Dan Barnes explains how Spain’s Grupo Santander was able to confound the nay-sayers and use IT cost savings as a basis for making its purchase of the UK’s Abbey a success.
Driving towards the headquarters of Grupo Santander, just outside of Madrid, the scale and functionality of the place is impressive. The atmosphere is as business-like as would be expected in any commercial centre but the view across the mountains and the 18-hole golf course are more reminiscent of the country clubs enjoyed by the finance professionals of New York, London and Frankfurt than their places of employment.
The situation is analogous to the general Santander demeanour: they make it look easy even when it’s not. In July 2004, when the group announced its £9.5bn purchase of UK mortgage bank Abbey, there was a healthy amount of scepticism about the claims of a potential £350m cost saving from the IT function. Fast-forward to 2006 and the bank is considering further purchases (there has been talk of Alliance & Leicester) and seems to be strengthening Abbey’s financial markets arm to take advantage of its foothold in the UK.
Cost-savings scepticism
Analysts seem to be happy with progress, although their caution about Santander’s belief that money can be saved in IT was understandable. The technology world had tripped over its own shoelaces a few years before and was not yet back on its feet. Faced with board rooms and shareholders alike sucking their fingers, unfulfilled promises from system vendors and a hangover from half-a-decade of excess, IT departments were not seen as reliable functions from which to look for economic returns.
When banks collide – as they are apt to do during M&A activity – casualties, whether job losses, job titles, resignations or executive egos, are commonplace. What often survive, sadly, are myriad systems that have been built up through years of quick-fix patch-ups to keep a line of business afloat. They often require middleware to talk to one another, let alone to those of other banks. The equation of one system plus one system all too often equals three systems with associated costs, time to build and maintenance.
So cost savings in the IT area are not easy to achieve – and the money regularly tends to run the other way. One CIO at a global bank says he was present during a takeover in which neither side could advocate their own systems as likely to improve the business performance of the other. The result was that the merged entity retained both structures.
Acquisition role model
It makes sense for banks that are aiming for acquisition-led growth – and perhaps analysts watching this space – to pay attention. Santander’s rise to ninth largest bank in the world may mean it has just shifted up a gear.
The Abbey purchase was, without doubt, opportunistic. The mortgage bank had reported losses of £686m for 2003 and had taken £786m of exceptional charges, which it attributed to its restructuring and withdrawal from an unsuccessful push into the wholesale banking space. Bids from domestic rivals had been blocked by the UK’s Competition Commission because Abbey’s market share of the mortgage business was significant.
For the Spanish bank, a number of pieces were falling into place.
In 2003, Santander was able to consider itself the best bank in Spain for enterprise, institutional and private banking, according to Enrique García Candelas, head of branch network at Santander. However, like other banks in Spain, Santander had witnessed community and regional savings banks making inroads into the mass market.
“All of our market studies indicated that the savings banks were making advances in this area – they were seen as trusted by the public, partly because they are smaller than a bank like ours and local to a particular region, which strengthened their customer service profile,” he says.
Certainly, research indicated that Santander’s customer satisfaction levels were comparatively low. The merger in January 1999 between Banco Santander and Banco Central Hispano (BCH) had led to office closures (a trend since reversed by Mr García Candelas) and development of a single branch network. As natural disruption to business settled, the time was right, in Mr García Candelas’ words, to “close the circle”, sealing a certain point of weakness.
Commission price war
Mr García Candelas’ response has been to overhaul Santander’s mass market strategy. He revived a business model (ironically entitled Phoenix) from his days as head of the Madrid region to stratify customers according to their wealth, renaming it the ‘Da Vinci’ project.
In January this year, he launched the Queremos ser tu banco (we want to be your bank) programme, eliminating fees on an array of consumer services (a significant issue for customers) and setting off a commissions price war in Spain.
Branches were given new, mass market focused targets, and Mr García Candelas visited every regional office in Spain to drive home the message, addressing more than 12,000 employees. “Without the Da Vinci business model and the Parténon platform, I couldn’t have done this,” Mr García Candelas says of the new strategy.
Parténon, which was already well known at Banesto, was rolled out in the Santander branch network in 2005. Any change in technology is accompanied by some difficulty, and Mr Garcia Candelas acknowledges that he had to accept that his immediate business needs were sometimes put on hold as IT prepared for the strategic roll out.
“The development took three years, with 3000 staff involved and 17,000 staff affected. Of course, there was a little disruption but to the customer this was minimal,” says Mr García Candelas.
At a branch in an affluent sector of Madrid, branch director Helena Marirrodriga Girón is able to identify every task that she and her staff should complete in the following week via automated alerts and input by staff. The performance of her branch and others is visible. Staff performance can be seen and measured. Parténon is a portal for every activity, including a staff chat room.
