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the journal of financial transformation


Recipient of the 2002 APEX Award for Publication Excellence

Susie Wee. hp labs.

©2002 Hewlett-Packard Company

What comes after TV?

Susie is inventing ways to stream audio and video in real time to any device, anywhere in the world,
over the Internet. Meaning video becomes a completely new way to capture and share experiences and information,
whenever and wherever you want. And you’ll never wonder if there’s anything on again.

Shahin Shojai, Director of Strategic Research, Capco

Advisory Editors
Predrag Dizdarevic, Partner, Capco
John Owen, Chief Operating Officer, Capco
Roger Preece, Partner, Capco

Editorial Board
Franklin Allen, Nippon Life Professor of Finance, The Wharton School,
University of Pennsylvania
Jacques Attali, Chairman, PlaNet Finance
Joe Anastasio, Partner, Capco
Rudi Bogni, Former Chief Executive Officer, UBS Private Banking
David Clark, Senior Advisor, Financial Services Authority
Elroy Dimson, Professor of Finance, London Business School
Nicholas Economides, Professor of Economics, Leonard N. Stern, School of
Business, New York University
Michael Enthoven, Chief Executive Officer, NIB Capital Bank N.V.
Stuart Feffer, Partner, Capco
George Feiger, Partner, Capco
Jordan W. Graham, Managing Director, Financial Services Industry,
Internet Business Solutions Group, Cisco Systems, Inc
Alasdair Haynes, Chief Executive Officer, ITG Europe
Anthony Kirby, Group Marketing Director-STP, Reuters
Thomas A. Kloet, Chief Executive Officer, Singapore Exchange Limited
Christopher Kundro, Partner, Capco
Herwig Langohr, Professor of Finance and Banking, INSEAD
Mitchel Lenson, Global Head of Operations & Technology,
Deutsche Bank Group
Donald A. Marchand, Professor of Strategy and Information Management,
IMD and Chairman and President of enterpriseIQ®
Colin Mayer, Peter Moores Professor of Management Studies, Saïd Business
School, Oxford University
Robert J. McGrail, Chairman of the Board, Omgeo
Jos Schmitt, Partner, Capco
Kate Sullivan, Chief Operating Officer, e-Citi
John Taysom, Founder & Joint CEO, The Reuters Greenhouse Fund
Graham Vickery, Head of Information Economy Unit, OECD
Norbert Walter, Group Chief Economist, Deutsche Bank Group
00 Opinion:
Managing the adoption of Linux in the financial
services enterprise
Ismail Pishori
Worldwide General Manager, HP Financial Markets Segment,
Financial Industries Business Unit INVESTMENTS

00 Opinion: 00 Opinion:
Web Services: Feel the burn Cost out, future in: Can IT management lower costs
Josh Lee while keeping financial institutions geared for long-term
Lead Technical Strategist — Financial Services, Microsoft business success?
Owen Kemp
00 Evolution of the financial software market Vice president and General manager,
Paul Gardiner HP Financial Industries Business Unit
Calypso Technology
00 Opinion:
00 Research technology priorities for broker-dealers Web services: The enabler of the new business service
in the U.S. operating model
Allan Rosenstein Predrag Dizdarevic
Managing Principal, Capco Partner, Capco
Shahin Shojai
BANKING Director of Strategic Research, Capco
00 Opinion: 00 2001: A transformation odyssey
Integration, integration, integration Mitchel Lenson
Andrew Derrer Chief Information Officer, Global Technology and Operations,
Vice President, Financial Services, Oracle EMEA Deutsche Bank AG
00 Opinion: 00 Return on investments in information technology:
Technologies for comprehensive, real-time, Beyond the productivity paradox
high-value payments processing Bruce Dehning
Caroline McDonald Assistant Professor, The Argyros School of Business
Global Director, HP Finance Industries Business Unit and Economics, Chapman University
00 Opinion: Vernon J. Richardson
Trends in payments: The move towards payments Associate Professor, School of Business,
factories University of Kansas
Mark Webster 00 Achieving ROI from e-business systems in financial
Partner, Capco services
00 Opinion: Bryan Foss
Enterprise event management: Delivering the ability to Customer Management Executive, Global Financial Services,
monitor and act on business-critical events in near-time IBM
Rama Chandra Murthy Paul McDaid
CTO, HP Financial Industries Business Unit e-Business Infrastructure Solutions Architect,
Financial Services Sector, IBM
00 Implementation of e-private banking in a Swiss private Colin P. Devonport
bank Market Manager — Integration, IBM Software Group, IBM
Olaf Schwarz
Head of e-Banking, Vontobel
00 Internet banking in the U.K.: From new distribution
channel to new business models
Feng Li
Chair of e-Business Development, The Business School,
University of Newcastle upon Tyne
Technologists continue to strive to become
the CEO's best friend

Dear Reader,

We have all come a long way since the days when technology was something that some people did somewhere in order

to help companies improve the way they kept and analyzed information. Today, most top executives use different tech-

nological tools, from mobile phones to e-mails to webcasting, to not only improve the way they communicate, but also

how they manage their businesses. Senior management has also recognized that technology can help significantly

improve how financial institutions attract and manage assets.

The new generation of solutions will further strengthen the relationship between management and technology. After all,

technology will not achieve its objective of creating more efficient organizations if it fails to communicate with decision-

makers. I believe that today's technological solutions go a long way to achieve this objective.

It is for this reason that we have dedicated this issue of the journal to technology. By helping our colleagues get a better

understanding of what new technologies are available to them and how they can help improve their businesses' overall

strategic positioning, we hope that we can play a small part in helping our industry achieve its full potential.

I hope that you enjoy reading this issue of the journal and find it helpful in your quest to create the world-class financial

organization of the future.


Rob Heyvaert.

Chairman and CEO, Capco

Making technology more user friendly

Dear Reader,

The dot com crisis has caused more damage to the financial services industry than merely loss of investment capital or

market capitalization. What it has done is to divert management attention away from focusing on the true benefits of new

disruptive technologies to how the bursting of the dot com fuelled speculative bubble has created an environment that

most senior management had not experienced in the lifetimes.

While most would agree that during the stock market boom of the late 1990’s certain share prices were highly question-

able, the resulting backlash that pursued can also be viewed as excessive. The spiraling stock market, which many attrib-

ute to the so-called dot com companies, resulted in many questioning the fundamental justifications behind employing

Internet as a tool for businesses. Senior executives dismissed most references to this medium, and its potential benefits,

by pointing to the over-optimistic perspectives that were held by the investment community prior to the crash. Suggest-

ing that anyone who believes in the tremendous capabilities of this new infrastructure is just as over-optimistic as his pred-

ecessors who invested in the shares of those companies that operated under its banner during the 1990's. As a result,

many firms did not take an objective view of this new medium and failed to take full advantage of it to achieve the two

most important objectives they have today, managing costs and improving revenues.

However, despite the tremendous negative publicity that this new medium received, a number of organizations continued

to believe in how these innovative technologies can truly transform our world and developed capabilities that rely on this

infrastructure. The result has been the development of technologies as advanced as web services, which allow different

systems to communicate with one another both within and without organizations. As a result of these continuous inno-

vations, it is now possible to imagine a world in which STP is no longer just a buzzword.

Recognizing the contribution of the Internet to our world is one thing, but being able to address it in a way that actually

helps executives recognize how it can help their overall corporate strategy is another. That is why the articles selected in

this paper do not focus on the underlying architecture, but on how they can enable organizations to improve the way they


We hope that you find the articles in this issue helpful and continue to support the journal by submitting your ideas to us.

We further hope that we have achieved one of the objectives that we share with the technology sector, to help present

new technologies in a way that can be useful to senior financial executives.


Shahin Shojai


Managing the adoption of Linux

in the financial services enterprise

Web Services: Feel the burn

Evolution of the financial software market

Research technology priorities for broker-dealers in the U.S.

Managing the adoption of Linux
in the financial services enterprise
Ismail Pishori
Worldwide General Manager, HP Financial Markets Segment,
Financial Industries Business Unit
How Linux can be used in an always-on Internet Barriers to adoption are coming down
infrastructure Given all the benefits of Linux, particularly in these times of
As the Linux operating system continues to gain ground in the budget reductions in financial companies worldwide, its adop-
enterprise, more financial services companies are incorporat- tion rates are certain to increase. Former barriers — such as
ing it as an alternative to UNIX and Windows. Now a rapidly concerns about security, high availability, manageability, and
expanding business platform, Linux is expected to grow from support — are now gradually being eliminated.
a U.S.$6.7 billion market in 2002 to more than U.S.$35 billion
by 2006 (IDC Server Forecast, March 2002). The numbers Early Linux adopters among financial companies focused pri-
sound exciting, but adoption of Linux is accompanied by risks marily on web appliances (firewall, caching, load-balancing,
that financial companies need to manage. etc.), file and print applications, web serving, compute clusters
and farms, and low-end solutions. Today, Linux use is gradual-
Few would argue that Linux today constitutes the ideal oper- ly expanding to other areas of the enterprise, driven by new
ating environment for the enterprise. One of its strengths — applications and tools as they become available. Recent devel-
the open source development community — is also potentially opments indicate that momentum toward Linux should accel-
a weakness in enterprise environments. Aberdeen Group erate. Some examples involving our partners, customers, and
points out that the lack of software management tools, and technologies support this expectation.
the challenge of managing hundreds of shared components
and libraries in an open source environment, is only now being ■ Reuters is currently porting its Market Data System
addressed in ways that will help Linux become more widely (RMDS) to Linux, in response to growing interest in and
adopted (Bill Claybrook, Aberdeen Group, March 2002). deployment of Linux in financial industries among leading
firms including Morgan Stanley.
Just what does Linux have that makes it so attractive to the ■ One of the world’s largest financial institutions, Brazil’s
financial industries? Well, here are just a few of its advan- HSBC, is currently using Linux to automate bank branch
tages: operations, and Bolivia’s Futuro de Bolivia AFP, which
administers retirement pension funds for half the working
■ Lower IT cost of ownership. Linux runs on industry-stan- population of Bolivia, chose Linux for faster, more scalable
dard Intel architectures, eliminating reliance on any single Oracle performance.
hardware platform and providing increased economies of ■ The first Linux TPC-C benchmark results have been
scale. released, based on Oracle 9i Real Application Clusters on
■ Smaller IT footprint. Servers and processor arrays are the Red Hat Linux Advanced Server operating system on
smaller, thus shrinking the IT footprint and enabling more HP servers. This is the first industry-standard platform to
systems to occupy the same physical space. offer enterprise-class performance for a clustered Oracle
■ Stability. Linux is built on a single, stable modular kernel database in a Linux environment.
providing exceptional reliability and flexibility for cus-
tomization. Industry-wide, Aberdeen identifies new suppliers of Linux
■ World’s largest development environment. Linux boasts software management and places them in two groups: emerg-
a huge, worldwide development community, which is driv- ing Linux companies and heterogeneous computing environ-
ing independent software vendors to shift to Linux with ment network and systems management solution providers.
increasing momentum. The emerging companies include Aduva, BladeLogic, The SCO

