Monday, June 25, 2007

Banking Business goes back to the Branch Offices

Reading an interesting interview to the Barclays Bank's CEO - John Varley - about "Banking Business goes back to the Branch Offices" I would like to draw some considerations.

Mr John Varley was saying:

Clients want services from the Branches AND the Internet AND the Telephone, non services from the Branches OR the Internet OR the Telephone. Clients should be free to choose to do banking operations at 2:00am in his home from his PC or at 10:00am in the Branch. It is not possible to think only to “cost cutting”, we have to go towards the Clients’ needs.

Therefore if the New Banking Business Model is “Client-centric”, as Mr John Varley was suggesting, with the main target to increase “market” penetration getting new Clients, there is the need for “a more effective retail model & transformation of branches” and the Banking Information Systems have to be re-designed.

In fact existing Banking Information Systems were “technology driven” and designed to support the Old Banking Business Model that was “Product-centric”, focused to “cost cutting”, non taking risks, and increasing revenue, via cross selling, on the existing Clients.

The new Banking Information Systems will be designed placing the Client’s needs at the centre instead of putting at the centre the Clients’ operations needs (technical forms).

Many information about the Client in the Old Banking Information System were hidden in the procedures and not in a unique Customer File.

So the in the New Banking Information System the Customer Information File will contain whatever it is conceivable about the Client:

  • Client’s risk profile,
  • Problems the Client had working with the Bank, and how and when the Bank has solved those issues
  • Client’s claims
  • Client’s profitability (gross and net)

Basel 2 it is not only a matter of reporting to ECB information about the Bank’s capital allocation, but a guide for the Bank to re-orient its activities toward a less risky category of Clientele.

Based on the New Banking Business Model, aimed at creating a competitive edge for a Retail Bank, the values disciplines are:

  • Product leadership: offering superior innovation, image, and performance in their market
  • Customer intimacy: offering expert advice and customization along with products and services to ensure the customer’s success
  • Operational excellence: offering the best combination of low price, reliability, and ease of purchase in their markets.


And the New Banking Information Systems areas:

  • Multi-channel: where “n” information could be delivered to Clients in “n” ways
  • Business Intelligence: Intelligence of all information about:
    • Client both internal and external
    • a periodic Customers Survey
    • a periodic Employees Survey
  • Risk Model: create information to manage the risks (market, credit, and operational) to all levels from when the Client opens his account, and through all his transactional life in the Bank

Hoping that these considerations are of any interest I am waiting to share ideas about the New way of doing Retail Banking facilitated by the new technologies and by the emerging solutions.

Lucio Vollaro

Large European Retail Banks are concentrating their TLC infrastructure

During the month of May I've visited many European Large Retail Banks and I've gathered that there is a common strategy of centralizing TLC shared services.

I've noticed that successful European Large Retail Banks are investing in:

  1. Product leadership: creating many standard, high quality, global products, with a very short time-to-market to surprise and win competitors
  2. Customer intimacy: customer insight, product knowledge, sales focus, facilities
  3. Operational excellence: offering the best combination of low price, reliability, and ease of purchase in their market

Therefore the objectives of Shared Services centralizations are:

  1. TLC cost reduction: global contract with a supplier to reduce costs
  2. Productivity increase: build TLC infrastructures that allow Large Banks to operate better and cheaper
  3. Business development: to create innovative products utilizing the new TLC technologies

Moreover the "sourcing" strategy becomes a "core competency" for the European Large Banks, in fact:

  1. Sourcing is not just a function through moving from category purchases to managed services
  2. Focused Supplier Model approach - work with world class providers of scale managed services
  3. Significant investment in supplier relationship management as majority of spend and key services are in long term relationships

Partnerships with TLC suppliers is based on Governing shared services for Value that is:

  1. Focus the Retail Bank's Business Units on: Customers and External Markets and Profit
  2. Focus the Shared Services on: Optimizing supply to meet demand and "best in class" sourcing strategy

In summary my findings are:

  1. CIOs are not a key factor for development anymore, Banking Business Leader are!
  2. TLC should be run as a business
  3. "Cross-pollination is the "key"- get Business people into Technology AND Technology people into the Business

Measurement for a successful Shared Services Organization is to be recognised as a "value added" partner - to the Business"

Any idea and comment is welcomed.

