ICT Technology for "Little Giants
Nowhere is the consolidation of the banking industry more evident than in the cash management sector – more corporates are operating globally so they need global cash management solutions – in terms of the global market, there are four dominant players (JP Morgan, HSBC, Citigroup, and Deutsche Bank). There are also a number of mainly European and US players that still harbour the ambitions of joining this "VIP magic circle" (Abn Amro, Bank of America, and BNP Paribas) – the banks that lie outside of the magic VIP circle:
- Some banks will maintain global ambitions
- The other banks, the Little Giants, will just concentrate on having a regional/niche focus. The sub-contracting play is an increasingly prevalent one that benefits the small regional players that no longer have the shoulder the expense of either creating or maintaining the technology to keep up with demand and regulatory compliance. They will also no longer have to battle against these behemoths when competing for business in their local market. These global banks are quite "superficial" thet think in term of "products", in many countries the regional banks think in term of "relationship with the Territory" and to become Little Giants they will probably have to learn to work with the big banks on a distributor basis.
Technology’s little giants
If economies of scale were always available, then IBM would have dominated over Microsoft. However, Bill Gates recognised that integrated circuits had, at any given technology level, some very real diseconomies of scale. Technologies have optimal operating ranges. Up to certain limits they work extremely well and cost effectively. Beyond those limits, it takes ever-increasing amounts of energy and cost to achieve a further unit of output. The success of the minicomputer and desktop PCs followed from this fact.
In reality we have many different technologies and when we combine them we have many different optimal operating ranges where we can achieve effective competitive advantage.
Smaller banks can compete effectively with giants by recognising that their problems being smaller can often be solved more cost effectively using smart technology. The Skipton Building Society moved its banking systems to Microsoft Wintel platforms and achieved technology unit costs much lower than its larger rivals still using IBM mainframes. Similarly some banks are moving onto Unix and Linux and achieving real advantages over traditional technologies. There are limits for effective Unix and Linux deployment. These limits are rising and may soon be able to address even the largest scale problems, but in recent years, smaller banks have been able to do some things at lower price points than their larger competitors because the large dwarves had a large scale, complex problem and extremely narrow margins, while the small giants had problems that were well within the optimal operating ranges of current technology. I believe that the Banca Popolare di Milano is a good example of this, which has innovated with Linux more rapidly than other larger banks, just as the Banca Populare di Bergamo (now part of BPU) did 10 years earlier with Unix and Oracle. It is a pity Rondelli did not mention them.
While I agree that technology will continue to drive economies of scale and outsourcing in general, smart sourcing with smart technology is the way forward: some in house, some outsourcing with different players, and always with the optimal technologies to achieve the best price performance.
Virtual Value Chains
Another important dynamic is the virtualization of the value chain. We are moving here way beyond the simple division of the world into suppliers and distributors into the multi-dimensional world of cyberspace, where commerce travels on the information highway. We can find opportunities for aggregation along the entire value chain. Technology means we can link up these suppliers into a distributed value chain of networked, white label suppliers and still give a coherent, unified brand image at the end of it. Like the Microsoft Windows interface, it is quite easy to understand and use, but quite complex to construct behind the scenes.
Portfolio management, custody, securitization and stock lending can all be split off from asset management and provided by separate entities. Trade routing and order management can be separated from brokerage, as can research and market data. Risk management, collections and even product processing itself can be split off from a mortgage business or credit cards. This has created enormous opportunities for local giants to gain niche market advantage in particular value chain steps.
Moreover the virtual value chain extends to the virtual customer. Instead of selling to private individuals, banks need to think about selling to friends and family or to role categories and affinity groups, with customer incentives to promote cross selling. Banks need to personalize products for children, single parents, pensioners/ grandparents, twinkies (two incomes, no kids), yuppies (young, upwardly mobile professionals), farmers, lawyers, doctors, even peripatetic politicians, etc. In the corporate world, the virtual customer is the whole supply chain or the vertical market sector, and both should be targeted, especially in the SME world.
By reconfiguring the value chain, aggregating key steps, exploiting smart technology sourcing, targeting virtual customer communities and leveraging their community assets, while exploiting their own market knowledge to the full, small, agile players can gain real competitive advantage in the new economy.
Economics of Knowledge
In a world of rapid change, the real challenge is not technology but how to manage knowledge and digital assets, including intellectual property. Building on market insight into old risks and new opportunities, promoting rapid technology transfer and time to market, patenting and exploiting intellectual property, leveraging the knowledge of aggregation and customer access, these are all examples of knowledge management. While technology is often described as the driver, the underlying economics are often really driven by the cost of mobilizing and delivering knowledge. Since knowledge is usually represented as information, technology is the infrastructure for the associated processing and delivery. However, if we focus too much on technology and not enough on knowledge then we will miss a fascinating piece of the action. Building new value chains is really about knowledge engineering.
We can say that information is data structured to answer a question and that knowledge is information being applied to solve a human problem. Usually that knowledge is in people’s heads when they take decisions. However, it can also be seen to be present in computer systems. The systems know where to go and what to do next. Unfortunately, in the past most of this knowledge was “embedded in the code” and quite fixed. It was implicit in the software programs and not held as data, which is more accessible, and thus can be shared and processed. Now, modern business process management systems are starting to embody all of the process rules in data tables, where they can be used both to drive the software and to help solve other problems, including error diagnosis and recovery, operational risk management, optimal costing, best execution decisions, etc.