8 - The Journal of financial transformation

Group (formerly Caldera), Red Hat, RLX, Sun Cobalt, Turbolin- (server, desktop, storage); security for the Linux operating sys-
ux and Ximian — all of which provide Linux software manage- tem; high availability server, storage and network implemen-
ment solutions. tations; hardware management tools; multi-O/S management
tools; integrated network management tools; application
In the second group, Aberdeen includes larger Linux solution source code and binary compatibility; a portfolio of services
companies including BMC, Computer Associates (CA), HP and for migration, architecting, project management, deployment,
Tivoli, all of whom offer Linux management solutions training and support; partnerships with leading Linux vendors;
designed for compatibility with enterprise environments. and participation in Linux standards organizations
Many of the larger companies have the ability to incorporate
specialized tools from the emerging group as required for a The fact that technology partners exist today who can actual-
specific customer solution. ly meet these criteria is an indication of just how far Linux has
come. Not long ago, Linux was a technology on the fringe,
Other recent Linux news also supports the view that Linux use implemented only by those on the bleeding edge of risk tak-
is growing. Red Hat is currently at work on a PC version of its ing. Today, Linux has moved well into the early adopter stage
operating system designed specifically for business users, of the technology adoption lifecycle, and indications are that
hoping to duplicate the company’s success in Linux on the it will successfully cross the chasm to mainstream adoption in
server side. In the meantime, four other Linux players have the next several years.
teamed up to produce UnitedLinux, a common Linux version
about to be released for its first public distribution. These ven- Look for Linux technology partners who can address business
dors are SuSe, the SCO Group, Connectiva and TurboLinux. needs and how these needs intersect a financial company’s
Though their combined market share is currently only half specific business drivers. A partner should be able to work
that of Red Hat, they have a strong presence in Europe, Latin hand-in-hand with the financial company’s IT organization to
America, and Asia. address all aspects of solution definition until the right com-
bination of applications, middleware, hardware, services, train-
Linux end-to-end ing, and support are identified and assembled in support of a
Key to the adoption of enterprise Linux solutions is working successful launch. This approach results in an end-to-end
with technology partners who understand the complete IT solution that can speed time to solution identification and
investment lifecycle. Most Linux business solutions should implementation. The right Linux expertise can save a financial
address requirements across applications, deployment, man- company months of research.
agement, high availability, security, database, distribution, and
platform configurations. Activities and services involved are The stability and reliability of Linux, coupled with increasing
likely to include porting, migrating, architecting, project man- applications in financial and other industries, illustrate that
agement, consulting, deployment, training, and support. All of the operating system is establishing itself successfully among
these factors play in a complete end-to-end solution. enterprise IT organizations. In financial services, where com-
panies are under continuous pressure to balance cost-cutting,
For financial companies, the best Linux technology partners regulatory requirements, and the need to develop innovative
will offer capabilities that make Linux work for the enterprise. products and services, a well-managed Linux adoption offers
These include a track record with enterprise Linux; expertise a hopeful alternative to traditional and more costly applica-
in the definition and delivery of enterprise Linux business tion technologies.
solutions; ability to provide Linux on a variety of platforms

Web services: Feel the burn
Josh Lee
Lead Technical Strategist – Financial Services, Microsoft

I must say that I find Star Trek™ very entertaining, especially and can become the bridge for understanding between the
the newer series. Sure, there are a few quirks that I find business and the technical community. In more complex cases,
humorous, like the fact that while outer space is three dimen- and with building momentum, technology can learn, adapt,
sional all the spacecraft still seem to travel in the same plane and fix itself based on system parameters, user needs, and
and polar alignment. Nevertheless, they are very enjoyable. I preferences. This is largely a function of software, with more
suppose one of the most intriguing and probably overlooked and more processing power, devices, and connectivity sup-
features of the program is the ubiquitous nature of computing porting each component.
portrayed in the show. You hardly, if ever, see system opera-
tors griping about systems being incompatible. So, I guess one War of the worlds
could say that the Star Trek™ computing model represents In the world of technology, 15 years is a very long time. Look-
what many of us perceive to be the future of computing? Per- ing back 15 years in computing is a glimpse into what chil-
haps not. I guess a more important question to ask is what is dren’s calculators are today. For enterprise computing, the
the future of computing? Admittedly, that is a little too broad picture at that time was a look into the true 'glass house', the
a topic. How about the future of networked computing? Still special climate controlled room where technicians hunched
too broad? Probably! Then, let’s just focus on the web, and over monochrome terminals debugging by line number and
yes, the topic du jour…web services. character position. It was a place where the constant whirr of
reel to reel storage and mainframe disks could be heard after
Quickly it will become apparent how idyllic it is to assume that hours. Requests for business reports would take weeks as
web services (or any other system) are an island of computing. large flat file data structures were queried with languages like
Computing is an end-to-end process. Some systems store data Focus™ and reports designed for and routed to large green
in vast repositories: databases and data warehouses. Others bar dot matrix printers. Truly, the last 15 years has seen great
collect the data, which is entered by machines and humans. advances in technology programming and platforms that
And, then there are systems that analyze and display that serve the needs of businesses.
same data in a thousand different permutations. Somewhere
among all those electrons, in all those 1’s and 0’s, lies the One of the things that these enterprise systems created were
Internet, as yet another type of client/server infrastructure large closed cultures eventually termed as Information Tech-
for doing 'things' with that data and related systems. nology… IT. Business leaders not only loathed IT, but they did
not even make the effort to understand the ins and outs of the
The ubiquitous nature of computing is the 'Holy Grail' of sys- systems that drove the business applications and stored the
tem design, and web services can help. But, before diving into data. In return, IT personnel did not have high regard for busi-
web services and all the 'love' that brings to systems, the ness units that demanded too much in too short a timeframe.
recent past bears some investigation. It is about symbiosis. Both groups were justified in their angst. IT did not have sys-
The world where the business user can explain the problem tems that allowed for fast integration with business needs.
and the technologist can return in short order and And simple application of a greater number of bodies on a
announce…'done'. And, changes and fixes… no problem. Does project was unable to speed up project delivery in a linear
the use of cutting edge technology always solve business fashion. In fact, most would agree that is still the case. The
problems? No, but it should try, and it can usually give users systems that the enterprise was using 15 years ago were nei-
and systems designers new ways to look at issues and ther flexible nor user friendly. Business units by the same
avenues of attack. In the simplest of instances the technology token did not make any major efforts to understand the com-
can be a way to execute business faster, just from sheer pro- plexities involved in developing on those 'legacy' platforms.
cessing power. Hopefully not just a function of chipset engi- This caused no small rift between both of those units. One of
neering, technology can be an enabler for the business user those units’ parameters has changed drastically over the last

10 - The Journal of financial transformation

decade… and it hasn’t been the business units’. from devices to programming interfaces to networks, there
are two items that are of paramount importance, data assets
Businesses have had the same issues for quite some time. and transaction assets. Computing assets either add value as
Lower costs, comply with regulatory changes, increase sales providers of data, or as providers of transaction services.
and distribution, streamline transactions, and raise profit mar- When the Starship Enterprise encounters an abandoned alien
gins. Take your pick of one or all, and you have today’s typical vessel the first thing they often do is to download the ship’s
business problems. Five decades ago, when IT first entered log (get the data) or try to start the engine (perform a trans-
the scene, it attempted to alleviate some of these issues. And action). When users access an application or web site, the user
it achieved its objective within a short few decades. Transac- interface is a necessary evil, a window dressing to either the
tions were processed in ways they never were, and faster. data or initiation for a transaction. For example, when one
Sales and distribution increased as electronic information was accesses one's bank account online, they may see the infor-
a tiny bit more accessible. However, this all came at the cost of mation in a browser or in a traditional personal finance man-
building IT infrastructures. Coming up to 15 years ago, those ager. They may interact with their bank in a number of differ-
infrastructures began to age, were probably amortized, and ent ways, but what they want most is the ability to 1) see accu-
were unable to provide the kinds of innovative leaps required rate data for their accounts and 2) be able to perform trans-
to truly add value to the large enterprise’s business needs. actions on them. And they demand that both of these opera-
tions must be fast. The benefits of a user interface are simply
Then came desktop operating system, which empowered the in the way that it allows data to be manipulated and the
end-user. These pieces of software were so user-friendly that speed/ease of performing operations or transactions. Without
today a large percentage of senior executives read and send the data or ability to transact with the hosting system, user
their own e-mails. As a by product, business executives have interfaces are only fun to play with, adding little value to
become ever more interested in Total Cost of Ownership enterprise business.
(TCO). It is no longer adequate for IT solutions or services
providers to simply get the system done. They also need to Computing assets are not always classified as ‘providers’ of
disclose all the costs for the system, software, hardware, and both data and transaction assets. Computing systems may
services. The commoditization that pursued resulted in sub- also act as consumers of resources at times. Consumers could
stantial reductions in costs. Those commodity parts make up also be termed subscribers, as we will see shortly in the web
the computing landscape. Once it was death by a thousand services sense. Consumers of data or transaction services are
parts. Today, it is possible to unite these parts into a function- either self-serving or apathetic to the provider, with con-
al organism that can adapt and sustain it. sumers of data services or data assets falling into the former
bucket. The operations that the consumer performs on the
The computing landscape provider of a data asset are typically to pull or query data for
The features of a computing environment are legion. Without personal use. Of course, it is not uncommon for the consumer
knowing how each part relates to others in the ecosystem, it to take that data, massage to fit some need, and in turn act as
can appear a chaotic cacophony of disparate and oft compet- a provider of a service for another constituent. For the pur-
ing interests. In order to really understand what is truly valu- poses of this paper, let’s focus on the point-to-point relation-
able to the enterprise, all of these disparate systems have to ship. A consumer of a transaction asset is likely to be ambiva-
be distilled down to their foundational elements and demon- lent to the overall ecosystem. The primary difference between
strate how they in fact synergistically relate to each other. this consumer and the consumer of a data asset is that this
consumer is allowed to push or provide information back to
Of the entire collection of things in the computing landscape, the provider. In a good system design, a pure data provider

does not allow consumers to interact with the data other than get past that, the first change to either system usually broke
to read it. This is because there are business rules and rela- things. In addition, the EDI formats, en vogue in earlier times,
tionships that are maintained with that data that are more was fairly loquacious and bulky in data description. Then came
appropriately accessed from within a transaction. That is the Internet, which could replace the expensive leased line.
where a transaction provider enters, sometimes they are the Although, the data format conundrum remained.
same business entity and sometimes not.
In addition to highly distributed systems, which were in use
So, data and transactions are the key assets in the computing inside the firewall, there were component technologies. The
landscape. However, like oil, they are buried under the depths issue really became more plumbing than anything else. Hav-
of that landscape. Littering the landscape is the cornucopia of ing objects communicate with one another, be described in a
devices, applications, user experiences, and client/server net- binary format, and do all the things that allow objects to be
works that use the data and leverage transactions. It is on this logical units of operation. A few object technologies emerged,
landscape that we see the blossoms of what will be lush fields like COM and CORBA, but bridging the diverse object’s bound-
of web services. Unfortunately, it is nearly impossible to give aries was fairly hard, requiring specialized bridging technolo-
a holistic definition of the term web services, in anything short gies. This technology did allow for some communication
of a multi-chapter book. Consequently, I will just focus on between the different object invocation and instantiation
those areas that I believe are most important to readers. architectures, but it also had some inherent issues with per-
formance, management, scale, and redistribution.
As already established, there are data assets and transaction
assets. In fact, data assets are hidden by transaction assets Standards — To be or not to be
classified as queries. All of those transactions are engines, This is where web services enter the scene. Web services are
plain and simple. That may seem odd, to some who think that the web standards encapsulation of objects, engines of pro-
the etymology of 'web services' is based on some new cessing that are highly distributed, based on Internet protocol
abstraction to the visual fiasco that was the dot-com bubble. standards that can be invoked at will. Web services are based
The fallacy that produced the now rampant delisting notices on XML. XML (eXtensible Markup Language) is a data descrip-
on the big boards was based on not a few bad business mod- tion markup which is a global industry standard. Far from past
els. The technology fallacy is that many of those businesses markups and file formats, it is one that has broad industry
were not based on core data or transactions that anyone support and is lightweight in its description and format. XML
cared about. The supposed consumers of the dot-com assets is in turn the basis for Simple Object Access Protocol (SOAP),
found the output either redundant, of little value, or just plain which is the basis for Web Services Description Language
silly as stand alone corporations. (WSDL). All of these standards are text-based standards.
There are also ways to capture binary data as a part of the
Web services are not directly related to the dot-com craze. text standard, but that is beyond the scope of this paper. The
Web services are the real reason the Internet should exist. The fact that these standards build on each other is a powerful
Internet is not a platform, it’s a global transport. At the risk of testament to the work that has gone into message-based
delving into all the deep technical aspects of protocol level architectures and the flexibility of XML and XML-based web
programming, at least a veneer of a web services infrastruc- services. Each one of these protocols and description lan-
ture needs to be leveled. Remember what it used to take to guages are XML-based mechanisms for passing data, invoking
get two systems to communicate over a long distance. Pre- remote processes, or encapsulating message parameters and
Internet if you could get past the connectivity, usually on metadata.
leased lines or some amalgam, you still had to have many
meetings to get the data feeds correct. And then if you could There are inherent benefits to having these be text-based

