This has started to change some of the dynamics of the sector, arguably playing into the hands of larger suppliers.
The theory is this. On the operational side, banks have honed their silos to such an extent that further improvements are difficult. “Like squeezing a dry dishcloth,” said one industry watcher recently. Business process outsourcing (BPO) can be viewed as one more step in this honing process, albeit with mixed results.
On the business side, the processes are essentially little changed from 20 years ago. Manual processes were automated at the outset; subsequent system replacements have done little more than replicate the first systems. What has changed is the level of complexity. Jens Hanker, partner at Accenture, gives the example of a Top 100 bank which today has more than 350 products, compared with fewer than 100 in 1985. That bank has 43 different transaction accounts and more than 40 processing centres. No wonder dealing with banks is complicated, which is why customers seldom receive good service or swift answers to their queries. Systems do not talk, there is a lot of rekeying, and – for all the investment in CRM and data warehouses – most institutions still fail to come up with a single view of the customer.
False sense of security?
At the same time, the banking sector is pretty healthy, as reflected in the most recent results. So are continued inefficiencies really a problem? Well, it is arguable that much of the industry has been lulled into a false sense of security. Some of the foundations are shifting, such as those that underpin many banks’ payments activities, with the painful arrival of the Single Euro Payments Area (SEPA). Moreover, a number of new competitors are taking significant market share. One example is ING Direct, which offers a simple product that constitutes a clearly better proposition than most. Hugh Croxford, co-author of a recent study, The Art of Better Retail Banking, argues that the complacency stems in part from comfortable comparisons. ‘It is reminiscent of when BA was comparing itself with KLM, Lufthansa and Air France, rather than with Ryanair and easyJet.’ Perhaps banks should be worried about supermarkets and mobile phone companies, not each other.
It is also worth looking at other sectors for lessons about production. Banks still retain 80% of their activities in-house and try to do most things themselves. Comparable figures for the electronics and automotive sectors come in at 20% and 25% respectively. However, activities cannot be detached and sourced from elsewhere unless there are clear breaks in the process flows. Hard-wire value chains are a major obstacle.
The enterprise-wide transformation projects that have started to appear have a few common attributes. There is a move to break down the silos and shift generic activities into central units, which can then become the focus for investment and constitute centres of excellence. This task is tending to start at the data and process-model level, with banks seeking to define their businesses, perhaps using the likes of IBM’s IFW as a starting point. Having mapped out the existing structure, the aim is then to define the optimal structure. The breaking down of business structures and silos will be a key facilitator for moving from the present to the future. The way ahead will encompass much more streamlined operating units, centred on best practice. There will be a decoupling of activities, such as reconciliations, exceptions management and account opening. From the resultant centralised units, such activities will be provided to the rest of the organisation (and potentially beyond) on a services basis. Anticipated time frames for enterprise-wide transformation are typically working out at five to 10 years, albeit with a common theme being the need for short-term wins as well.
The project which kicked off earlier this year at Standard Bank falls into this category. Focused on its domestic retail business, the bank is seeking to implement an Enterprise Architecture Framework, starting with the Customer Master File and ultimately taking in the underlying transaction systems. It is expected that there will be a major process change aspect to the project and retraining of staff; a true customer-centric model is a major goal. The bank’s strategic programme manager, Jörg Fischer, believes it is essential to take such a top-down approach. If you start at the product systems, he says, you end up with the same model as before.
Cross-silo initiatives
Even if the transformation efforts are not on an enterprise-wide basis, there are increasing numbers of cross-silo-based initiatives. In investment banking, systems have proliferated as businesses have become more complex. Tasks such as reconciliations and exceptions management are carried out in each silo, so that software and effort are duplicated. The challenge is to extract the generic back-office tasks from each unit and re-engineer them within a central facility, with this underpinned by strong workflow and likely to involve a move to real-time exceptions management with a single ‘dashboard’ showing the status of the exceptions.
So where does SOA fit in with this vision? The concept mirrors the idea of detaching processes from products. It envisages web-enabled services, centred on component-based models, which can be accessed as required. Discrete services for pricing, fees, credit management and other generic functions will slot into the architecture, with the aim of finally removing the huge burden of maintaining legacy systems, allowing much greater flexibility and time-to-market for products, and freeing up IT to work on more business-focused initiatives.
There will be many wrong turns along the way: some transformation projects will succeed, some will partially succeed, some will fail. Five-to-10-year projects will shatter into piecemeal efforts which will lose sight of the bigger picture. And people issues will be as hard to overcome as technology issues. Nevertheless, those institutions that manage the transformation will gain a tangible advantage over their counterparts and will be in a much better position to face new competitors.
Martin Whybrow is founder and principal of back office specialist, IBS Publishing, and its consultancy and research arm, IBS Intelligence. (www.ibspublishing.com, www.ibsintelligence.com)
BACK-OFFICE SYSTEMS ROUND-UP
There are still a reasonable number of banks – particularly mid to lower tier – that at some point in time will replace one or multiple core back-office systems with another. IBS’s annual sales league table, which measures new-name back-office wins in the sector in the calendar year, suggests that the market has been fairly static since the pre-Y2K slump. More deals end up in the hands of fewer suppliers each year. I-flex Solutions and Temenos are not complaining, but there is a lack of choice.
Having said that, other suppliers are breaking into the stronghold. Reuters has been an interesting addition, initially buying a French company, Diagram, and its emerging back-office system, with this now dubbed KTP, and pushed with notable success into the Kondor+ user base. Reuters now has a parallel strategy to add back-office capabilities directly to Kondor+ itself. SAP’s top-end retail banking system, now dubbed AM, has been under development for several years, mainly working with Deutsche Postbank, alongside a major payments-related development at this bank. Accenture has become an important partner for AM, following the strategic agreement forged with SAP in mid-2003.
Infosys can also be categorised as up-and-coming, even though its retail system, Finacle, has been around for a few years. The difference now is that it has broken out of India and Africa with this system, through multi-site implementations at ABN AMRO and in the overseas branches of State Bank of India. In universal banking, System Access’ Symbols seems to have undergone something of a revival; for derivatives and treasury, the Calypso system is one of the newer offerings. Fidelity cannot be ignored, having bought up Alltel’s Information Services business and having subsequently added other businesses, including Sanchez with its Profile retail back-office system.
In addition, one or two of the established suppliers are revamping their products. The most obvious example is Misys, with the evolution of its long-standing Midas into a solution that can support multi-entity, centralised back-office processing, combined with a move from RPG to Java. In its MidasPlus form, it has been gaining significant business, largely from banks with multiple Midas sites. Fortis and RZB are recent recruits. Misys is seeking to do something similar with its retail-oriented Equation. In the private banking space, ERI – another supplier with a long-standing IBM mid-range-based system – has recently come up with a product road map, with its Olympic being moved towards Java and XML.
However, it is arguable that the traditional application software houses need to evolve if they are to keep up with the new world. Decision-making has moved irreversibly to the centre, so that head office now lays down the IT strategy. Those banks that embark on sweeping transformations of the whole or major parts of their business will be looking for partners that provide a new set of skills and a mix of solutions, which span their own offerings as well as those of third parties, not merely one part of the jigsaw.
Martin Whybrow: supermarkets and mobile phone companies might be the real competitors
