THE APPLICATION OF MARKET

POWER THEORY AS A VALUE

DRIVER FOR INFORMATION
TECHNOLOGY INVESTMENT
DECISIONS:
A Study of Six Chilean Banks






A Thesis submitted in partial fulfilment of
the requirement for the degree of
Doctor of Business Administration


by



Paul David Richard Griffiths


Henley Management College, Brunel University

November 2004.








2







ABSTRACT
This research addresses the issue of determining the impact of information
technology on enterprise level performance, for banks. More specifically, it
addresses the question How can managers in financial services organisations
(FSOs) use ICT investments to improve performance through the attainment of
Market Power?

The motivation for this work arises from several factors. Firstly, from my own
professional experience that makes me critical on how financial services
organisations have used information technology for business transformation.
Secondly, it is clear from the literature that financial services is an industry under
great pressure due to that competitive forces have turned asymmetric on the
sector: for example barriers to entry for newcomers are significantly lower than
the opportunities for financial services firms to move into other market spaces.
Finally, it is well established from both the literature and from discussions with
knowledgeable informants that there is an incomplete understanding of the value
of ICT in such organisations.

The literature on the impact of ICT investments on the performance of business is
reviewed by partitioning it into two dimensions of value creation: Revenue
Enhancement, and Cost Reduction. These two dimensions are, in turn, observed
from four perspectives: ICT Investments and Productivity; ICT Investments for
Competitive Advantage; Change Management as an Approach to Closing the
Gap Between ICT and the Business; and Treating ICT Investments as a Portfolio.
These two dimensions and four perspectives define a 2x4 matrix in which each
cell corresponds to a section of the review.

The research strategy applied is based on multiple case studies. The research has
been undertaken at company level, and the cases are selected from the Chilean
banking sector. The conceptual underpinning of the study draws from the
industrial economics theory of market power, or monopolisation theory; the value
discipline of market leaders, proposed by Treacy & Wiersema (1995); and the
Managing by Maxims process of ICT planning proposed by Weill & Beoadbent
(1998).

Finally, based on the literature and grounded on the findings of the empirical
work carried out with six banks, it proposes the following theoretical conjecture:
Banks that operate in a customer intimacy or product leadership value discipline,
will only convert into shareholder value those ICT investments which enable
them to increase their Market Power. Departing from this theory it then presents
3
an ICT investment decision model and a set of guidelines aimed at helping
managers convert ICT investments into value.
4

TABLE OF CONTENTS


List of Figures
List of Tables
Acknowledgements
Authors Declaration

CHAPTER 1 - INTRODUCTION
1.1 The issue of deriving value from ICT investments
1.2 The dilemmas Financial Services Organisations are confronting
1.3 The academic challenge
1.4 Approach to the research
1.5 Research question
1.6 Structure of the thesis
1.7 Summary


CHAPTER 2 - CONVERTING ICT INVESTMENTS INTO SHAREHOLDER
VALUE
2.1 Introduction and Overview
2.2 Cost Reduction Through the Application of ICT
2.2.1 Cost Reduction Through the Impact of ICT Investments on Productivity
2.2.2. Cost Reduction by Closing the Gap Between ICT and the Business
2.2.3 Treating ICT Investments as a Portfolio for Achieving Cost Reduction
2.3. Revenue Enhancement Through the Application of ICT
2.3.1. Revenue Enhancement Through the Impact of ICT on Productivity
2.3.2 Revenue Enhancement Through ICT Investments for Competitive
Advantage
2.3.3 Revenue Enhancement by Closing the Gap in Between ICT and the
Business
2.3.4 Treating ICT Investments as a Portfolio for Achieving Revenue
Encement
2.4. Interpretation of the Literature
2.4.1. Discussion
2.4.2. Synthesis: Model of Departure
2.4.3. Some Critical Issues
2.5. Summary







5



CHAPTER 3 - CONTEXTUAL ANALYSIS: THE CHILEAN BANKING
SYSTEM.
3.1. Introduction and Overview
3.2. Competitive Forces: Alignment of the Chilean Banking System with Global
Trends
3.2.1. Global Trends in Banking.
3.2.2 Revenue Diversification.
3.2.3. Consolidation
3.2.4. Securitisation
3.2.5. Industry Deconstruction and Bank Reconstruction
3.3. Institutional Forces: The Chilean Banking System and BASEL II
3.3.1 Introduction: An Overview of Basel II.
3.3.2. International Banks and Basel II: How Prepared are They?
3.3.3. Degree of Preparedness of Chilean Banks.
3.3.4. Conclusions: Closing the Gap.
3.4. A Question of Balance: Strategic Group Analysis of Chilean Banking
3.4.1. Strategic Deviation: Concepts, Constructs and Variables.
3.4.2 Strategic Groups: Concepts and Constructs
3.4.3. Application to the Chilean Banking System
3.4.4. Conclusions.
3.5. The Impact of Competitive and Institutional Forces on the Banking System.
3.6. Final Reflection: An Orbit Theory of Bank Strategies
3.7. Summary


CHAPTER 4 - RESEARCH METHODOLOGY AND DESIGN
4.1. Introduction and Overview.
4.2. Research Strategy
4.3. Criteria for Selecting the Cases
4.3.1. Logic behind the Selection of Cases
4.3.2. How Access was Obtained
4.4. Research Stages
4.5. Evidence Collection and Analysis
4.6. Process of Generating Theory
4.7. Tests for Validity
4.8. High Level Work Plan
4.8.1. Initial Work Plan
4.8.2. Departures from Plan
4.9. Reflections on the Generalisation of Findings
4.10. Conceptual Strengths of the Design
4.11. Summary


6



CHAPTER 5 - RESEARCH PROCESS AND ANALYSIS OF EVIDENCE
5.1 Introduction and Overview.
5.2 Approach to the Analysis and Interpretation of Evidence
5.2.1. The Evidence Collection Process
5.2.2 The Process of Within-case analysis: Writing up the Cases.
5.2.3. The Process of Cross Case Analysis: Building a Theory and Model
5.3 Cross-Case Analysis
5.3.1. Strategic Positioning
5.3.2. Technology Alignment
5.3.3. ICT Investment Decisions
5.3.4. Analysis of Projects
5.3.5. Conclusions
5.4 Synthesis of Findings



CHAPTER 6 - THEORY AND DISCUSSION
6.1. Theory of Market Power ICT Investments for Value Creation.
6.1.1. Process of Development of the Theory
6.1.2. Theory of Building Value Through ICT Investments for Market Power
6.2 The Value-Builder ICT Investment Decision Model
6.2.1. Introduction
6.2.2. Completion of the Model
6.2.3. Application of the Value-Builder ICT Investment Decision Model
6.3 Validity of the Results
6.3.1. Formal Structure of the Theory
6.3.2. Is it Grounded in the Evidence?
6.3.3. Rigour of the Research
6.4 Corroboration of the Results
6.4.1. The Bank Boston Case
6.4.2. The BCI Case
6.4.3. How do Bank Boston and BCI fit the theory?
6.5 Relevance of the Results



CHAPTER 7 - CONCLUSIONS
7.1 Managerial Implications of the Findings
7.2 Contribution to Knowledge
7.3 Limitations, Reflections and Future Research Opportunities


7


APPENDIX A Evidence Collection
A1. Semi-Structured Interview Guide
A.2. Sample Formats for Reports


APPENDIX B - . BANCO DE CHILE: RENEWING A TRADITION
THROUGH TECHNOLOGY ENABLED BUSINESS TRANSFORMATION
B.1. Introduction: History of the Bank
B.2. Sources of Evidence
B.3. Strategic Positioning
B.3.1. Banco de Chile and its Competitive Context
B.3.2. Banco de Chiles Business Strategy
B.3.3. Value Discipline of the Organisation
B.4. The Role of Technology: Past and Present
B.4.1. Overview of the ICT Function
B.4.2. The ICT Budget
B.4.3. ICT Management Principles
B.5. Information Technology Investment Decisions
B.5.1. ICT Decision Criteria
B.5.2. Analysis of Some Major ICT Decisions and their Impact on Market
Power
B.5.2.1. Bankassurance Application
B.5.2.2. Digital Client File
B.5.2.3. NEOS Project
B.6. Thinking on the Future Role of ICT
B.7. Conclusions.


APPENDIX C - BANCO SECURITY: A NICHE PLAYER THAT INTENDS
TO BE A FAST-FOLLOWER ON TECHNOLOGY
C.1 Introduction: History of the Bank
C.2. Sources of Evidence
C.3. Strategic Postioning of Banco Security
C.3.1 Banco Security and its Competitive Context
C.3.2. Banco Securitys Business Strategy
C.3.3. Value Discipline of the Organisation
C.4. The Role of Technology: Past and Present
C.4.1. Overview of the ICT Function
C.4.2. The ICT Budget
C.4.3. ICT Management Principles




8

C.5. Information Technology Investment Decisions
C.5.1. ICT Decision Criteria
C.5.2. Analysis of Some Major ICT Decisions and their Impact on
Market Power
C.5.2.1. Treasury System
C.5.2.2. PeopleSoft for Support Processes
C.5.2.3. Cash-Management System
C.5.2.4. ASP Protestos Project
C.6. Thinking on the Future Role of ICT
C.7. Conclusions


APPENDIX D - BANCOESTADO: AN INSTITUTION COMMITTED TO
BANKING-FOR-ALL APPLIES TECHNOLOGY TO FULFIL ITS MISSION
D.1. Introduction: History of the Bank
D.2. Sources of Evidence
D.3. Strategic Positioning of BancoEstado
D.3.1. BancoEstado and its Competitive Context
D.3.2. BancoEstados Stated Business Strategy
D.3.3. Value Discipline of the Organisation
D.4. The Role of Technology: Past and Present
D.4.1. Overview of the ICT Function
D.4.2. The ICT Budget and Management Principles
D.5. Information Technology Investment Decisions
D.5.1. ICT Decision Criteria
D.5.2. Analysis of Some Major ICT Decisions and their Impact on Market
Power
D.5.2.1. Management Information System
D.5.2.2. CRM Analytics Project
D.5.2.3. Centralisation of Operational Processes
D.5.2.4. Technology Applied to Sales
D.6. Thinking on the Future Role of ICT
D.7. Conclusions.

APPENDIX E - BANCO SANTANDER-SANTIAGO: A UNIVERSAL BANK
WITH DILEMMAS ON STRATEGY, BUT A CLEAR UTILITY APPROACH
TO TECHNOLOGY
E.1. Introduction: History of the Bank
E.2. Sources of Evidence
E.3. Strategic Positioning of Banco Santander Santiago
E.3.1. Banco Santander and its Competitive Context
E.3.2. Banco Santander Santiagos Business Strategy
E.3.3. Value Discipline of the Organisation


9
E.4. The Role of Technology: Past and Present
E.4.1. Overview of the ICT Function
E.4.2. The ICT Budget
E.4.3. ICT Management Principles
E.4.4. A Reflection on the Value of Technology
E.5. Information Technology Investment Decisions
E.5.1. ICT Decision Criteria
E.5.2. Analysis of Some Major ICT Decisions and their Impact on Market
Power
E.5.2.1. Consolidation of Call Centres
E.5.2.2. Electronic Approval of Loans
E.5.2.3. Core Business Transformation
E.5.2.4. Treasury System in Brazil
E.6. Thinking on the Future Role of ICT
E.6.1. Driving Force for Future ICT Investments
E.6.2. Vision of the Competition
E.6.3. Other Reflections
E.7. Conclusions

APPENDIX F - LOG OF INTERVIEWS
F.1. Log of Interviews
F.2. Informants at Case-Study Banks

APPENDIX G SURVEY OF THE VALUE-BUILDER ICT INVESTMENT
DECISION MODEL, APPLIED TO BANKS.



REFERENCES
10

List of Figures



Figure 1.1 Input-Output Model
Figure 1.2 Three-construct Model
Figure 2.1 Perceptual map of literature (inspired on Hart, 1998, pp.169-170)
Figure 2.2. Three-construct model for IT Usage (Trice & Treacy, 1986)
Figure 2.3. Management Objectives of the Information Technology Portfolio
(Weill & Broadbent, 1998).
Figure 2.4. Different Views of Information Technology Infrastructure (Weill &
Broadbent, 1998).
Figure 2.5. Application-Portfolio Dynamics (Prahalad & Krishnan, 2002)
Figure 2.6. McKeen & Smith Model
Figure 2.7. Evolution in Service Characteristics (Watkins, 1998)
Figure 2.8. The Clients priorities: How they rank product attributes
Figure 2.9. A Resource-Based Model of Competitive Advantage (Mata et al.,
1995)
Figure 2.10. Three-construct model
Figure 2.11 Effect of Market Power (based on Crowston & Treacy, 1986)
Figure 2.12. There is an optimal level of Strategic Deviation (Deephouse, 1999).
Figure 2.13. Effect of Market Power Moderated by Strategic Balance and
Security.

Figure 3.1. Impact of Fee-Based Income on Profitability.
Figure 3.2. Fee-based revenue as percentage of Gross Profit
Figure 3.3. Chilean Bank Consolidation.
Figure 3.4. Volume of securitised assets in the Chilean market (US dollars) per
year of study (starting 1990).
Figure 3.5. Strategic Positioning of the Top Ten Private Chilean Banks.
Figure 3.6. Chilean Banks Market Share in Terms of Assets.
Figure 3.7. Deposit Profile of SG4 Banks
Figure 3.8. Loan Profile of SG4 Banks
Figure 4.1. Construction of a Theory (Christensen & Raynor, 2003)
Figure 4.2. Work Plan.
Figure 6.1. The Value Building Chain.
Figure 6.2. The Value Builder ICT Investment Decision Model
Figure A.1. Overview of IT initiatives for each case-study
Figure D.1. The three-horned dilemma of value discipline




11


List of Tables


Table 2.1. Key Papers in Literature Review
Table 2.2. Summary of Literature
Table 3.1. Profitability and Strategic Deviation of the Ten Largest Private Banks
Table 5.1. Market Power Driven ICT Investments.
Table 5.2. Efficiency-Driven ICT Investments
Table 6.1. Three-views of the DER project at Bank Boston
Table 6.2. Analysis of some major ICT investments at BCI
Table B.1. Comparison of IT Spend in Banco de Chile versus US Banks
Table B.2. Banco de Chile: Disaggregating ICT Spend into Maintenance and
New Investments.
Table B.3. Analysis of the impact of key projects on the competitive landscape
(Banco de Chile).
Table C.1. Comparison of ICT spend in Banco Security with US banks.
Table C.2. ICT Spend on New Initiatives vs. Maintenance of Legacy Systems in
US Niche Banks.
Table C.3. ICT Investments vs. Maintenance of Legacy Systems in US and EU
Banks.
Table C.4. ICT spend break-down for US, EU and Japanese banks compared to
Banco Security
Table C.5. ICT spend break-down of US niche banks compared to Banco
Security
Table C.6. Analysis of some major ICT investments at Banco Security.
Table D.1. Analysis of some major ICT investments at BancoEstado
Table E.1. Comparison of IT Spend at Santander-Santiago with US
Table E.2. ICT Spend Breakdown at Banco Santander Santiago Compared to US
Banks
Table E.3. ICT Spend Breakdown at Banco Santander Santiago Compared to
US, EU, and Japanese Banks
Table E.4. Analysis of some major ICT investments at Banco Santander-
Santiago.









12
Acknowledgements


Many people have been decisive in making possible the realisation of this
research. However, my first thanks must be to Professor Dan Remenyi, my
supervisor, for his focused questions and suggestions throughout the whole
voyage, which helped me keep on track and avoided going off in interesting but
tangential directions. My thanks also to Professor Arthur Money for his
constructive criticisms, particularly in the final stages of writing up the
dissertation.

With regards to the analysis of the Chilean banking system presented in Chapter
4, I am grateful to Dagoberto Espinoza of IBM BCS for his internet search for
outsourcing vendors to the Chilean banking system; to Carolina Franco, of Feller
Rate Vision de Riesgo, for her information on volumes of securitization in the
last two years of the study period; Vik Lund, co-author of the IBV (2003) paper,
for inspiring discussions on the from banks to banking point of view; Severino
Fernandez, operational risk expert, and Benedicto Gallardo, credit risk expert,
both from IBM BCS Spain, for their brilliant conduction of the Basel II
workshop in Santiago; Isabel Nazer and Enrique Hasbun of the Chilean Banking
Association (ABIF) for their leadership in getting so many banks to participate in
the Basel II workshop; and staff at the Banking Authority (SBIF) library for their
patience and help in obtaining background information on the industry.

I am also very grateful to Hernan Sommerville (Chairman) and Alejandro
Alarcon (General Manager) of ABIF, for their support in persuading 6 of ABIFs
member institutions to volunteer information and, above all, the time of many of
their senior managers for the empirical part of this research. And, of course, to
the informants themselves whose names are included in the case-studies. This is
proof of their commitment to progress of the industry.

Many thanks as well to HP-C Chile, and in particular Axel Heilenktter
(Marketing Manager), for their sponsorship of the three-day event which was so
important in attesting the relevance of the research.

Doing this research at a distance of 16-hour flight time from Henley required a
great deal of flexibility and responsiveness from the doctoral office and the
library at Henley. My utmost appreciation to their staff.

Finally, I must thank Juliana, my wife, and three children for their patience and
support during the three years in which I worked on my DBA while holding a
full-time job. Many dull late evenings and short week ends!
13

CHAPTER 1 - INTRODUCTION.



This dissertation derives a theory that will help financial services organisations in
deploying information and communications technology (ICT)
2
for value creation.
The present chapter describes why this issue is of importance and relevance to
banks, and gives an overview of the methods used to achieve the results of the
research.


1.1 The issue of deriving value from ICT investments.

I have been working in the area of transforming organisations through the use of
technology for many years and, reflecting on the 90s, I am critical on how we
have done this. If I had to summarise our activity during that period, I would say
that:
It was the most virulent expansion of company transformations based on
process re-design and technology support;
We went from custom-development to standard systems: the advent of
enterprise resource planning systems (ERP) on open platforms. Once a few
leading multinational companies decided that ERP was their solution, ERPs took
off like a trendy fashion where the questions asked were not Is ERP right for
us?, but Which ERP should we implement? ;
We focused on improving processes and financial reporting by
implementing transaction support systems, as opposed to business intelligence
systems;
We encouraged companies to outsource everything they could, focussing
on short term benefits; but we did not help them reorganise their ICT function to
be able to realise benefits in the long term;
We did not do enough to get value out of our systems implementation
projects. This was especially so towards the end of the decade with the advent of
the year 2000 (Y2K) syndrome: too often we just slammed-in solutions and
even gave it a name - vanilla implementations;
Business cases were developed, but only in terms of tangible (i.e.
productivity) benefits. We applied the same criteria to all ICT investments and
had no concept of application portfolio. We made little effort to determine
intangible benefits, and we applied Discounted Cash Flow (DCF) in a very
unoriginal way;
Very rarely were business-cases followed by cost-benefit tracking and
post-implementation evaluation, so we missed an opportunity to learn from our
mistakes;
As the decade came to a close, the ERP wave had definitely peaked, and
the ICT decision space became much harder to understand. What wave after

2
To all practical purposes in relation to this research, the acronyms ICT and IT are equivalent and
will be used interchangeably.
14
ERP? Is it E-biz; or customer relationship management (CRM); or advanced
planning systems (APS); or business intelligence (BI); or.
We all recited Moores Law on processing power and we witnessed a
substantial expansion in application software capabilities, but we were hopelessly
incapable of persuading organisations that the bottlenecks for information flow
and exploitation lay in their people and in the theories they used to employ ICT.

Information Systems (IS) Plans that were so popular in the late 70s and 80s had
almost disappeared as mentioned above, it was just a question of deciding
which ERP to implement and then getting on with it. Fortunately, in the 21
st

century business leaders are now asking a new set of questions around value and
the dynamics of change. These questions include:-

- How do I know what technology to introduce and when, given that
markets are moving so quickly?
- How can I keep our systems flexible and cost efficient enough to
accommodate possible mergers, acquisitions or alliances?
- What value can we create for the business by developing and
implementing an ICT strategy?
- What ICT investments should be done internally, and what initiatives
should be outsourced?
- How should we tackle the knowledge management issue? Where do we
start? How much is it going to cost?
- How can we convert our ICT investment into shareholder value?

ICT can no longer be viewed as a one-dimensional, one size fits all solution to
meet all business needs. It needs to be planned and managed as a multi-faceted
portfolio in order to realise the greatest business value as fast as possible and thus
facilitate ICT investment creating shareholder value.


1.2 The Dilemmas Financial Services Organisations are Confronting

Why focus on Financial Services? Firstly, because it is an information intensive
industry meaning that, from a resource perspective, ICT is a vital resource. In fact
the Financial Services industry has only two primary or overarching resources:
people and information technology (McKeen & Smith, 1996). A study done by
Clayton & Waldron (2003) on the use of technology by different sectors, reported
in OECD (2003, pp.65-66), finds that financial intermediation organisations are
intensive users of information and thus have the greatest scope to benefit from
ICT. Therefore the subject of this research has a direct impact on organisations.
Secondly, because it is an industry I work in as a consultant, which means I can
quickly apply and test the findings of the research. Finally, it is an industry under
great pressure to change and that is struggling with several fundamental
dilemmas deriving from the fact that competitive forces have turned asymmetric
for financial services firms, in the sense that barriers to entry for newcomers to
the sector are considerably lower. Furthermore, the opportunities for financial
15
services firms to move into other market spaces are limited. In the case of retail
banking the meaning of this has been well synthesised by Watkins (1998):

(a) Package Application Systems: New ICT developments such as client-
server, modular programming and multimedia open up the market to
competitors from other sectors, and although this would not have mattered in the
past because the whole industry would have followed a similar trajectory, it is
significant today. Acquiring the technology to support any of the major retail
financial products is now relatively inexpensive and can be bought off the shelf.
Due to this, companies from diverse sectors, such as retailing,
telecommunications and manufacturing, have acquired the necessary core
competencies (through their development and use of customer databases,
improved customer interfaces, and information systems) to enable them to move
into the financial services space.
(b) Rigid and Costly Legacy Systems: On the other hand, it is not simple for
the traditional financial services organisations to adopt the new technology.
When a large strategic core-business system is introduced, it takes years to
transfer all business to the new system. During this time most companies need to
support three layers of cost: the cost of running and maintaining the old systems,
the cost of licensing and implementing the new system replacing them, and the
cost of building and maintaining interfaces between the two. There is also the
pressure from user managers and business units for short term tactical solutions
to satisfy urgent needs.
(c) Co-existence of New and Legacy Systems: New technologies are
typically first piloted and then integrated with older existing systems where
possible. During the transition, it is difficult to impose new organisation
structures on old technology, and effective organisational change cannot be
completed until the new system is up and running.
(d) Enduring Hierarchical Organisational Structures: The new systems
facilitate rapid communications and decision making which enable new ways of
working. However, the hierarchical organisational structures, so typical of the
traditional financial services sector, with many layers of command and control,
and with business processes broken down into narrowly defined tasks or
procedures and spread amongst several departments, are too inflexible to
accommodate new working practices.

On the positive side, core competence development in the formerly separate
sectors of retail banking, insurance and mortgage lending, has enabled their
coming together, leading to wholesale rationalisation of the sector. Thus, it is
argued that the best defence against the newcomers are end-to-end financial
services based upon more sophisticated products; and information technology is
at the heart of this strategy.



1.3 The Academic Challenge

McKeen & Smith (1996) developed an interesting discussion on the limitations
of research in this area, which can be summarised as follows. The relatively
16
modest success achieved to date in assessing the value of ICT arises from several
shortcomings in current research models and business practices. The first
shortcoming is the lack of accepted universal measures of organisational
performance with which to link ICT investment (Remenyi et al., 2002). The
situation is made worse when researchers attempt to combine industries whose
inherent differences work against common measures. Even within a single
industry there are significant problems in constructing general measures which
are useful since the understanding of such commonly used measures as return on
invested capital and cost per unit of output can vary significantly across
organisations.

The second shortcoming involves the level of analysis. Assessment of the value
of ICT can occur at any of six levels of analysis (from the Individual in the
Organisation to the Economy level, passing through Projects, Division,
Company, and Industry).

The third shortcoming is connected to the previous one but relates more to the
analysis techniques used. Typically, the benefits of computer systems have been
estimated using industrial engineering concepts. Where computer systems are
used at the lowest organisational levels to improve clerical productivity, it is
possible to use such methods to determine the value of ICT. More often,
however, computers are used to improve information and decision-making at
many organisational levels. The benefits derived from such systems are
significantly more difficult to quantify.

The fourth shortcoming arises due to the lack of accepted causal models. Current
research has, in general, used simple bi-variate correlation analysis to link ICT
expenditures to bottom line indicators (figure 1.1), but has failed to explain how
and why ICT creates performance.





Figure 1.1 Input-Output Model


As a result of these shortcomings, it is clear that our understanding of the value of
ICT in organisations is incomplete. But even with an incomplete understanding,
McKeen & Smith (1996) ask themselves, how is it possible for the value of ICT
to remain so elusive?

As was stated by Bannister (2001, p. 41):

Overall, the result of this type of input/output focused research into IT
value using the tools of econometrics are less than satisfactory. The data
is problematic, the appropriateness of the methodology debatable, the
theoretical models open to challenge and the conclusions either weak or
IT Investment Organisational
Performance
17
intuitively suspect. To cap the problem, the research even throws up
conflicting evidence.

The underlying conjecture is that the impact of ICT becomes so diluted by other
factors in the production process that straight measurement of the relationship of
ICT inputs to business outputs via a production function (what the authors call
second order effects) may, to all intents and purposes, be undetectable (Barua et
al., 1995). Mooney et al. (1995) give as an example that where ICT investment
is aligned with business strategy, the success or failure of the investment is much
more likely to be determined by the success of the strategy than by ICTs
contribution or lack of contribution.


1.4 Approach to the Research.

There is an emerging view that studies based on the process perspective hold the
key to the problem of ICT investment evaluation ( Remenyi et al., 1998;
Bannister, 2001; Ginzberg (1979, cited by Crowston & Treacy, 1986). So to
avoid the shortcomings indicated above from applying the simple bi-variate
model, this research departed by deciding that it would apply a three-construct
model where the intervening construct would explain how ICT investments
would impact performance (see figure 1.2). In other words, it would reveal the
process by which ICT investments affect performance and it was thus called
process box.





Figure 1.2 Three-construct Model


Based on the work by Crowston & Treacy (1986) on revealing the value of the
new technology through understanding how the resulting information will be
used, it was decided that a theory would be applied to the process box. Filling the
process box with a theory that links inputs to outputs has some clear advantages
that recommend it as an approach for research. First, the process theory should
clarify which inputs and outputs of the firm are important and may contribute
methodologies to measure them. Second, by explicitly including the processes
within the firm, the impacts of ICT can be understood in more detail. Instead of
standing outside and trying to detect small variations in, for example, ROI, the
researcher can look at where ICT directly impacts the business and make a more
insightful estimate of this impact. Finally, and most importantly, the researcher
can discover the contingencies that allow systems to affect firm performance, and
prescribe the features of systems that will be useful to particular firms.

Many different theories about organisations could be used to fill the process box.
McKeen & Smith (1996) used IT Usage as a construct to operationalise the
Inputs Process Outputs
18
processes. On the other hand, following Crowston & Treacy (1986), one clear
source for such theories is the field of strategy. In one sense, strategic
performance is concerned with long-term profits, which can be achieved either
through superior revenues or superior costs. The utility of partitioning strategic
performance into these two components is that a body of literature within
industrial economics and corporate strategy relates to each: Monopolisation (or
Market Power) theory, and Williamsons theory of transaction costs economics.
These two fields are relevant places to look for foundational or reference theory
for studying the impact of information systems on enterprise performance and
they provide methodologies which serve well the objectives of this research.

This research applies market power as a source of theory. According to Crowston
& Treacy (1986), the industrial economics theory of market power, or
monopolisation theory, provides a basis for understanding the effects of ICT on
prices, market share and revenues. A financial services organisations monopoly
power is enhanced through attractive product differentiation, and by reducing the
amount of searching for financial services products performed by its customers
and prospects. Information technology can directly affect both these variables.
For example, a banks product differentiation can be achieved by bundling ICT
with existing products to differentiate them from the competition. On the other
hand, the same bank can reduce the size of its customers search for banking
suppliers by offering direct order entry systems and other forms of vertical
information integration. Conversely, the bank used in the example can, in turn,
reduce its own suppliers monopoly power by avoiding unique, differentiated
products and by searching widely for competing suppliers. This facilitates finding
the best product at the best price and reduces any price premium that the
suppliers might otherwise have extracted from the bank.



1.5 Research Question.

The scope of issues discussed in the previous paragraphs is broad, and it is clear
that not all of them will be addressed directly by this research. However, keeping
in mind that the objective is to assist financial services organisations in deploying
ICT for value creation, the concept of Market Power will be applied to develop
guidelines for practitioners in their decision making in the ICT space. This will
be achieved by answering the following research question:

How can managers in financial services organisations (FSOs) use ICT
investments to create improved performance through the attainment of Market
Power?

This question can be devolved into several sub-questions as follows:

How do managers at FSOs perceive that they will achieve market power through
ICT investments?
19
In what way do managers at FSOs perceive that market power obtained through
ICT investments will give their organisations a sustainable competitive
advantage?
How do managers at FSOs measure their success at attaining market power
through ICT investments?
What drivers will typically trigger FSO managers decisions to implement ICT
for increasing market power?

As has been advanced in the previous sections, and will be analysed in detail in
the Literature Review (Chapter 2), it is proposed that academic research needs to
increase its focus on evaluating the extent of the impact of ICT investments on
organisational performance. It needs to move towards models that will reveal why
and how ICT affects organisational performance, by applying a foundational
theory to underpin the process of tracing its effect on the organisation. The
present research will make its contribution in that direction by applying the
concept of market power to this situation, and this will be a key guiding principle
for its design.

In line with the guiding principle given above, this research is approached as a
theory building one. In a general sense, it pursues the construction of theory
through empirical work (Glaser & Strauss, 1967; Layder, 1993). The research
strategy to be followed is multiple case studies (Yin, 1994). The methods applied
will be primarily qualitative, but quantitative methods will be used when found
appropriate.



1.6. Structure of the Thesis.

This thesis follows the structure recommended by Yin (1994, p.134) for multiple
case study research, where the narrative for each case is presented in a separate
section or appendix, and the report contains a chapter or section covering the
cross-case analysis and results. The sequence of chapters, and the sections
within each individual case account, follow a theory building logic (Yin, 1994,
p.140). The structure of chapters and their content is as follows:


20
Chapter Contents
2 Converting ICT Investments An account of the literature review, structured along the
into Shareholder Value two-way partition of ICT applications for superior
revenue and for superior cost performance, as suggested
by Crowston and Treacy (1986).
The development of the conceptual framework for
the research
3 Contextual Analysis: The Considering that a case study based research focuses on
Chilean Banking System studying a phenomenon in its context, it perfoms
a multi-paradigm approach of strategies in a banking
system
4 Research Methodology and Presents the research strategy, methodology and design,
Design which will be based on multiple case
studies. It gives the criteria for selecting the cases and
an overview of the methods applied to collect and
analyse the evidence.
5 Research Process and A review of the evidence collection, case-study write-up
Analysis of Evidence and analysis processes 'as done'. Presents the results of
the cross-case analyses.
6 Theory and Discussion Proposal of a Theory of Market Power ICT Investments
for Value Creation, and a decision model to assist
practitioners in their prioritisation of technology
investments. Discussion on the rigour and relevance of
the findings.
7 Conclusions A summary of the thesis, an analysis of its limitations,
and suggestions for future research
Appendices Various appendices presenting the research
instruments; the detailed description of the cases
themselves; the within case analyses;
and details on tools and methods of analysis.







21

1.7 Summary

This chapter considered a number of subjects. First, it addressed the importance
and relevance of the issues to be tackled in the rest of the thesis, and therefore
established the need for this research and some of the challenges that it poses.

Secondly, this chapter highlighted some of the strong limitations that academic
research in ICT has encountered due to the application of simple, bi-variate
input-output models, and it proposed the way that this research is going to
overcome these problems.

In third place, it defined the objectives of the research, and distilled them in a
research question and a number of sub-questions. It gave the guiding principles
for the design of the project, and a brief overview of the research strategy and
methods that will be followed.

Finally, this chapter gave the structure of the thesis which should operate as a
roadmap to understanding its objectives and design.























22


CHAPTER 2 - CONVERTING ICT INVESTMENTS
INTO SHAREHOLDER VALUE





2.1. Introduction and Overview


This chapter reviews the literature on Strategy, on ICT management and on ICT
evaluation, with a particular emphasis on how the concepts apply to the financial
services industry. It also does a critique of an approach to research in evaluation
which has been used frequently by academics in the last decade and a half. Based
on the literature, it then proposes a conceptual framework which will be used to
underpin the present research.
As pointed out by Crowston and Treacy (1986, p. 299):
When computer systems were used largely for cost displacement, the
evaluation of their impact on enterprise performance could be conducted
using an accounting framework cost/benefit analysis. The costs were the
costs of putting the systems in place. The benefits were some offsetting
reduction in headcount or other organisational costs. Currently, systems
are often used to enhance performance without any necessary reduction
in organisational costs. With some systems, the benefits are better
decision making, improved communications, or other semi-tangible
instrumental changes.


So the task of assessing ICT investment value conversion has become more
complex.

A characteristic of the ICT evaluation literature is that it is highly dispersed.
Papers on this topic are found in a wide range of journals including those
addressing information management, finance and accounting, information
strategy, knowledge management and also in the fields of financial services. As
can be seen in figure 2.1, which is only indicative and not exhaustive of the
readings done, this review is the result of readings carried out along four streams:
Information Management; Strategy; Management Competences; and Issues in
Financial Services. Each of these streams is given a vertical area of the figure.
Two significant corroborations arise from the analysis of figure 2.1. In the first
place, it can be seen that most of this reading has focused on recent publications
(say, year 2000 onwards), as is indicated by the higher density of ovals in the
upper part of the figure. When older papers are analysed, it is because references
23
from more recent documents pointed in their direction (as indicated by the curved
arrows which represent references) and it was found necessary to study the
underlying issues in more depth.
3
The second corroboration from this figure is
that IS is an interdisciplinary field straddling other disciplines (Webster &
Watson, 2002) which manifests itself in that the literature is overlapping and
dispersed, as indicated by the fact that document codes and the reference arrows
cross the vertical boundaries of the four streams.


An earlier, version of this literature review was published in September 2003 in
the Henley Management Working Paper Series (Griffiths, 2003).



Figure 2.1 Perceptual map of literature (inspired on Hart, 1998, pp.169-170)



3
The authors document codes showed in each oval are linked to the documents in the
bibliography at the end of the thesis. The codes were assigned before reading the document on the
basis of the title. Codes starting in IM represent documents focused on information management;
FS stands for those on financial services; MC for management competence and strategy; M for
research methodology; EV for technology evaluation; PH for philosophy, and so on.
IM.116
IM.81
03
02
01
00
99
98
97
96
Before
90
90-95
IM.27
IM.01
IM. 28
IM.15
IM.127
IM.138
IM.83
IM.151
MC.07
IM.57
IM.56 IM.04
IM.55
IM.06
IM.58
IM.12
IM.13
IM.07 IM.18
IM.86
IM.94 FS.19
M.02
M.01
IM.45
FS.01 IM.64
M.03
M.22
M.25
Strategy Information Management
Management
Competencies
Issues in Financial
Services
IM.96
IM.16
IM.25 IM.133
M.68
M.69
M.64
IM.164
IM.95
IM.165
IM.166
M.96
IM.199
IM.198
MC.17
IM.26
IM.182
IM.201
FS.27
IM.204 IM.205
M.119
M.117
04
IM.243
IM.241
IM.240
IM.231
IM.214
IM.161
IM.14
FS.53
FS.39
FS.30
FS.31
FS.27
MC.111
MC.110
MC.91
MC.73
MC.71
MC.49
MC.46
MC.41
PH.10
M.159
M.141
M.129
M.121
M.52
M.32
EV.14
EV.15
EV.16
FP.13
FS.48
FS.51
M.166
IM.116
IM.81
03
02
01
00
99
98
97
96
Before
90
90-95
IM.27
IM.01
IM. 28
IM.15
IM.127
IM.138
IM.83
IM.151
MC.07
IM.57
IM.56 IM.04
IM.55
IM.06
IM.58
IM.12
IM.13
IM.07 IM.18
IM.86
IM.94 FS.19
M.02
M.01
IM.45
FS.01 IM.64
M.03
M.22
M.25
Strategy Information Management
Management
Competencies
Issues in Financial
Services
IM.96
IM.16
IM.25 IM.133
M.68
M.69
M.64
IM.164
IM.95
IM.165
IM.166
M.96
IM.199
IM.198
MC.17
IM.26
IM.182
IM.201
FS.27
IM.204 IM.205
M.119
M.117
04
IM.243
IM.241
IM.240
IM.231
IM.214
IM.161
IM.14
FS.53
FS.39
FS.30
FS.31
FS.27
MC.111
MC.110
MC.91
MC.73
MC.71
MC.49
MC.46
MC.41
PH.10
M.159
M.141
M.129
M.121
M.52
M.32
EV.14
EV.15
EV.16
FP.13
FS.48
FS.51
M.166
24
Financial services, is an interesting industry in which to analyse the impact of
information technology as it is going through intense change. This is particularly
true of retail banking. McConnell (1997), citing Llewellyn, gives the following
highly visible trends in the UK retail-banking sector:

1. Banks, confronted with declining customer bases due to the increased
competition in the industry, have become locked into uneconomic cost
structures from which it is difficult to escape.
2. Deregulation, globalisation, and financial innovation, in particular
securitisation, have increased the aggregate risk of individual banks and
the financial system as a whole. Increased competition generates excess
capacity, depresses margins and forces many banks to the marginal edge
of risk taking and may tempt some towards failure by reducing margins
and building riskier portfolios. Although there is evidence that confirms
this effect of deregulation and globalisation, there is other evidence that
denies that securtisation increases risks (Griffiths, 2004, p.10; The
Economist, 2003, August 16
th
) and gives indications of it actually
improving the risk profile of the individual bank.
3. Deregulation has increased competition by opening up new markets to
new competitors. Banks have rushed to compete in these newly
deregulated markets with seeming disregard for cost or profitability.
4. The cost of banking technology, once prohibitive, is no longer a barrier to
entry into the industry. As a consequence of this:
competition is working asymmetrically in the banking industry: because
of developments in technology and the general erosion of entry barriers
into banking, it is easier for non-bank financial institutions to diversify
into banking than for banks to diversify out of financial services
Llewellyn (1995) cited by McConnell (1997, p.4)

Harris (2001, p.36) reinforces this when she says that:

After the [British] banks have enjoyed many years operating within an
informal cartel, progressive deregulation in the financial services
industry and the availability of new technological opportunities have
removed many of the traditional barriers to market entry,

which has resulted in significantly increased levels of competition in the
industry.Examples of threats given by Harris (2001) are Microsoft that could use
its domination of world-wide computers to introduce new forms of money
transmission; or Tesco and Sainsbury who are among the major retailers offering
banking services to synergise their strong brands, their massive customer bases,
and their ability to offer higher interest rates to their customers. Even these
arguments given by Harris do not convincingly explain why retailers or car
manufacturers should move into banking which is a highly technical industry far
removed from their core competences. The real reason, according to an
experienced retailer interviewed during the course of this research, is that
becoming a bank allows them to take deposits, which are a cheap source of funds
to finance the credit activity attached to the sale of their products.

25
In addition to the banking sector of the financial services industry insurance firms
have also found similar pressures. According to Watkins (1998, p.42-47):


1. In the life assurance sector there is a shift from low value to higher value
products: from life assurance to investment; from annual products to
single premium products; from simple products like whole life, to
complex products such as utilised products; from rigid products to
flexible products; from mass marketing to individualised marketing; from
low advice to high advice levels; from obtaining new customers to
retaining and extending services to existing customers.
2. In the case of general insurance, in both the commercial and personal
lines markets, customers are buying mainly on price and will switch to
the cheapest supplier. To achieve higher retention rates and to overcome
price sensitivity, insurance companies are moving away from a product
culture to a service culture. A few examples are: (a) the introduction of
the all-embracing protection policy, instead of individual products; (b) a
major emphasis on improving quality of service by such measures as
documentation-while-you-wait, speedy reply to queries, better claims
handling and telephone advice; (c) for brokers, it would include access to
risk management skills and renewal incentives to retain customer loyalty.
3. In general insurance, the information on which underwriting is based is
also becoming more sophisticated. Direct marketing companies have the
advantage of starting with new systems that are client-based and have
MIS that provide data on key trends within seconds. The main problem
faced by the sector is the need to change from systems that deliver mass-
produced, standardised products to highly specialised systems that
provide customised insurance products for specific groups.


The question is, how can information technology investments create value in this
complex environment? According to Read et al. (2001, p. 97)
4
:

At its simplest level, value is created by generating revenues from the
delivery of products and services to customers that exceed the cost of the
delivery process.







So, in essence, the impact of information technology on value creation in any
organisation can happen either through increasing revenues or through reducing

4
This definition is based on economics; there are many other approaches to defining value (from
the strategy and organisation behaviour literature; marketing; labour economics; ). See Payne
& Holt (2001) for a literature review on different approaches to value.
26
costs, and thus enhancing operating profits. Following this it has been found
natural to organise this literature review along those two sources of value:
(1) Cost Reduction, and






Table 2.1. Key Papers in Literature Review





C O S T R E D U C T I O N R E V E N U E E N H A N C E M E N T
I T I N V E S T M E N T S I M , 1 5 1 - M c K i n s e y I n s t . ( 2 0 0 1 ) I M . 0 1 6 - M c K e e n ( 1 9 9 6 )
A N D P R O D U C T I T I V I Y I M . 1 3 8 - N e v e n s e t a l ( 2 0 0 2 )
I M . 0 0 7 - B r y n j o l f s s o n ( 1 9 9 3 )
I M . 0 0 6 - B h a r a d w a j e t a l ( 1 9 9 9 )
I M . 2 0 5 - H a y n e s e t a l ( 2 0 0 0 )
I M . 0 5 5 - B a n n i s t e r e l a l ( 1 9 9 9 )
I M . 0 1 3 - H i t t e t a l ( 1 9 9 6 )
I T I N V E S T M E N T S F O R I M . 0 4 5 - M c C o n n e l l ( 1 9 9 7 )
C O M P E T I T I V E A D V A N T A G E I M - 0 2 5 - W a t k i n s ( 1 9 9 8 )
I M . 0 2 8 - B a e t s ( 1 9 9 6 )
I M . 0 1 5 - M a t a e t a l ( 1 9 9 5 )
I M . 1 1 6 - P o r t e r ( 2 0 0 1 )
I M . 2 0 1 - D o n o v a n ( 1 9 9 7 )
C H A N G E M A N A G E M E N T : I M . 0 0 4 - B h a r d a w a j ( 2 0 0 0 )
C L O S I N G T H E G A P B E T W E E N I M . 0 1 2 - F e e n e y e t a l ( 1 9 9 8 )
I T A N D T H E B U S I N E S S : I M . 1 8 2 - H e r a c l e o u s e t a l ( 2 0 0 1 )
I M - 0 2 5 - W a t k i n s ( 1 9 9 8 )
I M - 1 6 5 - T r i c e & T r e a c y ( 1 9 8 6 ) I M . 0 1 6 - M c K e e n ( 1 9 9 6 )
I M - 1 6 9 - S a u e r e t a l ( 2 0 0 2 )
M C - 1 7 - M i n t z b e r g e t a l ( 1 9 8 5 )
I M . 0 9 6 - P e p p a r d ( 2 0 0 1 )
T R E A T I N G I T I N V E S T M E N T S I M . 2 6 - W e i l l & B r o a d b e n t ( 1 9 9 8 )
A S A P O R T F O L I O
I M . 1 9 8 - P r a h a l a d e t a l ( 2 0 0 2 )
I M . 1 2 7 - R o s s e t a l ( 2 0 0 2 )
I M . 1 3 3 - B e n a r o c h e t a l ( 1 9 9 9 )
I M . 1 9 9 - D a v i s ( 2 0 0 2 )
27
(2) Revenue Enhancement.
But, of course, there are several different perspectives with which researchers
observe the issues of both cost reduction and revenue enhancement; in this
review these perspectives are being classified in four categories:
(a) ICT Investments and Productivity;
(b) ICT Investments for Competitive Advantage;
(c) Change Management: Closing the Gap Between ICT and the
Business; and finally
(d) Treating ICT Investments as a Portfolio.

Table 2.1 indicates what have been found to be the key documents in the
literature that help understand the delivery of shareholder value through the
implementation of information technology in organisations. The focus of the
review is on financial services organisations, but other industrial sectors are also
analysed when it is understood that the findings would be applicable to
information intensive industries. The papers have been placed in the cell of the 2
x 4 matrix where they make the most contribution. However, when a paper
contributes in two cells, the arrow is indicating the area of secondary
contribution. The code beside each paper links table 2.1. to the ovals in figure
2.1.

2.2.Cost Reduction through the Application of ICT.

2.2.1 Cost Reduction through the Impact of ICT Investments on Productivity.

If one were to decide on what has made the decade of the 1990s different from its
predecessors in terms of business and organisation, two things would come to
mind:
a) Impressive growth in labour productivity, and
b) Sharp increase in information technology investments throughout every
industrial sector.

There is a natural tendency to link these two phenomena and justify the increase
in productivity on the massive introduction of transactional information systems
to support business processes, and to claim the presence of a New Economy. In
their study on the influence of ICT investments on US labour productivity, the
McKinsey Global Institute (2001, p.1) have found interesting results that seem to
challenge this link:



From 1995 to 2000, labour productivity grew at an annual rate of 2.5
percent nearly twice the 1972-1995 rate of 1.4 percent. During the
same years, US companies nearly doubled their pace of ICT
investments.



28
However, the McKinsey (2001, p.1) report concludes that ICT was only one of
several factors at work: Innovation (including but not limited to ICT),
competition and, to a lesser extent, cyclical demand factors, explain most of the
productivity growth.

An interesting finding of the McKinsey report is that:

Nearly all of the post-1995 productivity jump can be explained by the
performance of just six economic sectors: retail, wholesale, securities,
telecom, semiconductors, and computer manufacturing (the other 70
percent of the economy contributed a mix of small productivity gains and
losses that offset each other).

But, paradoxically, 60 percent of the acceleration in ICT investment was outside
of the six productivity growth sectors, and productivity growth actually declined
in some sectors, like hotels and retail banking, that invested heavily in ICT.

Is this a confirmation of the famous productivity paradox of ICT that the Nobel
Laureate economist Robert Solow has depicted as we see computers everywhere
except in the productivity statistics? (Brynjolfsson,1993; OECD, 2003).

When Michael Nevens (2002), co-author of the McKinsey study was asked by
Harvard Business Review to comment on what was happening in the industries in
which ICT had no impact on productivity, he replied that retail banking, which
invested heavily in ICT during the 1990s, is a case in point. There are isolated
examples of specific applications in individual banks that fuelled real business
benefits, but productivity did not improve in the industry as a whole. There are
several reasons for this:
(a) Many of the technology investments were designed less to reduce
labour costs than to increase revenue, and this is inherently more difficult
in a mature industry;
(b) Banks greatly increased product customisation, which increased the
complexity and cost of their ICT systems (in spite of this, banking
customers say they are less satisfied than ever with their banks!); and
(c) Many banks probably over-invested in computers. Between 1995 and
1999, banks spent more than US$ 5,000 per employee on ICT, enough to
buy them each two PCs ten times more than the rest of the private
sector.

A critique of the McKinsey report is that it does not take into account that an
economys productivity can increase in three ways (The Economist, 25 MAY
2002):
(a) Through the rise in productivity of existing companies;
(b) Through growth in market share of high-productivity firms at the
expense of the less productive ones; and
(c) Through the market entry of new firms and the exit of older firms.


29
Although this could have a big impact if the industry being analysed were high-
tech where the entry of new firms (i.e., as explained in case c) has an important
impact, in more mature industries like financial services the main influence on
productivity performance is given by existing firms.

A more fundamental flaw of the McKinsey claim, to which Nevens (2002) may
have been alluding, is that:

Aggregation across firms and industries, as well as the effects of other
economic changes, may disguise some of the impacts of ICT in sectoral
and aggregate analysis that are more evident from firm level analysis
(OECD, 2003, pp.76- 78).

This may also be because the impact of ICT on a sector depends on other factors
such as governemt sectoral policies, and regulations that affect some industries
more than others (e.g., financial services regulations that become a barrier for
banks and insurance companies to fully exploit the opportunities of ICT). The
OECD (2003, p.76) concludes its review of the literature on ICT and its impact
on economic growth citing Gretton et al.s (2002) finding that the firm-level
evidence suggests that ICT use:

is beneficial though under certain conditions to firm performance in
all countries for which micro-level studies have been conducted.
However, the aggregate and sectoral evidence is less conclusive about the
benefits of ICT use.

With respect to the productivity paradox of ICT, Brynjolfsson (1993, p.67) says
that:

Although similar conclusions are repeated by an alarming number of
researchers in this area, we should be careful not to over-interpret these
findings; a shortfall of evidence is not necessarily evidence of a
shortfall.

This paper reflects the results of a computerised literature search of 30 of the
leading journals in both IS and economics, as well as discussions with leading
researchers in the field.

As a result of his work, Brynjolfsson (1993, pp.72-76) arrives at four
explanations for the productivity paradox of ICT. The first two explanations are
positive in the sense that they challenge the paradox and confirm that ICT
investments have a positive effect on productivity, while the remainder have
negative implications:





30
(1) The easiest explanation for the low measurement productivity of ICT
is simply that output is not measured correctly. Most economists would
agree that the problems are particularly bad in service industries, which
happen to own the majority of ICT capital.
(2) A second explanation for the paradox is that the benefits from ICT
can take several years to show results on the bottom line. A survey of
executives suggested that many expected it to take as much as five years
for ICT investments to pay off.
(3) A third possible explanation is that ICT may be beneficial to
individual firms, but unproductive from the standpoint of the industry as a
whole, or the economy as a whole: ICT rearranges the shares of the pie
without making it any bigger. This effect is not unlike investments in
advertising.
(4) A fourth possibility is that, on the whole, ICT is really not productive
at the firm level. The investments are made nevertheless because the
decision makers are not acting in the best interest of the firm. Instead,
they are increasing their slack, building inefficient systems, or simply
using outdated criteria for decision making. While the idea of firms
consistently making inefficient investments in ICT is anathema to the
neo-classical view of the firm as a profit maximiser, it can be explained
formally by models such as agency theory and evolutionary economics,
which treat the firm as a more complex entity.


In a similar line, Haynes & Thompson (2000) subscribe to the measurement
problems of the unmeasureable sectors of the economy where output
determination is difficult and where productivity effects are correspondingly
harder to find. They add that the output measurement problem is intensified since
most ICT applications are both process and product innovation: that is they
impact on both the quantity and quality of any good or service being produced.
Again in line with Brynjolffson (1993), Haynes & Thompson conclude that
radically new technologies require an unusually long lag for results to show, and
add that they often require complementary investments in human and physical
capital and even organisational and contractual changes. Finally, Haynes &
Thompson (2000) say that much ICT investment may be unproductive because of
inappropriate deployment, and this is an issue that shall be tackled in depth in a
later section of this review.

In an effort to circumvent many of the usual problems encountered in using
service output and ICT capital input data, Haynes & Thompson (2000) research
the impact of ICT on productivity as measured through the introduction of ATMs
by building societies in the UK. The virtue of this approach is that it controls
factors by concentrating upon the deployment of a homogeneous embodied ICT
application in a narrowly defined financial market. Coming to the problem from
an econometric angle, Haynes & Thompson apply the Cobb-Douglas (C-D), the
constant elasticity of substitution (CES) and the translog forms of production
function
5
and reported that adopters showed a consistent seven to nine percent

5
Haynes & Thompson (2000) refer to Berger & Humphrey (1996) for a review on the literature
on estimating banking production functions.
31
productivity advantage over non-adopters. Of course, it can be argued that
applying the production function in general, and the Cobb-Douglas version in
particular, is completely inappropriate for ICT (Bannister, 2001, p.39). However,
the results reported in this paper do not support the ICT productivity paradox, as
they show that ICT investments may be associated with substantial productivity
gains; in fact, these results tend to support those who argue that the perceived
lack of productivity growth in services stems overwhelmingly from measurement
difficulties (OECD, 2003).

Bannister and Remenyi (1999, p.2) also support the concept of inadequacy of
output measurement when they say that over the past thirty years the computer
industry has grown to vast proportions (according to IDC, ICT investment in
1997 was US$1.8 trillion), and yet economists say there have been no perceivable
improvements in productivity.

Then the entire global managerial cadre must be responsible for a
colossal and collective act of enormous folly. Organisations would not
have made ICT investments on this scale if it were as irrational as some
economists claim.

Remenyi & Bannister (1999, p.2) cite Quinn and Baily (1994):

The real lesson here may well be that pronouncements by accountants
and economists on ICT value tell us more about the inadequacies of
accounting and economics than about the inadequacies of ICT
investment.

In another attempt to get around the limitations of accounting-based measures,
Bharadwaj et al. (1999) carried out a longitudinal study to determine whether
ICT investments affect firm performance measured by Tobins q
6
. The authors
rationalise that Tobins q which is defined as the ratio of a firms market value
to the replacement cost of its net assets - provides a more appropriate measure of
ICTs impact on firm performance than accounting ratios because:
(a) by relying on market valuation, q avoids many of the shortcomings of
accounting-based profit ratios; and
(b) accounting measures do not typically control for risk, thereby
providing an incomplete picture of the performance association of ICT
investments.
The latter is particularly important because the true contribution of any capital
investment should be assessed by considering its association with both the level
and the risk of current and future profitability. Information technology systems
have a significant effect on the risk of a firms income stream. Measures such as
the q have been shown to reflect the ex ante financial market valuation of the
level and risk of future profitability.


6
Tobins q is arguably the most enduring contribution to modern economics and finance of a man
(James Tolbin, 1981 Nobel laureate in Economics) whose vast scope of writing ranges from
sociology to macroeconomics and banking and finance.
32
Based on a sample of 631 firms over 5 years (1989-1993), with some 53 percent
from the manufacturing sector and 47 percent from services, Bhardawaj et al.
(1999) apply a hierarchical regression analysis where the key independent
variable is ICT spending ratio and the dependent variable is company
performance measured as Tobins q. The results of the hierarchical regression
analysis indicate that, in all of the five years, the inclusion of the ICT expenditure
variable in the model increased the variance explained in q significantly, which
indicates that the ICT variable provides unique information in explaining
variance in Tobins q. So the authors claim that:

(a) ICT contributes to long-run firm performance, and
(b) ICT contributes to firm intangible value, since Tobins q is a better
measure of long run firm performance than are the traditional accounting
performance ratios and it is a forward looking measure that takes into
account not only the level of expected future cash-flows, but also the risk
level associated with them.

An important limitation of this work, admitted by the authors, is that q is only an
aggregate measure of the intangible value of the firm, and further research is
needed to unbundle the various sources of intangible value, their appropriate
organisational measures, and the extent to which they are enabled by ICT.
Another strong limitation is Bhardawaj et al.s (1999) application of a simple
input-output model to assess the impact of ICT investments on firm performance
(McKeen & Smith, 1996; Crowston & Treacy, 1986). An alternative
conceptualisation would be to have a two-stage model that examines the effect of
ICT on intermediate process variables, which in turn would be associated with
higher level firm performance variables, such as market value and q.

Coming back to the productivity issue, Hitt & Brynjolfsson (1996), taking a
slightly broader approach, depart from a theoretical basis and the empirical
analysis of 370 top Fortune 500 firms over a period of five years from 1988 to
1992, to find that, on average:
ICT investments have a positive effect on productivity
ICT investments have no impact or, if anything, a negative impact on
profitability
ICT investments translate into consumer surplus
7





7
Definition of Consumer Surplus: The demand curve for a product represents how much
consumers would be willing to pay for each successive unit of the product. However, in practice
they need only pay the market price, so consumers with valuations higher than the market price
retain the surplus. Consumer surplus can be measured as the triangular area contained below the
demand curve and above the price.
33
The authors therefore claim that most of the benefits that firms make as a result
of ICT investments focused on productivity improvements are passed on to the
final consumers, since short term profit increases from new technology will
typically be eliminated by the increased competition that the new technology
facilitates. The authors suggest that this happens because managers either:

(a) Use their ICT investments to pursue a cost leadership strategy without
taking account of the fact that there are few barriers to the adoption of
ICT by their competitors, or

(b) Fail to look beyond productivity to focus on how ICT can address
other strategic levers such as product position, quality, or customer
service, and therefore find themselves making investments that render
competitive parity rather than sustained competitive advantage
8
.

Looking at the same issue from a different angle, the OECD (2003, p.79)
explains this in terms of the spillover effect that ICT usage has on gradually
improving the functioning of the economy, in the form of lower prices, better
quality and improved convenience.

Is it possible to overinvest in ICT? Several authors state so (Roach, 1991;
Nevens, 2002; Carr, 2003). Of course, much depends on how ICT is defined.
Carr (2003), whose controversial paper on the commoditisation of ICT and its
becoming an infrastructure (i.e. ubiquitious but not strategic) is based on a highly
restricted definition of ICT as storage capacity, processing capacity, and network
capacity. However, if a broader definition of ICT such as Sanchez &
Albertins(2004) (i.e. as a widely applicable technology aimed at enabling new
methods and processes, in combination with other investments) is taken, those
statements are questionable.

According to the structure that has been set up for this literature review (see table
2.1) the issues of applying ICT to achieve competitive advantage through cost
reduction should be tackled next. However, possibly due to Hitt & Brynjolfssons
(1996) findings mentioned in the previous paragraph, there is not much literature
to support this approach. Therefore the analysis of literature on ICT investments
for competitive advantage shall be left for later in this paper when revenue
enhancement is dealt with.



8
It is unfortunate that Hitt & Brynjolfsson (1996) discuss the relationship between competitive
advantage and barriers to entry, but do not give a clear definition of competitive parity and
sustained competitive advantage. These terms are used extensively in the strategy and ICT
evaluation literature, but are seldom defined with precision.
34



2.2.2. Cost Reduction by Closing the Gap between ICT and the Business.

On the basis of a matched sample comparison group, Bharadwaj (2000) employs
the resource-based view of the firm to develop the theoretical links and
empirically examine the association between ICT capability and business
performance. The author indicates the adoption of Grants classification scheme
of resources to arrive at the following classification of ICT resources:

(a) the tangible resource comprising the physical ICT infrastructure
components;
(b) the human ICT resources comprising the technical and managerial
ICT skills; and
(c) the intangible ICT-enabled resources such as knowledge assets,
customer orientation, and synergy.

Extending the traditional notion of organisational capabilities to a firms ICT
functions, Bharadwaj (2000) defines ICT capability as its ability to mobilise
and deploy ICT-based resources in combination or copresent with other
resources and capabilities.

The results of Bharadwajs (2000) study supports her two hypotheses:
- Superior ICT capability will be associated with significantly higher profit
ratios.
- Superior ICT capability will be associated with significantly lower cost
ratios.

Bharadwaj (2000) found that all profit ratios were significantly higher for the ICT
Leaders, for the four years tested; that total operating expense to sales (OEXP/S)
ratios were lower for the ICT Leaders; and that cost of goods sold to sales
(COGS/S) ratios were also lower for ICT Leaders. Surprisingly, the results also
indicate that Selling and Administrative Expense to Sales ratio (SGA/S) were
higher for ICT Leaders, which indicates that ICT Leaders typically incurred
higher overhead costs per unit of output:

and provides further evidence that an ICT capability may be developed
and sustained even at higher costs, if the additional costs are more than
offset by increased revenues (p.187).

This could also indicate that:
(a) ICT leaders do not have a cost focus, but exploit ICT for revenue
generation (Griffiths & Remenyi, 2003a), and
(b) investments do not reduce costs, but lead to cost avoidance and to
transform cost structures (Keen, 1991; Scott Morton, 1991).

Bharadwajs (2000, p.187) paper concludes that:
35

By establishing the link between IT capability and superior firm
performance, the study indicates that firms should do much more than
merely invest in IT; they should find ways to develop firm-wide IT
capability.

Building these capabilities is complex and takes time, and there are no clear-cut
guidelines, but some attempts by other researchers will be dealt with in the
following pages. A limitation of this study is that although there are clear
indications that strong ICT capabilities lead to superior performance, the
underlying mechanisms through which this is achieved is not clear. Further
research to determine the full chain of variables connecting ICT capability to firm
performance is required. Other methodological limitations of this work derive
from the matched-sample approach. Are the benchmark firms the right selection?
Would it not be better to benchmark the ICT leader firm against the rest of the
industry? And no correction has been made for the influence that good prior
financial performance (halo effect) has on reputation ratings by industry experts
(Santhan & Hartono, 2003).

Feeney and Willcocks (1998) take up the question of core IS capabilities for
exploiting information technology. In their paper the authors propose a model
that defines nine key IS capabilities for achieving a two-way business strategy
and ICT alignment, and that are pre-requisites for companies to be able to obtain
cost reductions through outsourcing.

Feeney and Willcocks (1998) identified three enduring challenges in ICT
exploitation that the company needs to successfully address over time:

a. Business and ICT Vision: the challenge is to address the need for two-way
strategic alignment between business and technology. A company should
consistently focus IS efforts to support business strategy and, in addition, ICT
developments can enable new, superior business strategies.
b. Delivery of IS Services: the challenge of delivery of IS services at low cost
and high quality is being transformed by the emerging vibrant services
market. The first aspect of this challenge is to proactively devise and manage
effective sourcing strategies, but it goes further than that and involves the
adoption of new ICT management prescriptions to cope with the
unprecedented pressures on the IS function to develop new systems faster and
to achieve higher performance in the operation of existing services.
c. Design of ICT Architecture: the choice of a technical platform on which to
mount IS services is the first critical step in achieving the technology asset of
the business, and it is linked closely to changes in technology capability and
supplier health. This is a big challenge with business life cycles of ICT
companies spanning years rather than decades; with needs to keep ICT
architecture open to the changing demands of the host business; and with the
blurring of organisational boundaries that may lead to profound changes in
what Keen (1991) calls reach and range of the platform.

36
These challenges are closely interrelated, and understanding their relationship can
be facilitated by applying the Managing by Maxims framework proposed by
Weill and Broadbent (1998). The strategic context of the firm will lead to
business maxims that will, in turn, give place to technology maxims. Once top
management has agreed on the technology maxims, they will develop a view of
the information technology infrastructure they need. An enabling view of
infrastructure will open strategic opportunities and allow the two-way alignment
indicated in challenge (a). However, in an environment that prioritises cost-
reduction, as is the main concern in this section, the firm will most probably
adopt a utility view of infrastructure which will define an almost exclusively
one-way link between strategy and ICT, and will define the architecture to be
adopted (challenge c) for a low cost operation (challenge b).

In order to meet these challenges, Feeney & Willcocks (1998) arrive at the
following nine core IS capabilities that should be developed by the firm:
Leadership, Business Systems Thinking Managers, Relationship Building,
Architecture Planning, Making Technology Work, Informed Buying, Contract
Facilitation, Contract Monitoring, Vendor Development.

According to Weill and Broadbent (1998) information and technology decisions
are political
9
issues because there is a natural tendency for managers not to share
information
10
. On the other hand, implementation of information systems can
result in radical changes in the way work is performed. An example given by the
authors is:

many insurance firms are investing in workflow systems in which tasks
such as claims processing are routed via information technology to a
claims processor who may be working from home. The technology has
completely changed the dynamics of the relationship between supervisor
and worker.

In addition to these issues and no matter how carefully information systems
projects are planned, the deployment of new systems frequently has unintended
consequences on the organisation and its people.

Due to the impact of information technology on the organisation and its people,
stakeholder management is essential for obtaining the benefits of information
technology investments. Heracleous & Barrett (2001) illustrate this by analysing
the communications between three stakeholder groups in the implementation of
an Electronic Placing System (EPS) at the Lloyds Insurance Market (LIM) in the
early to mid 1990s. The market leaders (who promoted the project) key goal
was to maintain Londons competitive position as a premier global insurance
centre through the streamlining of business processes (cost reduction) and
showing technological leadership at the visible front.


9
Also a conclusion of Farbey et al (1999)
10
Davenport (2003) also supports this conslusion.
37
To understand the implications of this change, a brief summary of the authors
overview of how this market works (and has worked with limited changes for the
last 300 years!) will follow. Risk placement of insurance started as a business in
the coffeehouses of Lloyds of London in the early 1700s and has over time
developed a number of institutionalised practices. At his or her office, a broker
first prepares a paper slip containing a clients risk details. The broker then
walks over to the Lloyds building to queue up at an insurers desk to negotiate
the financial terms and conditions with a lead underwriter, who subsequently
assumes a proportion of the risk. Through this manual process, relationships of
trust are developed or maintained between brokers and underwriters. Once the
lead underwriter assumes a portion of risk under certain conditions, brokers then
walk the risk around the market soliciting further participation by following
underwriters. Interested following underwriters subscribe to a percentage of the
risk under the agreed upon conditions until the risk has been fully insured. The
transaction is then finalised with the Client, the premiums are paid, and the
broker receives the appropriate commission. Apart from the absence of the corner
reserved for ship captains to compare notes on the hazards of all the new routes
that were opening up, and that it does not operate round the clock, the description
given by the authors of modern day LIMs operation is remarkably alike the
description of Edward Lloyds coffee shop operation described by Bernstein
(1996, p.90)!


The three stakeholder groups that Heracleous & Barrett (2001) analyse are:


(a) the Market leaders who, as mentioned, are pushing to keep LIM in a
global competitive position,
(b) the brokers and underwriters who believe that EPS will erode quality
of work and that traditional relationship-based trading is critical for LIM
to remain an innovative market, and
(c) the multinational brokers who believe the expected efficiency to be
introduced by EPS is critical to their survival, but who are not committed
to LIM and are prepared to join other electronic trading systems if they
are more advantageous.


The authors explore the change processes associated with the introduction of
electronic trading across the London Insurance Market and how these change
processes were influenced by the discourses of different stakeholder groups over
time. Taking a rhetorical and hermeneutics approach, the authors perform a
discourse analysis of the three stakeholder groups to identify two levels of
discourse: communicative action and deep structures. This research indicates that
leaders should go beyond what multiple stakeholder say about intended
implementation of information systems and attempt to understand the deeper
values and beliefs of the stakeholders that are enshrined in the groups discursive
structures because these are what persist over time and guide actors
interpretations and actions. It is the deep structures that are the main influence on
what the stakeholders say and do and therefore on the success or failure of
systems implementation. In this particular case, it was the irreconcilable
38
differences in the deep structures of the three stakeholder groups that led to the
failure and eventual abandonment of the EPS project at LIM. A recent report in
the The Economist (2004) announced that Lloyds is investing over 50 million
pounds on a new, and again controversial, ICT overhaul project (now called
Kinnect) it will be interesting to see if its management has learned the lesson.


Another aspect of change management is that benefits of systems are only
realised if the system is used. Trice and Treacy (1986) carry out a discussion on
measurement issues associated with utilisation variables, based on a review of the
literature and an examination of three relevant reference theories. The authors
point out that the majority of research implicitly defines utilisation (to be
understood as usage) of MIS as either the amount of effort expended interacting
with an information system or, less frequently, as the number of reports or other
information products generated by the information system per unit of time.


Trice & Treacy (1986) conclude that two features stand out from this summary of
the bulk of the last 10 years of the utilisation literature. First, there is a lack of an
accumulation of knowledge in this area, which is in part attributable to the lack of
any standardised measures. This shortcoming in standardised measures can be
traced back to a lack of underlying theory to guide the choice of measures and, in
the absence of an underlying theory, it is the research methodology rather than
the theory that drives the choice of utilisation measure. The authors argue that
this is an important problem because consistency of measurement, and thus a
cumulative tradition, can only be achieved if the proper reference theory, rather
than the research methodology, guides utilisation definition and measurement.
Second, there is a relatively large proportion of studies that employed self-
reported utilisation measures, even though unobtrusive ones are often obtainable
and, as a rule, more accurate. Even though machine usage statistics are routinely
logged and readily accessible (at least in the case of mainframe computers),
according to the literature survey, thus far they have been employed far less
frequently than self-reported measurements. This is probably because
organisations are more willing to give an interview or fill a questionnaire, than to
turn over this sort of statistical information.


Probably the most important finding of the Trice and Treacy (1986) paper is that
the research surveyed indicates that linkages between utilisation and its
determinants are not well understood. The lack of theoretical understanding has
in turn caused methodological problems. Many utilisation studies have measured
the relationship between various independent variables and utilisation directly
without paying attention to intervening variables. The authors also look at the
forward linkage between utilisation and performance. It is clear that forward
linkages should exist if a system is to affect performance, since information
technology cannot have an impact on performance if it is not used in some way.
However, the nature of the linkages is also not clear, and a management
information system can have a negative impact on performance if it is wrongly
designed or implemented.

39
Although understanding the nature of both backward and forward linkages is an
important step, taken together the two linkages do not provide a complete and
consistent view of the significance of utilisation as an intervening variable.
Constructing a continuous theoretical path from information technology through
utilisation to performance may still be difficult. The model proposed by the
authors in their paper is as shown in figure 2.2.

In summary, utilisation is an important intervening variable in the link between
ICT and performance, and although much valuable research has been performed,
utilisation is still not well understood or well measured. McKeen and Smith
(1996) take up this issue by applying the Trice & Treacy (1986) model of usage
as intervening variable between ICT and performance to a population of financial
service organisations in Canada, which shall be analysed in this review when
looking at the impact of utilisation on revenue enhancement.





Figure 2.2. Three-construct model for IT Usage (Trice & Treacy, 1986).



Finally, organisations need to find a way of improving the relationship between
the IS organisation and the rest of the company as a means of increasing the
value derived from ICT. Peppard (2001) empirically develops a process model
that provides a route map for organisations attempting to bridge the gap,
increase the performance of the IS function and, consequently, the contribution of
IS to the business. In this paper Peppard (2001) first develops a longitudinal
multiple-case study taking three organisations belonging to information intensive
industry segments and then, departing from the empirical cross-case study
information, the author theorises and proposes a process model for transforming
the value-added contribution of IS. This model contains six stages and
summarises the general areas to be addressed in creating a value-added
partnership between the IS organisation and the business, as follows:
Stage1: Get the basics right
Stage 2: Enlist key influencers
Stage 3: Build credibility.
IT Investment Utilisation Performance
Other
Variables
Other
Variables
40
Stage 4: Seek involvement early in projects
Stage 5: Place responsibility for IS with business
Stage 6: Cultivate and maintain partnership

It is proposed that by applying this process model, organisations shorten the cycle
time required to realise the benefits of their ICT investments. The model still
needs further validation, but it is clear that firms aiming at achieving cost
advantage through the implementation of ICT should carry out some process of
this sort to shorten the period required to show results on the bottom line and
counteract the second explanation given by Brynjolfsson (1993) for the
productivity paradox (see section 2.2.1).

2.2.3. Treating ICT Investments as a Portfolio for Achieving Cost Reduction.

The discussions to be dealt with in this section centre around how business
leaders view their firms ICT infrastructure in the context of their business
strategy, and what criteria do they use for deciding ICT investments. The sort of
questions that will be dealt with are: What infrastructure is needed to support the
firms business strategy? Will the infrastructure be treated as a utility aimed at
minimising the cost of doing business, or will it be an enabler for dynamic
strategies and for mobilising the synergies across the different business units?
And what about the applications, will they pursue standardisation and throughput
to ensure cost advantages (efficiency), or will they support innovation at the
product and process level for revenue enhancement (flexibility)? How do
companies justify investments in ICT infrastructure? How do they take risk into
account in their decision making? Do they analyse the option of deferring
investments?

Weill & Broadbent (1998, p.15) define architecture as an integrated set of
technical choices used to guide the organisation in satisfying business needs. The
authors define information technology architecture as:


a set of policies and rules that governs the use of information technology
and plots a path to the way business will be done in the future. This
architecture is not set in concrete and needs to constantly be reviewed. In
most firms it provides the technical guidelines rather than the rules for
decision making. An architecture has to cope with both business
uncertainty and technological change, making it one of the most difficult
tasks for a firm.

Another important definition by Weill & Broadbent (1998, p.24) that shall be
used here is:

The information technology portfolio of an organisation is its entire
investment in information technology, including all the people dedicated
to providing information technology services, whether centralised,
decentralised, distributed or outsourced.
41

According to Weill and Broadbent (1998) firms invest in information technology
to achieve four fundamentally different management objectives: infrastructure,
transactional, informational and strategic. These management objectives lead to
an ICT infrastructure and transactional, informational and strategic systems
which, together, form the organisations ICT investment portfolio as shown in
figure 2.3. Each component of this portfolio brings to the firm a different set of
capabilities as follows:


Infrastructure technology objectives: The infrastructure capability
includes both the technical and managerial skills to provide reliable
services like firm-wide communication network services, provision and
management of large-scale computing, the management of shared
customer databases, firm-wide intranet capability, and R&D expertise
aimed at applying emergent technologies to the business. On top of this
infrastructure sit the applications that support the business processes and
which conform the other three components of the ICT portfolio.
Transactional technology objectives: The next level of the ICT portfolio is
the transactional information technology that processes and automates the
basic, repetitive transactions of the firm. These include systems that
support order processing, inventory control, bank cash withdrawal, claims
processing, statement production, accounts receivable, accounts payable
and other transactional processing. Transactional systems aim to cut costs
by substituting capital for labour or to handle higher throughput with
greater speed and less unit cost. To be more precise, the authors should
have said that these applications support future cost avoidance rather than
actual cost reduction (Keen, 1991).
Informational technology objectives: Systems in this category typically
support management control, decision-making, planning, communication
and accounting. The data come from summaries of the transactional
systems, such as the account ledgers, and from external data services on
the industry, competitors and economy. The product of informational
systems is a combination of data, information, and knowledge as an input
to decision-making and control. Examples of these are management
cockpit systems and data-warehousing systems.
Strategic technology objectives: Strategic investments are made to gain
competitive advantage or to position the firm in the marketplace, most
often by increasing market share or sales. Firms with successful strategic
information technology initiatives have usually found a new use of
information technology for an industry at a particular point in time. The
authors say that the best way to determine a successful strategic
information technology initiative is to check for competitors responses in
the form of copying or improving on the initiative; and they give as an
example the first finance company to provide immediate 24-hour, seven-
day-a-week loan approvals in car dealerships using expert system
technology. Immediate loan approvals changed the way cars were sold.

42
Systems evolve over time in terms of their positioning in the portfolio. A
classical example is that of ATMs which were introduced in New York by
Citibank in the early 1980s to give its customers 24-hour access to their funds
(and, incidentally, shift workload from the banks employees onto their
customers) which gave that bank a thrust in market-share from 4 percent to 13
percent (Weill & Broadbent, 1998). As other banks followed and the technology
matured, it was used by banks to reduce their transaction costs, as the cost for the
bank of doing a transaction via ATM is two to three times less that doing the
same transaction via a branch teller. ATMs therefore became transactional
systems. Finally, as seen in the Haynes and Thompson (2000) case, banks have
linked up their ATM networks which has turned them into public infrastructure
that banks pay for on a transaction basis.

Considering that the concern in this section of the review is on how
organisations manage their ICT portfolio to reduce costs, the focus is on the
transactional systems component, and on how organisations manage their ICT
infrastructure component for cost optimisation. Strategic systems shall be
analysed later in this paper under revenue enhancement. Informational systems
components will be present in both organisations following cost leadership or
revenue enhancement strategies, but of course the objectives and type of
information they pursue are different.