12 - The Journal of financial transformation

standards. They can be accessible from a number of different er, with web services and the associated standards, those
devices, as well as being interoperable between platforms. things are all in the past. Besides fully encapsulating the
This means that from mainframes to UNIX to Windows, as long engines for processing, the web services infrastructure offers
as there is the ability to read text and parse a certain repre- a set of standards that also standardize the method of con-
sentation of data web services can be linked to corporate necting with that engine. When coupled with new emerging
intranets and over the Internet from any number of disparate tools that also provide development capabilities for creating
systems. This is the true definition of standards, open for par- web services, it becomes very easy to create, subscribe, and
ticipation and permissive of interoperation between systems. consume a web service that is developed by another entity. And
Each computing platform has inherent benefits and draw- all of these steps in the process are based on global standards.
backs. Each of those systems has developed interfaces to opti-
mize computing on that platform. Over time even those inter- The gratuitous momentum towards web services did have one
faces have in turn been optimized for. What those systems did interesting side effect. What quickly became apparent was
not need was yet another runtime masquerading as a stan- that there were still missing components necessary to make
dard. The runtime essentially diminishes a system's unique web services ready for the enterprise. In the infancy of this
ability to process and optimize the work that is processed on identification there were a few technology and tools vendors
that platform. Web services act as a message-based standard that banded together under the governance of some aging or
that allow system optimization of the message internally. irrelevant standards bodies, like OASIS or CEFACT, but adop-
tion does not seem to be forthcoming from either of these
Admittedly, web services are rather new, commercially avail- organizations, even with the newer ebXML specifications. It
able in late 2001. Permit me to explain how it works. Large also appears, from the list of participants, that there are a
companies, IT providers, and other institutions have two number of ulterior motives, which are impeding adoption and
assets, remember? As data and transaction providers these trending towards proprietary data formats or tools. Learning
organizations are making choices right now. As they evaluate from that experience, the industry has now developed a num-
the architectures and platforms for integrating between dis- ber of alternate initiatives to solve a myriad of these problems
parate systems and among disparate trading partners, they in a plug and play fashion.
will, without question, have to use integration technology like
web services. Sure they could choose, yet again, to move into When web services first entered the scene they were very
the proprietary connectivity and data format, but the possible demonstrable as point-to-point transactions, as well as several
integration of a number of different web services compel proofs of concept. These proofs of concept showed that web
these organizations to manufacture under the auspices of services, as a full blown enterprise architecture, can be valu-
truly global industry standards. Once the web services, the able and that there are possibilities beyond just the point-to-
core engines, are developed, they can then be exposed using point transaction. However, for each one of those experiments
XML-based directory services. These directory services are there was a significant amount of heavy lifting due to the lack
likely to be hosted by either a global directory for those serv- of quality tools for that development. It is clear that while the
ices that are available globally, or directories of services that base technology was great, the use of the technology and the
are hosted within large organizations. need for that type of standards-based application infrastruc-
ture can greatly decrease the time to market. Though missing
When looking at integrations of the past, one of the biggest were the analogous pieces in a web connected solution world
impediments to full interoperability was that each operation that system designers took for granted in a client/server envi-
from one application to another was different than the next. ronment, where they had control over memory, transactions,
There were different interfaces, different techniques. Howev- disk commits, and application versioning. These items that have

been taken for granted now needed to be simulated in a highly System specialization
distributed environment so that a multi-tier and reliable set of I have a gas powered water heater in my home. It is adequate
applications can be built on this new XML-based architecture. and can even make it through a visit from the in-laws without
doling out cold showers. Still I want a second water heater, an
For example, this new emerging architecture allows transac- electric model. You could call it domestic hedging, or maybe I
tions to be routed through multiple intermediaries with each am anticipating supporting my children’s upcoming teenage
one adding additional value to a transaction or being inserted years. In any event I had some ideas for something a little
based on rules encapsulated in the message. When put in the more custom for adding a second water heater. I wanted load
context of an enterprise application, it becomes clear how balancing between the two systems so that I could equalize or
that specific part of functionality can be valuable in a complex dial up or down the proportional usage between the two units.
transaction based environment. Other specific components of So, based on cost of utilities or speed of system restore, I
developing web services infrastructure include security and wanted a switch that would let me control usage and rules for
authentication, business processes, identification, and inspec- that usage. But when I called my local plumber to explain, the
tion. All of these components have a single purpose, and that silence on the other end of the telephone told me what I want-
is to create in a distributed Internet-centric world; the same ed to know. My only alternative was to either spend an inordi-
capabilities that are taken for granted in a connected and nate amount of money with more expert tradesmen or to per-
tightly coupled system. form some MacGyver-esque operation after multiple trips to
Home Depot.
It should be noted that there is absolutely no need for all of a
given solution to be entirely based on the web central model. The hardware that makes up the apparatus that I call a water
System A may process three steps in a process all on the same heater is specialized for a certain operation. It is that opera-
system, send a message to System B on the same network, tion that makes that system affordable, and the corollary to
and then perform two steps that are dependant on services that specialization creates a system that is virtually unman-
from System C, which is based at a separate business entity. ageable in cost. Systems that are specialized by functional
In that case, only some of the web standard architecture is areas allow optimization along those functional lines. Banking
required, although the message standards can be applicable institutions likely have core engines monitoring transactions
to all and lend consistency across the life of that transaction, for fraud detection that are specialized for high performance
workflow, or application. transaction throughput, monitoring, and system intelligence.
Other systems may be optimized for large storage of data with
Looking forward into the not too distant future, there will be very little transaction throughput. Those systems would opti-
many logical units of processing. Those will be the engines mize on storage compaction, on demand retrieval, archival or
that are found littering the landscape that populate and analysis routines. Those are two separate systems. It is per-
encapsulate logic that is valuable to the business entities that fectly reasonable that each be specialized in their own ways.
might consume that service. This will in turn allow the con- Consequently they add more value and generate lower system
sumers of these services to create a best of breed architec- cost by creating superlative performance.
ture. Best of breed is a term that also means that the solution
is risk mitigated and allows specialization of the hosting sys- Web services are just that, specialized units of operation that
tem. Business specialization of systems has long been proven are optimized for what they do. Each one may or may not be
as the system division of labor that optimizes the system dependant on another for full cycle transaction processing. In
based on varying resources that are available to or are in use reality, the web service is no different from the classic 'object'
by the system. of the past. The main difference in the web service, as for-

14 - The Journal of financial transformation

merly mentioned, is the encapsulation of global communica- being applicable to enterprise applications and users. Events
tion standards that provide easier discovery, integration, and are a notification transaction that can add real time context to
consumption of the services. In addition to those base fea- business applications.
tures of the web service, the further development of stan-
dards for security, routing, etc. ensure that the infrastructure Several months ago, I had planned a trip to the U.K. that
required for massive scale projects and integration will con- included the purchase of an airline ticket with my corporate
tinue to grow with participation by a global community of credit card. A number of weeks prior to that trip I had opened
technology providers, web service providers, and web service a new credit card account strictly for travel. During the trip I
consumers. visited an ATM machine. The credit account withdrawal was
denied. When I called the institution, the reason given was
Without the specialization of systems that can also run on the that a fraudulent event was detected in that withdrawal
communication transport of the Internet, the Internet remains because I had not notified them of my travel. Experiences like
nothing more than pretty pages. In fact, in the words of Kevin that happen to consumers and businesses on an hourly basis.
S. Kelly, Managing Director of Financial Services at Microsoft, My situation is not far from being alleviated with use of web
it is the 'global colorful dumb terminal network'. To be sure, service based events, institutional subscription models, and
the realization that there is a better use for the Internet and user preferences. But in order to tie all of those institutions
more standard ways that applications can interact is gratify- together — airlines, banks, ATMs, and user applications — we
ing to those that desire to bring applications to market faster. need to have an open message-based standards.
It is more rapid time to market that solves a few of the issues
that have been evidenced by information technology. Lethar- When it is possible to describe a number of components in a
gic responsiveness to the business needs and a megalomani- standard format that can be found by a standard location
acal need for IT to own every piece of code, become mere flim- mechanism integrated using tools, and layered to create a
sy excuses when stacked against specialized assets built by multi-tier enterprise application, then it should be done. There
web service programmers. are already a number of new business models that can and
should exist under the umbrella of enabling technology. It has
Enabling new business been a number of years since the airlines introduced elec-
A customer once told me that the products did not matter; tronic tickets. What is going to be the next innovation? Per-
after all it was only electrons. And a more true statement haps the next innovation is a way to describe airline miles in
could not have been made for the subject at hand. That is terms of money and perhaps link them to a credit card
largely what we have discussed to this point. It is the business account. Of course, airline miles are not as liquid as cash so
interests that are paramount. Many times, in the art of pro- that would require the web service transactions to capture the
gramming, those interests are lost in memory management exchange rate and perform the funds transfer, as well as allow
routines and data input and output. As far as a typical finan- the user to maintain preferences. When intelligent devices are
cial consumer is concerned, they reasonably assume they introduced there are many permutations for new computing
have single access to a number of financial instruments, models and new avenues for business. There are complex or
accounts, and institutions from a number of different vehicles. fiscally creative models as well as those that are as common
That assumption is well and proper. The reach beyond pure as balance transfers, credit scoring, or equity settlement that
financial institutions is also obvious. Remember that web are beginning to migrate from the proprietary and complex
services can be valuable as providers of transactions and component integration methods of the past.
data. Events are a special type of transaction that can add
additional value to the web services environment, as well as In a very real sense, there are institutions today that are using

web service engines as a cost recovery tool for previously integration a comparative understatement of the past.
closed information technology assets. These web service
engines are becoming components of a ubiquitous landscape At risk of waxing too allegorical, it is difficult not to think of
that can be leveraged from browsers, devices, thick and thin the effort in computing in terms of a workout at the health
clients, and that can be developed and brought to market club. During the workout, if done properly, the lactic acid
quickly. These services that are now being developed are builds in the muscles and the burn of muscle strain com-
going through the pains of subscription and varying revenue mences. Athletes feel the burn as they work their way around
models. While market leaders may feel some of the initial the racetrack. Nevertheless, at the end of the burn there is
pressure of developing supported infrastructure in the short- growth. Without pain there can be no growth in business. And
term, over time they will realize the financial benefits of high- in the world of a network connected computing environment,
ly efficient transaction subscription systems. there is pain to be felt. That pain will certainly lead to growth
of innovation and new opportunities for true business use of
In all of these models, there will be some growing pains. Faster global networks. I guess that the real question is what kind of
time to market of applications can occur when the technology water heater the Starship Enterprise has.
is easier to integrate, and based on messaging standards.
Reflecting on the general goals of businesses that were dis-
cussed earlier; lowering costs, complying with regulatory
changes, increased sales and distribution, streamlined trans-
actions and raised profit margins, all comprise a large portion
of the mandates companies have to shareholders and other
stakeholders. Lowering costs for information technology
takes place as systems become commoditized and have the
ability to streamline transactions that they process. In a mes-
sage based infrastructure like web services, those messages,
based on industry standard XML, can be routed through inter-
mediaries that can certify compliance to any number of regu-
lations. By making those web services available to directory
services, easier to integrate into applications and user experi-
ences, sales and distribution channels are opened. Those new
sales channels may have not been explored, or have not been
easy to integrate with past technologies. For many the future
of computing is more of the same, same hardware and soft-
ware, usually with much more duct tape. That is not the future
that true technologists and visionaries spend time architect-
ing. The future of the world of technology connects many
devices, both dumb and intelligent. Devices are a part of an
overall landscape that uses web services and global messag-
ing standards to nurture an ecosystem that exposes the best
of data and transactional assets. In this ecosystem consumers
with the proper credentials and business need are able to con-
sume the assets by using industry leading tools that make the

16 - The Journal of financial transformation


Evolution of
the financial
software market

Paul Gardiner
Calypso Technology

This article examines the market forces that are driving
change in the financial software market, describes the tech-
nologies that will be adopted by the next generation of finan-
cial software systems, and shows why those systems will be
developed by new market entrants rather than the large
incumbent companies.

