Which bank is en route to world's best practice? An innovative outsourcing deal between the Commonwealth Bank and EDS shows others how to think about the risks and rewards of a new kind of relationship.
After almost 40 years of delivering technology advantage using systems and methods developed to suit its prevailing culture, it has the lowest IT processing costs in the industry.
It leads the market in EFTPOS, direct banking, stockbroking and Internet banking. A recent IT study placed it in a leadership position to deliver increased shareholder value through technology.
But, by 1996 the Commonwealth Bank of Australia's IT department had seen the writing on the wall. Scrawled in response to a host of new pressures in the marketplace, the words were writ large, and they read: Strategic Partnership.
Management was demanding the bank move like gangbusters to become better aligned with the needs of its customers and the available market opportunities.
The bank was struggling to acquire expertise in the six core technologies it needed to remain competitive into the future: the Internet, electronic payments and electronic commerce (e-commerce), the data warehouse or customer information facility, advanced call centres, virtual private networks (VPNs), and imaging. And it knew that even all the resources available to it as a result of its years of expertise in banking IT were nowhere near adequate to the task.
Suddenly, a strategic partnership with an outsourcer was looking like a very attractive proposition indeed. According to Technology, Operations and Property head Russell Scrimshaw, the bank was getting to the point where it would have been impossible to continue delivering the required level of service using only the resources available in-house.
"Technology is changing so fast that not only do you need to integrate the new technologies, but you also need to continue to support the old ones, because you can't throw away some of your old systems that run your day-to-day operations.
"Finding the resources and skills that could enable the old to live but integrate the new is difficult. There's a severe shortage of quality people in Australia in IT across the whole marketplace. We weren't confident that we could find the people to be able to continue to make the transition that we needed to," Scrimshaw says.
The bank didn't have access to world's best practice, and without that access, it found it difficult to compare itself with others around the world. Nor did it have access to the kind of generous R&D budgets that would allow the experimentation it needed to take it into the 21st century. With work well under way on some of the newer core competencies, and just beginning on others, it began to realise a service organisation could bring in much-needed best-practice skills from its global organisation. Better still, it could also give the bank access to a wide range of its customers around the world to facilitate information sharing about new tools and approaches.
So in September 1997, after extensive deliberations and painstaking research, it entered into a strategic partnership with EDS (see related story When Worlds Collide, page 28), confident that was the best way to maintain its competitive technological edge whilst further reducing costs. And to date, Scrimshaw says, it has been well pleased with the result.
"Since entering the partnership with EDS we are continuing to secure competitive advantage by remaining at the forefront of technology development, yet reducing costs and providing enhanced career opportunities for the bank's 1300 IT staff who transitioned to EDS," Scrimshaw says. "The alliance adds value to the bank through access to EDS' global-based IT intellectual capital and via our 35 per cent interest in EDS Australia. It strengthens our ability to undertake strategic technology projects using the skills, capability and expertise of 110,000 EDS staff worldwide.
"Having gone from where we were six months ago to where we are now, we've made a quantum improvement in the effectiveness of our IT because of the outsourcing arrangement that we've put in place."Since outsourcing, the bank had substantially improved its cost base, extracting a 12 per cent saving on its total IT budget between the day the agreement took effect on October 10 and the end of the 1997-1998 financial year. "So far we would have to believe that we are going to see at least the 15 per cent savings that others have experienced and our guess is that we are going to save more than 20 per cent on an annual basis," Scrimshaw says.
Better still, the arrangement has vastly increased the pace at which CBA can roll out new technology. However, Scrimshaw says the real test of the outsourcing will come as the bank works with EDS towards achieving strategic advantage to improve its competitive positioning in the market.
"Banks are obviously under cost pressure -- as most industries are -- so cost was a pretty important rationale for outsourcing; and the other opportunities that an outsourcer presented were also pretty important. But I think if you look forward to 10 years' time, we'll probably experience some satisfaction that we saved ourselves a lot of money. But I would expect the real benefit -- the big benefit -- will come from strategic advantage to CBA over other banks," he says.