Lucio Vollaro

Making VoIP/Broad Band Matter:

Defining & Delivering Business Value

Last week I’ve met a Large Italian Banking Group’s CIO and discussed about TLC’s Operations’ (Automation and Management) implications since the Bank fully migrated into VoIP and Broad Band.

This discussion was about key issues for the Bank, and – between the lines-the evolving role of its TLC department in the future.

The theme of the discussion was TLC infrastructure redesign, in fact:

* Production centres’ (data centres, server farms) operations, infrastructure duplication logic have to be re-architected

* Communication logic between Production Centres have to be re-thought

* Way of Integration re-defined

TLC are becoming more and a more a neuralgic element for the Bank’s information system: the problematic that before were distributed in the periphery of the Bank (branch offices), now are centralized.

Therefore there is a need to create a robust TLC architecture.

TLC are becoming dominant and they need a platform to control and manage the services delivered to the Bank.

But in the discussion came out clear that the Bank needs a TLC Business Partner for the big task of redesigning its TLC architecture, and help the Banks’ TLC Operations in the automation and management of its activities.

The key value for Bank is to be able to de-couple its TLC infrastructure from its TLC services delivered to the Bank.

Two nagging questions kept repeating in this discussion:

1. What is the “Governance” role for the Bank’s TLC department

2. What is the “House keeping” role for the Bank’s TLC Business Partner?

Let’s probe both these questions

The “Governance” role of the Bank’s TLC department

So how important, really, is to keep a strong TLC “governance” in the Bank?

In a word: Very.

Here there are two evidences from the IDC world.

First, from IDC Europe’s 2005 ICT Forum in Paris where Frank Gens, IDC Senior VP Research, in his speech was saying that “success of a Leading Bank’s Business Strategy fully relies in its automation & execution” capability. See IDC eXchange blog.

A second indicator is the Governance definition given at the IDC Italy’s Innovation Forum.

Governance is the Bank’s TLC organization capability to execute the Bank’s strategy communicating to the Bank’s TLC Business Partner: provisioning needs and verifying relevant SLAs.

The Bank’s TLC department should then link TLC value to “metrics” that “matter” to the Bank Business Leaders like:

* Human Capital: employee churn rate; time-to-productivity

* Customer Care: customer retention, after-sale revenue

* Performance Management: customer satisfaction, employees satisfaction, productivity, growth & innovation, financial results

* Branch Operations: Sales/m2

* Sales&Marketing: Sales productivity, channel profitability, promotion effectiveness

* Innovation: product “hit” rate, development cycle

* Production: product quality, product variability

* Supply Chain: perfect order rate, inventory level

* Financial Management: cash-to-cash cycle, working capital

* Risk Management: operation risks, market risks, credit risks

* Compliance: Sarbanes-Oxley, IT control efficacy

So that they can talk to the Bank’s Business Leaders and CEOs in term of TLC services that “matter” to them.

The “House keeping” role of the Bank’s TLC Business Partner

From what said earlier, we can also affirm that the success of a Leading Bank’s TLC Operations fully relies on its “automation & management” capability.

The Bank cannot do and manage this change alone, it needs a solid TLC Business Partner able to accompany the Bank into this process of de-coupling TLC infrastructure from the services so that the management of the TLC environment could become more feasible.

Therefore the Bank’s TLC Business Partner should be capable to:

* Evolve its Role: from supplier (of hw/sw, maintenance & installation services) to TLC Business Partner. The TLC Business Partner should develop better Account Management skills to create/develop/cultivate a solid and profitable relationship with the customer; offer insights about “best practices”; develop infrastructure solutions to present to customer to help him in its decision process. TLC Business Partner should be able to create a Program Management Office that allows the management of Third Party players (even if they are their competitor).

* Address its Investments: to be able to buy customer (hw/sw) assets, develop an infrastructure service where knowledge of all applications affecting information (Information Lifecycle Management: a Bank’s asset) are managed by a small team that could provide useful information to the customer in the area of application development as well as opportunity for rationalization.

So how important, really, is TLC Business Partner’s “house keeping” role to the Bank?

In a word: Very.

Something to say?

ICT for Little Giants

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[1] 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.


[1] The virtualization concept also plays an important role in the “on demand” computer utility, which is coming to dominate technology architectures, but this takes us too far away from our main business focus.

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/t/trackback/5795749

Listed below are links to weblogs that reference ICT for Little Giants:

Comments

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.

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.

“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.

Post a comment

If you have a TypeKey or TypePad account, please Sign In

You are currently signed in as (nobody). Sign Out