Evolution of the financial software market

The fragmented financial software market trend to continue. While the finance industry was booming,
Banks have traditionally organized themselves by asset class. software companies could ignore this consolidation. Banks
Within a typical bank there might be separate groups for for- had plenty of money to spend on new technology.
eign exchange, FX options, money markets, futures, loans,
bonds, interest-rate derivatives, credit derivatives, equities, Finance is now in a recession and banks are reducing their IT
equity derivatives, and so on. Each group was run as a sepa- budgets. Banks are deferring the purchase and rollout of new
rate business, with its own budget and systems decisions. As systems. But, that is only a temporary solution. Maintaining
a result, each group invested in its own front, middle, and the systems it already owns is a far greater drain on a bank’s
back-office systems, which were isolated from the systems of IT budget than buying new ones. A recession does not natu-
other groups. Moreover, regional offices exercised their rally reduce maintenance costs. They are a function of the
autonomy to choose systems different from those in the head- number of systems the bank has to maintain, not of the num-
office, thereby exacerbating the problem for global firms. So ber of trades going through those systems. To reduce mainte-
prevalent was this structure that the groups became known as nance costs, a bank must reduce the number of systems it
product 'silos' or 'stovepipes'. maintains.

Silo-based systems selection determined the structure of the Even before the recession hit, the IT selection process within
financial software market. In fact, it is a little misleading to banks was changing. Banks were making global systems deci-
speak of a single financial software market. Up until now, sions rather than letting regions decide for themselves. They
there has been an equity derivatives front-office market, a for- were trying to break down the product silos and look for
eign-exchange front-office market, a foreign exchange back- cross-asset systems rather than single-asset systems and for
office market etc. These may be further subdivided by geog- front-to-back systems rather than separate front and back-
raphy. The European and American fixed-income markets are offices.
very different. Each market has the same set of target cus-
tomers (the banks) but different sets of competitors. Software companies thus face a doomsday scenario:
■ There are fewer potential customers.
A financial software start-up targets its product at one of ■ The potential customers are buying much less new soft-
these small markets. Often the product is co-developed with ware.
the first customer. If the company is successful, it can sell to ■ Existing customers are eliminating systems, reducing the
other banks in the same niche. Since financial software tends maintenance revenue on which the suppliers depend.
to have a high-ticket price, it only takes ten or twenty cus-
tomers for the software company to reach a point where it can The remaining market opportunity is for these global, cross-
survive almost indefinitely on the maintenance revenues from asset, front-to-back systems. Can existing systems satisfy this
those customers. Consequently, the financial software market opportunity?
became very fragmented with many small suppliers.
Consider again our typical software start-up. It focuses initial-
Where have all the customers gone? ly on one small niche and builds up a loyal user base in that
Ten years ago, a software company could look to sell to Man- niche. If the firm is really successful, it might reach 100 cus-
ufacturers Hanover, Chemical Bank, Chase Manhattan, and JP tomers. But it won’t reach 1,000 because the market is not
Morgan. Now, all these reputable banks have joined to create that big. Sooner or later, the firm has to look to adjacent nich-
JP Morgan Chase. Mergers and acquisitions have shrunk the es for growth. And this turns out to be surprisingly difficult.
number of banks, and there is no reason not to expect this The reason is that software systems are organic. When they

18 - The Journal of financial transformation

Evolution of the financial software market

are young, they are very flexible. When they are older, they If the requested enhancement would require a lot of work, the
are harder to change. If a system is used exclusively for, say, vendor may ask the bank to pay for it. Since only the vendor
interest-rate derivatives and has many happy derivatives can make enhancements to its product, it can charge a
users, it will be very hard to make it a good bonds or foreign monopoly price for doing so. Moreover, when the modification
exchange system. The very design decisions that made it a that the bank has paid for is complete, the vendor can inte-
good derivatives system in the first place may prevent it from grate the enhancement into its product and resell it to other
being a good system for other instruments. The software firm banks. If the bank regards the enhancement as proprietary, it
may attract some customers in the adjacent niches but they can request a customized version of the product. Customized
will invariably be banks that are already using the system in its versions are wonderful, until they have to be maintained.
core niche. For these banks, the advantages of having a single When the vendor releases a new version of its product, the
system from a trusted supplier outweigh the disadvantage of bank must forego the new features in that release or pay (and
having a system that is not a best-of-breed system in that wait) for the new features to be ported to the bank’s cus-
niche. Most will need a new system. tomized version. Customized versions are also inherently
more buggy. It is impractical for the vendor to spend as much
Build-versus-buy time testing each customized version as it does testing the
It is important to remember that there were originally good general release version.
reasons for letting each silo make its own decisions. Each silo
has particular issues that it needs to address. A securities sys- Rather than be dependent on the vendor in this way, banks
tem needs to talk to depositories; a foreign exchange system often request the source code to the product so that they can
does not. A derivatives system needs to capture volatility sur- make whatever modifications they want on their own sched-
faces and correlations; a securities system does not. Require- ule. Unfortunately, this is only a short-term solution. Once a
ments change rapidly in the front office, less frequently in the bank makes a modification, the vendor can no longer support
back. If a new system is not better than the system it is its product. If a user has a problem, the vendor cannot know
designed to replace, the silos will veto its implementation. whether the problem is in its software or in the modifications
that the bank has made, because it does not know what mod-
The first question to ask is whether the new cross-asset sys- ifications have been made and where. Moreover, when the
tems will be built internally or bought from vendors? This is an vendor releases a new version, the bank has to re-implement
age-old discussion: is it better to have a system that the bank all the features it has added. Thus, although budget con-
can tailor to its precise requirements or to have a system that straints force most banks to buy, they yearn for the flexibility
is much cheaper and has no development risk? To understand that an internal build brings.
the origins of this dilemma, suppose a bank wants some mod-
ification made to a piece of software that it is using. It asks the Application programming interfaces
software vendor to make the modification. The supplier may What does flexibility mean? From a technical perspective, flex-
be genuinely committed to supporting its product but it has to ibility means providing Application Programming Interfaces
balance requests from all its customers. Other enhancement (APIs). An API defines a set of functions that the bank’s devel-
requests may be more important, either because more clients opers must implement to achieve a desired goal. For example,
would benefit from them or because a sale depends on them. a trading application may have an API to add a new product or
Even if the vendor agrees to the enhancement request, the a new option-pricing algorithm. The promise of APIs is that
bank will have to wait until the next general release of the banks can make extensions using the APIs whenever they
product. This may be 12 or 18 months away, particularly if it is want and yet still benefit from all the standard features of the
a mature product. product. Unfortunately, APIs are not a yes or no feature. It

Evolution of the financial software market

does not make sense to say that system A and system B are processor increased 120-fold2 over the same period. A soft-
equally flexible because they both have APIs. It is necessary to ware system that took six hours to process a firm’s trades 13
dig deeper and ask such questions as: years ago should take less than 60 minutes today. And yet
post-trade processing remains a bottleneck for many firms.
■ How many APIs does a system have? Crudely, the more We know of one securities firm whose end-of-day process can
the better. take until 11am the next day. If banks consolidate systems
■ What do the APIs allow banks to do? An API for adding a across assets and geographies, this problem will get even
new product to the system is good but it is even better if worse. Fewer systems will have to handle more trades.
there are also APIs for hedging, confirming, settling, and
accounting for trades of the new product. Why have firms not seen their end-of-day times shrink? A
■ How easy is it to use the APIs? Does the bank need to have principal reason is that the architecture of most processing
the vendor’s source code? systems prevents them from taking advantage of increased
CPU (Central Processing Unit) speeds. Let us take a quick tour
In general, the skill of the vendor’s development team deter- of three technologies that can address the problem.
mines the ease of use of the APIs, but technology plays its
part too. Some old programming languages do not support Multi-threading
APIs at all. Others, such as C++, force developers to recompile It is intuitively obvious that distributing a task across multiple
every system component that needs to know about an exten- processors will enable it to run much faster than it would on a
sion built through an API. Modern languages, such as Java, single processor. But, if a program that was designed for a sin-
make it much easier. The developers do not need to touch the gle processor architecture is run on a 64-processor system, it
original system. They just have to place the code for their exten- will not run any faster. The design of the program must allow
sions in a particular directory and the system will automatically different 'threads' to be spun off and run in parallel on differ-
find and use them. Keeping the bank’s code and the vendor’s ent processors. To make an existing single-threaded program
code in clearly separate places has several advantages. multi-threaded is extraordinarily difficult because the entire
program structure is affected. Programs must be designed to
■ The bank can continue to accept new releases from the be multi-threaded.
vendor. When a new release comes out, the bank just
copies its code to the right directory for the new release. Every major operating system has supported multi-threaded
The new version will simply find and use the bank’s exten- programs for at least five years. High throughput applications
sions in the same way that the old version did. such as databases and web servers have been multi-threaded
■ The vendor can support its product. If there is any doubt for several years. The Java programming language tools pro-
about whether a problem is with the vendor’s code or the vides support for threads as a standard feature. Anyone set-
bank’s code, the bank can quickly remove its extensions ting out today to design a trade processing application would
and try to reproduce the problem. make it multi-threaded. But most trade processing applica-
■ Good APIs allow banks to forget about buy-versus-build tions on the market are not multi-threaded because they were
and to adopt a buy-and-extend strategy. originally designed so long ago.