Ms Marirrodriga Girón and her staff have had few problems adapting. “We’re six months into using the new platform and we have already forgotten the old system. It was called Challenge, and sometimes it was one, especially when we started,” she says.
Portal system flexibility
At a branch of Banesto, the next generation of the Parténon system called Alhambra demonstrates the same flexibility of function as Parténon but is delivered through a portal system that holds applications and data centrally. This is the same application delivery method that Abbey is aiming for with its platform so saving on costs. The portal system was delivered in the UK to its 20,000 users in a project that lasted from last December to this February but it has not yet been populated with applications to bring it fully on-line.
Francisco Gómez Roldán, CEO of Abbey, says there would have been no point in retaining the existing systems for a number of reasons. First, “they were very weak”, but also technology uniformity blended well with the banks’ shared strategic goals. “My goal is for Abbey to have the best customer service in the UK but with lower costs. We have to concentrate on increasing our presence and market share.”
Looking specifically at cross-border plays, he says that the platform is crucial to ensuring the bank’s success. “Customer habits can be very different between countries. Regulation can be very different. This means that products may also be quite different. Having a platform that will support products from one country to the next will be a great advantage,” says Mr Gómez Roldán.
José Maria Fuster, Grupo Santander’s global chief information officer, goes further, stating: “Without the Parténon platform we would not have had the story to buy Abbey.”
Early bird advantage
Santander gained the upper hand by investing early in the platform. Many banks will not take on the challenge of system upgrades outside of the normal IT replacement lifecycle, says Chris Digby, partner at Deloitte.
“There are a number of reasons not to address altering your platform. Take into account risk of system disruption, risk of project failure or delay, cost considerations. If there is not a pressing case for change, there are plenty of pressing reasons not to change.”
Mr Digby relates a case in which an upgrade to a bank’s mortgage application processing system went awry and left the bank unable to process customers’ business for two weeks – business that was permanently lost.
If the issue is not addressed, perhaps due to fear of failure, it may limit the options that banks have for growth. “Due diligence in IT has become an increasing concern over recent years when looking at M&A activity” says Mr Digby. “As there are significant risks and costs attached to IT – a fundamental part of your capability to do business – you don’t want to arrive at your latest acquisition and find the systems are held together with pieces of string and tape. This is one of the reasons that IT should have board level representation.”
Intellectual property
In this case it was not only internal technologies that were under consideration; Abbey had outsourced significant areas of business: mortgage processing to EDS and cards business to MBNA. These arrangements increased the complexity for Mr Fuster, who strongly believes that intellectual property should be held by the bank
“Only 20% of our IT development is done in house, the rest is outsourced but we hold all of the intellectual property. We outsource the process not the software. We fully understand and manage the process using external parties,” he says.
To work around the existing arrangements at Abbey, Mr Fuster negotiated with the partners to restructure the service level agreements. “It was tough. In both cases [EDS and MBNA], we had to give something to arrive at a position with which we were comfortable,” he says.
He believes that there is a certain irony to some arrangements in which the outsourcer is responsible for more and is therefore paid for that responsibility when it does not provide a real benefit to the customer. “From a user point of view, intelligence is value. Why pay someone else to have it?”
Graeme Hardie, executive director of retail banking at Abbey, says he believes that there is unique value for financial institutions in branching out beyond their domestic boundaries. “There aren’t really many downsides. You have a cross-fertilisation of ideas. Abbey, as with many UK banks, has a great deal of expertise in the telephony channel while Santander has incredible retail know-how,” he says.
The preparedness of the bank was striking, he says: following the merger with Central Hispano, both systems and strategy had been simplified and componentised making them transferable and comprehensible.
That did not mean a wholesale export of culture and process from the home market to a foreign market, however. “We are very much a stand-alone bank in the UK from a regulatory point of view,” says Mr Hardie. “Where we can use the power of Santander is in development of resources, in reducing costs. We believe we were already very competitive on price and our new infrastructure will give us significantly more flexibility.
“Abbey has seen significant changes. We are not just polishing the car, we’re fixing what’s under the bonnet.”
Cross-border movement
Mr Digby expects further consolidation across the retail space as foreign banks move into new domestic territories and realise success. “In the UK during 2005, [ING] took more deposits than all of the building societies combined,” he says.
The increase in cross-border activity has already begun. ABN AMRO and Banca Antonveneta, UniCredit and Bank Austria, UniCredit and HVB, BNP and BNL have all followed Santander’s move. The opportunities that are being pursued in each case vary, for example increased exposure to areas of high growth, such as emerging markets. However, the concept of reduced costs through shared resources/removing duplication of systems and processes is almost always a factor.
The winners at achieving this cost reduction will be those that have developed a service-oriented approach, a componentised model. Basing architectural change on the normal replacement cycle is allowing the competition to win on cost.
Santander pinned its colours to the mast with Parténon and won. Most of the hard work is behind it. And there is no reason that it could not replicate its success at Abbey elsewhere.