When Rondelli talks about the cultural revolution of the Hausbank, he is tackling one set of knowledge management problems. When some banks chose Microsoft for their core-banking platform, they did so because they realised that ease of programming and the wealth of low cost skills, read “knowledge”, in the market place would all impact on time to market, which had real value. When the EU issues directives like Basel II and MiFID, which require banks to know their customers and build risk or best execution models with market data to justify their actions, they are forcing banks to publish and record their corporate knowledge. These are all prime knowledge management issues.
Globalization and Multi-channel Mobility
Finally, while Rondelli mentions globalization in the context of bank consolidation, outsourcing and SME competition, he does not highlight one immediate and significant impact, the need for multi-channel mobility for companies and private clients. Multinational corporations have long had to deal with this, but relied often on fixed line telecommunications to established offices. For SMEs mobility is also becoming important, but the infrastructure is just not there. Portable mobility solutions are now becoming increasingly important in this sector as well.
The Italian SME market place used to depend on local knowledge for their supply chains and regional or global knowledge via marketing intermediaries for their distribution. Physical presence and personal contacts were critical. Now, small companies need a much broader range of knowledge in order to survive: technology knowledge, product knowledge, financial knowledge, supply-chain knowledge, distribution chain knowledge, risk management etc. Moreover, the SME entrepreneurs are having personally to travel more, doing deals and adapting to more complex virtual supply chains.
Banks can intermediate in these value chains in many new ways: electronic billing, micro payments, output factoring, treasury and payment management, financial value chain support etc. They can design once-off derivative or structured finance products to meet the specific risk hedging needs of particular projects. They can even manage the accounting and payments between clusters of SMEs working together in these value chains, reducing SME costs, speeding up the velocity of money and providing intermediation to the rich world of global finance.
However, most importantly banks need to provide their own sales staff and their SME clients with mobility solutions that allow them to build up e-trust and manage their affairs on the hoof. SMEs have limited connectivity to the outside world because of their size. Nevertheless, they still need to be able to manage the business while travelling and optimize the use of every trip. They also need to leverage their distributed supply chains for the knowledge and global contacts they represent.
Therefore, multi-channel access to their banks and mobility support will be key success factors for the new Hausbanken. While the biggest players will probably want to build their own multi-channel solutions, smaller players with fewer challenges of scale, should be able to maintain cost performance parity through smart sourcing.
Extending the Rondelli Argument
In summary, we can extend the Rondelli thesis for smaller banks as follows:
| Small Bank Strategic Focus | Key Driver | Key Differentiator |
| Production | Industrialization & Virtual Value Chains: greater emphasis on third party products and outsourcing | Smart Sourcing & Technology |
| Distribution | Supermarket- One stop shop and Virtual Customers | Knowledge Management and Multi-channel Mobility |
| Value Proposition | Customer Intimacy and SME Hausbank Relationships with mainly a Retail Focus | Market insight and agility |
For larger banks the thesis becomes:
| Large Bank Strategic Focus | Key Driver | Key Differentiator |
| Production | Industrialization & Virtual Value Chains: greater emphasis on insourcing | Smart Sourcing & Technology, Knowledge Management |
| Distribution | Supermarket- One stop shop, Third party partnerships and Virtual Customers | Knowledge Management and Multi-channel Mobility |
| Value Proposition | Operational efficiency, Product Leadership/ Innovation with a mixed Retail/ Corporate/ Institutional focus | Market insight with global reach |
This gives a much broader view of both the challenges and opportunities facing the various contenders. Naturally there are many more issues than these, but I think it gives a good framework for strategy development.
Conclusion
Rondelli addressed many interesting issues in his talk. However, he also raised a number of questions. Adaptation to one’s environment is key. Enormous change is taking place. Banks will need to have a rich and deep understanding of their place in the world in order to compete successfully. In this paper I have tried to illustrate a few more factors that they should take into account, in order to build a strategic framework that can meet the rapidly changing needs of banks large and small in the 21st century.
if outsorcing will be key for smaller local banks, they need to rethink their approach anyway. Both small and large banks come from a "product" driven culture, hence the need for small "local" players to create strong intimacy and branding with their customers.
Leaving aside the technology this seems to me quite a challenge anyway.
Posted by: chris | September 01, 2006 at 11:12 AM
Excellent analysis. Key for survival will be a clear strategic focus on the question which business will I (= the bank) do with which customer by using which technological means?Looking at the German experience there is profitable room for everybody as long as a clear strategy is followed through and "the me too" factor is reduced. To achieve this outsourcing of parts of the "production" will be a success factor to reduce costs by achieving a pay per use mode.
Posted by: Dr. Berthold Kaib | September 03, 2006 at 06:24 PM
“We can say that information is data structured to answer a question and that knowledge is information being applied to solve a human problem. Usually that knowledge is in people’s heads when they take decisions.” : fully agree, managers are the key point and the good managers with the right method in their mind, are the real asset of companies, banks included.
Posted by: pb | September 10, 2006 at 04:52 PM