High performance Compute pools

Computer speeds increase at a much faster rate than trade Consider the problem of hedging a large portfolio. Described
volumes. The number of trades on the NYSE increased 19-fold1 crudely, all hedge algorithms produce a hedge recommenda-
between 1988 and 2001. The speed of a standard micro- tion by valuing the trades in a portfolio under a variety of pos-

1 Consolidated tape trades grew from 17,738,727 in 1988 to 338,097,835 in 2001. 2 The Intel386 SX CPU introduced in 1988 worked at 16 MHz (2.5 MIPS) and had
20 Source: NYSE. 275,000 transistors. The Pentium 4 introduced in 2001 had 42,000,000 transistors
and worked at 1.9 GHz. (Source: Intel.)
Evolution of the financial software market

sible future market scenarios. Valuing an individual trade may For a component-based architecture to work, a program on
require a complex Monte Carlo simulation, there may be thou- one computer must be able to call a program on another com-
sands of individual trades in a portfolio and the portfolio may puter and get a result back. How does the first program know
have to be valued in thousands of possible future market sce- where the second program is running? How does it know what
narios. Computing the hedge can take hours. But a hedge functions are available for it to call? How does it know what
analysis is not a single complex calculation. It consists of mil- data the second program needs and in what format? How
lions of independent calculations (e.g. the valuation of a single does it know what format the result will be in? What if the two
trade under a single market scenario) whose results are com- programs are written in different programming languages or
bined to produce the final result. Instead of being run sequen- run on machines with different operating systems? These are
tially on one processor, the calculations can be divided among complex technical issues. The early attempts to address them,
a compute pool of 10, 100, or even 1000 computers. If one such as CORBA and Microsoft’s DCOM, were awkward to use
processor takes three hours to perform a calculation, one and debug. They tended to be used more for communication
hundred processors should be able to do it in about two min- between systems than for communication within a system.
utes3. That is the difference between running a calculation at Modern programming languages such as Java make it much
the end of the day and being able to run it intra-day. simpler to build a system of integrated components. Only
within the last four or five years has it even been possible to
Most financial software programs cannot break portfolios and build a component-based system.
hedge calculations into the small units that compute pools
need. They were designed at a time when compute pools did The Worldwide web
not exist — standard products that support compute pools There is no need to describe here the worldwide web and its
have emerged only in the last two years. enormous potential. It suffices to say that a modern system
must be able to deliver its functionality over the web. The sys-
Application components tem may not always, or even often, need to be used over the
Application components are separate programs that co-oper- web, but it must be an option. Many software firms have
ate to perform a task with each component being responsible attempted to give facelifts to old products by providing web
for a particular part of the task. For example, a trade process- front-ends to them. These have had limited success. Success-
ing application has to accept trade input, produce confirma- ful facelifts may keep an existing customer’s attention from
tions, update positions, calculate payments, generate wandering to the competitor’s attractive new product, but
accounting postings, and display results to users. Each of they cannot disguise for long that the body underneath is still
these tasks could be performed by a separate application old, inflexible, and liable to break down.
Anatomy of a modern system
A component-based architecture has several advantages: Let us review the system that the current technology allows
■ The components can be easier to support and maintain us to build:
than a single monolithic application because each compo- ■ It can be cross-asset and/or front-to-back.
nent is focused on a particular task. ■ It can supply the market-standard functionality that every
■ It improves scalability because the components do not bank needs but which provides no bank with a competitive
have to run on the same computer. advantage. This includes all back-office and many front-
■ It is easier to add new functionality to the system because office functions.
it is easier to add a new component than to modify a ■ It has APIs that banks can use to extend the system’s func-
monolithic program. tionality easily.

3 In practice, managing a distributed calculation imposes some overhead. If a calcu-

lation takes time t on one CPU, it might take around 1.2t/n on n equivalent CPUs. 21
Evolution of the financial software market

■ It offers dramatically faster performance, both for trade

processing and risk management. benefit
■ Its functionality can be deployed over the web. from Distributed
Technology components

Such a system has enormous value: Client-server

■ The new system replaces many existing systems, reducing
the bank’s systems maintenance costs. Monolithic
■ The bank can innovate faster because its IT staff is
focused on areas where it can add value directly to the
business. This might include building new pre-trade deci-
sion support tools or new analytics or new reports.
■ Traders can win more business because distributed pro-
Cumulative effort at developing technology
cessing enables them to price deals quicker.
■ Firm-wide risk management is easier because positions
come from fewer systems and calculations can be run The first generations of financial software systems were
intra-day instead of overnight. monolithic. A single program supported all the users, per-
■ It is easier to calculate and manage exposure to a single formed all the processing, and maintained all the data. They
credit because the new cross-asset system contains all the ran on mainframes or mini-computers and were written in
positions. Witness the difficulty certain bulge-bracket arcane programming languages. Many of these systems are
firms had in calculating their exposure to Enron. still in use today, particularly in the back-office, even though
■ The bank can do a better job of managing its corporate the improvements in each release are only marginal. The sec-
client base because traders and account representatives ond generation of systems used a client-server architecture.
can get a global view of a client’s positions in one place. Instead of logging in to a central computer to run an applica-
tion, users ran individual copies of the application on their
S-curves and adoption of new technologies own PCs. These applications (called clients) then connected
Let’s step back for a moment. The progress of a technology over the LAN (Local Area Network) to a shared database run-
over time is usually depicted with an S-curve. In the early ning on a central server. The first client-server systems were
stages, while the technology is being developed, a lot of work built in the early 1990's. Since they take advantage of the
produces relatively little user benefit. After a time the tech- computing power on user’s desktops, they were particularly
nology becomes 'proven' and the marginal user gain from suitable for front-office applications. Most such systems were
additional development of the technology is high. Ultimately, built in C, C++, or Basic. These systems have also now reached
however, the technology reaches its natural limit and addi- the point of diminishing returns. Users see relatively little
tional development effort attracts diminishing returns. An improvement in each release even though the vendors are
emerging new technology will follow a similar S-shaped curve. spending a lot of effort adding features and fixing bugs.
It may initially offer poorer performance than the older tech-
nology but its higher performance ceiling will enable it to sup- The technologies described in this article form a third gener-
plant the older eventually. ation. The early versions of these systems were technically
strong but functionally weak: the developers had not had time
When we translate this to financial software, the S-curve to add all the features users care about. The initial customers
applies to the architecture and underlying technologies used were those for whom the architectural strengths outweighed
to build a system. the functional weaknesses. Those systems have now passed

22 - The Journal of financial transformation

Evolution of the financial software market

the first inflection point in the curve and can be considered No firm is going to embark on a radical re-engineering of its
'proven'. The pace of improvement is much higher because product line that its customers are not demanding when those
their superior design enables developers to add features more customers are asking it to do other things that are easily
quickly. In many ways, the newer systems are now functional- achievable. Christensen noted that 'the firms that led the
ly better as well as architecturally better. The new technolo- industry in every instance of developing and adopting disrup-
gy’s S-curve has surpassed the peak of the old technology’s tive technologies were entrants to the industry, not its incum-
S-curve. bent leaders.'

Why don’t existing software firms adopt the new Sketch of the future
architecture? It is my opinion that our future industrial landscape will be
We have described how hard it is to take a system that han- quite different from what we have today. Firstly, new firms
dles one asset class well and make it handle other asset class- whose products are based on the technologies described here
es equally well. And we have seen how difficult it is to make a will displace the incumbent leaders in each category. Second-
system multi-threaded, or to have it use compute pools, or to ly, the need for cross-asset systems will increase barriers to
break it up into components. Even if it is not possible for an entry so that those new leaders will be few but large. New
existing system to satisfy the market opportunity, surely the start-ups will be concentrated in the analytics and pre-trade
vendors that produce those systems will develop new prod- decision support areas because there is always a market for
ucts than can? Can’t they see the writing on the wall? products, however immature, that promise to help traders
make more money.
Clayton Christensen has studied the adoption of new tech-
nologies to see what factors determined whether existing What will happen to the incumbent leaders? They will become
firms in an industry or new entrants would adopt them. In his zombies or cash cows. Zombies are the walking dead: they
book4, he distinguished between sustaining and disruptive sustain themselves based on the maintenance stream from
technology changes. Sustaining technology changes gave their installed base but make few or no new sales. They can-
'existing customers something more and better in what they not grow but can persist in this state for years until their
wanted', in which case 'the leading practitioners of the prior clients have all migrated away. Zombies are natural acquisi-
technology led the industry in the development and adoption tion targets. The product is mature and does not require a lot
of the new.’ Disruptive technology changes redefined the of product development investment. Nor does it need a large
basis of competition in the industry even though they were sales force because there are few new sales to be had. The
usually not radically new. 'Disruptive innovations were tech- acquirer can cut back on product development and sales,
nologically straightforward. They generally packaged known eliminate duplicate functions, such as accounting and human
technologies in a unique architecture.' resources, and milk the highly profitable maintenance revenue
stream. The largest global financial software firms specialize
Consider the technologies that have been discussed here. in buying zombie companies and turning them into cash cows.
They are not radical: all have been widely accepted by the The years ahead promise rich pickings for them.
software industry. Anyone developing a system from scratch
today would use all of them. But, it is extraordinarily difficult
to re-engineer an existing system to use any of them. More-
over, established software suppliers with existing products are
not being asked by their customers to adopt them. Instead,
their customers are telling them to add feature X or fix bug Y.

4 ‘The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail’, by
Clayton M. Christensen. Harvard Business School Press, 1997. 23

Research technology
priorities for
broker-dealers in
the U.S.

Allan Rosenstein
Managing Principal, Capco

Over the past year, the U.S. broker-dealers community has
come under enormous public scrutiny over the role that their
research departments play within the whole organization.
Questions about independence of these reports have resulted
in a number of these organizations being tried in the courts of
public opinion. However, changing the public perception of the
value and independence of these reports is not the only chal-
lenge that faces producers of financial research reports. Many
are also facing a number of less well-known challenges asso-
ciated with how they produce and disseminate their research.
It is my opinion that the combination of these internal and
external pressures will force a number of research report pro-
ducers to increasingly take advantage of new technologies to
help them in the process of research authoring, production,
and distribution. With the maturation of a few key technolo-
gies, it is now time to rethink the research technology model,
with an eye towards meeting the myriad of challenges faced,
and planning for the future. This paper will review the critical
challenges faced by sell-side research producers, set research
technology priorities for enabling operational solutions to
these challenges, and suggest an application architecture for
supporting research in the future.
Research technology priorities for broker-dealers in the U.S.

Introduction ■ Commoditization of the research product: The amount

In recent months, we have all been subject to a barrage of of available research has become overwhelming to institu-
negative information concerning the potential conflicts of tional brokerage clients, making it very difficult for any sin-
interest that exist within the research reports produced by the gle broker-dealer’s research to stand out. First Call alone
broker-dealer community. This information overload has been now claims 800 different contributors of research.2 Com-
so excessive that many believe that so long as the trust issue bination of an institution’s subscription to First Call and
is managed effectively, these institutions have nothing else to Multex, Bloomberg terminals, access to commingled and
worry about. The fact is, of course, that in addition to regain- single dealer research web sites, and inbound email chains
ing public trust; these institutions will need to continue to from several broker-dealers (not to mention old-fashioned
compete with their historical archrivals. What this paper aims printed research sent via fax and snail mail), have resulted
to provide is how new technologies can help these institutions in a substantial information overload for the end-users. In
improve their competitive position vis-à-vis their competitors addition, while the standardized format of certain
through better research report production and dissemination. research products has assisted with distribution, it has
To achieve this objective, I have separated this paper into 3 turned some research into a cookie-cutter product with
sections. Initially, I will begin with a short review of what the very little opportunity for differentiation. Very few money
current environment looks like. Secondly, I will highlight what managers have the time or energy to wade through this
the priorities are and should be for research organizations. sea of research. As a result, research producers now focus
And finally I will conclude my recommendations. a lot more of their attention on receiving high grades from
publications, such as the Institutional Investor, to draw
The current environment interest in their analysts. And, of course, Institutional
The number of challenges facing research report producers is clients go with those analysts whom they either know or
simply too many to be covered effectively in a few pages. How- whose names are familiar.
ever, my intention is to provide a non-exhaustive overview of
the major challenges facing sell-side research producers. ■ Growing distance between the producer and the con-
These challenges, which typically fall into one of these four sumer: The continued success of 3rd party research dis-
major buckets, include: tributors, such as First Call and Multex, has essentially cre-
ated a middleman between the dealer and their clients
■ Erosion of trust: By far the most visible issue driving with regards to research and published trade advice. In
change in research today is the erosion of public trust in some cases, a broker-dealer’s client ends up paying others
sell-side research. In the last economic boom year of for the research product, and then ‘freeriding’ (executing a
1999, there were just 125 ‘sell’ ratings out of a total of trade with broker B when the trade idea came from broker A)
33,169 stock recommendations.1 The bullish ratings, fol- off the information. The existence of a middleman also
lowed by declines in the corresponding security prices, inhibits the ability of research publishers to determine
have led to a thorough examination of the research pro- what their clients are finding valuable, and what products
vided by broker-dealers. Resulting from these examina- and services to target to them.
tions was the recent SEC approval of new research ana-
lyst behavior and disclaimer rules, NASD 2711 and NYSE ■ Rising cost of research publication and delivery: The
472. These rules have a material effect on how research complexity of offering research on a growing number of
gets reviewed prior to distribution, and the financial securities through a growing number of disparate
disclaimers/disclosures that must me published as part of distribution platforms is placing a strain on the IT groups
each research product. supporting the research function. The Tower Group esti-