Figure 2.3. Management Objectives of the Information Technology Portfolio
(Weill & Broadbent, 1998).
Weill and Broadbent (1998) use a sample of 54 businesses in 27 companies to
obtain five years data on information technology investments for analysing the
value of information infrastructure. These companies were based in seven
Informational Strategic
Transactional
Infrastructure
Increased control
Better information
Better Integration
Improved quality
Increased sales
Competitive advantage
Competitive necessity
Market positioning
Innovative services
Cut costs
Increased
throughput
Business integration
Business flexibility and
agility business units IT
Reduced IT costs over time
Standardization
Creating Business Value Through Information Technology
43
countries and belonged to three industrial sectors: financial services (banking and
insurance), process manufacturing and retail. The three industries differed in
their dependence on information technology and in how they allocated resources
within the portfolio.

Several key trends are apparent over the five years data:
Increasing their dependence on information technology at 12 percent per
year in dollars and more than 3 percent per year as percentage of
expenses. In the case of the finance industry, ICT expenditure over the
five year period represents 14.2 percent of total expenditure or 7 percent
of revenues.
Increasing central co-ordination and sharing infrastructure investments
but reducing centrally co-ordinated applications. The financial services
sector has the highest percentage of corporate ICT investments as
proportion of total ICT investments, which amounts to 73 percent.
Increasing their business units strategic and transactional investments in
information technology at more than 18 percent and 19 percent,
respectively. This trend is particularly strong in financial services where
the corresponding growth percentages are 25 percent for both
transactional and strategic investments.
Outsourcing an average of 10 percent of their information technology
investment and increasing at more than 8.2 percent per year. Financial
services appear to be the laggard in this dimension as only 5.9 percent of
ICT investments are outsourced.

Weill and Broadbent also find that the four types of information technology
investments have different risk-return profiles. Transactional information
technology is usually a reliable investment and the authors found that companies
that do not see information technology as a core competence tend to bias their
ICT portfolio towards the transactional systems investments. Likewise, firms
wishing to gain cost reduction economies from information technology, rather
than strategic positioning, will have a minimal infrastructure and a portfolio
heavily loaded with transactional investments. They will have minimal strategic
systems and their informational systems investments will be focused on obtaining
cost control information.


Finally, during their research Weill & Broadbent (1998, p. 96 ) identified four
approaches to information technology infrastructure investments that they call
strategic views of ICT infrastructure. The four views are:





None: No firm-wide information technology infrastructure
Utility View: Employ firm-wide infrastructure where clear cost-savings
are achieved
44
Dependent View: Infrastructure capability driven by a current business
strategy, such as customer service.
Enabling View: Infrastructure is a core competence, and extensive
capability is provided to increase strategic options.


The four views involve different levels of up-front infrastructure investments,
with different approaches to cost justifications and different benefit profiles (see
characteristics in figure 2.4). A utility view of infrastructure implies that
expenditures on ICT infrastructure are made primarily to achieve cost savings
through economies of scale. The infrastructure is not a strategic resource, but
rather a utility that incurs administrative expenses and is a necessary and
unavoidable service. The management thrust is to minimise the expense for a
desired level of service. This is the view taken by firms that focus on cost
leadership.

A rigid information technology infrastructure will stymie even the best
strategic initiatives, making it difficult to introduce change in cost- and
time-efficient ways. An applications-infrastructure scorecard can help
managers consistently recognise inherent trade-offs between efficiency
and innovation and create a more flexible application-portfolio
framework (Prahalad & Krishnan, 2002, p.24 )

This is the conclusion of a study done by Prahalad & Krishnan (2002) working
with more than 500 business leaders in large companies over a period of four
years. The objective of the study was to determine the capacity of these managers
to lead change within their companies.
45

Figure 2.4. Different Views of Information Technology Infrastructure (Weill &
Broadbent, 1998).


The authors apply the portfolio concept to the applications, that is the set of
transactional information systems that sit on top of the infrastructure to support
the business processes. The key for success here is to get the right balance
between support for innovation and experimentation (flexibility), and support for
standardisation (efficiency). Getting this balance right means understanding the
competitive reality of the firm and how it affects its internal business processes
which lie on a continuum between a Stable Domain (low variance in user
expectation) and an Evolving Domain (high variance in user expectation). One
can envision at the bottom of a funnel the stable domain applications which have
a low-risk profile, and the evolving domain applications, such as those geared to
improving channel management in insurance companies, have higher risks and
go near the funnels top (see figure 2.5). How do companies manage a portfolio
of applications? If competitive realities are pushing companies to create new
business models and experiment with evolving domains, the need for more
None Utility Dependent Enabling
Independence
Forgoing any
Economies of
Scale
Cost Savings Via
Economies of
Scale
Life-of Strategy
Business Benefits
Current and
Future Flexibility
View
Management
Objective
Independent
business units
No synergies
Often not a strategic
resource
Utility service at
lowest cost
Adminstrative
expense
Response to
particular
current strategy
Derived from
business plans
Business expense
Integrated with
strategic process
Enables new
strategies
Influenced by
strategies
Business investment
to achieve agility
Identifying Opportunities to Create Value
46
applications at the top of the funnel is pronounced. But the mission-critical
nature of such applications drives managers to stabilise processes early, forcing
the applications to the bottom of the funnel in order to reduce the risk profile.
The tension between innovation and stability means the application portfolio in a
companys information infrastructure is constantly churning. The rate of churn
also reflects the level of innovation and changes in the business processes. From
this analysis it is clear that cost leadership strategies are applicable only in the
more stable process domains where the firm can invest for efficiency.


Figure 2.5. Application-Portfolio Dynamics (Prahalad & Krishnan, 2002)

This study concludes that generating a dialogue between business and technology
managers is necessary to solve these dilemmas, and suggests the six questions
that are critical for such a dialogue: (a) What is the role of application strategy?
(b) Is knowledge about the business-process domain stable or evolving? (c) How
much does the application get changed? (d) Where do we source the application?
(e) What is the nature of the data? (f) What are the quality problems? On the
basis of these questions the authors propose a scorecard to assess the ICT
applications of the firm.






MANAGERIAL
PREOCCUPATION
APPLICATIONS WITH
CONFORMANCE VIEW
OF QUALITY
EVOLVING
DOMAIN
High variance in
user expectations
STABLE
DOMAIN
Low variance in
user expectations
APPLICATIONS WITH
EXPERIMENTATION
AND INNOVATION
INNOVATION
EFFICIENCY
COMPETITIVE
REALITY
APPLICATION - PORTAFOLIO DYNAMICS
MANAGERIAL
PREOCCUPATION
APPLICATIONS WITH
CONFORMANCE VIEW
OF QUALITY
EVOLVING
DOMAIN
High variance in
user expectations
STABLE
DOMAIN
Low variance in
user expectations
APPLICATIONS WITH
EXPERIMENTATION
AND INNOVATION
INNOVATION
EFFICIENCY
COMPETITIVE
REALITY
APPLICATION - PORTAFOLIO DYNAMICS
47
Moving onto the question of how companies justify ICT investments, the work of
Ross & Beath (2002) is analysed. Traditional approaches to ICT investment
attempt to identify projects with the best profit potential. Proponents of the
investment make the business case to senior management. The heightened
strategic importance of ICT, however, has forced companies to think differently:
(a) they now tend to weigh the returns on individual investments against demands
for organisation-wide capabilities, and (b) they also assess opportunities to
leverage and improve existing systems and infrastructures in light of
opportunities to create new capabilities and test new business models. These
complex trade-offs are leading to new ICT-investment patterns.

Ross & Beath (2002) carried out a qualitative, multiple-case study encompassing
thirty North- American and European companies. They found that many business
leaders were abandoning the security of the business case but were themselves
unclear as to whether they were initiating a trend that would shape future
behaviour or merely taking a temporary detour. Analysing the practices of
companies in their study, the authors found that investments differ along two
dimensions: strategic objectives, which highlight the trade-offs between short-
term profitability and long term growth, and technology scope, which
distinguishes between shared infrastructure and business solutions. To address
both dimensions companies need to make four distinct types of investment:
transformation, renewal, process improvement and experiments. The authors
give an interesting guide on how funding decisions should be made and who
should be the owners of the project. Only Renewal and Process Improvement
initiatives should be decided on the basis of a business case; Transformation
processes should de funded on the basis of an executive-level (company-wide)
allocation, and Experiments should be funded on the basis of business or
executive-level allocation but should be managed by the business unit or
functional area needing to learn. As can be seen, the criteria defined for
Experiments and Transformation investments are aligned with the criteria
proposed above by Weill & Broadbent (1998) for the Strategic investments and
Infrastructure investments, respectively.

So companies should formally establish four pools of resources (Transformation,
Renewal, Process Improvement, and Experiment) and then avoid the temptation
to under-fund one or more of the ICT investment types. A massive
transformation initiative or economic downturn could lead to temporary
reduction in an investment fund, but both short-term profitability and long-term
growth demand sustained investment in all four ICT-investment types. What
Ross and Beath (2002) do not do is give any indication on how investment
categories are prioritised in accordance to business strategy. However, relating
this to previous readings, an organisation following a cost-leadership strategy
(therefore focusing on cost reduction, which is the focus of this section) would
take a utility view of information technology and therefore prioritise the Renewal
and Process Improvement investment categories.



48
Having mentioned the limitations of traditional financial models such as
discounted cash flow (DCF) methods for building business cases, this review will
now analyse alternatives that allow for incorporating risk analysis and the value
of deferral options in information technology investments. There have been
attempts to use Option Pricing Method for evaluating information technology
investments. Although this technique is at an early stage and a lot more research
needs to be done before it can be used by practitioners, its capability of managing
asymmetric returns and deferral options makes it look promising. However,
because it is particularly adequate for the analysis of infrastructure and strategic
investments (more appropriate to an enabling view of technology), it will be
tackled in the corresponding Revenue Enhancement section of this paper.

In a proposal of a framework for evaluating product development projects, Davis
(2002) addresses the limitations of traditional financial models where, for
example, NPV is applied and an IRR of 53 percent is obtained. Should the
proposal be approved? It depends upon the assumptions and the risks that
underlie them. However, traditional financial models provide little if any insight
into those assumptions and this reveals one of the challenges inherent in
reviewing traditional proposals: They describe risks in a way that is designed to
persuade rather than inform the decision-maker. Few product-development
practitioners would admit to optimism in their assumptions to support a favoured
proposal, safe in the knowledge that there is little possibility that the assumptions
will be challenged. Particularly in the early stages, detailed estimates can be off
by orders of magnitude, according to Davis (2002).

Over-emphasising positive aspects of information technology initiatives is also
common. Harris (2001, p.38) is explicit when she says:

Other writers have gone further by claiming that the figures upon which
investment decisions are based may be at best inaccurate or even
manipulated for political reasons in order to force through a favoured
solution.

Based on experience at Xerox, Davis (2002) proposes the Net Present Value
adjusted for Risk (NPVR) model applying risk-adjusted projections in future cash
flow for product development evaluation. The NPVR model relies on using
experience and judgement to subjectively assess risk relative to one or more well-
defined extreme situations, for example, guaranteed success or failure. It assesses
the strength of a business case in six key areas of technical, market and user
needs risks by using a risk scoring vocabulary that is common across portfolio
categories. Rather than demand an estimate of probability, the NPVR model
scores risks as having a high, medium and low ranking of success. By relying on
a simple, qualitative vocabulary for risk assessment, the model avoids the
common but unproductive discussions that can occur about the precision of
estimates. It is more useful to understand whether the chances of success are high
or low than to seek consensus on whether the numbers are 83 percent or 17
percent. Qualitative assessments can be converted to numerical values after a
consensus emerges. NPVR is calculated as follows:
49
NPVR = (aM+bM+cT+dT+eU+fU)/10 x NPV where a, b, c, d, e and f are the
value chain, market segment, innovation, capabilities, interaction and
specification assessments, respectively, each of which has to be ranked on a 1-to-
5 scale. The values for the risk weighting, M (market), T (technical) and U
(user), are determined by questioning the proposal sponsor, referring to business
case data, and then assigning the proposal to a portfolio category.

Why not adapt the NPVR concept to information technology project
investments? Analysis of the variables to see how they can be adapted to the
information technology investment space is an interesting theme for future
research.



2.3 Revenue Enhancement through the Application of ICT.


Streamlining operations is not an end in itself. As an intrinsically cost intensive
sector, services must also expand (Roach, 1991). There is substantial research in
UK organisations to support that cost reduction, which mostly takes the form of
redundancy, delayering, or some combination of both, is perceived to have only a
weak effect on profitability improvement, and a strongly negative effect on the
survivors and on the residual organisational context and culture in which the
survivors remain working (Worrall & Cooper, 2002). Considering that cost
cutting indiscriminately will put at risk long-term performance, attention will
now be given to revenue enhancement.

2.3.1 Revenue Enhancement Through the Impact of ICT Investments on
Productivity.

Because information technology investments for increasing productivity are more
related to cost optimisation than to revenue enhancement, and because this
review has dealt with the literature on productivity at considerable depth in
section 2.2.1, the issue will not be dealt with extensively here. However, one
study should be mentioned and that is the paper by McKeen and Smith (1996) in
which the authors, prompted by the challenge to demonstrate the value of ICT in
organisations, apply a simplified version of the model proposed by Trice and
Treacy (1986) - shown in figure 2.3 - to study forty organisations in information
intensive industries (financial services) in Canada. This is a longitudinal,
quantitative study based on survey information from a sample of 40 organisations
21 life insurance, 10 general insurance, 4 banks, and 5 trust companies over
the period 1977-1991. McKeen & Smiths simplified, three-construct model is
given in figure 2.6:





50







Figure 2.6. McKeen & Smith Model



The study demonstrates that, for this sample, each dollar spent on information
technology is associated with additional revenues of $19.06 per white-collar
worker. Within the sample there are 21 organisations (just over half the sample
of 40) that have shown a significant relationship between their investments in
ICT and their business revenue per white-collar worker over time. These 21
organisations are not unique to banking, trust life insurance or to general
insurance which suggests that the ability to derive benefits form ICT is less
industry specific than it is specific to deployment. There are 19 organisations that
have been investing in ICT over many years without a significant discernible
impact on organisational performance. The authors compare the two groups (21
and 19) on the basis of twelve variables and find that only one of them proved to
be significant: ICT usage. It appears that the stronger the relationship between
ICT usage and business revenue, the stronger the relationship between ICT
investment and organisational performance. Are these results valid? Is there any
evidence to support the causality relationship between variables?

McKeen & Smith (1996, p. 20-21) develop an interesting discussion on the
internal validity of the model, as follows:

Although we have not explicitly claimed that the investment in ICT has
caused an increase in organisational performance, we also have not
claimed that it didnt. Therefore the question of cause and effect should
be raised. According to Cook and Campbell (1979), the three conditions
for assuming with any confidence that the relationship between two
variables is causal are (a) the variables must co-vary, (b) there is
temporal antecedence, and (c) there are no other plausible alternative
explanations.

The authors state that the first condition has been satisfied in that they have found
a statistically significant relationship between the ICT investment and
organisational performance per white-collar worker for the 40 organisations
examined. McKeen & Smith (1996) say that the second condition of temporal
antecedence is not as straight forward as it first appears. It is clear that one must
invest in information technology before it can be used, and it is also clear that
benefit from information technology cannot be realised without using it; but
investment in ICT is an ongoing activity that is associated with long term effects
and, because of this, there is the possibility of feedback. That is, enhanced
IT Investment IT Usage Performance
51
performance may encourage organisations to invest more heavily in ICT, which
should increase ICT usage (depending on the effectiveness of the deployment of
ICT). Because McKeen & Smiths (1996) research has adopted an enterprise
level of analysis and because it is a longitudinal study, the likelihood of this
happening is high. The authors stress that this does not weaken the argument for
temporal antecedence, it just allows for organisational learning. No doubt, the
experience of investing in ICT and witnessing its effects on organisational
performance directs organisations in their future investments in (and deployment
of) ICT.

With respect to the final condition of causality, it involves searching for variables
not explicitly included in the model that may be causing the observed behaviour
(e.g.: advertising, competition, general business cycles and economic climate,
changes in competitive practices, strategic position within the market and quality
of workforce). McKeen & Smith (1996, p. 21) say that the point is that marketing
can increase sales but it has no ability to increase sales per employee:

We are saying that sales per employee will more likely be a function of
the deployment of ICT to enhance that employee. This is particularly true
in organisations that only have two resources ICT and people.

Similar arguments can be applied to other variables:

Because of the longitudinal nature of this study, cyclical effects,
business cycles, competition, and even quality of the employee are
mitigated. If they were not, then organisations would simply cease to
exist.

This argument is not to suggest that there are no other variables that impact the
relationship between ICT investments and organisational performance; what it
means is that researchers need to look at those variables that impact their specific
measure of organisational performance in this case business revenue per white-
collar worker. Because the organisations in the sample were information
intensive (Mata et al., 1995) and have only two resources people and ICT - it is
reasonable to suspect that the deployment of these resources would have a greater
impact on revenue per employee than perhaps any other single variable.

In summary, the model has been developed with the sufficient internal
consistency (i.e.: logical formulation, the level of analysis, the longitudinal focus,
and the operationalisation of the constructs) to suggest that there is likely to be a
causal effect.







52

2.3.2 Revenue Enhancement Through ICT Investments for Competitive
Advantage.


Weill & Broadbent (1998) introduce Treacy & Wiersemas (1995) notion of three
value disciplines as a tool for highlighting implications of different business
strategies for technology choices. Successful organisations or market leaders
usually excel at delivering one type of business value to their chosen customers.
The three value disciplines are:

Operational Excellence, under which businesses emphasise efficiency and
reliability, lead the industry in price and convenience, minimise overhead
costs, and streamline the supply chain.
Customer Intimacy, with a focus on the cultivation of relationships, lifetime
value to the company, satisfaction of unique needs, customer service and
responsiveness and customisation based on deep customer knowledge.
Product (or Service) Leadership, with continuing product innovation,
embracing ideas, new solutions to problems, and rapid commercialisation.

Market leaders excel in at least one, but not more than two, value disciplines and
also meet a minimum standard of competence in the remainder. The authors
mention that prioritising different value disciplines also leads to different types of
information technology portfolios, often with tailored infrastructure capabilities.
For example, operational excellence required transactional systems that are fast,
robust, and cost effective, with a strong emphasis on systems that automate
transactions and reduce costs; in Prahalad & Krishnan (2002) terms, the balance
would be more inclined toward efficiency than flexibility. On the other hand, an
organisation that competes on customer intimacy as its value discipline, will
require greater attention to the storage, analysis, and availability of more
extensive information on customers than is necessary simply to complete
business transactions. Finally, an organisation that opts for product or service
leadership will emphasise information systems that manage flows of ideas across
functional or business unit boundaries, such as R&D, engineering, marketing or
sales. Here, systems to support the management of ideas are concerned with
context and communications, rather than with the content of the data, as in
transactional systems.

Managers need to identify their predominant value discipline as a step towards
understanding the implications for their information technology requirements.
Information technology investments for revenue enhancement would usually be
associated with infrastructure and applications required for customer intimacy
and product/service leadership.




53
Closely related to the selection of a value discipline, is Watkins (1998) finding
that, in retail banking the majority of information systems investments support
products or services that are commodities throughout the industry. Watkins
(1998) goes further to say that as information technology is applied to more
sophisticated tasks, mass service becomes more and more of a commodity and
financial services organisations are forced to move into higher archetype
services. As a result a range of changes occur: (a) focus of activity becomes more
people- than equipment-oriented; (b) customer contact time lengthens; (c) the
degree of customisation is greater; (d) employees use more discretion in their
work; (e) value-added is moved from back to front office; (f) focus moves from
product- to process-orientation (see figure 2.7). As they move up the scale
towards professional services,

they tend to have complex business processes that are often tailored on
an ad-hoc basis. They are, by nature, a people based business, whose
products are intimately linked with the skills and knowledge of the staff
delivering the services (Ezingeard et al, 2000, p.807).

Of course, to be able to go through this transformation, banks need to have highly
qualified staff, but the reward is, again, revenue enhancement. This application of
know-how to produce products and services which will enhance revenue, is what
Hall (1992) in his work on sustainable competitive advantage and intangible
resources, defines as creating a functional differential. Relevant to this as well, is
the OECDs (2003, p.67-8) finding from research in the UK and Canada, that
firms adopting advanced technologies increase their expenditure on education
and training (although it is debatable that expenditure, without taking account of
quality, is a good measure of education and training).





54
Professional services
Tax & investment planning
Pensions advice
Estate agency
Legal advice
Service shop
Loan applications
Life assurance
Mortgages
Mass services
Car insurance
Current account
Telebanking
Cash transmission
People
Contact time
Customisation
Discretion
Front office
Process
People/equipment
Contact time
Customisation
Discretion
Front/back office
Process/product
Equipment
Contact time
Customisation
Discretion
Back office
Product
High
Medium
Low
Service
characteristics
No. of customers processed by a typical unit /day
Figure 2.7. Evolution in Service Characteristics (Watkins, 1998)

Watkins (1998) evolution in service characteristics can be applied as the basis
for another explanation of the productivity paradox. Organisations invest in
transactional systems that make their processes more efficient, but by doing so
they commoditise the products and services related to those processes, and have
to move on to new, labour intensive areas. If overall measures are taken it may be
found that there is a drop in productivity, in spite of the fact that the processes on
which direct investments were made may be significantly more efficient.

Right at the juncture of business strategy, information technology alignment and
selecting a value discipline, is financial services organisations managers
awareness of Client behaviour and product elasticity. Surprisingly, not much
research has been done in this area. An exception is Baets (1996) who carried out
a piece of research on the application of IS Strategy to banking, with an aim to
identify major issues and to attempt to determine the relationships between these
issues, based on a research project in a number of mid-size Continental European
banks. This work suggests that the main problem in generating improved IS
Strategy Alignment is a lack of overall sector knowledge (not skills) amongst
banking managers. Awareness of IS issues (even the softer ones) does not cause
problems, but the application of these issues in the banking world does.







55
One of the many interesting findings reported in this paper is that, for customers
making decisions on financial products in their home market, product elasticity is
sensitive to:

Interest rate based products are significantly sensitive to price and quite
insensitive to HR (quality of bank staff measured by training investment) and
IS/IT (technology support of bank measured by investment in ICT).
Fee based products (e.g.: portfolio management) are sensitive to HR and
R&D (financial engineering) and little sensitive to IS/ICT.
Technology based products (e.g.: credit cards) are sensitive to IS/ICT and
Marketing (measured by investment in advertising), and little sensitive to
R&D, Price and HR.

Based on this work, figure 2.8 shows how clients rank product attributes in their
purchase decisions. However, these results should be used with caution because it
must be pointed out that:

(a) there was a wide dispersion of responses, and
(b) these results do not appear to have been triangulated by a survey of
customers.

An observation that can be made concerning Baets work is that there is bound to
be a second-order effect of information technology that does not appear to have
been considered. In order to be price-effective on interest-based products,
financial services organisations need to have appropriate transactional systems;
and to have professional staff and high quality financial engineering for
delivering to their Clients on fee-based products, these organisations should have
knowledge management capabilities well supported by information technology.






56
Figure 2.8. The Clients priorities: How they rank product attributes.



Keen (1991) lays down a number of key principles for deriving competitive
advantage from information technology, which tie together many of the concepts
that have been mentioned in previous sections of this review:

ICT investments should be targeted at core business drivers; this is well
aligned with the concept mentioned above of defining a predominant value
discipline first, and then deploying information systems to support it.
Sustained competitive advantage comes from the ICT platform rather than
from specific ICT applications. The right ICT platform, with a flexible
architecture, will enable deploying or decommissioning applications to meet
new market demands,
A complex technology infrastructure that combines global reach and range of
services is far harder to duplicate than individual ICT initiatives. A firms
ICT infrastructure can determine its business degrees of freedom enabling
(or disabling) future business options; the reach of an ICT infrastructure can
determine the locations that the business can link electronically, while its
range can determine the information that can be directly shared between
business units. These concepts summarise the strategic views of
information technology infrastructure proposed by Weill & Broadbent (1998)
as mentioned in section 2.2.3 and figure 2.4 of this review.
Expenditure on ICT should be accompanied by changes in the organisation of
the firm. Section 2.2.2 above gives the different flavours of these changes.

POLICIES
PRODUCTS
Interest-based
Fee-based
Technology-
based
Price Marketing Technol.
R&D (Fin.
Engin,)
HR
Developm.
1 4 5
5 1 2
2 5 1
57


Who will capture the economic benefits that the Internet creates? Will all the
value end up going to customers, or will companies be able to reap a share of it?
What will be the Internets impact on industry structure? Will it expand or shrink
the pool of profits? And, what will be its impact on strategy? Will the Internet
bolster or erode the ability of companies to gain sustained competitive advantage
over their competitors? These are some of the fundamental questions Porter
(2001) presents on strategy and the Internet. Since that article was published, the
business community has taken a clearer view of the Internet. According to the
author (p. 64 ):


we need to move away from the rhetoric about internet industries, e-
business strategies, and a new economy and see the Internet for what it
is: an enabling technology a powerful set of tools that can be used,
wisely or unwisely, in almost any industry and as part of almost any
strategy.


The Internet strongly influences industry structure and sustainable competitive
advantage. Industry structure derives from the basic forces of competition:
competitor rivalry; entry barriers for new competitors; the threat of substitute
offerings; and the bargaining power of suppliers, channels, and buyers. How does
the Internet affect these forces? According to Porter:

Its an open system whose technological advances level most industries
playing fields thus intensifying competitive rivalry and reducing entry
barriers.
It dramatically increases available information, shifting bargaining power to
buyers.

Sustainable Competitive Advantage comes from operational effectiveness
(doing what your competitors do, but better) or strategic positioning (delivering
unique value to customers by doing things differently than your competitors).
According to Porter (2001), most companies define Internet competition in terms
of operational effectiveness (speed, flexibility, and efficiency) but, because
competitors can copy a firms advances in these areas, strategic positioning
becomes most important. This is because, although the Internet makes it difficult
to sustain operational effectiveness, it makes it easier to maintain strategic
positioning. How?
It allows the creation of a customised, common information technology
platform for all the companys activities resulting in unique, integrated
systems that reinforce the strategic fit among the organisations many
functions. In general, competitors cannot imitate these systems.
Rather than cannibalise traditional ways of competing, it can complement
them. This is clear in financial services, where experience shows that e-
channels do not kill old ones, but co-exist with them.
58
By integrating virtual and physical activities to compensate for the
Internets performance limits (e.g., customers cannot physically touch and
test products), companies gain competitive advantage.

The question is not whether organisations should use the Internet or traditional
methods to compete; it is how they can use both to their greatest strategic
advantage. Getting this balance right is the essence of strategic positioning
which, in turn, will determine the firms capabilities for generating value through
revenue enhancement.

Mata et al. (1995) set out to capitalise on some then recent developments in
strategic management theory, in order to develop and apply a model that specifies
the conditions under which information technology can, and cannot, be a source
of sustained competitive advantage. The authors give a quite detailed overview of
the Resource Based View of the firm and apply the concept to information
technology resources. This paper presents a resource-based model of competitive
advantage, organised with reference to a set of three questions about a firms
resources and capabilities as shown in figure 2.9. Applying the model to four
information technology attributes: access to capital, proprietary technology, ICT
technical skills, ICT managerial skills, the authors arrive at the following
conclusions:

1. Access to Capital is not distributed heterogeneously amongst firms, so it does
not give a sustained competitive advantage, but a competitive parity.
2. Proprietary Technology is valuable, it is heterogeneously distributed, but is
impossible to keep secret for long, so it is a factor of temporary competitive
advantage.
3. Technical ICT Skills are valuable, but are not heterogeneously distributed nor
immobile, so they are not a basis for sustainable competitive advantage.
4. Managerial ICT Skills are valuable, they are heterogeneously distributed, and
are immobile, so they are a source of sustainable competitive advantage.

So, of the four factors analysed, only ICT Managerial Skill appears to be a key
factor in establishing the firms competitive advantage, since it is the most
difficult to imitate because information technology managerial skills take many
years to develop (role of history), it is an invisible asset depending on virtually
thousands of small decisions (causal ambiguity), and it is heavily dependent on
developing interpersonal relationships between ICT managers and line and other
functional managers (social complexity). It should be pointed out that this is a
theoretical conclusion and that future research opportunities lie in testing the
model and the conclusion empirically; in identifying other attributes and applying
the model to them; and in exploring in much more detail the exact nature of the
managerial ICT skills factor, how it develops and evolves in a firm, and how it
can be used to leverage a firms technical ICT skills to create sustained
competitive advantage. Notwithstanding, it appears that investing in developing
ICT management skills in the firm will lead to competitive advantage through
information technology, and therefore enhanced revenue.

59
A weakness of Mata et al.s (1995, p.488) paper is its definition of sustained
competitive advantage. It says that a firm has sustained competitive advantage:

when it is implementing a strategy not simultaneously implemented by
many competing firms and where these other firms face significant
disadvantages in acquiring the resources necessary to implement this
strategy.

It is weak because it depends on implementing a strategy without regard to
whether it is a sensible strategy or a flawed one; the word many before competing
firms is open to diverse interpretations and opinions; and it is restrictive to access
to resources (which is probably understandable considering their RBV approach
to the firm). Improvements to this definition need to be made prior to continuing
this line of research.



Figure 2.9. A Resource-Based Model of Competitive Advantage (Mata et al.,
1995)








Is a
resource or
capability
valuable?
Is it
heterogeneously
distributed across
competing firms?
Is it
imperfectly
mobile?
Temporary
Competitive
Advantage
Sustained
Competitive
Advantage
Competitive
Parity
Competitive
Disadvantage
No Yes
Yes
Yes
No
No
60


Is customer lock-in a viable means of obtaining sustained competitive
advantage and, thus, enhanced revenues? Up until the early 1990s technological
lock-in was still a widely debated issue. Mata et al. (1995) develop an interesting
discussion on the create-capture-keep paradigm of competitive advantage
based on creating switching costs for customers when they make investments that
are specific to a particular supplier of ICT. The idea goes that as long as the cost
of switching vendor is higher than the extra value extracted by the vendor in
the relationship, the customer will not switch. The authors give at least three
reasons why the create-capture-keep tactic is unlikely to be a source of
sustained competitive advantage: (a) customers usually anticipate the risk of
being captured by an ICT supplier (they can insist that the vendor licenses out to
another firm that will act as second supplier); (b) information technology vendors
who use this tactic will get a reputation of being untrustworthy; and (c) the
number of options for customers to obtain ICT has increased over time. In the
late 1990s the question of customer lock-in took a different turn. Firms invested
literally billions of dollars based on a theory that turned out to be wrong: it said
that in e-commerce, what mattered most was being first, not being best. Why?
Because the weird economics of the internet network effects, enhanced
economies of scale and lock-in gave a decisive advantage to first movers (The
Economist, 28 SEP 2002). According to this article, citing Liebowitz (2002), this
was the notion that caused the biggest mistakes in the dot.com era, and the area
where economists were most at fault.

As the story was told, Internet lock-in happens largely because of the network
effect, which happens when the value of a product increases with the popularity
of the product. In refuting this, the article refers to two types of lock-in where the
question of compatibility is central to both. One kind of lock-in comes from the
fact that switching to a new technology has a cost beyond the purchase and
implementation price: the effort of learning how to use the new technology or
system, and the difficulty of operating the new system alongside the legacy ones.
This is called self-incompatibility or weak lock-in. There is nothing new or
wrong with this and it drives organisations to efficiency organisations do not
change when the new release is slightly better, they change when the alternative
is much better. The other form, strong incompatibility, arises when a new product
is incompatible with the choices of other consumers and when, because of
network effect, this external incompatibility reduces the value of the product.
This form of incompatibility is due to the network effect. Strong lock-in means
that consumers will not change to a new and much better product unless a
number of other people do so as well, which reflects a failure of co-ordination,
causes economic losses and, in theory, creates opportunities for decisive first-
mover advantage. But how common is it, even in the new economy? According
to Liebowitz (2002), strong lock-in is not merely uncommon, there is actually no
known case. So, it may sound old-economy, but best is still more important
than first and lock-in is not a source of sustained competitive advantage or
enhanced revenue.


61
2.3.3. Revenue Enhancement by Closing the Gap in Between ICT and the
Business.

Applying powerful technologies to obsolete organisational structures is like
bolting jet engines onto a propeller aircraft (Nolan quoted by Watkins, 1998).

Over the past decade the large centralised ICT departments at banks and
insurance companies have changed substantially. For instance, some are using a
mix of overhead, cost centre and outsourcing strategies to manage the ICT
portfolio in the most cost-effective way; some are setting up federal type
structures which aim to maintain a balance between centralisation and freedom
for decentralised business units to develop individually. In general, financial
services organisations are applying a wide range of more sophisticated ICT
management strategies with the objective of supporting the business in adapting
to a changing strategic context. Watkins (1998) gives an overview of specific
trends that resulted from his analysis of the UK retail financial services sector, as
follows:

1. A slow but definite trend towards the break-up of the large centralised
ICT department and its relocation as four separate functions is clearly
evident. It is now common to see: (a) a small, central core of high-
level ICT personnel acting in an advisory capacity; (b) business units
responsible for their own ICT strategic planning and ICT budgeting;
(c) the remnants of the old centralised ICT departments set up as a
profit centre offering ICT services to the business units; and (d) most
systems development undertaken by the business units or outsourced
to contractors.
2. Partial outsourcing: Although relatively few financial services
organisations are thinking of outsourcing the whole of their ICT
department, most large ones are typically spending between 10 per
cent and 20 per cent of their ICT budget on outsourcing.
3. The traditional, hierarchical organisation forms, so characteristic of
the sector, have significant limitations and will not ensure survival
over the next decade. In current market conditions, organisations need
structures that facilitate the creation, communication, and flow of new
ideas, allowing greater emphasis to be given to innovation, flexibility,
and quick response to change.
4. The adoption of flexible organisation such as the adhocracy
(Toffler), the dynamic network (Miles and Snow) and the shamrock
organisation, with three main strands in terms of human resources: a
professional core, a contractual fringe and a flexible labour force.
Resources are thus organised in three main types of networks with
varying flexibility: the internal network, the stable network, and the
dynamic network.
5. The main advantages put forward for introducing flexible networks
into a large organisation are as follows: (a) it facilitates risk-taking;
(b) it focuses on company objectives and contributions; (c) it makes
optimum use of new technology; and (d) it increases efficiency.
62
6. Longer term strategies, which involve devising innovative products and
marketing plans, and making preparations for the future which enable
flexible and creative responses to new challenges, place great
emphasis on human resources as a source of competitive edge, and the
organisations responsibility for developing the capabilities, skills and
talents which are needed to create wealth. The learning
organisation tries to ensure that the conditions for learning and for
response to change are such that the aspirations of the individual, the
team and the organisation are in tune. It develops a learning culture
where learning is valued and is seen as an integral part of effective
performance.
7. Organisations, increasingly dominated by knowledge workers and
professionals, take on a characteristic diamond shaped structure with
a high percentage of professionals in the wide, middle band and
relatively few managers and clerical support workers at the extremes.

An interesting example of flexible networks in organisations dominated by
knowledge workers is given by Mintzberg (1985) in his case of the National Film
Board (NFB) of Canada. Based on the detailed tracking over time of the actions
of the NFB which strongly resembles an ideal adhocracy, this paper shows that
strategies can form in a variety of different ways: from the precedent set by
individual operators, from thin streams of activity that eventually pervade an
organisation, from spontaneous convergence in the behaviour of a variety of
actors, and so on. This is so because in adhocracies the organisation is under a
permanent state of change under the effects of two opposing forces: Those of
convergence or consistency (such as the intrinsic need to take advantage of
established skills and knowledge), and those of divergence or variety (prime
among those is the obsession with innovation). However, Mintzberg concludes
that a pure grass-roots model of strategy formation is false, as anyone who
seeks to test it in a broader context will quickly find out. But it is no more false
than the widely accepted conventional model - the deliberate (or
greenhouse) view of strategy formulation that no one has bothered to test.
A viable theory of strategy making should encompass both models. No
organisation can function with strategies that are always and purely emergent;
that would amount to a complete abdication of will and leadership, not to
mention conscious thought. But none can likewise function with strategies that
are always and purely deliberate; that would amount to an unwillingness to learn,
a blindness to whatever is unexpected. Mintzberg presents this paper because he
believes that there has to be a little of the NFB a few strategic weeds at least
in every organisation. Clearly this is the case of financial organisations that
want to compete through revenue enhancement in competitive markets,
particularly those that want to play in Watkins high value added services shown
at the top of figure 2.7.





63
Through interviews and surveys of 145 CEOs and CIOs at 97 companies in the
US, Europe and Australia, across diverse sectors such as technology suppliers
(including IBM, Oracle and Vistrom), distributors, financial services companies
(credit card, stock brokerage, insurance and banking firms), information
providers, pharmaceutical companies, utilities, and retailers and service
operations (including Safeway and Avis), Sauer and Willcocks (2002) raise the
issue of the gap between business strategy and ICT strategy, and sound
organisations for their view on how implementing the role of an organisational
architect can help close the gap. The authors conclude that:

Organisational architects work with both strategists and technologists to
identify and grow the organisational and technical capabilities needed to
see a vision through to its supporting platform. The architect should be
someone other than the CEO or CIO, but the support of key executives is
critical, and the architect should be trusted by the CEOs inner circle.
The architect sees the vision through three main translation phases: (a)
From Vision to Organisation; (b) From Organisation to Technology
Requirements; and (c) From Technology Requirements to Actual
Platform.
If a company with the enemy within platform is serious about having a
prepared response to strategic options, it needs to start from scratch. The
benefit is a clean slate; the drawbacks are cost, time and risk. The
organisational architect should strike a balance between sticking with a
reactive approach based on technology that becomes increasingly
complex and inflexible, and riding the risk-return potential of a new
platform.

The risk-return options that the organisation architect should follow in a revenue
enhancement strategy shall be covered in section 2.3.4.

2.3.4 Treating ICT Investments as a Portfolio for Achieving Revenue
Enhancement.

As has been seen in previous sections of this review, revenue enhancement
through competitive positioning requires a two-way dialogue between technology
and business strategy. For this two-way dialogue to flourish organisations adopt
an enabling view of technology (Weill & Broadbent, 1998) which, in essence,
requires prioritising investments in creating a corporate-wide infrastructure and
strategic systems. Firms following this strategy will gain competitive advantage
through agility, such as faster time to market, and will cash in on economies from
sharing information technology across business units.

Weill and Broadbent (1998, p. 39) find that firms are increasingly placing their
strategic information technology investments at the level of the business unit.
This is sensible, as such systems need to be managed as close as possible,
organisationally, to the products and services of which they are part and as close
as possible to the customers they serve. The more interlocked the information
technology is with the activities of the business unit, the more difficult it is to
imitate and the more sustainable the advantage.
64

Clearly one of the characteristics of strategic information technology investments
is that they are the high-risk, high-return part of the portfolio. The failure rate is
high, but the potential pay-off is great. Companies in the strategic-differentiation-
through-information- technology camp may decide to reduce risks of strategic
information investments by leaving the initiative to a leader and learning from
them. By taking a fast follower strategy they miss the advantages of being first
entrant to a successful market, but reduce the risks of failure. However, a
successful fast-follower response requires extensive infrastructure capability to
be in place as a platform for new initiatives (Weill & Broadbent, 1998, pp. 62-
63).

Using Ross & Beaths (2002) criteria for classifying technology investments
according to their position on the strategic objectives vs. technology scope
matrix, organisations stressing revenue enhancement will tend to concentrate
more heavily on transformational and experiments investments. As mentioned in
section 2.2.3, funding of these investments should be decided more on the basis
of executive-level allocation than on the results of a business case.

Financial services organisations pursuing a revenue enhancement through
strategic positioning strategy will prioritise flexibility in their processes over
efficiency. In Prahalad & Krishnan (2002) terms, they will be operating in the
evolving core-processes arena and therefore their applications supporting these
processes will lie in the top end of the funnel (see section 2.2.3, figure 2.5). The
goal in organisations following this strategy is to provide ease of change at the
business-component and interface levels and deliver economies of change.
Thus, for example, the full implementation of an ERP system may not be the
answer to a flexible information infrastructure that supports both efficiency and
the capacity to experiment and innovate; a development framework with flexible
bridges as an integral part of the application architecture may be needed. In order
to be thoughtful about ICT investments, senior business managers and ICT heads
need to ask (Prahalad & Krishnan, 2002):

(a) Does the application architecture and underlying infrastructure in the
enterprise reflect the companys strategic vision?
(b) What are the inherent risks and impediments to change embedded in
their information infrastructure?
(c) What does a viable portfolio of ICT capabilities look like?

With respect to tools to support decision-making on information technology
investments, recent research introduces the idea of borrowing Option Pricing
Methods (OPM) from financial markets analysis and applying it to information
technology investments (Benaroch & Kauffman, 1999; Taudes et al,, 2000). In
cases where the firm has a deferral option (delay deployment), the OPM method
has significant advantages over the traditional discounted cash flow (DCF)
method. The most basic advantage is that, unless an attempt is made to explicitly
model asymmetric returns, NPV will always undervalue; another more
operational one is that OPM takes into account the fact that changes in revenue
will occur as time passes and no parameter adjustments (e.g., discount rate or
65
expected value of revenues) are needed. The authors give a few examples of how
OPM can be adopted by organisations following a strategic positioning and
revenue enhancement strategy:

Organisations that adopt an enabling view of information technology
infrastructure often times make ICT investments without any immediate
expectation of payback. They do this to create the opportunity for later
operational ICT projects that support a specific business process which
yields measurable revenue (e.g., intranet and multi-media user interface
technologies,). This is handled in OPM by considering that this
opportunity is the options underlying asset.
Emerging technology investments pose a special challenge for forecasting
value payoffs in the face of uncertain cost, adoption and diffusion. In this
context, the value of the underlying asset the project that incorporates
the emerging technology is subject to both changing perceptions of
future costs on the part of the analyst and the marketplace at large. In this
case, the analysts interest in reflecting the impact of stochastic cost
(uncertain exercise price) is what drives the use of option pricing. This is
the case of Strategic ICT investments
Application design prototyping investments also provide significant
option value. With prototyping, the firm aims to maximise the value of an
application development project whose value will ultimately be
determined by how well its functionality can remain in synch with the
support needs of a changing business process. The value inherent in the
underlying asset is of somewhat less interest to the firm than its ability to
react: to both adapt and change the applications functionality as required
to remain competitive. Clearly, when there is considerable uncertainty in
an organisation about whether an application will be able to do the job
when it is delivered, or there is risk aversion on the part of management in
making capital investments in ICT, efforts to stage or chunk such
projects, and monitor their payback over time, is an appropriate approach.
From this perspective, much of the value of a prototype project will be in
the options that it offers the firm in the future. This too is the case of
Strategic ICT investments.

The major criticism made to the application of OPM to ICT is that ICT
investments are not tradable, which is one of the underlying assumptions of
OPM. However, the authors say that the finance literature offers several strong
arguments in support of the case for using the Black-Scholes version of OPM to
price ICT investment options. An intuitive argument is that, in capital budgeting,
irrespective of whether a project is traded, the aim is to determine what the
project cash-flows would be worth if they were traded (i.e., the contribution to
the firms market value).

Finally, Benaroch & Kauffman (1999) make an important contribution in that
they give the theoretical grounding for using OPM, and they present the first
application of the Black-Scholes model that uses a real world business situation
involving information technology as its test bed. However, Benaroch and
Kauffman (1999) admit that this application of OPM is still not mature, and add
66
that the difficulties that do remain in applying option pricing models (e.g.: the
restrictions associated with the assumptions of log-normality of the perceived
value of the ICT project, or the lack of experience that managers have in
estimating the variance of project returns) to ICT project assessment will not be
solved by additional research in finance. Instead, IS researchers should take the
lead in solving them and in better understanding the perceived value of ICT
projects. Perhaps one of the most important next steps in this research stream is
to examine the extent to which option pricing concepts can be applied to gauge
the risks associated with the portfolio of ICT projects that make up the IS
function in a firm.


2.4 Interpretation of the Literature.


2.4.1. Discussion.

This literature review demonstrates that there is an extensive body of thought on
the subject of ICT investments and corporate performance. It also shows how
complex an issue this is and how there are a wide variety of opinions which are
not easily integrated on the subject. The lack of convergence of thinking among
the academic community is probably owed to the many perspectives from which
this issue can be approached, and that there are no dominant theories on which
researchers can underpin their work. This section will add to the previous author-
led discussion of the literature by providing some conceptual order along the four
perspectives through which cost reduction and revenue enhancement ICT
investments were analysed in the literature review, as can be seen in table 2.2.

The first of these perspectives, which can be called the inadequacy of
measurement tools, addresses the relationship between ICT investments and
productivity. Although the link between information technology investments and
firm performance still needs to be researched, there is evidence to support that the
productivity paradox of information technology can be explained by the output
measurement limitations in a service economy, and by the limitations in change
management in ICT projects. In other words, that present accounting practices
are inadequate to measure productivity in the information economy
(Brynjolfsson, 1993; Haynes & Thompson, 2000; Bannister & Remenyi, 1999;
OECD, 2003), and that the benefits from ICT can take several years to show
results on the bottom-line due to limitations in learning how to do business in the
post-ICT investment environment (Brynjolfsson, 1993; Peppard, 2001; Haynes &
Thompson, 2000; OECD, 2003).

The second perspective, which is refered to as the portfolio effect tackles the fact
that different ICT Investments achieve fundamentally different systems
objectives. These are usually described under four headings as infrastructure,
transactional, informational and strategic. These management objectives lead to
an ICT infrastructure and transactional, informational, and strategic systems
which, together, form the organisations ICT investment portfolio (Weill &
Broadbent, 1998). Each of the four value creation categories has its own value
67
proposition driven by a different risk and returns profile, and therefore should
have its own investment decision criteria (Weill & Broadbent, 1998; Ross &
Beath, 2002). The application portfolio of the firm should balance efficiency for
mature processes with flexibility for innovation in evolving processes. A cost
leadership strategy is only applicable in the more stable process domains where
the firm can invest for standardisation and efficiency. A strategic positioning
approach requires investment in flexible applications to support evolving
processes in the search for innovation (Prahalad & Krishnan, 2002).

But moving to these more sophisticated ICT investment criteria surfaces the
limitations of the traditional accounting based tools for supporting business case
quantification. Information technology decision-makers need to adopt and adapt
tools from other disciplines (such as NPVR and OPM) that give more flexibility
for estimating risk and can give value to investment deferral options. However,
much research needs to be done before these tools are available for practitioners
(Davis, 2002; Benaroch & Kauffman, 1999).

The third perspective, which is the the change facilitator factor, refers to ICT
investments and Change Management. ICT implementations can result in radical
changes on how work is performed, and therefore stakeholder management needs
to be handled with care. Leaders need to go beyond what multiple stakeholders
say about the intended information systems implementations and attempt to
understand their deeper values and beliefs (communicative action vs. deep
structures) as a means of anticipating and reducing resistance to changing the
way people work and their use of the new ICT tools (Heracleous & Barrett,
2001). Although ICT Usage is key to enabling ICT investment returns, there is a
notorious lack of accumulation of knowledge in this area. This shortcoming is
attributed to the absence of standardised measures which, in turn, derives from
the absence of accepted underlying theories (Trice & Treacy, 1986). Finally,
there is research to suggest that in order to realise value from ICT investments,
these need to be accompanied by complementary investments in changing the
organisation, in training, and in infrastructure (McConnell, 1997; Keen, 1991,
OECD, 2003).

The fourth perspective, refered to here as the competitive advantage, is ICT
investments to create a distinct competitive edge. Although there is some
evidence that information technology investments have a positive effect on long-
term firm performance (Bharadwaj et al., 1999), it appears that it is ICT
capability (more than investment) that has a positive effect on the bottom line.
Thus, firms should not merely invest in information technology, but also focus on
developing their ICT capabilities (Bharadwaj, 2000; Santhanam & Hartono,
2003). What is not well understood are the underlying mechanisms through
which rational information technology investments and strong ICT capability
lead to superior performance. The main reason for this is that most research
efforts have measured the direct relationship between some independent variable
related to information technology and performance, without paying attention to
intervening variables. An alternative conceptualisation is to have a two-stage
model that examines the effect of ICT on intermediate process variables, which
in turn are associated with higher level performance variables (McKeen & Smith,
1996; Trice & Treacy, 1986; Crowston & Treacy, 1986).
68

But even a two stage model may not be enough. It has been seen that Trice &
Treacy (1986), and McKeen & Smith (1996), use a two stage model with ICT
Usage as the intervening construct, and discuss different ways of measuring the
amount of usage. The question that is not being asked or measured is whether
ICT is being used for the right thing. In the same way, much of the research
centred on the resource based view of the firm (e.g., Bharadwaj, 2000; Santhan &
Hartono, 2003) looks for associations between ICT Capability and business
performance, as if performance depended only on the availability of ICT
Capabilities and not on how they are used. It is almost as if the relevance of
strategy and technology alignment is being ignored, in spite of findings that
indicate that a clear mission is a pre-requisite for any major organisational
transformation, but particularly so if it is a technology-enabled one (Scott
Morton, 1991).

Additional findings in terms of ICT investments and competitive advantage are
that (a) firms that use ICT investments to pursue a cost leadership strategy,
achieve only a temporary competitive advantage and forfeit the benefits of their
information technology investments to their Clients (Hitt & Brynjolfsson, 1996;
OECD, 2003); and (b) sustained competitive advantage comes from the ICT
platform rather than from specific ICT applications: an enabling view of
technology infrastructure that combines global reach and range of services is far
harder to duplicate than individual information technology initiatives
(McConnell, 1997; Keen, 1991) and therefore provide a longer window of
competitive advantage.

69
PERSPECTIVE MOST RELEVANT ISSUES KEY PAPERS
Inadequacy of Productivity paradox of IT can be Brynjolfsson, 1993
Measurement Tools explained by: Haynes & Thompson, 2000
a. Output measurement limitations in a Bannister & Remenyi, 1999
service economy OECD, 2003
b. The benefits from ICT can take several
years to show results
Portfolio Effect ICT portfolio of infrastructure, transactional, Weill & Broadbent, 1998
informational and strategic systems Ross & Beath, 2002
Each has its own value proposition driven Prahalad & Krishnan, 2002
by a different risk and returns profile Davis, 2002;
Need to move away from traditional accounting Benaroch & Kauffman, 1999
based tools for supporting business case
quantification
Change Facilitator Stakeholder management needs to be Heracleous & Barrett, 2001
handled with care Trice & Treacy, 1986
Notorious lack of accumulation of McConnell, 1997
knowledge on ICT usage Keen, 1991
Complementary investments in changing OECD, 2003
the organisation, in training, in infrastructure
Competitive Advantage ICT capability (more than investment) has Bharadwaj et al ., 1999
a positive effect on the bottom line Bharadwaj, 2000
Must understand the underlying mechanisms Santhanam & Hartono, 2003
through which rational information technology McKeen & Smith, 1996
investments and strong ICT capability lead to Trice & Treacy, 1986
superior performance Crowston & Treacy, 1986
Quantity of ICT usage and availability of ICT Scott Morton, 1991
competencies are not enough Hitt & Brynjolfsson, 1996
A clear mission is a pre-requisite for any ICT OECD, 2003
based transformation McConnell, 1997
ICT investments to pursue a cost leadership Keen, 1991
strategy achieve only a temporary advantage
Sustained advantage comes from the ICT
platform, not from specific ICT applications


Table 2.2. Summary of Literature


Considering that it is questionable that ICT investments to pursue a cost
leadership strategy convert into value, and that financial services organisations
have put excessive focus on cost reduction as opposed to pursuing strategies for
growth (Roach, 1991), this study will put emphasis on revenue enhancement. It
will also put special emphasis on shedding light on the underlying mechanisms
through which ICT investments lead to superior performance. This it will do by
70
drawing from theory in Strategy and Industrial Organisation. Referring to the
structure applied for doing the literature review (table 2.1), it can be said that this
study aims at contributing mainly to the literature in the cell defined by Revenue
Enhancement and ICT Investments for Competitive Advantage.

The following section will synthesise the most relevant literature in this realm by
proposing a model of departure firmly founded on established theory. This model
will aim at explaining the underlying mechanisms through which ICT
investments convert into value, and a discussion will be held as to which theory
of the Strategy and Industrial Organisation literature it will apply to this end:
Market Power or Transaction Cost Economics.


2.4.2 Synthesis: Model of Departure

As the opening paragraph of this dissertation indicates, this research project has
set out to develop a theory that will help financial services organisations improve
the deployment of ICT for value creation. After doing the literature review which
addressed ICT and value, and reflecting on the alternatives, it was decided to
focus on value building through revenue enhancement, rather than through cost
performance. Thus, the focus of this research is on how ICT may be used on the
demand side of the business equation rather than on the supply side.

As mentioned in section 1.2 Approach to the Research, based on McKeen &
Smith (1996), Crowston & Treacy (1986) and Trice & Treacy (1986), this
research project will adopt the three construct model shown in figure 2.10 with a
robust theory underpinning the process box:






Figure 2.10. Three-construct model


According to Crowston & Treacy (1986), the industrial economics theory of
market power - or monopolisation theory - provides a basis for understanding the
effects of ICT on prices, market share and revenues. Edward Chamberlin (cited
by Backhouse, 2002) defined monopoly or market power as the ability of a firm
to control price through altering supply, and he defined pure competition as
competition in which monopoly elements were absent. He argued that the reason
why real-world competition diverged from pure competition was that firms in
practice experienced some degree of monopoly power. Markets were both
competitive (firms were competing with each other) and monopolistic (firms had
control over the price of the goods they sold). In this context, Chamberlin
analysed market structure in terms of two dimensions: the number of firms in an
industry and the degree to which each one produced a differentiated product.
Input Process Output
71
Product differentiation means that each firm has a degree of monopoly power in
that it can raise its prices without losing all its customers (Backhouse, 2002,
pp.205-206; Maurice & Smithson, 1988, p.408).

From the demand side perspective ICT investments operate on prices, market
share and revenues through product differentiation and/or by reducing the amount
of searching by customers (Crowston & Treacy, 1986). This can be represented
graphically as shown in figure 2.11.

Input Mark.Pwr.Factors Output














Figure 2.11 Effect of Market Power (based on Crowston & Treacy, 1986)



Transaction cost economics is an alternative theory considered for underpinning
the process box in the three-construct model. However, it was decided to go for
market power based on two reasons:
a. The impact of ICT on organisational structure through the application of
transaction costs economics has been substantially researched. ICT
reduces the costs of transaction which leads to changes in the make vs.
buy equation (vertical integration) and the redefinition of organisational
boundaries (Willamson & Masten, 1999). It has led some thinkers to
propose the advent of Meta-Capitalism (Means & Schneider, 2000).
Much of this research takes the form of supply chain management and e-
business. Far less research has been done in respect to ICT and its impact
on Market Power so there is a drive for originality.
b. The motivation to study the role of ICT in revenue enhancement because,
as can be seen in the paper by Roach (1991), financial services
organisations have put too much focus on cost reduction and in-so-doing
put their long term survival at risk. It was found that transaction cost
economics is more aimed at cost containment, while market power theory
is more apt for revenue enhancement.

IT Investment Product /Service
Differentiation
Price
Product /Service
Differentiation
Market Share
Revenue
72
To summarise, the conjecture is that, in order to convert their ICT investments
into shareholder value, financial services organisations should aim their ICT
investments at supporting Product/Service Differentiation, and at producing Ease
of Search for their Customers and prospects, as this will lead to better market
share, higher prices and thus higher revenue.

2.4.3 Some critical issues

Before exploring market power in depth there are some critical issues to be
addressed including How far should financial organisations go on
Product/Service differentiation? Being the financial services industry highly
competitive, if the firm conforms to the strategies of others it will find itself
approaching perfect competition where economic rents
11
approach zero.
Therefore it needs to differentiate as much as possible. On the other hand, being
the industry very sensitive to public trust and highly regulated, institutional
forces put pressure on the individual firms to conform mainstream strategies
under the argument that a firm that is similar to others avoids legitimacy
challenges. It should be noted that legitimacy challenges lead to diminishing the
ability of an individual firm to acquire resources from customers and suppliers
(Deephouse, 1999).

By analysing the tension between forces to differentiate and forces to conform,
Deephouse (1999) has found evidence to support his strategic balance
proposition: Moderate amounts of strategic similarity increase performance.
From the results of Deephouses (1999) tests, it appears that the relationship
between performance (dependent variable) and strategic deviation (independent
variable) is quadratic and has the shape of an inverted U. Performance will
maximise at a strategic balance point where the increased benefits of more
differentiation equals the cost of increased non-conformity as demonstrated in
figure 2.12.




11
Economists refer to the opportunity cost of capital as normal return. Any return over and
above the normal return is called economic rent, economic profit or pure profit (Maurice &
Smithson, 1988, p.352)
73
Strategic Deviation
P
e
r
f
o
r
m
a
n
c
e
Strategic Balance
Point


Figure 2.12. There is an optimal level of Strategic Deviation (Deephouse, 1999).


If the relative weight of the forces of competition is greater than the institutional
forces, the strategic balance point will move to the right. If, on the other hand, the
institutional forces of conformity are greater than the forces of competition, the
curve (and the strategic balance point) will move to the left.

Returning to the model being proposed, and assuming that product/service
differentiation is a materialisation of strategic positioning, it appears that
strategic balance acts as a moderator between product differentiation and
performance, as shown in figure 2.13.

Security is a growing concern in terms of vulnerability to criminal theft and fraud
and to accidents of leakage of information in banks. So much so that management
of Operational Risk is at the centre of the new international banking rules
planned to come into force by 2007 (this is dealt with in Chapter 4). Thus, the
difficulty to combine access and control is a dilemma financial services
companies have to live with. The very idea of on-line customer service and
product delivery is to make access convenient and easy for more and more people
(ease of search in the proposed model). Control demands the opposite: restriction
and difficulty of access (Keen, 1991). Security is therefore included in the model
as a moderator between ease of search and performance, as shown in figure 2.13.




74



Figure 2.13. Effect of Market Power Moderated by Strategic Balance and
Security.


The model described in figure 2.13 represents, therefore, the conceptual
framework that will be applied as a theoretical underpinning for the fieldwork in
this research.

It is concluded from the literature review that academic research needs to
increase its focus on evaluating the extent of the impact of ICT investments on
organisational performance. It needs to move towards models that will reveal why
and how ICT affects organisational performance, by applying a foundational
theory to underpin the process of tracing its effect on the organisation. This
research project will make its contribution in that direction by applying the
concept of market power to this situation.


2.5. Summary

The literature can be summarised by saying that ICT is no panacea; it will not
compensate for poor management (Strassmann, 2003, p.7), failure to innovate or
lack of skills (OECD, 2003). Nor will it compensate for poor strategy (Keen,
1991; Weill & Broadbent, 1998; Scott Morton, 1991; Griffiths & Remenyi,
2003a). On the contrary, there is evidence to support that ICT initiatives need to
be accompanied by complementary investment, and by changes in the
ICT Investment
Product/Serv.
Differentiation
Ease of Search
Performance (Price,
Market Share,
Revenue/WCW
Security
Strategic Deviation
75
organisation of work and in the skill set of the users, to become of value. And
they need to fit into a strategy. But the real challenge is moving from these
general statements to well founded theories that will help managers make
decisions and solve problems present in their day to day activities.



It is also clear from this review that looking at the impact of ICT investments on
performance in a simple input-output (black box) model is not an effective
research strategy for developing these much needed theories (McKeen & Smith,
1996; Trice & Treacy, 1986). It appears that the impact of ICT investments needs
to be traced through the organisation applying some sort of process model.

On the basis of these reflections, the conceptual framework that underpins this
research has been developed and presented in this chapter. It is founded on the
theory of Market Power and draws on concepts from the disciplines of industrial
organisation and of strategy. How this conceptual framework fits into the
research strategy and the methodology to be followed is dealt with in Chapter 4.




























76


CHAPTER 3 - CONTEXTUAL ANALYSIS: THE
CHILEAN BANKING SYSTEM.


3.1. Introduction and Overview


Banks serve as financial intermediaries, channeling money from investors to
borrowers. They also play central roles in the payment system and in the
implementation of monetary policies (Deephouse, 1999; Siglitz, 2002). Credit
risk management applied to making decisions on how loans are made, and taking
responsibility for monitoring and making sure that those loans are repaid, are the
essence of the banking business as conceived in this research project.

A sound and reliable banking system requires strong banking regulations. But on
the other hand, it is easy to create sound banks that do not lose money because of
bad loans: simply require them to invest in risk free US Treasury bills. The
challenge is not just to create sound banks but also to create sound banks that
serve their community by providing credit for growth (Stiglitz, 2002). And this
inexorably leads to a competitive banking system.

This is the only chapter in the dissertation that does not deal with ICT evaluation
at all. Its importance is given by the fact that this is a case-study based research
where the objective is to study a phenomenon in its context (McGrath, 1982; Yin,
1994; Easterby-Smith et al., 2002) and it gives a detailed description of the
context of the units of analysis. It moves to a higher level of analysis and sets the
stage for the rest of the research by doing a multi-paradigm (Lewis & Grimes,
1999) study of the competitive forces and institutional forces that define context
and shape strategies in the Chilean banking system. It is divided into three quite
distinct parts. The first part analyses the competitive environment that leads
banks to differentiate. It does so within a framework based on the key value
creation strategies in global banking identified by the IBM Institute for Business
Value (IBV, 2003), and by analysing how they have impacted the Chilean
banking system. This analysis takes an objective approach that combines
qualitative and quantitative factors, and is based on literature and the opinion of
observers from outside the sector (including the author).

The second part of this analysis addresses the institutional forces that lead to
conformity. Firms in a structured organisational field, like most financial services
systems, face institutional pressures from government regulators, professional
associations, and social networks (Deephouse, 1999). Rather than taking the
more static approach of looking back at the present regulating environment
(relatively unchanged since 1997) and analyzing its impact on the banking sector,
this project takes a more dynamic and forward looking approach by mapping the
77
Chilean system against the Basel II
12
requirements to be. It relies on primary
evidence and takes a subjective, quantitative approach based on a survey of
senior managers of the sector. As in the competitive environment analysis
mentioned before, the institutional forces analysis benchmarks the Chilean
system against global banks.

As opposed to the first two parts that take macro views of the banking sector, the
third part takes a micro approach. Instead of looking at the system as a whole, it
looks at the strategy of each individual bank by using strategic group analysis
(Porter, 1979, McNamara et al., 2003). Strategic group analysis aims at
determining what segments of the market the main banks have tackled, which is
defined by how each one has decided to negotiate the competitive and
institutional forces that are pressing it. This is an objective, quantitative analysis
based on secondary sources of industry information generated by the bank
regulators.

Finally, in the last section of this chapter, some key ideas will be extracted from
the previous sections. It will give an impression of where the Chilean system
stands today and, probably, where it will be heading to in the near future and
distils all these concepts in a proposed Orbit Theory of bank strategies.

The Chilean banking system is a particularly interesting one where to do this
analysis because of its history of having experimented with these concepts. It
went from nationalization in the early seventies, to total collapse due to excessive
deregulation in the early to mid-eighties, to being recognized as one of the stable
and resilient systems in the world, having survived, in the last few years, the most
severe stress tests induced by the banking crises in its neighbours and its main
trade partners. This transformation was achieved through the introduction of
prudent banking regulation measures (Caprio et al, 1998, pp.43-51), in an
economy where, after experimenting with extremes such as the Chilean path to
socialism and the liberal revolution, genuine economic pragmatism has
prevailed (Fernandez-Armesto, 2003).

The results of this analysis of the underlying forces that shape strategies in the
Chilean banking system were presented at a Research Colloquium held at Henley
Management College on 28
th
-29
th
September, 2003; and a research paper similar
to this chapter has be submitted to, and is currently under review for publication
by, a leading academic journal (Griffiths, 2004).







12
Basel II refers to the new international banking rules aimed at making economic and regulatory
capital requirements converge through the application of more sophisticated credit and
operational risk models. These rules are being developed under the umbrella of the Bank of
International Settlements (BIS) and should come into force by 2007.
78





3.2. Competitive Forces: Alignment of the Chilean Banking System with
Global Trends

3.2.1. Global Trends in Banking.

According to the IBM Institute for Business Value (IBV, 2003), banks three
primary value creation strategies of the 1990s were revenue diversification,
consolidation, and risk securitisation. In terms of revenue diversification, fee-
based services and the emphasis on non-bank financial offerings grew annuity-
type revenue sources, reducing banks reliance on the more volatile interest-
based income. With respect to consolidation, major regulatory changes spurred
strong industry consolidation and afforded survivors significant scale and scope
economies. Finally, banks increased usage of asset securitisation to improve
their risk profile allowed them to lower their net charge-off rates.

IBV (2003) adds that, although initial results were impressive, the returns from
these strategies have now flattened and a few undesirable consequences have
emerged. In the first place, revenue diversification is failing because retail
banking fees are beginning to plateau, so the mix between interest income and
non-interest income has settled into a constant range. This is partly due to that
banks have not been sufficiently creative to invent new services, and have simply
relied on charging fees for services that were traditionally free of charge, to
which Clients are reacting negatively. Secondly, efficiency gains achieved
through post-merger integration have dropped significantly, as acquisitions have
become less synergistic, so consolidation has lost its drive. Finally, with respect
to risk securitisation, the portion of loans outstanding that banks are securitising
and selling off their balance sheets have, similarly to fee-based revenue, leveled-
off to settle into a stable range.

This paper continues by saying that, in spite of all the changes these predominant
strategies of the nineties imply, banks are still largely operating with the same
traditional business structures, where distribution occurs by product silo and
operations are biased toward internally manufactured products. Within this
structure, according to IBV (2003), even leading banks have trouble finding
further costs to reduce, and customers generally see very little or no
differentiation among banks. In this context, and with the dynamics of the future
so unclear, the referred paper speculates that it only makes it more apparent that
banks will need: (a) Greater focus on what differentiates them from the
competition; (b) Heightened responsiveness; (c) Variable cost structures; and (d)
Improved resilience.

The paper then goes to propose that in order to achieve those goals, the industry
is moving away from a set of independent, vertically integrated institutions, to a
network of affiliated financial services firms. In most financial services
79
industries, the shift from vertical integration to a networked structure usually
begins with distribution as firms seek additional outlets for their manufactured
product. Scale-based processors emerge quickly too, assuming responsibility for
operations that other firms are choosing to relinquish. As technology continues
to progress, connectivity improves and standards emerge, the industry will have
the wherewithal to become more and more networked. Distributors will own the
customer interface, while specialists with deep product expertise will develop
new products based on segment-specific customer insights that the distributors
provide (Means & Schneider, 2000).

Clearly IBV (2003) has a limitation in that it is more an executive summary of a
point of view, than a research paper per se. It does not clearly differentiate the
is and ought (Kuhn, 1970). This makes it difficult to understand which
statements are based on hard evidence and which are merely speculation, and the
authors give the reader insufficient background information to assess and
question the conclusions. For instance, IBV alludes to a flattening of the growth
of asset-backed securities, which appears to be in direct contradiction to a report
in The Economist (August 16
th
, 2003) which shows growth from 1991 to 2002 at
an accelerating rate. It is also unclear if in the analyses of evolution of fee-based
income, corrections were made for real interest rate variations. Finally, recent
combinations such as Bank of America with Fleet-Boston and Bank One with
J.P. Morgan-Chase, do not support that consolidation has lost its drive, although
it remains to be seen if these mergers generate value (The Economist, 2004).
However, although it may be risky to accept the conclusions derived for the
global banking market (meaning North America, Europe and Asia-Pacific) at
face value and use them as a basis for further research, this does not invalidate
the proposed conclusions as a framework with which to analyse the Chilean
banking sector. This section of the chapter will therefore analyse the evolution of
fee-based income, consolidation, and risk securitisation in the Chilean banking
market between 1990 and 2002.


3.2.2 Revenue Diversification.

Fee-based income, in Chilean banks, has increased substantially over the twelve
years from 1990 to 2002. In 1990, the ratio of Fees to Gross Profit was 5.99
percent (SBIF, 1991), and grew to 18.8 percent by 2002 (SBIF, 2003). From
interviews with bank managers, it appears that this large increase derives from
charging fees for services that were traditionally free of charge
13
. In opinion of
two interviewees, if all banks charge for these services, the risks of loosing Client
loyalty is low. If this is a general opinion, it could be revealing a myopic view of
the future because, apart from the experience in other markets mentioned above,
there is growing literature in economics and strategy that questions the
assumption of collusion (McNamara et al, 2002, cite extensive literature). But,
the question remains, does increased fee-based income necessarily lead to better
performance for Chilean banks? Plotting Operational Profit:Assets ratio against

13
Free-of-charge in the sense that the Client did not make direct, individualised, payments for
these services; Clients were, undoubtedly, paying for them through an intricate system of cross-
subsidies whose rules they were, in general, not aware of.
80
Fees:Gross Profit ratio, for the eleven leading banks in terms of market share, for
2002, the scatter chart in figure 4.1 is obtained. From a simple visual analysis of
the chart, confirmed by an analysis of correlation, it is clear that fee-based
income has little impact on profitability (R
2
= 0.000857). Of course, taking
information of just one year is not indicative. An interesting area for future
research is to develop this analysis with data of the whole period, 1990 to 2002.
If a significant relationship is found between performance improvement and fee
based income, the following step would be to analyse if this is a genuine effect or
if it is a consequence of the decrease in interest rates over the last few years,
which has made the traditional business of financial spreads less profitable. A
way to control for this would be to use Fees:Operating Expense instead of
Fees:Gross Profits but, of course, it must be taken into account that this would
introduce noise from efficiency gains.

Impact of Fee Based Income on Profitability
Based on 2002 figures.
0
0.5
1
1.5
2
2.5
3
0 5 10 15 20 25 30
Fees:Gross Profit Ratio
O
p
e
r
a
t
i
n
g

P
r
o
f
i
t
:
A
s
s
e
t
s

R
a
t
i
o


Figure 3.1. Impact of Fee-Based Income on Profitability.


Although the sector as a whole has grown substantially in its fee-based revenue
structure, there is a considerable spread among the top eleven players in the
market. As can be seen in figure 3.2, Scotiabank and BCI operate with a
Fee:Gross Profit ratio in excess of 25 percent, while at the other extreme are
Security Bank, which operates in the region of 7 percent, and BICE and Citibank
at just over 14 percent.
81


Figure 3.2. Fee-based revenue as percentage of Gross Profit.


3.2.3. Consolidation:

Chile has followed the global trend towards concentration of the banking sector.
The Chilean banking system in 1990 comprised thirty six banks and four
financial societies, which are banks with restricted operations. By December
2002, the banking system comprised twenty seven banks and one financial
society (which has subsequently been licensed to operate as a full bank and then
acquired by BCI).

Another indicator of consolidation and concentration of the sector is that the top
eleven banks in 2002 represent 94 percent market share of loans, while in 1990
the first eleven banks represented only 82 percent. Even more explicit is the fact
that the top two banks had a loan market share of 43.18 percent in December
2002, while only 31.93 percent market share in December 1990. The trend
towards concentration can be seen graphically in figure 4.3 which shows the
evolution of the number of banks operating in Chile.

This situation is worrying for the Banking regulators (Superintendencia de
Bancos e Instituciones Financieras - SBIF) as can be seen in an article in
Estrategia (2001), one of the main financial daily newspapers, dated 18 June
2001. In an interview in this article, Mr. Enrique Marshall, the Banking
Superintendent
14
, admits that in the previous ten years, access to new bank
charters has been highly restrictive. However, he adds, the clear signs of
consolidation in the sector have led the financial services authority to take actions
to ensure the sector remains competitive. Among those actions are (a) the

14
The Superintendente de Bancos e Instituciones Financieras is the head of the banking regulator
(SBIF) and the senior banking authority in Chile.
0
5
10
15
20
25
30
F
e
e
s
:
G
r
o
s
s

P
r
o
f
i
t
T
O
T
A
L

B
I
C
E
C
h
i
le
B
C
I
S
a
n
t
a
n
d
e
r
E
s
t
a
d
o
C
o
r
p
b
a
n
c
a
C
i
t
i
b
a
n
k
S
c
o
t
ia
n
k
S
e
c
u
r
i
t
y
B
B
V
A
D
e
s
a
r
r
o
l
lo
Bank
Fee Based Business Volume
82
availability of banking charters for those who meet the requirements, (b) more
flexibility in regulations for specialised/niche banks, and (c) new capital markets
regulations. The article confirms that, in the recent past, bank
0
5
10
15
20
25
30
35
40
N
u
m
b
e
r

o
f

B
a
n
k
s
1 2 3 4 5 6 7 8 9 10 11 12 13
Year of Study (Starting 1990)
Chilean Bank Consolidation


Figure 3.3. Chilean Bank Consolidation.

charters have been awarded to those intending to operate in niches where there
are a small number of competitors (i.e., HNS bank which serves SMEs, and
Banco Falabella which is the off-spring of one of the major retailers in Chile, and
serves the consumer market). Capital requirements for setting up a bank are still
quite considerable for the size of the market, and stand at, approximately, US
dollars nineteen million. The intention behind this requirement is to keep banks
of a minimum size as deposits are, in effect, guaranteed by the State and it is
thought that a minimum threshold better protects tax payers money.

Does this mean that new banks will appear on every corner of Santiago and other
cities? No. According to the cited Estrategia (2001) article, the real limitations
now are not regulatory but commercial. The consolidation of the sector has
created cost structures based on economies of scale which creates a considerable
entry barrier for players intending to grow organically from scratch. New entrants
with a business plan of achieving 5 -8% market share in a few years would have
to think on acquisitions.

Is it expected that new foreign banks will enter the market? The article states that
there is a fair representation of European and North American banks already, so it
is not likely to see new entrants from those markets. The article, however, does
state that there is a marked under-representation of Asian banks considering the
amount of business that takes place between Chile and that part of the World.
The analyst says that the small presence of Asian banks in Chile can be explained
by (a) the internal problems of the Japanese banks which have reduced their
ability to tackle new markets; (b) the small size of the Chilean market which
makes it less attractive than competing alternatives such as Brazil, Mexico or
Argentina; and (c) that commercial relationships between Chile and, say, Japan
are based almost entirely on trade, while it is usually foreign direct investments
by companies that creates the environment for setting up banks. The article gives
the example of the Spanish banks which took strong positions in Latin America
83
after the ENDESAs, Telefonicas, Aguas Barcelona and other Spanish companies
made major investments in utilities and industrial concerns. Although this is an
interesting view, the causal relationship needs to be researched.

There are competing views as to whether bank concentration has a positive
effect, or a negative one, on the community the specific banking system serves.
On the one hand, efficiency should increase through economies of scale, and risk
management should improve through the diversification of risk which comes
with size. On the other hand, increased market power can lead to higher interest
rates and fees, and to increased systemic risk (Berger, 1995). Judging by the
findings of a study by Fuentes & Guzman (2002) on the Chilean banking system,
the banking authorities are right to be concerned about concentration. In the first
place, during the period 1990-2000, the profitability of banks (measured both as
return on assets or as return on equity), has grown considerably. Secondly, social
efficiency, which determines the banking systems capability to serve its
community and is measured in terms of interest rate spread, has diminished over
the study period. Admittedly, Fuentes & Guzman (2002) find that those effects
could partially be owed to banking disintermediation over the period, and not
only to bank concentration.


