and privacy capabilities, to protect the enterprise.
The good news, says Mr Greene, is that becoming an on-demand business does not require a big bang approach or investment but is a gradual evolution, with transformation implemented in manageable chunks with clear short-term return on investment. Moreover, he says: “The transformation required to become an on-demand business is already visible in the industry at both the industry and organisational level. The banking industry is moving away from a set of independent, vertically integrated institutions towards a network of affiliated financial institutions.”
Simultaneous changes
At the same time, individual enterprises can be seen to be reconstructing themselves, breaking out of their product silos into small, encapsulated business components that can be shared across the enterprise. Mr Greene suggests that the simultaneous change at industry and enterprise level is automatically propelling banks to an on-demand operating environment. For example, the growing popularity of outsourcing of non-core business components, such as IT support and cheque handling, demonstrates the move to variable cost structures and a focus on core competencies.
The on-demand business model is about focusing on core competencies while establishing networks of partners or suppliers to provide components at which they excel and therefore offer the best in class. Mr Greene says if a bank is clearly focused on its core competencies, and is supporting these in the most cost-efficient manner that is flexible to change, then the bank should be able to offer the process to third parties who may benefit from this. Likewise, the bank that has distinguished various core and non-core business components (that is, componentised its business processes and systems) will be able to outsource and collaborate with other third parties on the non-core components. Thus it is able to move from high-fixed costs and rigidity to variable cost structures and improved flexibility and resilience.
Mr Greene concludes: “IBM’s on-demand strategy should be seen as the synchronised execution of business and IT to create sustainable value.”