1 Fortune Magazine, ‘A Whole New Ball Game’, July 24, 2000 2 First Call website
Research technology priorities for broker-dealers in the U.S.

mates that broker-dealers will spend nearly U.S.$600 mil- spreadsheet software, using embedded Visual Basic and
lion on just the delivery of research and analytical infor- Active X controls. However, these host office applications are
mation to institutional clients in 2003.3 generally not intended to be software development environ-
ments. As a result, version control of authoring template
Reviewing the aforementioned challenges, it becomes clear across multiple releases of office suites is a continuing strug-
quite quickly that improved production and more effective gle for research technology groups.
dissemination of this information can help significantly
improve the broker-dealers' ability to attract attention to their Nevertheless, there are ways to make these authoring tem-
recommendations. I believe that technological solutions exist plates more flexible, within the framework of a full research
today that can help in this process. In the next section I will architecture, and that are less challenging (and more desir-
discuss how these technologies can be employed effectively. able) than trying to wean research analysts off of their
favorite office suite. First, put as much of the data associated
Research technology priorities with research as possible into a database, outside of the
While a technology platform cannot solve the above-men- authoring template. This allows for standardized storage and
tioned issues on its own, it can help improve the efficiency of maintenance of critical, proprietary research information, and
the process of research production. For example, sell-side frees the authoring template to focus only on formatting and
firms still have some deep thinking to do regarding the busi- automation tools to make the analyst’s life easier. Many bro-
ness value proposition of research, and how it gets produced ker-dealers already have a ‘numbers’ database in their equi-
within their organizations. What improved technology can do, ties area, containing security identifiers, actual and estimated
however, is enable rapid adaptation to regulatory changes, earnings data, as well as previous day market data (among
open up new operational efficiencies, and at the same time other information). Given the scrutiny surrounding analyst
create new capabilities that will allow for better decision- conflicts of interest, this database should be enriched to
making regarding the research product. include disclosure, company mentioned, and earnings foot-
notes text. This way, the text used in presenting disclaimers
In order to effectively introduce and employ new technologies and disclosures in reports can be standardized, free from
within their research production processes, broker-dealers human error. Also, once database-driven, new disclaimer
need to achieve 3 important priorities. At this stage, I would types can be added and removed without changing the tem-
like to apologize from the readers for the use of a number of plate itself. Some firms have taken this further, by linking the
technical terms. I hope that it will not cause too much dis- disclosure text data with the investment banking relationship
comfort. With your permission, therefore, here are the three data, automating most of the disclosure process from start to
priorities that I have identified. finish.

■ Priority #1: Utilize XML and traditional database tech- Another important key to flexibility, and to product differenti-
nologies to differentiate your research and make your ation, is in how the research is indexed, stored, and distrib-
tools more flexible uted. Many market participants have joined RIXML.org, which
is focused on designing an industry-wide XML (Extensible
Delivering a flexible set of authoring tools to handle the many Markup Language) standard for how research content should
ongoing changes to research disclosure regulations is a diffi- be tagged and delivered. While this noble pursuance contin-
cult proposition, especially in the research analyst’s world of ues, however, firms can reap immediate benefits by altering
word processing and spreadsheet templates. Many of these their current research tools to generate and store research in
authoring templates are built into the word processor or their own XML format. The flexibility that storing research in

3 Tower Group, Andy Nybo, February 2001

Research technology priorities for broker-dealers in the U.S.

XML provides is hard to ignore. Research stored in XML can be cases both are combined into one file) to their destination,
rendered, in real-time, in the multiple formats (such as PDF, usually via FTP (File Transfer Protocol).
HTML and ASCII) required by various research destinations.
Use of XML can also allow firms to differentiate their research, For many firms, little of the distribution process is automated,
through the employment of new searchable tags, and the leading to large support staffing requirements and human
opportunity to piece different portions of research together to error. Firms can recognize significant savings by building (or buy-
custom-tailor the end product for different uses. ing) a distribution engine to automate and manage these tasks.

Just the potential storage space saved alone may make XML When distribution is boiled down to its technical steps, it is
implementation worth the effort, let alone the reduction in easy to picture a highly automated, rules-based solution:
manual effort needed to manage and manipulate the many
formats and versions of research today. XML can be generat- ■ Apply data mapping rules — Once the research content is
ed either at the point of authorship, within the authoring tool, created and inputted into the system, the distribution
or as an initial step in the distribution process. Where it gets engine can first match the research to its appropriate des-
created depends on the firm’s specific implementation of tinations, and map the appropriate identifier fields to what
research technology. is required by each vendor. These mappings should be
table-driven and kept out of the distribution engine itself.
■ Priority #2: Automate the distribution process to
reduce costs ■ Apply format transformation rules — Based on the dif-
ferent destinations, the appropriate format for each can
Taking action on priority number 1 will certainly remove some be automatically rendered. This is where storing research
of the costs from the research publication process. Still more as XML has enormous advantages. A few formats, such as
cost savings opportunity exists in research distribution. The the high-resolution files required for hardcopy printing,
term ‘distribution’ is meant to describe the process whereby may still require an external process.
research content is rendered, tagged, and delivered to the
myriad of research destinations broker-dealers support today. ■ Apply vendor key rules and send — Now that the content
For instance, a short equity morning note needs to be deliv- is in the correct format with the correct content-specific
ered to First Call, Multex, and various other destinations. To do tags, the control file is enriched with destination-specific
this, the research content (usually in Microsoft Word or maybe information and sent out.
in XML if priority number 1 has been acted upon) must be
transformed into at least three other formats: ASCII text for If the solution is built in a modular and data-driven fashion,
First Call, a PDF (Acrobat) file for Multex, and potentially adding new research formats and destinations could be as
HTML for the dealer’s proprietary website. Once the correct simple as adding additional mapping rules and writing a for-
formats are generated, they must be ‘tagged’ with identifiers mat sheet (for those more technically inclined, this would
that are put into a ‘control file’. Some of these tags describe most like be an XSL style sheet).
the research itself, such as who the analyst is or what compa-
ny the research is covering. Other tags are specific to the des- Overall, development or purchase of a proper distribution
tination, such as what menu the research should show up engine can have the complimentary effects of reducing distri-
under on a Bloomberg terminal, or which First Call users are bution costs while speeding up the delivery of the research
entitled to see the report. Finally, the correctly formatted product. There are several vendors in the marketplace offer-
research is sent along with the control file (in a couple of ing automated research distribution systems today.

28 - The Journal of financial transformation

Research technology priorities for broker-dealers in the U.S.

■ Priority #3: Use of peer-to-peer and instant messaging First Call. As a result, they have added yet another source of
technologies to increase the timeliness and quality of research to the fray, without adding many additional benefits
research feedback and consumption information to the research consumer or adding tools to increase client
Of the three major priorities, nothing peaks the interest of
analysts more than providing them, and their management, A better industry strategy for obtaining feedback on research
with an easier way to communicate with their clients on and readership is to leverage new technologies to improve the
research, to track what their clients are reading, and what overall research value proposition for institutional and retail
actions are taken as a result. Measuring the economic value of consumers. Peer-to-Peer (P2P) technology can be deployed
research, always a tricky issue for research producers, has for real-time commingled distribution of research to client
become even more difficult in recent years with the prolifera- desktops, using a full-time Internet-enabled application
tion of research aggregator ‘middlemen’ and new e-commerce instead of the multitude of website addresses clients use
trading platforms. While many firms get very good informa- today. Integrate strong research filtering capabilities and
tion from their own online web research portals, they do not instant message/chat functionality into this tool, and you have
get uniform or timely feedback from other research distribu- given the research consumer more control over what they
tion channels. see, while at the same time providing a mechanism for ‘live’
discussion and feedback on the research that is delivered.
There are three significant barriers to obtaining feedback on Obviously, privacy issues would still prevent ‘real time’ report-
research. The first barrier is the obvious technical complexity ing on what clients are reading. But, providing a place for ana-
of trying to collect feedback data from the many non-uniform lysts and sales personnel to engage customers on the
research destinations (each with its own format), as men- research they are reading, besides the serial nature of the
tioned above. Second is the right to privacy of the research telephone, should shed a bright light on what’s working or not
consumers, which causes ‘embargo periods’ of various working in the research product itself.
lengths before some research aggregators (i.e. First Call, Mul-
tex) will share research readership information with produc- This concept can be extended throughout the broker-dealer
ers. Third is the acknowledgement that research delivery has community. A joint industry directive to offer research direct-
become rather impersonal in nature. Sure, analysts pay very ly to clients via P2P is a viable way for broker-dealers to dis-
close attention to important customers. But, the majority of tribute and aggregate research without the aggregators. This
research, particularly on the retail side, is accessed through a might very well upset the established research aggregation
third party aggregator, eliminating any chance of real-time players, who are already working on next generation client
discussion and feedback on the product itself. research products of their own (most recently evidenced by
First Call’s acquisition of Worldstreet, a P2P technology com-
Many broker-dealers are already trying to address these bar- pany). But the concept of removing the middleman from the
riers, by participating in dealer consortium websites that pro- research delivery process is certainly compelling.
vide many of the same commingled search capabilities as the
research aggregators. When users select a research title on Beyond the highly integrated solution suggested above, there
these websites, they are directed to the broker-dealer's pro- are a few less grandiose, shorter-term actions that research
prietary web portal for the research content (and subsequent producers can take to improve research-tracking capability:
readership tracking mechanisms). However, these consor-
tiums share many aspects of their technology platform and
business model with the existing research aggregators like

Research technology priorities for broker-dealers in the U.S.