3.2.4. Securitisation:

The Chilean securities market was non-existent until March 1994, when the bill
that establishes its legal framework (No. 19.301) came into force. The scope of
assets liable to be securitized was restricted to certain kinds of mortgage loans.
This gave place to a very slow start for this market, until a later bill (No. 19.623
of 26
th
August, 1999) which both opened this instrument for applicability to other
kinds of assets, and simplified the processes and requirements for origination of
securities, came into force (Arias, 2001). Under the present legal framework,
security originators can purchase rights over any cash flow that is documented in
writing and is transferable; and they do not need to have all assets under
management at the time of originating the security, but have a period of 60 days
(extensible to 90 days) to acquire them.

Securities have had mixed success across Latin America, and this has dependent
mainly on the legal framework, the level of interest rates, the maturity of
financial markets, the development of the mortgage loan market, and the demand
for new financial instruments by institutional investors (Arias, 2001). However,
while in most other Latin American countries the driving force for developing the
securities markets has been to gain access to international financial markets with
instruments that are resilient to country risk ratings, in Chile these instruments
are aimed at the domestic market (Arias & Garcia, 2002). There are two main
reasons for this difference of approach. First, Chiles economic, political and
financial stability of the last decade, has kept its sovereign risk rating level low,
which has enabled its companies access to international financial markets at a
relatively low cost. Secondly, it has a strong domestic demand for this sort of
instruments from institutional investors, like the private pension fund managers
who are restricted in how much of their funds can be placed abroad, and life
84
insurance companies who need to invest in this sort of long term instrument to
match their obligations in life-pensions (Arias, 2001).

According to Arias and Garcia (2002), the strengthening of the legal framework
and the progress in learning by all the operators (originators and investors) has
led to a rapid evolution of the securities market in the last few years, as can be
seen in figure 4.4. The market has moved away from purely mortgage-backed
securities, to other assets such as vehicle and credit card loans. However, the
present economic scenario with interest rates at a historical low which has
significantly reduced mortgage interest rates, are squeezing interest rate spreads
and making it tougher for originators to absorb fixed costs. This could limit the
attractiveness of securities to only those originators who can develop economies
of scale, like banks, and it could lead to pooling of efforts (co-sourcing) as has
happened in other operational areas.



Volume of Risk Securitised per Year
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12 13
Year
V
o
l
u
m
e

(
U
S
$

M
)



Figure 3.4. Volume of securitised assets in the Chilean market (US dollars)
per year of study (starting 1990).

In sum, although securities have evolved favourably in the last few years,
according to expert observers there is still a lot of potential for seeing both an
increase in volumes and a diversification of underlying assets (Arias & Garcia,
2002).




A question the Chilean banking authorities should be asking themselves is
whether the regulating framework is ready for this. There are concerns in other
parts of the World where securitisation has taken-off quickly. Just to cite The
Economist (August 16
th
, 2003):

85
"Loans of some $34 Billion were wiped out in the bankruptcies of Enron
and WorldCom. Yet only millions, rather than billions, of losses are
showing up in the quarterly reports of big financial institutions. Where
have all the losses gone, if not through the profit and loss accounts of the
few big banks that do most of the lending to giant corporations?...One
thing is certain, such risk does not neatly disappear into thin air. In a
weak economy, bad debts increase and banks traditionally take a big hit.
If they are not taking that hit in this economic slowdown, then somebody
else is."

The article then continues:

"For the moment, the incentive to banks is to make loans that are not
sufficiently profitable, but that they know can be sold to entities that face
lesser regulatory and capital costs. This is a form of arbitrage that is
driving credit risk out of institutions where it is well understood and
managed, and into institutions where it is far less so."

This trend is reinforced by the regulations that require banks, and not other
financial organisations, to hold capital in proportion to their loan book. It is
therefore cheaper and more efficient for these loans to be off-loaded by banks
and shifted onto the books of insurance companies and investment funds. But if
credit risk ends up in life insurance policies and pension funds, failures could
emerge many years later with a serious social impact. This is only one indicator
of how the frontiers between the different segments of the financial services
industry are disappearing, and it should lead to reflection, of all parties involved,
on how to change regulation and veer towards a single financial services
authority to oversee the whole sector.

3.2.5. Industry Deconstruction and Bank Reconstruction:

As can be seen in the preceding paragraphs, the Chilean banking system abides
strongly by the global trend described by IBV (2003) of industry consolidation,
but differs markedly in terms of income diversification and risk profile
improvement through asset securitization, where there appears to be yet ample
space for growth.

Although there is not much public documentation on which to base this assertion,
from personal experience and from talking to executives in several banks, there
is still a long way to go in terms of Bank Reconstruction. Except for one or two
exceptions of international bank subsidiaries that have made large investments to
renew their information technology, the top eleven banks are still very much
aligned according to the traditional product silo structures. Efforts are being made
to develop and implement Client databases to cut across silos in order to be able
to focus their go to market on Client segments, but their in-house developed
back-office core systems are making this effort troublesome and inefficient. Most
banks recognize this shortcoming, and some of them (e.g.: Banco de Chile) are in
the process of defining transformation projects based on the implementation of
package-based core systems and a modular technological architecture. This move
86
is accompanied by a trend to migrate away from their traditional mainframe
based infrastructures, to open systems.

On the other hand, Chile is well ahead on the industry deconstruction front.
Probably due to the small scale of their market, Chilean banks have for many
years pooled their resources to develop shared infrastructure, and have
outsourced certain parts of their back-office operations. A search on the Web for
companies servicing the banking industry resulted in a myriad firms, some very
conspicuous to the Banks clients, and many others that operate back stage.
Just a few examples:

Redbanc: Its vision is to provide banks with the interconnected electronic
networks and associated services that they need, in a flexible framework
that will allow the banks to differentiate and develop competitive
advantages. At present Redbanc manages all the network and switching
services for the Automatic Teller Machine (ATM) network of its
shareholders. Redbanc is owned by the 13 largest private banks who pay
for this service on a transaction basis. According to an informant, this has
led the Chilean banking system to have one of the lowest ATM
transaction costs in the World (this information was not verified by the
author).
Transbank: It services banks by handling payment systems in general. It
manages all the main credit cards (VISA, MasterCard, American Express,
Diners Club, Magna), debit cards (Redcompra, Electron, Maestro), and
Internet payment authorizations through Webpay. One of Transbancs
missions is to expand the network of businesses that accept these forms of
payment. It is owned by the banks which, again, pay for its services on a
transaction basis.
Servibanca: It was founded in 1990 by a joint-venture of a local and an
international technology firm, to give operational services to banks.
Typically it supports banks in their cheque and document clearing, in their
collections for third parties (treasury management for Clients), in
digitalizing documents, and other related services.
Artikos: Artikos is a B2B portal set up by two of the leading banks in a
joint-venture. It handles all the purchase-to-payment cycle for the banks
Clients that chose to engage this service.
Comicrom: It gives banks logistics services like document custody,
distribution of cheque-books and account statements, logistical assistance
in cheque and document clearing; and technical services such as
document scanning and imaging. It has been operating for over 24 years.
Servipag: It is a bill payment network that came into existence partly as a
response to a Chilean law obliging banks to provide Clients and non-
clients alike, with services such as utility bill and tax collections. They
operate out of non-frills kiosks and basement offices, and are staffed with
less qualified and less costly people. More than 20 percent of all monetary
transactions previously handled by bank tellers now go through Servipag,
significantly reducing branch operating costs (Elewaut et al, 2003).

87
Banks also outsource their technology infrastructure management and printing
services to traditional providers such as IBM or EDS. There has been talk in the
market of locally owned banks exploring the possibility of merging their back
office operations along the concept of a banking utility, as a means of
developing scale to compete with the international banks that have already set, or
are in the process of doing so, shared services to manage all their back office
transactions across Latin America (i.e. Citibank, Santander, BBVA,). But these
initiatives have been, apparently, put on hold for now.

According to Elewaut et al (2003), some institutions have outsourced almost half
of their operations, including purchasing, credit card processing, money
transport, data-centre management, and software development and maintenance.
Fifty percent appears high and Elewaut et al (2003) do not substantiate their
claim nor give any examples. However, there is no doubt that the Chilean system
has covered a lot of ground on the industry de-construction front, and there is
little doubt that this is part of the reason why it has achieved world-class
efficiency standards. Incidentally, Elewaut et al (2003) make a, this time,
evidence-based statement that Chiles five largest banks have an average cost-to-
income ratio of 59 percent, which is better than the top five US banks 67
percent, in spite of their economies of scale disadvantages.

From the previous paragraphs it appears that the Chilean banking system is
starting to move, but still has a long way to go, in terms of bank reconstruction.
On the other hand it is pragmatic and well established in the ideas of outsourcing
and industry deconstruction, so the path of bank transformation through the
implementation of new technology and setting up of value added networks is a
feasible path to follow.



3.3. Institutional Forces: The Chilean Banking System and BASEL II

3.3.1 Introduction: An Overview of Basel II.

Many changes have happened since the original Basel bank capital adequacy
accord came into force in 1988, but four have been of paramount importance in
making that agreement obsolete. First, significant progress has been made by
practitioners in the understanding of risk management, and in the development of
tools for the evaluation and measurement of risk. Second, the calculations of risk
weighted assets in Basel I did not lead to a satisfactory alignment of capital
reserves with the levels of risk exposure of the banks. Third, the advent of
financial instruments, such as asset-backed securities and credit derivatives, that
allow banks to off-load risk from their own balance sheets and pass them onto
third parties such as insurance companies and investment funds. Finally, that in
spite of the fact that considerable bank losses derive from operational incidences,
no capital reserves based on operational risk are prescribed. This led the Basel
Committee, in 1998, to launch Basel II, an initiative to develop a revised bank
capital framework. The main objective of Basel II is to improve capital
allocation and risk management practices, aligning regulatory capital with the
88
risk incurred by banks. The most significant changes introduced by Basel II are:
(a) to propose several methodologies to calculate credit risk capital requirements;
and (b) to include operational risk in the calculation of capital reserves (Bear et
al., 2001; IBV, 2002).

In terms of Credit Risk, Basel II will offer banks three alternative methodologies
for quantifying risk based on their own internal models, taking into account the
effects of portfolio diversification and risk mitigation techniques. With respect to
Operational Risk, Basel II introduces operational risk in the calculations of
reserves and offers banks three alternative, and progressively more sophisticated,
models. These models are defined internally by the banks. Finally, Basel II
makes no changes in standards for management of market risks, and leaves in
place an addendum to the original accord that allows for the banks to use their
own models to determine their values at risk (VaR) for market risk quantification.
The present deadline to put the new risk calculation models in full operation is
January 1
st
, 2007. However, Basel II will demand that the new models operate in
parallel with the present methodologies for one full year, that is starting in
January 2006. This puts a lot of pressure on banks, particularly on the operational
risk front, because it demands three years historical data at the time of starting the
full operation (Bear et al., 2001; IBV, 2002).

Basel II is organized along three pillars: (a) Minimum capital requirements, (b)
Supervisory process, and (c) Market discipline. Pillar I contains the framework
with the methodologies for determining capital ratios, taking account of both
Credit and Operational risk, as mentioned above. Pillar II establishes the
information that has to be provided by the banks to the supervisory authority, and
the process by which the regulator approves the risk models proposed by the
banks. It also establishes that the regulator should monitor the strategies and
internal models, and gives it directions on how to act if it considers capital
requirements are insufficient. Pillar III regulates market disclosure and defines
the information transparency requirements that banks must comply with, which
includes not only capital composition information, but also information on risk
models and risk management in general (Bear et al., 2001; IBV, 2002).


3.3.2. International Banks and Basel II: How Prepared are They?

In late 2002, the IBM Institute for Business Value (IBV) carried out a research
project called Banks and Basel II: How Prepared are They? (IBV, 2002), with
the three tier objective of (a) Understanding where banks from around the world
presently stand with respect to Basel II compliance; (b) Identifying the future
plans for Basel II compliance, as well as broader credit and operational risk
management objectives; and (c) Determining the primary challenges facing banks
in complying with Basel II.

As part of the project, the team interviewed senior-level executives charged with
Basel II compliance in their banks. The sample was comprised of thirty-two
financial services institutions of varying sizes, from across the world. Nine were
from North America, seventeen from Europe, and six from Asia Pacific.
89
Classified by size, there were sixteen Tier 1 institutions and sixteen Tier 2 ones,
taking Tier 1 as those institutions with US$ 100 billion or more in assets. The
majority of the interviewees belonged to the Risk Management function,
followed in numbers by the Finance and Treasury function; just a few were from
Operations or Technology.

The IBV indicates that the key findings of its project are the following:

Tier 1 banks are progressing well towards Basel II compliance, while
many resource-constrained Tier 2 banks are lagging behind and have yet
to give it high strategic priority. Tier 1 banks have placed greater
emphasis than Tier 2 ones, on putting in place a focused programme
management to develop and implement their plans.
The primary challenge in meeting Basel II requirements entails the
development and launch of databases to measure credit and operational
risk default data (e.g.: probability of default, loss given default, exposure
at default) internally.
Banks are almost unanimously confident that they will achieve Basel II
compliance by the end of 2006 deadline. Even those who are now behind
schedule are confident of the ascension of Basel II to a senior
management priority in 2003.
On average, banks expect to allocate 18-36 months to implement all of
the necessary components of Basel II.
Most banks will seek to capitalize on the expected economic benefits of
implementing an internal ratings-based (IRB) approach for determining
their Credit risk Capital. Sixty-three percent of respondents state that their
end-point credit risk methodologies will be the Advanced IRB Approach.
Ninety-four percent of respondents are confident that they will develop
the necessary default databases on time to enable IRB. However, there is
a big difference in progress between Tier 1 and Tier 2 banks.
Similar to credit risk, the majority of banks will target an internal
measurement approach to operational risk. Forty-eight percent said they
were aiming at Advanced Measurement Approach (AMA) by the 2006
deadline, and a total of sixty-one percent said they will have implemented
AMA by the end of the second year after the deadline.
The great majority of banks are measuring operational loss events
quantitatively, although with varying degrees of granularity. Banks
targeting the AMA are confident that their default databases will be
functional by 2004.
Irrespective of Basel II, most respondents would have improved their
operational risk management capabilities.
Banks are split evenly on the impact that Basel II will have on their
existing capital reserves obligations (32 percent say it will increase, 32
percent say it will decrease, and 36 percent say it will stay the same).
With respect to the supervisory review process and market disclosure,
respondents were generally taking a wait-and-see approach towards
Pillars Two and Three, anticipating modifications in the final version of
the Accord.
90

3.3.3. Degree of Preparedness of Chilean Banks.

In May 2003, a team of IBM Business Consulting Services consultants (headed
by the author of this dissertation and the Asociacion de Bancos e Instituciones
Financieras (Chilean Banking Association ABIF) convened twenty two Chilean
banks for a two-day meeting to (a) brief them on the latest developments of the
Basel II Accord, (b) help them digest the Accord, (c) help them understand where
the Chilean banking system stands with respect to meeting the requirements of
Basel II, and (d) show them how to define a roadmap that will take them to Basel
II.

During the course of this meeting, which was attended by the Risk Managers,
Operations Managers, and Finance Managers of the twenty two banks, a survey
was carried out to understand what the current thinking on Basel II was at the
time. The questionnaire was filled during the meeting, in teams per bank. That is,
there was one response for each bank. The teams had a choice to turn in the
response anonymously, which most of them did (20 responses, out of a total of
21, were anonymous). The results can be summarized as follows:

On whether the Bank has made a decision on a Credit Risk Capital
model and, if so, what sort of model are they inclined towards, 24
percent of banks said they had not made a decision yet. Forty-six
percent said they would go for the Advanced Internal Ratings-Based
(IRB), 14 percent said they would go for the Basic IRB, and 14 percent
said they would go for the Standardized approach. This means that a
significant number of banks had not made a decision, but of those that
had, a remarkably high number would go for the advanced internal
models.
Asked to give what they thought to be the most critical aspect of
implementing Basel II in their bank (they were given six choices from
which to pick one), eleven responded that gathering data, having good
historical data, and having reliable databases was the most critical
factor. Four said that the development of methodologies and statistical
models was the most critical factor. Three said that training and human
capital was the most critical factor. Two groups said that top
management support and commitment was critical. And one each said
that implementation project organization, and cultural issues (derived
from the increased transparency which would make errors very visible)
are the critical factor.
Asked whether they have a Rating Model in place, sixty-six percent of
the respondents said they do; twenty-four percent say they dont; and
ten percent responded that they are presently developing a model. So
in a majority of cases a Rating Model has been developed and is being
used, although only a relatively small number of banks (12 percent
overall) have actually submitted the model for approval by the
Banking Authority (SBIF) and are awaiting its decision.
On the availability of tools for estimating Credit Risk components, the
results were that 22 percent have a methodology for performing in-
91
house estimations of probability of default, 36 percent responded that
they dont; and 41 percent responded they are actually developing a
methodology. In terms of having a tool to manage collaterals, 53
percent say they do, and 47percent that they dont. With respect to
possessing a tool to help them calculate recovery rates, only 5 percent
responded that they do; 55 percent say they dont, and 40 percent are
actually developing a tool.
Moving onto Operational Risk, on the question whether their bank has
defined a methodology for calculating operational risk capital, 36
percent say they have not made a decision yet; 32 percent say they
have opted for AMA, 27 percent for Standardised methodology, and
five percent have settled for the basic indicator. What this is telling is
that there is still a considerable level of lack of definition; that hardly
any bank is going for the basic indicator; and that a considerably large
number is going for AMA, in spite of its strong implications in terms
of complexity.
Asked whether their banks had clearly identified the roadmap for
implementing operational risk management, 63 percent say they have;
16 percent say they do not; and 21 percent responded that they are in
the process of developing a roadmap. Have they defined the check-
points? 47 percent have; 37 percent havent; and 16 percent are in the
process of doing so.
Thirty-two percent of respondents say their bank has already defined
the key indicators for operational risk management, while 53 percent
have not, and 16 percent are in the process of defining them.
On the critical factor of gathering historical information on operational
losses, only 22 percent responded that their bank has started, 61
percent admit that they have not started yet, and 17 percent are actually
in the process of getting organized for collection of information. This
is rather alarming in that, as mentioned earlier in this chapter, having
three years of historical information by January 2007 will be critical
for adopting Basel II.

These results can be obtained in graphical form from the author.


3.3.4. Conclusions: Closing the Gap.

Some of the interesting conclusions that came out of this two-day session and an
executive brief on its results to the bank CEOs and Mr. Enrique Marshall (the
Chairman of the SBIF) are the following:

a. The Banking regulators are determined to drive the Chilean system
towards BIS II;
b. Whether or not they adopt the Basel II Accord standards, practically all
banks are seriously considering adopting rigorous Operational Risk
management standards.
92
c. As in the international bank survey, Chilean bank managers believe that
Basel II guidelines should not represent an end-state, but that they must
continually evolve this critical function.
d. Most bank managers are aware that, unlike Credit or Market Risk
management where responsibility can be concentrated upon a single
individual or unit within the bank, responsibility for Operational risk is by
its very nature distributed throughout many different areas within the
bank. This means that adopting rigorous operational risk management
standards has strong organizational implications. Further, although this
issue did not come out in the meeting, from an operational risk point of
view:

It is no longer enough to ensure that internal processes will
work, should a disaster strike... Banks are increasingly part of a
supply chain with services such as cheque clearing outsourced or
shared between companies (Financial Times, 2003).

Therefore operational risk management must extend to partners and
suppliers.
e. The SBIF says it has performed several simulations and found support
for the fact that Basel II will not imply greater capital demands than the
present regulatory framework. Apparently, it has concluded that the
Operational Risk Capital prescribed by the new system is off-set by the
reduction in Credit Risk Capital that comes from adopting the advanced
models of BIS II.
f. In spite of the previous point, Chilean bank CEOs are highly sceptical
about those findings, and are deeply concerned that BIS II will imply
greater regulatory capital for their banks. This is an issue that must be
overcome if BIS II is to be implemented successfully. Although it is true
that operating within the Basel II framework will give some hard-to-
quantify benefits to banks that aspire to operate internationally, these
banks are led by business people who will do a risk-weighted cost-benefit
analysis before committing to a BIS II compliance project.



3.4 A Question of Balance: Strategic Group Analysis of Chilean Banking

3.4.1 Strategic Deviation: Concepts, Constructs and Variables.

Fundamental strategic decisions of a bank are the selection of assets and
liabilities (Santomero, 1984; Deephouse, 1999). Bank assets are loans and
investments in various sectors of the economy, such as real estate loans and
government securities; and bank liabilities are borrowings of various types, such
as current accounts, savings deposits and money market borrowing. Associated
with each asset and liability is an interest rate reflecting the assets price or the
liabilitys cost.

93
Strategic similarity is a firm-level construct representing the difference between a
firms realised strategy and those of its competitors. Strategic similarity is subject
to competitive and institutional forces. So how far should banks go on
differentiation? As anticipated in Chapter 2 (Conceptual Framework), being the
financial services industry highly competitive, if the firm conforms to the
strategies of others it will find itself approaching perfect competition where
economic rents approach zero. Therefore it needs to differentiate as much as
possible. On the other hand, being this industry very sensitive to public trust and
highly regulated, institutional forces put pressure on the individual firms to
conform mainstream strategies under the argument that a firm that is similar to
others avoids legitimacy challenges. It should be noted that legitimacy challenges
lead to diminishing the ability of an individual firm to acquire resources from
customers and suppliers (Deephouse, 1999; Griffiths & Remenyi, 2003a).

Also mentioned in Chapter 3, by analysing the tension between forces to
differentiate and forces to conform, Deephouse (1999) has found evidence to
support his strategic balance proposition: Moderate amounts of strategic
similarity increase performance. From the results of Deephouses tests, it
appears that the relationship between performance (dependent variable) and
strategic deviation (independent variable) is quadratic and has the shape of an
inverted U. Performance will maximise at a strategic balance point where the
increased benefits of more differentiation equals the cost of increased non-
conformity.

Strategic similarity is the focal construct of this research. The specific strategies
used are bank asset strategies and bank liability strategies. In terms of assets, the
following 10 types of loans are considered: Commercial, Consumer,
Import/Export, Mortgage, Intrerbank, Over due, Leasing Contracts, Factoring
Operations, and Other Loans. Bank liability strategies are analysed in terms of 11
classifications of deposits: Current Accounts, Other On Demand Deposits,
Accounts on Demand, Fixed Term 30-89 days, Fixed Term 90-364 days, Other
Short Term Deposits, Accounts and Documents Payable, Long Term (LT>365
days) Fixed Deposits, LT Documents Payable, LT Bond Commitments. These
classifications were taken from SBIF (2003), which was also the source for the
variables.

Each asset and each liability was measured as a proportion of total assets or
liabilities, respectively. For a given set of strategies, there may be several ways to
compute strategic similarity. This study follows Deephouse (1999) and uses
standard deviation units because these indicate conformity to institutional norms.
The measure of strategic similarity is called strategic deviation. Each asset
strategy, and each liability strategy, for each bank, was compared to the industry
mean for that strategy and expressed as a standard deviation. The absolute values
of the standard deviation of all asset and liability strategy variables were totaled
for each bank, because strategy is a holistic concept involving interrelated
components and aggregation increases model parsimony (Deephouse, 1999).
Asset Strategic Deviation
it
=
10
a=1
ABS[(P
ait
-M(P
at
))/SD(P
at
)] of bank i in year
t, ABS is the absolute value function, M(P
at
) is the mean of asset strategy a in
year t for Chilean banks, and SD(P
at
) is its standard deviation. Strategic
94
deviation is equal to zero if, and only if, all firms have the same strategy. Similar
criteria and definitions are followed for liabilities.
Liability Strategic Deviation
it
=
11
l=1
ABS[(P
lit
-M(P
lt
))/SD(P
lt
)]

Taking the two dimensional (asset and liability) view to strategy is a
methodological contribution of this project, as Deephouse (1999) only looks at
asset strategy. This approach allows representing the strategy of each bank on a
three dimensional space (bubble diagram) as shown in figure 3.5.


3.4.2 Strategic Groups: Concepts and Constructs.

A strategic group is defined as a set of companies within an industry pursuing
strategies that are similar to each other (Porter, 1979; McNamara et al., 2003).
Zuiga-Vicente et al. (2004) affirm that the first precursor of the strategic group
concept was Chamberlain (1932), but that the term was actually first coined by
Hunt (1972) in his doctoral thesis. In their review of the strategic group literature,
Zuiga-Vicente et al. (2004) say the concept was originally developed departing
from the industrial oganisation theory (IOT), and cite Caves & Porter (1978),
Newman (1973, 1978), Scherer (1980) and Porter (1973, 1979) as significant
studies along that line. The concept was independently, though influenced by
IOT, tackled from the strategic management viewpoint, and Zuiga-Vicente et al.
(2004) point out to the work of Hatten (1974), Schendel & Patton (1978), Hatten
& Schnedel (1977), Hatten, Schendel & Cooper (1978) and others.

According to McNamara et al. (2003), past research from both an economic and
a cognitive perspectives proposed that firms vary in the degree to which they
identify with their strategic group, such that some firms follow the group strategy
closely (core firms) and others follow it less closely (secondary firms). In
addition to core and secondary firms within multi-firm strategic groups, single
firm groups, or solitary firms, may also exist within the overall industry
landscape. The resource-based and the contestable-markets perspectives highlight
the value of being strategically different, implying secondary firms should have
higher performance than core firms (because they make the most of the
conformity advantage that comes with belonging to a group, with the competitive
advantage of differentiation) . These results support what could be a revisionist
view of strategic group research that questions the traditional Industrial
Organisation view of the firm, proposed originally by Porter and others in the
1980s.

The assumption of collusion is an important pillar of the position that
performance differences exist across, rather than within, strategic groups.
However, there is growing literature in economics and strategy that questions the
assumption of collusion. This work builds on the observation that collusion
depends on industry conditions such as enforcement, the number of firms in the
industry, and the bargaining power of buyers. Instead, there is growing evidence
that similar firms exhibit more rivalrous actions. McNamara et al. (2003) add
that collusion is difficult to achieve due to coordination difficulties and
differences in the costs and benefits of collusion among industry members. Their
95
tests on the Minnesota banking industry found little support for the collusion
hypothesis for explaining performance.



Along with positioning within a firms strategic group, firm performance may
also be related to positioning within the entire industry landscape. As seen above,
firms can take on one of three positions within an industry comprised of strategic
groups. In addition to the core and secondary members of strategic groups, there
may be solitary firms that are not a member of a multi-firm strategic group.


Chilean Private Banks: Profitability vs. Positioning
2
3
4
5
6
7
8
9
10
4 5 6 7 8
Strategic Deviation of Deposits
S
t
r
a
t
e
g
i
c

D
e
v
i
a
t
i
o
n

o
f

L
o
a
n
s


Figure 3.5. Strategic Positioning of the Top Ten Private Chilean Banks (see
Table 3.1 for the names of the banks) .



3.4.3. Application to the Chilean Banking System.

Plotted in figure 3.5 is the strategic positioning of the ten largest private banks in
Chile. The co-ordinates are given by each banks strategic deviation of deposits
and of loans, respectively. The size of the bubbles are proportional to the
profitability of each bank. Profitability is defined, for this purpose, as the ratio of
Total Operating Income:Assets. The values used for the graph are given in Table
4.1
96


Table 3.1. Profitability and Strategic Deviation of the Ten Largest Private Banks
(where Strat Dev means Strategic Deviation)

From observation of figure 3.5, several conclusions can be drawn. Firstly, the ten
banks are positioned within an area centred around the co-ordinate (6,6) divided
in four quadrants. In quadrant I, that is low strategic deviation of deposits and
low strategic deviation of loans, are the two Spanish banks, Santander and
BBVA. In quadrant II, high deviation of deposits, and low deviation of loans, are
Banco Chile, BCI and Scotia Bank. In quadrant III, that is high deviation of
deposits and high deviation of loans, are Desarrollo, Security and BICE; and in
the remainder, quadrant IV, are CitiBank and Corpbanca.

Secondly, four strategic groups in the form of clusters in the graph, are clearly
apparent. They are: (SG1) Santander and BBVA; (SG2) Chile and BCI; (SG3)
Desarrollo and Scotia; and (SG4) Corpbanca, BICE, Security and Citibank. Do
these strategic groups have descriptive validity? SG1 comprises the two main
Spanish banks, who compete for the financial services requirements of the
Spanish corporations that operate in Chile, and leverage their extensive Iberian
and Latin American networks to serve a large retail Client base; SG2 comprises
the two largest locally owned banks, which compete for the same corporate and
retail segments; SG3includes two banks (i.e., Desarrollo and Scotia) of very
similar size and Client profile, and heavily based on fee income as can be seen in
figure 4.2; SG4 is the most interesting group because it appears to include four
banks. Three of the banks in SG4 are locally owned and are heavily focused on
corporate business; Citibank focuses on corporate as well, but also works in
personal banking with mid- to high-net-worth individuals. Security Bank appears
to be a secondary bank within that strategic group. Banco Estado, the eleventh
bank in the previous analyses, is not included in this graph, but if it were, it
would lie well out to the top right hand corner of this area, at (14.38; 10.87),
forming a solitary firm strategic group. How can it cope with such a large
strategic deviation? From a strategy perspective, its large deviation can be
explained by the fact that it has a social development support mission, apart from
the necessity of being profitable. From a conformance perspective, Estado can
afford to be deviant because it is a state owned bank with its deposits
guaranteed by the State.

Thirdly, it is quite clear that in every group, except for SG2, there is a dominant
bank in terms of performance measured by profitability. If, on the other hand
BICE Chile BCI Santander Corpbanca Citi Scotia Security BBVA Desarrllo
Strat Dev
Deposits 6.34 6.05 6.31 4.48 6.00 5.78 7.27 6.81 4.25 7.63
Strat Dev
Loans 8.28 2.49 3.94 4.35 8.28 8.86 5.44 9.36 4.61 7.09
Profitability
(%) 1.35 1.48 1.46 2.22 2.80 1.01 0.82 1.10 1.09 2.05
Asset Mkt.
Share (%) 1.46 13.23 7.86 15.97 3.35 6.81 2.40 1.92 5.39 2.15

97
performance is measured in terms of asset market share (see figure 3.6) again,
performance differs markedly within the strategic groups (except for SG3). This
supports McNamara et al.s (2003) finding that there is little collusion within
groups, and therefore there is probably more rivalry within groups than across
them. The evidence does not support McNamara et al.s (2003) other conclusion
that secondary firms tend to outperform core firms, by whichever performance
measure is taken, be it profitability or market share.




Chilean Private Banks: Assets vs. Positioning
2
4
6
8
10
4 5 6 7 8
Strategic Deviation of Deposits
S
t
r
a
t
e
g
i
c

D
e
v
i
a
t
i
o
n

o
f

L
o
a
n
s




Figure 3.6. Chilean Banks Market Share in Terms of Assets.


The descriptive difficulties mentioned above about fitting Citibank in SG4, beg
for a deeper analysis of this particular group.

98
SG4: Deposit Profile, 2002
0
10
20
30
40
50
60
C
u
r
r
e
n
t
a
c
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-
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o
n
d
c
o
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m
i
t
m
e
n
t
s
Deposit Category
S
h
a
r
e

(
%
)
System
Corpbanca
BICE
Security
Citi



Figure 3.7. Deposit Profile of SG4 Banks





As can be observed in figure 3.7, Corpbanca and BICE have similar deposit
profiles, both skewed toward relatively more short term deposits; on the other
hand Citibank and Security Bank are also similar to each other, but with a greater
relative weight of long term deposits compared to the banking system average.

With respect to loan profiles (figure 3.8), BICE and Security are heavily skewed
towards Commercial loans and are almost out of the Consumer loan business.
Corpbanca is slightly over the banking system average on both Commercial loans
and Consumer loans, while Citibank is slightly under the system average in
commercial loans, and well above the system average (and the other three co-
group members) on Consumer. BICE and Security are industry leaders in
Export/Import loans, followed closely by Corpbanca; Citibank is below system
average on Import/Export. All four banks are well below system average on
mortgage loan, but Citibank is considerably ahead of the other three.
99
SG4: Loan Profile, 2002
0
10
20
30
40
50
60
70
80
C
o
m
m
e
r
c
ia
l
C
o
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r
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r

L
o
a
n
s
Loan Category
S
h
a
r
e

(
%
)
System
Corpbanca
BICE
Security
Citi


Figure 3.8. Loan Profile of SG4 Banks

Finally, the three local banks are above the industry average on leasing contracts,
while Citibank, for all practical purposes, is out of this line of business.

From the analysis of the loan profiles, it is safe to say that Citibank is quite
probably in a strategic group of its own, which will be called SG5. Banco del
Estado will be called SG6.

Thus, SG4 is comprised of three banks: Corpbanca, BICE and Security. A
question worth looking into is the reason why the secondary bank, Security, is
under-performing relative to Corpbanca, which, as mentioned above, contradicts
McNamara et als (2003) findings. From an analysis of information, two
possible reasons stand out: (a) Looking at the deposits profiles (figure 4.7), it is
clear that both Corpbanca and BCI have a heavier load of short term deposits and
lesser load of long term deposits, than Security; and (b) from figure 4.5, it is also
clear that Securitys fee-based income is considerably lower than Corpbanca and
BCI. In times of record low interest rates, as are being experienced today, both
these factors work against Securitys relative profitability.


3.4.4. Conclusions

This section introduced a methodology for taking a more granular view of a
financial services market which, applied to the Chilean banking sector, shows
that the eleven largest banks have distributed themselves across the market
domain in strategic groups. Within this population, there are six strategic groups,
of which four comprise two or more banks.

The analysis of the Chilean market under this lens supports McNamara et al.s
(2003) proposition that rivalry within strategic groups is greater than rivalry
100
across strategic groups. This statement is made based on that performance of
banks within a strategic group differs markedly, in fact more so than across
groups, which appears to indicate there is an absence of collusion within strategic
group s. On the other hand, this analysis does not support McNamara et al.s
other proposition, that secondary firms outperform the rest of the strategic
groups. Only one of the strategic groups identified has a secondary bank, which
is outperformed by the group core banks both in terms of profitability and market
share.



3.5 The Impact of Competitive and Institutional Forces on the Banking
System.

This section of the chapter distills the findings of the previous sections, in order
to understand how the interplay of institutional forces and competitive forces are
shaping the industry.

a. Contextual factors such as low interest rates, and institutional forces in the
form of shareholder demands for profitability, have put a significant pressure on
Chilean banks to increase their fee-based income. This appears to be a trend that
will continue in the near future.

b. Institutional forces in the form of (i) capital requirement asymmetries between
banks and other financial institutions, and (ii) new regulations that give a flexible
normative framework, have led to a steep growth in asset-backed securities.
Through these instruments banks have taken loans off their balance sheets and
passed them on to insurance companies and institutional investors (Arias, 2001).
It appears that this trend will continue in the near future.

c. The trend indicated in the previous point is shifting credit risk from the books
of those who know how to manage it (i.e.: banks), and onto the books of those
who have less expertise such as insurance companies and pension fund managers
(The Economist, 2003). This could be a highly volatile situation for a country
that has entirely privatized its pension programmes. Banks should expect changes
in institutional forces in the form of further-reaching financial services
regulations.

d. Competitive forces in the form of a need to improve efficiency ratios in a small
market like Chile, have led banks to co-source with each other, or out-source to
specialist low- cost providers, a substantial part of their peripheral back office
operations (Elewaut et al, 2003). Continuing prospects of low interest rates plus
the policies of the large multinational players to increase scale through setting up
of global shared service centres in low-cost locations, is putting pressure on the
Chilean banks to move deeper into sharing core-system operations, setting up
banking utilities, and embarking on joint-ventures to originate securities and
other instruments.

101
e. Institutional forces in the form of Basel II compliance, together with the
secondary effect of the industrys tendency to de-construct into value added
networks as indicated in the previous point, have made bank managers aware of
the necessity to tackle their operational risk management. Many have not realized
yet, but will do so in the near future, that the span of their operational risk
management exceeds their own organizational limits, and covers their suppliers
and partners as well (Pritchard, 2003).

f. As back-office integration increases, banks are becoming more conformant
from an operational point of view. The forces of competition are, therefore,
pushing banks to focus their only two strategic resources, people and information
technology, on achieving market power through differentiating their products and
services, or through increasing their Clients ease of search (Griffiths &
Remenyi, 2003a).

g. In order for Chilean banks to maximize the benefits of their propensity to co-
source and out-source their operations, and at the same time cope with
competitive forces that lead them to differentiate, they will have to overhaul their
rigid organizational structures. A possibility is to follow the trend of global banks
(IBV, 2003) and reconstruct by transforming internally to modular structures. It
is difficult to see how this could happen without implementing major changes in
their technology infrastructures, and without developing their people (Watkins,
1998).

h. Strategic group analysis based on a three dimensional space of strategic
deviation and profitability, gives a good understanding of where each bank stands
and who it competes with. In other words, it shows how each bank decides to
balance competitive and institutional forces. This study supports McNamara et
als (2003) findings that performance differs more within strategic groups than
across them, which appears to indicate that there is no collusion within strategic
groups as traditional theory indicates, and that competition is fiercer within
strategic groups than across them.

i. This study does not support McNamara et al.s (2003) other finding, that
secondary firms within strategic groups outperform the core firms. However, this
conclusion is arrived at based on a single case, and could be owed to
circumstantial interest rate levels. This issue needs further research.



3.6. Final Reflection: An Orbit Theory of Bank Strategies

So, how are competitive forces and institutional forces shaping the Chilean
banking system? Applying a simile from physics, Chilean banks are subject to
the centrifugal forces of competition and the centripetal institutional forces. The
result is that they all lie within a relatively small area of the two-dimensional
strategic deviation of loans and strategic deviation of deposits plane. Actually,
the size of this area and its distance form the origin (0,0), could be taken as a
measure of the relative strengths of the two forces: a large area would indicate
102
that competitive forces predominate over institutional ones, and a small area
would indicate the converse. By negotiating and balancing these two opposing
forces, each bank defines whereabouts in this area it wants to operate. By
influence of their size, the larger banks will tend to define the industry average
and therefore settle in positions within this area closer to the origin (0,0). In the
case of the present analysis, BSCH, BBVA, Chile, and BCI take this mainstream
role. The smaller breakaway banks will venture further out to define a niche
where they want to compete. State owned banks like BancoEstado, whose
deposits are guaranteed by the State, have a different competitive forces versus
institutional forces relationship, and therefore can afford to compete on an outer
orbit without their legitimacy being challenged.

Whereabouts on this plane a bank decides to operate defines its strategic group
and therefore its principal competitors. What factors intervene in a banks decision
on where to place itself within this competitive landscape is beyond the scope of
this research project but, if the resource-based view of the firm (RBV) is to be
believed, the banks competencies should be a key factor (Bharadwaj, 2000; Hall,
1992; Mata et al., 1995; Santhanan & Hartono, 2003). As found by McNamara
et al. (2003) and supported by this research, top performers, measured in terms of
profitability, are not concentrated in one specific strategic group or area of this
plane, but rather distributed among them (see figure 4.5). Performance, therefore,
appears to be related to how well a specific bank competes within its strategic
group. As banks are information intense organizations and therefore their only
two strategic resources are people and information technology (Griffiths, 2003),
profitability is dependent on how they combine these two resources to out-
perform their closest competitors. Trying to determine how bank managers make
their decisions in this realm, should be the subject of further research.




3.7. Summary

A multiple case-study based research, such as the one being pursued here,
focuses on studying a phenomenon in its context. In order to document the
context of this research, this Chapter did an in-depth analysis of the Chilean
banking system which is the business environment in which the six cases being
analysed operate. It did so through a multi-paradigm approach aimed at
understand the underlying forces that shape strategies in a banking system.

In Chapter 5 this analysis of context will be used to define the criteria by which
the six cases will be divided into two groups. The first group of four will be
included in Apendices B, C, D and E, and will be used to build the theory. The
case-studies of the remaining two banks will be used to corroborate the results.
103

CHAPTER 4 - RESEARCH METHODOLOGY AND
DESIGN


4.1. Introduction and Overview.

From the literature reviewed in Chapter 2, it is clear that evaluation of
technology is not a new area of research. Notwithstanding the considerable
attention that evaluation has been given by researchers over the last twenty years,
there are surprisingly few accepted theories to help practitioners solve the
problems that arise in their day to day interactions with technology investment
decisions. It is also quite clear from the literature that the way to arrive at these
theories is not the much used method of finding correlations between different
measures of ICT investments (input) and alternative measures of firm
performance (output). A different line of approach to the problem, both from a
conceptual and from a methodological standpoint, is required.

A conceptual framework to overcome these limitations, based on the theory of
market power, was developed as part of the interpretation of the literature at the
end of Chapter 2 and is shown in graphical form in figure 2.13. The literature
gives tested alternative measures for the Input box (e.g. investment in
information technology, or investment in ICT per white-collar worker, etc.) and
for the output box (i.e. price, market share or revenue/white-collar-worker).
However, what does not come from the literature is a tested measure of market
power factors, which is a problem. It is a problem because it means that the
traditional scientific, positivist, deductive approach of defining a model,
proposing some hypotheses and setting out to collect evidence to corroborate
them (Hamel, 1993, p.29) could turn out to be a risky endeavour. In order to be
able to apply a positivist approach, concepts need to be operationalised in a way
which enables facts to be measured quantitatively (Easterby-Smith et al., 2002,
p.28).
The absence of tested measures for the Market Power Theory constructs, together
with the ambition of developing an in-depth understanding of the issues at stake,
led to adopting an alternative research strategy, as will be seen in this chapter.
The issue is tackled with an inductive, interpretist, approach by putting forward
the research question and carrying out a qualitative research project aimed at
constructing theory from the evidence unearthed by the research. For reasons
that will be substantiated in the following section, the research design is based on
multiple case studies.
The present chapter will develop the research methodology and design. It
describes mainly the research design as it was defined in the original research
proposal and protocol. As often happens when design is taken to the field,
particularly in the case of inductive theory building research (Layder, 1993),
adaptations had to be made. Some of these departures from the original design
will be described in this chapter; others will be seen in the Research Process and
Analysis of Evidence (Chapter 5).

104

4.2. Research Strategy.
15



This is a theory building research project (using the characterisation of
Eisenhardt, 1989), as opposed to a theory testing one (Layder, 1993). The
objective is to propose a theory that will assist financial service organisations to
understand how they can improve their performance by making information
technology investments that will help them create or retain market power.

The research strategy adopted is the construction of theory on the basis of
empirical work, which is the discovery of theory from systematically obtained
and analysed evidence. The advantages of theory developed in this way, as
opposed to those generated through speculation and reformulation of others
speculations, is that the theory derived must fit the situation being researched,
and must work when put into use (Glaser & Strauss, 1967). The theory is made
to fit the evidence, rather than the theory defining the type of evidence to be
collected as in theory testing (Layder, 1993, p.20). Although the research design
will capitalise on some of the advantages of the grounded theory approach, it will
differ from early ideas on this strategy (Glaser & Strauss, 1967, p.45) in that it is
not purely inductive. It will capitalise on existing literature and practitioner-based
knowledge to develop a conceptual framework of departure, in line with more
recent writings which admit adopting a priori constructs (Leonard & McAdam,
2002, p.51, citing Strauss & Corbin, 1990). Some authors go further to say that
for the design of explanatory case studies it is essential to have an initial
theoretical proposition (Bickman & Rog, 1998, pp. 234-235).

There are different ways of grounding theory in the evidence. However, the most
powerful means of doing so is through the comparative method which involves
comparing groups of both maximum and minimum similarity, because of its
coverage of many diverse properties of the groups studied. These exercises in
comparison enable developing categories, properties and hypotheses as they
emerge from the collection and analysis of evidence (Layder, 1993, pp.137-139;
Glaser & Strauss, 1967, pp.21-31). On this basis it was decided to opt for
multiple case-studies (over other alternatives such as action research or focus
groups) which is an appropriate research tactic when the intention is to answer
the why? and how? questions rather than the how much? (Yin, 1994, p.1); and
when the question is being asked about contemporary events over which the
researcher has little or no control.

Another reason for discarding action research, which has recognised merits for
studying information technology in its natural setting, is the fact that it requires
practical action and taking the role of participant observer (Baskerville & Myers,
2004; Kohli & Kettinger, 2004; Iversen et al., 2004; Lindgren et al., 2004; Street
& Meister, 2004; Eden & Huxham, 1996) which is not feasible in this case due to
access limitations.

15
Strategy is understood here as the manner in which particular methods and technique are
brought together in the research so as to produce the most efficient means of collecting empirical
evidence (Layder, 1993, p.2), and analysing it.
105

Because this research focuses mainly on managerial and organisational issues, as
opposed to purely technological ones, qualitative research methods become
particularly useful (Myers, 1997, p. 241). The study is fundamentally qualitative,
but quantitative tools are also applied when judged appropriate (Yin, 1994;
Layder, 1993; Bryman,1989 cited by Bannister, 2001). An example of the
application of quantitative tools is the analysis of market and financial evidence
from secondary sources to understand the strategic positioning of individual
banks in a banking system (Chapter 3). As will be seen below in the section on
evidence collection and analysis, the qualitative evidence was gathered mainly
through in-depth interviews geared at allowing peoples own interpretations and
meanings to surface. Because the intention was to record the informants
meanings and understandings rather than a quantitative expression of the
relations between variables, this method of evidence collection was selected over
questionnaires or highly structured interviews (Layder, 1993). On the other hand,
according to Glaser & Strauss (1967) the researcher interested in developing
grounded theory is an active sampler of theoretically relevant data, which
therefore rules out ethnographical approaches to evidence collection, as they
concentrate on providing detailed description of observed behaviour but in a
rather more passive way (Layder, 1993, p.44).

The approach is interpretivist which has the advantage for a study of this nature,
that it is holistic and not reductionist, and therefore allows for the examination of
more complicated situations (Remenyi et al., 1998). Because the resource
limitations and time constraints for this study are stringent, a cross sectional as
opposed to a longitudinal approach is followed. However, because ICT decision-
making is a process that varies over time, a historical dimension was thought
relevant and included in the analysis of each case (i.e., a summary of the history
of the organisation; a summary of each informants career; and the historical role
of ICT in the organisation) (Layder, 1993).

Although it is not usually possible or desirable to spell out a priori all the steps in
an interpretivist study in the same way as one can for a positivist research
programme (Layder, 1993; Glaser & Strauss, 1967), at the time of discussion on
whether this research should have a loose or a tight design, the balance inclined
towards the latter. The reasons for this were (a) that the literature review and the
researchers experience had given a first-cut conceptual framework, and (b) that
the project was constrained for time and resources and thus a more structured
design was deemed to enable starting evidence collection and analysis in a more
focused and efficient way. The price paid for this is to have carried out a more
deductive study with less freedom than a purely inductive one, which could
possibly have led to missing some opportunities. On the continuum between a
purely deductive and a purely inductive approach, this project lies somewhere
off-centre towards the inductive camp (Miles & Huberman, 1994).

A final word on theory grounded on evidence, is that there is a difference of
opinion between Glaser & Strauss (1967) and Layder (1993) on how theory
relates to the evidence. While Glaser & Strauss (1967) define grounded theory as
theory that is limited by the evidence, Layder (1993, p.60) admits that grounded
106
theory engulfs both theory that is limited by empirical evidence, and theory that is
guided by the evidence. The latter gives place to a looser fit between evidence
and theory. The present research is more closely aligned with the Glaser &
Strauss (1967) perspective.



4.3. Criteria for Selecting the Cases.


4.3.1 Logic behind the Selection of Cases.

According to Hamel (1993, p. 38) a central idea is to locate the global in the
local thus making the careful selection of the research site the most critical
decision in the analytic process. Case study research should rely on theoretical
sampling
16
where the cases may be chosen to fill theoretical categories and
provide examples of polar type (Eisenhardt, 1989, p. 537 ).

With only a limited number of sites, consider purposeful selection,
rather than relying on the idiosyncrasies of chance. The same logic
applies to selecting informants and observations, (Light et al., 1990,
cited by Maxwell, 1996, p.71).

Qualitative samples tend to be purposive rather than random, as qualitative
researchers usually work with small samples (Kuzel, 1992 and Morse, 1989, cited
by Miles and Huberman, 1994, p.27). It is also important to consider that the
selection of an appropriate population controls extraneous variation and helps to
define the limits for generalising the findings (Eisenhardt, 1989). According to
Glaser & Strauss (1967), in the service of generating theory the researcher must
select comparison groups according to their theoretical relevance in furthering
the development of emerging categories, properties, hypotheses and the
integration of the theory. Finally:

the constant selection and control over comparison groups is part of
the dynamic and emergent design of the research process and encourages
the development of properly grounded theory (Layder, 1993, p.45).

In terms of number of cases to select, Giddens (1984, cited by Hamel, 1993,
p.34) says that:

the traditional small-scale community research of fieldwork
anthropology are not in themselves generalising studies. But they can

16
Theoretical sampling may be defined as the process by which the researcher, after previous
analysis, seeks samples of population, events, activities guided by his or her emerging (if still
primitive) theory. This sampling is directly linked to making comparisons in terms of the basic
categories and distinctions of the emergent theory. The process of sampling, and therefore
evidence collection, is controlled by the emerging theory (Layder, 1993; p.138; Glaser & Strauss,
1967; p.45).
107
easily become such if carried out in some numbers, so that judgement of
the typicality can justifiably be made.

While there is no ideal number of cases, a number between 4 and 10 usually
works well. With fewer than 4 cases, it is often difficult to generate theory, and
its empirical grounding is likely to be unconvincing, unless the case has several
mini-cases within it. With more than 10 cases, it quickly becomes difficult to
cope with the complexity and volume of the evidence (Eisenhardt, 1989).

One area where the literature did not help much was in defining the unit of
analysis. Assessment of the value of information technology can occur at any of
six levels of analysis: from the individual level to the economy level, passing
through Project, Division, Company, Industry (McKeen & Smith, 1996). Based
on that there is rigorous research to support that ICTs impact is difficult to
capture at the aggregate and sectoral level (OECD. 2003, p.81), this level of
analysis was discarded. Two possible levels of analysis were considered: Project
and Company. After considerable reflection it became clear that this research
should be done at company level. Some of the arguments were the following: (a)
as stated above, the object of the study is to help financial service organisations
understand the impact of information technology on enterprise level performance,
and clearly this goes beyond the analysis of individual projects; (b) the market
power benefits of an individual project depend on the Treacy & Wiersemas
(1995) notion of three value disciplines, and Weill & Broadbents (1998) view
of IT infrastructure framework which should be seen at an enterprise level; (c)
projects can be of non-comparable magnitude (Remenyi et al., 1998); and (d)
considering that this is not a positivist research project, the unit of analysis does
not need to be reduced to its simplest form but may include the complexity of
whole situations (Easterby-Smith et al., 2002).

Based on the previous argumentation, the population from which to select four to
six cases was defined as:

Top 10 Banks in Chile
Top 10 Insurance Companies in Chile
Six Pension Fund Managers (AFPs) in Chile

This selection of population was seen to diminish the effects of extraneous
factors in the environment, or noise (Remenyi et al., 1998). By taking all
organisations from the same country the introduction of noise due to cultural and
macro-economy performance differences would be avoided; by taking all in the
same sector (i.e., financial services) noise from different regulatory environments
was to be prevented; and finally by selecting the cases from the largest
companies the introduction of noise from size differences would also be avoided.

Within this group of companies, it was defined that the cases would be selected
trying to include some extreme or polar cases (Eisenhardt, 1989) in terms of
business strategies and of the use of information technology. In other words, the
cases were to be selected with a view at extending the development of emerging
categories, properties, hypotheses and the integration of the theory (Layder,
108
1993). Additionally, the choice of site would be clearly justified and an eligible
research site would have the following properties (Remenyi et al., 1998): (a)
entry should be possible; (b) the site would present the possibility of collecting
pertinent evidence; (c) trust should be able to be established with informants; and
(d) evidence quality and credibility of the research should be assured.

One of the critical challenges was to obtain access to the key people in the most
interesting companies. It was decided that the tactics to be applied for obtaining
access were:

a. To explore the possibility of going through the Association of Banks, the
Association of Insurance Companies, and the Association of AFPs
b. To use personal/professional contacts at some of the organisations
c. To offer something in exchange for their participation.


4.3.2. How Access was Obtained.

In the end, all three tactics mentioned in the previous paragraph were applied to
secure the required number of organisations to volunteer for case studies.
Applying professional contacts with the Chairman and General Manager of the
Banking Association (ABIF), access was obtained to make a presentation on the
objectives and approach of the project to the Planning Committee of ABIF. The
planning committee is integrated by the Planning Managers of the largest banks
who meet once a month. The presentation was delivered in their meeting of 14
th

October 2003. In this presentation the objectives of the project were explained,
together with the methodology to be applied, the role of the participating banks
and the demand on their time, and the benefits they would get in exchange. A
one-day Strategy-Technology Alignment workshop based on Weill &
Broadbents (1998) Managing by Maxims ideas, at no cost, was offered to the
participant banks in order to entice them to volunteer. After this presentation,
ABIF sent a letter to all the banks in the Chilean system inviting them to
participate.

This activity was highly successful as six banks enrolled as volunteers: Bank
Boston, Banco de Chile, Banco Santander Santiago, BancoEstado, BCI and
Banco Security. These six banks are among the twelve largest banks in Chile and
represent over 80 percent of the assets of the Chilean Banking System. It was
then decided not to approach insurance companies and pension fund managers,
and thus restrict the study to banking, with the advantage that this puts an extra
level of control over regulation-generated noise.


4.4. Research Stages.

The project adopted the stages in a theory building research project proposed by
Eisenhardt (1989), which are the following:

109
i. Getting Started: Define the question and a-priori specification of
constructs to focus data collection, but keep a balance and do not
make the design too tight.
ii. Selecting Cases: Theoretical sampling to replicate previous cases or
extend the emerging theory. Take extreme situations and polar
types.
iii. Crafting Instruments and Protocols: Use qualitative data to reveal
theory and try to corroborate with quantitative evidence.
iv. Entering the Field: In field notes, observation and analysis should be
separate. Push thinking by asking What am I learning?, How
does this case differ from the last? It is legitimate to alter data
collection methods as the project progresses.
v. Analysing Within-Case Data: Become intimately familiar with each
case as a stand-alone entity.
vi. Searching for Cross-Case Patterns: Look at data in many diverging
ways. Select categories and then look for within-group similarities
and inter-group differences.
vii. Shaping Hypothesis: Compare systematically the emergent frame
with the evidence from each case. Sharpen constructs by (a) refining
their definition and (b) building evidence that measures the
constructs in each case.
viii. Enfolding Literature: Compare the emergent concepts, theory, or
hypotheses with the extant literature. Special attention should be
given to conflicting literature, which forces the researcher into a
more creative, frame-breaking mode.
ix. Reach Closure: Decide when to stop adding cases, and when to stop
iterating between theory and evidence and deciding that saturation
has been achieved.

These stages are well aligned with the process model for research given by
Howard and Sharp (1983, cited by Remenyi et al, 1998) , whom add that these
stages should not be regarded as linear but that the researcher should revisit them
time and again during the design and execution phases. Another interesting
concept is that Business and management research requires both lumping and
splitting, but often in management research the former predominates and not
enough splitting is done. Positivist research tends to lump while non-positivist
or interpretivist research tends to split.


4.5. Evidence Collection and Analysis.

Sources of information: Several sources are used in order to triangulate
information, but interviews are especially relevant, due to that they are an
appropriate means of collecting highly complex and sensitive information
(Hair et al., 2003, p.142) and when the objective is to obtain insight through the
informants interpretation of human affairs (Yin, 1994, p.85). Different types of
interviews are used, namely semi-structured and focused ones (Scholtz & Tietje,
2002, pp.13-14; Yin, 1994, p.84-85). :
110

a. Semi-structured Interviews: It was decided to apply semi-structured in-
depth interviews, as opposed to open ended ones, because this is a
multiple case study and otherwise there is a risk of collecting a wealth
of information from individually valuable interviews that are then
difficult to generalise from (Miles & Huberman, 1994, p.17). An
interview guide much in line with that developed by Bannister (2001,
pp. 387-391), was developed on all aspects of the research question, and
the conceptual framework indicated in Chapter 2. The interview guide is
shown in Appendix A. This type of interview was held only with the
informants of the case-study banks.
b. Focused Interviews: These are applied as a method to corroborate certain
facts and interpretations of events. They are narrower in scope than the
semi-structured ones of the previous paragraph, and are open-ended in
structure (Yin, 1994, p.85). These interviews are held with outside
observers or with informants of the case-study banks who are not part of
the core interviewee group designated by each bank.
c. Because interview evidence are verbal reports and therefore need to be
corroborated by other types of evidence (Bickman & Rog, 1998, p.247),
the research design contemplates the analysis of multiple documentary
sources, including meeting memorandums, strategy plans, project
charters and annual reports. A critical aspect of this is imposing a
framework or structure on the evidence that will allow the researcher to
catalogue the themes and concepts. These themes should emerge from
the bottom up:
rather than being the result of selecting a theory by convenience
and then dipping into fragments [of evidence] that support such
a theory. Such practice is known as circularity and is to be
avoided (Remenyi et al., 1998, pp. 112-113).

Interviewees: According to Gummesson (1991, p.21, cited by Remenyi et al.,
1998) access or the ability to get close to the object of study in order to find out
what is happening, is the researchers biggest problem. Although it was
anticipated that this could change as the research progressed, the holders of the
following positions were to be interviewed: the Managing Director, the
Operations (& ICT) Manager, the Planning Manager and the Market Managers.
In addition, each interviewee would be asked whom else in the organisation they
thought should also be interviewed, and why (Bannister, 2001, p.149).

In terms of rigour in the collection and analysis of evidence in the case-study
method, it is important to minimise the introduction of subjectivity, and therefore
bias, by both the informants and the researcher. These biases affect in that
preconceived ideas, thoughts and values of the informants and the researcher
stand in the way of an exact reconstruction of elements that could define the
phenomenon, the object of study (Hamel, 1993).

Hamel (1993) gives several ways in which the problem of subjectivity can be
eliminated or contained. One idea that is adopted in this design is to do a
comparative analysis, through multiple-cases, to discover biases of the
111
informants (i.e., six cases are analysed in this research). A second possibility,
which is also applied in this research, is to use public and published quantitative
evidence in the form of annual reports, industry statistics, market information,
in such a way that the information from different sources fits together like pieces
of a puzzle (i.e., as can be seen in the write-up of each case, triangulation takes
place by using published information).

With respect to biases on the part of the researcher, Hamel (2003 ) recommends
limiting the freedom of the researcher by underpinning the analysis with
established theory. In this research, several theories are put into the design of
evidence collection and the analysis process: market power theory, Porters five-
forces model and value chain analysis, Treacy & Wiersemas (1995) notion of
three value disciplines, and Weill & Broadbents (1998) view of ICT
infrastructure framework. These concepts were included in the detailed semi-
structured interview guide, which was presented for discussion and comments at
a Research Colloquium held at Henley Management College in March 2003. In
terms of hearing and recording the responses, each interview was written up and
sent to the interviewee for comments and corrections. It was also planned to
have a second interviewer at each interview, but in the end it was not possible
due to funding limitations.

Data reduction refers to the process of selecting, focusing, simplifying,
abstracting, and transforming the data that appear in written-up field notes or
transcriptions. Reduction is followed by evidence display which, in addition to
extended text, would take the form of matrices, graphs, charts and networks
(Miles & Huberman, 1994, pp.10-11). An early design of one of these structures
is given in Appendix A.

In general terms, it can be said that this method of evidence collection is adhered
to closely. Notwithstanding, in each case study report there is a Sources of
Evidence section that describes any departures from the blueprint. Comments
are also made in the cross-case analysis section in Chapter 5.


4.6. Process of Generating Theory.

Christensen & Raynor (2003) define theory as a statement predicting which
actions will lead to what results and why. Remenyi (2004) states that a theory
should be able to predict, but this is not essential; what is essential is that it
explains a phenomenon, which is in line with Weber (2003, p.iv) who says that
a theory is an account that is intended to explain or predict some phenomena
that we perceive in the world. So Christensen & Raynor (2003) appear to be
more restrictive in their definition; however, when they describe why good
theories are valuable, they say that First, they help us make
predictionsSecond, sound theories help us interpret the present, to understand
what is happening and why (p.68; my underlining). Considering that interpret
has its roots in the Latin word interpretari, which means explain (The Concise
Oxford Dictionary, Sixth Edition, Eighth Impression, 1979), it can safely be
assumed that the three definitions are coincident. This study shall therefore adopt
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the broader conception: explain or predict. Incidently, according to Yin (1994,
p.110) to explain a phenomenon is to stipulate a set of causal links about it,
which can be interpreted as a necessary step to be able to predict.

The terms account and phenomena, however, have particular meanings,
according to Weber (2003). In his view, the two fundamental (atomic) constructs
needed to be able to describe anything perceived in the world, are things and the
properties of things. The values of the properties of some thing at a point in
space-time determine its state. Changes of state (which are changes in the value
of properties) are events that occur to a thing:

Phenomena are the states of things or events that occur to things. When
we build a theory, therefore, we are seeking to account for the state(s) of
some thing (or things) or an event(s) that occurs to some thing (or
things) (p.iv).

Reflecting on this characterisation of account and phenomena: Does it carry an
implicit epistemological and ontological position? It is believed that this is not
necessarily so. On what a positivist and a non-positivist, or an external realist and
an idealist, would differ is in their conception of the fundamental constructs:
things and properties of things.

Rather surprisingly, Weber (2003) puts little explicit emphasis on causation and
the importance of rising above mere correlations. He defines account of the
phenomena as:

the explanation of the laws that are hypothesized to relate them laws
that specify the relationship between the values of different properties of a
single thing, or laws that specify the relationship between the values of
properties of different things. (p.v)

Christensen & Raynor (2003) tackle the issue directly when they say that, as a
first step, people:

typically identify the most visible attributes of the phenomenon in
question that appear to be correlated with a particular outcomeIt takes
a while to develop categories that capture a deep understanding of what
causes the outcome, (p.69)

implying that only the latter qualify as theories. The necessity of time for
precipitating (in the figurative sense of chemistry or physics) causal relationships
is also implied by Remenyi (2004) when he says that extensive observation
followed by insightful reflection leads to the understanding of causal
relationships.

According to Christensen & Raynor (2003) the construction of a theory requires
three steps. It begins with a description of the phenomenon to be understood. It
then classifies aspects of the phenomenon into categories. And finally, it
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formulates a hypothesis of what causes the phenomenon to happen and why. The
first step in this study is the enunciation of the problem of converting ICT
investments into shareholder value in banks, which has been the purpose of the
dissertation up to this point. Steps two and three shall be tackled in the next
section. All this implies and includes interactions that Christensen & Raynor
(2003) represent by the diagram in figure 4.1:








4.7. Tests for Validity.

The quality of case-study research can be judged on the basis of four tests:
construct validity, internal validity, external validity and reliability (Yin, 1994;
Remenyi et al., 1998).

Construct validity refers to ensuring correct operational measures for the
concepts being studied. Responding to the recommendations given by Yin (1994,
pp.98-99), it was defined to use three tactics to test for construct validity:
- Check that multiple sources of evidence have been used to triangulate
information
- Ensure that a clear chain of evidence has been established
- Have the key informants review the draft case study reports

Internal Validity refers to ensuring that the causal relationships between
constructs are well supported. This is a decisive test in explanatory research as
Formation of a theory:
A statement of what
causes what and why.
Categorisation
Observation and description
of the phenomenon
Anomaly
Confirmation
Prediction
Figure 4.1. Construction of a Theory (Christensen & Raynor, 2003)
114
this (Yin, 1994; Remenyi et al., 1998). Again, it was decided to apply three
tactics to reduce the risk of spurious effects, as follows:
- Pattern-matching, where predicted patterns are compared with
empirical ones.
- Explanation building: analyse the case study evidence by building an
explanation about the case. The final explanation results from a series
of iterations
- Time-series: match between a trend of evidence points compared with
a theoretically significant trend. However, because this is a cross-
sectional study there will not be a time-series as an output, so it will
not be possible to apply this tactic.

External Validity: Although some literature suggests carrying out this test, it
would be more adequate for a positivist, survey based study where the researcher
intends carrying out a statistical generalisation. In this study, the intention is to
rely on an analytical generalisation to generalise from the particular cases
analysed to a broader theory of converting ICT investments into shareholder
value. Thus, this test is not so important in this particular study (Yin, 1994, p.36;
Remenyi et al., 1998, p.180).

Reliability: The objective of the test is to ensure that if another researcher
analyses exactly the same evidence, he or she will arrive at the same results. It
was decided that this would be achieved by archiving the research protocol and
the interview notes and transcripts; by giving a detailed account of the research
process, ex-post; and by presenting a tight chain of evidence throughout all stages
of the study.







115

4.8. High Level Work Plan.

4.8.1. Initial Work Plan.
The stages of research described in the section on Research Stages are
disaggregated into activities and placed on a time-line as indicated in figure 4.2.

Figure 4.2. Work Plan.




The activities on the work plan are described as follows:

a. Background on Financial Services Sector in Chile: Overview of history and
of legal and regulatory framework; identify key players and their strategic
positioning.
b. Select, Contact and Enrol Cases: Make initial contacts through personal calls
and secure commitment at industry events to be held in March-April 2003.
Identify the key people to interview and request appointment of a contact
person in each organisation.
c. Design and Refine Semi-structured Interview Guides: The guides must go
from general to specific issues. Some of the issues to be addressed are:
Approach to market; value discipline; strategic view of ICT; identify Market
Power enhancing projects; what triggered them; effect on industry structure
THESIS DEVELOPMENT WORKPLAN Nov 26 , 2002
Literarure Review
Finish CDP and Thesis
Critique
Background on FS Sector
in Chile
Select, Contact and Enroll
Cases
Design and Refine Semi-
Strucutred Interview Guides
Perform Interviews
Re-Interview If/W hen Required
Write-up Cases
Develop Conclusions
Pull together First Draft
Final Write-up
Theam Group Presentations 1 2 3 4 5 6 7
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003 2004 2005
116
(Porters five-forces); outcome in terms of price, market share and revenue;
degree of success; reaction of competitors. Design tables and graphs for
presenting results.
d. Perform Interviews: Set up meetings through the contact person at each
organisation. Prepare through reading annual reports and other public or
accessible information; ideally enrol analyst to accompany and take leading
roll in interview; go through guide; conduct in Spanish unless the informant
is clearly fluent in English; record if the interviewee agrees, or make notes
otherwise; request documents such as organisational charts, systems maps,
meeting minutes, strategic plans, project charters, that can be used after
the interview to enrich the case; document meeting proceedings in Spanish;
translate into English. Estimate 25 - 30 interviews.
e. Write-up Cases: Develop within-case analysis on the basis of background
material, minutes of interviews and documents obtained at interviews.
Summarise as much as possible in table and chart form. Evaluate
triangulation. Give to interviewees for their feedback. Adjust on basis of
comments if necessary. Re-interview if necessary.
f. Develop Conclusions: Perform cross-case analysis. Design and construct
tables and charts summarising all cases. Look for cross-case study patterns.
Identify learning points. Present results at a research colloquium to get feed-
back.
g. Pull-together First Draft: Refine design of final report. Merge
chapters/sections into a single document. Revise for consistency of content
and style.
h. Final Write-up: After a few weeks of reflection, come back to the document
and give in-depth revision.
i. Theme Group/Research Colloquia Presentations: Ensure that progress is
presented at Theme Groups at least once every three months. Content of
presentations: 1. Final research proposal with emphasis on the methodology;
2. Overview of Chilean financial services sector and interview guides; 3.
Interview plan and learning-points of initial interviews; 4. Structure of case-
studies and results of first case; 5. Overview of cases and early conclusions;
6. More advanced conclusions and structure of final report; 7. Mock-viva.



4.8.2. Departures from Plan.

There are two departures from the original plan, both related to activity (d)
above, that are worth mentioning: (i) The minutes of the interviews were not
written up in Spanish but straight into English, as all interviewees have sufficient
command of the English language to be able to review the minutes; and (ii) It
was not possible to have an analyst present at each interview. Apart from that, the
proceedings conformed to the plan. Further details are given, however, in each
case-study report (Appendices B,C, D, and E).



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4.9. Reflections on the Generalisability of Findings.

The value of representativeness or generalisability is not so much a function of
the group or case under investigation as it is of the object of the study (Hamel,
1993). Therefore the selection of the case or cases to analyse must not be done at
random, but observing closely the object of the study, and it is the researchers
responsibility to try to understand what it is that the case might fail to represent.
Along similar lines, Yin (1994) differentiates what he calls analytical
generalisation from statistical generalisation based on the fact that the case study
does not represent a sample, and the investigators goal is to expand and
generalise theories (analytical generalisation) and not enumerate frequencies
(statistical generalisation).

Along the same line of thought, Walsham (1995, cited by Bannister, 2001, p.127)
argues that it is possible to generalise on the basis of cogent and logical reasoning
in drawing inferences from cases.

Kennedy (1979) makes an interesting contribution to the discussion when she
says that another point about generalisation is that it is not simply a function of
the number of units one has observed; more important are the kind of units
observed, that is, the range of characteristics of the units investigated and the
range of conditions under which observations occurred. The range of
characteristics included in a sample increases the range of population
characteristics to which generalisation is possible.

Maxwell (1996) divides the issue of generalisability into internal and external,
where internal generalisability refers to the generalisability of a conclusion within
the setting or group studied, whereas external generalisability refers to
generalisability beyond the setting or group. Internal generalisability is clearly a
key issue for qualitative research; it corresponds to what Cook and Campbell
(1979, cited by Maxwell, 1996, pp.96-97) call statistical conclusion validity in
quantitative research. In contrast, external validity is often not crucial for
qualitative research; in fact, the researchs value may indeed depend on its lack of
external validity! An example given by Maxwell (1996, p.97) is a study on social
controls for physician practices. The case selected was an atypical practice for
being the most progressive and with better trained staff for which social controls
on practice should have been most likely to be effective. Because the study
showed that social controls did not work in this case it provides a more
persuasive argument for the unworkability of such controls than would a study of
a representative group.

As a final reflection on generalisability: Is generalising from a case to a
population the only path? In both legal and clinical fields (case law and clinical
treatment, respectively) it is seen that generalisations are frequently necessary
from single cases, but it is also clear that these generalisations are done by the
user of the case rather than by the person who originated the case evidence. And
the generalisation is not from a case to a population but rather from a case to
another case. In these situations, generalisations are the responsibility of the
receiver of information, rather than the original generator of the information, and
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so the evaluator must be careful to provide sufficient information to make such
generalisations possible and valid (Kennedy, 1979). The usefulness of this
approach is evident because once a phenomenon has been identified, even only
once, the probability of it being unique is so low as to make it almost impossible
(Remenyi et al., 1998, p.31).


What precipitates from this discussion is that the selection of the case or cases is
a determinant of the results of the project, and that the object of the study must be
clear at the time of choosing the cases. In this research project a substantial
amount of effort is put into the selection of the cases as can be seen in the
preceding section 4.4, in Chapter 3 and will be seen in section 5.1 of this
dissertation.



4.10. Conceptual Strengths and Weaknesses of the Design.


Summing up this research design, it is useful to state where it stands on the key
choices of research design indicated by Easterby-Smith et al. (2002, p.43). On the
continuum between researcher is independent and researcher is involved, it is
the former that prevails; in other words the case studies are carried out more
aligned with Yin than with Stakes approach (as cited by Easterby-Smith et al.,,
2002). On the decision whether to go for a large sample or a small one, the
decision is clearly to remain on the small-size-sample camp. On whether theory
is to be tested or generated, it is the latter; however, it is important to point out
that this research will be more aligned with the approach of Strauss than that of
Glaser. The decision was to go for fieldwork as opposed to experimental design.
Finally, the decision was to opt for local knowledge and not for universal theory.

The strengths and weaknesses are therefore those which come with a post-
positivist approach.




Strengths:

a. This research project answers the Why questions and is not limited to
How Much.
b. It is a relatively unobtrusive research operation
c. It maximises realism of context (McGrath, 1982).
d. It can be undertaken in a short period of time - see results early.
e. The theory building process is so intimately linked to the evidence collection
that the resultant theory is consistent with empirical observation (Eisenhardt,
1989).
119
f. It enables the researcher to combine both qualitative and quantitative
evidence (Bryman, 1989).
g. It is a highly flexible approach (Bannister, 2001).
h. Case-studies are practical (Bannister, 2001) and therefore avoid very abstract
theorising which, as opposed to grounded theory, may lead to failure to learn
from past experience (Backhouse, 2002).

Weaknesses:
a. It lacks precision with respect to measurement, manipulation and control of
behaviour variables (McGrath, 1982). On the other hand, the approach is
founded on a resilient theory which counteracts this limitation (Market Power
Theory)
b. It lacks generalisability with respect to population. Really what happens is
that the responsibility for generalising is thrown upon the reader, not the
researcher in a sense similar to case-law or clinical medicine (Kennedy,
1979)
c. It represents the situation at a point in time and therefore does not have the
ability to explain change processes over time.
d. It is carried out by a single investigator, thus reducing the creative potential
and possibly lacking the confidence in findings of convergence of
observations from multiple investigators.
e. It may result in a narrow and idiosyncratic theory.
f. The intensive use of empirical evidence may result in an overly complex
theory.
g. Because it is only partially structured, it could offer the temptation to the
researcher to veer off in interesting but tangential directions (Bannister, 2001)
h. A further difficulty lies in the analysis of evidence which, according to Yin
(1994), is still an underdeveloped area.

Finally, using McGraths (1982) criteria, this research strategy seizes horn C
(context) of the dilemma boldly but must sit upon relatively uncomfortable
levels of the A (actors, population) and B (behaviour) horns, meaning that
this research design prioritises studying a phenomenon in its context, at the
detriment of the other dimensions.



4.11. Summary.

The opening chapter of this dissertation did a broad overview of the issues that
are affecting the financial services industry in terms of its management of ICT
investments. A significant diversity of issues were analysed, not with the
intention of addressing them all in this research project, but to give a dimension
of the relevance that ICT investment decisions have for this industry. The point
that was made is that financial services practitioners are in need of fresh ideas to
help them tackle the question of ICT investments for value creation. With a view
of contributing in that space, at the end of Chapter 1 it was stated that this
120
dissertation will focus on a specific aspect of ICT evaluation in financial services
to be researched, and it distilled this aspect down to a concrete research question.

The literature review presented in the second chapter should have made the
reader aware that ICT evaluation, and in particular its application to financial
services, is not an area that has gone without research. The review shows that
academics in many parts of the world have worked intensely in this area over the
last twenty years. The question that immediately comes to mind then is: Why is it
that a discipline that has been considerably researched has not come up with
answers for practitioners? Or if it has, why are there still so many knowledge
gaps at the practitioner level? Should not filling these gaps and giving
practitioners guidance for solving their day-to-day problems be the end purpose
of academic research?

Considerable analysis of the evidence and reflection on this paradox has led to
the conclusion, as pointed out at the end of Chapter 2, that much of the research
pursued in this area has been based on strategies and methodologies that have not
led to theories of practical application. It was seen that much of the research was
based on an input-output, black-box, model that has not led to consistent results.
This dissertation presents a relatively different approach to ICT evaluation
research, based on a conceptual framework that allows tracing the impact of
technology investments through the organisation, and from there its effect on
performance. This conceptual framework applies Market Power as its theoretical
underpinning.

With the previous conceptual framework in mind, the present chapter describes
the research strategy to be followed, based on constructing theory grounded on
empirical evidence. It also gives the methodology to be applied, which is multiple
case-studies, and discusses in detail some key aspects of this methodology, such
as the selection of the cases and the issue of generalisability of findings. Because
context is so important in a study based on cases, Chapter 3 did a detailed
analysis of the Chilean banking system from a strategy perspective. Finally,
Chapter 4 gives arguments to support the rigour of the research process and
proposes tests that should give confidence in the validity of the results to be
obtained.

