What is an Indian Offshore Banking Unit
McK: Mr. Lamberti, IT is one of the main efficiency drivers in banks and therefore one of the most critical elements of an optimization program. You started converting your technology five years ago. Where were the biggest hurdles?Hermann-Josef Lamberti: First of all, the structures and responsibilities were not clearly separated. The then IT and Operations division Global Technology Services was set up in such a way that it was partly a profit center, but partly also a cost center. He was also the internal service provider for the bank that every department had to use - but without having any budget control over it. Once a year, when the annual plan was approved, IT proposed a top-down budget in the billions instead of the business units determining their investment priorities based on their strategic direction. Among other things, this led to incorrect assessments of the cost situation.
So we made two fundamental decisions. We wanted to set up an organizationally clearly structured profit center area that would run a substantial part of the operations as a separate, profit-oriented business, clearly separated from the business areas. In addition, and building on this, we decided to break down Global Technology Services, assign it to the business units and build a model in which IT and Operations are oriented towards the needs of the respective business area. We call this business alignment.
That sounds like major internal modifications.
Yes, we first had to create completely new structures: firstly, a changed organizational structure for application development, i.e. our application development, secondly a clearly defined infrastructure area and thirdly, a new unit that, as an internal service provider, can handle cross-bank functions such as purchasing or facility management, but also credit card management, Point of sale, payment and securities processing took over - an area with several thousand employees. The next task was to set up an IT governance structure that divides the budget into two parts. We differentiate between Change the Bank (CTB) and Run the Bank (RTB). While the RTB budget is intended to maintain ongoing operations, the CTB part enables new investments, i.e. changes, for the further development of our IT.
Why this separation?
You have to approach the two cost blocks differently in order to gain more leeway for new IT projects - without further increasing the overall budget. Our goal was to reduce RTB costs by five percent annually and increase the CTB budget by 25 to 30 percent. We achieved both and, incidentally, were not only able to reduce costs in the RTB area, but also manage an increased volume of transactions. The productivity increases at RTB thus serve as a source of finance for new investments in the CTB area. The process to get there, however, required far-reaching changes: The business should be able to make independent investment decisions via the CTB budget. Of course, that was sometimes difficult because IT also has an opinion on certain projects or implementations. In order to take this into account, we have installed the IT Investment Committee as a steering committee for all new projects. This is where the project managers from the business areas, the COO representatives for overarching cost control and the IT representatives sit together. This structure means that the business areas can determine their own investment projects - and IT is involved as an informed contractor.
Theoretically. New structures are not yet a guarantee of success.
The basic requirement for success, however, is complete cost transparency. Today we can see exactly who is calculating what, right down to the individual employee. In the past, this allocation process between IT, other central functions and the business areas ran in several directions and was more of a zero-sum game. As soon as someone changed a budget, the allocations to the other areas also changed. They then also adjusted their budgets, and in the end we were in the same situation as at the beginning. In order to end this obscuration, we have introduced a new model: All business areas and functions may only offset each other downwards in a clearly defined manner, like a waterfall.
Cost transparency does not yet reduce costs. What have you actually saved?
Between 2001 and 2003 about one billion euros. That was significantly more than initially expected. Incidentally, most of these savings came from the RTB budget. In the CTB division, investments have increased as planned and now make up around 30 percent of our total IT budget.
Savings of this magnitude can probably not be achieved through budget cuts alone. By what else?
Through a combination of many individual measures. At the beginning, it was crucial to have a clean master plan. An essential starting point in this: the massive spin-off of non-central functions. For example, we have merged our former subsidiary Emagine with an external partner, GFT Technologies. The bank is now cooperating with GFT as a service provider for application developments. We have also systematically made the RTB area leaner. Outsourcing also plays an important role here. We concentrated on the bank's existing support organization. Many functions were already bundled under the umbrella of this internal unit, which took care of cross-bank functions - which was always a good indicator for me that such functions could also be outsourced. One example of this is DB Payments, our operational unit for payment transaction processing in the retail business, which we recently sold to Deutsche Postbank.
How far have you gone in outsourcing?
We consider outsourcing on three levels: infrastructure, business processes and so-called commodity banking processes.
The first level concerns the pure basic infrastructure services. This includes, for example, the operation of our data centers. It is now the task of our outsourcing partner to maximize availability within a planned budget and to provide computing power according to a highly developed price model. This was necessary, among other things, because we would have had to renew the physical infrastructure in the medium term anyway and after September 11, 2001 we wanted to revise our business continuity management concepts. We have also integrated our continental European data centers in Italy, Spain, Luxembourg and Switzerland with our outsourcing partner.
The next level is the business processes, which brings us to the topic of business process outsourcing. This is not about the bank's core processes, but about supporting processes such as purchasing, human resources systems or facility management. For our business success or our competitiveness, it is not crucial to keep this kind of process knowledge in-house.
The third level could be banking processes that have a commodity character. This means that they have neither a competitive factor nor a very high profit margin, even though they are basically typical banking business, such as securities or payment processing in the retail sector. I believe that such processes can also be outsourced in the long term and that a large number of other market participants will follow this concept. We are talking about the industrialization of banking.
Anyone who outsources wants to save money first of all.
Naturally. Lowering costs is a big decision factor. We do not pursue outsourcing without a significant cost advantage. The minimum for us was always 20 percent. At the same time, however, it must also be possible to achieve improvements in quality. Overall, our efforts are aimed at reducing complexity and getting costs under control.
How can the performance orientation for outsourced processes be ensured?
There are two options for functions over which you no longer have direct control: competition and transparency.
Competition means: You go into open tenders so that you can achieve real market prices. When it comes to infrastructure, for example, this means that equipment cannot be supplied by just one manufacturer, but by any provider. We now always try to have a portfolio from several providers for each area. Transparency, or open book, means having full insight into the cost situation, but also into productivity and the performance indicators for each process.
Are you also planning offshoring projects?
Offshoring is now also reaching the so-called white collar jobs. The area of IT application development is certainly one of the first to be affected by this. Since we are a global bank, with a lot of experience in software development in India, for example, we are already carrying out projects with offshore specialists. From my point of view, this wave has only just begun and we are moving with it.
We assume that customer data in the broadest sense cannot be offshore. Not because the technology would not work, but because the security of this data may not always be guaranteed due to possible legal and political imponderables in offshoring countries. What would our supervisory authorities say if German banks' data on German customers were kept in China, for example?
In your opinion, what are the key issues in relation to the development of IT in the next two or three years?
Our future scenario has three cornerstones: the transition to a value contribution model, the separation of distribution and production and the focus on customer orientation. Our value contribution model is about measuring IT investments in terms of their real contribution to value creation. We have already developed initial approaches here. In addition, we will have to make the separation between sales and production even clearer.
And finally, we need a new boost in customer orientation. This can neither be done by new employees nor by the one hundred and twenty-fifth training on the topic of cross selling, but solely through the technology. In my opinion, only technology can help to develop new customers or to better exploit existing customer potential. For me, that is what defines the next round of IT evolution. I firmly believe that this is imminent.
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