■ Give consumers more ways to provide qualitative feed- ■ Make some research available only on the producer’s
back — There are simple feedback mechanisms that are proprietary website — This is certainly less desirable to
underused in research, such as a ‘rate this research’ fea- clients, who now need to go to multiple places to get
ture on dealer websites and a web link address added to research. However, this is an acknowledged way of driving
the end of research reports for feedback. Dealers can also readership traffic to the producer’s web site, where better
use existing, non-integrated instant messaging tools to reporting mechanisms exist.
alert clients of new research, and to have qualitative dis-
cussions on the research product. To date, the overall trend regarding research consumption
tracking has been to drive as many clients to a dealer’s pro-
■ Match what readership data you have with execution prietary website for research as is possible. In the future, fur-
data — Sounds straightforward, but many firms are not yet ther adoption of P2P and instant messaging should provide
doing this. The readership data most broker-dealers get better mechanisms for direct dialog with clients on research,
from their proprietary websites should allow for correla- and may even make the many research websites obsolete.
tion analysis with trade execution on the securities asso-
ciated with the research. A high correlation may signify a Pulling it all together
valuable piece of research, and help research producers There are several additional layers of detail, beyond the three
determine areas to focus on in the future. priorities mentioned above, that need to be considered when

Compliance & Content Client

Analyst Authoring & Product Creation Management Distribution Access
Reference/ External
Numbers Research Email Research Submission Tool Gateways
Data Admin Authoring Proprietary Proprietary
Tool Templates Portal Portal(s)
Party Ftp
Analysts Control
Compliance Review Engine
(various formats and stages) File
Http Third
Reporting Financial Party
Models Commingled
Bloomberg/ Publish/Subscribe Portals
Market Compliance P2P Filters
Workbench Dashboard/Single Signon

Information Disclosure
ResearchData Email Fax
Applications Distribution
Production Publishing Email Clients
Supervisory Reference Applications (Institutional
Analysts Audio/Video
Data & Retail)
Printers Hard Copy

Numbers Workflow Engine/Version Control Research Chairman
Instant Messaging/Chat
Content Repository Administration
Readership/Activity Reporting
Compliance Data
Research Analysts/Sales
<XML> Geography Area Client Readership
Contact Management
RIXML Based Specific Trade Data
Repositories Repositories Repositories Data

Figure 1: New technological research architecture

30 - The Journal of financial transformation

Research technology priorities for broker-dealers in the U.S.

deploying research technologies that are beyond the scope of Conclusion

this article. However, an updated technological research archi- Deployment of technology to solve business problems is often
tecture, such as the one presented in figure 1, can enable mistakenly perceived as a ‘silver bullet’ in corporate manage-
these organizations to become responsive to changes in the ment. Many fail to recognize that there is always more to it
product itself and build closer links with customers, while at than simply loading the latest software. However, careful
the same time reducing the cost of research production. application of distinct technologies to address specific busi-
ness challenges, within the framework of a strategic architec-
In order to help the readers identify where and how this new ture, can go a long way towards increasing operational effi-
technological research architecture differs from the current ciency, as well generating new capabilities.
methods and how it can improve the whole process, I have
compared them along a number of factors. These compar- It is my belief that the time is right for reinventing research
isons are presented below. technology in broker-dealer organizations. The combined fac-
tors of newly introduced regulations, increasing competition,
As you can see, the thoughtful utilization of new technologies growing reliance on third parties, and expanding costs are
can improve the research department at a U.S-based broker- pushing many existing, disjointed manual research processes
dealer in a number of ways. Implementation of a new, cost to the limit. By focusing on a strategic architecture employing
effective research technology architecture should be a key a few key technologies, organizations can produce higher
consideration for sell-side research management. quality research that is more timely and cost effective. That’s
a competitive advantage too hard to ignore.

Research scenarios Research technology responsiveness

Current research technology Updated research technology

New reporting disclosure requirements ■ Change authoring template code ■ No change to authoring templates
(erosion of trust) ■ Retest authoring applications ■ Add new information to disclosures database
■ Redistribute applications to users ■ Update XML schema

Differentiate research through new branding ■ Change authoring template code ■ Minimal changes to authoring templates
■ Retest authoring applications ■ New style sheet to work off of XML research
■ Redistribute applications to users document

Timely feedback from customers on research ■ Obtain readership reports from 3rd party ■ View multi-dimensional, near-real-time
aggregator for prior month readership reports from P2P distribution engine
■ Review web logs ■ Converse with readers directly via secure
Instant Messaging

Add new destination for research delivery ■ Add a manual process to the production ■ Add the new data mappings to the database
teams’ tasks
■ Alternatively, make code changes to current ■ If necessary, create a new transformation
distribution software style sheet

Change the ratings system used by analysts ■ Change authoring template code ■ Update database with new ratings
■ Change distribution engine code


Integration, integration, integration

Technologies for comprehensive, real-time,

high-value payments processing

Trends in payments:
The move towards payments factories

Enterprise event management:

Delivering the ability to monitor and act on business-critical events in near-time

Implementation of e-private banking in a

Swiss private bank

Internet banking in the U.K.:

From new distribution channel to new business models
Integration, integration, integration
Andrew Derrer
Vice President, Financial Services, Oracle EMEA

Financial services companies are under pressure from all Infrastructure renewal must, of course, be accompanied by
sides. Globalization and increased competition, together with rigorous performance monitoring to ensure that gains in prof-
advancing technology and regulatory requirements, are caus- itability are maintained. The banking industry is moving
ing unprecedented change in the financial sector. Retail banks, towards standardized performance metrics that can give sen-
in particular, are faced with multiple challenges from share- ior executives and board directors a fast and effective
holders, customers, and regulators. Shareholders want bigger overview of performance and aid important decision making.
returns, investors are looking for cost-effective management,
and regulatory authorities demand stricter rules. Infrastructure renewal also enables banks to improve cus-
tomer service effectively to turn retail banking into bank
The three key challenges, therefore, facing the banking indus- retailing. The decline of the branch infrastructure demands
try are to improve profits, to improve customer service, and to that banks redefine their relationship with customers.
ensure compliance with new regulations such as the Basle II Changes to business processes and infrastructure must take
Accord. Meeting this triple challenge, inevitably, relies on tech- account of steadily evolving technology and customers expec-
nology. More effective technology can push profits up through tations. Currently the focus is on telephone and Internet bank-
better productivity and greater efficiency. It can also improve ing. But, soon mobile telephones and digital television will
customer service, through better use of data, and enable reg- offer additional channels. Business process and infrastructure
ulatory compliance. must be able to accommodate them. Customers expect con-
sistency regardless of the channel they choose and banks
In the current economic climate, maintaining profitability is no must be able to deliver.
easy task. Banks are faced with fundamental changes in infra-
structure and need to make significant investment. The shift As if accommodating new forms of banking and satisfying
to areas such as telephone and Internet banking, for example, customers were not enough, banks are also faced with the
has not only placed an additional burden on over-stretched specter of new regulations governing their activities. The
technology, it requires a radical overhaul of business process- Basle II Accord places a burden on banks to put comprehen-
es. Emphasis is moving away from the traditional branch infra- sive risk management policies in place. It places particular
structure to an integrated multiple channel-model, where cus- emphasis on 'completeness' in that an organization must be
tomers expect consistent service. The business processes and able to demonstrate that it is able to measure and control risk
the technology that supports them must adapt to these across its whole operation.
The common thread running through all three of these chal-
Faced with the need for such radical change in business lenges is integration. Indeed, banks now face the same inte-
processes and infrastructure, some banks are considering gration issues that were experienced by the manufacturing
outsourcing some of the processing load as a means of industry during the 1990's, as it moved towards enterprise
improving profitability. Outsourcing bank office activities, resource planning (ERP). Banks need to bring together a wide
such as cheque processing can, for example, bring savings of range of different processes, based on different technologies,
as much as 40%. Not only can these savings be passed on to and synthesize them into a coherent whole.
customers to increase competitiveness; they can also feed
back into re-positioning the bank's brand identity. Fast, effi- Over the last three decades, different layers of business
cient processing can help to redefine a traditional brand and process have grown up around whatever technology vogue
align it with contemporary expectations. was in favor at the time — from mainframe and minicomputers

34 - The Journal of financial transformation

in the 1970’s, through PC’s and networks in the 1980’s, to the Hansabank, the leading financial institution in the Baltic
Internet and the Web in the 1990's. Clearly this patchwork of States, provides an example of how integration can work.
processes and technologies must be brought together and Hansabank has been a pioneer in the implementation of com-
rationalized. prehensive, innovative IT and e-banking solutions. The Hansa-
bank banking system, which covers three markets with specif-
The first integration priority is channel integration. Banks can ic requirements, different currencies and languages, runs on a
achieve this by putting common processes in place that are single integrated platform. It manages current accounts, loan
capable of serving any combination of channels. If a customer accounts, securities, cross-border payments, and leasing solu-
phones a call center with a query about an item on the web- tions. It is managed from a single centre in Estonia, where the
site, the call center agent must be able to access the web page automation of most of the back-office processes has enabled
and customer account details simultaneously. The rationaliza- Hansabank to cut its IT infrastructure costs. Over 340,000
tion of business processes offers substantial savings and effi- customers use Hansabank's on-line banking facility.
ciency improvements. It also impresses customers. But, it is
not only front-end, customer facing processes that need inte- There can be no doubt that retail banks face some formidable
grating. Further gains in profitability can also come from inte- challenges. Against a background of uncertain economic con-
grated back office processes. More importantly integrated ditions, structural change in the financial markets, growing
back office processes enable compliance with the demands of customer demand and ever advancing technology, they must
risk management and reporting regulations. increase their profits, please their customers, and meet
increasingly strict regulations. While this may seem a tall
Technology integration underpins the drive to integrate chan- order, it is not impossible. Integration of channels, of business
nels and business processes. Banks need a common frame- processes, and of technology systems is the essential first
work on which to accommodate existing communications step that will lay the foundation for the changes yet to come.
channels and build new ones. When interactive digital televi-
sion, for example, begins to catch on, they do not want to have
to go back to the drawing board again. They want to be able to
integrate novel forms of access with those that already exist.

Technologies for comprehensive, real-
time, high-value payments processing
Caroline McDonald
Global Director, HP Finance Industries Business Unit

Although wholesale banking has faced globalization, consoli- entiate and excel, wholesale banks must establish, invest in,
dation, and regulation long enough to entrench these market and leverage core competencies. To effectively manage costs,
factors in the competitive landscape, competitive challenges it is critical for banks to align innovations with business
continue to rise. For example, new specialist providers are re- processes and information technology.
defining the nature of the processes that will underlie com-
mercial and institutional transaction management in the near Thought leaders in financial services are helping institutions
future. around the globe stem margin erosion and take advantage of
business opportunities that are inherent in the move towards
At the same time, the basics of good wholesale banking have Real Time Gross Settlement (RTGS). This can be achieved with
not changed. Shareholder value and Return on Investment integrated payments systems that offer comprehensive liq-
(ROI) remain the cornerstone of the bank’s business plan. uidity and risk management. It is not uncommon for a bank’s
Development of new revenue streams and delivery of excep- payments systems to turn over its total assets three or more
tional service to customers continue to be the key to success. times per day. Historically, the business processes involved in
The need for client retention and growth has been the driver payments have not been streamlined or integrated and
behind profitability and service quality for at least a decade. numerous duplications still exist. Many current payments sys-
What’s new today, compared with the 1990’s, are requirements tems are badly in need of replacement.
for cost reduction and increased operational excellence.
Typical problems faced by payments systems today arise from
Delivering on the basics while meeting key business require- the following factors:
ments is a challenge most banks are now addressing, at least
in part, via seamless integration of business process strategy ■ Many banks have gone through one or more mergers
and information technology (IT) implementation. Through this since implementing their payments applications. They
union of business and IT, banks believe they can improve may now have several different systems. They may also
processes, reduce costs and complexity, optimize core have consolidated all their systems into one, but with sev-
strengths, consolidate disparate systems, mitigate risks, and eral compromises in product presentation and operations.
grow revenues. It is a tall order but increasingly necessary, if ■ Several banks have been unable to keep up with recent
banks are to drive margins in line with business growth. On operating system, hardware, and application software
the technology side the alignment of business solutions and IT changes. Bank IT staff find it particularly difficult to pro-
requires strategic, end-to-end IT, and business solutions over vide the continual testing and support needed.
a wide variety of distinct yet flexible and highly secure deliv- ■ Some payments system vendors have ceased to support
ery channels. applications, leaving banks with orphaned technology.
■ Various payments system vendors are unable or unwilling
Wholesale payments processing: Where it’s been to respond to a bank’s requirements within a reasonable
Although still among the most profitable services in the bank- time frame or at a reasonable price, or both.
ing industry, wholesale payments processing margins are ■ Numerous institutions have a backlog of new products
shrinking. The arena is currently experiencing excess capaci- and functions, which they have been unable to implement
ty, and payments processing is under market pressure, as re- safely and cost effectively. This quickly reduces individual
investment, regulatory, and infrastructure costs rise and unit bank competitiveness and could cost a bank the business
prices fall. Globalization threatens to push wholesale banking of its most important customers.
rapidly toward models that offer lower unit costs, such as Con-
tinuous Link Settlement (CLS) consolidation models. To differ-