Looking ahead, Chapter 5 will describe the research process as it was actually
carried out, and it will present the analysis of evidence, in particular the cross-
case analysis. In that way it will set the stage for Chapter 6 which will propose
the Theory of Market Power ICT Investments for Value Creation.



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CHAPTER 5 - RESEARCH PROCESS AND
ANALYSIS OF EVIDENCE



5.1 Introduction and Overview.

Chapter 4 described the original Methodology and Research Design with few
variations from how it was presented in the Research Proposal, and prior to
carrying out the fieldwork.

However, some departures from the original plan did take place as the
research progressed. One of them was the decision to use the evidence from
four cases to develop the theory, and then consult the evidence from the
remaining two case studies to confirm the theoretical conjectures.

The four cases for initial analysis were selected purposefully through
theoretical sampling, where the cases were chosen to fill theoretical
categories and to provide for polar types (Eisenhardt, 1989; Maxwell, 1996;
Miles & Huberman, 1994). The four cases selected, and the rationale for their
selection, are the following:
Banco de Chile: It is a locally owned, private sector bank; it is the
second largest bank in the market; it is a universal bank with products
for all market segments; it cultivates a customer intimacy value
discipline; it has a long tradition in the Chilean business community;
it is going through a major technology-enabled business
transformation; its leadership is moving towards an enabling view of
technology.
Banco Santander-Santiago: It is a multinational bank; it is the largest
bank in Chile; it is a universal bank with products and services for all
market segments; in recent years it has operated on an operational
excellence value discipline, but appears to be questioning that model;
it has a clear utility approach to technology.
Banco Security: It is a locally owned private sector bank; it is mid
size; it has a niche approach to the market, focusing on enterprise
banking and high income individuals, with a customer intimacy value
discipline; it is a fast follower on technology.
BancoEstado: It is a state owned bank, which has a social mission of
making banking services accessible to all Chileans, aside from the
need to be profitable; as such, it operates with a two-pronged value
discipline of customer intimacy and operational excellence; it serves
all market segments, but is particularly active in the micro-business
segment; it relies heavily on, and has a dependent view of,
technology.

These four banks belong to different strategic groups according to the
analysis done in Chapter 3 and in the paper published by Griffiths (2004).
122
The remaining two banks, BankBoston and BCI, belong to the same strategic
groups as Banco Security and Banco de Chile, respectively. The description
and within-case analyses of the four primary cases are given in Appendix B
(Banco de Chile), Appendix C (Banco Security), Appendix D (BancoEstado)
and Appendix E (Banco Santander Santiago).

This chapter does three things. First, it describes the process through which
the evidence was analysed and interpreted, indicating departures from the
original design and their justification. Secondly, it draws on the four case-
studies to develop a comparative analysis and find patterns of differences and
similarities between the cases (Strauss & Corbin, 1990). In line with Miles &
Huberman (1994), the evidence is reduced by selecting, simplifying,
abstracting and transforming the contents of field notes, interview transcripts
and documents; and later displayed in the form of extended text, tables and
diagrams. Finally, this chapter does a synthesis of the cross case analysis.

5.2 Approach to the Analysis and Interpretation of Evidence

5.2.1. The evidence collection process.

As mentioned in the Methodology and Research Design chapter, when
approaching empirical work as an interpretist it is expected that the evidence
collection and analysis phases are not linear but interactive (Layder, 1998;
Remenyi et al., 1998). Therefore, it is inevitable that in order to explain how
the analysis was performed, some reference will be made to the process of
evidence collection.

Notwithstanding the referred overlap in the evidence collection and analysis
stages, a significant effort has gone into documenting separately the
observation and the interpretation of evidence, in line with Eisenhardt (1989).
Evidence in this study is mainly, although not entirely, understood to be the
informants interpretations of situations, opinions and phenomena. Thus, as
pointed out by Walsham (1995), the analysis of evidence in interpretive
studies is to some extent about interpreting informants interpretations of
phenomena and events.

Interviews were the main source of primary evidence. Fifty-one interviews
and discussion sessions were carried out in all, as shown in Appendix F.1,
Log of Interviews. Thirty-three of these were in-depth, semi-structured
interviews with knowledgeable informants of the six participating banks.
These were one-and-a-half-hour-long sessions with 42 informants (five
interviews were held with two informants jointly, and two had three
interviewees together). As can be seen in Appendix F.2, Informants at Case-
Study Banks, the informants were all members of the senior management
team, including the Managing Directors and their first and second level
reports. Two focused interviews were held with managers of two other banks
who volunteered relevant information on a personal basis; another five were
held with outside experts to enquire on the impact of the digital signature on
banking; and two more focused interviews were held with managers of ABIF
123
(the Chilean Banking Association) to discuss progress and find their opinion
on specific issues. Seven meetings were held with the contact persons at the
particiapting banks, to give an overview of the research project and obtain
clarifications; and, finally, management team meetings were held at three of
the banks to discuss the project findings on their own bank. All these
interviews took place between November 2003 and early June 2004. All
semi-structured interviews at each of the six banks were concentrated within
a three-week period, in order to avoid as much as possible major changes in
the organisation during the interview period.

The semi-structured interviews were carried out following the interview
guide described in the Methodology (Chapter 4) and shown in Appendix A.
Because time was limited, some sections of the guide were skipped in order
to be able to focus on issues particularly close to the interviewee which were
deemed to give illuminating evidence on phenomena closely related to ICT
investment decisions. However, for each bank there were the opinions of at
least three informants on each particular section of the interview guide. A
section for free discussion was left at the end of each interview. Some of the
important insights on each case came out of the discussions in this section.

Considerable preparation was done before the interviews in order to have a
plan as when to use techniques such as the silent probe, overt encouragement,
request for elaboration and clarification, and repetition. Although much of
the literature found in this area applies more to survey interviews, some
advice was found useful and applicable (Trochim, 2001; Churchill &
Iacobucci, 2002).

At the interview itself, the informant was given a copy of the interview guide
in English, which he or she had a chance to read and follow in the meeting.
All the interviewees have knowledge of the English language, in varying
degrees of proficiency, so they were able to understand the guide. However,
in order to make the most of fluency, the interview itself was carried out in
Spanish. The interviews were not recorded as it was found that informants
would have felt uncomfortable and strained to say things only in a socially or
organisationally acceptable way (Trochim, 2001), but copious notes were
taken during the interview, with the responses being transcribed shortly
afterwards. It was not always possible to keep to the original plan of writing
up the interview transcripts before the following interview, due to time
constraints as, on occasions, two or up to three interviews were held on the
same day. The transcripts were written up in English and sent to the
interviewee for comments. Only five (out of 33) interview transcripts came
back with proposed changes, and these changes responded more to political
sensitivity of the way the idea was expressed, than to disagreement on
content. It is interesting that changes were based on political sensitivity
despite the fact that the interviewees were given assurance that the transcript
would be kept confidential and would not be seen by anybody other than the
interviewee and the interviewer.

124
At the time of writing up the transcripts, effort was made to keep the bodies
of the documents as literal as possible. In this way, they should closely
represent the interviewees interpretation of the phenomena. Reflections on
the ideas discussed were documented at the end of the transcripts.

Although the intention was to keep each interview individual, as mentioned
above some of the interviews were held jointly for two, or in some cases even
three, informants. In all cases this was done not by design but because the
interviewees demanded it was done that way, in some cases due to the
impossibility of finding alternative dates (this was the case at Banco Security)
and in others because the informants alleged they would be in a better
position to give deep responses on all issues (this was the case at Banco
Santander Santiago). The lesson here is that a joint interview has advantages
and disadvantages. On the positive side, it keeps the interviewees honest
and the opinions given tend to be agreed upon and therefore of broader
consensus within the organisation; and it is more time-efficient for the
researcher. On the negative side, it is suspected that richness of opinion is lost
by the fact that one of the informants tends to dominate the interview, and
that points of view are less radical. It is interesting that, of the seven
interviews carried out with more than one informant, in only one of them
were divergent opinions on an issue recorded. In all other cases, the
informants reached a consensus of opinions. On the down side as well, a joint
interview is harder to conduct and is more time consuming for the
interviewees.

A final comment on the evidence collection process is that the interviews
were carried out in two groups. The interviews at four banks (i.e.
BancoEstado, BankBoston, Banco Security and Banco de Chile) were
completed in the November-December 2003 period, while those at the
remaining two banks (i.e. Banco Santander Santiago and BCI) were
performed in the April-May 2004 period. This was so because January and
February are the southern hemisphere summer holiday months, and in March
bank managers are busy launching all their annual activities. The January-
March period was used to finish writing the transcripts of the interviews at
the first four banks; to write up three cases; and to reflect on how to improve
the interview guide. As a result, minor changes were introduced in the
interview guide, specifically in re-grouping the ICT decision criteria that the
informants were asked to comment on, for the interviews in the final two
banks.



5.2.2. The process of within-case analyses: writing up the cases.

Becoming familiar with each of the six banks as a stand-alone entity is the
objective of this process (Eisenhardt, 1989). In order to maximise knowledge
through focus, the evidence of each bank was analysed and the case study
was written up in succession (i.e., a new case was not analysed until the
previous one had been fully written up).
125

As can be seen in the respective cases, all case studies were analysed and
written up using the same structure, which is in turn closely relates to the
structure of the interview guide. The structure of the case studies is the
following:

a. Introduction: History of the Bank. This section does a historical review
of the bank and its tradition in the Chilean business community. The sources
of information for this section are written documents and information
contained in the banks web-site.

b. Sources of Evidence. This section gives an overview of the sources of
information used for elaborating the case, states the names and positions of
the people interviewed, and gives a brief description of the informants
careers in banking and their connection to ICT investment decisions. The
sources of information for this section are section 1. Background of the
interview transcripts (see Appendix A).

c. Strategic Positioning of the Bank. This section of the case is divided
into three subsections. The Bank and its Competitive Context draws on
information in the banks financial reports and in the SBIF (banking authority)
annual reports to give a position on the banks market share, and it draws on
strategic group analysis (Griffiths, 2004) to analyse which are the banks key
competitors. The Banks Business Strategy draws mainly on the
organisations Annual Report, mainly from the Chairperson of the Board and
the CEOs annual message to their shareholders, to document its stated
business strategy. The Value Discipline of the Organisation draws mainly on
section 2 of the interview transcripts to give the banks dimensions of
customer value and predominant value proposition. Treacy & Wiersemas
(1995) theory on the discipline of market leaders is used for this analysis.

d. Role of Technology: Past and Present. This part of the case draws
from section 3. Recent Role of Information Technology and section 4. Genesis
of Information Technology Investments of the interview transcripts to give an
overview of the ICT functions management principles, strategy and
execution, and benchmarks based on its ICT budget.

e. Information Technology Investment Decisions. Based on section 5.
Information Technology Investment Decisions and section 6. Analysis of
Some Major Information Technology Investments and their Impact on Market
Power of the interview transcripts, it identifies the banks predominant
quantitative and qualitative ICT investment decision criteria, and uses past
ICT projects to identify patterns of successful and unsuccessful ICT
investments. The latter is done with the aide of the ICT Investment Decision
Model given in the Conceptual Framework (Chapter 2), and theories such as
Porters Five-Forces and Competitive Advantage.

f. Thinking on the Future Role of ICT. Taking into account section 7.
Current Thinking on Future Role of Information Technology and section 9.
126
Open Discussion of the interview transcripts, the driving force behind future
ICT investments is induced.

g. Conclusions. This section of the case-studies summarises the significant
findings of the previous sections. The findings are disaggregated in a form
that facilitates the cross-case analysis.

The cases were analysed and written up with a holistic approach,
encompassing as broad set of opinions as possible. Care was put into keeping
a balance between lumping
17
together opinions for simplification of
concepts, and splitting them for richness (Remenyi et al., 1998).

The first case to be written was Banco Security (Appendix C). This case was
presented for critique at a Writing Skills Workshop held on 2
nd
and 3
rd
March,
2004, and as part of a progress report at a Research Colloquium on 5
th
March,
2004, both held at Henley Management College. The main suggestion for
improvement that came out of those meetings was that credibility would
increase if more direct citations to the informants were included. Although
the Banco Security case did include multiple opinions, reference to the names
of the informants were omitted to keep confidentiality of opinions. The Banco
Security case was left unchanged, but this suggestion was taken into account
for the remaining cases where quotes are included throughout.

Once one is steeped in the corporate strategy of one bank, it is extremely
difficult to do comparative research in this highly competitive sector,

according to Baets (1996 p. 158) from his experience doing research in
Continental European banks. As mentioned in the Methodology chapter, the
tactic of keeping the discussion closely related to technology strategy and
only tangentially dipping into corporate strategy issues was successful in
achieving an open and fluid communication with the informants. However,
only in one of the six cases was the Strategic Planning document made
available to take-away for in-depth analysis, and in two others these
documents were shared at the meetings but not lent for post-interivew
analysis. The tactic of offering a technology strategy planning session in line
with the Managing by Maxims (Weill & Broadbent, 1998) methodology as
a means of breaking through this trust barrier was partially successful. Three
banks accepted this offer; two of them (Banco Security and Banco de Chile)
used the sessions as an opportunity to capture an external view of their
organisation rather than as a real two-way communication strategy-
technology alignment session. The third one, BancoEstado, used it more as an
interactive strategy workshop. This research should be viewed as the product
of an outside observer and not an involved researcher, with the merits of
having been perceived as independent by the informants but the limitation of
not having had access to all the sensitive documents (Walsham, 1995).


17
Lumping means bringing together by prioritising the characteristics in common over the
differences across cases; Splitting means dividing into different categories by prioritising
differences over characteristics in common across cases.
127
5.2.3. The process of cross-case analysis: building a theory and a model.

The structure of the Cross-Case Analysis relates closely to the structure of the
case-studies themselves, as follows:

Strategic Positioning: This section deals with the Dimensions of
Customer Value, the Value Proposition, and the Core Processes of the
banks, and draws on sections B.3, C.3, D.3 and E.3. Strategic
Positioning of each case study.
Strategy-Technology Alignment: This section deals with ICT
Planning, with the View of Technology, with Organisation and
Culture, and with ICT Execution, drawing from sections B.4, C.4, D.4
and E.4. The Role of Technology: Past and Present; and it deals with
Future ICT Investment Drivers, drawing from sections B.6, C.6, D.6
and E.6. Thinking on the Future Role of ICT, of each case-study.
ICT Investment Decisions: The content of this section of the cross-
case analysis is self-explanatory, and it draws from sections B.5, C.5,
D.5 and E.5.Information Technology Investment Decisions, in
particular the first part of those sections (B.5.1, C.5.1, D.5.1, and
E.5.1 ICT Decision Criteria) of the cases and relates it to Strategic
Positioning.
Analysis of Projects: This section draws mainly on B.5, C.5, D.5 and
E.5. Information Technology Investment Decisions, in particular the
second parts, B.5.2, C.5.2, D.5.2 and E.5.2. Analysis of Some Major
ICT Decisions and their Impact on Market Power, of each case-study.

These elements of the structure of the analysis, closely related to the structure
of the cases, thus provide a framework for the comparative analysis, and the
interpretation of similarities and differences between cases.

The Cross-Case Analysis section is written in a way that prioritises splitting
over lumping, and makes direct references to the case studies. On the other
hand, this section is followed by the Synthesis of Findings, by the Theory of
Market Power Investments for Value Creation and by the Value-Builder ICT
Investment Decision Model, all of which are intended to do more lumping at
a higher level of abstraction and are, in turn, grounded heavily on the Cross-
Case Analysis. As will be described below when discussing the validity of the
study, it can be said with confidence that this argument structure allows the
reader to trace evidence all the way from interview transcripts to theory in a
tight chain of evidence.

5.3. Cross-Case Analysis.

So, on the basis of the four selected cases, and of the structure defined in the
previous section, the similarities and differences between the cases is
described.

5.3.1.Strategic Positioning.
128

Dimensions of Customer Value: There is agreement within the leadership
teams at BancoEstado and at Banco Security, on which are the dimensions of
customer value of their respective bank. At Banco de Chile, managers
interviewed seem to agree on the two most important dimensions (i.e., service
convenience and service reliability), but there is a dispersion of opinions on
the rest; while at Banco Santander-Santiago there is a clear split of opinions
between those informants from Client facing units and those from back-office
positions.

Value Proposition: BancoEstado is very clear and understandable in their
two-pronged approach: it helps them make converge their social role and
their pursuit of profitability. Banco de Chile and Banco Security are clear in
their commitment to best total solution. The one that has problems is Banco
Santander-Santiago; some of its managers say they are migrating from best
total cost to best total solution; others talk about having a value proposition
for each Client segment. This just sounds like confusion. Can a foreign bank,
with strong corporate directives, be more customer intimate than BCI or
Banco de Chile, who have the flexibility to adapt solutions quickly to their
Clients without having to abide by corporate rules and standards? If, on the
other hand, local management were successful in convincing its head-office
to have more flexible products and solutions, would it not lose its corporate,
scale-based, cost advantage? Why does it not simply play for best total cost
and drive for market share growth?

A reflection on the issue leads to the conjecture that it only makes sense for a
foreign bank to enter the retail segment of a small market like Chiles, if it is
going to build on international scale and become a price leader, or if it is
going to bring differential products and offer a best product value
proposition. This could well be different in corporate banking. A discussion
on the issue held with an executive at ABN AMRO Chile led to the belief that
it might be feasible, in corporate banking, to act on a best total solution value
proposition, by spring-boarding on the local operations of multinational
Clients, and then extending to local companies. This ties in well with an
observation found in one of the financial news-papers in Chile (Estrategia,
2001) that Asian banks have not moved into Chile despite the intense level of
trade, because it is not trade but foreign direct investment that lures banks to
follow their Corporate Clients in to foreign markets.





Core Processes: Again, there is a notable dispersion of opinions among top
managers on which are the key processes at Banco Santander-Santiago, while
there is good alignment of opinions at BancoEstado (i.e., well aligned with
the two value propositions they have mentioned, but now talking about
different value disciplines per segment) and at Banco de Chile. There is some
129
dispersion of opinions at Banco Security, where people tend to mention as
critical those processes closer to their own part of the business.


5.3.2 Technology Alignment.

ICT Planning: None of the four banks has a formal ICT Planning process;
they do carry out strategic planning, but this is not followed up by a resource
plan. As a result, Banco Santander-Santiago has a business strategy that is
taking it toward a customer intimacy value discipline, but its projects are
more aligned with an operational excellence discipline. Its business planning
is done locally, but its ICT initiatives tend to be defined at head-office. This
situation appears to be causing a classical strategy-technology misalignment.
In addition to that, because ICT projects are treated globally or regionally
with an aim at developing synergies with other markets, projects become
large, costly, long and not sufficiently customised to serve a customer
intimacy value discipline. ICT planning would give the IT Committee an
agenda and make it work as a team (i.e., everyone has the same goal) rather
than a Committee (i.e., each member represents and tries to maximise payoff
for his or her own business unit).

In the case of BancoEstado which, apart from having to make converge
seemingly divergent missions, has proposed itself to:
(a) penetrate the consumer market as a means of recovering market share
and not falling into oblivion, and
(b) sub-segment its client markets in order to move toward the customer
intimacy value discipline,
the case is even more critical. This is because its strategy will surface an ever
increasing number of ICT initiatives competing for limited resources. A
formal ICT plan, plus the adoption of sophisticated tools to evaluate and
prioritise initiatives (which the bank does not have at present) would help
filter and focus on those which more closely support the organisations
objective.

In the case of Banco de Chile, the NEOS project is engulfing most of its ICT
efforts and therefore its efforts are more co-ordinated. It would, however,
benefit from using ICT planning as an exercise to make sure NEOS does not
go off-course, as some members of its management admit that a large project
like NEOS could lead to inward looking and therefore losing touch with its
context.

Finally, as the analyses of, particularly, BancoEstado and Banco de Chile
have surfaced, planning of ICT resources and human resources could be
coordinated. Using the three service archetype model introduced by Watkins
(1998) to argument this at BancoEstado, leads to an interesting result: In
order for BancoEstado to fulfil its mission of drawing Chilean people into the
financial services system, and educating them in its use, the bank needs to
educate its own staff.

130
View of Technology. Although the banks have not made an explicit effort to
define their view of technology, some indications on where they stand
become apparent. From the discourse of Banco Santander-Santiagos senior
management, it appears that this bank has no specific view, or at most a utility
view of technology. However, this does not match with the high level of
spend on technology. It may be that local management does not talk about
ICT simply because it does not have any control over it, as it is all imposed
from head-office. BancoEstado appears to have a view that is somewhere
between a utility and a dependent view of technology. BancoEstado is
adamant, as is BancoSecurity, that it wants to be a follower on technology.
The impression that one gets from Banco de Chile is that its management has
a dependent view of technology, but may be moving towards an enabling
view through the NEOS project.

Organisation and Culture. Banco de Chile used to have a very self centred IT
Department which is now being converted into a service unit as part of the
NEOS project. Banco Santander-Santiago has plans to change its Client
managers, sending the experts to the back-office to define the business rules
and putting people-oriented staff to look after Clients; this will require
business training (i.e., with the three service archetype model approach) to the
new front-line people if the bank really wants to move to the best total
solution model. It may also have to change its processes which, in a clear
operational excellence design, are highly structured and designed to meet
internal controls before Client needs. Aside form this, Banco Santander-
Santiago has still a marked cultural difference between legacy Banco
Santader Chile and legacy Banco Santiago staff.

ICT Execution. Banco de Chile, BancoEstado and Banco Security all appear
to have serious problems of intra-company integration of information,
possibly due to the lack of central information repositories, and all of them
are doing something about it at present. This does not appear to be such a
significant issue at Banco Santander-Santiago, although there are one or two
dissonant voices on the matter.

The four banks seem to be open to outsourcing their technology to varying
degrees, but none appears to have a clear criterion, based on strategy
considerations, as to what can and cannot be outsourced. This is possibly
another effect of not having a formal ICT planning process. There is
evidence to support that it is easier for large banks to arrive at cost-driven
outsourcing deals with technology service providers, than for the smaller
ones. This difference appears to be based on the larger banks greater
negotiating power.

Paradoxically, Banco Security and Banco de Chile have a lower proportion of
their ICT spend going to new technology initiatives than EU banks; and
Banco Santander Santiago has a greater proportion of its spend going to new
initiatives than the average EU bank. This is a paradox because operational
excellence banks are supposed to spend more of their budget on operating,
maintaining and streamlining their systems, than on new technology; while
131
the reverse is normal for customer intimacy banks (Weill & Broadbent,
1998).

Banco Security has problems with its Group technology shared services
putting its core banking system onto a shared service centre which serves
other non-banking organisations, does not allow it to benefit from economies
of scale.

With respect to carrying out projects, it was found that at Banco Santander-
Santiago they are led too much by the Operations & Technology areas
responsibility for projects should be shifted to the user business units in order
that they take ownership of them. The same situation, but in a less critical
form, happens at BancoEstado.

With respect to Banco de Chile and Banco Security, patterns of successful
projects emerged. These patterns revolve around several dimensions such as
whether the project is aimed at gaining market power, if it is aligned with the
value discipline of the bank, the role of the users in the management of the
project, the combination of outside and in-house resources, the size of the
project, etc. In the case of BancoEstado, because it has two value
propositions, the results of a similar search are less crisp, but a pattern
never-the-less seems to be present. This analysis was not possible for Banco
Santander-Santiago due to the characteristics of the projects analysed, one of
which took place at the Brazilian Banco Santander subsidiary and another at
one of its acquired banks in Chile. Admittedly, the number of projects studied
at each bank is not sufficient to make strong generalisations, but it certainly is
sufficient to anticipate that there could be important potential benefits of
researching this in more depth.

For their analysis from a value building perspective, large projects like NEOS
have to be broken down into components. NEOS moves away from the
pattern of success at Banco de Chile on size as well as on scope, due to the
heavy back-office component of NEOS. It is quite possible that this
component of the project is not building value, but actually destroying it.

Future ICT Investment Drivers: When the strategy is not clear or the bank is
migrating value disciplines, there is dispersion in opinions on what should be
the future drivers of technology investments. This appears to be the case at
Banco Santander-Santiago. In cases like BancoEstado, where there is more
than one value discipline, there are diverse initiatives and the bank will do
well in following a stepwise strategy, making progress on transactional
systems, then moving to data-warehousing and back to transactional. Again, a
formal ICT planning process would help in defining how these progressive
steps are timed and planned. When there is not a planning process in place,
even if the banks management is clear on where it wants to go in terms of
value discipline, people do not have a common vision on technology and
therefore tend to prioritise those initiatives that are closer to their own
function. This is clearly the case at Banco Security.

132
5.3.3. ICT Investment Decisions.

It is hard to find a very clear pattern in terms of ICT decision criteria. Banco
de Chile is one of the banks that seem to have a balance between quantitative
and qualitative criteria, where both sets of criteria come into decisions. This is
what would intuitively be predicted to happen in a customer intimacy oriented
bank, and it is what Treacy & Wiersemas (1995) research supports.
However, at Banco Security, another customer intimate bank, it is only hard
numbers that count. At Banco Santander-Santiago there is a wide dispersion
of opinions on whether it is qualitative or quantitative criteria that
predominate; some of those opinions are quite radical. This could be a
reflection of the migration from an operational excellence model to a
customer intimate one that informants mention. At BancoEstado, there is,
again, a wide dispersion of opinions. This could reflect that the bank operates
with two predominant value disciplines, and that it does not have a
methodology for evaluating opportunities. Dispersion of opinions is not only
evident in the area of quantitative versus qualitative, but also in which criteria
are the most important within each category. Notwithstanding, a few patterns
can be detected:

a. In banks that are clearly aligned with a customer intimate value discipline
model, criteria seem to differ if the ICT investment initiative comes from
the planning and operations areas of the bank, or from the Client facing
business units. When they come from the former, it is cost drivers that
predominate in the quantitative criteria, and risk reduction and staff
efficiency in the qualitative. On the other hand, when the initiatives
originate in the Client facing areas, attaining market power through
differentiation or ease of search are important on the quantitative side, and
improving customer service and response to customer demand on the
qualitative. Another recurrent criterion in this camp, which was not seen
in the others, is reference to the competition.

b. In those banks where operational excellence is a significant value
discipline (be it as ex-focus like Santander-Santiago, or as a shared focus
like at BancoEstado) cost-benefit analysis and financial metrics are the
leading quantitative criteria. On the qualitative side, criteria are ranked in
a mixed bag of efficiency drivers, differentiators for market power, and
improved customer service.

c. Risk reduction ranks high in every banks qualitative criteria. However,
risk reduction tends to have different meanings according to the function
of the informant. For the customer facing business units, risk reduction
flows in the direction of credit-check agility: find ways for effectively
checking a Client or prospects credit worthiness, but done in an agile
way that will not slow down loan origination processes. For people in the
planning functions, risk reduction is associated to catastrophic operational
incidents and business continuity contingency plans. For people in
finance, risk reduction means having almost real-time information on the
market risk exposure of the bank. Finally, for people from the Operations
133
and Technology area, risk reduction tends to mean evolutionary gains in
operational stability.

d. Mandatory/ no-choice also ranks high in most banks as a qualitative
criterion. This refers to changes imposed by new regulations and other
demands from regulators and, in the case of multinational banks,
standards imposed on the Chilean operation by head-office. There seems
to be wide-spread opinion that the frequency and magnitude of changes
imposed from local regulators has subsided in recent times.

e. Considering the market power building potential of an ICT investment,
both through differentiation and through ease of search, appears to be
high up in qualitative priorities in the large, aggressively competitive
banks, such as the cases of Santander-Santiago and Banco de Chile. At
Banco Security there was also mention of market power through ease of
search, but this was a very specific, non-strategic, reference to internet
banking. Banco Santander Santiago also mentioned market power, in this
case for differentiation, as its second most important qualitative criterion
for ICT decision making. BancoEstado made no mention at all to market
power. Is there a relationship between market power and operating in a
highly competitive market? Is market power potential a decision criterion
of most relevance to those players operating in a high-adrenaline
environment?

f. It must be taken into account that value disciplines are relatively long-
term, while organisations like banks have short term cycle-needs that
press them to swing, in time and across business areas, from a focus on
innovation to a focus on effectiveness, much in line with Davenport and
Prusak (2003).

g. A chapter in itself, within ICT investment decision-making and
converting ICT investments into share-holder value, is the question of
change management. There is strong evidence to support that ICT
investments have a delayed effect on performance, in some cases with a
lag of five years (Brynjolfsson, 1993; Haynes & Thompson, 2000;
Griffiths, 2003). This is confirmed by Chilean banks when they say that
technology moves faster than people are prepared to adopt it (Banco
Santander-Santiago). So one way of improving returns on ICT projects
would appear to be to cut down this delay. Considering that the only way
to materialise benefits on ICT investments is to use them, and that this is
done, precisely, through changing the way people work in order to
maximise use of the new tools (McKeen & Smith, 1993), change
management appears to be an undisputed need in ICT investment
projects. In fact, it should be one of the key factors. Notwithstanding, the
analysis of the Chilean banking system arrives at the paradox that banks
frequently overlook the change management side of projects (Banco
Security), and change management is the first component of the project
that management cuts when the project plan appears to exceed the
134
available budget. Would it not be wiser to break down the project into
stages, or reduce the scope, but not cut out change management?

h. With the reputation that large ICT projects in banks have of leading to
major head-count reductions, how do you get staff motivated to help
land the plane, right up to the end, on large business transformation
projects? This is a question that some Chilean banks are asking
themselves (e.g., Banco de Chile). An answer to this question lies in
Watkins (1998) three-service archetype model, developed on the basis of
UK financial services organisations. As technology automates and
commoditises the simpler products, banks need to move up to higher level
services, with more highly trained staff. This means that banks should not
limit change management to training in the new processes and tools, but
to educate its staff to move up to a higher level service archetype.


5.3.4. Analysis of Projects.

Fifteen projects in the four selected banks were analysed in a fair degree of
detail. Eight of these projects can be classified as Market Power building
initiatives, while the other seven are efficiency driven, or aimed at reducing
costs and better managing the business through improved management
information. Each of these two sets of projects will be analysed separately:

Market Power Building Projects: These eight projects were developed in four
banks. They comprise a cash management solution, a treasury management
solution, a field-sales support application, a call centre consolidation, a loan
approval workflow, the digitalisation of Client files, a bank-assurance
application, and a customer relationship management (CRM) analytics
implementation (see Table 5.1). Seven of these projects were developed in a
customer intimate environment, while the remainder (i.e., Consolidation of
call-centres at Banco Santiago-Santander) was within an operational
excellence value discipline. They were all aimed at implementing a tool that
would solve a Client problem, or assist Client facing staff to offer (sell or
deliver) a new product or services, or improve quality of service. These ICT
investments are relatively small and focused on solving Client issues.

a. Trigger: investments are triggered by a competitive issue (i.e., catch up with
the competition), or a strategic imperative to grow in a determined market
segment or product.

b. Output: the objective was to increase market power, usually through
differentiation of products (i.e., more features or more quality) or of
services (i.e., service convenience in the form of agility of response). Only
one of the eight projects aimed at increasing market power through ease-of-
search.


135

c. Effect on Industry Structure and the Competitive Landscape: these projects
had an impact on industry structure in the form of eliminating entry-barriers
to a market sub-segment or service, or by increasing rivalry within a
segment. They all had an effect on competitiveness by allowing the bank
making the investment to achieve parity or a temporary or even sustainable
competitive advantage.

d. Outcome: These projects, when successful, always appear to have an
impact on performance, which is why they convert into shareholder value.
The most frequent impact on performance is through an increase in market-
share, which later translates into profit. On some occasions, the effect has
been to stop a decline in market share.

e. Degree of Success: All these projects are perceived by senior management,
across all functions, as having been highly successful. However, in terms of
their effect on performance, seven of them can be said to have achieved the
pursued outcome; the remainder, which is the only one developed in an
operational excellence environment, was defined as too early to tell.

f. Leadership: These projects are led by the market facing business units who
need the output of the investment to do their job and achieve their
performance goals.

g. Change Management: There did not appear to be a specific effort on change
management in these projects but they were never-the-less, as mentioned
above, successful. Two reasons appear to explain this: first, they were not
seen as a threat to people jobs; and second, they were small and localised,
so basically it meant training a reduced number of people to use a new tool
for which they were imploring anyway! A key factor here is that the project
was sponsored by the manager of the user unit, who made sure her or his
staff learned to use the tool.
















136










Table 5.1. Market Power Driven ICT Investments.

CROSS-CASE ANALYSIS: MARKET POWER PROJECTS
INPUT Project OUTPUT: Effect on Five-Forces Degree of
Project/Bank/V.Discipline Trigger Impact on Market Power & Competitveness OUTCOME Success
Bankassurance Strategic Product differentiation through Increased rivalry Increased market High
Application/ Banco Imperative agility and comleting policy in among existing share which led to
de Chile/Customer to Grow single visit. companies// increased profits
Intimacy in Insur. Competitive parity w/
& Improve Santander, and Tem-
Client Ser. porary Advantage w/
the rest.
Digital Client File/ Banco Strategic Product differentiation through Increased rivalry Increased market High
de Chile/Customer Imperative agility and speed in loan among existing share which led to
Intimacy to Grow approvals companies// increased profits
in Retail Competitve parity
& Improve
Client Ser.
CRM Analytics Need to Improved Client service and Eliminated entry Increase in Market N/A
Project/BancoEstado/ survive & differentiation barriers/Competitive Share and Increase High for first
Customer Intimacy grow parity. in Profits phase.
Technology Enable Improved Client service Erected barreirs to Market share growth High
Applied to Sales/ MiPE Better Clientimage through IT entry for competition/ followed be profit
BancoEstado/Customer banking in the field; cost reduction Sustainable compet. growth
Intimacy advantage
Consolidation Customer More proactive go-to-market None on Industry Increased Market N/A, too
of Call Centres/ Banco Complaint (market power thru' ease of structure// Tempor. Share early
Santander-Santiago/ & Opport. search) compet. Advantage
Operational Excellence Cross-sell
Electronic Serious Market power thru' differentiation Competitors reaction Increased Market High
Approval of Loans/ Client Ser. (loan approvals from 5 days to to shorten cycle// Share
Banco Santander-SantiagProblems 6 hours) Sustain. Comp. Adv.
/Custome rintimacy
Treasury Management Operational Increased Mkt. Power thru' Differ Eliminated entry Enabled Increased High
BAC (SONDA)/Banco Risk (because better prod. Thru better barrier to treasury Market Share
Security/Customer risk management) services/Temp. Comp. Adv
Intimacy
Cash Management Catch-up Improved Client service and new Eliminated entry Profit growth through High
Services/Banco with products to offer barrier to cash- increasing fee-based
Security/Customer competition management services income and increa-
Intimacy Competitive parity. sing current account
balances
137


Efficiency Driven Projects: The projects analysed were three core-banking
systems, an enterprise resource planning (ERP) project, a management
information system (MIS) implementation, a treasury system, and a cheque
clearing/settlement application. Four of the projects were developed in an
operational excellence environment, while the other three were carried out
within a customer intimacy value discipline (see Table 5.2).

a. Trigger: these projects are triggered either by serious transactional
limitations, by lack of management information, or by operational
risk.

b. Output: the output of these ICT investments was to increase
throughput and improve the information available to keep control of
the business. They improved the cost structure by stream-lining and
automating processes, which in many cases led to head-count
downsizing in the back-office, or freeing up time of front-office staff.
Some of them also helped in shortening time to market of new
products.

c. Effect on Industry Structure and the Competitive Landscape: Four of
these projects had no impact on industry structure, and led to
competitive parity. The other three projects eliminated barriers to
entry or erected barriers through scale, which caused reaction from the
competition. To a certain extent, these projects changed the status-quo
in the industry, primarily in terms of cost-structure, and rendered
sustainable or temporary competitive advantage to the banks that
made the investment.

d. Outcome: The four projects developed in an operational excellence
environment had an impact on performance in the form of market-
share growth (when the efficiency gains were transferred to prices) or
in the form of profit growth through increased margins. Of the three
projects developed in customer intimacy oriented banks, one is
considered to have been unsuccessful, with no impact on
performance; another one is an on-going initiative and therefore it is
too early to tell; and, the third one started off badly but, after a
significant amount of effort, eventually led to increased profits.

e. Degree of Success: Of the four projects that had a positive outcome
through improved performance, two are not well regarded in the
perception of the managers of the Client facing business units. An
explanation for this situation, as well as for the projects that failed or
took a long time to give results, is that the respective banks did not put
enough effort into change management.

f. Leadership: These projects were led by the back-office unit that
proposed or sponsored the initiatives, namely Operations &
138
Technology, Financing, Planning and Controlling, with a varying, but
generally limited, participation of the Client facing business units.

g. Change Management: Because these projects are generally large,
impact many people, and are driven by a comparatively small group in
comparison to the number of users, change management cannot be
just left to happen. The projects need to have a specifically designed
change management component.


Table 5.2. Efficiency-Driven ICT Investments


5.3.5 Conclusions.

As anticipated in section 5.2.3, this section has presented the cross-case analysis
in a way that allows the reader to trace all arguments back to the cases. Every
statement presented here makes a direct reference to one or more cases, and it is
written in a way that prioritises splitting over lumping. In the next section and
CROSS-CASE ANALYSIS: EFFICIENCY-DRIVEN PROJECTS
INPUT Project Effect on Five-Forces Degree of
Project/Bank/V.Discipline Trigger OUTPUT & Competitveness OUTCOME Success
NEOS / Banco de Chile/ Need to Product differentiation through Increase ent ry barrier Increase market N/A
Customer Intimacy change getting it right t he first time' and through scale// share which will
Environment model for improving 'time to market' Competitive parity lead to increased
servicing profits
Clients
Centralisation Need to More competitive pricing. Increased rivalry Revert decline in High
of Operations/ suppot bank amongst esxisting market share &
BancoEstado/ Operat. transform. firms/Temp. Compe- maintain ir increase
Excellence Environment tive Advantage profits
MIS Project / BancoEstado Need to Better management inf ormation Non on industry str/ Enabled market- High
OperationalExcellence grow & & lower costs Competitive parity share growth
keep control
Core Business Serious Streamlined processes (cost Competitors reaction Increased Profit & M
Transformation Transact. efficiency) mainly; and Flexibility to improve core// Possible increase
ALTAIR / Banco Limitation f or cust omised products (Mkt. Sustainable Comp. Market share
Santander-Santiago/ Pwr. Thru' differentiation) as Advantage
Operational Excellence secondary
Treasury High Mkt. I ncreased Mrk. Power throuh Eliminat ed Barriers Increase Market M-H
System Brazil / Banco Risk differentiation (based on better to entry into Treas. Share
Santander Santiago/ Exposure product due to better risk Market// Sustainable
Operational Excellence management) compet. Advantage
PeopleSoft for Poor I mproved management infor- No impact nor reac- Efficiency in conso- Low
Support Functions/ Management mation and streamlined back- tion from competitors lidating information
Banco Security/ Customer Information office processes
Intimacy Environment
ASP Protestos for Need to I ncreased Market Power thru' No impact/ Potentially increase High, after
Cheque Clearing free-up differnentation because Client Competitive parity profit thru' cross- and struggle
Process/ Banco Client Ma- Managers spend more time with up-selling
security/Customer nagers' Clients
Intimacy Environment time
139
in Chapter 6, an attempt will be made to move up to a higher level of abstraction
and, on the basis of this cross-case analysis, synthesise the findings and enunciate
a theory that will explain, or even predict, the phenomenon of ICT investment
decisions in financial services organisations.




5.4. Synthesis of Findings.

In this section I shall attempt to find some commonalities between the four cases
being analysed. Using, again, Remenyi et al.s (1998) term, I will try to lump
together some of the ideas that came out in the previous section. Considering that
the four banks we are analysing represent over 53 percent of the Chilean banking
systems assets, the reader could be tempted into extrapolating these findings to
the whole system. However, methodologically this would be a serious flaw. As
mentioned in the Methodology (Chapter 4) and other parts of this thesis, because
I have applied an interpretative case study approach, it cannot be inferred that
these conclusions are statistically generalisable to the whole banking population.
I claim that these conclusions are applicable to the sample I have studied, and
that that they can be extended by the reader to other individual cases that he or
she believes fit the characteristics of the cases I have studied. But this must be the
result of a conscientious analysis and deep reflection on the individual case and
its border conditions. The findings are as follows:

a. Banks spend a significant amount of effort on defining a business strategy
and aligning its management team with that strategy. On answering the
what and when questions. It is evident that top management
alignment is crisper in the smaller, niche players. In large universal banks,
creating a shared vision and strategy is harder to achieve.

b. Banks are not putting sufficient effort into resource planning, that is,
answering the how and how much questions. This is a defect that
probably comes from the nineties, when organisations managed their ICT
investment in a bandwagon mode. Considering that banks, as other
information intensive industries, have only two strategic resources (i.e.,
information and talent) it would make sense to co-ordinate their ICT
planning and HR planning, and made to play together to maximise
competitive advantage.

c. The analysis of the cases shows that the lack of an ICT plan leads to a
dispersion of criteria on ICT investment decisions. Leaving ICT
prioritisation to an ICT Committee without an ICT view and plan, means
giving it a responsibility but depriving it of an agenda; this can lead to
erratic decision-making, or at least decision making that is not focused on
value creation.

d. But the evidence suggests that ICT planning should not, like in the
seventies and eighties, be led by Operations & Technology. It should be
140
led by the Client facing business units and it should ensure a tight and
dynamic fit between competitive context, value discipline, business
strategy, view of technology, and resource deployment (in line with Weill
and Broadbent, 1998).



e. Not enough effort is being put into Change Management when
implementing ICT investments. The rapid speedup enabled by IT can
create unanticipated bottlenecks at each human in the information
processing chain. More money spent on IT will not help until these
bottlenecks are addressed (Brynjolfsson, 1993, p.75). This is particularly
important in the large, efficiency driven, business transformation projects,
which lead to downsizing but, at the same time, need staff commitment up
to the end.

f. Know what your organisation is good at. From a preliminary analysis of
projects in Chilean banks, patterns of successful and of unsuccessful
projects in each bank have emerged. If banks are aware of this, they can
use it to prioritise initiatives, or to reinforce weaknesses in those
inevitable projects that depart from the favoured patterns.

g. Outsourcing can be a form of avoiding non-value building (or value
destroying) investments. Most banks say they are open to outsourcing
everything that is not strategic, and ICT outsourcing at Chilean banks
has increased in recent times. However, discrepancies surface when
managers are asked to define what is not strategic. This definition
should be part of the ICT planning exercise. Another definition of the ICT
planning exercise is how the ICT department is re-organised when
outsourcing, in order to retain intellectual capital (i.e., outsource
resources, but do not outsource knowledge!).

h. It is observed that outsourcing deals are easier to achieve for big banks
than for the smaller ones. An explanation is that large banks can use their
negotiating power to make vendors adapt their offering to the banks
specific needs. Should not the smaller banks be thinking on pooling or
co-sourcing?

i. From the initial analysis of fourteen projects at four banks, and the
verification of another seven projects at two banks (i.e., BCI and
BankBoston), the following findings are reported as guidelines for
converting ICT investments into share-holder value:

Customer intimate organisations appear to get better returns on
performance, and therefore shareholder value, from projects that
are aimed at achieving market power through differentiation or
through ease-of-search, than they do from efficiency driven
initiatives.
141
Market-power building projects are usually relatively small,
focused on solving Client problems or assisting Client facing staff
in improving quality of service, and led by the user department of
the bank.
Efficiency-driven projects are more successful in terms of
generating an impact on performance, and therefore on
shareholder value, when they are developed in an operational
excellence environment.
In the smaller, market-power building projects change
management can be handled naturally by the implementation
team; however, in the larger, efficiency driven projects, change
management should be formally set up as a specific work-stream
of the project. In the former, change management is oriented to
training staff to use the new tools; in the latter, change
management is applied to developing staff to enable the bank to
move up to a higher level service archetype (Watkins, 1998).

On the basis of this synthesis, in Chapter 6 I shall engage on a higher level of
abstraction to propose a theory of value creation through focussing ICT
investments on market power building initiatives.



























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CHAPTER 6 - THEORY AND DISCUSSION



6.1. Theory of Market Power ICT Investments for Value Creation.

On the basis of the previous analysis and synthesis, Chapter 6 proposes a theory
that explains and predicts the impact of ICT investments on value creation
through the development of market power. It will also use what has been learned
from the case studies to develop an ICT investment decision model. This chapter
will then review the validity, rigour and relevance of the research.

6.1.1 Process of Development of the Theory.

Given that it is sometimes said that qualitative research emphasises the
importance of situating the perspective of the researcher, before describing how
the theory was developed I shall make explicit my philosophical position: From
an epistemological stance I place myself as a post-positivist (i.e., Facts and
values are intertwined; both are involved in scientific knowledge), and from an
ontological point of view I see myself as an internal-realist (i.e., Reality-for-us
is an inter-subjective construction of shared human cognitive apparatus)
(Walsham, 1995; Myers & Avison, 2002).

In general terms, it can be said that I was made aware of the particular problem
tackled in this research, by my experience as a practitioner. However, the way it
was framed and the way the research question was stated, are clearly influenced
by my epistemological and ontological position, and my theoretical starting
point.

It should be pointed out that the research question was arrived at after being on
the doctoral programme for over a year. During that period a substantial amount
of reading was done on approaches to research (philosophical stances and
methodology) and on theory of strategy-technology alignment, market power,
and other theories that underpin this research. I was by then becoming aware of
my ontological and epistemological stances, and my style of learning. I was also
starting to understand the benefits of qualitative approaches such as depth of
analysis, and the risks of approaching in a quantitative, statistical mode, problems
where constructs and variables are not defined in a more or less accepted way.

The literature review revealed the inconsistent findings of research on ICT
conversion into value, and the fact that those inconsistencies could be traced back
to the limitations of using a simple input-output model. The benefits of moving to
a three-construct model with a process box in the middle, underpinned by theory,
also emerged from the literature review. By that time I was also able to articulate
the idea that organisations have over-emphasised the drive towards cost-
reduction, and would probably get better returns on their ICT investments if they
focused on revenue enhancement. And, of course, I had also become familiar
with the Market Power theory and how it could be used to support ICT
investments for growth by applying it to underpin the mentioned process box.
143

From there the theory and model developed through creativity triggered by a
method essentially based on questions followed by comparisons (which, in turn,
lead to further questions and so on). This approach is materialised in a process
that goes from evidence collection, to analysis, to comparison with theory, to
conceptualisation, to theoretical sampling, and back to evidence collection and a
new cycle. Some of the key concepts that emerged from this process were
Strategic Positioning (with its three categories), View of ICT (i.e., enabler,
dependent, utility, none), Change Management, Outsourcing, e-Banking,
Digital Signature, E-Invoicing, ICT Investment (classified into efficiency
driven or market-power driven projects), Differentiation, Ease of Search,
Strategic Deviation, Security, Performance, Value Proposition (with its
three categories), Customer Value (with its 7 properties), Personal Banking,
Enterprise Banking, Micro-credit, Porters Five Forces, Core Processes for
delivering value, Size, Product Range, Target Market, Ownership (i.e.,
local private, multinational, state), Barriers to Entry; Competitive advantage
(i.e., none, parity, temporary, sustainable).

Several of these concepts or categories were introduced in the model of
departure. Others emerged from the findings of the empirical work, as can be
seen in the following examples. Change Management emerged with Banco de
Chile, as a deep concern with their NEOS project, where they are finding it
difficult to keep people aligned considering that the project will lead to a large
headcount reduction. Outsourcing emerged at Banco Security, as a difficulty
with vendors, which was subsequently identified as a problem for small banks.
Micro-credit to small businesses came up in the BancoEstado case as the
problem of effectiveness in giving loans in the US$ 1,000 to US$ 2,000 range,
where standard scoring tools do not work, and where it is difficult to draw a line
between the finances of the individual and of his or her business.

In the final analysis, after much reflection, ICT Investment (project) emerged as
the core category. It classifies projects in market power driven and efficiency
driven ones. It emerged gradually as a result of the development of the taxonomy
of ICT projects in the synthesis of the cross-case analysis. This development was
relatively complex because relationships with Strategic Positioning, ICT
Planning, Differentiation, Ease of Search, and Performance, had to be
analysed.

Some of these categories were used for guiding theoretical sampling, in line with
Strauss & Corbin (1998). At the institutional level, theoretical sampling was not
applied to selecting new cases; however, it was applied at the stage of defining
which cases would be used for the cross-case analysis, and which would be left
for corroboratin of the theory. The categories used were Strategic Positioning,
Size, Product Range, Ownership, View of ICT. Strategic Positioning and
View of ICT (ICT Planning) proved to be highly significant concepts which
were included in the final model. Size, Product Range and Ownership were
not significantly representative, and were not included in the final model. This
was corroborated by the analysis of the final two cases.
On another front, e-Invoicing appeared as a significant concept which led
theoretical sampling to include it as an issue of discussion in interviews, and to
144
select several external informants for interviews. However, this concept did not
end up being significant and was not included in the model.

In terms of relationships, one of the most significant relationships that emerged
was that between Strategic Positioning (classified along value disciplines) and
ICT Investment (classified between market power driven and efficiency
driven). It later emerged that the ICT Planning (classified by view of ICT) had a
significant influence on that relationship. A dialectic analysis took place to define
if this concept was a mediator or moderator; after much reflection it was included
as a mediator to operationalise the alignment of ICT Investment initiatives with
Strategic Positioning.

The model of departure did not explain why some banks appeared to be
successful on efficiency driven projects, and others were not. It was this that led
to including the Strategic Positioning and ICT Planning constructs in the
model, which appears to have explained the issue.

The result of this process will be presented in the following sections in the form
of a theory and model.

6.1.2. Theory of Building Value Through ICT Investments for Market Power.

Grounded on the theoretical and empirical work described in the preceding
chapters of this dissertation, I propose the following theoretical conjecture: Banks
that operate in a customer intimacy or product leadership value discipline, will
only convert into shareholder value those ICT investments which enable them to
increase their Market Power.

By value discipline I refer to the three desirable ways in which companies can
combine operating models and value propositions to be the best in their
markets, as defined by Treacy & Wiersema (1995, p.xii). The third value
discipline, not mentioned in the theoretical proposition, is operational excellence.

Shareholder value is created, as defined earlier in the Literature Review (Chapter
2), by generating revenues from the delivery of products and services to
customers that exceed the cost of the delivery process (Read et al, 2001, p.97).









Another key definition is what we understand by ICT. ICT in the context of this
theory has a far broader conception than simply data processing capacity, data
storage capacity, and networking capabilities. ICT can be better described as a
145
widely applicable technology whose main contribution lies in enabling new
methods and processes when combined with other complementary investments
such as new work systems, organisational restructurings, or redesigning
processes. This definition is borrowed from Sanchez & Albertin (2004), who cite
Malone & Rockart (1991); Milgrom & Roberts, (1992); Brynjolfsson & Hitt
(2002).

Finally, Market Power is defined as the capacity of an organisation to increase its
prices without losing all its Clients. In banks, as in other business organisations,
Market Power can take two forms: differentiation of products and services, or
ease of search. There is a trade-off between differentiation and loss of legitimacy
which is optimised at a strategic balance point. Likewise, there is a trade-off
between ease of search and security that must be taken into account.

This theory categorises ICT investments into Market-Power driven initiatives,
and non-Market-Power driven ones. Prominent among the non-Market-Power
ICT investments are the efficiency-driven initiatives. A corollary of this theory is
that banks that adopt a customer intimacy or a product leadership value discipline
will not convert efficiency-driven ICT investments into shareholder value.

This theory categorises banks according to the value discipline they adopt.
Another corollary of this theory is that only banks that adopt an operational
excellence value discipline have a chance of converting efficiency-driven ICT
investments into shareholder value.

Finally, it is important to understand the value building chain that underpins this
theory. As an illustration, I shall take, for example, the case of a customer
intimacy bank in relation to its corporate Clients. The bank uses ICT investments
to build market power through differentiation or ease of search. This allows it to
add value to its Clients that its competitors cannot imitate. This enables the bank
to position itself as its Clients primary bank (i.e., its Clients will work with other
banks, as do most businesses, but the bank of our example will support the
Clients critical processes and take the largest share-of-wallet). Becoming its
Clients primary bank enables the bank to increase profitability per Client, which
in turn leads to increasing profitability per share, which translates into
shareholder value. This is shown graphically in figure 6.1.





146


Figure 6.1. The Value Building Chain.



Similar examples can be portrayed for personal banking and other Client
categories, and for product leadership banks.



6.2. The Value-Builder ICT Investment Decision Model.

6.2.1 Introduction

Having elaborated the cases, developed the cross-case analysis, and enunciated
the theory, I am now in a position to fulfil the objective of this whole research
project: tackle the question of How can managers at financial services
organisations use ICT investments to create Market Power? I shall respond to this
question by proposing what I have called the The Value-Builder ICT Investment
Decision Model.

6.2.2. Completion of the Model.

In the Conceptual Framework (Chapter 2) I developed the model represented
graphically in figure 2.13 for ICT decision making, which is based on theory.
But, of what use is a model if we do not define a context in which its application
is valid? Precisely, defining in what context this model is applicable is the most
important contribution of the empirical work done with the Chilean banks.

As mentioned in the Theory of Building Value through ICT Investments for
Market Power (Section 6.1.2), the fieldwork allowed me to identify restrictions
in its applicability which must also be translated to the model. The theory
categorises banks according to their value discipline, and has limited its
applicability to customer intimacy and product leadership banks. This has led me
to include Strategic Positioning as a construct in the model, which defines the
context of ICT investment decisions.

Become
CLients
Primary
Bank
Increase
Profitability
per Client
Increase
Profitability
per Share
Increase
Shareholder
Value
Build
Market
Power
Add value
to CLient
Become
Clients
Primary Bank
147
As emerged in the case-studies and in the cross-case analysis, in order to have
agreement across the management team on ICT investment decision criteria,
there must be an ICT planning process in the bank. This ICT planning process
should link strategy and technology decisions, and should define the
organisations vision of the role of technology, which is closely connected with
the value discipline adopted (Weill & Broadbent, 1998; Treacy & Wiersema,
1995). ICT investment decisions must, therefore, fit into the ICT plan which
therefore defines the setting for ICT investment decisions. This is materialised in
the model by including ICT Planning as another construct in the model.

The previous considerations lead me to propose the following model (figure 6.2)
for ICT investment decisions, which I have called the Value-Builder ICT
Investment Decision Model:



Figure 6.2. The Value Builder ICT Investment Decision Model

The Strategic Positioning construct is defined as the value discipline of the
organisation, and its state is determined through the application of Treacy &
Wiersemas (1995) three-value disciplines model.

The ICT Planning construct represents the ICT guidelines of the organisations. Its
state is defined through the application of Weill & Broadbents (1998)
Managing by Maxims methodology.

The ICT Investment construct represents the individual ICT initiative, with its
descriptive characteristics such as objectives, functionality, processes it is aimed
to support, technology, and amount of investment required.

The remaining constructs have been defined in section 2.4 of this dissertation.




ICT Investment
Product
Differentiation
Performance
(Profit, Market
Share,
Revenue)
Ease of Search
Strategic
Balance

Security
ICT PLanning Strategic
Postioning
Context
Setting Input Output
Moderators
Outcome
148
The model in figure 6.3 was presented at a Research Colloquium held at Henley
Management College on 5-8 May, 2004. One of the questions raised was whether
the Strategic Balance and the Security constructs should be moderators or
mediators. After reflecting on the issue, it is clear that there is no causal
relationship between Product Differentiation and Strategic Balance, or between
Ease of Search and Security. This is so because Strategic Balance Point and
optimal security are not intrinsic properties of the bank, but of the banking
system in which it operates. Therefore a moderator relationship is more adequate
than a mediator one. The same question could be raised about the ICT Planning
construct; in this case, it is clear that Strategic Positioning should be an input for
ICT Planning, and that ICT Investment initiatives should be an output of the ICT
Planning process. It is also clear that not all ICT initiatives will be included in the
annual ICT Planning process; many initiatives will emerge dynamically during
the year; however, decisions on these initiatives should take into account the
view of ICT and the ICT guidelines defined by it. In other words, a mediator
position for the ICT Planning construct seems more appropriate.


6.2.3 Application of the Value-Builder ICT Investment Decision Model.

I do not intend to dwell into the issue of how this model is applied. The study of
the Analysis of Some Major ICT Decisions and their Impact on Market Power
section in each of the case-studies and, above all, of the preceding section 5.3.4
Analysis of Projects, should give the reader an indication of how the principles
of this model are applied, and an understanding of the taxonomy of Market-
Power driven projects. What is of more interest, at this point, is to analyse what
happens when a customer intimacy or product leadership bank is confronted with
an ICT investment that does not enable it to increase its Market Power (in other
words, a non-market Power building ICT investment).

One alternative is that of outsourcing. Non-Market Power driven (e.g., efficiency-
driven projects) can be outsourced to specialised technology management
organisations. A second alternative is to pool resources with other banks or
financial services organisations in co-sourcing arrangements that will allow them
to build economies of scale. When neither of those alternatives is feasible, and
the initiative is inevitable, it has to be pursued in-house with a high probability of
destroying value or, at best, not adding value to the bank. But even in this case,
the application of the model produces the benefit of putting all the issues on the
table at the time of making a decision, and helps the organisations leadership
understand where it has to focus its management attention.








149
6.3. Validity of the Results.

6.3.1. Formal Structure of the Theory.

From a formal stand-point, the theoretical conjecture proposed has the structure
of a strictly universal statement as opposed to a strictly or purley existential
statement as would be expected of an empirical or scientific theory (Popper,
2003 [1934], pp. 47-49).

Mapping my theory onto Webers (2003) definition of theory given in section
6.1.1, I arrive at the following:

This theory is dealing with two things: banks and ICT Investments.
The properties of banks are represented by the Strategic Positioning, ICT
Planning, and Performance constructs
The properties of ICT Investments are given by their classification as
Market-Power driven, or non-market power driven; and by the constructs
Differentiation, Strategic Balance, Ease of Search and Security.
The laws of interaction among the constructs are represented by the
arrows in the model.
The lawful state space of the theory is given by the circumstance-
contingencies: the categorisation of ICT investments (Market-Power
driven) and of banks according to their value discipline (customer
intimacy and product leadership).

6.3.2. Is the Theory Grounded on Evidence?

On what grounds do I claim that this theory is grounded on the evidence? I have
conceded in the Methodology chapter that, although interpretive, this piece of
research is not purely inductive. It is true that the model was developed very
much based on readings and bringing together ideas from other disciplines
based on literature - before going out into organisations to do empirical work.
Indeed, the idea of moving to a three-construct model, instead of a simple input-
output one, came from IS research. The original idea of using Market Power as
the process construct, too came from IS research, although its development drew
on the field of economics. The idea of putting Strategic Deviation in as a
moderator came from research in strategy and banking; the idea of putting
Security in as a moderator, again came from previous research in IS. But it was
the fieldwork and the reactions I observed in discussions with many experienced
practitioners that gave me the confidence to believe that there is value in this
model. But above all, the great contribution of the fieldwork in grounding this
theory, is in restricting it. Whilst I departed assuming that the model was
applicable to all organisations, it was the fieldwork that led me to restrict its
applicability only to customer intimate and product leadership organisations. The
case studies refuted the applicability of the original theory to operational
excellence organisation, through anomalies observed in specific ICT investment
initiatives, and led me to include the Strategic Positioning and ICT Planning
constructs in the model, as the Context and Setting in which ICT investment
150
decisions must be made. Thus, the evidence has enriched the theory by defining
its circumstance-contingency.

Going into more detail, the theory will be reviewed on the basis of the criteria
given by Strauss & Corbin (1998, pp. 270-272). The core concept generated by
the empirical work is ICT Investment and its classification of projects into
market-power building and efficiency driven ones. Other concepts, like the
Strategic Positioning and ICT planning, emerged as significant but then were
operationalised through assimilation to concepts in the literature. Yet another set
of concepts emerged from the literature and were included in the model of
departure: Differentiation; Ease of Search, Performance, Security, Strategic
Deviation.

A significant part of this study, as in most theory building projects, and empirical
studies that attempt at linking evidence to theory, a great deal of effort went into
linking concepts. This happened at the initial, theoretical phase, which led to the
model of departure. And it happened in the fieldwork as can be seen in the
introduction of the ICT Planning and Strategic Positioning constructs and their
relationship to the rest of the model. These links are represented by the lines in
the model (figure 6.2). An interesting discussion emerged as to whether some of
these relationships were mediator or moderator ones.

The Value Builder ICT Investment Decision Model (figure 6.2) is an abstraction
of the links between concepts developed throughout the research. It shows that
the concepts arrived at are tightly linked and therefore support the theory that has
been proposed. The core concept which is ICT Investments has been classified
into two categories, Market-Power Driven and Efficiency Driven projects, and
both categories have many properties and dimensions (see section 5.4 ) which
means it is theoretically dense. The Strategic Positioning concept has also been
clearly defined, and three categories have been proposed. These categories have
also been well defined, with many properties and dimensions. The difference is
that while the properties and dimensions of the IT Investment concept have
emerged entirely from the evidence, in the case of Strategic Positioning, Treacy
& Wiersemas three value-disciplines model was used to give theoretical density
to the concept. A similar approach was taken for the ICT Planning construct
where Weill & Broadbents ideas of managing by maxims and vision of ICT
were used to define the properties and dimensions. It is these tight links and the
density of the cateogires which gives the theory its specificity and explanatory
power.

Variation is important because it means that a concept has been examined under a
series of different conditions and developed across its range of dimensions. This
theory has been proposed for a broad set of conditions as defined by the
multiplicity of bank strategies (as given by the Strategic Positioning construct,
which is the context for ICT investments) and of ICT strategies (as given by the
ICT Planning construct, which constitutes the setting for ICT investment
decisions) for which it holds. It is also characterised by a broad set of
actions/interactions as defined by the ICT Investment decisions (which can be
aimed at building market power or pursuing efficiency) and, if market power-
151
driven, can be applied to Differentiation or Ease of Search. In turn, differentiation
has to be evaluated and moderated in terms of strategic deviation; and ease-of-
search needs to be evaluated and moderated in terms of security. Finally, the
theory also allows for a range of consequences in terms of the impact on
performance of the organisation, measured in terms of profit ratio, market share,
or revenue per white collar worker. In other words, it can be said that the theory
is complex and supports a substantial amount of variation.

Conditions under which a theory holds is an essential part of theory building.
Chapter 3 does a contextual analysis of the study and gives a detailed description
of the Chilean banking system from a competitive and institutional perspective,
so that the reader has a clear understanding of the greater context in which this
theory holds. But analysis of the broader conditions is not limited to a separate
chapter of the thesis. It is interwoven with the analysis of evidence as can be seen
by its inclusion in each case study, in the cross-case analysis and in the synthesis
of the cross-case analysis. Finally, and even more concretely, the conditions
under which variation can be found is included in the model itself in the form of
the Strategic Positioning construct.

Identifying process in research is important because it enables theory users to
explain action under changing conditions. This theory is about converting ICT
investments into value, which is a process. The focus of the research is the
decision process and predicting the conditions under which these investments
will convert into value. Although the research is cross-section instead of
longitudinal as it probably should have been, this limitation is reduced by taking
the time dimension into account through historical analysis.

In terms of relevance, this depends on the interplay between the researcher and
the evidence, and its measure of success is that the research delivers new
information and/or produces guidelines for action. This interplay of researcher
and evidence means that the significance of the findings is dependent on the
attributes of the researcher (i.e., analytical capabilities, theoretical sensitivity, and
writing skills to convey the results) and on the quality of the evidence (i.e.,
failure can be traced to the researcher not drawing on the fuller resources of
evidence or on failing to push the collection of evidence far enough). A survey of
practitioners was carried out to evaluate the contribution in terms of relevance,
with a positive outcome, as can be seen in the Section 6.5 (Relevance of the
Results )



6.3.3. Rigour of the Research.

As mentioned in Section 3.6, the rigour of the research will be tested for
construct validity, internal validity and reliability (Yin, 1994; Remenyi et al.,
1998).

a. Construct Validity: The first tactic for establishing correct operational
measures for the concepts being studied refers to using multiple sources
152
of evidence. As was designed in Chapter 3 (Methodology) and actually
carried out, as reported in the preceding Section 5.2.1, both interviews
and written documents were used as sources of evidence; and at least
three informants from each bank were asked to comment on each point of
the semi-structured interview guide. The second tactic consists of
establishing a clear chain of evidence. In sections 5.3.2 and 5.3.3 above, I
describe how the structure of the case studies is related to the structure of
the Interview Guide; and how the structure of the cross-case analysis is, in
turn, related to that of the case-studies. I also mention how right up to the
cross-case analysis, splitting was prioritised over lumping, where the
case-studies reference heavily on individual opinions of informants, as
shown in the interview transcripts; and the cross case analysis references
heavily on the individual cases. It is only in the proposal of a theory and
in the development of the model, that lumping predominates, but in every
case referencing heavily on the cross-case analysis. I am confident that
this organisation allows the reader to trace evidence both backwards and
forward as indicated by Yin (1994, pp.98-99). Finally, the third tactic is to
have key informants review the draft case study report. Not only have I
asked key informants to review the report, but I have gone further to
present the reports to groups of managers at the banks and taken note of
their live comments.

b. Internal Validity: As mentioned in section 3.6, this is a decisive test in
explanatory research like the one I am pursuing (Yin, 1994; Remenyi et
al., 1998) where the objective is to identify causal relationships between
constructs. Again, three tactics are applied to reduce the threat of spurious
effects. The first is pattern-matching, where predicted patterns are
compared with empirical ones. In my analysis, I predicted through the
early versions of the value-building ICT investment decision model that
ICT investments leading to market power convert into value. As shown in
Table 5.1, out of eight ICT investments leading to market power, seven
had a positive impact on performance, and the eighth was defined as too
early to tell. We have therefore done a literal replication across cases.
However, when I analysed seven efficiency-driven projects as shown in
Table 5.2, I found that two of these projects had been successful in their
impact on performance, therefore falsifying my thesis that only market-
power building projects would build value. I then restricted the theoretical
proposition to customer-intimacy and product-leadership banks. Under
this scenario, we see that the only two ICT efficiency-driven initiatives
developed in a customer intimacy environment (the last two in Table 5.2)
either had a low impact on performance, or a high impact after a very
serious initial struggle. It can be said, therefore, that I have done a
theoretical replication across cases (Yin, 1994). The second tactic is that
of explanation building. This test is a special type of pattern-matching in
which the goal is to analyse the case study evidence by building an
explanation about the case. According to Yin (1994, p.111) one of the
important characteristics of explanation building is that the final
explanation is a result of a series of iterations, much in line with the
process described above. The third tactic suggested by the literature is to
perform a Time-Series analysis of the evidence. The essential logic
153
underlying a time-series analysis is the match between a trend of evidence
points compared with a theoretically significant trend specified before the
onset of the investigation (Yin, 1994, p.114). However, because I have
not identified a historical series of evidence related to the phenomena I
am trying to explain, nor am I performing a longitudinal study which
would allow me to create a series, I am not carrying out this test.

c. Reliability: The objective of this test, sometimes called reproducibility, is
to ensure that if another researcher analyses exactly the same cases, he or
she will arrive at the same results. However, reproducing social
phenomena can be complicated because it may not be possible to replicate
the original conditions in which evidence was collected; this is one of the
differences between doing laboratory work where the variables can be
closely controlled, and real world work where the researcher has not
such control. Strauss & Corbin (1998, pp.266-267) give a broader
interpretation if reproducibility in social science research, particularly
theory building one: a second researcher with the same theoretical
perspective as the original one, departing from the same situation, looking
at the same sources of evidence, should arrive at similar explanations for
the phenomena under research. The same problems and issues should
arise, even if the conceptualisation and integration of concepts is slightly
different. And if there are differences, it should be possible to explain
them by going back to the evidence and reviewing the analysis process.
I am confident that (a) the project protocol; (b) the project archive, where
each interview transcript is filed with the corresponding interview notes
forming a clear and reliable repository of primary evidence; (c) the
evidence collection as done report described in section 5.2.1; and (d) the
tight chain of evidence built throughout all stages of the study, ensure that
this study is straight forward to reproduce in the broad sense described
above.


6.4. Corroboration of the Results.

As mentioned in section 5.1, it was decided that the theory would be constructed
on the basis of the evidence collected and analysed from four cases, and the
remaining two cases would be used for corroborating or falsifying the theory.
This section will therefore describe the two remaining cases, Bank Boston and
BCI, and then use them to test the theory.


6.4.1. The Bank Boston Case

Bank Boston Chile has grown remarkably over the last six or seven years. Up to
the mid to late nineties, it was a small operation with 10 branches and
approximately ten thousand Clients, which made heavy losses on retail banking.
It had serious problems in its selling capabilities. This situation has changed
substantially since then: The bank has now 32 branch offices and is planning to
open another 10; it has some 50 thousand Clients; and the Personal banking
154
division represents a full 40 percent of profits. Its main challenge at present is to
become balanced in size (from interview with Boris Buvinic, triangulated with
evidence from SBIF, 1991; SBIF, 1997; SBIF, 2003 and www.bankboston.cl ).

BankBoston Chile is a niche player, a universal bank for selected Clients. It is led
by an Executive Committee integrated by the General Manager and three
Executive Directors, and it combines both a flat structure, which makes it agile at
making decisions, with an effective control structure consisting of profit centres
with fully loaded profit and loss (P&L) statements (e.g., in Wholesale Banking
there are ten such profit centres). Bank Boston has become particularly good at
the Retail side of the business, where many of its competitors manifest that it is
impossible to make a profit (from the interview with Paulina Valdes).

From the four interviews carried out in November and December 2003 with its
senior managers (see Appendix F) it is clear that the banks value proposition is
based on best total solution. Its leaders believe that Bank Bostons most
important dimensions of customer value are service convenience followed by
service reliability (Treacy & Wiersema, 1995), and that the core processes for
delivering value are client acquisition and development (particularly development
at this stage), customer service cycle and market exploitation.

In the opinion of its leaders, Bank Boston Chiles main competitor is Citibank.
The preferential Client divisions of the large banks (i.e., BCI, Chile and
Santander-Santiago, in that order) are serious contenders in Personal Banking,
and some of the niche players such as BICE, Banco Security and ABN-AMRO
are also respected in the enterprise banking segment.

At Bank Boston, ICTs role is perceived by its leadership to be:
(a) improve efficiency;
(b) enable or make feasible the management of the mass market; and
(c) help keep the business under control and report to head-quarters, the
banking authorities, etc. ICT is essential for risk mitigation and for
reporting, both of which are seen as critical requirement for international
banks.
ICT is involved in strategic planning through the Operations and Technology
leader who is a member of the Executive Committee, and it is highly involved in
all product/service design, from inception. The ICT area is perceived by the
business units of the bank as being Client-oriented and a facilitator of commercial
business. Like all other back office and support function professionals, ICT
staffoperate on a Balanced Score Card agenda, with targets, evaluations, and
bonuses.

From the interview with Luis Recabarren it appears that there used to be an IT
Committee that approved all ICT investments and monitored the whole life cycle
of the implementation projects. However, for reasons that did not become clear at
the interview, the time-effectiveness of the meetings came under question and it
stopped operating some two years ago. ICT investments are therefore approved
locally by the Executive Committee, but need to be signed off by the Regional
office in Buenos Aires, or head-office in Boston, once they exceed certain
thresholds.
155

An interesting discussion that came up at the interview with Luis Recabarren is
the paradox of making compatible a long term vision on ICT, and solving the
day-to-day problems. According to Mr. Recabarren, it is not possible to have an
ICT manager that can focus on both the long term strategy and the day to day
fire-fighting. In his view Bank Boston Chile is approaching an effective formula
where it has an able technologist as ICT manager (Mario Diethelm) who solves
the tactical issues, and an Operations Manager (Jose Santomingo) who is a
visionary and is taking up the more long term view. He added that It is essential
that this role be taken by a member of the Executive Committee of the bank
(which Mr. Santomingo is).

According to Mr. Santomingo, the most significant drivers of ICT investments
are management (strategic planning) and user demand, in that order. In all cases,
it is the business unit that defines the needs/functional requirements (What?) and
ICT that define the best way to achieve this (How?). Operations and ICT are
responsible for the efficiency of technology, and its compliance with corporate
standards. Taking a more micro view, ICT investment decisions seem to be
firmly based on quantitative criteria (i.e., cost-benefit analysis, financial metrics,
cost drivers). The most frequent qualitative criteria are perceived to be risk
reduction, mandatory/no choice and greater staff efficiency. This is consistent
with the efficiency and compliance driven role of ICT mentioned above, but
could be indicating an over-reliance on quantitative and cost focused criteria for
an organisation that is operating in a customer intimacy value discipline (Treacy
& Wiersema, 1995; Weill & Broadbent, 1998).

While the bank had few Clients and good interfaces with them, its DIPs core
banking application was satisfactorily operational. However, its growth of the last
few years took the banks core system to the verge of collapsing. That is probably
why at all the interviews, when the informants were asked to comment on an ICT
project they found particularly important and that they had been closely involved
on, all referred to the DIPs Enhancement and Reinforcement (DER) project.

The DIPs application was adopted from the UK Wholesale operation, and
therefore had to go through major adaptations when Bank Boston Chile decided
to tackle the Retail market. These adaptations derived in fragmented and heavily
manual processes, which led to inefficiencies, lack of control, and error-prone
Client service. So the investment initiative was triggered by the strategic decision
to tackle the Retail market, in particular that of the high net income individuals.
This is an efficiency driven project whose output is streamlined processes and
future cost avoidance. The initiative had no impact on industry structure, and
gives the bank competitive parity with its rivals. Finally, the outcome of the
project is increased profits through cost avoidance, and it is perceived by senior
management as being a highly successful project, in spite of being still at an early
stage with only partial delivery of functionality.

The decision to carry out the DER project took over two years to crystallise. In
this process local management was successful in securing support from its head-
office to move away from the corporate guideline that indicated that Bank Boston
Chile should implement a new system (i.e., Altamira from Accenture) at between
156
4 and 5 times the cost of DER. The project was then organised in a way that got
full support from the user business units. The Senior Executives of Retail,
Wholesale and Treasury were appointed members of the Steering Committee of
the project. The three divisions assigned project managers to lead their specific
stream of the project, while the ICT Manager co-ordinated the overall activities.
All the actual development work was outsourced to third parties. The senior
management of the bank was well aligned on their vision, as can be seen in Table
6.1 that summarises their views as obtained from three independent interviews.

CASE STUDY: Bank Boston
INPUT Project Effect on Five-Forces Degree of
Project/Project classification Trigger OUTPUT & Competitveness OUTCOME Success
DER: Dips Survival: Streamlined processes leading No impact on Increased profits High
Enhancement & Catching to cost reduction industry structure/ thru' cost
Reinforcement/ up with competitive parity displacement
Efficiency Driven the
competion
L. Recabarren
Jose Santomingo & Strategic Streamlined processes leading NO impact on Increased profits High
Mario Diethelm decision to cost reduction and Improved industry structure/ thru cost
to tackle Client service in the form of competitive parity displacement
top-tier fewer errors.
retail
market
Paulina Valdes del Need for Streamlined processes leading NO impact on Operational High
Rio growth to cost reduction industry structure/ robustness and
in Retail competitive parity flexibility

Table 6.1. Three-views of the DER project at Bank Boston



As a final reflection on the Bank Boston case, is the paradox that information
technology in financial services requires more investment all the time, in spite of
the fact that the cost of the individual components of technology drop in line with
Moores law. According to Paulina Valdes, this should lead to investments being
distributed in a more continuous fashion. Boris Budinic believes that banks
should be cautious in how much they spend on ICT. He admits that Bank Boston
Chiles ICT investments may seem to be on the low side, but he believes they are
reasonable for Chile where CRM is still largely based on people (i.e., Chile is one
of the few markets where banks assign a Client Manager to retail customers).