No stranger to outsourcing, Scrimshaw joined the bank at the end of January from Optus, where he had been director of marketing almost since the company's inception and where he was responsible for the data warehouse. His career began with a 17-year stint at IBM. He has also worked at Alcatel in Australia and at Amdahl Corporation, where he was vice president and general manager for the Western Area of USA, and where he had both CSC and EDS as customers.
Under the new arrangement, Scrimshaw has a broad area of responsibility. His Technology, Operations and Property Group combines Group Technology -- which manages the IT services contract with EDS -- with the bank's processing businesses and the combined property investment and corporate real estate property functions.
EDS now does all application development. It has taken over most of the bank's 1500 IT staff, with just 30 IT people staying back to work in the headquarters organisation and reporting directly to CIO Howard Morris (previously CIO with the Australian Stock Exchange). Most of Morris' staff now spend their time managing the relationship and the contract with EDS and in "paying the bills", Scrimshaw says.
Meanwhile, CBA is also hiring a new chief technical officer as leader of the "futurists" or "IT visionaries" the bank chose to retain on staff.
It took the bank a long while to find a partner, Scrimshaw says, starting the work in 1996 and spending most of the year examining the market, taking submissions and gathering data from other companies which had already outsourced. Not until the beginning of 1997 did the bank narrow the choice to a two-horse race and then it took another seven months or so to begin formal negotiations with EDS.
Yes, the bank could have moved faster; and yes, it might even have ended up with the same result, he says. But the time spent consulting with other leading organisations from all points of the globe -- some of whom had outsourced up to 10 years before and changed their contract several times since -- proved invaluable.
The bank looked at both positive and negative experiences with outsourcing. It found in nearly every case where an arrangement had worked well that the quality of the agreement -- the contract- and the service-level agreements that were put in place between the two organisations -- was a major factor. Since the bank's research showed deals normally failed when contract negotiations had been badly managed, it also spent a lot a lot of time with overseas law firms which had done a lot of these kinds of contracts.
And the bank joined IITUG (the International IT users group), whose members include such large companies as Boeing, Bethlehem Steel, UK Inland Revenue, BP and Hughes Corporation, which have all outsourced. In IITUG, the bank found a wealth of statistical information measuring the effectiveness of various approaches to outsourcing. "Doing that research externally made sure that we caught as many of the pitfalls as we could, and found as many factors as we could take advantage of," Scrimshaw says.
In Scrimshaw's view, keys to the success of the bank's arrangement with EDS are a robust contract and an environment where both organisations see themselves as genuine partners. There's probably only one window of time where you can negotiate an arrangement like that, Scrimshaw says, and that's at the time the agreement is being drawn up.
"The best lesson is that it is a partnership, and therefore the people have to have -- whilst understanding the separate needs of both organisations -- some feeling of empathy towards the view of both organisations. If EDS comes to us and says a part of the agreement is not working, we need to understand its point of view pretty clearly and it needs to understand ours."So much for the theory. Seven months into the marriage the honeymoon is barely over. EDS has spent much of the time so far transitioning 1500 people from the bank's payroll to its own, and creating a management structure around the group that includes experts from around the world. But EDS proved its worth early on in the contract. When EFTPOS volumes skyrocketed to unanticipated levels at Christmas, EDS used its worldwide resources to put in equipment in a hurry to carry the bank through the Christmas trading period.
But now the real work begins.
"If you were to ask me for a report card on the first six or seven months, we've gotten the savings we said we would, so that's good -- there's a big tick there. We have not seen any negative impact on any of our development cycles, and all of the people have transitioned pretty smoothly considering the scope of the exercise," Scrimshaw says.
"However, now we're at the stage where we need the relationship to start to envisage the strategic advantages that we're looking for it to deliver. That leads me back to the six core competencies. We need, together with EDS, to start to focus around those things. There'll be some other technologies that we need, too, but they [the six core competencies] are ones, in aggregate, that will be of most advantage.
"We've got some sessions with EDS in the US in July where we're going to start to look at those things and focus on areas where we can deliver extra advantage," Scrimshaw says.
Already the bank is getting added value via consulting services known as Value Discovery, which are being delivered via the EDS consulting firm, AT Kearney.