157

6.4.2. The BCI Case

Banco de Credito e Inversiones, or BCI as it is more generally referred to, is the
third largest bank in the Chilean market. It has been operating for over 66 years,
and is controlled by local shareholders (BCI, 2004; www.bci.cl).


The message BCI gives its Clients is We are with you count on us because we
are different. This message has implicit that the bank has to change over time.
BCI is a universal bank, which means it is in all types of business, but not
necessarily serves all people. It was the first bank in Chile to seriously use market
segmentation. In personal banking it focuses on the C1, C2 and C3 segments. In
enterprise banking it works with all segments, though with a different approach
to each the segments are Corporate, Large Companies, Small & Medium
Enterprises (SME - less than US$ 1.0 million turnover) and Micro-enterprises
(where it is difficult to draw a line between the individuals personal services and
those of the business).

An example of BCIs segmentation approach is T-Bank, its telephone and
internet banking arm, which operates as a separate Business Unit that manages a
set of Clients whose profile is young, highly educated people, who operate only
via web, and have to be given a very simple, no-nonsense quality of service.

BCI has some 270 thousand Clients, of which 267 thousand are retail Clients.
Like most other Chilean banks, BCI relies heavily on Client managers. For the
preferential (high net income Clients) the bank assigns one Client manager for
every 250 Clients; for the more standard branch Clients the ratio is some 500 to
800 Clients per manager. T-Bank Clients are not assigned a Client manager. With
respect to the branch offices, on average they are staffed by some 12 people per
office, with some small ones with 2 or 3 people, going to as many as 50 people
per office. The lower headcounts are achieved in branches based in the
Metropolitan area of Santiago, where all back office work such as accounting is
centralised.

From the eight interviews carried out in April 2004 with senior managers (see
Appendix F), there is clear agreement that the banks value proposition is best
total solution and that the most important dimension of value to clients is service
convenience. The informants rate customer service cycle as the most important
process to deliver value to Clients, followed by end-to-end product delivery
(Treacy & Wiersema, 1995).

Although the bank puts significant effort into its annual strategic plan and
balanced scorecard, it does not accompany this with a corporate wide ICT Plan.
Technology initiatives are assessed by an ICT Committee as they arise.

ICT investment decisions are analysed by the Committee in terms of how they
align with the balanced scorecard. There is a dispersion of opinions on the
leading criteria applied for deciding ICT investments. However, the informants
perceive that the most frequent quantitative decision criteria are cost drivers and
158
financial metrics; and that the most frequent qualitative criteria are strategy to
move into e-banking followed by greater staff efficiency and service to customer.

In interviews with two of the leaders of strategic business units, it was found that
there is a perception that the commercial (business) areas of the bank are not
sufficiently involved in ICT investment decisions; nor is the Steering Committee
of the bank. There is a sense that these decisions are too centralised in the
General Manager and Operations Manager, and there is resentment towards the
fact that ICT expenses are charged back to the business units which have to
accept them without discussion.

With an objective of understanding further the criteria applied by BCI for ICT
investments, and the banks ability in converting these into shareholder value,
five projects were analysed in significant detail:

a. Lead Tracking Application: This project consisted of the implementation
of a system to enable market managers to monitor opportunities as they
mature. It was led by the Commercial Manager and was triggered by the
need to improve sales productivity and give Clients better service through
being more responsive. The outcome of this investment, which is still at a
pilot stage, is to increase market power through differential service. It has
not had an impact on industry structure, but it is expected to create
temporary competitive advantage as the application is new to the banking
industry and the bank has negotiated a freeze period of 1.5 years in which
the vendor cannot sell it to other banks in Chile. The incipient outcome of
the project has been to enable an increase in market share in the segment
where it is being piloted; it is perceived as a highly successful project in
converting into value, but it is still too early to make a final evaluation.

b. T-Bank: As mentioned above, this is the telephone and internet arm of the
bank. Surprisingly, the project was no triggered by a strategy to move to
e-banking, but by the need to increase efficiency through transferring
customer transactions to a cheaper channel. It achieved some degree of
success in shortening certain client service cycles from 7 days to 24
hours; these were then used as benchmarks to make changes in the rest of
the bank. The bank then grasped the potential of this project to create
market power through ease of search, and thus gave it a Client focus.
However, the project was led by the Operations and Technology Division,
and not by the strategic business units. The project had visibility from
BCIs competitors, and induced several of them to move into the e-
banking space; it also erected entry barriers to the thirty-something,
highly educated, professional market segment to which it was targeted.
This gave BCI a temporary to sustainable competitive advantage in that
segment. The outcome of the project is that it has achieved increased
profits through cost displacement and some market share growth;
however, it is perceived to have had a low level of conversion into
shareholder value due to that market share growth has been modest.
Opinions on the success of the project differ markedly between the
Operations & Technology managers, and the market segment managers.
159
The project is perceived as visionary, but is said to have failed to involve
Marketing and the Regions.

c. ICT Architecture: The purpose of this project was to give the bank a
more flexible technology platform. It took the bank from a 2-tier to a 3-
tier architecture based on Web-logic from BEA. The project was triggered
by an almost total collapse of its ICT infrastructure due to the
incorporation of new channels. So the direct outcome of the project was
business continuity and a reduction in operational risk, and indirectly it
led to better customer service through having a robust ICT infrastructure.
The project did not have an impact on industry structure, but it did give
BCI a temporary competitive advantage through more flexibility. The
outcome of the project was an increase in market share due to that the
robust infrastructure allowed BCI to capture a significant amount of new
Clients from its two main rivals who were going through large
acquisitions and mergers. The new infrastructure is not consolidated yet,
so it is not possible to make a final assessment of its success.

d. BCI in Action: This is a CRM Analytics project aimed at giving the
salespeople a tool to help them make each customer profitable. The
application is linked to scoring, to the credit bureau, and to risk
management applications. The initiative was triggered by the CEOs
vision that each Client manager should have enough information to retain
his or her Clients and make them profitable. However, the project was
led by Operations & Technology rather than the market management
business units. It was thus given more an efficiency orientation than a
market power building one. The expected output of this investment was
better risk management and better Client service which would translate
into an increase in market share and an increase on profits per Client.
This outcome was not achieved due to that the system is not used;
according to the Personal Banking leader, this lack of usage is owed to (i)
a cumbersome design of the application that makes the user navigate too
many windows and log-in/log-off to different systems; and (ii) failure to
involve the users in the design and implementation. The project failed to
make an impact on industry structure and on BCIs competitive
positioning; and is perceived as having had a low degree of success in
converting into shareholder value.

e. Bank Asset & Liability Information System: The bank bought a suite of
applications composed of Bankware which produces and presents
management information, and one called Convergence which is a
simulation tool. These applications are fed with information from all the
banks transactional systems, which poses a challenge in most banks,
including BCI, due to the complicated information architectures they
possess. BCI needed a tool for making decisions on liquidity, funding and
gapping. The legacy system gave a good instant photo of the banks
position, but did not give forward looking information on flows, etc. The
project was, thus, triggered by the lack of management information on
position of Clients or market segments, and the lack of management
information on asset and liabilities flows. The expected output of the
160
investment was better management information which should lead to
increased profits. However, the project was led by a back-office unit,
Financial Control, without putting in the change management initiatives
required to involve and get buy-in from the users. The result is a tool that
is, again, not sufficiently used. At a certain stage the project was taken
over by the Treasury department of the bank (which is the main user of
the system) and the perceived degree of success of the project went from
low to medium. However, the tool is perceived to have great potential in
the long term.

Table 6.2 summarises these projects.


Table 6.2. Analysis of some major ICT investments at BCI


CASE STUDY: BCI
INPUT Project OUTPUT Effect on Five-Forces Degree of
Project/Project classification Trigger Impact on Market Power & Competitveness OUTCOME Success
a. Lead Tracking Need to Market power thru' differentiation No visible impact at Increased Market Still early
Application/ increase due to better Client service pilot stage/Temporary Share but
Market Power sales compet. advantage appears
productiv. High
b. T-Bank/ Increase Initially cost reduction through It caused other banks Increased profits Low
Initially Efficiency efficiency increased staff efficiency. to implement similar thru' cost reduction; in terms
driven; later market by moving Shortened some Client cycles solutions.Erected and increased of Mkt
power driven Clients to from 7 days to 1 day. entry barrier to young market share share
cheaper Later, the bank understood & educated segment
channels potential and gave it Client focus /Temp.to sustain.
achieving Mkt power thru' ease comp. advantage
of search
c. ICT Architecture ICT infras. Business continuity. No impact on Increase market Not
(from 2-tier to 3-tier)/ close to Indirectly, it allowed market industry strucutre/ share thru' allowing consoli-
Non-market power collapse power thru' ease of search Temporary competi- to take Clients from dated yet.
due to and better service (different.) tive advantage competitors when
new they merged.
channels
d. "BCI in Action" Retain Better risk management No impact for now/ Increased profit Low due
(CRM Analytics)/ Clients & and inceased sales-force Not visible for now per Client to lack
Efficiency-driven make productivity of use
them
profitable
e. Bank Asset and Lack of No impact on Clients; better No impact on Should lead to Low at
Liability Position informat. management information industry orgnisation/ increase in Profits first;
Information System/ on Asset Possible a temporary but this is not medium
Efficiency driven & Liability cometitive advantage visible yet. now
flows
161

As a final reflection on this case, it is remarkable that the banks leadership
perceives that 4 of the 5 projects analysed did not convert into value, particularly
considering that a majority of the informants in the other cases pointed towards
BCI as a market leader in its use of technology. Do these four unsuccessful
projects bear witness of an organisation that has problems managing ICT
projects, or of a highly auto-critical leadership team?


6.4.3. How do Bank Boston and BCI fit the theory?

Having analysed the two final cases, I shall now use them to review the
explanatory and predictive power of the theoretical conjecture proposed in
section 6.2.2.

Starting with BCI. As described in the previous section, BCI is a customer
intimacy bank. Its strategy-technology alignment is debatable due to that it does
not carry out a formal ICT planning process, and that ICT investment decisions
are substantially centralised in the Operations & Technology Division with the
General Manager, thus not involving the strategic business units. There are
indications that the causes of failures in the T-Bank and the BCI in Action
projects (projects (b) and (d) in Table 6.2) could be traced to lack of involvement
of the user business units.

The analysis of the five projects presented in the previous section indicates that
only the Market-Power building project (i.e., Lead Tracking Application) is
perceived by the informants to have converted into value. The remaining four
projects, which have been shown to be non-Market Power building, are perceived
by the informants as not having converted into value. Moreover, two of these
projects (i.e., T-Bank and Asset & Liability Position), after initial failure seemed
to improve their impact on value once BCI changed their focus from efficiency-
driven to Market-Power building. I therefore contend that there are strong
indications that the BCI case supports the theory.

Bank Boston Chile can be characterised as customer intimate; although it does
not carry out a specific ICT plan as a resource plan to support its business
strategy, the Operations & ICT leadership is heavily involved in the development
of the annual business plan. In other words, strategy and technology seem to be
fairly well aligned.

On the other hand, the only ICT investment analysed in detail is a core banking
application, which is a non-Market power building investment. Applying my
theory, the expected outcome of this initiative is that it would not be perceived by
the banks leadership to have added value. But, from table 6.1 it is clear that the
informants have classified it as highly successful in creating value. So, what
should be made out if this?



162

The DER project is singular in several ways. First, although it is an efficiency-
driven project, it actually showed a remarkably strong commitment from Bank
Boston Chiles leadership to avoid a 5-fold larger non-Market Power building
investment as would have been the alternative implementation of Altamira. This
commitment is demonstrated by the fact that the leadership team fought a two-
year battle to obtain authorisation to move away from the corporate standard.
Second, the investment was triggered by a business strategy imperative, as was
the need to tackle the Retail market segment. This, again, drew commitment from
senior management as can be demonstrated by the fact that (a) all three strategic
business unit executive Directors sat on the steering committee of the project; and
(b) by the fact that all informants in the case study chose DER as their preferred
project to analyse in depth. The banks leadership had recognised that, in its prior
state, DIPs would not have made possible moving to retail, and were on a single
opinion that this project was a necessary evil. Third, the three strategic business
units took charge of their respective stream of the project by assigning a project
manager to operationalise it. This had a positive impact on change management:
the strategic business units would make sure that the enhanced system would be
used by staff in the field. Fourth, the ICT function of the bank took a co-
ordination role, while project leadership was left to the user business units.
Finally, the bank structured the project in a way that the business knowledge-
intensive positions were filled with internal staff, and all development activities
were outsourced to third parties.

So, although DER has an apparent efficiency-driven output, the higher level
motivation for pursuing it was market-power building; and the taxonomy of the
project is closer to the characterisation of a Market-Power building one than an
efficiency-driven project, as characterised in section 5.3.4. above. Finally, Bank
Boston set up the project in a way that abides very closely to the guidelines
arrived at in section 6.2.3. for when a customer intimacy or product leadership
bank is confronted with a non-Market Power building ICT investment. It can
therefore be said the Bank Boston case does not falsify the theory; on the
contrary, it corroborates it.


6.5. Relevance of the Results

In the previous sections I have developed an in-depth discussion on the rigour
and validity of the study. But is it relevant? According to Benbasat & Zmud
(1999, pp. 4-5), for research to be relevant to the information systems practice, it
should comply with certain characteristics, as follow:
a. The topic should address enduring or current organisational problems,
b. The implications of the research should be implementable,
c. It should synthesise an existing body of research
d. It should stimulate critical thinking, and
e. It should be communicated in a style and tone that make it
understandable.


163

In order to find out the opinion of practitioners, the 24 Chilean banks were
invited to appoint some of their managers to attend a two half-day workshop
where the findings were presented to them. In addition to this, the General
Managers of the banks were invited for an executive overview presentation of
results and discussion. The first two sessions were held on the 15
th
and 17
th
June,
2004. The first session gave an overview of the theory and model, and how they
were developed. The second session gave a diagnostic of the status of ICT
investment decisions in Chilean banks. The executive presentation to the General
Managers, which was held in a breakfast meeting on 21
st
June, 2004, did an
overview of both parts.

At the end of the second session, the participants were asked to fill a
questionnaire on the applicability of the Value-Builder ICT Investment Decision
Model. Of 22 participants, 16 returned the filled questionnaire. The 16
individuals who filled the questionnaire belonged to 10 different banks.

The questionnaire was designed to evaluate relevance along the five
characteristics given above. It opened with three open-ended questions which
asked the participants to give their opinion on the technology planning of their
own bank; the methodology they use for selecting technology solutions; and on
the ability of their own bank to convert ICT investments into shareholder value.

The second block of questions was specifically focused on the model. The first
question of this block asked the participants to qualify the model with respect to
its potential usefulness for ICT planning and technology investment decisions at
their own bank. On a 1 (low) to 7 (high) scale, usefulness of the model was
qualified with a mean of 5.5. The second question asked the bank managers to
qualify, in their opinion, the feasibility of the model fitting in with their own
banks management style. The mean on this count was 5.6. Finally, the
respondents were asked to qualify their opinion on the model itself, on the 1
(low) to 7 (high) scale, and the mean was 5.8.

The third block of questions tackled the issues of the quality of the presenter and
of the infrastructure at the event.

To summarise, it must be said that the bank managers qualified the quality of the
model with a rating of 5.8 (out of seven) and its usability got a rating of 5.5 and
5.6. This result, which can be analysed further in Appendix G, supports the
relevance of the findings.

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CHAPTER 7 CONCLUSIONS


7.1 Managerial Implications of the Findings.

In the precedeing chapters I have outlined the research and I have demonstrated
that the problem of converting ICT investments into shareholder value in banks,
is highly relevant. I have also shown that I have approached the research in a
rigorous way; and I have distilled the findings in a theory which responds to the
research question. However, no matter how relevant and rigorous the findings,
they only represent new ways of thinking and new management ideas. But the
ultimate objective in management research is to put these ideas to work. The
paradox is that putting them to work is less about ideas, and more about
managing people, budgets, projects, and processes (Davenport et al., 2003).
Notwithstanding, my own experience in business has shown me that if leadership
inspires, in line with Antoine de Saint-Exuperys:

If you want to build a ship, dont drum up the men to go to the forest to
gather wood, saw it, and nail the planks together - instead, teach them the
desire for the sea,

all these things fall into place.

The following management ideas should help bank leaders fix the vision that will
enable their organisations to overcome the forces of inertia and convert ICT
investments into shareholder value:


Implement an annual ICT planning process in line with Weill & Broadbents
(1998) Managing by Maxims methodology. To make this work the
leadership team has to be on a single note on the banks value discipline.

Apply Watkins (1998) 3-service archetype model as a way of binding
together technology and talent planning. Use it to underpin communications
to staff and to change management processes in large projects.

If you decide to go down the outsourcing route, organise the in-house IS
function in a way that will allow your organisation to keep up with the pace
of technological change. See Feeney & Willcocks (1998) for a framework to
help do this.

Apply the model proposed in this study to ensure that all ICT decisions are
aligned with the business strategy and focused on building shareholder value.
If you are a bank with a customer intimate or a best product value discipline,
stick to those ICT investments that lead to market power and you shall create
shareholder value; and keep in mind that ICT investments for more efficiency
165
will, most probably, destroy value. If, on the other hand, you are an
operational excellence bank, you have better chances of converting
efficiency-driven ICT investments into shareholder value, but make sure you
put strong emphasis on associated change management initiatives.


7.2. Contribution to Knowledge.

The main contribution to knowledge of this research is bringing together
concepts from diverse fields and, through empirical work, articulating them into a
Theory of Market Power ICT Investments for Value Creation, and applying that
theory to propose the Value-Builder ICT Investment Decision Model.

Although the idea of using a process box to understand how ICT investments
impact performance was taken from McKeen & Smith (1996), and the idea of
using Market Power as the theoretical underpinning for that construct, came from
Crowston & Treacy (1986), actually turning that into a model and applying it to
empirical research was a contribution of this study.

Another aspect is that of the moderator constructs in the model. Taking the
Strategic Balance construct from work done in strategy by Deephouse (1999),
and putting it in as a moderator of differentiations impact on performance, is a
contribution. Also a contribution is taking the concepts of security, dealt with by
Keen (1991) in the field of IS research, and turning them into a construct that
moderates the impact of ease-of-search on performance.

The empirical work led to the conceptualisation of ICT Investments, with its
categories of market-power driven and efficiency driven initiatives, and the
properties and dimensions of each. It also led to the need of setting the ICT
Investment decisions in an ICT strategy and a business strategy (Strategic
Positioning).

The Strategy theory and the Strategy-Technology alignment literature gave the
conceptual frameworks for operationalsing these concepts into the constructs that
define the setting and context of ICT investment decisions. More explicitly,
taking from Treacy & Wiersema (1995) the concepts of value discipline applied
in their research into strategy, and transforming them into the Strategic
Positioning construct is a contribution; as is converting Weill & Broadbents
(1998) view-of-technology approach from IS research into an ICT Planning
construct. Defining the relationship of these constructs to ICT Investment
initiatives is also a contribution.

The application of the model to the Chilean banking system, and the diagnostic of
ICT investment decisions in Chilean banks, is another contribution. So is the
characterisation of market-power-driven, and efficiency-driven, ICT initiatives.

Finally, in Chapter 3, several peripheral contributions are made (peripheral
because they are not directly related to the issue of converting ICT investments
166
into shareholder value, which is the main objective of this work). First, it builds
on the work of Deephouse (1999) and McNamara et al. (2003) in the field of
strategy, to present a three-dimensional way of visualising strategic groups and
bank positioning. Second, it proposes a framework to make a detailed analysis of
the competitive and institutional forces that act upon a national banking system,
and applies it to the specific case of the Chilean market. Third, from a
methodological point of view, it looks at the Chilean banking system through
three lenses, all based on different combinations of objective-subjective, and
quantitative-qualitative approaches. Lastly, it integrates the three views of the
previous point to propose the Orbit Theory which explains the way individual
banks react to these forces.



7.3. Limitations, Reflections and Future Research Opportunities.

The fact that this is a doctoral piece of research puts on it many limitations in
terms of time and resources. These constraints force limitations on the final
outcome, some of which I shall enumerate:
Due to time limitation, the project was approached in a cross-sectional
instead of a longitudinal way, which would have enabled doing time-
series and other analyses.
Due to resource limitations, it was not possible to have a second
researcher at the interviews. Had this been possible, deeper insights
would probably have resulted.
Although it was originally planned to look at financial services
organisations in general, the study was finally restricted to banks.
Not having a product leadership value discipline bank in the multiple
case-study is also a limitation.

Less obvious, but possibly a more important liability, are lost opportunities of
arriving at a denser theory. Because my coding abilities were not highly refined
at the initial phases of the study, I may have lost opportunities of greater depth
and richer concept development at the time of designing the semi-structured
interview guide. This, of course, may have had a significant impact on the final
outcome.

Similarly, I did not become fully conversant with the evidence collection,
analysis, conceptualisation, theoretical sampling, and again evidence collection
process until late in the research. As a result, I went out and did the interviews at
four banks simultaneously, before having analysed and written up the first case,
and therefore lost the opportunity of using the conceptualisations that emerged
from that case to guide evidence collection at the second, and so on. Although I
did use the input from one interview to shape the focus of the following
interviews, and I did use the analyses of the first four cases to define the focus of
the last two, I could have done this in a more systematic way. If I had to start
again with what I now know, I would start off with evidence collection and
analysis in two banks (to allow for comparisons), and then do the other four in
167
succession, as a means of exploiting theoretical sampling (and the research
process in general) at its full potential.

A further reflection is that, although one is aware of the interplay between
philosophical ideas and the methodologies to apply when doing empirical
research work, it is quite common for these two levels of thinking to move on
different, parallel planes. On one hand, it is difficult to land abstract
philosophical ideas in order to make them of use to solve practical problems, and
on the other we get so involved in the process of empirical work (evidence
gathering and analysis) that we do not take a step back and see how our findings
can be related to higher level philosophical positions. Clearly, the objective is to
achieve this integration, and if we are successful at it our theories are bound to be
denser and of broader application.

Personally, I found it difficult to do this during my research. Firstly, because I
only understood and internalised the importance of this integration of levels of
thinking when I was close to the end, after having gathered most of the evidence,
and when I was already deeply involved in the cross-case analysis. Secondly,
because until then my understanding of my own epistemological and ontological
stances was superficial. Thirdly, because one is limited on time and resources.
However, I do think I had a significant success in this area when I went back to
the two cases (Bank Boston and BCI) for corroboration of findings. With the idea
in mind of integrating philosophical ideas and empirical work, I went through the
interview transcripts with a focus on questioning the evidence (counter-
induction, using Feyerabends (2002[1975]) term) rather than just seeing how
the theory fitted the evidence. Through reflection along this line, I was able to
show how a negative case, as was Bank Boston, actually helped corroborate the
theory.

A final reflection is on the role of interviews and the limitations they introduce
in this study. Interviews played a significant role in evidence collection; they
were not the only source, but they were the most important one. Through
interviews we obtain the interpretations of our informants on the things and
events of the phenomenon we want to study. But there are many other issues at
stake in an interview. It is the attitude of the informant towards an interview
(people have different ideas on what is expected of them in an interview, of the
time they should devote to it, of whether they are doing it as a favour or whether
the organisation is imposing it on the individual; on the informants opinion on the
value of the research for her/him and her/his organisation). And there are political
issues such as how will what the informant is saying affect his/her career in the
organisation (e.g., I have been asked by informants to change words in an
interview write-up, even though they were assured that only the interviewer and
the interviewee would see each transcript). And there are marketing aspects such
as what image of himself/herself, of the Division, of the Company, of the
Profession, of the Industry, dose the individual want to convey. Rivalry across
Divisions within an organisation (e.g., I have been asked more than once what
other people in the organisation had responded to a particular question).

Alvesson & Skldberg (2000, p.193) put it graphically when they say that:
168
How interviewees appear or represent reality in specific interview
situations has less to do with how they, or reality, really are (or how they
perceive a reality out there); rather, it is about the way they temporarily
develop a form of subjectivity, and how they represent reality in relation
to the local discursive context created by the interview.

The authors recommend not relying entirely on interviews for evidence
collection, and suggest participant-observation as the method to obtain empirical
material of non-trivial nature (at least as a complement to interviews).

The researcher has to see through these things and take them into account at the
time of interpretation, analysis and reflection. But also,

it is important to raise the perspective and not be too limited by
observed behaviours or interview accounts, but to consider these in terms
of the broader context (Alvesson & Skldberg, 2000, p.270).

An error we make is to treat interviews as too much of an evidence extraction
exercise or, applying Potters (1997, p.149, cited by Alvesson & Skldberg,
2000, p. 206) terminology, as a machinery for harvesting data from
respondents. An effective interview should move beyond this and become
integrated into the action/interaction of the organisation. If this is achieved, the
interview becomes an interaction in its own right (Alvesson & Skldberg, 2000,
p.206). But it is difficult to achieve and may need the researcher becoming
deeply familiar with the organisation before the interview. It probably means
spending a significant amount of time in the informant organisation. It is also
more difficult to do in highly structured or semi-structured interviews where one
follows a script. It is more feasible to do in a focused interview when the
researcher is highly conversant on the issue in discussion and the informants open
up in a discussion from which they believe they are getting value in the form of
expert advice. In my particular case I moved to this instance on a few occasions
and, as mentioned in Chapter 5, I complemented the interviews with feed-back
sessions and planning sessions, which allowed me to move beyond the external
interviewer position and have at least brief perceptions of the players in action.


Is this the end? Definitely not; the work of building ever-better theory is never
finished (Christensen & Raynor, 2003, p.71). It is only the beginning. There are
many incremental opportunities for further research in this area, such as:
Extending, through replication, the applicability of the theory and ICT
investment decision model to other industrial sectors, particularly other
information intensive ones.
Doing a more comprehensive, but necessarily less deep, study to analyse
the applicability of the theory and the model to other markets. The present
study could be used to design the survey instruments.
Develop an action research project at one of the case study banks for
analysing in more depth the characteristic patterns of success or failure in
ICT projects; implementing actions to improve its ICT investment
conversion; and learning from the outcome to further refine the theory
(Coghlan, 1994).
169

A more ambitious line of research, in which I plan to be involved, is to:
Continue the development of the Orbit theory proposed in Chapter 3, in
order to arrive at a measure of a financial services market degree of
competitiveness or of regulation, based on the size of the area on which
the banks operate on the two-dimensional space of strategic deviation of
loans versus strategic deviation of deposits and its distance to the origin;
Identify what criteria bank managers use to decide whereabouts on the
mentioned area they want their bank to operate. More specifically,
considering that talent and information are the only two strategic
resources a bank can count on to differentiate from the competition:
How do bank managers use people development and ICT capabilities to
decide on their market position? How do they apply ICT investments
and HR development to strengthen their position?
In this way both theories, Orbit and ICT Investments for Market Power, would
converge to an overall conjecture that would relate competitive positioning with
resource allocation in banks.





























170


APPENDIX A Evidence Collection

A1. Semi-Structured Interview Guide

1. BACKGROUND
Objective: To establish the position and role of the interviewee. (7-9 min.)

1.1 Describe your own career in the bank/company or other recent
organisations (last five years).

1.2 What has been your involvement with IT decisions?

1.3 What has been your input into IT strategy?

1.4 What, if any, IT selection committees have you been on?


2. VALUE DISCIPLINE OF THE ORGANISATION .
Objective: To establish the strategic positioning of the organisation. Address the
question: How do we compete and win in the market-place? (8
min.)

2.1 In your organisation which are the key dimensions of customer value
(rank them in descending order of importance):
2.1.1 Price,
2.1.2 Product Quality,
2.1.3 Product Features,
2.1.4 Service Convenience,
2.1.5 Service Reliability,
2.1.6 Expert Advice, or
2.1.7 Support Services?
2.2 What is the Value Proposition to Clients (choose one, or at most two):
2.2.1 Best total cost;
2.2.2 Best product; or
2.2.3 Best total solution.
2.3 Which are the core processes of the organisation (rank them in
descending order of importance):
2.3.1 End-to end product delivery;
2.3.2 Customer service cycle;
2.3.3 Design and launch new products;
2.3.4 Commercialisation;
2.3.5 Market exploitation;
2.3.6 Client acquisition & development; or
2.3.7 Solution development.
171
2.4 Have these changed over the last five years?


3. RECENT ROLE OF INFORMATION TECHNOLOGY (only for non-IT
and non-Operations informants)
Objective: To assess how the role of IT is perceived by top management (10-
12 min.)

3.1 What is the role of IT perceived to be?

3.2 Are there visionaries in the IT function?

3.3 Is there much resistance by IT to new initiatives?

3.4 Is there any concept of the value of IT? Do people differentiate value
and value for money?

3.5 Has intra-company integration arisen as an issue? And inter-company
integration?

3.6 If so, when did it start to emerge?

3.7 How has the perception of the role of IT changed over time?


4. GENESIS OF INFORMATION TECHNOLOGY INVESTMENTS
(only for IT and Operations informants)
Objective: To establish the genesis of investments in IT. (12 min.)
4.1 Where does demand for innovative IT originate? Is it from:
4.1.1 Individuals/Champions in the IT function?

4.1.2 User demand?

4.1.3 Demand from customers?

4.1.4 Management driven (strategic planning)?

4.1.5 Competitor developments?

4.1.6 Technology developments?

4.2 Is IT considered an expense or an investment?

4.3 Is there a policy for outsourcing/insourcing of IT?

4.4 Portfolio approach to IT investments: Of what order is the IT budget?
172

4.4.1 How does it break down into Operations, Maintenance and New
Initiaitives?
4.4.2 How do investments in New Initiatives break down into: (a)
Transformational; (b) Renewal; (c) Process Improvement; (d)
Experiment


5. INFORMATION TECHNOLOGY INVESTMENT DECISIONS
Objective: To find out what factors were taken into account at the time of making
IT acquisition decisions. To understand what drivers have typically triggered
FSO managers decisions to implement IT. To determine if market power has
been a factor in the decision process. (17 min.)
5.1 Which of the following QUANTITATIVE criteria are important in IT
decisions (ask the informant to give the three most important criteria, and
assimilate the answers to the given categories; mention the market power
factors specifically if the informant does not do so spontaneously):
5.1.1 Cost benefit;
5.1.2 Return on Investment;
5.1.3 Net present value;
5.1.4 Internal rate of return;
5.1.5 Cost savings;
5.1.6 Net cost savings;
5.1.7 Avoided future costs;
5.1.8 Increase in capacity/throughput;
5.1.9 Necessity to increase Market Power through product
differentiation (for increasing PROFIT);
5.1.10 Necessity to increase Market Power through ease of search (for
increasing PROFIT);
5.1.11 Other benchmarks.


5.2. Which of the following QUALITATIVE criteria are important in IT
decisions (ask the informant to give the three most important criteria, and
assimilate the answers to the given categories; mention the market power factors
specifically if the informant does not do so spontaneously) :
5.2.1 Risk reduction;
5.2.2 Mandatory/no choice (regulator)
5.2.3 Intangible benefits;
5.2.4. Better staff morale;
5.2.5 Greater staff efficiency;
5.2.6 Improved communication;
5.2.7 Corporate image;
5.2.8 Empowering staff;
5.2.9 Encouraging creativity;
5.2.10 Reference to what competitors are doing;
5.2.11 What has happened in other markets;
173
5.2.12 Service to the customer;
5.2.13 Customer demand:
5.2.14 Strategy to move into e-banking;
5.2.15 User motivation/morale;
5.2.16 Better management information;
5.2.17 Rationalisation of IT alignment with corporate objectives;
5.2.18 Necessity to increase Market Power through product differentiation
(for increasing market share or price);
5.2.19 Necessity to increase Market Power through ease of search (for
increasing market share or price);
5.2.20 Enabling of seamless customer service;
5.2.21 Intercompany co-operation.
5.2.22 Other benchmark;

5.2 5.3Do you perceive that attitudes to IT value for decision making
purposes have changed over the last five years?

5.3 5.4If so, how?

5.4 5.5 What caused changes in perception of IT?


6. ANALYSIS OF SOME MAJOR INFORMATION TECHNOLOGY
INVESTMENTS AND THEIR IMPACT ON MARKET POWER
Objective: To understand how managers in FSOs measure their success in
implementing IT investments. To understand how FSO managers measure the
impact of their IT investments on the industry competitive landscape. To explore
if obtaining market power is a success factor to be measured in IT
implementations. (25 min.)
6.1 Which do you think is the most important IT project undertaken by your
organisation in the last five years?

6.2 Why was it important?

6.3 Of what order of magnitude was the investment?

6.4 What was your role in connection with the project?

6.5 What triggered the project?

6.6 What factors were taken into account at the time a making a decision (see
section 5.)?




174

6.7 What was the output with respect to Clients of this project?
6.7.1 Product differentiation
6.7.2 Ease of search
6.7.3 Competitive pricing
6.7.4 Improved Client service.
6.7.5 Other

6.8 What was the output with respect to the internal workings of the
organisation?
6.8.1 More innovative products
6.8.2 Streamlined processes leading to cost reduction
6.8.3 Better Client information
6.8.4 Better management information
6.8.5 Intra-organisation integration of information
6.8.6 Inter-organisation integration of information and/or processes
6.8.7 More pro-active go-to-market processes
6.8.8 Other

6.9 Did this project have any impact on industry structure? (Based on Porter,
2001)
6.9.1 Rivalry amongst existing companies
6.9.2 Barriers to entry
6.9.3 Bargaining power of Clients and channels
6.9.4 Bargaining power of suppliers and partners
6.9.5 Threat of substitute products or services
6.9.6 Did competitors react in any visible way to this project?

6.10 Did this project have any measurable outcome in terms of Market
Power? If so, how did it manifest itself ?:
6.10.1 Increase in Market Share
6.10.2 Increase in Price
6.10.3 Increase in profit
6.10.4 Other

6.11 Did this project render any competitive advantage to the firm?
6.11.1 Sustainable
6.11.2 Temporary
6.11.3 Parity
6.11.4 None

6.12 In your opinion, what was the degree of success of the project?
6.12.1 High
6.12.2 Medium
6.12.3 Low

175
7. CURRENT THINKING ON FUTURE ROLE OF INFORMATION
TECHNOLOGY
Objective: To understand the thinking about IT today and for the future. To
understand how FSO managers see a role for IT investments in achieving market
power. (7 min.)
7.1 Where will the driving force for future IT projects be:
7.1.1 Transactional systems to support core processes
7.1.2 Transactional systems to achieve more effective support processes
7.1.3 Datawarehouse projects aimed at better customer knowledge
7.1.4 Datawarehouse projects aimed at internal controls
7.1.5 Datawarehouse projects aimed at improving knowledge
management
7.1.6 Groupware software to make teams better connected (idea
sharing)?

7.2 Can you think which will be the next major IT project?

7.3 Who do you consider to be your two main competitors?

7.3.1 What differences do you perceive in the way they use information
technology compared to your organisation?

8. SOURCES OF INFORMATION

Objective: To identify any further sources of information that I might have
overlooked. (5 mIn.)
8.1 Could you suggest other people in the organisation who I should talk to
with reference to these issues?

8.2 Are there any documents you think I should read with respect to these
issues?

8.3 Can you think of any other source of information?

9. OPEN DISCUSSION
Objective: To enable the interviewee to discuss any other aspect of IT in FSOs
that he/she may want.



Note: The times indicated in brackets are a guide to help the interviewer keep the
meeting on track, but not shown to the interviewee.
176

A.2. Sample Formats for Reports


.



Figure A.1. Overview of IT initiatives for each case-study.






















The Evidence from Each Case Study
CASE STUDY BANK X
Project Effect on Five-Forces Degree of
INPUT Trigger OUTPUT (Industry context) OUTCOME Success
IT Project Alpha Compet. Enabled product differentiation Reduced threat of Impact on Price of M
Move through substitute
IT Project Beta Acquisition Enabled Ease of Search Reduced bargaining Impact on Market L
through power of suppliers Share of.
IT Project Gamma Defense Enabled ease of search Increased barrier to Impact on Revenue H
through entry of of
177


APPENDIX B

BANCO DE CHILE: RENEWING A TRADITION
THROUGH TECHNOLOGY ENABLED BUSINESS
TRANSFORMATION.


B.1 Introduction: History of the Bank

Banco de Chile is a venerable institution within the business community in Chile.
It was founded in 1893 as a result of the merger of three banks: Banco Nacional
de Chile, Banco Agricola, and Banco de Valparaiso. It was based out of
Valparaiso, which is still Chiles main port city, but even more important in those
days as Chiles gateway to the World. However, from day one it served Clients
through branch offices in 24 different Chilean towns and cities, including the
capital, Santiago. In 1926, the banks head-quarters were moved to an imposing
building in Santiago, where it remains to this day.

Over the years, Banco de Chile has expanded its physical presence throughout
Chile, and has developed an international presence through offices in New York,
Miami, Mexico City, Sao Paulo and Buenos Aires, and a network of
correspondent banks.

In March 2001, Quinienco, the holding company of the Luksic family, which
controlled Banco Edwards, took a controlling interest in Banco de Chile. In
August of the same year, the Boards of both banks agreed to merge their
operations and filed a merger request with the Chilean banking authority,
Superintendencia de Bancos e Instituciones Financieras (SBIF). The merger was
concluded by decision of their respective shareholders in special shareholder
meetings that took place on 2
nd
January, 2002, giving birth to what is known
within the bank as the new Banco de Chile. At that time, Banco de Chile was
the second, and Banco Edwards the fourth, largest banks in Chile. The resulting
new Banco de Chile became the largest bank in Chile, managing roughly 20
percent of assets, loans and deposits. A few months later Banco Santander and
Banco Santiago also merged, displacing Banco de Chile to the second position in
market share, but it still remains the largest bank controlled by Chilean investors.

Banco Edwards is also a venerable name in the Chilean business landscape. It
was founded in 1851, in Valparaiso, as the first privately held bank in the
country, by a very successful businessman of the time called Agustin Edwards.
The bank remained in the family and managed to survive the economic cycles
and political swings of the country, until 1970 when Chile went through its
Marxist experiment and the bank was nationalised and later shut down in 1972.
Eight years later it was re-opened by taking over assets and liabilities from Banco
Constitucion. In 1986 the bank changed hands and it started a period of steep
178
market share growth and consolidation, together with the incorporation of state of
the art technologies aimed at improving customer service. In late 1995 it repaid
its subordinate debt to the Central bank, and listed on the New York Stock
Exchange where it placed its ADRs.

In August 1999 Quinienco took control of Banco Edwards. This gave place to a
capital increase which launched a period of renewed energy and growth, with
substantial investments in technology and a significant expansion of the branch
office network. Banco de Chile has recognised the value of the Banco Edwards
brand by preserving it for serving its high net income personal banking
customers.

Banco de Chile is listed in the Chilean stock exchange and, since its merger with
Banco Edwards, its ADRs are registered and therefore traded in the New York
Stock Exchange (NYSE). The merged entity boasts one of the largest market
capitalizations among Chilean companies, which is in the order of two billion US
Dollars. During 2002, the Bank also listed its shares in the Madrid Stock
Exchange and in the London Stock Exchange, becoming, according to the
Chairmans letter to shareholders (Banco de Chile, 2003, p.3) the only Chilean
company whose shares and debt are traded in the four markets.

The Bank is mainly engaged in commercial banking in Chile, providing general
banking services to a diverse customer base that includes large corporations,
small and mid-sized businesses and individuals. It delivers financial products and
services through a nationwide network of 224 branches, 823 bank-owned ATMs,
and other electronic distribution channels.


B.2. Sources of Evidence.

Several sources of information have been used in order to triangulate evidence:
a. Interviews: Semi-structured in-depth interviews, as opposed to open
ended ones, were performed because this is a multiple case study and otherwise
there is a risk of collecting a wealth of information from individually valuable
interviews that are then difficult to generalise from (Remenyi et al., 1998; Miles
& Huberman, 1994, p.17). An interview guide (see Appendix 1) was developed
on the basis of the four aspects of the research question, and of the conceptual
framework indicated in the Research Proposal and refined in Griffiths &
Remenyi (2003).
b. Documents: Analysis of multiple documentary sources such as the reports
produced by the banking authorities (SBIF, 2003); Banco de Chiles (2003a)
Annual Report for 2002 (the 2003 Annual Report was not available at the time of
this); Banco de Chiles web-site (www.bancochile.cl) during the period 15
th
to
29
th
February, 2004; its link to Quinienco (Banco de Chiles controlling
shareholders) Groups web-site, in particular the presentation on Banco de Chile
(2003b) delivered by its CEO at the Quinienco Day at Wall Street. Through these
documents it was possible to understand the banks history and to have access to
strategy statements and performance measures.

179
According to Gummesson (1991, p.21, cited by Remenyi et al., 1998) access or
the ability to get close to the object of study in order to find out what is
happening, is the researchers biggest problem. In this case, considering that
access to informants at the highest levels in the bank was obtained and that,
following Bannister (2001, p.149) each interviewee was asked if they would
suggest additional interviewees or other sources of information, there is
confidence in the validity and relevance of the sources of information.
As specified in the Research Proposal, interviews were held with the Division
Heads for Planning and Research, for Enterprise Banking, for Retail Banking and
Branches, for Operations and Technology; and with the Planning and Budgeting
Manager, who was the co-ordinator of this project on the banks behalf. The
people interviewed, with a brief description of their background, are the
following:
Arturo Tagle, Head of the Planning and Research Division, has been with the
bank for many years, and has been in his present position for the last two. At
present, he leads the NEOS project which is probably the most ambitious
business transformation project ever pursued by the bank. Prior to his present
responsibilities, Arturo Tagle spent two years as Controller with a particular
focus on operational and technological risk at Banco de Chile. Before that, Arturo
was advisor to the President of the bank on regulatory and other issues.
Throughout his career, Mr. Tagle has been involved on all phases of information
and communications technology (ICT) projects: development of business case,
solution design, construction, and implementation. In his position as leader of
the NEOS projects, Arturo Tagle is operating at the confluence of strategy and
technology because, although NEOS is a technology based transformation
project, it was preceded by a strategy definition phase. The latter defined how the
bank wants to do business in the mid to long term, and gives NEOS its strategic
context. Mr. Tagle also serves on the Comite de Inversiones y Tecnologia
(Investment and Technology Committee), which analyses, prioritises and signs-
off all ICT investments. He reports to the CEO.
Cristian Wolleter, Head of the Enterprise Banking Division, has been with Banco
de Chile for over 22 years. During his tenure at the bank, Crisitan Wolleter has
always been part of the Commercial areas; initially he was in Corporate banking;
later he managed the branches of a Region; after that he was in retail/personal
banking. At present, Mr. Wolleter is the Director responsible for Small and
Medium Enterprises. He is a graduate in business from the University of Chile.
During most of his career, Mr. Wolleter has been involved with technology only
as a user. An exception to this have been the Electronic Client File project which
he led; and the NEOS project where he has been heavily involved on specifying
requirements, and assigning key staff to the project. Mr.Wolleter reports to the
CEO.
Alejandro Herrera, Head of Retail Banking, is responsible for personal banking
and the branch offices at Banco de Chile. Alejandro Herrera has been with the
bank for three years, when it merged with Banco Edwards with which he had
been for two years. Prior to that, Mr. Herrera had been with Banco Sudamericano
for three years, and Banco Santiago for 16 years. In all, Alejandro Herrera has
over 22 years financial services experience. For most of this time he has been on
the retail/personal banking side of the business, except for a short spell in the
corporate and enterprise business units in the early part of his career. For a
period, Mr. Herrera was General Manager at AFP Banco de Santiago, which is
180
the pension fund management subsidiary of Banco de Santiago. Alejandro
Herrera is a graduate in business administration. He has been involved in IT as a
user to define requirements, and in the final phases of decision making on
solutions. In the past, he was part of the implementation team for a Loan System.
With respect to NEOS, the large core-banking transformation project that Banco
de Chile has recently embarked on, Alejandro Herrera has been involved more on
a consultative basis; not really in the detailed evaluation of the alternative
solutions. He reports to the CEO.
Marcelo Caracci, Head of the Operations and Technology Division, has worked
for the financial services industry for over 25 years. He has been Operations
Manager at Banco de Chile since 2001when he was brought in to lead the merger
with Banco Edwards from an operations viewpoint. Marcelo Caracci had been
ICT Manager at Banco de Chile for six or seven years in a prior tenure; in
between, Mr. Caracci was an ICT Consultant for the banking industry. In an
earlier stage of his career, Marcelo Caracci was Operations and Technology
manager at Banco de Concepcion, after having been IT manager at the same bank
for some five years. He is a graduate Civil Engineer. As in most banks, ICT is
very close to Operations, so Marcelo Caracci is heavily involved on all ICT
decisions, and is a member of the Investment and Technology Committee which
meets weekly. He reports to the CEO.
Ricardo Morales, Planning and Budgeting Manager, has a business degree
(Ingeniero Comercial, as it is called in Chile). He has been working for banks
ever since graduation. From 1980 to 1986, Ricardo Morales was at Banco de
Chile where he worked for the Planning and Research Division. From 1986 until
2001, he was at Banco Edwards, also in the planning and research area. Since
then, as a result of the Banco de Chile and Banco Edwards merge, Mr. Morales is
back in Banco de Chile where he leads the Planning and Budgeting function. He
is responsible for managerial accounting and reporting, and actually prepares and
presents the figures to the Board at their monthly meetings. During his time at
Banco Edwards, Ricardo Morales was close to the ICT function from three
perspectives: (a) as a member of the IT Committee where IT investments were
planned and prioritised, (b) as a user where he defined, designed and led the
bank MIS systems, and (c) as a member of the Y2K Committee. Mr. Morales has
been involved in the solution selection for the NEOS project, the most ambitious
technology project ever carried out by the bank. He reports to Arturo Tagle.

It must be pointed out that all interviews were individual, and they were
performed during November and December, 2003.











181

B.3.Strategic Positioning of Banco de Chile.


B.3.1. Banco de Chile and its Competitive Context.

As mentioned in Chapter 3 and Griffiths (2004), the Chilean banking system
comprised, at December 2002, twenty eight institutions as a result of having
followed the global trend of rapid consolidation. Taking an exchange rate of
Chilean pesos 695.28 to the US dollar, at end of 2002, the total assets in the
system amounted to some US$ 71,225 million (Banco de Chile, 2003b), of which
Banco de Chile represented US$ 12 billion, or just under 17 percent (Banco de
Chile, 2003a, p.13; SBIF, 2003). Having over US$ 5 billion and under US$ 100
billion in assets, it is classified as a mid-sized bank on international standards,
according to criteria adopted by the Tower Group (IBM, 2003). In terms of
loans, the total Chilean banking system amounted, at the time, to US$ 45.6
billion (SBIF, 2003), of which US$ 8.57 billion (Banco de Chile, 2003a, p.13;
SBIF, 2003) are managed by Banco de Chile, which represents 18.7 percent of
the market.

On the revenue diversification front, it was mentioned in Chapter 3 that the
Chilean banking system followed the global trend of increasing fee-based income
as a proportion of total income. In the twelve year period from 1990 to 2002, fee-
based income, for the banking system as a whole, grew from 6 percent to 18.8
percent of total income. Banco de Chile was among the top four banks in terms of
fee-based income relative to total income, which in its case amounted to 20
percent. In Banco de Chile (2003b) it is claimed that Banco de Chile substantially
increased its fee-based income during 2003. The growth figures given in the
presentation for the second quarter of 2003, are impressive, at 18.1 percent with
respect to the previous quarter, or 43 percent with respect to a year earlier.
Another interesting analysis given by the same source is that, at June 2003, the
ratio of fee income: operational expense for Banco de Chile is 35.6 percent,
which compares favourably with respect to the system as a whole which has a
ratio of 28.6 percent.

In the strategic group analysis of the Chilean banking system performed in
Chapter 3, it becomes clear that Banco de Chile operates in the same strategic
group as BCI. The general conclusion of that analysis is that a banks performance
is related to how well it competes with the banks within its own strategic group,
resulting in winners and losers within those groups (McNamara et al., 2003;
Griffiths, 2004). However, this strategic group is the only one that defies those
conclusions as the performance of Banco de Chile and BCI are very similar. At
end of 2002, Banco de Chile and BCI were very close to each other in terms of
profitability. However, in terms of market share, it can be said that Banco de
Chile has been more successful than BCI.




182




B.3.2.Banco de Chiles Business Strategy

Mr. Pablo Granifo, the CEO, summarises the banks strategy in his overview of
Banco de Chile During 2002 when he says that:

Our Banks businesses have been conducted in accordance with the
sound guidelines established in our Strategic Plan. Among [these]
guidelines, the following continue to have special relevance: market
segmentation, customized and specialized services for each segment,
permanent focus on service excellence, ongoing development of new
transactional services provided through remote and self-service
technological channels, and greater integration of product mix and Bank
and branch services with the commercial platforms that comprise our
network of branches (Banco de Chile, 2003, p.12).

Banco de Chile is a universal bank in its approach to the market and how it is
organised to serve it:

As a full-service financial institution the Bank provides, directly and
indirectly through its subsidiaries and affiliates, a wide variety of credit
and non-credit products and services to all segments of the Chilean
financial market. Our operations are organized in six main commercial
divisions: large corporations, middle market companies, retail banking,
consumer, international banking, treasury and money market operations,
as well as in eight non-banking financial service subsidiaries, namely,
Securities Brokerage, Investment and Mutual Funds, Collections, Retail
Sales, Factoring, Insurance, Financial Advisory, and Securitization
(Statement in item 4 Information on the Company in the banks web-
site).

Banco de Chile is a multi-segment and multi-product bank. It aspires to
be market leader in all products. It needs to be very efficient, and intends
to be so by making the most of synergies and taking advantage of
economies of scale. It must deliver all products and services demanded in
the market at competitive prices. All the products it sells are produced in-
house (or within its financial group) except for general insurance where it
distributes third party products, according to Alejandro Herrera.

It manufactures and distributes a broad set of products and services:

Our corporate banking services include commercial loans - covering
working capital facilities and trade finance - foreign exchange, capital
market services, cash management and non-credit services such as
payroll and payment transactions. We also offer a wide range of treasury
183
and risk management products to our corporate customers, and we
provide our individual customers with credit cards, residential mortgage,
auto and consumer loans as well as traditional deposit services such as
checking and savings accounts and time deposits (Statement in item 4
Information on the Company in the banks web-site).

The bank has international ambitions:

We offer international banking services through our branch in New
York, our agency in Miami, representative offices in Buenos Aires, So
Paulo and Mexico City and a worldwide network of approximately 1,000
correspondent banks (Statement in item 4 Information on the
Company in the banks web-site).

Mr. Granifo says that it tends to follow a conservative strategy in its exposure to
international credit risk, which is mostly aimed at supporting foreign trade
operations by Chilean companies (Banco de Chile, 2003, p.14). However, it
recognizes that its competitive advantage is in its local market. As Marcelo
Caracci mentioned in an interview, in the top Corporate sector, due to scale and
size, Banco de Chile only competes with Grupo Santander. He added that,
being a local bank helps Banco de Chile in several respects in the commercial
banking segments: (a) It is considerably more flexible in the solutions it provides;
and (b) It has a deep knowledge of the business networks and the people and
history behind each company.

Technology is seen as an important resource, judging by the fact that the CEO
devotes one full page of his seven-page overview of Banco de Chile During
2002 (Banco de Chile, 2003) to e-banking, where he says that:

E-banking has been one of the main driving forces of business growth in
all market segments serviced by our Bank, based on the permanent
development of new and enhanced technological solutions for
customers. (Banco de Chile, 2003, p.16).


B.3.3 Value Discipline of the Organisation.

The interviewees were first asked to rank, in descending order of importance, the
seven key dimensions of customer value defined by Treacy & Wiersema (1995).
In general terms, it can be said that Service Convenience and Service Reliability
score high in the opinion of all informants. However, as would be expected in a
large, universal bank operating in a competitive market, there are marked
differences of opinion which probably reflect the different role that each
interviewee plays in the organisation.

For Marcelo Caracci who is responsible for Operations & Technology, Price,
Product Quality and Product Features are essential for competing in the
universal banking market in Chile, where basic products, such as current
184
accounts and credit cards, are completely commoditised. Differentiation is given
by Service Convenience and Service Reliability which are the dimensions on
which the bank is working on now. In Mr. Caraccis view, Expert Advice and
Support Services are the future, but both Banco de Chile and the market are
still very far from that. Exceptions to this rule are corporate Clients, and high net
income individuals who are prepared to pay for private banking services.

Alejandro Herrera, who leads the Retail Banking division, agreed that Price is
the key dimension of customer value, but he did not mention Product Quality
and Product Features as significant. In Mr. Herreras opinion, Service
Convenience and Service Reliability are the dimensions that follow Price in
importance.

From the perspective of the head of small and medium enterprise (SME) banking,
Cristian Wolleter thinks Expert Advice is the most important customer value,
followed by Service Convenience and Service Reliability. According to Mr.
Wolleter, in this segment of the market it is essential to know the Client very
closely; it is not like in Personal Banking where credit is based on relatively fixed
salary income scoring, or in Corporate banking where there is more formal
financial statement information on which to base scoring. Technology does not
displace the account manager in the SME segment. These concepts can be given
a conceptual foundation based on Watkins (1998, pp.165-170) three service
archetypes framework that explains the transition towards knowledge intensity
and the relationship between Client Contact and Technology Based
Commoditisation. On the other hand, Price is not critical in this segment.

Finally, from a perspective which is more detached from day to day operations
and the strategic business units, Arturo Tagle and Ricardo Morales, in the
Planning function, believe that Service Reliability, Service Convenience and
Product Quality are the most important dimensions of customer value; on the
other hand, Price and Support Services are seen as the least significant.

All interviewees coincide that the value proposition to Clients of Banco de Chile
is Best Total Solution. By this, Mr. Caracci specified the best combination of
Channel, Product and Service. However, considering the importance given to
Price within the dimensions of customer value by several interviewees, it
appears that price should also be factored in to this definition.

Asked to rank the core processes of the organisation in descending order of
criticality, Mr. Caracci responded that it depends on the Client segment. For
Personal banking targeted on the upper segments of the population
(A,B,C1,C2,C3 segments), where product density is 4.5 products per Client, for a
Client base of some 500 thousand, the core process is Market Exploitation.
Mr. Herrera, who manages retail banking at Banco de Chile, supports that
Market Exploitation is important, but he assigns criticality to Client
Acquisition and Development. For enterprise banking, both Mr. Caracci and Mr.
Wolleter coincide that Customer Service Cycle is the critical process, but Mr.
Wolleter put emphasis as well on Client Acquisition and Development. For
Corporate banking (e.g. Infrastructure concessions, property developments, ).
185
Solution Development is the most critical internal process from Mr. Caraccis
perspective.

Closely related to the value proposition of Best Total Solution is the role of the
client manager. Mr. Caracci added that in Personal banking each client manager
serves 600 persons, while in enterprise banking the ratio is 120 Clients per client
manager, for A companies, and 300 Clients per client manager in the case of
B companies. A significant part of the banks earnings comes from the
enterprise segment, where there is a personalised plan for each company. The
combination of a strong brand, like Banco de Chiles, and a competent client
manager, leads to effective Solution Development, which is therefore a critical
process in this segment.

For those interviewees who are slightly more detached from the day to day
running of the business (Arturo Tagle and Ricardo Morales) End to End Product
Delivery is vital together with Client Acquisition and Development (Mr.
Tagle) and Design and Launch New Products (Mr. Morales).

Have these value propositions and core processes changes over time? Most
interviewees feel that priorities did change substantially with the merger, but not
since. For instance, Arturo Tagle mentioned that with the merger, critical
processes changed from Market Exploitation and Solution Development to Client
Acquisition and Development and End-to-End Product Delivery. The latter is
probably related to Ricardo Morales opinion that since the merger, pursuing
efficiency has become a priority. Mr Wolleter mentions that the enterprise market
segment he serves is probably the segment in the banking industry where the
effect of technology is less felt. It is still very much Client Manager based as
there is no easy way to automate credit scoring in this segment. Because of this,
the commoditisation process that has happened in the Retail and the Corporate
segments, has not happened in the medium and smaller enterprise market.


B.4. The Role of Technology: Past and Present.

B.4.1.Overview of the ICT Function.

In terms of technology strategy definition and planning, the bank does not have a
formal IT strategic planning process. ICT investments are decided by the IT
Committee, which meets weekly to review and prioritise the projects proposed by
the business units and the support units, in this way defining a realised strategy
(Mintzberg & McHugh, 1985). The IT Committee is chaired by the CEO, Pablo
Granifo, and has the following three permanent members: Jorge Diaz, Director;
Arturo Tagle, and Marcelo Caracci.

According to Mr. Caracci, large projects like NEOS are originated in the
Operations and Technology area, and are Management Driven, meaning that
they respond to the strategic plan of the bank. Smaller, business unit specific,
projects are initiated in several fronts. All projects have to go through the revision
and approval of the IT Committee as mentioned above. From the perspective of
186
other interviewees, the ICT function at Banco de Chile is a monopolistic provider
of services, which has high awareness of technical quality of the services it
provides, but is negligent of the cost factor. Traditionally, the role of IT was very
self-centred. Users would make their requests and IT would decide if those
requests were do-able or not. All applications were developed internally (even
their e-mail system). This had a big impact on operations, which became costly
and rigid. For example, time to market for new products was unacceptably high.
After the merger, it was decided to make drastic changes to this situation and the
NEOS project was launched. NEOS is seen by Mr. Morales as a survival project
for Banco de Chile.

Both managers of the strategic business units interviewed, retail banking and
enterprise banking, coincide in that ICT is an essential tool for improving
efficiency and customer service. Efficiency improvements are achieved by
increasing the sales-force productivity through putting Client information in the
hands of the Client Managers at the time of serving a Client, and by allowing the
sales-people to concentrate on sales execution rather than sales administration.
This, in turn, improves agility which has a positive effect on improving customer
service and therefore customer retention. However, from the interviews it
transpires that reality at Banco de Chile is that it is limited on efficiency. There is
still a heavy load of back-office work being carried out in the branch office
network (the commercial platform as Mr. Herrera calls it). There is room for
significant improvement on this front which would have a large impact if it is
considered that Banco de Chile has 185 branch offices, which added to the
offices of its lower-segment consumer loan brand, comes to a total of 224 offices.

There is a feeling in some of the interviewees, that the Bank lost its sense for
innovation in ICT a few years ago. One possible explanation given for this is that,
as a consequence of the year 2000 (Y2K) problem, the ICT people were so
worried and focused on solving the Y2K issue that they stopped innovating.
Another explanation given is that there really has not been much room for IT to
take a visionary role in the last few years, because there has been an almost
continuous freeze on new ICT initiatives. The roots of this freeze span over
several years and are due to the bank having embarked on major initiatives such
as: (a) Y2K; (b) An enterprise-wide reengineering project (referred to at the bank
as the McKinsey project); (c) The Banco Chile-Banco Edwards merger
process; (d) The NEOS project. Other informants commented that the IT area
traditionally lacked vision, that it was reactive to user demand, and that they were
used to setting their own priorities.

In terms of resistance to new initiatives on the side of the IT area of the bank,
most interviewees mentioned that there was not so much resistance as a lack of
resources to confront all the initiatives on hand. However, one of the interviewees
mentioned that it took IT a lot of time to make the mind-shift from owner of
ICT in the bank, to service provider of the strategic business units and support
units.

As for the cost-consciousness of the users of ICT, Ricardo Morales seems to
represent a general opinion when he mentions that:
187

Users know that significant IT requests must be supported by a business
case that would have to be approved by the IT Committee; there is
therefore a methodology in place, but its application is not always
rigorous.

Another interviewee mentioned that users are aware that it is essential to
differentiate value and value for money, but it is still quite common to incur in
significant expenses to develop products that later cannot be sold.

All interviewees coincided that intra-company integration of information is a big
problem at the bank. There is no central data repository and many management
information systems are local for each business unit, which leads to serious
problems at the time of sharing information across business units, or of producing
management and external reports. The banks staff spend a significant amount of
time cross-checking information from different sources, and consolidating it, at
reporting time. In terms of inter-company integration, very little has been
developed in spite of the fact that it would make sense to have the banks systems
connected with the Tax Authoritys, National ID Registry, credit-checking
organisations, etc.

In the opinion of the interviewees, since the merger, IT has been put at the
service of the business. An important objective of the NEOS project is to change
the ICT infrastructure and convert it from the present constraining factor to a
strategy enabling role. This also means that the ICT organisation itself should
change to become more service oriented.

B.4.2. The ICT Budget.

According to Mr. Caracci, the total ICT budget at Banco de Chile is
approximately US$ 29 million. More broadly, the total Operations and
Technology budget is US$ 100 million, which breaks down into US$ 45 million
on labour (some 3,000 people), and US$ 55 million on administration expenses,
infrastructure and outsourcing contracts (i.e. Transbank, Redbank, Servibanca).
Of the total labour expenditure, US$ 11 million (or 400 people) work in the ICT
function. Of the US$ 55 million on administration, infrastructure and
outsourcing, US$ 18 million are technology.

Of the US$ 29 million, US$ 10 million go to investments, while the rest (US$ 19
million) go to ICT operations and maintenance expense. The US$ 10 million
investments, in turn, break down into US$ 1 million on PCs and renovation; US$
2.5 million on ATMs (of which the bank has 800); and US$ 6.5 million go on
other new initiatives.

As can be seen in Table B.1, Banco de Chiles annual spend on ICT per
employee, at US$ 5,517.- is significantly lower than at US banks, where the ratio
of annual spend is US$ 9,500.- per employee. Another interesting ratio is that of
total annual spend on ICT to total assets of the bank. On this measure it can be
said that Banco de Chiles spend is very similar to the average US bank, at 0.24
188
percent. In terms of total ICT spend as a proportion of Total Operational Income,
at 5.1 percent Banco de Chile compares favourably with the average US banks
4.4 percent. Banco de Chile also compares favourably with the average US bank
on ICT spend as a proportion of Total Operational Expense, at 8.7 percent versus
7.4 percent.


Table B.1. Comparison of IT Spend in Banco de Chile versus US Banks.


Research done by Celent Communication, over a multi-year period from
financial year 2001 to 2004, with four Japanese Banks (Resona Holdings, UFJ
Holdings, SMBC and Mizuho Holdings), as cited by IBM (2004), found that ICT
spend goes through a hump during merger periods. The report does not indicate
how these findings are generalised or projected, but the report claims that during
a typical year ICT spend at Japanese banks amounts to 13 percent of operational
expense, while during a merger period that goes up to 19 percent. These figures
appear to be well above Banco de Chiles spend on ICT.

How does Banco de Chiles ICT spend break-down into maintenance and new
technology compare to US, European and Japanese banks? As can be seen in
Table B.2, the ratio of new plus replacement technology to total ICT spend for
Japanese banks is at 25.5 percent, and at US banks was at 18.9 percent in 2003,
and is projected to be at 26.6 percent by 2007. So, at 34.5 percent, Banco de
Chile is in excess of these values. However, Banco de Chile proportion of ICT
spend devoted to new initiatives is clearly below that at European Union banks,
which are presently at 38.3 percent and projected to be 40.8 percent by 2006.

It must be said that the real value of these benchmarks is questionable on several
definition grounds. What exactly is total ICT spend? It is clear that a hardware or
software purchase qualifies as ICT cost, but where is the line drawn between
technology and bank operations labour cost? Or, how is overhead cost allocated
at each bank? When looking at ICT spend per employee, what sense does it
make to compare this ratio for a bank that does everything in-house, with one that
out-sources everything it possibly can? Do all banks use the same definition for
Total Operational Income or for Total Operational Expense? This problem is
exacerbated by the fact that these benchmarks are mostly based on self-reported
TOTAL SPEND
RATIOS
US Banks 9,500 4.4 0.24 7.4
(IBMBanking Factbook, 2004
citing Datamonitor)
Banco de Chile 5,157 4.7 0.22 8.8
(Source data Banco Chile, 2004)
ITSpend:
Total Assets
(%)
IT Spend:
Total Oper.
Expense (%)
IT Spend per
Employee
(US$/Employee)
IT Spend:
Total Oper. Income
(%)
189
figures which, again, introduces subjectivity into the matter. And even if it were
possible to standardise these definitions, what does it really mean to spend more
than another bank on ICT? Is it a sign of efficiency and productivity, or is it a
symptom of wasteful overinvestment in ICT (Carr, 2003)? What sense does it
make to look at these ratios without doing a deep analysis of the strategic
positioning and value discipline of each bank?














190


Table B.2. Banco de Chile: Disaggregating ICT Spend into Maintenance and
New Investments.








US and EU (excluding new
entrants): Spend on IT

(based on IBM 2004 Banking
Factbook, citing Tower Group).

In US$ Billion Year Maint.
New
Tech. Replac. Total (New+Repl)/
New /
Total
(%)
Total (%)

US Banks 2003 27.4 3.7 2.7 33.8 18.9 10.9

2007 29.2 6.1 4.5 39.8 26.6 15.3


EU Banks 2003 65.2 26.2 14.3 105.7 38.3 24.8

2006 68.9 31.4 16.1 116.4 40.8 27.0



US$
Billion
Japanese Banks
FY
2004 8.8 3.0 N/A 11.8 25.5 N/A
(IBM Banking
Factbook, Jan 2004,
citing CELENT)


Banco de Chile 2003 19.0 9.0 1.0 29.0 34.5 31.0
(Self reported; in US$
Million)
191

B.4.3. ICT Management Principles

After many years of developing all its ICT applications in-house, in the past three
years the bank has moved to a more pragmatic position on the outsource-insource
debate. At present, there is a tendency to outsource new projects (outsource
development and infrastructure management). This is clearly the case with
NEOS, the banks most critical technology enabled business transformation
project.

Due to pressure for resources by NEOS, the bank is being pushed to outsource its
legacy systems as well. It has recently outsourced over 80 servers to EDS. The
banks idea is to move all this equipment to their providers sites, and this has a
considerable impact on expensive resources such as space. Through this contract
with EDS, the bank has made available for other uses, 90 m
2
of prime floor space
previously occupied by the servers. The bank plans to let this space as
commercial area. Mr. Caracci believes that outsourcing puts discipline into the
system, and will help overcome the present absurd situation in which bank
knowledge is in the application code.


B.5. Information Technology Investment Decisions.

B.5.1 ICT Decision Criteria
The question on which are the leading criteria for making ICT investment
decisions is clearly influenced by the position held by the interviewee in the
bank. For the people who come from Operations and Technology, or from
Planning, the key criteria are cost benefit analyses based on financial metrics
(i.e., return on investment, payback period) and on cost reduction opportunities.
However, it is interesting that all informants in this category recognised that these
criteria have limitations and other factors must be taken into account as well. For
instance, Marcelo Caracci stated that:

In large initiatives like NEOS, the bank does a business case (financial
cost-benefit analysis, RoI, NPV, IRR), but the real driver is meeting a
business objective: the bank had to improve its service to the customer.
Simple cost savings is not often a driver, although there is still a lot of
low hanging fruit in cost terms.

In a similar line of thought, Ricardo Morales mentioned that Cost Benefit
Analysis is the most important criteria; followed by Net Present Value for the
larger initiatives; and, finally, Necessity to increase Market Power through
product differentiation for revenue enhancing projects.

For those interviewees from the strategic business units achieving Market Power
through product differentiation is the most important criterion. This difference of
criteria depending on the position of the interview was made explicit by Arturo
Tagle when he says that:
192



the most important quantitative criterion is Payback Period, followed
by RoI, NPV, and IRR. If the project is proposed by Operations, the third
block of criteria are Cost Savings, Net cost savings and Avoided future
costs. If, on the other hand, the project is led by a strategic business unit,
Increase Market Power through differentiation and Increase Market
Power through ease of search become leading criteria.

In terms of the qualitative criteria for ICT investment decisions, most informants
mentioned Risk Reduction as a leading criterion. However, risk reduction means
different things to different people, depending on their view of the organisation.
For Alejandro Herrera:

Risk reduction is always qualified in terms of allowing for more business
in terms of credit check agility, or in terms of its impact on performance
of the banks loan portfolio.

For Arturo Tagle, risk reduction is a key decision criterion in that Security is a
key concern at the bank, particularly with regards to catastrophic show
stoppers. Marcelo Caracci also looks at risk reduction from an operational risk
point of view, but more as evolutionary improvements than as contingency
management when he states that:

The drive is to preserve present functionality and gain on stability. The
clear trends in centralisation of back-office [transactions] and of
outsourcing [of technology components] is based on this.

There is a wide dispersion of interviewee opinions on which are the following
most important qualitative decision criteria. However, there seems to be
considerable awareness that Strategy-Technology Alignment (i.e., alignment in
general; strategy to move into e-banking; necessity to increase market power
through product differentiation) is a significant criterion. Less so, but Reference
to what competitors are doing also appeared to be in peoples minds as a criterion
that is frequently applied for ICT investment decisions.

Most interviewees coincide in that decision criteria have changed since new
management took over after the merger, some two years ago. Arturo Tagle
mentioned that People have come to understand that fixing a bad ICT decision
takes a long time and a lot of resources. The opinion of another interviewee is
that:

In the past, ICT investments were decided by a disproportionately
powerful technology function of the bank, based on technological criteria.
Nowadays, it is the business units that make the decisions. Strategy, not
technology, drives decisions.

193

At some of the interviews it was implied that, to a certain extent, qualitative
criteria have taken pre-eminence over quantitative ones.

B.5.2 Analysis of Some Major ICT Decisions and their Impact on Market Power.

With the objective of understanding further the criteria applied by Banco de Chile
in its ICT decisions, and the impact of its ICT investments on the competitive
landscape of Chilean banking, a few recent projects are analysed. The two
managers interviewed who lead strategic business units, proposed discussing ICT
projects which were critical for their business unit and in which they were
personally highly involved: Alejandro Herrera talked about the Bank Assurance
Application project, and Cristian Wolleter about the Digital Client File project.
The remaining three interviewees address the NEOS project, which is in its early
phases of development but has the ambitious goal of transforming the whole bank
in the next three to five years.

B.5.2.1 Bankassurance Application: The objective of the project was to
streamline the sales cycle process of insurance products. The functional scope
was all the individual/personal insurance lines: Life, Home, Car, These
products are sold independently or, in many cases, attached to bank loans. As an
example of a deliverable achieved by this project, the health declaration of a life
insurance policy attached to a mortgage loan can be done, by the Client manager,
on-line with the insurance company. As a result of the project the insurance sales
cycle was fully automated, which was a quantum leap from the purely manual
processes that prevailed before the project. At present, Clients can conclude their
insurance coverage in one visit (although they are still not at the point of being
able to walk away from this single meeting with the policy under their arm - it is
sent to them shortly afterwards).

The project was highly demanding on both IT and Marketing resources. It was
developed with only internal resources (no third party providers), and its total
cost was some US$ 500 thousand. Alejandro Herrera was the project sponsor and
project leader, and was closely involved during the whole life-cycle of the
project.

The project was triggered by the need to grow the bank-assurance business.
Banco de Chiles market share was extremely low, and the quality of service to
Clients needed to be radically improved. The key decision criteria were
Increasing throughput and Improving service to the Customer.

In terms of results, the project had a visible impact on Clients. In Alejandro
Herreras words, this project has enabled salespeople to make the most of the
moment of truth with their Clients. This has led to a significant number of
Clients having voluntary insurance products with the bank. In terms of figures, as
a result of the project the share of personal banking Clients with voluntary
insurance products has gone up from 1 percent to 25 percent, in four years. With
respect to the internal workings of the organisation, More pro-active go-to-
194
market processes, followed by Streamlined processes leading to cost reduction
have been the main effects.

This project also had an impact on the competitive landscape of the Chilean
bank-assurance market. According to Mr. Herrera:

The effect on the industry was that Banco de Chiles rivals realised that
they had a new competitor. Banco de Chile went from a very small market
share to become number two in this market after Santander.

In Porters terms, this increased Rivalry amongst existing companies. It also
increased the banks market power which, in turn, translated into an Increase in
profits. In the final analysis, the project gave Banco de Chile competitive parity
with Santander and temporary competitive advantage with the rest of the banks.
Mr. Herrera considers the overall degree of success to have been High.

B.5.2.2. Digital Client File: The Digital Client File project was headed by
Cristian Wolleter when he led the Retail/Personal banking Division. Mr. Wolleter
was the project sponsor and chaired the Steering Committee of the project. It was
developed some three years ago. The objective was to computerise the Client
files. The importance of the project was given by the fact that:

It was the first case in which technological support was put into the
hands of the sales workforce, with a high expectation on achieving
considerable gains in speeding up loan approvals, and increasing
productivity. It was also a first approximation to the paperless office.

The project was triggered by the need to implement the banks strategic
imperative of strong growth in retail banking. There was a real need to
drastically increase the volumes of sales in the Personal banking segment and to
improve response time to Clients. So the key decision criteria for going forward
with the project were Increase capacity/throughput, Greater staff efficiency, and
Service to the Customer, in that order of importance.


In terms of outcomes, the project had a direct impact on Improved Client service
through having the Clients history on-line which enabled speeding up response
time. It also had a notorious impact on the internal workings of the bank. Mr.
Wolleter ranked the improvements on the internal workings in the following
order: More pro-active go-to-market processes, Better Client information, Better
management information and Streamlined processes leading to cost reduction.

The project also had an impact on industry structure (Porter, 2001). The bank was
not an innovator with this tool; its foreign competitors, such as the US and
Spanish banks operating in Chile, already had equivalent tools. But what this
project did was allow Banco de Chile to compete more effectively with them. In
Porters terms, it increased rivalry amongst existing companies. This, in turn, had
195
an important effect in allowing the bank to increase its market power. This
manifested itself, quoting Mr. Wolleter, in that:

The key effect is that it enabled an Increase in Market Share, which in
retail banking is followed by an Increase in Profits.

In terms of competitive advantage, it can be said that the project led to
competitive parity. Overall, in the opinion of Mr Wolleter, the project had a high
degree of success.

B.5.2.3. NEOS Project. This project is at its initial stages, but it is extremely
ambitious. According to Ricardo Morales, the bank has not undertaken anything
like it before. Its functional scope includes the core banking back office
processes, support processes, customer relationship management processes, data-
warehousing and analytical tools. It is a business transformation project enabled
by technology, and comprises the implementation of a diverse set of applications
such as a core-banking application (Flexcube), an ERP (Oracle Financials), a
CRM application (Siebel), and others. The first wave of deliverables will be in
the area of CRM, sometime in May or June 2004. According to Mr. Caracci, the
organisational changes in the bank to align it with the future business model that
resulted from the re-engineering project that preceded NEOS, are already being
implemented. This generates a considerable tension as it is not easy to make the
new model and the old tools work together.

The focus is on solving Client problems. Although the project has a heavy back-
office component, the vision of the banks managers is that the real goal is a
quantum improvement of the banks go to market ability. Arturo Tagle
emphasises the operational aspects of sales when he says:

It will enable the bank to be the market leader through controlling
Client turnover, Client acquisition, cross selling, and improving time-to-
market it will allow the bank to be more proactive in its go to market
and in the launching of new products. It will help improve Client service
through getting it right the first time. It will allow the bank to open
accounts much more quickly and therefore improve response time.

In the same direction but from a knowledge management angle, Marcelo Caracci
says that:

The bank has a good sales force, but the capacity is in the people, not in
the organisation. If you lose people, you lose real opportunities. This
project is a way of institutionalising knowledge. The three pillars for a
sales-person at Banco de Chile to generate business are: (a) his/her
personal network; (b) the banks systems; and (c) his/her pro-activity. The
NEOS project is about putting (a) into the system, and radically
improving (b)The bank needs more information on how they [the
salespeople] operate, amongst other things, to be able to compare
performances and pass on good practices from one another; in other
words, this means institutionalising pro-activity.
196





The importance of the project is reflected in the size of the budget. Just the core
system transformation part will be of the order of US$ 40 million; once the other
components are added, the budget exceeds US$ 70 million. And this amount
includes out-of-pocket expenses only, to which must be added internal costs.

Arturo Tagle, Marcelo Caracci and Ricardo Morales had highly relevant roles in
the reengineering process and the project definition that preceded the actual
launch of NEOS. At present, Mr. Tagle is the Project Director; Mr. Caracci is a
member of the Steering Committee; and Mr. Morales is the lead user of the
business intelligence component of the project.

The three interviewees coincide in that the project was triggered by the need to
change the model for servicing Clients. In Mr. Morales words:

The bank re-defined its strategy and found it had an insurmountable ICT
gap to be able to deliver that strategy. For example, in the past the bank
did very little Client segmentation; the new strategy demands strong
customer segmentation and this requires a lot of ICT support which
cannot be given by the present ICT infrastructure.

The bank has a very rigid cost structure and its leadership became conscious of
their lack of flexibility to launch new products and lower their costs, according
to Mr. Tagle.

In terms of which were the key factors taken into account at the time of making a
decision on the project, Mr. Morales explained that the decision on NEOS was
more based on the need for a platform for growth, than on the need for cost
reduction (although efficiency is also an important goal). The relative weight of
these two needs was, speaking loosely, 2/3 platform for growth and 1/3 cost
reduction. This is supported by Mr. Caracci who mentioned Service to the
customer, and Cost-Benefit Analysis, in that order, and by Mr. Tagle who says
that the key decision criteria were Improving the capacity to do business;
Improving cost flexibility; and Increase capacity/throughput. Other important
factors were Benchmarking with World-class banks and considering what
developments had there been in ICT since the bank stopped evolving in this area
in the late nineties.

Another factor mentioned by Mr. Morales as having been taken into account
when defining and deciding the NEOS solution, was that the bank did not want to
be on the cutting edge of technology, because that is too expensive. The bank
sees itself as a fast-follower on technology. Two other key criteria in the decision
were Net Present Value of the NEOS solution, and probability of success or
project risk management. With respect to the latter, the bank decided it did not
197
want to innovate on the technology front and the functional front at the same
time. There was a great internal debate on which dimension to tackle first, after
which it was decided that the bank would make the technological leap first, and
leave the functional improvements for a second stage. The core banking solution
was selected on this basis.

Although it is clearly too early to talk about results, in Mr. Tagles view the two
key outcomes of this project with respect to Clients, will be (a) to become a
Client centred bank through ease in managing information, and (b) to transform
their channels to become a sales generating platform rather than an after-sales
support infrastructure. In the same line of thought, Mr. Caracci mentions
Improved Client Service and the facilities for one-to-one marketing,
personalised for each Client. Mr. Caracci makes an interesting comment in the
sense that segmentation is necessary, but not sufficient the bank needs to go
further and make sure that the Clients perceive that they also benefit from this
relationship.

In terms of the internal workings of the organisation, Arturo Tagle appears to
represent the genenal opinion when he says that it will be Better Client
information and More pro-active go-to-market processes. It is anticipated that
significantly more transactions will be moved to self-service channels, so this
should have an impact on Streamlined processes leading to cost reduction. Mr.
Caracci adds that another outcome should be a process oriented organisation. He
would expect to see, as a sub-product of the project, documentation of how the
bank works, which should enable much better management processes, and much
better headcount management standards. This should help in giving each activity
importance according to the value it adds.

Opinions are divided on whether the project will have an impact on industry
structure. Mr. Tagle says that:

Banco de Chile is not good at exploiting economies of scale, but this
project should enable it to, and therefore raise entry barriers.

Mr. Morales believes that the bank is really only getting up to speed with the
market, so he is sceptical about it having an impact on industry structure. Mr.
Caracci thinks that there is awareness in the Chilean banking market that core
system transformations are necessary and must be confronted in the near future in
order to improve efficiency and customer responsiveness. Whether NEOS has
contributed to that awareness is a different matter but, in his opinion, it is
undeniable that all players in the Chilean market are following NEOS closely.

There is full agreement that the bank should achieve increased market power in
the form of a larger market-share and greater profits. According to Mr. Morales,
an important factor in achieving this is that the project is led by the business unit
leaders who have committed to deliver on these two fronts. Mr. Morales
rationale is supported by research that shows that ICT investments very rarely
lead to cost reductions they usually lead to a change in cost structure, but the
benefits are only realised if the strategic business units are successful in obtaining
198
more volume of business (Roach, 1991; Keen, 1991; Griffiths & Rememyi,
2003b). Marcelo Caracci is in sync with this view when he points out that market
share growth has a direct impact on increasing shareholder value; while an
increase in efficiency not necessarily has an impact on shareholder value. On the
basis of previous research (Treacy & Wiersema, 1995; Weill & Broadbent,
1998), it is contended that increase in efficiency leads to greater shareholder
value only if the value discipline of the organisation is operational excellence.

In terms of competitive advantage, Mr. Tagle believes that the bank will achieve
sustainable competitive advantage in some respects, and in others it will reach
competitive parity with Santander. With such a broad project, it probably does
make sense to look at it partially. Mr. Morales believes it will render temporary
competitive advantage, as does Mr Caracci, who adds that it should lead to
temporary competitive advantage but with a significant window of time. The
cultural changes that are bound to come with the project will be positive and,
added to the good brand-name of the bank, there should be a significant impact.

The projects and their strategic impact is summarised in table B.3.

CASE STUDY: BANCO DE CHILE
Project Effect on Five-Forces Degree of
INPUT Trigger OUTPUT & Competitveness OUTCOME Success
Bankassurance Strategic Product differentiation through Increased rivalry Increased market H
Application Imperative agility and comleting policy in among existing share which led to
to Grow single visit. companies// increased profits
in Insur. Competitive parity w/
& Improve Santander, and Tem-
Client Ser. porary Advantage w/
the rest.
Digital Client File Strategic Product differentiation through Increased rivalry Increased market H
Imperative agility and speed in loan among existing share which led to
to Grow approvals companies// increased profits
in Retail Competitve parity
& Improve
Client Ser.
NEOS Need to Product differentiation through Increase entry barrier Increase market N/A
change getting it right the first time' and through scale// share which will
model for improving 'time to market' Opinions vary betweenlead to increased
servicing competitive parity and profits
Clients sustainable compe-
titive advantage.


Table B.3. Analysis of the impact of key projects on the competitive landscape
(Banco de Chile).



199




B.6. Thinking on the Future Role of ICT

There was full agreement across all interviews that NEOS will fill the ICT
agenda at Banco de Chile for the next three to five years, and that it should solve,
in the shorter term, most if not all the transactional bottlenecks. After that, the
driving force for ICT activities will be Datawarehouse projects aimed at better
customer knowledge, and Datawarehouse projects aimed at improving
knowledge management, to enable, in Arturo Tagles words:

A better [fit] between Banco de Chiles value proposition and the
different market segments.

Alejandro Herrera was equally specific when he said that CRM Analytics would
dominate the next wave of projects.

In Cristian Wolleters view, those who predicted that the development of ICT
would lead to pure click banking services were proven wrong:

What ICT has done is given the Client more information, and easier
access (through more channels) to his/her funds. It has transferred a lot
of power to the customer which, in turn, has led to a strong
commoditisation of banking services, particularly in the Corporate and
Retail segments (e.g.: loan simulation tools, cost comparison, ). But it
has not changed, and will not change, the way of doing business.

This is supported by the academic literature which says that, in retail banking, the
majority of information systems investments are made to support products and
services that are commodities throughout the industry, and as information
technology is applied to more sophisticated tasks, mass service becomes
increasingly a commodity and incumbent financial services organisations are
forced to move into higher level service (Watkins, 1998; Griffiths & Remenyi,
2003).

Marcelo Caracci took a visionary approach when he stated that for the next 5 to 8
years the banks strong brand will give it a significant competitive advantage, but
that in the long term (15 years?) the banking world will operate around a small
number of global brands and that, in that scenario, Banco de Chile will have to
integrate with global networks. Mr. Caracci is convinced that the NEOS project
will have to be accompanied, or followed, by an institutionalisation of managerial
style, through the application of tools like balanced score card or structured MIS.
Successfully achieving this should increase the ease with which this integration
to global networks should take place, both from a technological and a managerial
point of view. These thoughts are very much aligned with the concept of Meta-
Capitalism proposed by Means & Schneider (2000).
200

All interviewees coincided in that BCI and Santander are their most formidable
competitors. Interestingly Alejandro Herrera, from his retail banking position,
also mentioned BancoEstado as being a sleeping elephant, but dangerous
because it could become a serious contendor if well run. Arturo Tagle also
included BBVA in his ranking of head-on competitors, and mentioned Citibank
and Bank Boston as players in certain market segments.

On how their competitors use technology, all interviewees mentioned that
Santander has a considerable advantage in the resources it has available, and the
capacity of developing economies of scale. Santander has leveraged these
advantages in becoming highly efficient, and this is putting a lot of pressure on
the market. An example of this is the way Santander has set up its back-office
processing of credit cards, with a shared service centre for Latin America located
in Nicaragua. On the other hand, Mr. Herrera mentioned that Santander gives two
important handicaps. First, it has a positioning disadvantage in that their strong
efficiency drive makes them look very arrogant, added to that people dislike the
attitude of the Spanish utility companies (CTC, ENDESA, ) and this has a
negative halo effect on the Spanish banks. This is not only true within the market
at large, but also within their own staff (i.e., people are not listened to; solutions
come from abroad to be implemented with no, or with minimum, localisation.).
Secondly, their rigidity of products and technological developments the fact
that they have to sell corporate products and implement corporate tools/solutions,
makes them out of synch with the market at times.

Points of view are slightly more divergent on BCIs ability to use technology.
Cristian Wolleter believes BCI are narrower than Banco de Chile in the segments
they serve, but they need to be watched they are effective with the use of
technology. Ricardo Morales thinks Banco de Chile will be ahead of BCI in
some two years time when NEOS starts delivering results, while Marcelo Caracci
stated that there was really no difference even before NEOS. Mr. Caracci also
thinks BCI will not do a NEOS type project because it would be too capital
demanding and BCI is more gradualist in its approach to change.

Arturo Tagle believes BBVA is a rival to respect in its management of
technology because of the ICT management and operational scale they are
developing through the implementation of a shared service centre based in
Mexico. With respect to Citibank, Mr. Tagle thinks that threat is not so worrying
because of Citis variability in its commitment to Latin America (i.e., Latin
America moves up and down in their market priorities).

Marcelo Caracci also gave an interesting insight on why the Chilean banking
system has achieved a high degree of efficiency (compared to other banking
markets, particularly in the region). Mr. Caracci says that the Chilean banks have
used technology intensively for many years, but the fact that Chile was a poor
country, made them very austere and therefore extremely careful at the time of
making ICT investment decisions:

201
This is a cultural characteristics of the Chilean business person, which is
also a recipe for good use of technology.

This is particularly so if Carrs (2003) view that the opportunities for gaining IT-
based advantages are already dwindling due to that information technology is
reaching advanced stages of build-out, is to be believed. As such, ICT is quickly
becoming an infrastructural technology, becoming costs of doing business
that must be paid by all but provide distinction to none.

Another issue brought up by Mr. Caracci is how the HR factor in a project like
NEOS is managed. According to Mr. Caracci, it is so obvious that changes
require a highly motivated and involved staff. But if it is so obvious, why is it not
normal practice to prioritise this aspect of projects? There is substantial academic
research that supports that ICT investments have a delayed effect on
performance, in some cases the time lag being up to five years, and that the way
to realise benefits early is through the development of people (Brynjolfsson,
1993; Hayes & Thompson, 2000; Griffiths & Remenyi, 2003). Mr. Caracci adds
that there is always the dilemma that these projects lead to down-sizing and lay-
offs, but on the other hand you need to manage the labour climate and motivation
until the end.

Reflecting on this after the interview, it can be said that the problem is one of
developing the banks people in parallel to the implementation of technology. As
mentioned earlier in this case, implementation of technology leads to automating
the delivery of services and products, which in turn leads to commoditisation of
those services and products. In order to be able to achieve market power, banks
need to move up the value chain, from mass service, to service shop to
professional services, applying Watkins(1998) three service archetype model in
the transition to knowledge intensity (see figure 2.7). To be able to do this, the
bank needs to invest in training its people to be able to perform the more
sophisticated tasks that comprise the higher level jobs. However, it is the
experience of this researcher through his participation in over forty technology
based business transformation projects, that training on these projects is focused
on how to use the new tools and how to perform the same task on the new
process design. Moreover, most of this training effort is applied only to those
people who are projected to be needed in the new organisation after the
applications are implemented! In other words, in order for these projects to build
value through the development of market power, there has to be a mind-shift
from training to education, where people are developed to move into the higher
level jobs of Watkins (1998) transition to knowledge intensity model.









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B.7. Conclusion.

Although a full analysis and interpretation of the evidence presented in this case-
study will be done in the cross-case study analysis in a later chapter, it is useful to
document a few initial reflections on the findings.

Banco de Chile is a universal bank; it is the second largest bank, with a market
share of around 20 percent in terms of deposits; it is controlled by Chilean
shareholders, and its shares/debt/ADR are traded on the Santiago, New York,
London and Madrid stock-exchanges. The new Banco de Chile is actually the
result of a recent merger of two banks, Banco de Chile and Banco Edwards. It is
organised around Client segments: Large Enterprises, Small Enterprises, and
Personal Banking. These three segments are managed on a relationship base
through Client managers. Banco Edwards remains as a brand aimed at high net
worth individuals. There is another BU targeted on massive, low income
individuals, which is managed on a product basis. The bank has an international
operation, with branch offices or representatives in the main financial centres,
mainly aimed at supporting its Chilean customers in their foreign investments
and foreign trade operations.

In terms of which are the dimensions of customer value offered by the bank, it
can be said that Service Convenience and Service Reliability score high in the
opinion of all informants, but there are differences of opinion which appear to be
related to the role played by each interviewee in the organisation. However, all
interviewees coincide that the value proposition to Clients of Banco de Chile is
Best Total Solution which is the best combination of channel, product, service
and price, and where the client manager plays a key role. Again, there are
differences of opinion on which are the core processes at the bank, but it can be
safely said that market exploitation, client acquisition and development, and
customer service cycle rank high on most managers priorities. These core
processes are what would be expected in an organisation following a customer
intimacy value discilpline model (Treacy & Wiersema, 1995).


In terms of technology strategy definition and planning, as happens in most
Chilean banks, Banco de Chile does not have a formal IT strategic planning
process. ICT investments are decided by the IT Committee, which meets weekly
to review and prioritise the projects proposed by the business units and the
support units, in this way defining a realised strategy. Notwithstanding, there
does not seem to be significant misalignment between corporate strategy and
203
technology. An explanation for this is that Banco de Chile is in the midst of a
major technology enabled business transformation project, called NEOS, which
covers most aspects of ICT at the bank, and therefore takes the role if ICT
planning. It must also be said that NEOS was organised in a professional and
disciplined way (by the book), where a lot of thought was given to the strategic
imperatives before embarking in organisational changes and implementation of
ICT tools. However, there is a risk that a project spanning several years like
NEOS, could lose touch with the banks business context without a strategy-
technology alignment process of the type Managing by Maxims (Weill &
Broadbent, 1998).

All interviewees coincided that intra-company integration of information is a big
problem at the bank. There is no central data repository and many management
information systems are local for each business unit, which leads to serious
problems at the time of sharing information across business units, or of producing
management and external reports. In terms of inter-company integration, very
little has been developed in spite of the fact that it would make sense to have the
banks systems connected with the Tax Authoritys, National ID Registry, credit-
checking organisations, etc.

In the opinion of the interviewees, since the merger IT has been put at the service
of the business. Before that, IT was very self-centred. An important objective of
the NEOS project is to change the ICT infrastructure and convert it from the
present constraining factor to a strategy enabling role. This also means that the
ICT organisation itself should change to become more service oriented.

The total ICT budget at Banco de Chile is approximately US$ 29 million. As
compared to US banks, Banco de Chiles annual spend on ICT per employee, at
US$ 5,517.- is significantly lower than at US banks, where the ratio of annual
spend is US$ 9,500.- per employee. The ratio of total annual spend on ICT to
total assets at Banco de Chile is very similar to the average US bank, at 0.24
percent. In terms of total ICT spend as a proportion of Total Operational Income,
at 5.1 percent Banco de Chile spends more than the average US banks 4.4
percent. Banco de Chile also spends more than the average US bank on ICT
spend as a proportion of Total Operational Expense, at 8.7 percent versus 7.4
percent. On the other hand, ICT spend at Banco de Chile is significantly lower
than at the average Japanese bank, which is around 13 percent of operational
expense in normal operations, and can go up to 19 percent at the time of a
merger.

Banco de Chiles break-down of ICT spend between maintenance and operation
on one hand, and new technology and replacement on the other, shows that
Banco de Chile spends more on the latter than US and Japanese banks, but less
than the European banks. This is significant because it is an accepted fact by
banking practitioners in Chile that the European banking model is more relevant
to Chilean banks than the American one. It is important to understand that
spending a high proportion of the ICT budget on legacy systems to support
continuous improvement of processes is a characteristic of an operational
excellence and not a customer intimacy model (Treacy & Wiersema, 1995, pp.
204
47-63). On the other hand, it must be said that the real value of these benchmarks
is questionable on several definition grounds like: What exactly is total ICT
spend? And also on what do ICT average budgets mean when they are averaged
across different sorts of banks, or even similar banks with different value
propositions to their Clients?

In terms of ICT decision criteria, Banco de Chile appears to maintain a good
balance between qualitative and quantitative criteria. However, there is a wide
dispersion of opinions on which are the critical criteria, and these opinions seem
to be strongly influenced by the position held in the bank by the person. This
could be revealing a shortcoming in a common ICT vision due to not having a
formal ICT-planning process. An annual process based on analysing the strategic
context of the bank, defining the business maxims, and from there the technology
maxims and more detailed requirements of ICT, in the Managing by Maxims
form prescribed by Weill & Broadbent (1998), would help overcome this
problem. This would also improve the effectiveness of the ICT Committee,
which would have a more clear agenda and would operate more as a team, with
fewer of the problems of a committee. Quoting Treacy and Wiersema (1995,
p.13):

In teams, every member focuses on a common goal scoring a
touchdown, dominating a market. In committees, members represent
different functions or businesses and act to protect the interest of their
spheres.

Most interviewees coincide in that the ICT investment decision criteria have
changed since new management took over after the merger, some two years ago.
Arturo Tagle mentioned that:

People have come to understand that fixing a bad ICT decision takes a
long time and a lot of resources.

The opinion of another interviewee is that:

In the past, ICT investments were decided by a disproportionately
powerful technology function of the bank, based on technological criteria.
Nowadays, it is the business units that make the decisions. Strategy, not
technology, drives decisions.

At some of the interviews it was implied that, to a certain extent, qualitative
criteria have taken pre-eminence over quantitative ones. This is supported by the
fact that there seems to be considerable awareness that Strategy-Technology
Alignment (i.e., alignment in general; strategy to move into e-banking; necessity
to increase market power through product differentiation) is a significant ICT
decision criterion.

Banco de Chile has success stories to tell in implementing ICT enabled solutions
to solve specific business problems, as the Bankassurance Application and the
205
Digital Client File projects show. These two projects have a common pattern.
Some of the characteristics of these projects are that they were led by the
strategic business units that needed them for their business, and they were
implemented by use of mostly internal resources. They were triggered by the
need to respond to a strategic imperative of growth in their specific areas. The
decision criteria applied to go ahead with these projects were to increase
capacity/throughput and improve service to the customer, in that order of
importance. The outcomes in terms of market power factors were product
differentiation through increased agility and response times. Neither project was
particularly innovative in the use of technology and, in terms of competitive
advantage, they gave Banco de Chile competitive parity with the market leaders.
The impact on industry structure was, in both cases, increased rivalry between
existing companies. The two projects had a visible impact on Clients in the form
of better Client service, and on the internal workings of the bank in the form of
more pro-active go-to-market processes and streamlined processes leading to
cost reduction. Finally, in terms of outcome both led to increased market share
which enabled increased profits, as is the norm in retail banking, and both are
considered to have had a high degree of success. This pattern should be taken
into account at the time of making decisions on future projects.

The NEOS project moves away from the pattern that Banco de Chile appears to
manage with ease, in several respects. NEOS is not aimed at solving a specific
business problem, but is much broader in scope tackling a major enterprise-wide
transformation. It is led by the strategic business units, but is executed through a
myriad of external providers. It is triggered by a need to change the whole model
for servicing Clients, with a heavy load of back-office work, rather than the need
for supporting growth in a particular Client-interface area of the bank. The
decision criteria used were similar to the previous projects, namely increase
capacity/throughput, improve service to the customer and cost-benefit analysis as
was the fact that the bank does not intend to be on the cutting edge of technology
but go for proven solutions. (It is remarkable that, in spite of the latter and that
the project decisions are led by the businesses, when selecting the core-banking
application the bank decided to make the technological leap first, and leave the
functional improvements for a second stage). In terms of impact on industry
structure, this project is aimed more at raising barriers to entry through exploiting
economies of scale, something the bank has not traditionally been comfortable
with, rather than increasing rivalry amongst existing companies. All these
differences stress that NEOS is well out of the comfort zone of the bank, and
therefore requires extraordinary management attention.

As for the potential for converting ICT investments into shareholder value, the
previous statement is reinforced by a value discipline analysis. The Bank-
assurance and the Digital File projects, insofar as they were aimed at solving a
client service issue, were strongly aligned with the customer intimacy value
discipline. On the other hand, with its heavy back-office component in the early
stages, the NEOS project is a transaction system that supports product delivery
and basic service cycle, which are key value builders in operational excellence
focused banks but not in customer intimacy organisations (Treacy & Wiersema,
1995, p.52 and p.130). Citing Carr (2003) again, in a commoditised ICT situation
206
as there appears to be in banking, there is a serious risk of overspending on ICT,
which destroys, not builds, value.

A key success factor for NEOS, as opposed to the other smaller projects, lies in
how the HR factor is managed. How can the bank manage the labour climate and
motivation up to the end, fending off the distracting perspectives of rampant
downsizing and major lay-offs? One way of achieving this is for the bank to plan
to move up the value chain, from mass service, to service shop to professional
services, applying Watkins(1998) three service archetype model in the transition
to knowledge intensity. To be able to do this, the bank needs to invest in training
its people to be able to perform the more sophisticated tasks that comprise the
higher level jobs. In other words, there has to be a mind-shift from training on the
use of tools and new procedures, to education on the new opportunities, where
people are developed to move into the higher level jobs of Watkins (1998)
transition to knowledge intensity model.
207

APPENDIX C.

BANCO SECURITY: A NICHE PLAYER THAT
INTENDS TO BE A FAST-FOLLOWER ON
TECHNOLOGY.


C.1. Introduction: History of the Bank.

Banco Securitys genesis can be traced back to 1981 when Banco Urquijo of
Spain founded Banco Urquijo de Chile. Six years later Security Pacific Corp.,
subsidiary of Security Pacific National Bank of Los Angeles, California, acquired
100 percent of the shares of Banco Urquijo de Chile, whose name was changed to
Banco Security Pacific. In 1991 Security Pacific sold a controlling interest in the
bank to a recently created, locally owned, financial Group, called Grupo Security.
The banks name was subsequently changed to Banco Security. In 1994, Bank of
America, which had acquired Security Pacific National Bank, sold its remaining
40 percent holdings to Grupo Security which then became 100 percent owner of
the bank. In July 1995, Grupo Security went public and was listed on the Chilean
Stock Exchange where it began trading shortly afterwards (Grupo Security, 2003,
pp.12-13).

Thus Banco Security has followed the reverse path to the consolidation and
growing foreign ownership of banks in Chile, which has been a marked trend
since 1990 (Griffiths, 2004). Interestingly, close to 69 percent of Grupo
Securitys shares are held by 12 shareholders who are a mix of qualified bankers,
business people and professionals with a long track record in the Chilean
financial services sector,
which shapes a very unique conjunction of common long-term
objectives, generating the proper incentives that ensure an agile and
efficient organisation as well as long lasting relationships with Clients
(Grupo Security, 2003, p.18).

Banco Security is now the main holding of Grupo Security which also holds
companies operating as insurance carriers (life and non-life), mutual funds
managers, stock brokers, insurance brokers, investment managers, advisors in
securitisation and other financial services issues. Apart from this string of
financial services firms, Grupo Security also holds service companies such as
travel agents and property brokers. Interestingly, in the last few years the Group
has set up a series of shared services companies whose aim is to give back-office
support to the core firms: Invest Security does the accounting, internal auditing,
and corporate image services; while Virtual Security was created in 2002 to give
data processing and application development and maintenance services to the
Group (Grupo Security, 2003, pp. 28-33). As part of the group, therefore, Banco
Security can offer its Clients a complete basket of financial products, and can
obtain efficiencies through shared services.
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The importance of the role of local banks in an economy like Chiles that needs
to grow at rates substantially higher than the developed world, is two-fold
(Stiglitz, 2002). First, they make credit available to sectors not served by
multinational banks. International banks expertise and information base
lies in lending to their traditional clients which are multinationals, large local
companies, and high net-worth individuals. Second, they are more sensitive to
what is called window guidance, that is subtle signals from the Central bank to
expand credit when the economy needs stimulus, and contract it when the
economy is overheating (Stiglitz, 2002, pp. 69-70). With respect to the former,
Banco Security is not making much of a contribution because it is focused on
precisely the segments normally tackled by the international banks. If, as Stiglitz
(2002) states, American banks can provide greater security for depositors than
do small local banks (unless the local government provides deposit insurance),
how is it that a small bank like Banco Security can survive by competing with the
international ones on their own turf?

From the interviews held with executives at Banco Security and other banks,
including the multinational ones, two explanations can be given for this. On the
deposits side, the general opinion is that the Chilean banking authority
(Superintendencia de Bancos e Instituciones Financieras SBIF) sets very
stringent banking rules and is thorough in ensuring that all banks comply with
them, which leads to a highly stable system and one in which the Chilean public
has a lot of trust without discriminating between international or local banks.
This is supported by the fact that the average BIS capital adequacy ratio of
Chilean banks is 13.9 percent (November 2002), well above the legal minimum 8
percent. What is more, all banks in the Chilean system exceed 10 percent BIS
capital adequacy ratio (Banco Security, 2003, pp. 14-15). On the credit side, the
greater flexibility of Banco Securitys internal rules in comparison with the
multinational banks, allows it to offer more tailor-made solutions to its Clients.
This flexibility in business rules, together with its shareholders and managers
intimate knowledge of the Chilean business environment, should give it an
advantage when the need and opportunity of moving onto other segments of the
economy arise.



C.2. Sources of Evidence.

Several sources of information have been used in order to triangulate evidence:
a. Interviews: Semi-structured in-depth interviews, as opposed to open ended
ones, were performed because this is a multiple case study and otherwise
there is a risk of collecting a wealth of information from individually
valuable interviews that are then difficult to generalise from (Remenyi et
al., 1998; Miles & Huberman, 1994, p.17). An interview guide (see
Appendix A) was developed on the basis of the four aspects of the research
209
question, and of the conceptual framework indicated in the Research
Proposal and refined in Griffiths & Remenyi (2003). All interviews were
held during November and December, 2003.
b. Documents: Analysis of multiple documentary sources such as the reports
produced by the banking authorities (SBIF); annual reports of Banco
Security and of its parent company, Grupo Security; and a corporate image
research report commissioned by the bank to an independent research firm
called Punto de Vista. Through these documents it was possible to
understand the banks history and to have access to strategy statements and
performance measures.
c. Group discussion: a meeting with the top-management team (attended by all
the interviewees) was held on 12
th
April, 2004, where the findings of the
case study were presented and discussed.
According to Gummesson (1991, p.21, cited by Remenyi et al., 1998) access or
the ability to get close to the object of study in order to find out what is
happening, is the researchers biggest problem. In this case, considering that
access to informants at the highest levels in the bank was obtained and that,
following Bannister (2001, p.149) each interviewee was asked if they would
suggest additional interviewees or other sources of information, there is
confidence in the validity and relevance of the sources of information.
As specified in the Research Proposal, interviews were held with the Managing
Director, the Operations Manager, the Planning Manager, the Market Managers,
and the Information Technology Manager. The people interviewed, with a brief
description of their background, are the following:
Ramon Eluchans, General Manager. Ramon has been with Banco
Security since 1988, and was appointed General Manager in 1995. He has
been in banking for over 25 years, mostly in the commercial and business
development areas. From the interview it became clear that Ramon feels
completely at ease with technology issues, and as a member if the
Technology Committee is closely involved on technology decisions.
Margarita Hepp, Advisor to the General Manager. Margarita reports
to Ramon and has been in the same position within the bank since 1995.
One of her main roles is coordinating annual strategic plans and budgets.
Prior to that Margarita was with the IMF in Washington, and held
positions within the Chilean Ministry of Economy and Planning, at which
time she was heavily involved in the Pension System reform.
Christian Sinclair, Commercial Manager. This position at Banco
Security entails responsibility for all the go to market units of the bank:
the three market segment divisions, marketing, technology-based
channels, and products. Christian has been in banking for some twenty
years, the last eleven of which have been with Banco Security. In the past
five years Christian has been involved on ICT decisions affecting the
Commercial area of the bank, as a user. He is a member of the
Technology Committee. Christian reports to Ramon Eluchans.
Arturo Kutscher, Operations Manager. Arturo has been in his present
position with the bank, where he oversees all the back-office core
processes, and all the back-office support processes except HR, for three
years. A peculiarity of Banco Security is that ICT does not report to the
Operations Manager as in most other Chilean banks. However, Arturo is
210
involved in all ICT decisions as a member of the Technology Committee.
Prior to Banco Security, Arturo managed an ICT firm that developed and
sold an anti-fraud solution for the health insurance industry, for two years.
Before that, Arturo spent 14 years working for banks in their technology
area. Arturo reports to Ramon Eluchans.
Eduardo Herrera, ICT Manager. In 2001, when Virtual Security was
created as the in-house provider of ICT services to all the subsidiaries of
Grupo Security, Eduardo was brought in to do the ICT planning for the
Group. In May 2003, Eduardo moved to his present position at Banco
Security. Eduardo does not have prior banking experience; his career
started in the early nineties when he had an IT development position at
Apple Chile for five years, and then worked for other industries in
planning, budgeting and financial responsibilities. Eduardo chairs the
Technology Committee at Banco Security, and reports to Ramon
Eluchans.
Marcial Letelier, Electronic Banking Manager. Marcial has been with
Banco Security for ten years, where his whole career has developed in the
commercial areas, in particular corporate banking. Prior to that, Marcial
worked for one of Banco Securitys main rivals for a year. For the last
four years, Marcial has been the banks e-Banking Manager and, as such,
has been deeply involved in all ICT decisions concerning channels.
Marcial reports to Christian Sinclair.
Manuel Widow, Head of Research. Manuel joined Banco Security in
early 2003; before that, he was a Credit Analyst with one of Banco
Securitys main rivals. At Banco Security, Manuel is heavily involved on
budgeting and planning, on management information, and on reporting.
With regards to ICT, Manuel is a member of the Technology Committee
and is presently a member of the selection committee for the new core-
banking system. Manuel reports to Margarita Hepp.

It must be pointed out that all interviews were individual, except for one which,
due to limitations in time availability on the part of the interviewees, was held
jointly with Ramon Eluchans, Margarita Hepp, and Manuel Widow. The
experience from that interview is that a joint interview has an advantage in that it
keeps the informants more objective, as their opinions are being scrutinized
on line by people who know the context very well; on the other hand, it is
possible that richness of opinions is lost, as the informants tend to give their
opinions in a more generally acceptable way.










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C.3. Strategic Positioning of Banco Security.

C.3.1. Banco Security and its Competitive Context.

As mentioned in Chapter 3 and Griffiths (2004), the Chilean banking system
comprised, at December 2002, twenty eight institutions as a result of having
followed the global trend of rapid consolidation. Taking an exchange rate of
Chilean pesos 695.28 to the US dollar, at end of 2002, the total assets in the
system amounted to some US$ 120 billion (SBIF, 2003), of which Security bank
represented just under 2 percent (Banco Security, p. 52; SBIF, 2003). Having less
than US$ 5 billion in assets, it is classified as a small bank on international
standards, according to criteria adopted by the Tower Group (IBV, 2003). In
terms of loans, the total Chilean banking system amounted, at the time, to US$
45.6 billion (SBIF, 2003), of which US$ 1.2 billion (Banco Security, p.52; SBIF,
2003) are managed by Security, which represents 2.6 percent of the market. The
total amount of deposits in the Chilean banking system at December 2002 were,
approximately, US$ 41.1 billion (SBIF, 2003) of which US$ 1.1 billion were
with Banco Security (Banco Security, 2003; SBIF, 2003), which represents a 2.7
percent market share.

On the revenue diversification front, it was mentioned in Chapter 4 that the
Chilean banking system also followed the global trend of increasing fee-based
income as a proportion of total income. In the twelve year period from 1990 to
2002 fee-based income, for the banking system as a whole, grew from 6 percent
to 18.8 percent of total income. Interestingly, Banco Security fell well behind that
growth trend and by the end of 2002 it lagged its competitors with a contribution
of fees to income in the region of 7 percent. To Banco Securitys credit, it must
be pointed out that in a preliminary analysis of correlation between the level of
fee income and profitability did not give any significant impact.

In the strategic group analysis of the Chilean banking system performed in
Chapter 3, it becomes clear that Banco Security operates in the same strategic
group as BICE and Corpbanca. The general conclusion of that analysis is that a
banks performance is related to how well it competes with the banks in its own
strategic group. The fact that Banco Security, which appears to be a secondary
member of that strategic group, is outperformed by Corpbanca in terms of
profitability, falsifies McNamaras proposition that secondary firms within a
strategic group outperform the core firms. An explanation for this is given in
terms of deposit profiles and differences in income structure.

One area where Banco Securitys results are remarkable is in productivity. At
December 2002 Banco Security had a total headcount of 314 (SBIF, 2003) or 315
(Banco Security, 2003, p.6). In terms of loans per employee, Banco Securitys
productivity is US$ 3.90 million/employee (Banco Security, 2003, p.6) as
compared to US$ 1.24 million / employee for the industry as a whole (based on
data from SBIF, 2003).
212



Banco Security had, at end of 2002, a capital adequacy ratio of 11.6 percent
(Banco Security, 2003, p.38), significantly above the minimum requirement of 8
percent, but below the Chilean banking system average of 13.9 percent as given
above.


C.3.2. Banco Securitys Business Strategy

Within an industry that has been characterised by rapid concentration
and numerous mergers, leading the system to be dominated by a handful
of large-sized banks, Banco Security stands out as a different, mid-sized
bank that operates in a clearly defined niche (Grupo Security, 2003,
p.25).

Its target markets are large and medium sized companies together with a select
group of high-income individuals. Accordingly, the bank is organised along three
divisions, namely, Corporate Banking, Personal Banking, and Investment
Banking.

The Corporate Banking Division, which is the most traditional part of the bank,
represents 85 percent of the total US$ 1.2 billion in loans (December 2002) and
is organised along three groups: (i) Large Corporations, which focuses on large
private and state owned companies, defined as those with sales in excess of US$
25 million; (ii) Mid-size Companies, which focuses on companies with annual
turnover between US$ 5 million and US$ 25 million; and (iii) Leasing Module,
which provides leasing services to these market segments (Grupo Security, 2003,
p.25).

The Personal Banking Division, which targets high income individuals (this
category is not defined in the Annual Report), accounted for 14 percent of loans
at December 2002 and counted on some 9,100 Clients holding current accounts.
It serves its Clients through a Preferential Banking unit and a Private Banking
unit, and offers personal banking and mortgage products. As opposed to many
other markets in the world where private banking selects their prospective Clients
on the basis of their net worth, in Chile this is done on the basis of income
(Grupo Security, 2003, pp.25-6).

The Investment Banking Division, which operates both locally and in the
international markets, explores foreign financial markets and obtains funds for
financing mainly foreign trade operations, where Security holds a leadership
position in Chile (Grupo Security, 2003, p.26).




213



C.3.3 Value Discipline of the Organisation.

The interviewees were first asked to rank, in descending order of importance, the
seven key dimensions of customer value defined by Treacy & Wiersema (1995).
This gave place to interesting discussions where two factors that differentiate the
bank from its competitors surfaced consistently. One was the flexibility the bank
has for tailoring its products, and combination of products, to its customers
needs. This was mentioned as particularly important to corporate and enterprise
Clients, and usually translated into that the critical dimension of customer value
is Service Convenience, which was mentioned as the top ranking dimension by
three informants, and second by another. In one case Product Quality and in
another Product Features came out top, but when these replies were analysed in
detail, it was clear that the concept of flexibility was behind those answers. The
other factor that was mentioned as a differentiator is the quality of the people at
Banco Security (i.e. all their Client managers are university graduates). Closely
related to this is that three informants placed Expert Advice as the third most
important dimension of value, particularly important for corporate Clients. The
least mentioned dimension of value is Price; one informant mentioned that in the
Chilean system today it is almost impossible to differentiate on price, and that
Banco Security has a good price:service quality ratio. Another interesting aspect
that came up in the interviews is that the banks internet innovation thrust is
aimed at personal banking, not at enterprise Clients. For enterprises, tailor made
products are not internet based.

In terms of the Value Proposition of the bank to its Clients, there was all round
coincidence that it is Best Total Solution. One informant mentioned Best Total
Cost as their secondary value proposition; nobody mentioned Best Product. This
is consistent with the previous discussion on dimensions of value.

With reference to the core processes of the organisation, Customer Service Cycle
had the highest number of mentions: it was placed top by two interviewees,
second by one, third by one, and fourth by another. This was followed by
Commercialisation, in turn followed by End-to-end Product Delivery. The least
mentioned were Design and Launch new Products and Market Exploitation. That
Customer Service Cycle and Commercialisation are the leading critical core
processes is consistent with the dimensions of customer value and the value
proposition. It is surprising that Market Exploitation should not rank further up in
a bank that focuses on a small number of Clients and tailor-makes solutions for
them. End-to-end product delivery, more related to a critical process in
operational excellence/best total cost organisations, ranks surprisingly high for a
best total solution organisation. However, if the responses are analysed in detail,
it can be seen that it is the informants from operations and technology that rank it
high, and this could be that they are biased towards the processes closer to them.

Closely related to the fact that the bank offers Best Total Solution is that it has 90
Client managers, which is a significant number for a bank of its size. Each Client
214
manager serves from 50 to 60 enterprise Clients, or 290 to 350 personal banking
Clients (these figures were cross-checked with several interviewees).
Incidentally, it is a characteristic of the Chilean banking system that personal
banking Clients are assigned to a Client manager; in most other markets this is
not the case and only those Clients who qualify for private banking get that
treatment.

In terms of efficiency, there have been improvements in the last few years, but
Banco Securitys efficiency ratio (defined as the ratio of administrative expenses
to gross profit) at 55.2 percent (Banco Security, 2003, p.13) is clearly not at the
forefront of the market. This is reasonable for a bank that is small and focuses on
Best Total Solution rather than operational excellence.

Recently, a local market research firm, called Punto de Vista, was engaged by
Banco Security to carry out a study to understand the publics perception of its
corporate attributes. Results are presented for nine attributes, on a perceptual
scale that goes from minus 100 to plus 100. The nine dimensions are size,
growth, prestige/goodwill, market leadership, modernity, agility, price
convenience, service quality, and trustworthiness. Results were presented
divided in two categories of informants: clients and non-clients. The study shows
that perceptions scored highly positive on trustworthiness, quality of service,
agility and modernity. Perceptions scored highly negatively on market leadership
and size. Perceptions are neutral on growth and market convenience. None of
these results are surprising and have a good fit with the results of the interviews.
What was unexpected is that prestige/goodwill scored only moderately positive;
it would be interesting to research further why this is so.


C.4. The Role of Technology: Past and Present.

C.4.1. Overview of the ICT Function.

In terms of technology strategy definition and planning, the bank does not have a
formal ICT Strategy/Planning process; these activities are done through the
operation of its IT Committee which meets every two weeks, and analyses,
prioritises, signs-off and fits into a time-line, all the different ICT initiatives that
come from the Business Units and Support Units. The IT Committee is chaired
by Eduardo Herrera (IT Manager) who prepares the meeting agendas, and is
conformed by Ramon Eluchans (General Manager), Arturo Kutscher
(Operations), Christian Sinclair (Commercial), Manuel Widow (Planning) plus
occasional members according to the specific agenda of the day. There is also a
Group Executive Committee on IT that meets periodically, which has a
representation of bank executives. The latter is more an information-sharing and
progress-tracking body, than a decision making one. Most technology initiatives
appear to respond to user demand which should respond to the strategic plans of
the organisations. The managers of Security Bank consider that they are not
leaders, but fast followers, in terms of use of technology. Thus, it appears that
most ICT initiatives are management driven (responding to the strategic plan of
the organisation) or response to competitor developments.
215

With respect to the execution of the technology function, it is fully outsourced to
Virtual Security. According to Grupo Security (2003, p.33), Virtual Security was
created as a separate company within the Group in early 2002, based on the IT
Division of Banco Security. The purpose of this move was to set up a shared
services company that would concentrate Grupo Securitys technology assets in a
specialised unit that could manage data processing, application development and
maintenance, and hardware and software management, exclusively for the Grupo
Security companies. Virtual Security was set three objectives as follows: (a) To
establish a common and organised technological platform that gives quality and
secure services to the companies of Grupo Security; (b) To contribute in
increasing the value of each Grupo Security company through the adequate use of
technology; and (c) To help each company of the Group to improve their
customer satisfaction through the use of technology. During 2002, service level
agreements, which include a transfer pricing structure that allow financing
Virtual Securitys operation, were subscribed. That same year, all Banco
Securitys ICT assets and people were transferred to Virtual Security.

According to information picked up during the interviews, Banco Security found
that its needs were not being responded to as promptly as required, and this led it
to reinstate the position of IT Manager within its own structure. This position was
filled by Eduardo Herrera who moved from Virtual to Banco Security in early
2003.


C.4.2 The ICT Budget.

Banco Security has a strict policy of preserving its income statements bottom
line, so that its ICT amortisation costs are embedded in its ICT budget. This
means that new projects can be tackled only once old ones are fully amortised.
The banks 2004 budget is Chilean $ 3.4 billion (US$ 5.76 million), of which
Chilean $ 1.4 billion are amortisation, which leaves Chilean $ 2.0 billion for
current expenditure. According to an analysis of the IT budget held at one of the
interviews, the Ch$ 2.0 billion break down as follows: software maintenance is
some Ch$ 630 million; equipment replacement Ch $ 44 million; network and
communications, Ch$ 113 million; outsourced services take up Ch $ 1,1 billion
(of which Ch$ 900 million go to Virtual).

As can be seen in Table C.1, Banco Securitys annual spend on ICT per
employee, at US$ 10,616.- is higher than at the average US banks, where the
ratio of annual spend is US$ 9,500.- per employee. Another interesting ratio is
that of total annual spent on ICT to total assets of the bank. On this measure it
can be said that Banco Securitys spend is lower than the average US bank, at
0.20 percent versus 0.24 percent. In terms of total ICT spend as a proportion of
total operational income, at 5.4 percent Banco Securitys is higher than the
average US banks 4.4 percent. Finally, Banco Securitys ICT spend as a
percentage of total operational expenses is significantly higher than the average
US bank, at 10.8 percent versus 7.4 percent.

216



Table C.1. Comparison of ICT spend in Banco Security with US banks.

Although practitioners like to compare themselves to other organisations, it must
be said that the real value of these benchmarks is questionable on several
definition grounds. What exactly is total ICT spend? It is clear that a hardware or
software purchase qualifies as ICT cost, but where is the line drawn between
technology and bank operations labour cost? Or, how is overhead cost allocated
at each bank? When looking at ICT spend per employee, what sense does it
make to compare this ratio for a bank that does everything in-house, with one that
out-sources everything it possibly can? Do all banks use the same definition for
Total Operational Income or for Total Operational Expense? This problem is
exacerbated by the fact that these benchmarks are mostly based on self-reported
figures which, again, introduces subjectivity into the matter. And even if it were
possible to standardise these definitions, what does it really mean to spend more
than another bank on ICT? Is it a sign of efficiency and productivity, or is it a
symptom of wasteful overinvestment in ICT (Carr, 2003)? What sense does it
make to look at these figures without doing a deep analysis of the strategic
positioning and value discipline of each bank?

Re-classifying the budget figures and making a few assumptions, it is possible to
disaggregate the budget into operations, maintenance and new initiatives, and
compare Banco Securitys ICT expenditure with international standards.
Software maintenance (Ch$ 630 million) is a maintenance cost; equipment
replacement (Ch$ 44million) is an investment; network & communications (Ch$
113 million) is an operational expense; of the outsourced services, Ch$ 200
million are an operational expense, and the Ch$ 900 million with Virtual Security
are split between operational expenses, maintenance expenses and investment in
new developments. If it is assumed that the Ch$ 900 million split up into 500 for
new developments and 400 for operations and maintenance, total investments
amount to approximately Ch $ 544 million (44+500).The fraction of the IT
budget devoted to new technology is therefore 544/2,000 or 27.2 percent.

This compares favourably with US banks, according to IBM (2004) citing Tower
Group and Celent Communications, which says that banks of similar categories
(i.e., Cross Product Distributor, Niche Distributor, and Niche Manufacturer)
TOTAL SPEND
RATIOS
US Banks 4.4 0.24 7.4
(IBM Banking Factbook, 2004
citing Datamonitor)
Banco Security 10,616 5.4 0.20 10.8
(Source data SBIF, 2003)
IT Spend:
Total Oper.
Expense (%)
ITSpend:
Total Assets
(%)
9,500
IT Spend:
Total Oper. Income
(%)
IT Spend per
Employee
(US$/Employee)
217
spend between 20 percent and 25 percent of their IT budget on new technology
(see Table C.2).



US Banks: 2003 Spend on IT (based on IBM 2004 Banking Factbook, citing
Tower Group and Celent).


In US$ Billions Maint. New Total
New/Total
(%)

National and Regional: 11.15 1.38 12.53 11.01

Universal: 9.85 1.22 11.07 11.02

Cross Product Distributor: 4.80 1.20 6.00 20.00

Niche Distributor: 3.94 0.98 4.92 19.92

Niche Manufacturer: 3.96 1.32 5.28 25.00




Table C.2. ICT Spend on New Initiatives vs. Maintenance of Legacy Systems in
US Niche Banks.

On the other hand, Banco Securitys breakdown of new technology to total ICT
expense is very much in line with Japanese banks, who spend between 24 percent
and 28 percent according to a four-year study (2001 to 2004) obtained from the
same source citing Celent Communications. However, Banco Securitys spend on
new technologies as a proportion of total spend, compares negatively with
European banks, as can be seen in another study of US and EU banks by IBM
(2004) citing Tower Group. According to this study, European banks spend 38
percent of their IT budget on new and replacement technologies. This study
foresees a significant growth (from 18.9 to 26.6 percent) in new technology
spend by 2007 in US banks, and a smaller increase from 38.3 percent to 40.8
percent in European ones by 2006 (see Table C.3). It must be noted that all the
figures cited here are based on information provided by banks.



US and EU (excluding new entrants):
Spend on IT
218

(based on IBM 2004 Banking Factbook, citing
Tower Group).

In US$ Billion Year Maint.
New
Tech. Replac. Total (New+Repl)/
Total (%)

US Banks 2003 27.4 3.7 2.7 33.8 18.9

2007 29.2 6.1 4.5 39.8 26.6


EU Banks 2003 65.2 26.2 14.3 105.7 38.3

2006 68.9 31.4 16.1 116.4 40.8


Table C.3. ICT Investments vs. Maintenance of Legacy Systems in US and EU
Banks.



C.4.3 ICT Management Principles

The opinion of Banco Securitys management is that the bank is pragmatic about
the outsourcing/insourcing of ICT services discussion: All activity which is not a
differentiator (i.e., back-office processes that are transparent to the Client) are
liable to be outsourced. ICT and operations outsourcing opportunities are
analysed on a case by case basis, performing a cost-benefit analysis which takes
into account the expected quality of service. Technically speaking, it could be
said that all technology services are outsourced to Virtual Security, except for the
position of ICT Manager. However, if Virtual Security is considered an internal
resource, and a comparison is carried out with US, European, and Japanese
banks, it is found that the proportion of IT spend on internal resources is
considerably higher at Banco Security than at US and European banks, and
moderately higher than at Japanese banks (see Table C.4). If compared to similar
types of banks in the US, Banco Securitys use of internal resources is
significantly higher than niche manufacturers and cross product distributors, and
of the same order of magnitude as niche distributors (sees Table C.5).






219

ICT Spend Categories US EU Jap Security
Percent

Total Internal 37.0 43.0 48.2 50.6


Hardware 17.0 21.0 20.7 2.2

Software 14.0 14.0 11.8 31.5

Outsourcing 21.0 8.0 19.3 15.7

Prof. Services 11.0 15.0 0.0


Total External 63.0 58.0 51.8 49.4


Table C.4. ICT spend break-down for US, EU and Japanese banks compared to
Banco Security



Type of Bank Currency Internal External Total
Internal
(%)
External
(%)


Cross Product
Distributor:
US$
Billion 2.7 3.3 6.0 45.0 55.0

Niche Distributor:
US$
Billion 2.6 2.4 4.9 52.0 48.0

Niche
Manufacturer:
US$
Billion 2.1 3.2 5.3 40.0 60.0

Banco Security
Ch$
Million 1013.0 987.0 2000.0 50.6 49.4

Table C.5. ICT spend break-down of US niche banks compared to B.Security.
220

This issue was brought up in the interview with the ICT Manager who mentioned
that, in his experience, quite often business cases do not justify moving to an
external provider. In his view, the reason for this is that very often outsourcing
vendors offer more quality of service than strictly needed.

Their mistake is that they do not spend enough time to understand the
present level of service, and analyse what changes in that respect, if any,
need to be made to cover the users requirements.

They just go off and offer what they see themselves as a good solution but which
will always be over-priced because it exceeds the users requirements. Of course,
it can be speculated that vendors are driven towards this for two reasons. In the
first place there is a practical reason, which is that the outsourcing service
vendors want to make life easier for them once they take over the operation, by
applying more resources. Secondly, there is a psychological reason. Because the
vendors are professionals of the outsourced function, errors admissible for the
banks internal operations are not admissible for them; and because they perceive
that the banks staff will be significantly more demanding on them than they are
on their internal work-force. Does this create a grey zone where outsourcing
deals have no chance of being closed?

Although the role of ICT in making operational processes more efficient came up
in one of the interviews, in general, the banks business managers coincide in that
the key role of ICT at Banco Security is in supporting the relationship with its
Clients. For achieving this role, ICT needs to be well aligned with the business
strategy. ICT is especially critical in deploying the banks strategy in the personal
banking market, where it relies heavily on Internet services. That the internet is
important amongst channels is supported by the fact that 62 percent of their
Clients transact with the bank, via Internet, at least three times per month; and 30
percent of their Clients say they only operate via Internet. Banco Security
managers believe this is a good thing, but realise that it can make their
relationship with Clients cold or detached; their challenge is to humanise this
relationship for which the bank has a large number of highly educated Client
Managers as mentioned above.

In spite of the importance given to technology, the strategic business units do not
see their ICT area as visionaries; they see them as reactive to the business units
demands. The business units see IT as receptive to their demands, but quite
limited in their capabilities for responding. Two possible causes were detected for
this. First, the bank has problems with its legacy systems due to disorderly
growth. When the bank was small, it had a reasonably good ICT infrastructure,
but it grew in an unstructured way leading to multiple databases and to
applications that do not talk to each other. Some efforts have been made to
develop links between the different subsystems, but this has not been successful.
The second reason cited, is that the IT people in the bank have a low level of
Client orientation, meaning that they are more focused on hardware and lines of
code than on the needs of the final Client. The consequence of this is that Banco
Security may have good information on its products and on its Clients, but this
221
information is not integrated (i.e., data silos), which makes information
management cumbersome and highly time-consuming.




C.5. Information Technology Investment Decisions.

C.5.1 ICT Decision Criteria
There was absolute coincidence across all interviewees that the leading
quantitative criteria for deciding on ICT investments is a cost benefit analysis
based on financial measures such as return on investment, net present value, and
internal rate of return. All informants also coincided in that the following criteria
in importance are those related to controlling costs, such as cost savings and
avoidance of future costs. In a third level of importance, some interviewees
mentioned increase in market power through ease of search with an aim at
increasing profits, and another mentioned increasing throughput.

All interviewees also coincided on the leading qualitative criterion in their ICT
decisions, which is simply compliance with mandatory changes resulting from
SBIF instructions. As mentioned earlier, SBIF puts a lot of pressure on the banks
operating in Chile to ensure a stable financial system. One of the interviewees
added that, however, the importance of this criterion is diminishing in favour of
other criteria. Beyond that, opinions diverge and appear to be influenced by the
position of the informant. For those involved in the overall management and
planning of the bank, improving management information systems is the
following most important qualitative criterion. For those in the commercial areas,
it is improving customer service and responding to customer demand. For those
closer to operations, it is risk reduction and greater staff efficiency. All
interviewees mentioned reference to what the competition is doing among their
four top criteria, which is consistent with the fact that they define themselves as
followers on technology. Considering that internet banking appears to be so
developed in the personal banking segment, it is quite surprising that strategy to
move to e-banking is not a significant criterion; enquired about this, one of the
interviewees mentioned that, true as it may be that Banco Security is strong in e-
banking, this does not respond to a formal strategy.

The opinion of all interviewees seems to be that the process and criteria for
making ICT decisions have changed in the last few years, particularly since the
bank decided to move into retail personal banking. There has been more
involvement of the banks top management in the decision processes, and
customer relationship management has moved up in the priority scale.

C.5.2 Analysis of Some Major ICT Decisions and their Impact on Market Power.

With the objective of understanding further the criteria applied by Banco Security
in its ICT decisions, and the impact of its ICT investments on the competitive
landscape of Chilean banking, a few recent projects were analysed.

222
C.5.2.1 Treasury System: The bank implemented a new Treasury Management
application known as BAC, developed by a local technology firm called
SONDA. The banks management believes it was an important project from
several perspectives: (a) it decreased the banks exposure to operational risk and
to market risk; (b) it improved the banks information integration; (c) it improved
the banks compliance with regulation; and (d) it helped improve efficiency. The
investment was relatively low, at US$ 300 thousand out-of-pocket expenses, plus
internal costs. The project was triggered by a need to control risk in an operation
that had grown beyond its means, but the decision to go ahead was based on a
quantitative cost-benefit analysis considering variables such as return on
investment, net present value, and internal rate of return. The project had no
obvious impact on Clients, but the bank would not have been able to grow in
treasury services without it. With respect to the internal workings of the
organisation, the project increased capacity and streamlined processes which led
to cost reduction. The project had an impact on industry structure in the form of
eliminating entry barriers to expanding treasury services, but there was no
obvious reaction from the competition. In terms of market power, the project did
have an impact through differentiation, due to a better product based on better
risk management. The outcome was an increase in market share, helping Banco
Security keep its leadership position in this service. In terms of competitive
advantage, the banks management believes this project gave it at least a
temporary competitive advantage, and possibly a sustainable one. The banks
managers also believe this was a highly successful project.

C.5.2.2 Peoplesoft for support processes: Peoplesoft was implemented to
streamline and support the following processes: General Ledger, Procurement
and Accounts Payable, and Asset Management. The scope of the project was not
just Banco Security, but the whole Grupo Security. The importance of the
project, at the time the decision was made, was given by the fact that it would
help streamline the support processes, and it would help improve the financial
accounting (i.e., chart of accounts) and the managerial accounting (i.e., cost
centre structure). The original budget, at the time the decision was made, was
US$ 500 thousand out-of-pocket, plus internal costs. The project was triggered
by the need to have a common accounting tool across the whole Group, and the
facilities for performing group-level consolidation and delivering better
management information were key criteria in selecting the solution. The project
was transparent to Clients (meaning it had no impact on them) but, in terms of the
internal workings of the organisation, the main impact was better management
information followed by intra-organisation integration of information. As
expected, the project had no impact on industry structure or outcome in terms of
market power. Neither did it have any direct impact on competitive advantage,
although better management information may have had an indirect impact.

According to the banks management, the project had a low degree of success.
The time and effort overruns have made it excessively costly. The project,
originally planned to have a duration of one year, lasted for three years. Also, the
fact that the scope of the project did not cover the processes end-to-end meant
that parts of the legacy systems had to be left in place, which made the project
lose effectiveness due to problems of co-existence of two, or more, systems.
Another shortcoming is that the management information system is not as good
223
as planned because the extraction of information is cumbersome. Finally, the
project was to introduce significant changes in the way people performed their
work, but the project did not include a change management initiative, which is
seen as a mistake. It was simply assumed that Banco Security staff would learn
the new way of operating without change management assistance.

C.5.2.3 Cash-Management System: The objective of this tool is to offer cash-
management services as third party providers to their Corporate, large and mid-
sized enterprise Clients which, as mentioned earlier, represent 85 percent of
Banco Securitys income. Typical services include payroll, accounts payable
management, and social security (welfare) payments. Management considers this
an important project because (a) the processes it supports are targeted on the
banks key client segment; (b) most, if not all, Banco Securitys competitors who
serve this segment of the market already offered this cash management service;
and (c) this service anchors Clients it makes them generate strong links with
the bank. The implementation cost was of the order of UF 10 thousand (at some
US$ 25 per the UF, the unidad de fomento is a non-monetary instrument for
commercial transactions which remains from the days of uncontrolled inflation
an anachronism) plus a monthly payment of Ch$ 5 million (US$ 8,000.-) and
monthly internal costs of some Ch$ 18 million (US$ 30,000.-) as the operation of
the application is outsourced. Two factors triggered this project. On one hand, it
was the need to catch up with the competition, who was already offering this
service in an efficient way. On the other, it was the need to generate fee-based
income. Banco Security is an almost exclusively interest-based bank, as can be
seen in the overview of the industry (Chapter 3), having one of the lowest ratios
of fee income: total income in the Chilean market. The service this project
supports does not only generate fee-based income, but it also increases the
average balance in their Clients current account and it helps Banco Security
become their Clients prime bank.

The main decision criteria for going ahead with this project, was reference to
what competitors are doing. The main output with respect to Clients was
improved client service, which translates into an increase in market power
through service differentiation. With respect to the internal workings of the
organisation, this project enabled more pro-active go-to-market processes (it
made it easier to acquire new Clients and retain extant ones) and better
management information. The project eliminated entry barriers into the cash-
management service space, and gave Banco Security competitive parity with the
leaders. Nowadays, these services are given for free by banks, in an aggressively
competitive landscape. The outcome of the project was increased profits through
fees on cash management services and increased balances in current accounts,
which do not pay interest in Chile. Banco Securitys management consider this
project to have been highly successful.

C.5.2.4. ASP Protestos project: The objective of this project was to develop a tool
that would assist the Account Managers decide what cheques should be rejected,
prior to the clearing house process. The previously existing process was totally
manual and it absorbed a lot of the Client Managers time, so the project was
triggered by the need to free Client managers time. All ninety Client managers
are users of the system. There was no significant up-front investment as the
224
whole process was outsourced, and the application was developed by the
clearing-house service provider, COMICROM. The decision to go ahead with the
project was based on a cost-benefit analysis , where the cost of the project was
offset by the Client managers having more time to serve their Clients (and,
hopefully cross-sell and up-sell to them) and bringing in more commissions from
rejected cheques, as they can now do this more quickly and accurately. So the
output of the project in terms of clients was better Client service and with
reference to the internal workings of the organisation, streamlined processes
leading to cost reduction, better management information, and intra-
organisational integration of information. The project had no impact on the
industry structure, nor any measureable outcome in terms of market power. In
terms of competitive advantage, it gave Banco Security competitive parity. The
banks management believes the degree of success of the project was, at the end
of the day, high, but not without problems during the implementation. At one
point the project was actually stopped, but later resumed and completed. Their
vendor, COMICROM, had a very positive attitude and was critical for the final
success of the initiative.

The strategic impact of these projects is summarised in table C.6.



SECURITY BANK CASE STUDY
Project Effect on Five-Forces Degree of
Trigger OUTPUT Success
Treasury Operational Increased Mkt. Power thru' Differ Eliminated entry Enabled Increased High
Management Risk (because better prod. Thru better barrier to treasury Market Share
BAC (SONDA) risk management) services/Temp. Comp. Adv
PeopleSoft for Poor Improved management infor- No impact nor reac- Efficiency in conso- Low
Support Functions Management mation and streamlined back- tion from competitors lidating information
Information office processes
Cash Management Catch-up Improved Client service and new Eliminated entry Profit growth through High
Services with products to offer barrier to cash- increasing fee-based
competition management services income and increa-
Competitive parity. sing current account
balances
ASP Protestos for Need to Increased Market Power thru' No impact/ Potentially increase High, after
Cheque Clearing free-up differnentation because Client Competitive parity profit thru' cross- and struggle
Process Client Ma- Managers spend more time with up-selling
nagers' Clients
time
INPUT (Industry context) OUTCOME

Table C.6. Analysis of some major ICT investments at Banco Security.


C.6. Thinking on the Future Role of ICT

There was full agreement across all interviews that the next major wave of ICT
projects in Banco Security will be in the transaction systems to support core
processes space. More specifically, the banks senior management believes that
the bank will undertake a major core-banking system transformation project in
225
the very near future. However, there are differences in their vision of the scope of
the project. While two interviewees stated that the project should focus on the
strictly back-office processes at the first instance, one interviewee stated that
there should be a parallel datawarehouse project aimed at improving internal
controls; and another thought there should be a parallel datawarehouse project
aimed at improving customer knowledge. The interviewee who appears to be
most ambitious for the initial phase believes that the core system transformation
project should include the client service platform (i.e., branch office application)
and customer analytics information.

All interviewees also agree on that BICE is Banco Securitys main competitor,
followed by Corpbanca in enterprise banking and Bank Boston in personal
banking. One of the interviewees also mentioned Banco de Credito e Inversion
(BCI), Banco Santander and Banco de Chile as universal banks of much larger
size than Banco Security, but that also compete with Security in its specific
market niches.

In terms of how they use technology, the conclusion from talking to senior
management at Banco Security is that they perceive BICE as also quite behind on
ICT, but marginally better than themselves. However, it must be pointed out that
this conclusion is not based on hard facts but on their perception from informal
contacts with their colleagues at BICE. Although both banks are followers on
ICT, another generalised impression is that Banco Security is a considerably
more concerned about technology than BICE is, and that the ICT transformation
being planned at Banco Security is significantly more aggressive than any
changes being planned at BICE. Therefore, Banco Security management foresees
Banco Security leapfrogging BICE on the ICT front in the mid term.

With respect to Corpbanca, there is agreement that Corpbanca is further ahead
than Banco Security on technology infrastructure. Banco Securitys management
perceive that Corpbanca has invested heavily on a new core-banking system,
which gave them a lot of trouble to implement, but that now appears to be
stabilised. At one of the interviews it was mentioned that Corpbanca has better
information, but that it is doubtful whether they have the capabilities to exploit it.
Other conclusions on how the competition uses ICT, is that technology is more
critical to Bank Boston than it is to Banco Security, due to Bostons deep
involvement in retail banking. It is admitted that Bank Boston has better ICT
infrastructure and better integration of customer information. Concerning BCI, it
was mentioned that they are very good at aligning technology with business
strategy.

Four interesting discussions, on issues not specifically tackled in the interview
guide, took place throughout the interviews. The first is that there is no doubt that
ICT has become more and more critical in a banking operation, but that this must
be kept in balance with the human side of relationships with Clients. Banks must
be careful not to go too far on technology and get out of sync with what Clients
are willing to accept. ICT based relationships are more exact, but they are more
rigid as well. Personal relationships are very important for Banco Securitys
Clients. ICT investments and people/talent investments must go hand in hand.
ICT should be put in to support the simple products (which quickly become
226
commodities), and people should be trained to move further up the value chain to
the lengthier, deeper, advisory based contacts with their Clients. The theoretical
underpinning for these concepts is given by Watkins (1998).

The second discussion concerned co-sourcing. One of the informants stated that
changing the core banking system is almost a made decision; the question now is
how it will be executed. There is concern that it is a significant investment for
Banco Security to confront on its own, so they are exploring the possibility of
setting up a 3
rd
party company to give Banco Security and other small to mid size
banks, the core back-office processing services. This 3
rd
party provider would be
a joint venture with other similar size banks in a co-sourcing arrangement. A joint
project to design the business and operating model is being carried out with two
other banks, BICE and Banco Internacional. They see substantial advantages in
doing it in that way. The researcher mentioned that, in his experience with similar
projects, the critical point is agreeing on governance of the organisation.

Having reflected on this issue and discussed it with the banks senior
management team after the interviews, it is clear that Banco Security must put a
lot of thought into its core-system decision if it is to convert it into shareholder
value. A core-banking system is a transaction system that supports product
delivery and basic service cycle, which are key value builders in operational
excellence focused banks but not in customer intimacy organisations (Treacy &
Wiersema, 1995, p.52 and p.130). Several banks in Chile have already made (i.e.
Santander-Santiago, Corpbanca), or are in the processes of making (i.e. Banco de
Chile), significant investments to implement updated core banking systems,
which have as a consequence become part of the infrastructure and, as such, are
becoming costs of doing business that must be paid by all but provide distinction
to none, citing Carr (2003). In this situation, according to Carr (2003) there is a
serious risk of overspending on technology, which is a way of destroying, not
building, value.

The third issue of discussion referred to inter-organisational integration. The
discussion centred on the opportunities for banks to become part of the supply-
chain of their small and medium enterprise (SME) customers. The bank already
offers multiple services around payments, such as payroll and accounts payable
management, and on managing their SME customers cash investments, but little
is done on the collection side, other than factoring services.

227
Electronic Invoice Presentment and Payment (EIPP) is the process by which
companies present invoices and make payments to one another through the
Internet, allowing businesses to view, dispute, approve and pay their bills
(Fairchild, 2003; Griffiths & Remenyi, 2003b). Initial research in EIPP and
banking (Fairchild, 2003) showed that the key EIPP drivers in the current
banking environment are: (a) The possibility for the bank of new revenue from
the increased volume of electronic payments; (b) The ability to become billing
service provider (BSP) and charge for an added-value service; and (c) The ability
to capture new corporate customers and cross sell additional bank solutions.

Asked on the potential for EIPP to assist banks in this area, one of the informants
believes that the market is not quite ready yet, but that it could help develop
synergies with their factoring and other services and competencies. One of the
issues or problems to overcome is that in Chile companies see invoices as a
source of credit by delaying payment (e.g., a thirty day invoice is probably paid
in 60 days, and this is an accepted business practice in the market). The
introduction of EIPP with banks acting as billing service provider (BSP) could
help put discipline into the business community, and it would also help banks
position themselves as the end-to-end cash managers of their SME and corporate
Clients. In the opinion of the banks management, the role of ICT is essential for
this initiative to materialise.

After the interviews, an analysis was made of the status of EIPP in Chile, and it
was found that there is already a 12-month old pilot project sponsored by the
countrys Internal Revenue Service (SII) and carried out by eight locally
operating companies. The SII estimates that by mid-2004 close to one third of all
invoices, that is over 10 million invoices per month, will be filed electronically
(Chile Investment Review, October 2003, citing Business News Americas,
October 16
th
). Although this statement appears over-optimistic given the reason
stated by Banco Security above and that, according to the same article, 40 percent
of Chiless 300,000.- plus companies do not have computers, let alone internet
connections, it is probably a mistake to believe that the market is not quite ready
yet. This is particularly so given that Banco Security targets on the top tier
companies that will be leading the EIPP adoption process.

Finally, with two of the interviewees, the application of digital signature to
enabling unlimited-amount electronic transactions, was discussed. In many
countries, including Chile, the passing of legislation to regulate digital signatures
opens a whole new area for banks, particularly in their electronic business. To
quote Arnfield (2003) on developments in other parts of the world:

There has been talk for years about combining smart cards and PKI
[public key infrastructure] to secure electronic transactions, but relatively
little action. Now the UKs banking clearinghouse is giving the concept a
big lift.

As opposed to the tradition PIN, digital signatures are legally binding. They
enable the concept of virtual branch office which gives a lot of banking
228
flexibility to enterprise clients, particularly valued by SMEs (Griffiths &
Remenyi, 2003b).

Banks will offer new features, such as online cheque and statement
images, account alerts and pre-filled application forms, to achieve their
core objectives, but customer expectations will drive up overall
standards according to Tower Group, quoted by Yahoo! News (2003).

There is agreement at Banco Security in that the concept of Virtual Branch Office
(VBO) is an ideal solution for a bank focused on enterprise banking and like
Banco Security which has only 13 offices - with a small brick-and-mortar branch
network, but the banks Board is very quantitative-justification oriented, and does
not accept creative initiatives without a convincing, hard business case. How do
you do that with a VBO application which is aimed at improving Client service
and at strengthening links with the Client?













5.7. Conclusion.

Although a full analysis and interpretation of the evidence presented in this case-
study will be done in the cross-case study analysis in a later chapter, it is useful to
document a few initial reflections on the findings.

(a) Banco Security is a Client centred bank which focuses on a niche of large
and mid-size enterprises, and high net income individuals. As such, it
intends to have an organisation capable of developing customer intimacy,
which means knowing their customers needs almost before they know
themselves. It is not a great product innovator; it struggles to keep abreast
of the competition on products. Its strength lies in designing and
implementing tailor-made solutions for its Clients; these solutions are
based on in-house products and third party products. It therefore
prioritises flexibility over standardisation, and that is reflected in that
Banco Security is not a leader on efficiency ratio. Citing Treacy &
Wiersema (1995) variety kills efficiency. They are not cost leaders and
their Clients know that; however, the Chilean market is not used to paying
large cost-premiums for service, so Banco Security has to keep its costs in
line. Both its staff and its Clients are highly educated people, which is
229
why the bank wants to move up to people-based professional services
(i.e., high contact time, high customisation, high discretion, front-office
focused, process based), rather than equipment/technology based mass
services (i.e. low contact time, standardisation, low discretion, back-office
focus, product based)(Watkins, 1998).
(b) There is a remarkably high coincidence in opinions of the top
management team on what are the dimensions of customer value offered
by Banco Security, on the value proposition to its Clients, and on its value
discipline of customer intimacy. With some minor exceptions, there is
also good coincidence on what is the operating model of the organisation.
However, some very clear discrepancies showed up when analysing the
qualitative criteria applied to making decisions on ICT investments. The
criteria stated by all interviewees clearly prioritised the issues closer to
their own business unit or function in the bank.
(c) There is coincidence across all interviewees that the overriding
quantitative criteria for deciding ICT investments are a cost-benefit
analysis based on financial metrics, cost savings, and avoidance of future
costs. These criteria seem to be more aligned with an operational
excellence than a customer intimacy operating model.
(d) When analysing the ICT spend, the proportion of the budget devoted to
new initiatives is 27 percent, which is more than US banks do. However,
it is an accepted fact by banking practitioners in Chile that the European
banking model is more relevant to Chilean banks than the American one,
and European banks spend in excess of 38 percent on new initiatives.
Again, spending a high proportion of the ICT budget on legacy systems to
support continuous improvement of processes is a characteristic of an
operational excellence and not a customer intimacy model (Treacy &
Wiersema, 1995, pp. 47-63).
(e) All informants coincide in that changing the back-office core-banking
system is a short-term necessity for Banco Security. However, in spite of
the fact that the bank appears to be in advanced stages of the process for
making major decisions on the solution, there are significant
discrepancies on what should be the functional scope of the project. This
can be interpreted as another sign of misalignment between strategy and
technology.
(f) That a customer intimacy model bank, targeted on enterprises, and with
a branch office network that is 25 times smaller than that of the market
leaders, has trouble in justifying a Vitual Branch Office application
because it cannot set up a hard business case, is again telling of a strategy-
technology misalignment.
(g) It is highly probable that the misalignment issues raised in the preceding
paragraphs (b) to (f) arise from the shortcoming of not having a formal
ICT-planning process. An annual process based on analysing the strategic
context of the bank, defining the business maxims, and from there the
technology maxims and more detailed requirements of ICT, in the
Managing by Maxims form prescribed by Weill & Broadbent (1998),
would help overcome this problem. This would also improve the
effectiveness of the ICT Committee, and make it operate more as a team
with fewer of the problems of a committee. Quoting Treacy and
Wiersema (1995, p.13) In teams, every member focuses on a common
230
goal scoring a touchdown, dominating a market. In committees,
members represent different functions or businesses and act to protect the
interest of their spheres.
(h) From a preliminary analysis, which should be followed by a more in-
depth study, of the four ICT projects in section C.5, the following
conclusions can be drawn: (i) All these projects are aimed at eliminating
entry barriers into sub-segments of the market, or at achieving
competitive parity with the leading banks; this supports the statement that
Banco Security is a follower on technology. (ii) Banco Security seems to
be more successful in small projects aimed at solving client-service
problems (Treasury Management, Cash Management Services) than at
larger projects aimed at solving back-office issues (Peoplesoft and ASP
Protestos). (iii) The outcome of projects focused on solving Client-service
issues has been increased market power in the form of greater market
share or better profits. (iv) When working on back office process systems,
Banco Security has benefited from using trusted vendors in an
outsourcing relationship.
(i) Banco Security relies considerably more on internal resources for solving
its ICT issues than the average US or EU bank. On the other hand, it has
created Virtual Security to manage ICT for all companies in the Group,
which are of different nature and sizes and have different key success
factors than does Banco Security. According to Schulman et al. (1999)
there are three types of function that are most appropriate for
implementing in a shared service organisation: (i) Those that require high
volume, routine processing; (ii) Those that require specialised skills; and
(iii) Those that are aimed at producing enterprise-wide information.
Grupo Security should ask itself if it is really developing synergies across
companies. Might it not be better to focus Virtual Security on financial
accounting, managerial accounting, procurement, call centres, HR, and
outsource more specific functions like back-office core-banking
processing to a third party provider?
(j) There are ICT projects where Banco Security has overlooked the change
management component. There is a compelling literature that points to
the fact that one of the important barriers to realising the benefits of ICT
investments is the time-lag for the organisation to learn the way of doing
business with the new ICT tools (Brynjolfsson, 1993).
(k) It is interesting to see how Securitys management view of their
competition coincides with the conclusion of the analysis of the Chilean
System, performed in Chapter 3, based on strategic group analysis.
(l) Although it does not appear to have had a significant impact on the final
results, a lesson from this exercise is that more time at the interviews
should have been spent on the definition of terms, such as the different
dimensions of customer value and the designations of processes.







231

APPENDIX D

BANCOESTADO: AN INSTITUTION COMMITTED
TO BANKING-FOR-ALL APPLIES TECHNOLOGY TO
FULFIL ITS MISSION.



D.1. Introduction: History of the Bank.


Since its creation in 1953, BancoEstado has been an important player in the
Chilean financial services system and, for the best part of that period, a key
instrument for the governments of the day to execute economic and
developmental policies. If there is one thing that sets BancoEstado apart from the
rest of the banks in the system, it is that all Chileans (especially those who are not
served by the private banks) have access to its services, support and advice
(Friedmann, 1993).