"We've had AT Kearney people here for almost the whole six months, and they've been looking within the bank, looking at what they know to be world's best practice, and identifying areas where we ought to be focusing to get more efficiency and effectiveness," Scrimshaw said.
Solid to the Core
Scrimshaw says the Commonwealth Bank of Australia is looking to six core competencies (the Internet, electronic payments and electronic commerce (e-commerce), the data warehouse or customer information facility, advanced call centres, virtual private networks (VPNs), and imaging) to maintain its competitive edge into the future, and is now relying on EDS to help with all of them.
Recognising Internet protocol as the technology that will drive both telecommunications and information technology into the future, the bank is focusing hard on the Internet as it develops its products, services and offerings. So far, Scrimshaw says, the bank is "at least as good at Internet as its competitors".
Closely bound is electronic payments and electronic commerce. "If you think about a bank's business, one of its requirements is to be pretty good at accepting payments and having people make payments on accounts. The more we can do that electronically, the better it is from both a cost perspective and a customer advantage perspective," Scrimshaw says. "So using Internet technology is the backbone to becoming extremely good at electronic payments, and coming off that, electronic commerce."Just as critically important is the data warehouse or customer information facility and associated mining tools, query tools and capabilities that can allow the organisation to present the right customer information at the right point of interface.
While the Commonwealth Bank's data warehouse has come a long way, there is much work to do before the data warehouse reaches the level the bank demands, Scrimshaw says, particularly in view of a recent restructure designed to make the bank more focused on market segments. The bank already has an extensive history of customers on the data warehouse platform, and is now working to segment that database, turning it into information that will be more usable at the point of contact.
"It's essential that at any point of interface that we have with the customer -- whether it's through the customer service call centres, or a branch, or an ATM -- we are able to provide the right information at that point of access.
The interface must 'know' what products and services the customer has or is likely to want to have, and how we should service the customer. That's what the data warehouse and the tools and support processes around it are meant to achieve," Scrimshaw says.
Then there's advanced call centres. The bank is looking to enhance its existing call centres so that the initial Integrated Voice Response (IVR) can identify a customer and the reason for the call. Skills-based routing will be another important component of this effort. Scrimshaw says the bank was already a fair way down this track and expected to be at world's best practice within six to 12 months.
"The fifth one is virtual private networks," Scrimshaw says, "taking the telecommunications environment that most of us have evolved in our own organisations over up to 40 years, but using the newer technologies and tools available for telecommunications to dramatically reduce the cost of the ordinary telephone call."Although confident the revolution in telecommunications being brought about by newer companies like Newbridge, Cisco and Summa will eventually help the bank save "a very large amount of money", Scrimshaw says the bank has barely started down this path as yet and recognises the move as a major challenge.
The final core competency is in imaging, he says. While the bank has a large image cheque-processing centre in Sydney, it is yet to deploy the technology around the country. "We now believe that we've got the right technology and the right business case that leads us to think we can do that pretty quickly," Scrimshaw says. It's also looking to major savings from other opportunities brought about by imaging.
-- S Bushell
Making the Grade
The ABN Amro Information Technology report, commissioned by ABN Amro and prepared by IT consultant Kevin Abrahamson, gives a unique insight into the IT systems within the finance services sector. Abrahamson conducted extensive interviews with CIOs of Australia's major and some regional banks during the period before the Commonwealth Bank of Australia outsourced.
Scrimshaw says the ABN Amro Information Technology report gave the bank a measure against the other banks that it didn't "have a close handle on before".
The report gave the bank very high points for the effort it was putting into year 2000, and good marks for the work being done around interactive banking -- which Scrimshaw calls "the banking of the future". The report gave it the second highest rating on major projects but downgraded CBA on the effectiveness and efficiency of its traditional IT area, having considered the dollar spend on IT relative to the total size of the bank as a whole, and major projects under way.
Four months after joining the bank, Scrimshaw is unsure how justified those criticisms were and insists they are, at any rate, no longer relevant.
"It is one person's judgement, as I said before, and it's a bit difficult to do it from outside. If you really are going to do it properly, you'd probably have unfettered access for a long period of time. I don't think you can measure effectiveness based upon how much you spend relative to your size as a bank versus the others, because you may have better tools and techniques," he says.
-- S Bushell
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