Banco del Estado is a state owned bank that resulted from the merger of four
financial institutions: Caja de Credito Hipotecario, Caja Nacional de Ahorros,
Caja de Credito Agrario, and Instituto de Credito Industrial. Its history can be
traced back to 1855 when Caja de Credito Hipotecario was founded as a vehicle
to channel funds from investors to agricultural producers through the subscription
of what could be defined as mortgage bonds. Caja de Credito Hipotecario also
financed housing for lower income families but, due to its operating model, this
institution was not accessible to small investors/depositors. In order to fill that
gap, the first Caja de Ahorro (savings and loans) was founded in 1884 and
managed under supervision of the Caja de Credito Hipotecario. The first Caja de
Ahorro was followed by many other similar institutions in each of the main cities
of the country, which were finally consolidated into a single, independent,
organisation called Caja Nacional de Ahorros in 1910 (Friedmann, 1993).

The Caja de Credito Agrario was founded in 1929. Its purpose was to promote
the development of farm production through offering credit and through
supplying tools and consumable goods to farmers. This institution introduced the
prenda agraria which was a loan backed by the farmers produce and which
gave the Caja de Credito Agrario priority rights of collection over other creditors
in case of default. A year later, the Instituto de Credito Industrial was founded
with the purpose of promoting industrial manufacturing initiatives, which in
those days were scarce and primitive. The Instituto de Credito Industrial secured
its loans with a prenda industrial, which meant using the manufacturers stock
of finished goods, work-in-process, and raw materials as collateral for its loans,
again with a priority of recovery over other creditors in case of default.

232
At the time of the merger, Caja Nacional de Ahorros was the largest of the four
organisations in terms of branch office network, headcount, and volume of
transactions.

The creation of Banco del Estado was a controversial initiative which had been
attempted (and failed) several times since the administration of President
Balmaceda (1886-1891). According to Friedmann (1993), the private banks
decried it on the basis of unfair competition (pp. 33-5); the unions of banking
employees opposed it because it would lead to downsizing of the private banks
and therefore endanger jobs of their membership (p.35); the federation of
industries and of large agricultural producers denounced it because it would
politicise credit and make it bureaucratic (pp. 39-42); the staff of the four
institutions to be merged rebelled until they were guaranteed that they would be
equalised upward (pp.37-8); and even the politicians sitting on the Boards of
the four institutions, some of whom had supported the merger initiative when in
prior positions, were by then dragging their feet to make the changes (p.46). El
Mercurio, then, like now, the most influential newspaper in Chile, fiercely
opposed the creation of Banco del Estado (pp. 42-46); on the other hand, the
editorial of Panorama Economico, a young and specialised publication linked to
the School of Economics of the Universidad de Chile, appeared to be supportive
of its creation (pp.46-8).

The mission of Banco del Estado was to promote the development of productive
sectors, to stimulate savings in the country, and to act as banker/cash-manager to
the Government and most state own companies (Friedmann, 1993). It was given,
by the bill that created it, certain privileges like tax waivers, priority for recovery
of bad loans, monopoly for management of state cash, monopoly over certain
kinds of savings accounts, and others. During its first 20 years, the bank
flourished and grew to become the largest bank in Chile in terms of loans and
deposits; by the end of the Marxist experiment in Chile (1972-3), when the
banking system was nationalised, Banco del Estado represented over 50 percent
of the system. During the second half of the seventies, and the eighties, when
Chile applied a neo-liberal model based on market economy, BancoEstado lost
many of its privileges and its original objectives, and its market share fell
notoriously. It was deprived of the resources required to modernise and acquire
technology, which left it at a great disadvantage with respect to its private sector
competitors by the early nineties (Friedmann, 1993).

As will be seen in the following sections of this case study, during the last decade
the bank has made a significant effort to develop its people, to incorporate
technology and to modernise, while finding a role for itself in a competitive
commercial banking market. It is still a significant player within the top four
banks, and its leadership is determined to keep it in the upper league; this is a
challenge for a state-owned bank operating in a dynamic market characterised by
foreign ownership, by mergers, and by new agile entrants who are targeting its
core segments. Keeping within the top players is a struggle for survival,
according to some of its leaders, for it only makes sense to have a state-owned
commercial bank if it is going to be a relevant actor.

233





D.2. Sources of Evidence.

Several sources of information have been used in order to triangulate evidence:
a. Interviews: Semi-structured in-depth interviews, as opposed to open ended
ones, were performed because this is a multiple case study and otherwise
there is a risk of collecting a wealth of information from individually
valuable interviews that are then difficult to generalise from (Remenyi et
al., 1998; Miles & Huberman, 1994, p.17). An interview guide (see
Appendix A) was developed on the basis of the four aspects of the research
question, and of the conceptual framework indicated in the Research
Proposal and refined in Griffiths & Remenyi (2003a). All interviews were
held during December, 2003.
b. Documents: Analysis of multiple documentary sources such as the reports
produced by the banking authorities (SBIF); the 2002 Annual Report of
BancoEstado; a history of the bank published to commemorate its fortieth
anniversary; a study on the Micro and Small Enterprise (MIPE) sector in
Chile, commissioned by the MIPE Promotion Committee of the Chilean
government; and the banks 2004 Corporate Planning document. From
analyzing these documents it was possible to understand the banks history
and its market, and to have access to strategy statements and performance
measures.

According to Gummesson (1991, p.21, cited by Remenyi et al., 1998) access or
the ability to get close to the object of study in order to find out what is
happening, is the researchers biggest problem. In this case, considering that
access to informants at the highest levels in the bank was obtained and that,
following Bannister (2001, p.149) each interviewee was asked if they would
suggest additional interviewees or other sources of information, there is
confidence in the validity and relevance of the sources of information.

As specified in the Research Proposal, interviews were held with the Managing
Director, the Operations Manager, the Planning Manager, the Market Manager,
the Micro- and Small-business Manager, and the Information Technology
Manager. The people interviewed, with a brief description of their background,
are the following:
Jose Manuel Mena, General Manager, has been working for the
Chilean banking sector for the last 24 years. He has been with Banco del
Estado, in the position of CEO, for eight years (the longest serving CEO
since the bank took its present form in the 1950s). Prior to that, Mr. Mena
worked for Banco de Osorno where he was Sub-General Manger, and
Banco de Talca, amongst others. Most of his career has been in the
planning and co-ordination of commercial areas. Mr. Mena has
traditionally been distant from ICT management, but at Banco del Estado
he got much closer at the beginning of his tenure; now he trusts the
234
operations and technology team and delegates more. Mr. Mena is a
graduate industrial engineer.
Arnoldo Courard, Commercial Manager, has been in this position
since the year 2000 when he joined the bank. At that time, the bank
decided to reorient its business to a Client centred organisation, and
brought in Mr. Courard to help develop its Strategic Plan. Before that,
Arnoldo Courard worked for several banks and private sector companies,
the last one being Sodimac Home Centre/Falabella, one of the largest
retailers in Chile. Prior to that, Mr. Courard ran a consulting firm, focused
on banks, which did a significant amount of work for BancoEstado. At
Sodimac, which is strong on ICT to support its logistics operations, Mr.
Courard was heavily involve on ICT decisions. He reports to Jose Manuel
Mena.
Fernando Leon, Operations & Technology Manager, has been
Operations and Technology Manager at Banco del Estado for over seven
years, and has worked for banks for some 23 years. Prior to BancoEstado,
Mr. Leon was Planning Manager at Banco Osorno for 5 years; he was
responsible for management information at Banco OHiggings for 5 years
before that, and previously held positions within the operations area of
Banco Santiago. Mr. Leon is deeply involved in ICT decisions. Departing
from the Sales and Business Plan, his Division develops a technology
plan mainly focused on ensuring the stability and reliability of the banks
operation. Mr. Leon reports to Jose Manuel Mena.
Jaime Pizarro, Micro- and Small-business Manager, has been with
BancoEstado for over ten years, during which he has always worked with
the small and micro-business (MIPE) segment. He now manages the
division that looks after this segment of the market. The MIPE
programme was launched by the bank some seven years ago, so Mr.
Pizarro has seen it since its inception. Jaime Pizarro is highly experienced
with MIPEs since he worked for that segment as a consultant (for five
years) before joining BancoEstado. Mr. Pizarro is a graduate industrial
engineer and feels at ease with technology. All solutions for the MIPEs
segment are signed-off and sponsored by him. He reports to Arnaldo
Courard.
Oscar Gonzalez, Planning Manager, has been with BancoEstado for
three years, in the same position since he was hired. His main
responsibilities are coordinating the budget, tracking actual vs. planned,
and producing management information. Mr. Gonzalez looks at
technology from a budget point of view. He is the first person to hold this
position at BancoEstado so he has, in a way, moulded the job. Oscar
Gonzalez is a graduate engineer but has worked for banks since
graduation in 1979. He has been in many different functional areas, in
particular risk management and controls, at several banks (Banco Osorno
amongst them). Mr. Gonzalez also worked for the Banking Authority
(Superintendencia de Bancos e Instituciones Finanaciaeras - SBIF) as an
inspector. Mr. Gonzalez is a member of the IT Committee that signs-off
ICT investments, and analyses ICT investments from a cost-benefit
analysis standpoint. He reports to Jose Manuel Mena.
235
Rodrigo Collado, IT Manager, has been with BancoEstado for 7 years.
Before that Rodrigo worked for Banco Internacional, and prior to that for
Banco de Credito e Inversiones (BCI). Prior to that, at some point in his
career, Rodrigo worked for a software house for four years so he has a
significant experience on banking technology. Mr. Collado is a member
of the IT Committee that signs-off all ICT decisions, and works closely
with Mr. Leon in developing the technology plan which, as mentioned
above, is mainly focused on ensuring the stability and reliability of the
banks operation. Mr. Collado is a graduate engineer and he reports to Mr.
Leon.

It must be pointed out that all interviews were individual, except for one which,
due to limitations in time availability on the part of the interviewees, was held
jointly with Fernando Leon and Rodrigo Collado. The experience from that
interview is that a joint interview has an advantage in that it keeps the
informants more objective, as their opinions are being scrutinized on line by
people who know the context very well; on the other hand, it is possible that
richness of opinions is lost, as the informants tend to give their opinions in a
more generally acceptable way.

D.3. Strategic Positioning of BancoEstado.

D.3.1. BancoEstado and its Competitive Context.

As mentioned in Chapter 3 and Griffiths (2004), the Chilean banking system
comprised, at December 2002, twenty eight institutions as a result of having
followed the global trend of rapid consolidation. Taking an exchange rate of
Chilean pesos 695.28 to the US dollar, at end of 2002, the total assets in the
system amounted to some US$ 67 billion (SBIF, 2003, p.35, Activo Circulante
plus Activo Fijo), of which BancoEstado represented US$ 9.32 billion or just
under 14 percent (Banco del Estado, 2003, p. 42; SBIF, 2003). Having over US$
5 billion and under US$ 100 billion in assets, it is classified as a mid-size bank on
international standards, according to criteria adopted by the Tower Group (IBM,
2003). In terms of loans, the total Chilean banking system amounted, at the time,
to US$ 45.6 billion (SBIF, 2003, p.35), of which US$ 5.66 billion (Banco del
Estado, 2003, p.42; SBIF, 2003) are managed by BancoEstado, which represents
12.4 percent of the market. The total amount of deposits in the Chilean banking
system at December 2002 were, approximately, US$ 41.1 billion (SBIF, 2003,
p.37) of which US$ 5.75 billion were with BancoEstado (Banco del Estado,
2003, p.43, current accounts + time deposits + other demand and time
deposits; SBIF, 2003, p.45), which represents a 14 percent market share.

On the revenue diversification front, it was mentioned in Chapter 3 that the
Chilean banking system also followed the global trend of increasing fee-based
income as a proportion of total income. In the twelve year period from 1990 to
2002 fee-based income, for the banking system as a whole, grew from 6 percent
to 18.8 percent of total gross margin (SBIF, 2003; SBIF, 2004). With fee income
at 13.9 percent of gross margin (Banco del Estado, 2003, p.44), BancoEstado is
significantly below the industry average on this metric.
236

In the strategic group analysis of the Chilean banking system performed by
Griffiths (2004), BancoEstado appears well to the top-right hand side of the
graph, forming a solitary firm strategic group, with an extremely large strategic
deviation (14.38; 10.87). How can it cope with such a large strategic deviation?
From a strategy perspective, its large deviation can be explained by the fact that it
has a social development support mission, apart from the necessity of being
profitable. From a conformance perspective, BancoEstado can afford to be
deviant because it is a state owned bank with its deposits, in effect, being
guaranteed by the state.


BancoEstado had, at end of 2002, a capital adequacy ratio of 11.22 percent
(Banco del Estado, 2003), significantly above the minimum requirement of 8
percent, but below the Chilean banking system average at the time of 13.9
percent.


D.3.2. BancoEstados Stated Business Strategy

As mentioned in the historical overview, BancoEstados purpose has evolved
over time. At this stage of its existence, the banks Mission is as follows:

To offer competitive financial services that contribute to the countrys
development and promote access for all Chileans to products and services
that make life easier and more secure (Banco del Estado, 2003, p.2).

This mission statement brings together the need for competitiveness for operating
in the commercial banking space, with the developmental role of banks through
the allocation of resources, with the social role of making quality-of-life-
enhancing financial products available to all Chileans. It is the combination of
these three objectives, together with the fact that it is a state-owned bank, that
define BancoEstado and sets it apart from the rest of the participants in the
Chilean financial services system. This source of differentiation is acknowledged
by the Chairman of the Board when he states that:

We firstly share with private banks the need to provide an adequate
return for the owners and meet similar requirements (and even exceed
them in some aspects) regarding taxation, financial regulation, solvency
and risk management. Secondly, we proudly assume with satisfaction our
social responsibility, an additional task as important as the other, given
our nature of being a public bank committed to providing access to
financial services to all Chileans, especially those without access to the
private market (Banco del Estado, 2003, p.2).

It is the challenge of managing the divergent forces that underlie the three
objectives, that determines how the bank deploys the only two strategic resources
an information intensive organisation has to achieve its goals: talent and
237
information technology (Griffiths, 2003). This is also acknowledged by the
Chairman when he says:

This double requirement implies properly combining the demands of
modernity with those of [its] social role, urging a huge effort from all
staff (Banco de Chile, 2003, p.2).

It appears to be this combination of objectives that leads BancoEstado to
negotiate the centrifugal forces of competition and the centripetal institutional
forces, as can be seen in the previous section, in Chapter 3, and in Griffiths
(2004), with a significant strategic deviation from the rest of the system.

Becoming available to all Chileans is partly materialised by a continuous
expansion of its branch network which has grown 45 percent, or one hundred
offices, since 1998, leading to the present network of 310 branch offices. If
remote service points are added, BancoEstado is the only entity offering banking
service in half the towns and villages of the country. The extension of this
network was achieved without increasing headcount through the application of a
new technology-enabled operating model centred on the customers needs, and
through a significant effort in training. The significance of this achievement is
especially remarkable when compared with international banks that have, over
the last few years, cut down on the number of branches, and are now realising
that it was a mistake (The Economist, 2004, p.23). In a similar line, BancoEstado
has now 1,350,000 active contracts for remote banking - telephone, internet and
ATMs (Banco del Estado, 2003, pp.3-4).

Another aspect of reaching out to as many Chileans as possible is the delivery of
products and services. The year 2002 was a record breaking year in consumer
loans, the sale of insurance, and of credit cards. To its undisputed leadership in
state-subsidised mortgage loans, in 2002 the bank increased its non-subsidised
mortgages targeted on middle income individuals. A significant part of
BancoEstados growth has come from sectors of the population who previously
had no access to financial services sector, at all. A case in point is the delivery of
the digital chequebook which has allowed people who do not qualify for a current
account to have a technologically advanced means for making payments. Another
example is the offering of low premium insurance products that extend protection
to people in risky occupations such as self-employed fishermen (Banco del
Estado, 2003, pp.3-4).

Consistent with its focus on the lower segments of the market are that the bank
has defined that it will give all its Clients the same quality of service there is no
segmentation of service quality - and its claim that it has led the market in
transferring interest rate reductions to its Clients loans (Banco del Estado, 2003,
p.4).

Apart from serving lower segment individuals, the bank gives them solutions for
their businesses. BancoEstado claims that it has one of the largest micro-business
portfolios in Latin America. It served 60,000 by the end of 2002, and intends to
reach 100,000 by 2004. It also claims to have one of the highest loan recovery
238
rates at 99 percent in this segment, and claims that for three out of four of its
micro-enterprise Clients the loan received from BancoEstado is the first, from
any financial institution, in the owners life (Banco del Estado, 2003, p.4). In
theory, this market segment has a lot of potential. According to a study
commissioned by the Chilean government, there are 1,200,000 businesses in
Chile, which is one for every 13 inhabitants. Of those, some 650,000 are legally
established, while the remainder are informal. Of the formally established ones,
82 percent or 536,000 are micro-businesses (defined as those with annual revenue
below US$ 50,000). The report says that the productivity of these enterprises is
significantly lower than that of the larger firms, or than micro-businesses in other
parts of the world, but that they are more resilient to economic downturns. In
terms of their relationship with the financial services sector, the interest rates they
pay are almost abusively high in comparison with similar firms in other
countries. However, their debt-management is considered good with an overdue
debt rate of around 5 percent (Comite Fomento de la MIPE, 2003).

Jaime Pizarro adds that BancoEstado offers a specialised service to the MIPE
segment. They have a low ratio of Clients per Client manager in this segment.
Just as a guide, for corporate Clients the ratio is 30 companies per Client
manager; for mid-size firms it is 60 companies per Client Manager; for small
companies it is 150 Clients per manager; and for micro-companies it is 400
companies per manager. According to Mr. Pizarro, this means they can be much
closer to their Clients than their competitors, who use an average of 600 clients
per Client manager in the MIPE segment. The result of this is that BancoEstado
has a lower default rate than the rest of the market; in fact, their default rate in
this segment is 1 percent which, according to Jaime Pizarro, is the lowest in Latin
America. Although this is very heavy on costs, interest-rate-level for this segment
has a considerable premium. Just as a reference, in the Chilean market as a
whole, interest rate on loans for corporations is at around 3-4 percent; for mid-
size firms it is at 8 to 10 percent; for MIPEs interest rates are probably in the 18-
20 percent range.


D.3.3. Value Discipline of the Organisation.

The interviewees were first asked to rank, in descending order of importance, the
seven key dimensions of customer value defined by Treacy & Wiersema (1995).
This gave place to interesting discussions where two factors that differentiate the
bank from its competitors surfaced consistently. One was the level of trust that its
Clients, and the Chilean public in general, have in BancoEstado. This opinion of
the interviewees was supported by a survey commissioned by the Bank to a third
party provider on which institutions the public associates to the concept of trust .
BancoEstado came up top with 28 percent of respondents placing it in first place,
ahead of other institutions such as the Police Department, Fire Brigade,
Hospitals, the Church, and other organisations. Interestingly, it appears that this
perception of trust is strongest in the lower echelons of Chilean society. (It must
be pointed out that the results of the survey were made available, but not the
methodology, which was therefore not assessed).The other factor was
accessibility to its products and services, by all people. Jose Mena, for instance,
239
mentioned that the bank works on drawing into the financial system low income
individuals by offering a mix of products that allows the bank to be of relatively
low cost, although not the lowest.

Arnaldo Courard eloquently summarises this balance of dimension of customer
value when he says that the bank does its distribution by type of Client. Its
strategy for the massive personal market is based on three pillars. The first pillar
is trust on which the bank is extremely well positioned. This pillar is strongly
related to the other two which are access on the one hand (all Chileans can
come here, a diverse set of Clients) and price on the other.

The bank has been very aggressive on price in the last few years, when it
has competed more on price than on quality. But this has been tactical,
because the bank does not have a cost advantage in the market.

Mr. Courard adds that this tactic is being reviewed now; it has allowed the bank
to grow from 4 percent to 13 percent market-share in personal banking in three
years, but in the long term the bank has to live from what it makes from its
Clients.

Assimilating trust to service reliability and access to service convenience in
Treacy & Wiersemas (1995) description of dimensions of customer value, it can
be said that the bankss leadership believes that service reliability is the key
dimension of value, followed closely by price and service convenience, in that
order.

In terms of the Value Proposition of the bank to its Clients, the interviewees
unequivocally rank best total solution and best total cost over best product. From
the opinion of its leaders, this appears to be a case of a bank that focuses on two
value propositions, based on solutions tailored to their target market with the
constraint that this segment is limited on resources. Jose Mena is quite explicit on
this when he says that the Value Proposition to clients is centred around: (a)
Their star product which is credit to micro-businesses; (b) Consumer loans,
which are bundled with credit cards and insurance; and (c) Personal Insurance,
basically centred on Life, Health, and Job-Loss products. Mr. Mena gives further
details on their offering to micro-businesses when he says that BancoEstado has
100 thousands debtors in this category, with a total stock of US$ 100 million
short term, low risk loans. These have to be very competitively priced products
where the banks spread is very low, say 5 percent; thus the bank needs to have a
very high recovery rate of circa 98 percent. These are basically loans of between
US$ 1,000.- and US$ 2,000.-, which must be cheap. The bank is geared up to
visit these Clients in their office/workshop and process their loan in 48 hours.
They do this by equipping their field salesmen with hand-held devices.

In discussions on which are the core processes of the organisation in its delivery
of value to Clients, an overwhelming majority of informants mentioned end-to-
end product delivery and customer service cycle, in that order, as the key
processes. This is consistent with the Value Proposition of best total cost
mentioned before. This is emphasised by Mr. Mena when he says that this is a
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heavily transactional based bank, with credit response times of 48 hours, risk
free, so operational processes are critical.

Commercialisation and market exploitation were also defined as important
processes by most interviewees. Evidence of the former is that the bank has
become a significant player in the insurance business through the sale of third
party products. With respect to market exploitation, Oscar Gonzalez mentioned
that BancoEstado has 8 million Clients, most of whom have a savings account as
a single product, which makes them very low margin customers; the Bank must
therefore grow in the relationship with these Clients increasing product density
and moving to make them more profitable. Fernando Leon and Rodrigo Collado
point in the same direction when they say that the banks present product density
is 2.5 products per Client, and that they are targeting on 4 products per Client.

Is it reasonable for a bank which says that its Value Proposition is best total
solution to not have solution development as a core process? Is this an
inconsistency? This issue would justify further research, but it could be explained
by the fact that the segments targeted by the bank do not require complex or very
innovative solutions. It requires basic solutions (bundle of products and services,
produced in-house or delivered by third parties).

Asked on whether the value discipline of the bank has changed over time,
Arnaldo Courard mentioned that it has done so, and will continue doing so as the
banks priorities change moving forward. There are three key issues that are
worrying the banks management: (a) Reduce transaction cost by inducing
Clients to move to more convenient channels CRM and improve customer
attention to the more profitable Clients; (b) Increase market share; and (c)
Position it as something different but Mr. Courard added that the banks
leadership is still thinking about the latter.

D.4. The Role of Technology: Past and Present.

D.4.1. Overview of the ICT Function.

In terms of technology strategy, the banks Management Committee carries out
an annual Sales and Business Plan, which is then approved by the Executive
Committee of the bank. Departing from the Sales and Business Plan, Operations
and IT develop a technology plan. The main aim of the ICT plan is to give
stability and reliability to the operations of the bank. It is a 3-year plan, reviewed
every year. This planning process has changed substantially in the last few years;
in the 1980s and early 1990s there was an ICT plan that was developed by
Operations and Technology without participation of the business units, which
meant it did not respond to a commercial business plan (information obtained
from the F.Leon and R.Collado interview).

According to Fernando Leon, in order to understand the criticality of obtaining
operational stability and reliability, it is important to know that the bank performs
over 20 million transactions per month, for a Client base of 8 million, of which
some two million Clients have more than one product with the bank. This makes
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it the bank with most transactions in the Chilean banking system. Mr. Mena adds
that downtime cost for the bank is very high: Because the bank impacts so many
people, added to the fact that it is a state-owned bank, any downtime would have
immediate repercussion in the press, with the corresponding loss in image over
and above the cost of lost business. Due to this, BancoEstado is conservative on
ICT having defined it does not intend to be on the cutting edge of technology, but
rather adopt proven solutions (Jose Mena). Technology, per se, is not important
for the bank, and technological developments are not a significant driver for new
projects (Fernando Leon).

User demand is, on the other hand, a significant driver for new ICT projects. This
was not the case five or six years ago when Individuals/Champions in the ICT
function were the main source of initiatives. But since the Operations &
Technology Division was created this situation has changed, and users have taken
control of the direction of ICT. However, significant user requests have to be
submitted to the Management Committee and, in the end, what happens is that
they are channelled through the strategic planning process and become
Management Driven (strategic planning). In the case of Institutional Clients,
Demand from Customers is also a significant source of ICT project initiatives.
Non-the-less, all in all it has to be said that the most important thrust for new ICT
initiatives is Management Driven (strategic planning).

Jaime Pizarro says that the MIPE sector is well served by ICT. Although he does
not see IT as a visionary department that proactively brings them ideas and
initiatives, he is satisfied with the response his area gets from IT, especially in the
Client service channels: Intranet, ATM, portals. Arnoldo Courard has a different
view. He says that, up to now, the two main focuses of IT have been (a) Cost
reduction, essential to making possible a massive operation; and (b) Achieving
more precision in information (reports for supervisors, regulators, accounting and
MIS). But the bank is very behind on information to deal with Clients. Ten years
ago (up until 1995) they had very few competitors but this has changed
dramatically. From now on the focus will have to be to use information for
improving sales and relationship with Clients. In a similar line of thought, Oscar
Gonzalez says that the central issue for IT is the Client Service Platform (branch
office applications) due to the massiveness of the bank, and there is still a lot to
do there like improving agility for launching new products. Mr. Gonzalez adds
that CRM is viewed as the heart of their strategy and that much has been done,
but a great deal is still pending. Similarly, management information is strategic
and still needs developing. Closely related to these limitations, is the issue of
intra-company information integration. Arnaldo Courard indicated that there are
very significant information integration problems, conditioned by the past, and
this view is supported by Oscar Gonzalez, who adds that the bank is lacking a
management information data-warehouse.

Another aspect of users is that of cost consciousness on their part. Oscar
Gonzalez believes it is still very limited. Jose Mena commented on this point that
users are learning to be users. They have implemented a management
organisation based on Profit Centres with a P&L and a Balanced Score Card,
which has made the business units and support units learn to be cost conscious.
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According to Arnaldo Courard, for projects above a certain value, the area that
demands the work has to make a detailed cost-benefit analysis.

D.4.2. The ICT Budget and Management Principles.

At BancoEstado, it is difficult to break down the budget into bank operations and
ICT; it is a single pool, of the order of US$ 100 million. Having said this, Mr.
Leon estimates that US$ 20 million are out-of-pocket investments in Operations
& Technology (of which half corresponds to new ICT initiatives), and US$ 80
million are spent on bank operations and maintenance of their systems. The
expense budget, of US$ 80 million, breaks down into US$ 68 million for
Centralised Operations, and US$ 12 million go to customer interaction
tools/channels such as Internet banking, ATMs, Call Centre, and Self Service
terminals.

In term of ICT management principles, there is a strong tendency at BancoEstado
towards outsourcing as much as possible. Probably 50 percent of the ICT budget
is outsourced, according to Messrs Leon and Collado.

D.5. Information Technology Investment Decisions.

D.5.1 ICT Decision Criteria

The bank makes investments of some US$ 20 million per year, of which some
US$ 10 million go to technology. Mr. Mena recognises that this is low for their
operation. The most important decision criteria for ICT investments, in Mr.
Menas view, are (a) ICT must follow (keep up with) growth, maintaining the
same standard of service. Just as an example, Mr. Mena cited that the bank has
gone from 200 branches in 1998, to 310 branches in 2001. (b) Second criteria is
to support leaps in Quality of Service and/or Productivity. An example of this is
the CRM project that gave the bank the necessary business intelligence tools for
customer segmentation. (c) Third are MIS initiatives that help improving
controls. Finally, (d) Market power initiatives like the mentioned growth in
branch network and the recent connection of their ATM network with
REDBANK (the ATM network shared by most other banks in Chile).

Most informants coincide that cost-benefit analysis is the most frequently used
quantitative criteria for prioritising and deciding on ICT investments. Although
there is a considerable dispersion in their opinion on the following most
important criteria, it can be said that financial metrics (NPV, IRR), cost control,
and increasing capacity/throughput were in most peoples mind. Further down in
the ranking scale, Fernando Leon and Rodrigo Collado mentioned the need to
increase market power through ease of search. However, it must also be added
that Mr. Gonzalez admits that the bank does not have a standard, well developed,
quantitative methodology that is applied systematically for evaluating projects,
and this is something the bank has to work on. Mr Gonzalez further clarifies this
when he says that the investment approval process works like this: Management
develops an annual budget where specific ICT projects are budgeted, and a
certain amount is left aside for requirements that come up during the year. During
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the year, projects are proposed to be charged to this pool of funds. It is usually
the users that come up with the initiatives, but they have difficulties in specifying
their needs. So specifications are developed in conjunction with IT, and from
there they develop the business case. There is not much experience in the Bank
on managing these processes.

With reference to the qualitative criteria applied for ICT decision making, again
there is a wide dispersion of opinions. However, risk reduction and mandatory/no
choice seem to be predominant. Service to the customer and better management
information systems were mentioned by at least two interviewees each.

On the issue of whether the decision criteria have changed in the last few years,
Mr. Mena says that the criteria have changed in accordance with the development
phases of the bank. Since the early to mid nineties when the present management
team took over, the bank has gone through three phases of development. Phase 1,
which Mr. Mena calls building a bank, comprised, basically, putting in the risk
management function and business controls; Phase 2 was growth, and an
example of this is that the banks market share in consumer loans went from 4
percent to 14 percent (without having a scoring tool!). Phase 3 is scoring and
risk management tools - for example the bank has recently engaged a Spanish
company to help it implement a scoring system. Fernando Leon and Rodrigo
Collado also say that criteria have changed: from focused on ICT and operations,
to responding to strategic alignment.

D.5.2 Analysis of Some Major ICT Decisions and their Impact on Market Power.

With the objective of understanding further the criteria applied by BancoEstado
in its ICT decisions, and the impact of its ICT investments on the competitive
landscape of Chilean banking, a few recent projects were analysed.

D.5.2.1. Management Information System: The importance of the project is given
by the fact that before this project, management information systems were,
except for a few isolated departmental solutions, manual and difficult to construct
and extract management information from (Jose Mena, Oscar Gonzalez).
According to Mr. Mena, the project was triggered by the need to grow, but at the
same time keep the business under control. The present system is trustworthy,
and fully integrated with the general ledger. The project required an out-of-
pocket investment of some US$ 1.5 million, and Mr. Mena was the project
Sponsor. Leadership of the project was shared by Oscar Gonzalez, who had the
functional responsibility for definitions such as cost centre structure, transfer
pricing models, etc., and by Fernando Leon who was responsible for the
technology decisions.

Three solutions presented by PeopleSoft, Oracle and IBM, were analysed before
the bank decided on the one proposed by IBM. The main criteria for comparison
between alternative solutions were: (a) it had to be an internationally proven
solution (the selection committee went to visit banks actually using the solution);
(b) it had to be flexible; (c) it had to have the best total cost of ownership; (d) the
proposed architecture had to be compatible with the banks standards, and (e)
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trustworthiness of the vendor. According to Mr. Gonzalez, another criterion taken
into account was that the datawarehouse solution selected for the MIS could later
be used as the technological platform for future CRM applications.

According to Mr. Mena, the project had no impact on Clients, but was significant
in terms of its impact on the internal workings of the bank. The main
achievements are that (a) it delivered a Profit and Loss statement for each
business and support unit; (b) it enables communication and dialogue based on
hard (quantitative) figures between areas of the bank; and (c) it has supported a
positive cultural change in the bank, based on (a) and (b). So, the main outcomes
were better management information, followed by streamlined processes leading
to cost reduction, and finally, intra-organisational integration of information
(Oscar Gonazalez).

In terms of its impact on the competitive advantage of BancoEstado, it falls
somewhere in between competitive parity and temporary competitive advantage.
Both Mr. Mena and Mr. Gonzalez consider the project to have been highly
successful due to the changes in work practices that it enabled, and because it
helped in creating more cost-consciousness through the performance
measurement of the strategic business units and the support functions.

D.5.2.2. CRM Analytics Project: It was started a year ago, and the bank has just
completed stage 1, so BancoEstado is just starting to exploit the information. The
importance of the projects is given by the lack of integration of information
mentioned in section D.4.1. The aim of the project is to set up a single Client
database, which the sales people can use to know who their Clients are, what
products they have, what sort of transaction they do, what profitability they make
on each Client/Product/Channel/Geography, etc. This will allow the bank to
embark on Direct Marketing, reducing the cost of sales and allowing them to
bundle products.

The project required an investment in technology of between US$ 500 thousand
and US$ 800 thousand, but there are synergies with other projects, so it is
difficult to be precise on the investment made on this specific project. Mr.
Courard was the project sponsor for Stage 1 and, as such, he sat on the Steering
Committee. The project was managed by the Marketing department so Mr.
Courards involvement was deep.

It appears that the project was triggered by the need to survive and increase
market share in a more competitive environment. The main decision criterion was
the need to increase throughput to achieve economies of scale.

The project has had a significant impact on Clients on the dimensions of improve
Client service and product differentiation, as it allows offering more products and
increasing response times. In terms of the internal workings of the bank, the
main result of the project has been better Client information followed by intra-
organisation integration of information and more pro-active go-to-market
processes, in that order.

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In terms of the impact on industry structure (based on Porter, 2001), there
appears to be no clear and evident impact, but BancoEstado claims to have been a
front-runner on Direct Marketing and that caught the industry by surprise. Mr.
Courard is more assertive in claiming that the project has had a measurable
impact on the banks market power, which takes the form of increase in profit
(through reduced costs and more cross selling), followed by increase in market
share (growth in the number of Clients). In terms of competitive advantage, the
project has enabled competitive parity.

With respect to the level of success of the project, Mr. Courard believes the
project has been a success, but admits that it is probably too early to give a final
assessment.

D.5.2.3. Centralisation of Operational Processes: In Mr. Leons and Mr.
Collados views, this was the most important project in operations and
technology. Through this project, BancoEstado has eliminated all back office
activities from the branch offices, and centralised them. To be able to achieve the
centralisation of back-office activities, two key subprojects were included: (a)
setting up one single Client data base, and (b) implementing a new sales
platform, which is what Mr. Leon calls the branch/channel application.

The importance of this project is given by the fact that: (a) it allowed cutting
across product silos and having a more integrated view of Clients; (b) it enabled
Client segmentation which could not be done before this project; and (c) it
allowed the bank to recycle all branch staff (many of whom performed back-
office activities until then) into sales people. As part of this project, the concept
of Client Executive was implemented and a strategy of cross-selling was
introduced.

The interviewees estimate the cost of the project at some US$ 30 million. Just as
an indicator of its magnitude, it is interesting that the processing power of the
banks mainframe computer grew eight-fold, from 100 Mips to 800 Mips.
Fernando Leon was the project sponsor, and Rodrigo Collado the project leader
from the technical side. The sales and go-to-market areas of the bank were
involved after the initial stages.

The project was triggered by the need to support the bank transformation
mentioned above. The commercial structure of the bank had remained, in
essence, unchanged since the banks foundation in the 1950s. There were no real
sales organisations. Probably as a consequence, the bank had a very serious drop
in market share, going from 50 percent market share in the early to mid 1970s, to
13 percent market share in 2003. The key decision criterion was, therefore, the
necessity to increase Market Power to be manifested in the form of increased
market share.

According to both interviewees, the output of this project with respect to Clients
was more competitive pricing. It also had an impact on the internal workings of
the organisation in the form of better Client information, streamlined processes
leading to cost reduction, and intra-organisation integration of information, in
246
that order of importance. In Messrs. Leon and Collados opinion, this project was
highly visible in the industry and led their competitors to put BancoEstado on
their radar screens and to lower their prices.

In terms of market power, this project helped BancoEstado stop its decline in
market share, and actually enabled a market share increase. Secondly, it
maintained or increased the banks profits. From a competitive advantage
standpoint, it rendered BancoEstado temporary competitive advantage. Both
interviewees say the project had a high degree of success.

D.5.2.4. Technology Applied to Sales. Specifically, this project comprised the
business platform application for the bank, with a layer specifically tailored to the
requirements for serving MIPE Clients. According to Mr. Pizarro, the importance
of this project lies in that this application enabled Client managers to improve
their productivity through having more depth of Client information (enabling
market exploitation through cross-selling, up-selling), and it also greatly
improved the quality of life of Client managers.

The project amounts to approximately US$ 1.5 million of out-of-pocket
investment. The project started in 1999 and is planned to conclude in 2004. The
bank is currently working on the third release which consists of solutions for
serving small businesses; the previous releases applied only to micro-enterprises.
At the initial stages, Jaime Pizarro was responsible for the functional design
mainly through validating the solution, and was involved in the approval of the
vendor. At the implementation stage, Jaime is the project sponsor and leader.

The investment was triggered by the fact that the bank was conscious that it could
not tackle this segment without technology, due to the volumes and complexity
of information involved. The bank, thus, needed this project to reduce risk (credit
and operational) and to increase throughput. The purpose of the project was to
enable a specialised service to Clients, and the decision criterion for going
forwards was a business case based on Cost-benefit analysis.

According to Mr. Pizarro, this project has a visible impact on Clients in the form
of improved Client service. But it is difficult to see a direct measurable impact of
the technology itself, because it actually depends much on how the Client
manager applies it. However, Clients do like to see, and value, technology in the
field. As for the internal workings of the organisation, the most important impact
is on streamlined processes leading to cost reduction followed by more pro-
active go-to-market processes.

With respect to the projects impact on industry structure (based on Porter, 2001)
Mr. Pizarro states that in the micro-enterprises segment, BancoEstado has a 40
percent market-share (BancoEstado is the first bank in Latin America in terms of
number of micro-enterprise Clients: 100 thousand Clients). Sixty five thousand
micro-enterprises were actually banked (i.e., introduced into the banking
system) by BancoEstado. In the micro-enterprise sub-segment, BancoEstados
product density is 3.0 products per Client. The combination of market share and
density creates a barrier to entry for competitors. Just as a reference, it is
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interesting to observe that the bank has 6,000 mid-size Clients, and 15 thousand
small-enterprise Clients. The latter have a product density of 2.5 products/client.
The next release of the solution should have an impact on this group.

In terms of Market Power, the most important outcome was an increase in market
share followed by an increase in profit. Mr. Pizarro believes this investment
raises a significant entry-barrier to other players who want to serve the MIPE
market, and therefore gives BancoEstado a sustainable competitive advantage.
The bank has 45 percent market-share in the MIPE segment, followed by Banco
Santander with 27 percent. The other significant player in this segment, but quite
a lot smaller, is Banco Desarrollo. Enabled by this technological platform, the
plan is to capture 200 thousand micro-enterprise Clients by the year 2006.

Another derivation of this project is that BancoEstado sells its MIPE client
service platform design to other MIPE focused banks (operating in different
geographies to their own). Mr. Pizarro indicated that the bank is now planning to
package the solution and sell it with the hardware and software as a ready-to-run
application. This is a prestige activity for the bank.

Finally, Mr. Pizarro thinks the project had a high degree of success.

The impact on Clients, on industry structure and on competitive advantage, of
the four projects analysed in this section, are summarised in Table D.1.


Table D.1. Analysis of some major ICT investments at BancoEstado.



CASE STUDY: BANCOESTADO
Project Effect on Five-Forces Degree of
Trigger OUTPUT & Competitveness Success
5.2.1 MIS Project Need to Better management information Non on industry str/ Enabled market- H
grow & & lower costs Competitive parity share growth
keep control
5.2.2. CRM Analytics Need to Improved Client service and Eliminated entry Increase in Market N/A
Project survive & differentiation barriers/Competitive Share and Increase H first
grow parity. in Profits phase.
5.2.3 Centralisation Need to More competitive pricing. Increased rivalry Revert decline in H
of Operations suppot bank amongst esxisting market share &
transform. firms/Temp. Compe- maintain or increase
tive Advantage profits
5.2.4 Technology Enable Improved Client service Erected barreirs to Market share growth H
Applied to Sales MiPE Better Clientimage through IT entry for competition/ followed be profit
banking in the field; cost reduction Sustainable compet. growth
advantage
OUTCOME INPUT
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D.6. Thinking on the Future Role of ICT.

In terms of which will be the predominant drivers for future ICT investments, the
informants were almost equally divided between transaction systems to support
core processes and datawarehouse projects aimed at better customer knowledge.
From the discussions held at the interviews, and taking account of the present
state of the banks technological infrastructure, it appears that the former should
be on the banks agenda in the short term, and the latter immediately afterwards.
However, competitive realities will force the bank to progress step-wise, making
relatively small transactional improvements that enable better data management
initiatives, followed by further transactional improvements, and so on. Initiatives
aimed at improving transaction systems to achieve more effective support
processes and datawarehouse projects aimed at internal controls were also
mentioned, but with less intensity.

Mr Courard thinks that due to its massiveness in terms of Client numbers,
BancoEstado should be ahead of the rest of the market on ICT. The Commercial
area of the bank, which Arnoldo Courard leads, is pushing Operations &
Technology to use ICT for differentiation through customer relationship
management programmes. Mr. Courard is conscious that these initiatives will not
give the bank a clear advantage because he is well aware that the competition is
already working along this line.

Both Mr. Courard and Mr. Gonzalez mentioned that the bank intends moving
towards a model for servicing/attending different Client segments that will
include the implementation of a sub-segmented model for Client service with a
value proposition for each sub-segment. (Incidentally, Mr. Gonzalez also
mentioned that the bank needs to differentiate Client attention/servicing levels for
different segments which appears to be in contradiction with the banks strategy
of same service to all). This is a process change project that will trigger many
ICT initiatives, according to Mr. Gonzalez. One of the benefits of this project,
according to Mr. Courard, is that the bank could operate more efficiently if it had
more information on the Clients needs: the bank could reduce its cost of
publicity/advertising; it could reduce human contact time; and it could improve
service quality.

Enquired on what they thought would be the major ICT projects in the near
future, Mr. Pizarro mentioned CRM Analytics, which was also mentioned by
Messrs. Leon and Collado, who added credit scoring solutions as well. Both
CRM Analytics and credit scoring solutions are well aligned with the
segmentation intiative mentioned in the previous paragraph, and with the Phase 3
in bank development mentioned by Mr. Mesa earlier.

Asked about whom they thought are their main competitors, Banco Santander
came up top, followed quite closely by Banco de Chile and Banco Falabella. Mr.
Mena and Messrs. Leon and Collado mentioned BCI, and Mr. Pizarro mentioned
Banco de Desarrollo.
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With respect to Banco Santanders use of technology, Mr. Mena does not
particularly like the technological platform they have adopted, but respects their
capabilities to develop scale. Mr. Courard believes Santander has made large
investments and has used its ICT innovations for improving its efficiency,
achieving remarkable productivity by synergising with Regional efforts. Mr.
Pizarro commented that Santander has a better Client database than BancoEstado,
and can therefore better focus its sales campaigns. Finally, Mr. Gonzalez
reinforced their competitors ability to experiment with ICT solutions in other
markets and develop economies of scale, and added that it has a better time to
market with new products.

It is interesting that Banco Falabella, a relatively new and small bank founded by
one of the large department store retailers in Chile, should be at the top of
BancoEstados mind in terms of competition. It is its ability to effectively
manage large volumes of Client information, and the fact that it targets a massive
consumer market with creative offerings, that worries the traditional banks.
According to Mr. Mena, Falabella have less developed technology than
BancoEstado, because they deal with simpler products. Messrs. Leon and
Collado believe that BancoEstado is better and stronger on ICT than their
competitors, but it is how their competitors use technology that worries them
more. Particularly Falabella due to its commercial flair. Mr. Pizarro stresses that
Banco Falabella is first class at using Client information, and says they are
commercially aggressive; for example, they issue credit cards to all
BancoEstados Clients. Another menace he sees in Falabella is that a large
number of the department stores suppliers are BancoEstados MIPE Clients,
who could be enticed by Falabella to switch and buy financial services from them
(Porters, 2001, bargaining power of Clients). As has been shown in the US
market by Commerce Bank and by Wells Fargo, managing a bank with the
commercial orientation of a retailer could have a significant impact on increasing
market share and profits (The Economist, 2004, p.19 and p.21).

With respect to Banco de Chiles ICT stock, Mr. Mena believes they have a
hotch-potch of systems and technologies, and will have to make changes to stay
competitive. Mr. Courard has a slightly different opinion, when he says that
Banco de Chile invests a lot more on ICT than BancoEstado, and has spent more
time and effort on improving technology and processes. Mr.Gonzalez thinks
Banco de Chile has better time to market than themselves, and this could be a
result of better use of technology.

Finally, with reference to BCI, Mr. Mena thinks it is one of the banks with the
best ICT investment stock; and with reference to Banco de Desarrollo, Mr.
Pizarro says it is a significant player in the segments his Division serves, but it
tends to follow BancoEstado on technology.

The interviews were used to discuss issue of interest to the interviewee. Mr.
Mena is particularly sensitive to the banks need to educate its Clients as part of
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its social role. How should the bank make its offering compatible with its Clients
needs? How should they move in advance of their Clients needs, to fulfil their
mission of expanding the communitys use of financial services? There is an
important trade-off here between the banks objective of being commercially
profitable and therefore serve its Clients need of the day; and its social role of
extending the Chilean populations access to banking.

Linking this concern with the initiative to move to a segmentation operating
model as described above, and with the use of technology, could define an
operating model that allows for the convergence of this dilemma. Applying
Watkins (1998) three service archetype model (see figure 2.7) the bank needs to
put in technology to automate as far as possible the delivery of its simpler
products and services, such as current accounts, payment instruments, simple
insurance products, and telebanking. These services are based on a large volume
of transactions per unit of time, and therefore highly automated (equipment
based, low contact time and with little discretionary decision-making on the part
of Client facing staff, no customisation, heavily based on back-office transaction
processes, marketed on a product basis). In other words, this sort of product
would be commercialised on a product basis, would be delivered on an
operational excellence value discipline (Treacy & Wiersema, 1995), and targeted
on the unbanked population and lower segments of the banks Clients.

Simultaneously, the banks staff who are liberated from those simple products
and services through automation, should be educated and trained to move up to
deliver the more advanced products operated on a service shop basis, such as
loan applications, life assurance products, mortgage loans, etc. The sales and
delivery of these services are based both on people and equipment; they require
higher contact time and more discretionary decision-making on behalf of Client
facing staff; they require more customisation, and are based on both back-office
and front-office processes. This sort of service would be offered to higher income
individuals and to the MIPE segment, where it is difficult to draw a line between
the owners personal needs and those of her/his business. The value discipline
here would be more of a customer intimacy nature (Treacy & Wiersema, 1995).

Following this, the most high calibre staff of the bank would be trained and
educated to move further up the value-added chain to sell and deliver
professional services such as pension advice, tax and investment planning,
legal services, financial instruments, etc., which would be offered to highly
sophisticated corporate Clients and high net worth or high income individuals.

By capturing un-banked individuals at the lower end, and pulling them
through the value-added chain to progressively more sophisticated products and
services, BancoEstado would fulfil its dual objective of (a) meeting its social
obligation of educating and making financial services accessible to a larger mass
of the population, and (b) increase its Clients loyalty towards the bank, and
therefore its market power which should, in turn, lead to increased performance
in the form of greater market-share, greater profits, or greater revenue as
indicated in the model proposed by Griffiths & Remenyi (2003a).

251


An interesting finding of this line of reasoning, is that departing from the banks
need to educate its Clients and the population in general, it arrives at the need for
educating its own staff. It also shows, based on Watkins (1998) three service
archetype model, how intimately co-ordinated should be the planning of a banks
only two strategic resources - talent and technology (Griffiths, 2003) in order to
develop market power and remain competitive; and how the planning of these
two resources has to be, in turn, intimately related to the banks business
planning in order for the bank to attain its mission and vision (Sauer &
Willcocks, 2002). This tight integration of envisioning and planning activities
can be achieved by applying methodologies such as Managing by Maxims as
supported by research developed by Weill & Broadbent (1998) and requires
adopting a rigorous criteria for developing business cases, analysing and
prioritising ICT investments, which the bank appears to be lacking.

One final reflection is on how the bank has to define its value discipline in order
to define the business model that will allow it to attain its objectives. How can it
live with the need to strive for operational excellence in lower segment, mass
services offerings and, simultaneously, strive for customer intimacy in other
segments where it needs to offer service shop or professional services
offerings? As supported by the research reported in Treacy & Wiersema (1995),
market leaders cannot simultaneously offer best total cost, best total solution
and best product (see figure D.1). So in this three-horned dilemma, in its
striving for Operational excellence and customer intimacy, BancoEstado will
have to relinquish having the best products. The banks management is intuitively
prepared for this, as transcends from section D.3.3 where its leadership team
defines the banks value proposition. As found by Treacy & Wiersemas (1995)
research, the value discipline adopted has a deep impact on the organisation (the
structure, the culture, the performance measures, and the critical ICT systems).
The structure would probably have to be organised along market segments, where
the business units that will pursue operational excellence will have to count on
highly reliable and low cost transactional system (Treacy & Wiersema, 1995, pp.
49-63); and those that pursue customer intimacy will need to count on deep data-
warehouse applications that will provide them with far more Client information
than that required simply to complete transactions (Treacy & Wiersema, 1995,
pp. 125-142).

252


Figure D.1. The three-horned dilemma of value discipline



D.7. Conclusion.

Although a full analysis and interpretation of the evidence presented in this case-
study will be done in the cross-case study analysis in Chapter 5, it is useful to
document a few initial reflections on the findings.
(a) BancoEstado is a state owned bank created in 1953 as the result of the
merger of four financial institutions. Its mission statement brings together
the need for competitiveness for operating in the commercial banking
space, with the developmental role of banks through the allocation of
resources, with the social role of making quality-of-life-enhancing
financial products available to all Chileans. It is the combination of these
three objectives, together with the fact that it is a state-owned bank, that
define BancoEstado and sets it apart from the rest of the participants in
the Chilean financial services system. For most of its history it has been a
key instrument for the government of the day to execute economic and
developmental policies. It is the challenge of managing the divergent
forces that underlie the three objectives, that determines how the bank
deploys the only two strategic resources an information intensive
organisation has to achieve its goals: talent and information technology
(Griffiths, 2003). Becoming available to all Chileans is partly
materialised by a continuous expansion of its branch network which has
grown 45 percent, or one hundred offices, since 1998, leading to the
present network of 310 branch offices. Another aspect of reaching out to
as many Chileans as possible is the delivery of products and services. The
Operational Excellence
best product
Product
Leadership
Operational
competence
Customer
responsive
Product
differentiation
Customer Intimacy
best total cost
best total solution
253
year 2002 was a record breaking year for BancoEstado in consumer loans,
the sale of insurance, and of credit cards. To its undisputed leadership in
state-subsidised mortgage loans, in 2002 the bank increased its non-
subsidised mortgages targeted on middle income individuals. A
significant part of BancoEstados growth has come from sectors of the
population who previously had no access to financial services sector, at
all. Consistent with its focus on the lower segments of the market is that
the bank has defined that it will give all its Clients the same quality of
service and its claim that it has led the market in transferring interest rate
reductions to its Clients loans (Banco del Estado, 2003, p.4). Apart from
serving lower segment individuals, the bank gives them solutions for their
businesses. BancoEstado claims that it has one of the largest micro-
business portfolios in Latin America. It served 60,000 by the end of 2002,
and intends to reach 100,000 by 2004. With fee income at 13.9 percent of
gross margin (Banco del Estado, 2003, p.44), BancoEstado is
significantly below the industry average on this metric. In the strategic
group analysis of the Chilean banking system performed by Griffiths
(2004), BancoEstado appears well to the top-right hand side of the graph,
forming a solitary firm strategic group, with an extremely large
strategic deviation. From a strategy perspective, its large deviation can be
explained by the fact that it has the mentioned social development support
mission, apart from the necessity of being profitable. From a conformance
perspective, BancoEstado can afford to be deviant because it is a state
owned bank with its deposits, in effect, being guaranteed by the state.
(b) With a market share of approximately 14 percent in terms of total assets
and of loans, BancoEstado is still the fourth largest bank in the Chilean
system. However, that is a significant decline from its peak of over 50
percent market share in the early 1970s. Pushed by its objective of
recovering market share and penetrating the consumer market, the bank
has been highly aggressive on price in the last few years, when it has
competed more on price than on quality, despite not having a cost
advantage with respect to the other players in the market. This tactic,
which has allowed the bank to grow from 4 percent to 13 percent market-
share in personal banking in three years, is currently being reviewed
because, in the long term, the bank has to live profitably from what it
makes from doing business with its Clients.
(c) Assimilating trust to service reliability and access to service convenience
in Treacy & Wiersemas (1995) description of dimensions of customer
value, it can be said that the bankss leadership believes that service
reliability is the key dimension of value, followed closely by price and
service convenience, in that order. Consistently with these top dimensions
of customer value, in terms of the Value Proposition of the bank to its
Clients, the interviewees unequivocally rank best total solution and best
total cost over best product. From the opinion of its leaders, this appears
to be a case of a bank that focuses on two value propositions, based on
solutions tailored to their target market with the constraint that this
segment is limited on resources.


254
(d) When discussing the value discipline of BancoEstado with its Managers,
one of the issues that surfaced was the need for the bank to reduce
transaction cost by inducing Clients to move to more convenient channels
CRM and improve customer attention to the more profitable Clients.
The latter appears to be in conflict with the banks stated strategy of
giving all its Clients the same quality of service.
(e) In discussions on which are the core processes of the organisation in its
delivery of value to Clients, an overwhelming majority of informants
mentioned end-to-end product delivery and customer service cycle, in that
order, as the key processes. This is consistent with the Value Proposition
of best total cost mentioned before. Commercialisation and market
exploitation were also defined as important processes by most
interviewees, and this is consistent with best total solution. However, it is
surprising that the process of solution development was not defined as a
core process in an organisation offering a best total solution value
proposition.
(f) The bank defines itself as a follower in the use of technology. It is
conservative on ICT, having defined it does not intend to be on the
cutting edge of technology, but rather adopt proven solutions.
Technology, per se, is not important for the bank, and technological
developments are not a significant driver for new projects. Applying Weill
& Broadbents (1998) terminology, BancoEstados view of technology is
somewhere in between a Utility and a Dependent view of its strategic
value.
(g) Although in the last few years the genesis of ICT initiatives has
significantly moved from the IT department to the users, IT is still very
much inward looking and will have to move towards more Client centred
issues. Up to now, the two main focuses of IT have been (a) cost
reduction, essential to making possible a massive operation; and (b)
achieving more precision in information (reports for supervisors,
regulators, accounting and MIS) but the bank is notoriously behind its
competitors on information to deal with Clients. From now on the focus
will have to be to use information for improving sales and relationship
with Clients, and for improving the banks agility for launching new
products and solutions.
(h) Part of the lack of Client information is that there are significant
information integration problems, conditioned by the past, which also
translate into management information deficiencies. The bank is lacking
analytical management information.
(i) In terms of decision criteria for ICT investments, it becomes clear from
the interviews that there is a broad dispersion of opinions on which are
the critical quantitative and qualitative criteria applied by the bank. It also
becomes clear that the bank does not have a well developed and
systematically applied methodology for evaluating and prioritising
projects. The bank needs to do something about this quite urgently,
particularly as the bank is going through an intense transformation effort
since the mid nineties, which makes it more difficult to have strategy and
technology well aligned.

255

(j) In terms of which will be the predominant drivers for future ICT
investments, the informants were almost equally divided between
transaction systems to support core processes and datawarehouse projects
aimed at better customer knowledge. From the discussions held at the
interviews, and taking account of the present state of the banks
technological infrastructure, it appears that the former should be on the
banks agenda in the short term, and the latter immediately afterwards.
However, competitive realities will force the bank to progress step-wise,
making relatively small transactional improvements that enable better
data management initiatives, followed by further transactional
improvements, and so on. Initiatives aimed at improving transaction
systems to achieve more effective support processes and datawarehouse
projects aimed at internal controls were also mentioned, but with less
intensity.
(k) The bank intends moving towards a model for servicing/attending
different Client segments that will include the implementation of a sub-
segmented model for Client service with a value proposition for each sub-
segment. This is a process change project that will trigger many ICT
initiatives.
(l) As can be seen in the preceding paragraphs (d), (g), (h), (j) and (k), there
are many demands on ICT, with users claiming for support on several
very different fronts, and limited resources. On the other hand, as seen in
(f) users do not see ICT as visionaries that bring them ideas, and the bank
has a Utility or Demand view of technology, which means technology
must be permanently monitored in terms of its alignment with strategy.
Additionally, in (i) it becomes clear that there is no full agreement on the
decision criteria to prioritise ICT investments and that there is any
systematic methodology to evaluate the opportunities. Finally, and to
make things even more complex, the bank has adopted a value discipline
based on two value propositions to Clients: best total cost and best total
solution. All this appears to be pointing towards the bank needing a more
rigorous and interactive process of ICT planning, based on Managing by
Maxims (Weill & Broadbent, 1998), in which the users take a leadership
role.
(m) There is an important trade-off between a banks objective of being
commercially profitable and therefore serve its Clients needs of the day;
and its social role of extending the Chilean populations access to banking
and educating its Clients in the use of financial services. Applying
Watkins (1998) three service archetype model, this case proposes an
operating model that allows for the convergence of the dilemma. An
interesting finding of this line of reasoning, is that departing from the
banks need to educate its Clients and the population in general, it arrives
at the need for educating its own staff. It also shows, based on Watkins
(1998) three service archetype model, how intimately co-ordinated should
be the planning of a banks only two strategic resources - talent and
technology (Griffiths, 2003) in order to develop market power and
remain competitive; and how the planning of these two resources has to
be, in turn, intimately related to the banks business planning in order for
the bank to attain its mission and vision (Sauer & Willcocks, 2002).
256


APPENDIX E.

BANCO SANTANDER SANTIAGO: A UNIVERSAL
BANK WITH DILEMMAS ON STRATEGY, BUT A
CLEAR UTILITY APPROACH TO TECHNOLOGY.


E.1. Introduction: History of the Bank.

Grupo Santander from Spain opened its first office in Chile in 1978, as a second floor bank. Four
years later it acquired all assets and liabilities of a Chilean retail bank called Banco Espaol, and
operated under that brand-name until 1989, when it changed name to Banco Santander Chile. In
1993, Banco Santander Chile acquired Fincar and thus entered the mid to lower income personal
financial services market. An important milestone was achieved the following year, when Banco
Santander Chile listed on the New York Stock Exchange. A year after that, Banco Santander
Chile acquired another financial services provider, called Financiera Fusa, and merged it with
Fincar to give birth to its Banefe Division. In 1996 Banco Santander Chile merged with Banco
Osorno (Banco Santander Chile, 2004, p.16).

In 1999, Grupo Santander in Spain merged with Banco Central Hispano to form Grupo Santander
Central Hispano. In Chile, this meant that Banco Santander Chile became a shareholder of Banco
Santiago which had, in turn, merged with Banco OHiggins two years earlier. This situation
triggered a process by which Banco Santander Chile increased its stakes in Banco Santiago until
it took full control by April 2002. Four months later the merger of both banks was approved by
the banking authorities and shareholders, and by April 2003 full operational integration was
achieved and the bank was re-launched as Banco Santander-Santiago (Banco Santander Chile,
2004, p.17).

Miguel Mata, Corporate Organisation Manager, gave a background history of the bank, from a
technology point of view. During the 1994-95 period, Banco OHiggins merged with the local
operations of Banco Central Hispano from Spain and HSBC, therefore incorporating foreign
shareholders. It also listed its debt in the US Stock Exchange (ADR). All these external demands
added considerable rigour to its investment decision making, in particular ICT investments. In
1997 Banco OHiggins merged with Banco Santiago. This was particularly complicated because
the two banks had very different ICT platforms. Banco OHiggins systems were enterprise wide,
mainframe-based, while Banco Santiagos were much less structured, client-server based (they
had over 48 servers). The bank decided to adopt the Banco de Santiago systems, but merging
those two operations from a technology point of view was a failure. This led the merged bank to
go out to look for a core-banking system package and decided on Altamira (and back to IBM
mainframe computers). As mentioned above, Banco Santiago was eventually controlled by Banco
Santander Chile and their operations were merged in 2002. This last merger was a lot less
traumatic than the previously mentioned one.

Mr. Mata explained that Banco Santander-Santiago must be analysed taking account that it is part
of a Latin American franchise. This has an impact on technology, in the sense that the bank is
well on the way to setting up shared-services for the Region. These shared services can be
conceived in terms of development centres and processing centres. The ICT budget is defined by
head-office in Spain. The different business units make their requests for technology initiatives
which are prioritised and signed off by the IT Committee within the constraints of the total
budget. Once the initiatives are signed off and prioritised, the process of execution is
operationalised by the IT Demand Management Department.


257
E.2. Sources of Evidence.

Several sources of information have been used in order to triangulate evidence:
a. Interviews: Semi-structured in-depth interviews, as opposed to open ended ones, were
performed because this is a multiple case study and otherwise there is a risk of collecting a
wealth of information from individually valuable interviews that are then difficult to
generalise from (Remenyi et al., 1998; Miles & Huberman, 1994, p.17). An interview
guide (see Appendix A) was developed on the basis of the four aspects of the research
question, and of the conceptual framework indicated in the Research Proposal and refined
in Griffiths & Remenyi (2003).
b. Documents: Analysis of multiple documentary sources such as the reports
produced by the banking authorities (SBIF) and the annual reports of Banco
Santander Chile. Through these documents it was possible to understand
the banks history and to have access to strategy statements and
performance measures.
According to Gummesson (1991, p.21, cited by Remenyi et al., 1998) access or
the ability to get close to the object of study in order to find out what is
happening, is the researchers biggest problem. In this case, considering that
access to informants at the highest levels in the bank was obtained and that,
following Bannister (2001, p.149) each interviewee was asked if they would
suggest additional interviewees or other sources of information, there is
confidence in the validity and relevance of the sources of information.

As specified in the Research Proposal, interviews were held with the Operations
Manager, the Planning Manager, the Market Managers, and the Information
Technology Manager. Unfortunately, the interview with the Managing Director
had to be cancelled. The people interviewed, with a brief description of their
background, are the following:
Miguel Mata, Gerente Division Organizacion y Seguimiento de Negocios (Business
Organisation and Development Division Manager). Mr. Mata has been in banking since
1990 when he joined Banco OHiggins (then owned by the Luksic Group) in the
Controller function. After the merger he was appointed Controller at Banco Santiago.
After Banco Santiago was merged with Banco Santander Chile, Mr. Mata took his
present position where he is responsible for producing management information for local
use, and for analysing the rationality of the organisational structure. The latter
encompasses prioritising projects, analysing business cases, and controlling the budget
for ICT initiatives. He also has to make sure the projects are aligned with the three-year
development plan (I-06). Mr Mata is part of the ICT Committee which is composed of
the General Manager plus his first level of report managers. Mr. Mata is a graduate
Mechanical Engineer. He reports to the General Manager.
Juan Fernandez, Gerente de Operaciones y Administracin. Mr. Fernandez has been
working for banks since 1975, and has been with Banco Santander for eleven years. He
started off in Operations and Accounting, then moved on to Administration and Services.
At his present position, Mr. Fernandez is responsible for Operations, Technology and all
administrative services such as purchasing (which is centralised at the bank; that is, the
business units specify and request what they need, but Administration does the actual
purchasing in a centralised way) and Accounting. With respect to ICT, much of the
infrastructure operation is outsourced to IBM and others; and almost all the development
of new applications is outsourced to ALTEC, a Santander Group service firm.
Raimundo Monge, Strategic Planning Manager. Mr. Monge joined Santander Chile in
1990, when it had a mere 4 percent market share, so he has lived the whole growth-
through-acquisition process. He has been in the Planning and Finance functions for his
whole career. Mr. Monge wears two hats at Grupo Santander: (a) Financial Planning
at the Chile holding company, where he looks mostly at acquisitions, its financing and
debt management, and (b) Strategic Planning of business at the Bank itself. The planning
258
process at the bank is led by business and commercial planning all the resource
planning (HR, ICT, Finance, etc) has to fall in line with this. Raimundo Monge
graduated in Economics from the Universidad Catolica, and took an MBA at UCLA.
Raimundo is not a member of the ICT Committee. He is not closely involved with ICT
decisions except in special events such as operational integration as a result of mergers.
His input into ICT strategy has mostly been in helping define how to adopt and adapt
global Santander solutions.
Ignacio Ruiz Tagle, Gerente Division Banca Global (Corporate Banking Division
Manager). Ignacio Ruiz-Tagle has been with Banco Santander for over 12 years. During
his tenure, he started off on the commercial side of the business, for enterprise (business)
Clients. He later moved to Cash Management, and subsequently to International Banking
and Foreign Exchange. In his present position, Mr. Ruiz-Tagle is responsible for the
management of large corporate Clients, such as Global Clients, Institutional Banks, and
assists them to set up large, complex deals, such as major Property Developments,
infrastructure privatisation and operation, etc. His Division is responsible for the market,
that is making sure those Clients get an integral treatment with all the banks
capabilities, but he does not manage the delivery of products. Mr. Ruiz-Tagle has not
been very closely involved with ICT, but he is a member of the Technology Committee
that prioritises initiatives, where his role is more related to managing the budget, and
over-seeing that his Divisions projects are properly analysed and prioritised.

David Turiel, Controller. Mr. Turiel has been working for Banco Santander in Latin
America since 1995. He spent 5 years with the Bank in Brazil before coming to Chile. In
Brazil he initially worked on monitoring the operation through managerial accounting
and controlling, and consolidated managerial accounting data for reporting to Head-
Office. During his period in Brazil, Santander acquired and merged four banks in that
market, and Mr. Turiel led a team that defined the operating model for the commercial
operations of the bank. After that, Mr. Turiel led a team that defined a Treasury system
for all the operations in Brazil, which was later taken as a corporate model by Santander.
Since in Chile, David Turiel is a member of the ICT Committee, in the role of demand
management and prioritisation. Banco Santander has recently started a global
management information system (management cockpit) which will be piloted in Chile;
Mr.Turiel is the Santander Chile leader for this project
Marcos Thomas, Gerente Control Financiero. Mr. Thomas has been working for banks
since 1989 when he joined Banco Edwards. He remained with Baco Edwards until 1997
in the position of Strategic Planning Manager. From 1997 to 2000 he was the Planning
Manager for Banco Torquist in Argentina, which was a joint venture of the Luksic
Group and Banco Central Hispano (the latter was subsequently acquired by Banco
Santander). In 2001 Mr. Thomas returned to Chile where he joined Banco Santiago
which had been acquired, but still not merged, by Banco Santander Chile.
Alberto Salinas, Group Project Leader, ALTEC. As from early 2004, Aberto was
appointed Technical Leader of a Global Management Information System, at ALTEC,
one of Grupo Santanders subsidiaries, which looks after ICT for the Group. From 1998
to 2003, Alberto was Operations and Technology Manager at Banco de Santiago, and
after the merger in 2003, at Banco Santander-Santiago. During the period 1996-97,
Alberto was Operations and Technology Manager at BankBoston Argentina. Before that
he had held the same position at Banco OHiggins, where he was previously ICT
Manager. In all, Alberto has been working close to the technology area in Financial
Services organisations since 1981.
Orlando Toledo, Gerente de Reingenieria . Orlando Toledo started his career at Banco
OHiggins (later acquired by Banco Santiago, which was itself acquired by Santander)
some 23 years ago. At Banco OHiggins, Mr. Toledo started off in the ICT Department
where he reached the ICT Manager position. He then moved to the position of Strategic
Planning Manager, and finally became the Operations and Technology Division
Manager. When Banco OHiggins was taken over by Banco Santiago, Mr. Toledo was
appointed Planning Division Manager, until the bank was merged with Banco Santander
and he came to his present position.
Enrique Morales, Gerente de Gestion de Demanda de Tecnologia. Enrique Morales
position is responsible for managing the relationship with ALTEC. This means, on the
259
internal front, managing the bank users demand for ICT development services, and on
the external front, managing the Service Level Agreements (SLA) with ALTEC. Mr.
Morales started his career in technology in 1981 when he was working for CODELCO,
the largest copper-mining company in Chile. Five years later he joined Banco OHiggins
and has remained in banks ever since. He spent a period of time working for the
Operations and Technology division of Banco Torquist in Argentina, and then returned
to Chile where he joined Banco Santiago as ICT Manager.
German Gonzalez, Gerente Division Clientes. Mr. Gonzalez has been with Banco
Santander or its acquired banks for some 14 years. He started off in Banco OHiggins,
was later with Banco Santiago, and transferred to Santander Santiago since the merger.
During his career German Gonzalez has been close to technology decisions, on both user
and project management roles. He is a graduate in business administration.
Veronica Lara, Inteligencia de Negocios. Ms. Lara has been with Banco Santander for
some 12 years, where she has been client manager and has been project manager on
technology projects. She now reports to Mr. Gonzalez and takes care of all the CRM and
business intelligence initiatives. She is a graduate in business administration


It must be pointed out that most interviews were individual, but there were
exceptions in which they were held jointly for several informants, due to the
banks preference in that sense. The interviews held jointly were those of David
Turiel and Marcos Thomas; Juan Fernandez, Orlando Toledo and Enrique
Morales; and German Gonzalez and Veronica Lara. The experience from these
interviews is that a joint interview has an advantage in that it keeps the
informants more objective, as their opinions are being scrutinized on line by
people who know the context very well; on the other hand, it is possible that
richness of opinions is lost, as the informants tend to give their opinions in a
more generally acceptable way. Another comment is that time management
becomes more challenging in a joint interview, and allows for less depth in the
analysis of the interviewees professional history with the organisation.


E.3. Strategic Positioning of Banco Security.

E.3.1. Banco Santander-Santiago and its Competitive Context.

As mentioned in Chapter 3 and Griffiths (2004), the Chilean banking system comprised, at
December 2002, twenty eight institutions as a result of having followed the global trend of rapid
consolidation. Taking an exchange rate of Chilean pesos 695.28 to the US dollar, at end of 2002,
the total assets in the system amounted to some US$ 67 billion (SBIF, 2003, p.35, Activo
Circulante plus Activo Fijo), of which Banco Santander Santiago represented just under 23.9
percent (SBIF, 2003, p.46). Having over US$ 5 billion and less than US$ 100 billion in assets, it
is classified as a mid-sized bank on international standards, according to criteria adopted by the
Tower Group (IBV, 2003). In terms of loans, the total Chilean banking system amounted, at the
time, to US$ 45.6 billion (SBIF, 2003), of which US$ 11.1 billion (SBIF, 2003, p.65) are
managed by Banco Santander Santiago, which represents 24.4 percent of the market. The total
amount of deposits in the Chilean banking system at December 2002 were, approximately, US$
41.1 billion (SBIF, 2003) of which US$ 9.4 billion were with Banco Santander Santiago (SBIF,
2003, p.47), which represents a 22.8 percent market share.

On the revenue diversification front, it was mentioned in Chapter 4 that the Chilean banking
system also followed the global trend of increasing fee-based income as a proportion of total
income. In the twelve year period from 1990 to 2002 fee-based income, for the banking system as
a whole, grew from 6 percent to 18.8 percent of total income (SBIF, 2003; SBIF, 2001). At
December 2002, Banco Santander Santiago was just over the average of the system as its fee-
based income represents just over 20 percent. In its Annual Report at December 2003
260
(BancoSantander Chile, 2004, p. 35), Banco Santander Santiago compares fee-based income with
Operational Expenses, and presents a ratio of 44.7 percent. On this measure, Banco Santander
Santiago ranks first in the Chilean banking system.

In the strategic group analysis of the Chilean banking system performed in Chapter 3, it becomes
clear that Banco Santander Santiago operates in the same strategic group as its rival BBVA. The
general conclusion of that analysis is that a banks performance is related to how well it competes
with the banks in its own strategic group. From figures 3.4 and 3.5, it is clear that Banco
Santander Santiago has been more successful in both profitability and market share than BBVA
Chile.

Banco Santander Santiago is one of the most efficient banks in Chile. Its efficiency ratio in 2003
worked out to be 43.6 percent, which was 6 percentage points below the system average and
outstanding even at international standards. This is remarkable for an operation in a small country
like Chile (Banco Santiago Chile, 2004, p.29 and p.35). Significant progress on this front was
made in 2003 with respect to 2002, partly owed to a sharp drop in Operational Expenses due to
efficiencies achieved as a result of the Santander Santiago merger (Banco Santander Chile,
p.35). It would be interesting to do some in-depth research to understand the sources of such
efficiencies, which probably derive from Banco Santanders abitility to develop synergies across
borders and build economies of scale.

Banco Santander Santiago reports a BIS capital adequacy ratio of 14.27 percent at December
2002, and 14.61 percent at December 2003 (Banco Santander Chile, 2004), which are not only
significantly higher than the minimum requirement of 8 percent, but also higher than the Chilean
banking system average of 13.9 percent in 2002 (SBIF, 2003, p.10) and 14.06 percent in
December 2003 (SBIF, 2004, p.10).



8.3.2. Banco Santander-Santiagos Business Strategy

As opposed to most of the other Chilean banks analysed in this study, Banco Santander-
Santiagos strategy cannot be analysed without taking into account that it is part of a Latin-
American operation of a Euro-Iberoamerican Group, as it defines itself. According to Mr.
Francisco Luzon, Managing Director for the Latin America Division:

We are the leading financial services organisation in Ibero-America, with a strong
presence in the markets with the greatest potential (i.e.,Brazil and Mexico), and in the
most mature ones (i.e., Chile and Puerto Rico) (Banco Santanader Chile, 2004, p.13).

In Chile, the Santander Group operates under three brand names: Banco Santande-Santiago,
Banefe and Summa Bansander. Quoting its President, Mr. Mauricio Larrain:

Santander-Santiago is the top bank in the country, in terms of size and profitability,
while Banefe is the market leader in consumer finance and micro-credit, and AFP
Summa Bansander manages pension funds in excess of US$ 5 billion and has over half a
million Clients (Banco Santanader Chile, 2004, p.14).

In his annual letter to the shareholders, Mr. Larrain mentions that one of the important milestones
of 2003 was the conclusion of the operational merger of Banco Santander Chile with Banco
Santiago, acquired by the Santander Group over a year earlier. He then gives an overview of the
financial results, which show impressive figures in terms of profit and profit growth, and of ROE
which reached 24.2 percent. Its efficiency ratio improved from 47.2 percent the previous year, to
43.6 percent in 2003; and fee-based revenue has shown a healthy growth. Outstanding loans have
dropped by 5.8 percent, which is explained by Mr. Larrain in terms of the bank having displaced
its assets from low return to higher return activities, or from Corporate and Large Enterprise
banking where spreads are small, to consumer lending and leasing where spreads are greater
(Banco Santander Chile, 2004, p.18).
261

In the mentioned letter to the banks shareholders, Mr. Larrain gives two components of
qualitative information which are of more interest to this study than the analysis of performance
figures. First, he gives his vision for the Chilean operation, which is to consolidate it as the best
financial institution in Latin America, by 2006. He does not define what the best financial
institution actually means or how the progress towards that vision will be monitored, but he says
that the ambition is based:

On a clear strategic plan shared by all the banks teams, the largest Client base among
the private sector banks, the main distribution network in the country, an excellent brand
image, the support of the world-wide Santander Group, and the commitment of all the
banks staff.

The other interesting information is what will be the focus of the banks strategy for 2004:
profitability, growth of commercial banking, and quality of service to Clients. The letter does not
explain how the bank intends to make these three goals converge (Banco Santander Chile, 2004,
pp.18-9). However, it is quite possible that achieving them will require ICT investment decisions,
so they are of interest to this study.

In his introduction to the analysis of Banco Santander Santiagos (which is the unit of analysis of
this case study) performance in 2003, its General Manager, Mr. Oscar Von Chrismar, highlights
that during 2003 the bank has worked hard on market segmentation, to better understand its
Clients needs and expectations. He predicts particularly tough challenges in the commercial area
for 2004 (Banco Santander Chile, 2004, p.30).

The bank is organised along market segments, and sub-segments. It has three market facing
Divisions: (a) Banca Global, which covers corporate banking, and is sub segmented into
Corporations, Large Companies, Property Developers, Institutional Clients, and Companies. (b)
Banca Comercial y Minorista (Commercial banking and Retail) which looks after mid-to-high
income individuals and smaller companies. The personal banking area is subdivided into Nobel,
Preferred, Premier, Classic, and Generation, while the smaller enterprises are sub-segmented
into SME and Businesses. The definition of these categories is not given. These Clients are served
through an extensive branch office network. And (c) Banefe which serves emerging sectors of the
population, and micro-enterprises. The bank has a different value proposition for each segment,
with different combinations of price, product, channel, and service level.

From the analysis of the report, it is evident that the operational merger of Banco Santander and
Banco Santiago has had an impact on the banks performance during the past year. On the positive
side, the merger has enabled a strong reduction in operational costs (over 15 percent year on
year), which measured in terms of the efficiency ratio (defined as operational expense/gross
profit) has gone from 47.2 percent at December 2002, to 43.6 percent a year later (Banco
Santander Chile, 2004, p.35). On the negative side, the report admits that, as international
experience would indicate, the merger has had an impact on quality of service. In order to
overcome this problem, the bank will further strengthen its Corporate Quality Division and it will
continue implementing its Service Quality Model. The Service Quality model acts upon four
dimensions of the organisation: The Client, defined as the centre of gravity of the bank; The
People, promoting participation and teamwork; The Processes, aimed at cost control and
continuous improvement; and The Leader, who has to transmit the vision, select the
opportunities, and obtain results (Banco Santander Chile, 2004, p.43-4).

The report also gives an overview of the banks Strategic Plan for 2006, which has four main
development dimensions: (a) Strong Client orientation; (b) Focus on growth of Profit on each
Client; (c) Consolidate improvements in efficiency and productivity, without strangling growth;
and (d) Managing risk per market segment, with an adequate risk-return evaluation for each.

Banco Santander Chile has put itself a demanding goal for excellence, when it has defined that it
aspires to be the best banking group in Latin America in the next three years. It has set itself some
hard and some soft metrics for measuring progress on this front. It operates on a three-year
262
revolving budget; it has defined 12 world-class banks it wants to benchmark with; it aims at
getting external recognition through international awards, etc. The bank is very sales oriented,
and overlooks post-sales support. As a consequence, the bank has a key business issues: reduce
attrition rate which is exceedingly high.

Finally, Mr. Von Chrismars report mentions Corporate Governance and Transparency as one of
the four qualitative pillars of a successful bank administration (the other three are Human Capital,
Quality of Service, and Social Responsibility). It must be said that the Annual Report for 2003
does honour to transparency: it is of high quality standards, easy to understand and, above all, one
of the most informative of its subjects management processes and performance in the Chilean
market.


E.3.3. Value Discipline of the Organisation.

Which are the most critical dimensions of customer value at Banco Santander-Santiago? This is a
question that is bound to receive a broad spectrum of responses when posed to managers at a
universal bank (universal in the sense that it serves all lines of business and has products for all
market segments). According to Mr. Mata, the bank does not offer the same dimensions of
customer value to all segments. He clearly differentiates the massive market from the rest; in the
massive market there are different sales processes and different products (e.g., in this segment
people do not have a current account through which to process operations). In the case of
Corporate banking, despite it being a price driven segment, Mr. Mata thinks Santander-Santiago
has a strategic competitive advantage by leveraging its size, which allows it to offer attractive
proposals.

Surprisingly, an analysis of the individual responses of the interviewees reveals a pattern of
opinions where the differences of dimensions of customer value are not so marked. In the case of
corporate banking (large enterprises) and mid- to upper-income individuals, service convenience
appears to be the most important dimension, followed by service reliability and price, in that
order. In the case of smaller companies and lower income individuals, service convenience also
appears be the top ranking dimension of customer value, followed by price and service
convenience, in that order. In both categories product features appear to be more important than
product quality. As expected, expert advice seems to be more important in the large enterprise
and mid- to high- income individuals segments, than in the others.

Only Mr. Ruiz-Tagle, head of corporate banking, mentioned support services as important, and
even he ranked it only fourth in importance. This lack of focus on support services could possibly
be linked to Mr. Monges remark:

The bank is very sales oriented, and overlooks post-sales support. As a consequence,
the bank has a key business issues: reducing attrition rate which is exceedingly high.



It is interesting to note that the three informants who are closest to the market have opinions that
differ from the pattern of opinion. Mr. Ruiz-Tagle, who looks after large enterprise Clients, puts
expert advice first, followed by product features, while German Gonzalez and Veronica Lara,
who are responsible for retail Clients, place product features first, followed by product quality.

David Turiel and Marcos Thomas relate the dimensions of customer value to the type of financial
product being dealt with. For interest-based products (i.e. loans) it is price that predominates; on
the other hand, for fee-based services, the Client usually looks for the product quality/features or
service convenience/reliability. This opinion is aligned with Baets (1996) finding, in a study of
mid-size continental European banks, that interest-based products are significantly sensitive to
price and quite insensitive to knowledge of staff or the technology applied; and that fee-based
products are more sensitive to knowledge of staff (service reliability?) and financial engineering
263
(product quality?) than to price. Messrs Turiel and Thomas also mentioned that a great majority
of Clients are still not prepared for valuing service.

With respect to the value proposition of the bank to its Clients, an analysis of the interviews leads
to a sense that the bank is in the midst of a transition of its value discipline. Mr Mata says that up
to a year ago the bank was in the efficiency race and competed on price (i.e., it set up a back-
office banking factory which positioned the bank on scale). However, in the past year it has
combined that cost efficiency with a clever segmentation of the market, which has allowed it to
move from selling products to selling solutions (packages) and therefore to move away from price
leadership to being able to charge a premium for its services (i.e., from best total cost to best total
solution). Mr. Gonzalez and Ms. Lara mention a similar trend, although a difference in timing,
when they say that:

At present, the value proposition to [retail] Clients is based on best total cost, but in
future it will move to a more complete and integral solution, based on attributes such as
expert advice on investments and pension funds [best total solution, or best product].

Similarly, Juan Gonzalez, Enrique Morales and Orlando Toledo, say that:

At present, the value proposition of the bank is centred on best product, followed by
best total costbut in future the bank will move to best total solution.

Again, like in the key dimensions of customer value, there are opinions that the value proposition
changes for each market segment. One interviewee mentioned he thinks the bank has a different
value proposition for each segment but, in general, ranks them as best total solution, best total
cost, and best product. Another interviewee said that the value proposition depends on the
business unit:

For BANEFE, focused on consumer loans, best total cost is the value proposition. In
the case of Personal Banking, it could be best product, and in Enterprise Banking it is
best total solution.

Messrs. Turiel and Thomas say they believe best total cost and best total solution are the basis of
Banco Santander Chiles value proposition, however, this depends on the market segment.

The only opinions that do not give a sense of transition nor of dependence on the market-segment,
are those of Mr. Monge (best total solution) and of Mr. Ruiz-Tagle, who believes that Banco
Santander-Santiago:

Has the best combination of products in the market, the best investment banking
service, and the best treasury service. On the other hand, the banks objective is to be
[our] Corporate Clients first bank (i.e., they are bound to work with other banks as
well, but Santander should be their primary bank).

Mr. Ruiz-Tagle therefore defined best total solution, followed by best total cost as their key value
propositions, but it must be said that this opinion appears to be based on the perspective of his
business-unit alone, and not the bank as a whole.

During the course of the interviews, several of the interviewees were asked why the bank with the
best efficiency ratio in the market did not play for best total cost, outright. Raimundo Monge
explained that, although they are very efficient (even at international standards) this is so on
average, but not in all products. He also mentioned that this analysis is not so simple in financial
services where distribution is complex due to the combination of Channel-Product-Price. Mr.
Monge thinks the number of branches is a key differentiator, particularly in large, complex
projects like the Santiago Transport Ticketing project they are competing for. Another
interviewee mentioned that there is a lot of push for efficiency, but efficiency gains are aimed at
increasing profitability, not at transferring the benefits to the Client in the form of consumer
surplus.
264

As with dimensions of customer value and value proposition, there was also a variety of opinions
on which are the core processes for the organisation to deliver its value proposition. However,
end to end product delivery and commercialisation were the most frequently mentioned, followed
by design and launch new products and customer service cycle. Market exploitation was also
mentioned quite frequently. Considering that end to end product delivery is the critical process
for an operational excellence value discipline, and that commercialisation and market
exploitation are closely related to the customer intimacy value discipline, the opinions on core
processes, as those on dimensions of value and on value propositions before, reflect the co-
existence of these two predominating disciplines at the bank.



Mr. Monge is the only interviewee who mentioned market exploitation as the most important
process, and he supported his opinion on the fact that, for a small market like Chiles where the
bank has such a large market share, market exploitation is critical because it is a way of
increasing profitability without significantly increasing risk exposure.

At an interview it was mentioned that one of the main bottlenecks affecting the business is that
the banks processes are not designed with the Client in mind, but more focused on complying
with accounting and controlling requirements. The result of this is that sales people have
problems in communicating to Operations, and that Client Managers have to devote a significant
amount of time to back-office issues, which introduces an enormous cost to the operation. An
example of this is that bank statements for Clients present information grouped in the form that
suits Accounting with a large amount of transactions charged to Other Charges. This is a
source of many queries from Clients, to explain which takes a lot of effort on the part of the
Clients manager, who has to dig into the banks information and talk to Operations and
Accounting people to be able to give an explanation. This not only introduces inefficiencies, but
also a slow response time to the Client.

Although it needs further research, the example of the previous paragraph could be indicating one
of the problems of migrating value disciplines, or of living with the co-existence of two or three
value-disciplines. With the deep impact that a value discipline has on organisation and culture,
how can an organisation be effective in all three? How can they get their business units to live
together with such different design requirements? How do they negotiate the two opposing forces
of convergence or consistency (such as the intrinsic need to take advantage of established skills
and knowledge, typical of operational excellence), and those of divergence or variety (prime
among those is the obsession with innovation, typical of product leaders; or designing specific
solutions for each Client, typical of customer intimacy ) (Mintzberg & McHugh, 1985)


E.4. The Role of Technology: Past and Present.

E.4.1.Overview of the ICT Function.

The bank has a utility vision of ICT (Weill & Broadbent, 1998). ICT is a non-issue unless it
doesnt work, in which case all management attention turns to it, says Raimundo Monge. In
Messrs Turiel and Thomas view, ICT is a utility in the sense that it is at the disposal of the
business, and has to be there when required, but it is not a strategy enabler: ICT follows strategy.
In a similar line of thought, Miguel Mata says that ICT is at the service of the business; it is the
Market Business Units that set the priorities. This is reinforced by the fact that in his two-page
address to the banks shareholders, Mauricio Larrain, the President of the Board, does not
mention the word technology a single time; and in his 21-page analysis of the banks
performance in 2003, Oscar Von Chrismar, the General Manager, doesnt mention the word
technology at all, and uses, in passing, the word Internet only twice in the final three pages where
he is talking about the banks Strategic Plan up to 2006 (Banco Santander Chile, 2004, pp. 18-
51). There is no section of the report devoted to technology or internet banking.

265
In this sense, a clear cultural difference between legacy-Santander and legacy-Santiago staff
emerges: Banco Santander was traditionally more de-centralised, in the sense that the Strategic
Business Units (Retail, Corporate, Small Business) define where they want to drive the business,
and Operations and the other support units have to fall in line. Banco Santiago had a more
centralised approach (i.e., business strategy was driven from the centre) and it gave ICT a more
strategic role. Up until last year, when the General Manager changed, the Banco Santiago culture
prevailed. Under the present administration the bank is leaning further toward the Banco
Santander model. Although the merger is operationally concluded, there is still a problem in
getting these two different cultures to blend and work together. From the interviews it appears
that until last year, the legacy Banco Santiago people had a de-facto veto power on ICT.
Nowadays, the banks leadership believes that ICT is not a source of differentiation; it believes
that it is not worth re-inventing locally, but just to take what people in Spain have already
thought out.

Not surprisingly, the users of technology do not see the IT people in the bank as visionaries that
proactively bring them solutions; in the best case they perceive IT as reactive to their demands.
The Client facing business units have a more negative opinion when they express that the service
provided by ICT to the Client facing business units of the bank is almost non-existent. In their
opinion, for the past eight years the banks ICT function has focused on integrating operations as
a result of mergers (i.e., Banco Osorno in 1997; Banco Santiago in 2002), and on implementing a
core-banking system called Altair. The consequence of this is, according to one of the
interviewees, that the bank is hardly capable of launching new products and that a high
percentage of its ICT budget goes on maintenance, with very few new services.

Another opinion is that the applications that have been implemented lately are not good for
Clients or user friendly for the banks staff, because they are trying to give global solutions to
local problems. This makes the projects very complex and lengthy for the business units. In
addition, these solutions are too focused on giving the right information to the Accounting
function instead of being focused mainly on solving Client issues. Examples given of this
situation are the Loans Approval project; the workflow for issuing credit cards and plastics in
general; and the credit card management application. When projects are part of global roll-out,
defined by Head-Office, there is hardly any participation from the users in the design; this leads
to functionality problems as well as very lengthy projects at a very high cost.

The problems indicated in the last two paragraphs could possibly be a manifestation of living
with different value disciplines. The problems described seem to result from trying to implement
back-office core-banking systems and apply global, standard solutions. These are typically
operational excellence initiatives which logically clash with moving towards customer intimacy
(Treacy & Wiersema, 1995). More light could be shed on this issue by analysing the technology
planning and ICT investment decision processes, and how they align with business planning.

From one of the interviews it appears that all key decisions are made by Head-Office and passed
down to the markets in a clear top-down style. Thick visions come from the centre in Madrid
and there is evidence of a very high adoption rate, both in business directives and technology
directives, which are at Banco Santander-Santiago, as in most banks, very closely related. From
reading the Annual Report and from the interviews with leaders of the Planning and the
Operations sides of the business, it seems that the business directives are broken down and
customised at country level, in a three-year strategic plan. The strategic plan aims at making
Banco Santander-Santiago the best bank in Latin America, and in order to achieve that it needs to
offer new products and services, which in turn require to be supported by technology. However,
from those sources plus the interviews with the market segment managers, there does not appear
to be a structured technology plan with heavy participation of the go-to-market units of the bank.
If the field identifies a great opportunity, there is space to propose it bottom-up, but this is quite
rare and is prioritised and decided upon on a case by case basis and, again, not as part of a
structured ICT plan.

To summarise the situation of ICT strategy, it can be said that most ICT investments decisions
are management driven (strategic planning), even though this responds to an ICT plan of Head
Office, not of Banco Santander-Santiago. Some initiatives come from the market-facing business
266
units, but they are not very significant. Considering that (a) most ICT applications are aimed at
reducing payroll costs which amount to 60 percent of operational costs (Raimundo Monge); and
(b) in Head-Offices vision, ITs role is to push for more proven and efficient technology which
is sustainable in time using world class solutions deployed globally (Miguel Mata), a
misalignment of strategy and technology is taking place. This misalignment results from ICT
investments being predominantly aimed at improving operational excellence when Banco
Santander-Santiagos three-year strategic plan is aiming at customer intimacy.

With respect to ICT execution, opinions are diverse in terms of information integration. German
Gonzalez and Veronica Lara say that intra-company integration is not really a serious issue. The
bank has good data-warehouses and data marts, and consistency of information is good.
Raimundo Monge supports this opinion when he says that for the most part, intra-company
integration is not a big issue and adds:

An exception to this is during times of mergers and acquisitions, when there are losses
of continuity of series of historical information. During those times there are complaints
about changes of format of reports, etc but this is more a change management issue
than an ICT issue.




Other interviewees give less favourable opinions such as:

Clearly MIS is improvable because there is still a lot of duplication of information and
reporting - Altamira has a centralised Client repository and its data-warehouse is
significantly developed, but still has room for a lot of improvement, or
Intra-company integration of information is a big problem - this has led each business
unit to create its own MIS department, based on EXCEL spreadsheet solutions, which is
very precarious and risky.


E.4.2. The ICT Budget.

Banco Santander-Santiago has instated an ICT budgeting process that drives for efficiency. One
of the interviewees descrbes it as follows: IT is told that it has to reduce its budget with respect to
the previous year by x percent. IT then communicates to the user business units which services or
new initiatives are going to be cut in order to comply. The business units then make their
arguments for keeping those services or new initiatives in the budget. Finally, top management
accepts that, but then goes back to IT and tells them they have to give that service without
increasing the budget, which puts a lot of pressure for efficiency.

ICT investments imposed on Banco Santander-Santiago from the centre are initially funded by
Head Office. However, once the roll-outs are under way, these investments are charged-back to
the different geographies. In the past, these costs were absorbed by Banco Santander-Santiago as
a whole; of late, however, the tendency is to charge back these investments to the different
business units in Chile, which is creating a lot more cost-awareness by the business units.

From the interviews with the Operations and Technology area of the bank, it is found that the
total spend on ICT amounts to some US$ 60 million per year. Of those, total investments for 2004
add up to US$ 25 million, which break down into US$ 15 million on technology improvement
and renewal, and US$ 10 million on new initiatives. By convention, the bank considers all
hardware purchases, all software purchases worth over US$ 100K, and all external
providers/developers fees, as investments to be amortized over a three year period; on the other
hand, internal payroll and software purchases below US$ 100K are expensed.

267
Table E.1 compares total spend on ICT by Banco Santander-Santiago in 2003, with the average
US bank. As can be seen, spend on ICT per employee is significantly lower in Banco Santander-
Santiago than at US banks. However, on the other three ratios taken, Banco Santander-Santiago
spends significantly more than US banks with respect to Total Operations Income and Total
Assets, and almost twice as much in relation to Total Operations Expense. This is a surprising
result for a bank that has a utility view of technology.



Table E.1. Comparison of IT Spend at Santander-Santiago with US Banks

Table E.2 compares the breakdown of ICT spend into new initiatives and on-going expenses at
Banco Santander-Santiago with the average US universal bank, and regional/national bank. As
can be seen, spend on new technology at Banco Santander-Santiago is considerably higher than at
its equivalent US banks.

US Banks: 2003 Spend on IT (based on IBM 2004 Banking Factbook, citing Tower Group and Celent).
In US$ Billions Maint. New Total New/Total (%)
National and Regional: 11.15 1.38 12.53 11.01
Universal: 9.85 1.22 11.07 11.02
Santander-Santiago (self reported in US$ Million) 50.00 10.00 60.00 16.67


Table E.2. ICT Spend Breakdown at Banco Santander Santiago Compared to US Banks


Table E.3 shows the breakdown of Banco Santander-Santiagos ICT spend into maintenance, new
technology, and replacement, and compares it to the average US, European Union (EU) and
Japanese banks. As can be seen, Banco Santander-Santiagos spend on new technology +
replacement as a proportion of total spend, is higher even than the average EU bank projected to
2006! On the other hand, when looking at only new technology as a proportion of total spend,
Banco Santander-Santiago is higher than US banks but significantly lower than EU ones.


TOTAL SPEND
RATIOS Total Oper. Income
US Banks 9,500 4.4 0.24 7.4
(IBM Banking Factbook, 2004
citing Datamonitor)
Banco Santander-Santiago 7,935 6.3 0.33 14.5
(Source data Banco Santander Chile, 2004)
IT Spend:
(%)
IT Spend per
Employee
(US$/Employee)
IT Spend:
Total Oper.
Expense (%)
ITSpend:
Total Assets
(%)
268
US and EU (excluding new entrants): Spend on IT
(based on IBM 2004 Banking Factbook, citing Tower Group).
In US$ Billion Year Maint. New Tech. Replac. Total (New+ReplNew / Total (%)
Total (%)
US Banks 2003 27.4 3.7 2.7 33.8 18.9 10.9
2007 29.2 6.1 4.5 39.8 26.6 15.3
EU Banks 2003 65.2 26.2 14.3 105.7 38.3 24.8
2006 68.9 31.4 16.1 116.4 40.8 27.0
US$ Billion
Japanese Banks FY 2004 8.8 3.0 N/A 11.8 25.5 N/A
(IBM Banking Factbook, Jan 2004, citing CELENT)
Santander Santiago 2004 35.0 10.0 15.0 60.0 41.7 16.7
(Self reported; in US$ Million)


Table E.3. ICT Spend Breakdown at Banco Santander Santiago Compared to US, EU, and
Japanese Banks.

It must be said that the real value of these benchmarks is questionable on several definition
grounds. What exactly is total ICT spend? It is clear that a hardware or software purchase
qualifies as ICT cost, but where is the line drawn between technology and bank operations labour
cost? Or, how is overhead cost allocated at each bank? When looking at ICT spend per
employee, what sense does it make to compare this ratio for a bank that does everything in-house,
with one that out-sources everything it possibly can? Do all banks use the same definition for
Total Operational Income or for Total Operational Expense? This problem is exacerbated by the
fact that these benchmarks are mostly based on self-reported figures which, again, introduces
subjectivity into the matter. And even if it were possible to standardise these definitions, what
does it really mean to spend more than another bank on ICT? Is it a sign of efficiency and
productivity, or is it a symptom of wasteful overinvestment in ICT (Carr, 2003)? What sense does
it make to look at these ratios without doing a deep analysis of the strategic positioning and value
discipline of each bank?

E.4.3 ICT Management Principles
The bank is pragmatic about outsourcing of ICT, and will outsource anything if
there is a cost advantage, according to Juan Fernandez, Orlando Toledo and
Enrique Morales. At present, all development of applications is outsourced to
ALTEC, and all platform operation is outsourced to IBM. ALTEC is a wholly
owned Grupo Santander software development and maintenance outfit.

Is this policy reasonable? Considering that information technology is one of the only two strategic
resources a bank counts on to differentiate - the other being talent (Griffiths, 2003)- should there
not be a more long term approach to these decisions? Should it not be strategic to keep some areas
in-house? Although this would be reasonable for a bank deeply committed to an operational
excellence value discipline, is it so for one that professes customer intimacy? Could this not be the
cause of the rigidities that the customer-facing business units were referring to earlier? Should not
the outsourcing policies emerge from an ICT planning exercise of the type called Managing by
Maxims (Weill & Broadbent, 1998)?
269

An interesting discussion was held with Alberto Salinas on the subject that, from experience,
there is a grey area where it is difficult to arrive at an outsourcing deal. This grey area is due to a
price/expectancy gap owing to that, very often, outsourcing vendors offer more quality of service
than strictly needed. Mr. Salinas pointed out that this may be so for the smaller banks, but it is not
the case with a large bank like Banco Santander-Santiago. The large banks have the negotiating
power to get the outsourcing providers to adapt the solution and cost to the banks requirements.

E.4.4. A reflection on the value of technology.

A lot has been said and debated, in recent times, on that information technology, like many other
revolutionary technologies that preceded it, is getting closer to its phase of advanced build-out,
and becoming an infrastructure. In other words, that ICT is becoming a cost of doing business
that must be paid by all but provide distinction to none. However, this debate was initiated by
Carr (2003) who uses a notoriously narrow definition of ICT: technologies used for processing,
storing, and transporting information in digital form.
This narrow definition of ICT gives little space for considering its impact on work processes and
people productivity which is the real bottleneck and opportunity for competitive advantage.
There is rigorous academic research that supports that ICT-based competitive advantage is given
by ICT Management and not by the technology itself (Mata et al., 1995). Therefore it could be a
mistake for the banks leadership to believe that ICT is not a source of differentiation.

The comment that:

[The banks leadership] believes that it is not worth re-inventing locally, but just to take
what people in Spain have already thought out

could be describing a valid approach if the banks strategy were to implement a world-wide
operational excellence bank, looking to standardise processes around the World. However, from
the interviews there is evidence that the bank is moving towards a model based on a customer
intimacy value discipline. If this is confirmed to be the case, this could be a source of strategy-
technology de-alignment.

E.5. Information Technology Investment Decisions.

E.5.1. ICT Decision Criteria
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As shall be analysed below, there is reasonably strong coincidence in opinions
on which are the most frequently used quantitative criteria and the most
frequent qualitative criteria for ICT decisions. However, there is a wide
dispersion of perceptions on whether qualitative criteria predominate over
qualitative, or vice-versa. Mr. Mata is emphatic when he says that:
Anything that is not quantitative or supported by a cost-benefit
analysis, is not done. If the project does not pay-back in one year, it
isnt done either.
On the other hand, Mr. Mata adds, the hurdle-rates imposed by head-office for
projects are outrageously high. Messrs. Fernandez, Toledo and Morales also
believe that quantitative criteria outweigh qualitative ones when deciding ICT
investments. On the other hand, the interviewees from the Client-facing
business units say that the most frequent criteria for going ahead with ICT
projects is qualitative (Ignacio Ruiz-Tagle, German Gonzalez, Veronica Lara).
Mr. Salinas commented that, although the bank has a stated objective of basing
at least 50 percent of its ICT investment decisions on quantitative business
cases, reality says that only about one third of investments are decided on hard
facts.

Within the quantitative criteria, practically all interviewees agree that financial metrics such as
discounted cash flow and RoI are the most frequently applied criteria; cost-benefit analysis and
cost drivers were mentioned by two interviewees each; and increase market power to enhance
profits through differentiation and through ease of search were mentioned once each. Messrs.
Fernandez, Toledo and Morales give an interesting insight when they say that the bank also
differentiates the application of criteria when the initiative comes from the commercial areas of
the bank, from when it is more back-office efficiency oriented. As an indication, when the
initiative comes from the commercial business units, net present value weighs about 50 percent in
the decision, impact on Clients in the form of improved customer service weighs 20 percent, and
ROI and risk reduction 15 percent each. If the initiative is more back office efficiency oriented,
the weights are 50 percent for the efficiency ratio improvement (greater staff efficiency), while
improved customer service and risk reduction weigh 25 percent each.

With respect to the qualitative criteria, mandatory/no choice, be it to comply with the Regulators
or with head-office directives, was mentioned as the first or second most frequent criterion at five
interviews; necessity to increase market power through product differentiation, IT alignment with
corporate objectives, service to the customer, risk reduction, greater staff efficiency, and necessity
to increase market power through ease of search, in that order, were mentioned as the following
most frequent criteria for deciding ICT investments.

Miguel Mata says that traditionally head-office has put a lot of pressure on its subsidiaries to
increase efficiency, but nowadays it has shifted more towards increasing the bottom line - but
with an efficiency ratio of 37 percent, there is little space for cost reduction so the bank has to
focus on revenue enhancement initiatives. Along the same line of thought, Mr. Ruiz-Tagle says
that:

after the mandatory projects are signed off and funded, the rest of the budget is
divided amongst the locally generated initiatives. The latter are divided into revenue
generating and into cost reduction initiatives. The bank has achieved remarkable levels
of efficiency ratio, therefore there is no low-hanging-fruit on the cost front, so revenue
generation projects are done before cost-reduction ones.
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E.5.2 Analysis of Some Major ICT Decisions and their Impact on Market Power.
With the objective of understanding further the criteria applied by Banco
Santander-Santiago in its ICT decisions, and the impact of its ICT investments
on the competitive landscape of Chilean banking, a few recent projects were
analysed.

E.5.2.1 Consolidation of Call Centres: This project was important because the
bank had several call-centres, with no integration of information between
them, which led to a Client being called from several call centres to offer
different products, with no co-ordination between them. This project
consolidated all the call centres into one. The total out-of-pocket investment
amounted to some US$ 5 million, in addition to internal costs. The three
interviewees had a role on the project: Mr. Fernandez sat on the Steering
Committee and took responsibility for budget control; Mr. Morales was the
project manager from the users side, working together with an ALTEC project
manager; and Mr. Toledo developed and tracked the balanced score card of the
project.

The project was triggered by (a) there were clear indications of Client annoyance with the
situation of being approached from several uncoordinated sources, and (b) there was a need and
opportunity to exploit incoming calls for sales purposes. The key criteria applied for making the
decision were the need to improve service to the customer and, once decided to go ahead, the
solution had to be compatible with Banco Santanders global solutions for call-centres (IT
alignment with corporate objectives).

The output with respect to Clients was improved cross-selling due to improved Client service and
ease of search. It should be added that the bank had a large number of complaints on this issue, so
this helped to improve Client satisfaction and therefore retain Clients. With respect to the internal
workings of the organisation, the project will enable the bank to further improve Client
segmentation, so the output is expected to be more pro-active go-to-market processes, followed
by streamlined processes leading to cost reductions. The project had little, if any, impact on
industry structure but, it did have a positive impact on the banks market power that led to an
increase in market share. From a competitive advantage perspective, it gave the bank a temporary
competitive advantage.





It is too early to give an opinion on the projects degree of success.


E.5.2.2. Electronic Approval of Loans: This project was at Banco OHiggins. It consisted on
setting up a new process supported by an IT application, for the approval of loans covering all the
banks products and markets, except corporate banking. It allowed shortening the loan approval
service cycle from 5 days to 6 hours. The total investment was some US$ 200 thousand, including
internal costs, and German Gonzalez was the Project Manager.

The project took place eight years ago and was triggered by the fact that the bank was having
serious Client service problems due to slowness in response to credit approval. The delays were
owed to problems in the back-office factory. On the quantitative side, the decision criteria
applied was a cost-benefit analysis; and on the qualitative, it was about improved service to the
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customer, greater staff efficiency (of the Client managers), and security of information or risk
reduction.

The output of the project with respect to Clients was in terms of improved Client service followed
by product differentiation. The impact on the internal workings of the organisation was a
downsizing of headcount and a more balanced workload, which can be summarised by
streamlined processes leading to cost reduction, followed by more pro-active go-to-market
processes. In terms of industry structure, the project led the banks competitors to react by
making their loan processes more agile. In Mr. Gonzalez opinion, the project had a very clear
impact on the banks market power through product differentiation, which led to an increase in
market share and showed up in the form of visible growth the first year. The new process and
application gave the bank a sustainable competitive advantage.

German Gonzalez believes the project had a high degree of success.

E.5.2.3. Core Business Transformation of the Bank: The implementation of ALTAIR for the
transformation of the core banking back-office processes. The scope of the project covered the
central platform that supports Accounting, Clients, Deposits and Loans. The project was the first
stage of a complete overhaul of the banks technology infrastructure. Stage 2 included
applications such as Credit Card processing, Credit Risk management, Channels (Call Centre and
Branch office; Internet banking was attempted but not very successful), and Treasury system. The
third stage, presently under way, covers non-transactional applications such as Management
Information Systems, CRM Analytics, and behaviour- prediction-models-based systems for
Credit decision making and Credit Risk management. The importance of the project is given by
the fact it was part of the strategy to expand in Latin America with a standard IT infrastructure.
The total project for the Latin American region had a budget of some US$ 60 million for
developing the Regional solution, and US$ 40 million for the roll-out to the different markets. Of
the total US$ 100 million, around US$ 10 million correspond to Banco Santander-Santiago.
Alberto Salinas, then Operations & Technology manager at the bank, was the Sponsor and Project
Leader for the implementation at Banco de Santiago.

The project was triggered by the fact that Banco Santiago, as a result if its merger with Banco
OHiggins, had serious limitations in its technology and needed to change its core system. It
carried out a solution selection process which led to choosing Altamira. At that time, Banco
Santiago was acquired by Banco Santander and therefore it needed its acquirers approval. The
project was given the green light to implement ALTAIR, which was Santanders version of
Altamira to become the standard for all the banks operations in the Region. Mr. Salinas does not
know which factors were taken into account by Santander when it decided to go for ALTAIR.

The outcome of the project, in terms of its impact on Clients, was greater flexibility that enabled
more customised products. This can be interpreted as product differentiation and improved Client
service. With respect to the internal workings of the organisation, the outcomes were more pro-
active go-to-market processes in the form of easier launching of campaigns, and streamlined
processes leading to cost reduction. With reference to industry structure, there were visible
reactions from the competition. Banco de Chile reacted by launching a major core system
transformation project; and BCI continued with its evolutionary expansion of systems. In terms of
market power, there may have been an increase which led to a possible increase in market share,
but Alberto Salinas thinks it was less than expected. Finally, Mr. Salinas thinks the project helped
the bank build a sustainable competitive advantage due to cost efficiency. As a reflection on the
last point, although it is true that Banco Santander-Santiago, through this project and other
initiatives, achieved a remarkable efficiency, it is questionable whether this advantage is
sustainable; it would appear to be more a temporary advantage.

Mr. Salinas thinks the project had a medium degree of success. This opinion is based on that not
all promises were delivered. There is not one common solution for all markets in Latin America
as was originally intended, because localisations for each country had to be made for political
reasons. The intended standardisation gave way to more flexibility. As a consequence, all the
potential synergies could not be materialised (e.g., maintenance cost savings, that was one of the
key drivers, was not achieved). Apart from this move away from standardisation, another factor
273
that has slowed the reduction of ICT maintenance costs, is the circumstantial fact that ALTEC is
based in Chile. The strong currency leads to high costs compared to other countries in the Region.
Notwithstanding, according to Mr. Mata, the ALTAIR core-banking project in Chile had a three-
year payback period.

E.5.2.4. Treasury System in Brazil: The objective was to set up a trading and investment
application to manage the banks funds and those of its Clients. The importance of the project is
given by the fact that treasury management was vital for the bank to meet its profit targets. Apart
from treasury being an important revenue generating function, the context in Brazil in those days
was highly volatile so the bank needed a tool that allowed it to understand its position and risk
exposure at all times. To this must be added that the bank went through a series of acquisitions
and mergers at the time, and it needed this tool to be able to give standard operating guidelines to
the commercial areas of all the acquired units. The result was a very sophisticated system that was
then used as the basis of a Global Treasury system. Mr. Turiel is sceptical of Banco Santanders
intention to develop a standard Treasury System to be operated in all its markets. His scepticism
is based on that it is impractical to think of a Treasury system that will be able to respond to all
the different national market specificities. It is highly dependent on the legal framework, and if it
were simple, global players like J.P.Morgan or Citi would have them, but they do not.

The project required an investment of US$ 5 million, and David Turiel was the lead user,
responsible for the functional quality assurance of the solution.

The initiative was triggered by the need to have trustworthy results in a changing [volatile]
environment. The banks management had no idea of how much the bank was earning or losing in
any given day. They did not know who in the bank was generating risk-exposure, nor how much,
so the solution had to be developed very closely with the risk management function of the bank.
Another factor was that the derivatives the bank was trading had to comply with Brazilian and
Spanish regulations, and the bank therefore needed a tool to help it ensure compliance. The
decision criteria were basically qualitative, and within these the driving force in the decision was
risk reduction.

The impact on Clients was improved Client service and more competitive pricing. The main
outcome in terms of the internal workings of the organisation, was that it reduced the amount of
work required to obtain market information (therefore streamlined processes leading to cost
reduction) and made it possible for the bank to take market positions, because without this
information Head-Office would have halted or reduced operations (more pro-active go-to-market
processes). According to Mr. Turiel, the latter is more important than the former.

With respect to industry structure, Mr. Turiel says this specific project did not appear to create
any particular reaction from the banks competitors, but it certainly reduced Banco Santanders
barriers to entry into the treasury market. It also allowed the bank to increase its market power
which translated into an increase in market share. Banco Santander became one of the top
operators in the Brazilian capital markets. It also gave the bank a sustainable competitive
advantage because its main competitors in the Brazilian market did not have a tool like it.

Mr. Turiel defined success of the project as medium to high. It met its objectives, but it drew
many complaints from front office people but they complain about everything!

The four ICT investment initiatives are summarised in Table E.4.

274
CASE STUDY: BANCO SANTANDER-SANTIAGO
Project Effect on Five-Forces Degree of
INPUT Trigger OUTPUT & Competitveness OUTCOME Success
5.2.1. Consolidation Customer More proactive go-to-market None on Industry Increased Market N/A, too
of Call Centres Complaint (market power thru' ease of structure// Tempor. Share early
& Opport. search) compet. Advantage
Cross-sell
5.2.2. Electronic Serious Market power thru' differentiation Competitors reaction Increased Market H
Approval of Loans Client Ser. (loan approvals from 5 days to to shorten cycle// Share
Problems 6 hours) Sustain. Comp. Adv.
5.2.3. Core Business Serious Streamlined processes (cost Competitors reaction Increased Profit & M
Transformation Transact. efficiency) mainly; and Flexibility to improve core// Possible increase
ALTAIR Limitation for customised products (Mkt. Sustainable Comp. Market share
Pwr. Thru' differentiation) as Advantage
secondary
5.2.4. Treasury High Mkt. Increased Mrk. Power throuh Eliminated Barriers Increase Market M-H
System Brazil Risk differentiation (better product to entry into Treas. Share
Exposure due to improved risk manage- Market// Sustainable
ment) compet. Advantage


Table E.4. Analysis of some major ICT investments at Banco Santander-Santiago.

There was a comment that projects are led too much by Operations & Technology, which means
the users take no ownership and they become very bureaucratic (German Gonzalez). That is
probably why, of the four projects described, two were related to previous organisations
(Santander Brazil and OHiggins).

E.6. Thinking on the Future Role of ICT

E.6.1 Driving force for future ICT investments.

The future role of ICT at Banco Santander-Santiago will, of course, depend on the approach to
business adopted by the bank. In Raimundo Monges view, there are several changes taking place
at the bank. First, Banco Santander-Santiago is moving toward the Distribution model in the
convergence of the financial services sector, selling third party products in insurance, or its own
subsidiaries products in the mutual funds and other spaces. Secondly, it is in the process of
moving transactions onto cheaper channels. In third place, the bank is analysing complex
products, with many intervening parties, such as mortgage loans, to better understand the value
chain and hence improve the use of technology to support the transactions and processes. Finally,
the bank is changing its front line staff (Client managers), who at present are good analysts and
engineers but not necessarily good with people, and substituting them by people who are strong
on personal relationships, such as teachers and social workers. These new front line people will
operate by business rules contained in applications and workflows that are designed and defined
by a small group of centralised experts. In line with this trend, Mr. Monge believes that the focus
of near-future ICT projects will be transaction systems to streamline complex product provision
(such as mortgages loans), combining ICT and people.

Mr. Ruiz-Tagle believes the bank should be by far the ICT leader in the market, in three respects.
First, ICT should be a competitive advantage for Banco Santander-Santiago as the bank should be
able to leverage scale across the Region to have the best systems, at low service cost. Second, the
bank should focus on building more technology into the products, or have more technology based
products (transactional systems to support core processes, and data-warehouse projects aimed at
improving knowledge management). Finally, the bank should put more technology into
275
management information systems, in order to create further awareness of business opportunities
(data-warehouse projects aimed at better customer knowledge).

German Gonzalez thinks the drive for future projects will come from data-warehouse projects
aimed at better customer knowledge basically in two fronts: (a) integration of Client bases with
behaviour and predictor models; and (b) Internet based relationship community with retailers, etc.

David Turiel and Marcos Thomas believe that much more sophisticated transactional systems to
support core processes such as designing and launching new products, and data-warehousing
projects aimed at internal controls, will be the next wave of projects.

More from a Technology perspective, Alberto Salinas believes the driving forces for future ICT
projects will be: (a) achieving extremely high levels of services, with up-times on the Internet
and at the tills in the region of 100 percent, and great flexibility in giving each Client the sort of
account s/he needs (e.g., the market is demanding family accounts, where all the accounts of a
group rest on the head of the group) which requires advanced transactional systems to support
core processes; (b) Cost reduction to maintain efficiency leadership; and (c) Integrated
management information systems, standard across all markets (i.e., data-warehouse projects
aimed at internal controls and reporting and data-warhouse systems aimed at better customer
knowledge).

As can be seen from the preceding paragraphs, although the majority of interviewees seem to
believe that future drivers of technology investments will be different sorts of core transactional
systems, followed by customer knowledge data-warehousing systems, there is a considerable
dispersion of opinions. The other comment that comes to mind is the following: Does it make
sense for the bank to focus investments on transactional core-banking systems if the bank is
moving to a distribution model, customer intimacy value discipline?

E.6.2. Vision of the competition.

Clearly, the most visible competitors in the interviewees mind are BCI and Banco de Chile. Other
banks mentioned are BBVA, Citibank, Falabella, Corpbanca and BancoEstado. Banco Santnader-
Santiago managers have interesting views with respect to how Banco Santader-Santiagos
competitors align strategy and technology.

On BCI, Miguel Mata says that it has not gone through any traumatic merger in its life-time, and
has managed to keep a very stable management team, totally grown from within. They have been
clever in reaping benefits from the mergers of their main competitors. On the other hand, they
have a structural problem and will need to capitalise in order to stay in the top league that will
impact their blue pond. With respect to ICT, they are good for their size, and have an acceptable
level of efficiency. Mr. Monge says that they are good at quality of service, but ICT is only a part
of that. Ignacio Ruiz-Tagle believes BCI is very nimble on technology, basically because its
general manager comes from Operations and Technology, and he has enabled the development of
a culture that is pro-active in its use of ICT. German Gonzalez and Veronica Lara are not so
complimentary to BCI when they say that it was a pioneer on segmentation a few years ago, but
that it did not manage to really get to know its Clients. Messrs Turiel and Thomas are of the
opinion that BCI is relatively modern and updated on ICT, but that their systems lack integration.
Finally, according to Alberto Salinas, BCI competes with Santander-Santiago on productivity, but
he believes they will not be able to keep up with Santanders pace of investment and innovation.

With respect to Banco de Chile, Miguel Mata believes it has a very big problem on the
technology front and that, after the merger, it has a lot to do in terms of efficiency (i.e., there is a
lot of low hanging fruit; Mr. Mata mentioned, as an example, that their ATM booths have air
conditioning!). Mr. Mata is sceptical about the regional processing centres it set up which, in his
view, are not viable. Another problem is that they are going to have serious cultural problems
deriving from the i-Flex implementation. Not only the people issue on the project, but also that
the Indians use completely different criteria for financial consolidation and other operations, and
they manage their banks very differently; they have a completely different mental structure. On
276
the other hand, a successful NEOS is vital for Banco de Chile and it will distract a lot of its
management attention for the next two or three years. On the positive side, the value of its brand
is enormous. Mr. Gonzalez and Ms. Lara think that no bank in Chile is really good at CRM; on a
seven point scale, the most advanced would probably qualify for a four. Having said that, their
opinion is that Banco de Chile seem to know their Clients more than Santander-Santiago; they
are closer to their Clients. David Turiel and Marcos Thomas say that Banco de Chile is very
behind Santander-Santiago on ICT, and will have to make major changes. Banco Santander-
Santiago is not so worried about Banco de Chiles NEOS project because, according to Mr.
Salinas, by the time it finishes its core banking project, Santander-Santiago will have made a
great leap forward on MIS and other technology supported fronts.

Raimundo Monge professes considerable respect for Banco Falabella in the low income,
consumer, personal banking segments. He thinks Banco Falabella is agile and has inherited, from
its department store parent, the ability to manage and exploit a large Client base. ICT is
important, but it is more than that; Mr. Monge thinks bankers need to go back to basics and think
like retailers.

This idea may sound revolutionary, but in a search done after the interview, it was found that it is
already being done. Examples are Wells Fargo, Washington Mutual and Commerce Bank in the
US, who are unashamedly imitating Wal-Mart. But some of the lessons from those cases are
being directly contravened by Santander-Santiago.
Acquisitions are a good way to lose customers. It dilutes your model, dilutes your
culture, distracts your firm and dilutes your brand. No great retailer ever grew by
acquisition,

according to The Economist (2004, p.19) quoting Vernon Hill, founder and Chairman of
Commerce Bank. Branch offices are not closed, but actually new office are opened, as shown by
Washington Mutual (WaMu). Not only that, but branch offices are transformed into stores
where there is coffee on sale, there are no counters nor ropes funnelling people towards tellers,
and employees stand at teller towers dispensing advice or leading customers to colleagues who
can help them with a loan or mortgage (The Economist, 2004, p.18). And with respect to cross-
selling, Wells Fargo says that:

...the financial services industry used to administer its products separately, so
customers were in effect paying for several different sales-forces. The trick is to bring all
of them together, cut costs and pass some of the savings on to customers. Wells Fargo
does this by offering packages of services

and giving tangible discounts on them (The Economist, 2004, p.21). The article quotes Richard
Kovacevich, Wells Fargos CEO, as saying:

The bad news is that this is hard to do; the good news is that this is hard to do.
Whoever gets it right, in other words, can make a packet.

With respect to the third initiative, that is cross-selling, Chilean banking in general, but
Santander-Santiago in particular, is at an advantage with respect to US ones. It has used Client
managers for retail banking for many years it is now a question of creating the packages,
understanding the savings, passing part of those savings onto the pricing, adapt the technology to
support the new processes, and training the people to sell them.

The Client facing business units have other players on their radar screen: those that can make a
noise on their turf. Mr. Ruiz-Tagle mentions Citibank as having the best technology; they are the
only ones who can offer multinational Clients based in Chile (i.e., Nestle, Goodyear), quasi-
seamless transactional services across Latin America. And Mr. Gonzalez and Ms. Lara say
BancoEstado has, in the last few months, incorporated catch-up technology and improved
processes for their go-to-market. They reckon BancoEstado is still some five years behind
Santander-Santiago in technology:

277
but it has a tremendous base of untapped Clients in their subsidised savings
accounts and mortgage loans when they start exploiting this they will become a
challenge to all banks.


E.6.3 Other reflections.

Raimundo Monge observes that Banco Santander-Santiago is remarkably good at focusing its
operations on where it can win. However, being part of a global group with a strong corporate
culture and operating guidelines, it cannot always focus only on these fronts. Related to this is
that, in the view of local management, ICT projects have to be short and nimble. A project that
requires more than a year and a half should be rethought in order to reduce its scope, or it should
be dropped. One of the problems at Banco Santander-Santiago is that what may originally start as
a short and nimble local ICT initiative, turns into a large and heavy project pursuing regional or
global optimisation. But this is the essence of the dilemma in large multi-national organisations:
should they standardise processes across the globe to develop efficiencies through economies of
scale; should they focus R&D to develop excellent products that can be deployed around the
World; or do they focus around Client solutions for each Market in the world. That is why it is
so important that if Banco Santander Santiago is migrating from an operational excellence to a
customer intimacy value discipline, this is well co-ordinated with Head Office.

Another reflection by Mr. Monge is, alluding to the change management issue, that at the bank
technology moves much faster than people are prepared to adopt it. This is a serious problem, in
terms of converting ICT investments into shareholder value, because it delays benefit realisation
(Brynjolfsson, 1993; Haynes & Thompson, 2000; Griffiths & Remenyi, 2003).

Ignacio Ruiz-Tagle oriented the discussion to the issue of organisational silos. There is an
enormous opportunity, still untapped, for offering Clients more comprehensive solutions. He sees
three areas where the bank is working to synchronise the Global Banking and Personal Banking
Divisions. The first refers to financing property developments, where the mortgage on the total
development programme would be off-loaded onto the mortgage of the end-purchasers of the
houses/flats. Second, in dealing with suppliers to the Bank the bank will not purchase from any
vendor that does not, in turn, become a Client of the bank through opening its accounts, etc., with
them. Finally, in creating alliances with Corporate customers where both can benefit from each
others Clients (e.g., make an agreement with the telephone companies where Banco Santander
will offer telephones from that company to all the banks Clients, while the telephone operator
offers Santander-Santiago credit-cards to all its Clients. As can be observed, the three types of
services mentioned here require Global Banking and Personal Banking salespeople to team up.
For this to work the right incentives have to be put in place. The bank tends to use more a stick
incentive than the carrot. It tells its salespeople that if they dont meet a target of sales on the
other service lines products, they lose their bonus in their own line of service.

German Gonzalez and Veronica Lara were asked to comment on why the digital signature, whose
legal framework has been in place for over a year, has not had a significant impact on the sector.
The interviewees think the digital cheque will be made available, but they are a bit sceptical about
the speed in which it will substitute physical cheques. The explanation for this is that Chilean
people are, to a large degree, suspicious of paperless transactions. They like to see a paper
document, and the physical cheque serves this purpose. Another reason for the survival of the
physical cheque is that it is a highly validated form of giving credit: it is very commonly used
with deferred due dates for making payments in three or six monthly instalments.

With respect to the concept of Virtual Branch Office where, based on the digital signature
people can do over the web any transaction they could do in a branch-office, it is up against the
fact that people like to relate to a Client Manager (the concept of having a Client manager is
deeply engrained in the Chilean system; Chilean banks assign Clients to a Client manager even
for relatively small retail accounts); so it is probably in the banks best interest not to weaken this
link.

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Alberto Salinas does not agree with the proposition that the benefits of ICT investments for cost
reduction end up being transferred to the final customer in the form of consumer surplus. The
experience at Banco Santander-Santiago is that cost reductions can be turned into increased
profitability. However, there is rigorous research that supports this proposition (Scott Morton,
1991; Hitt & Brynjolfsson, 1996; Hayward et al., 2002). An explanation for this may be that Mr.
Salinas is looking at the issue short term. Most certainly the organisation that invests in ICT to
reduce costs can get a temporary increase in margins; but as soon as its competitors imitate the
investment this advantage vanishes.

Alberto believes very few managers at Santander-Santiago are clear on the future role of ICT. He
also thinks many of them are unsatisfied with the results they are getting from ICT.
















E.7. Conclusion.

Although a full analysis and interpretation of the evidence presented in this case-study will be
done in the cross-case study analysis in a later chapter, it is useful to document a few initial
reflections on the findings.

(m) Banco Santander-Santiago is the largest bank operating in the Chilean banking sector. It
is a universal bank that wants to operate in all lines of business with products for all
market segments. Banco Santander-Santiago cannot be analysed without taking account
that it is part of the Latin American operation of Banco Santander of Spain, due to that
the Corporation has a strong culture and management style. Both the Group and the
Chilean operation have set themselves ambitious goals for excellence: Banco Santander
has proposed itself to become one of the ten top players in the World in its field; and
Banco Santander-Santiago aspires to become the best banking group in Latin America
by 2006. As this case study shows, achieving these objectives requires making converge
seemingly divergent initiatives, and converting their ICT spend into shareholder value. .
(n) There is a difference in perception between the Client facing managers on one hand, and
the planning, staff and back-office managers on the other, as to which are the key
dimensions of customer value.
(o) The bank appears to be in a transition in its value proposition, from best total cost, to
best total solution. This means migrating from an operational excellence to a customer
intimacy value discipline. This has a major impact on organisation design, core
processes, culture, measurement and reward system, and information technology. Is the
bank prepared to take the tough decisions that this change involves and requires? Is
head-office in Spain ready to support this?
(p) There appears to be an idea to implement different value propositions for each market
segment. For this to work, it requires implementing different value disciplines for each
market segment. Has the bank thought out how it will make these different cultures
operate under one roof?
279
(q) There is a dispersion in opinions amongst the interviewees on which are the core
processes in order to deliver the value proposition this is consistent with having a
transition in value discipline.
(r) In process design, controls weigh more than Client requirements this is typical of an
operational excellence organisation.
(s) Although the integration of Santander Chile and Santiago is formally concluded, deep
cultural differences still persist between legacy people of one or other institution. If the
bank intends to retain talents, it will have to find a way of overcoming this. Training
could be a good way of doing so.
(t) The bank has a utility view of technology, and its IT people are not seen as proactive
service providers although this vision is adequate for operational excellence, it may
not be so for customer intimacy.
(u) With a utility view of technology and an operational excellence value discipline,
Regional applications imposed by head-office may have made sense this will most
probably not be so in the case of moving to customer intimacy. Not, at least, in the
customer facing processes where more agile and responsive solutions will be required.
The art will be to co-ordinate nimble customer solutions with very reliable back office
solutions.
(v) Although business planning sessions are held every year, and that has allowed to land
global business plan onto a Chilean three year plan for the business, this has not been
accompanied by the required resource planning: people and technology.
(w) To summarise the situation of ICT strategy, it can be said that most ICT investments
decisions are management driven (strategic planning), even though this responds to an
ICT plan of Head Office, not of Banco Santander-Santiago. Some initiatives come from
the market-facing business units, but they are not very significant. Considering that (a)
most ICT applications are aimed at reducing payroll costs which amount to 60 percent of
operational costs ; and (b) in Head-Offices vision, ITs role is to push for more proven
and efficient technology which is sustainable in time using world class solutions
deployed globally, a misalignment of strategy and technology is taking place. This
misalignment results from ICT investments being predominantly aimed at improving
operational excellence when Banco Santander-Santiagos three-year strategic plan is
aiming at customer intimacy
(x) Spend on ICT per employee is significantly lower at Banco Santander-Santiago than at
US banks. However, on the other three ratios taken, Banco Santander-Santiago spends
significantly more than US banks with respect to Total Operations Income and Total
Assets, and almost twice as much in relation to Total Operations Expense. This is a
surprising result for a bank that has a utility view of technology. Is there a data problem?
(y) Spend on new technology at Banco Santander-Santiago is considerably higher than at its
equivalent US banks. Banco Santander-Santiagos spend on new technology +
replacement as a proportion of total ICT spend, is higher even than the average EU bank
projected to 2006! On the other hand, when looking at only new technology as a
proportion of total spend, Banco Santander-Santiago is higher than US banks but
significantly lower than EU ones.
(z) The bank is pragmatic about outsourcing of ICT, and will outsource anything if there is a
cost advantage. Is this policy reasonable? Considering that information technology is one
of the only two strategic resources a bank counts on to differentiate - the other being
talent (Griffiths, 2003)- should there not be a more long term approach to these
decisions? Should it not be strategic to keep some areas in-house? Could this not be the
cause of the rigidities that the customer-facing business units were referring to earlier?
Should not the outsourcing policies emerge from an ICT planning exercise of the type
called Managing by Maxims (Weill & Broadbent, 1998)?
(aa) With respect to the decision criteria for ICT investments, there is substantial agreement
that the main quantitative criteria applied are DCF and ROI. There is also agreement that
the most frequent qualitative criteria are mandatory/no choice in response to Regulator
or head-office directives, followed by necessity to increase market power through
product differentiation, IT alignment with corporate objectives, service to the customer
and others. However, there is also substantial disagreement on whether quantitative
predominate over qualitative, or vice versa.
280
(bb) There was a comment that projects are led too much by Operations & Technology,
which means the users take no ownership and they become very bureaucratic (German
Gonzalez). That is probably why, of the four projects described, two were related to
previous organisations (Santander Brazil and OHiggins). Also, this possibly explains
why Client facing staff were manifestly unsatisfied with the results of two of the projects
analysed.
(cc) The bank is changing its front line staff (Client managers), who at present are good
analysts and engineers but not necessarily good with people, and substituting them by
people who are strong on personal relationships, such as teachers and social workers.
These new front line people will operate by business rules contained in applications and
workflows that are designed and defined by a small group of centralised experts. This is
an innovative and interesting approach. The challenge here is that concentrating
knowledge in the centre is typical of an operational excellence model, not a customer
intimacy discipline which is where the bank appears to want to go (Treacy & Wiersema,
1995). In this value discipline, Clients expect to talk to people who really know their
business. So implementing this initiative will require a strong effort on technology and
on training (but training beyond requirements to use the technology it means training
on the business of the bank and of its Clients) (Watkins, 1998).
(dd) In line with the previous point, one area of focus of near-future ICT projects will be
transaction systems to streamline complex product provision (such as mortgages loans),
combining ICT and people.
(ee) Although the majority of interviewees seem to believe that future drivers of technology
investments will be different sorts of core transactional systems, followed by customer
knowledge data-warehousing systems, there is a considerable dispersion of opinions.
(ff) Building on its extensive network of branch offices, Banco Santander-Santiago is in a
strong position to impose in banking the concepts of retailing. It needs not re-invent the
wheel, but benchmark with banks that are already doing this in other markets.
(gg) Banco Santander-Santiago is remarkably good at focusing its operations on where it can
win. Unfortunately, however, quite often head office pushes it to be good at everything,
and that is not possible. Related to this is that, in the view of local management, ICT
projects have to be short and nimble. A project that requires more than a year and a half
should be rethought in order to reduce its scope, or it should be dropped. One of the
problems at Santander-Santiago is that very big projects, which depart from this short
and nimble concept, are imposed on them by Head Office.
(hh) Another reflection, alluding to the change management issue, is that at the bank
technology moves much faster than people are prepared to adopt it.


(ii) It is highly probable that the misalignment issues raised in the preceding paragraphs
arise from the shortcoming of not having a formal ICT-planning process. An annual
process based on analysing the strategic context of the bank, defining the business
maxims, and from there the technology maxims and more detailed requirements of ICT,
in the Managing by Maxims form prescribed by Weill & Broadbent (1998), would
help overcome this problem. This would also improve the effectiveness of the ICT
Committee, and make it operate more as a team with fewer of the problems of a
committee. Quoting Treacy and Wiersema (1995, p.13):

In teams, every member focuses on a common goal scoring a touchdown,
dominating a market. In committees, members represent different functions or
businesses and act to protect the interest of their spheres.






281


























APPENDIX F. LOG OF INTERVIEWS



282
APPENDIX F.1
LOG OF INTERVIEWS
DATE NAME ORGANISATION OBJECTIVE/ACTIVITY
18-Nov-03 Morales, Ricardo Banco de Chile Overview of research
24-Nov-03 Morales, Ricardo Banco de Chile Semi-strucutrd interview
03-Dec-03 Caracci, Marcelo Banco de Chile Semi-strucutrd interview
03-Dec-03 Herrera, Alejandro Banco de Chile Semi-strucutrd interview
05-Dec-03 Tagle, Arturo Banco de Chile Semi-strucutrd interview
15-Dec-03 Wolleter, Cristian Banco de Chile Semi-strucutrd interview
13-Nov-03 Gonzalez, Oscar BancoEstado Semi-strucutrd interview
01-Dec-03 Leon, F. & Collado, R. BancoEstado Semi-strucutrd interview
04-Dec-03 Mena, Jose BancoEstado Semi-strucutrd interview
09-Dec-03 Courard, Arnoldo BancoEstado Semi-strucutrd interview
16-Dec-03 Pizarro, Jaime BancoEstado Semi-strucutrd interview
10-Nov-03 Recabarren, Luis BankBoston Semi-strucutrd interview
21-Nov-03 Valdes, Paulina BankBoston Semi-strucutrd interview
24-Nov-03 Santomingo, J.& Diethem, BankBoston Semi-strucutrd interview
09-Dec-03 Buvinic, Boris BankBoston Semi-strucutrd interview
04-Dec-03 Eluchans, R, Hepp, & WidoBanco Security Semi-strucutrd interview
04-Dec-03 Herrera, Eduardo Banco Security Semi-strucutrd interview
05-Dec-03 Kutscher, Arturo Banco Security Semi-strucutrd interview
09-Dec-03 Sinclair, Christian Banco Security Semi-strucutrd interview
09-Dec-03 Letelier, Marcial Banco Security Semi-strucutrd interview
09-Mar-04 Salinas, Alberto Banco Santander Overview of Reseach
16-Mar-04 Hasbun, Enrique ABIF Organise Event
16-Mar-04 Izquierdo, Jose Manuel ABN-Amor Electronic Billing in Banking
16-Mar-04 Morales, Enrique Banco Santander Overview of Reseach
19-Mar-04 Salinas, Alberto Banco Santander Semi-strucutrd interview
22-Mar-04 Gonzalez, Oscar BancoEstado History and Planning Issues
25-Mar-04 Muoz, Pedro Azurian Electronic Billing in Banking
25-Mar-04 Musso, Roberto STI-Soluziona Electronic Billing in Banking
26-Mar-04 Beas, Domingo Camara de Comerci Electronic Billing in Banking
29-Mar-04 Morales, Ricardo Banco de Chile Discussion on Findings
30-Mar-04 Gaete, Mario BCI Overview of Reseach
30-Mar-04 Thomas, Marcos Banco Santander Overview of Reseach
01-Apr-04 Hasbun, E. & Henriquez E ABIF Progress and Validation Planning
12-Apr-04 Management Team Banco Security Validation of Findings
19-Apr-04 Monge, Raimundo Banco Santander Semi-strucutrd interview
19-Apr-04 Turiel & Thomas Banco Santander Semi-strucutrd interview
20-Apr-04 Romero, Abraham BCI Semi-strucutrd interview
21-Apr-04 Von Chrismar, Eugenio BCI Semi-strucutrd interview
21-Apr-04 Paulsen, Eduardo BCI Semi-strucutrd interview
22-Apr-04 Cousio, Pablo BCI Semi-strucutrd interview
22-Apr-04 Gaete, Mario BCI Semi-strucutrd interview
22-Apr-04 Garcia Huidobro, Adolfo BCI Semi-strucutrd interview
26-Apr-04 Tagle & Morales Banco de Chile Validation of Findings
27-Apr-04 Fernandez, Toledo & MoraBanco Santander Semi-strucutrd interview
27-Apr-04 Gomez, Mario BCI Semi-strucutrd interview
28-Apr-04 Olavarria, Lionel BCI Semi-strucutrd interview
28-Apr-04 Mata, Miguel Banco Santander Semi-strucutrd interview
29-Apr-04 Gonzalez & Lara Banco Santander Semi-strucutrd interview
19-May-04 Gutierrez, R. & Rivero, R Certinet Digital Signature in Banking
19-May-04 Gaminara, Eduardo Paysecsystem Dig. Signature and Virtual Branch Office
04-Jun-04 Solari, Sergio Banco Falabella Semi-strucutrd interview

283
APPENDIX F.2
INFORMANTS AT CASE-STUDY BANKS
(Including Date of Semi-Strucutred Interview)
DATE NAME ORGANISATION POSITION
24-Nov-03 Morales, Ricardo Banco de Chile Gerente de Estudios
03-Dec-03 Caracci, Marcelo Banco de Chile Gerente de Operaciones y Tecnologia
03-Dec-03 Herrera, Alejandro Banco de Chile Gerente Division Banca Persona
05-Dec-03 Tagle, Arturo Banco de Chile Gernete Division Estudios y Gestion
15-Dec-03 Wolleter, Cristian Banco de Chile Gerente Division Banca de Empresas
13-Nov-03 Gonzalez, Oscar BancoEstado Gerente de Planeacion
01-Dec-03 Leon, Fernando BancoEstado Gerente de Operaciones y Tecnologia
01-Dec-03 Collado, Rodrigo BancoEstado Gerente de Tecnologia
04-Dec-03 Mena, Jose BancoEstado Gerente General
09-Dec-03 Courard, Arnoldo BancoEstado Gerente General de Creditos
16-Dec-03 Pizarro, Jaime BancoEstado Gerente Microempresas
10-Nov-03 Recabarren, Luis BankBoston Gerente de Planeacion y Control Financier
21-Nov-03 Valdes, Paulina BankBoston Executive Director, Wholesale Banking
24-Nov-03 Santomingo, Jose BankBoston Executive Director, Treasury & Operations
24-Nov-03 Diethelm, Mario BankBoston Gerente de Informatica
09-Dec-03 Buvinic, Boris BankBoston General Manager
04-Dec-03 Eluchans, Ramon Banco Security Gerente General
04-Dec-03 Hepp, Margarita Banco Security Gerente Asesor Gerencia General
04-Dec-03 Widow, Manuel Banco Security Subgerente de Estudios
04-Dec-03 Herrera, Eduardo Banco Security Gerente de Tecnologia
05-Dec-03 Kutscher, Arturo Banco Security Gerente de Operaciones
09-Dec-03 Sinclair, Christian Banco Security Gerente Comercial
09-Dec-03 Letelier, Marcial Banco Security Gerente Banca Electronica
19-Mar-04 Salinas, Alberto Banco Santander ALTEC-Gerente Proyecto MIS del Grupo
19-Apr-04 Monge, Raimundo Banco Santander Gerente Planeacion Estrategica
19-Apr-04 Turiel, David Banco Santander Controller Financiero
19-Apr-04 Thomas, Marcos Banco Santander Gerente Control Financiero
26-Apr-04 Ruiz Tagle, Ignacio Banco Santander Gerente Division Banca Global
27-Apr-04 Fernandez, Juan Banco Santander Gerente de Operaciones y Administracion
27-Apr-04 Toledo, Orlando Banco Santander Gerente de Reingenieria
27-Apr-04 Morales, Enrique Banco Santander Gerente de Gestion de Demanda de Tecno
28-Apr-04 Mata, Miguel Banco Santander Gerente de Division Organizacin y Seguim
29-Apr-04 Gonzalez, German Banco Santander Gerente Division Clientes
29-Apr-04 Lara, Veronica Banco Santander Inteligencia de Negocios
20-Apr-04 Romero, Abraham BCI Gerente Banca Personas
21-Apr-04 Von Chrismar, Eugenio BCI Gerente Finanza e Internacional
21-Apr-04 Paulsen, Eduardo BCI Gerente Banca Virtual
22-Apr-04 Cousio, Pablo BCI Gerente de Desarrollo de Tecnologia
22-Apr-04 Gaete, Mario BCI Gerente de Operaciones y Tecnologia
22-Apr-04 Garcia Huidobro, Adolfo BCI Gernete de Marketing
27-Apr-04 Gomez, Mario BCI Gerente Comercial y Filiales
28-Apr-04 Olavarria, Lionel BCI Gerente General

284
APPENDIX G

The Value-Builder ICT Investment Decision Model, Applied to Banks.

Hyatt Hotel, Santiago
15
th
& 17
th
June, 2004.

Model Applicability Survey.


Name of Participant (optional): There were 16 respondents out of 22 participants on the second
day, when the survey was done.


Name of Bank (optional): Responses came from 10 banks: ABN AMRO, BankBoston, Bank of
Tokyp-Mits., ScotiaBank, Banco de Chile, BancoEstado, Banco Security, Banco de Desarrollo,
Banco Falabella, Banco Ripley.


A. On Planning at Your Bank and the Model:

1. Do you consider your bank has in place a good technology planning methodology?
ABN AMRO say they do at a global level, using a model similar to Feeney &
Willcocks (1998) Three enduring challenges, nine enduring capabilities model.
BankBoston says they do. Bank of Tokyo says they do not, that they are only reactive,
and that the back-office technology is very behind. One Scotiabank participant says they
do, and the other says it could be improved. The two participants of BancoChile say they
do. One of the BancoEstado participants says it is reasonably good and in permanent
interaction with strategic planning; the other participant thinks they do, but that it can be
improved. Opinions of the three respondents from Banco Security go from poor but
improving, to could be better, to could improve to achieve a better prioritisation and
alignment with strategy. Banco de Desarrollo say they do have a good ICT planning
methodology in place. Falabella says yes. One of the Banco Ripley respondents says that
when the bank started two years ago, an ICT methodology for a start-up bank was
adopted - however, they have no methodology to define future developments of their
technology infrastructure; the other respondent gives their methodology a 5.5 grade on a
seven point scale.










2. Do you think your bank applies a good methodology for selecting solutions and making
decisions on technology acquisition? ABN AMRO say they do at a global level, but a
weakness is that it is not flexible to allow for adapting to local needs. BankBoston says
they do. Bank of Tokyo says that despite what was said in the previous question, at the
time of executing, they do. One of the ScotiaBank participants says they do, and the
other says that includes many of the concepts discussed in these sessions. The two
participants of BancoChile say they do. One of BancoEstado participants says it is
reasonable and the other that it can be improved. The three Banco Security opinions go
285
from poor but improving, to yes but could be better, to yes it responds to the different
visions of all areas involved. Banco de Desarrollo say they have a reasonably good
solution. Falabella says yes. According to both Banco Ripley respondents, the bank does
have a methodology, and one of them clarifies that it is based on a model for purchasing
and/or for contracting out ICT services.

3. Do you think your bank has a good level of conversion of technology investments into
shareholder value? ABN AMRO says this remains to be seen. BankBoston says they
dont. Bank of Tokyo say they dont. Both ScotiaBank participants say they do, and one
of them adds that particularly so in the last few years. The two participants of
BancoChile say they do. One BancoEstado participant says yes, and the other that he
does not know because it is not measured. The three Banco Security opinions go from
that the bank lacks the means to measure the outcome, to that only insofar as that it
makes sure that ICT investments are profitable, to that it icould be improved. Banco de
Desarrollo says their conversion rate is low. Falabella says yes. One Banco Ripley
respondent says they do; the other says that ICT investments are made to support
commercial decisions, which are defined by the Board, with participation of the
shareholders.

4. In your opinion, would the model presented be useful for the bank in technology
planning and in technology investment decision-making?
a. Qualify from 1 (low) to 7 (high): 6, 6, 6, 5, 5, 6, 5, 5, 7, 6, 5, 5, 5, 5. Mean: 5.5
b. Comments: Bank of Tokyo says that due to bureaucracy imposed by head-
office it could prove complicated, but if managed internally (locally) with
sufficient leadership support, it would be possible. One of the ScotiaBank
participants says that its success would depend on the level of development the
bank is at. One Banco Chile participant says it would help to improve their
present methodology. One of the BancoEstado participants says that it would
help in ensuring discipline in the planning process. At Banco Security opinions
go from that they should be more strict in the application of a model, to that it
would be important for the strategic criteria to converge, to that the model
would be very useful but would require solving some prior problems, such as
agreeing on a value proposition. The Banco Falabella respondent says that the
model could potentially be very useful, and it would be worth analysing further
its applicability to Falabella (if it requires adaptations); it would be particularly
worth looking in more depth into the vision of Falabella. One Banco Ripley
respondents comments that the model needs landing to the reality of small,
retail oriented, banks.
5. What, in your opinion, is the feasibility of the use of this model fitting in with your
banks management style? Why?
a. Qualify from 1 (low) to 7 (high): 6, 6, 6, 5, 5, 6, 6, 7, 6, 6, 5, 5, 5, 4. Mean:
5.6
b. Comments: ABN AMRO says that it is necessary to convert the model into a
methodology. BankBoston says their present ICT planning process is
disciplined and follows a model liable to be improved. Bank of Tokyo says that,
due to that they do not count with a strategic planning process at their Chilean
operation, being able to apply a model like this once they define a vision,
mission, etc., would be very interesting. One Banco de Chile participant says it
would be feasible. One BancoEstado participant says he would see no
difficulties in its implementation. Banco Security comments: it looks easy to
implement and only requires discipline; from a cultural point of view, the
business areas of the bank need to take more ownership of projects; being a
small bank, there is a good level of communication and convergence of criteria.
The Banco Falabella respondent says she needs learn about the model in more
depth, but it is feasible of being applied. One Banco Ripley respondent says that
the bank has a small, business oriented structure, and therefore the application
of such a model would require more support than a traditional bank; the other
respondent says that sticking to a methodology is not part of the banks culture.

286
6. What is your opinion on the model?
a. Qualify from 1 (low) a 7 (high): 6, 6, 7, 6, 6, 6, 5, 6, 6, 6, 5, 5, 6, 5. Mean: 5.8
b. Comments: Bank of Tokyo says it is very complete, integrating aspects that
have been ignored like the need to plan; it breaks paradigms such as the cost
issue and its integration with a business strategy; this make it worth pursuing its
analysis. Banco Security comments: not totally new, but it does organise ideas;
it covers all the important aspects; very interesting. The Banco Falabella
respondent says that the model is clear and appears simple to apply. One Banco
Ripley respondent says that the concept is good and would lead to discipline;
the other says that he finds it needs moving from a model to a methodology.

7. What strengths and weaknesses do you see in the model? ABN AMRO says that its
strength lies in its simplicity, and it s weakness is that it is not accompanied by a
methodology. Bank of Tokyo talks about the top management support and the fact that
all areas of the bank are involved; at present, the silo organisation of the banks internal
units are a problem. One of Scotiabank participants says that its strength is in the order
of the roles; and its weakness is illegible. One Banco Chile participant says its strength is
that it is based on logical and applicable proposals. One of the BancoEstado participants
mentions evaluation of results as a strength, and does not mention weaknesses. Banco
Security gives tha tit includes a methodology and that it is theoretically well founded as
strengths; and that it could me more difficult in practice and that it would require
aligning the whole organisation which could delay projects, as weaknesses. Acording to
Banco Falabella, the strengths are given in the previous comments, but considering that
it must be customised to the reality of each organisation. One of the Banco Ripley
respondents found that one of the strengths is the strategic analysis of the business.

8. What is your opinion on the diagnostic of ICT investment decisions in Chilean banks?
a. Qualify from 1 (low) to 7 (high): 4, 3, 6, 6, 5, 5, 5, 6, 5, 6, 5, 4, 6. Mean: 5.1
b. Comments: BankBoston says that local market figures need to be analysed.
Bank of Tokyo says that the value of comparing them with large banks is
debatable; they are a very small bank with a very particular cultural reality.
According to Banco Security: it was probably too general; it needs to define
concepts more precisely; very good and innovative there was no prior
information like it. The Banco Falabella respondent says they found it too
general and she did not understand the point of comparing the Chilean banking
system to the US one they are not comparable. One of the Banco Ripley
respondents found it close to reality.


B. On the Presentations:

1. What is your opinion on the presenters clarity of presentation, on the first day?
a. Qualify from 1 (low) to 7 (high): 7, 7, 7, 6, 6, 6, 6, 5, 6, 7, 7, 6, 7. Mean: 6.4
b. Please comment on areas of improvement: Bank of Tokyo says the presenter
was well prepared. One of the BancoEstado participants says he found time was
too short for the presentation. Banco de Desarrollo respondent says he did not
participate the first day. Banco Falabella did not come the first day. One of the
Ripley respondents says that the quality of the slides needs improvement, and
also having them in Spanish.
2. What is your opinion on the presenters clarity of presentation, on the second day?
a. Qualify from 1 (low) to 7 (high): 7, 7, 6, 7, 7, 6, 6, 7, 6, 6, 7, 6, 6, 6, 7. Mean:
6.5
b. Please comment on areas of improvement: Bank of Tokyo says the presenter
dropped his concentration a bit on the second day, and got confusing on a few
issues. One of the BancoEstado participants says he found time was too short
for the presentation. Banco Security: the group assignment did not add much.
One of the Ripley respondents says that the quality of the slides needs
improvement, and also having them in Spanish
287








3. What is your opinion on the quality of overhead slides?
a. Qualify them from 1 (low) to 7 (high): 6, 6, 5, 7, 7, 5, 7, 7, 6, 5, 5, 6, 6, 6, 4.
Mean: 5.9
b. Please comment on areas of improvement: Bank of Tokyo says the slides
needed more colour, movement, and more entertainment. One of the
BancoEstado participants says the presentations should have included
references at the end. Banco Security: could be made more dynamic and to use
more multimedia. Banco Falabella: OK, no comments


4. What is your opinion on the quality of the infrastructure (room, coffee break, etc.)
a. Qualify from 1 (low) to 7 (high): 5, 6, 7, 7, 6, 6, 7, 6, 7, 7, 6, 6, 5, 6. Mean:
6.2
b. Please comment on areas of improvement: One Banco de Chile participant says
they would have liked a coffee-break. Banco Falabella: OK, no comments. One
Banco Ripley respondents says that a table for taking notes would be an
improvement.

One of the BancoEstado participants added spontaneously that the programme was a good
contribution, and thanked for it.







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