36 - The Journal of financial transformation

The next-generation payments processing: To help them achieve their objectives, leading banks believe
Where it’s going that the ideal payment and funds transfer system should have
Today banks seek payment technologies that will, at a mini- the following attributes:
mum, help them streamline processing throughout the pay-
ments system; provide new customer services, such as recur- ■ Reliability — the system must function reliably and
ring payments, telephone payments and cash management; employ the level of hot backup that each institution has
automate accounting interfaces to multiple systems within come to expect.
the bank; and accommodate geographic expansion. In addi- ■ Expandability — banks must be able to add resources to
tion, they are also looking for advanced capabilities that sup- the system (or subtract from it) as their business changes,
port new business initiatives, including the following. without having to change software.
■ Usability — there must be a choice of modern and efficient
■ Risk management — Banks and other financial institutions, user interfaces to meet the needs of both the expert and
in their role as payment processors, are incurring increas- the occasional user. Multiple languages may be required.
ing levels of payment risk. Bank mergers; unsupported ■ Completeness — the system must either incorporate all
systems; increasing payment values, volumes, and pro- necessary reference data or provide standard methods of
cessing speeds; plus the increasing number of worldwide obtaining and updating such data regularly.
payment-system participants, are contributing to an over- ■ Volume — the system must handle predicted volumes and
all systemic and operational risk. To reduce these risks and peaks without issue. The infrastructure must be capable of
add stability to the global payments system, market regu- supporting volumes several times above current traffic.
lators have mandated real-time gross settlement (RTGS). ■ Support — the system must be designed, implemented,
and supported by individuals who know payments. Banks
■ Straight-through-processing — Today more than 70 per- do not want to be left with an orphaned system.
cent of wholesale payments processed by financial institu- ■ Integration of payments — the system must be an inte-
tions receive individual clerical attention. This manual grated worldwide payments environment, encompassing
intervention is driving operational costs and risks to unac- liquidity management, operations, and systems manage-
ceptable levels. Without STP, banks will not be able to ment.
reduce costs and conform to RTGS mandates. ■ Ease of migration — the migration path must be clear and
manageable, with effortless reconfiguration and modifica-
■ Liquidity and cash management — Given the high values tion capabilities.
associated with wholesale payments, banks and corpora-
tions are requesting solutions that will help them better Next-generation technology: Available today
manage funds, reduce risk, and lower interest payments Although the aforementioned list of requirements seems
on intra-day loans. To meet this goal, banks require pack- overwhelming, it is important to note that such capabilities
aged solutions to integrate back-office legacy systems and are already available in the market. When we advise our
implement STP. wholesale banking clients, we tell them to look for a solution
that has already implemented the following functionalities
■ Corporate customers — In today’s 24x7 global market, and features:
corporate customers need real-time payment initiation
and notification of settlement. Wholesale banks are being ■ The solution must have been in the market for a number
forced to offer improved payment services or lose their of years and is fully operational — tested in the real world.
highly profitable customers to the competition. ■ It must have been regularly updated and enhanced to

incorporate evolving market, regulatory, and customer ■ Web-enabled banking products and services — within the
requirements. bank as well as to corporate, commercial, and small busi-
■ The vendor has a track record and a team with expertise ness customers
and commitment to wholesale banking. ■ Choice of production-proven operating environments
■ The solution must work both at the enterprise-wide level ■ Services and support in a 24x7 global environment
and globally. Domestic and international functionality ■ Adaptable software:
must be inherent and must fulfill legal requirements. • Straightforward configuration, requiring little custom
■ Must be possible to integrate wholesale banking-related development
applications with data and processing functions, resulting • User-managed parameters to control workflow, pro-
in more efficient and cost effective processing. cessing steps, and default actions and values
■ Must include extensive, configurable risk management • Capability to handle a wide range of payments and
and position tracking facilities for accounts and cus- volumes effectively and efficiently
tomers; the bank; SWIFT, Fedwire and CHIPS; and other • Flexibility — adjustable as business needs change.
■ Full support for intra-day liquidity. Towards operational excellence
■ The system should cover an end-to-end payment A premium payments system integrates business require-
approach that covers payment initiation through payment ments with information technology and helps the bank
finality. achieve operational excellence. An operationally excellent sys-
■ A complete suite of banking solutions that can be added to tem facilitates exceptional services for customers as well as
as needed, in an integrated environment. The suite of new revenue streams for the institution. It supports the bank’s
solutions could encompass Internet banking, ACH Pro- objectives of reducing costs, capitalizing on core competen-
cessing, financial EDI, CLS, B2B electronic bill present- cies, delivering shareholder value, and retaining customers.
ment and payment, foreign exchange, trade finance, busi- Comprehensive, real-time, high-value payments processing
ness process management, Internet access, comprehen- should help improve STP rate, operating margins, liquidity and
sive cash management, and behavior detection. risk management, and services for customers, while at the
same time reducing costs. Moreover, it can help simplify inte-
In addition to business functionality requirements, the ideal gration with current and future applications and compliance
solution should provide equally robust technology, including: with RTGS mandates.

■ High availability for mission-critical banking These are all crucial components of the wholesale banking
■ Scalable and extensible platform industry’s passage to operational excellence.

38 - The Journal of financial transformation

Trends in payments:
The move towards payments factories
Mark Webster
Partner, Capco

Prior to the industrial revolution, most manufacturing was management and electronic payments. Finally, technology
done on a unit-by-unit basis using manual labor. Each product has been adopted piecemeal and applied to improve existing
created was unique, and required a large investment in time processes rather than redesign the processes to take full
and labor. The industrial revolution, with the introduction of advantage of modern technology.
the automation and machinery simplified the situation. But it
wasn’t until Eli Whitney originated the concept of inter- The end result is the need to maintain multiple processing
changeable parts, and Henry Ford introduced the concept of platforms, many legacy systems that need to be updated or
assembly line production that modern factories became pos- replaced, and all performing essentially the same function.
sible. Today, most manufacturing is done in highly automated Few of the existing platforms communicate with each other,
factories, with a minimum of manual labor, and a high degree none of their 'parts' are interchangeable, and they rarely use
of productivity. Even products that are 'made to order' are a common database. The lack of communication and cooper-
usually created on an assembly line with automation doing ation leads to high levels of exception processing and rework
most of the work. with minimal straight through processing. The bottom line is
high cost, low productivity, and an inability to respond rapidly
The same, however, cannot be said for most service industries. to external opportunities and customer demands.
Although automation has improved the productivity of most
white-collar workers, manual efforts and custom processes Today’s financial institutions are facing pressure from a vari-
are still quite common. The banking industry in general and ety of directions. Regulators are demanding more and more
payments in particular are no exception. Modern banking has information regarding operations and transaction processing,
made heavy use of computers and automation to streamline much of it requiring manual intervention or systemic work-
check processing, funds transfers, and card payments. Much arounds to deal with the existing processing silos. Customers
of what is done today would be impossible without a heavy are demanding lower costs, faster processing, increased
investment in technology. Unfortunately, there is still a signif- transparency, and combined reporting across all delivery
icant amount of manual intervention and custom processing channels. Management is demanding lower cost, faster devel-
needed to make today’s payments systems work. The per- opment time, and improved risk management – again across
centage of straight through processing is nowhere near what all channels and platforms. At the same time, operations man-
it needs to be from a cost perspective, and manual processing agers are faced with aging legacy systems, many of which no
of exception items is one of the biggest operational problems longer have vendor support, fewer resources, new delivery
that most banks face. channels, and the difficult task of coordinating development
and operations across multiple silos.
There are a variety of causes for this situation. Most financial
institutions have a wide variety of payments processing plat- One potential solution is to apply the lessons we’ve learned in
forms, almost always operating in their own management manufacturing and build payments factories to replace our
silos. At a minimum, any given bank will usually have separate existing fractured payments operations. A payments factory
processes (and operational silos) for check, electronic pay- would be a single consolidated payments platform using com-
ments, and cards. In most cases, this is further complicated by ponentized technology and a common repository for both
the legacy of various systems resulting from prior mergers data and operating rules. A payments factory, by design, can
and acquisitions. Beyond that, most banks have built specialty handle multiple payments media through multiple payments
applications to meet specific customer requirements or to channels in a highly automated fashion. Using modern rules-
provide new services that the existing systems cannot handle, based and message-based systems, it is possible to build a
or to meet regulatory requirements around such things as risk payments platform that can automate most of the existing

exception processing, practically eliminating manual interven- demonstrates that it can be done.
tion, and providing a significant degree of straight through
processing. By eliminating processing silos and redundant The good news is that various parties are exploring options to
processing, we reduce costs and improve productivity. By build the first payment factories. Several of the large, multi-
using componentized, interchangeable software we reduce national banks are looking to payments factories as a solution
resource requirements and improve development speed. By for the various operational problems that they currently face
using a common data repository we gain a cohesive view of in processing payments. They are also looking at white-label-
our customers and their transactions, improve internal risk ing the factories to smaller institutions as a method of cover-
management, simplify regulatory and customer reporting, ing some of the related costs. Some smaller financial institu-
and gain the potential for new value-added services. tions are looking at creating payments factories as jointly
owned payments utilities to reduce costs, meet customer
If the solution is so simple, why hasn’t someone already done demands, and compete more effectively with the larger banks.
it? Again there are multiple reasons. First, the technology Finally, several vendors are in discussion with both banks and
needed to support a true payments factory has not existed industry trade associations regarding creating jointly owned
until fairly recently. Many of the concepts and systems need- payments utilities that will use the factory concept to provide
ed to make the idea a reality are being tested and tried today. processing capabilities for members and fee revenue for the
Fortunately, or unfortunately depending upon your point of owners.
view, many of these new technologies can also be used to put
'Band-Aids' on the existing hodge-podge of payments plat- Banking is, to a large extent, a 'me too' industry. As soon as
forms to allow financial institutions some of the expected pro- one successful payments factory is created, others will be
ductivity gains and defer the need for change. Second, build- built. Given the lead-time needed to create a payments facto-
ing a true payments factory will be expensive. While there is ry, there is certainly an advantage to being a leader in this
significant payback over time, the up-front investment is sub- area. Considering the operational and cost advantage that
stantial. Given today’s economy, very few institutions are will- such a utility will create, there is absolutely a disadvantage in
ing to make a long-term investment of this type when existing not having one, once they become a reality. Looking to what
systems still work. Finally, and perhaps most importantly, pay- factories and automation have done for manufacturing, it is
ments systems represent the lifeblood of modern financial only a matter of time till we see similar gains in banking, now
institutions. Bankers, for many legitimate reasons, tend to be that the technology exists. Henry Ford took an extreme risk
conservative. Very few are willing to run the risk of being first when he built the first automobile assembly line, but the
to make major changes to their payments networks and results were unimaginable. The question now is, who will be
processes, unless they absolutely have to. The pain level is not the Henry Ford of the payments world?
that high yet. And probably won’t be until someone else

40 - The Journal of financial transformation

Enterprise event management:
Delivering the ability to monitor and act
on business-critical events in near-time
Rama Chandra Murthy
CTO, HP Financial Industries Business Unit
Executive ability to monitor and visualize the business and act ing calls to its customer support center.
on events in near-time promises to become the next milestone
in the integration of information technology with business What makes the automation of business operation tracking so
operations. The question is, how long will financial companies appealing is the potential of real-time business views to
have to wait for enterprise event management to become a respond when something goes wrong. But, more critically, to
day-to-day reality. Although IT has taken enormous strides in predict when something may go wrong in time to take pre-
transforming lines of business silos into enterprise-wide busi- ventive action.
ness systems, technology today is still far from able to deliver
a single real-time view of the entire business operation. But, the Business activity monitoring
pressure is on technology developers to provide this capability. According to Gartner, business activity monitoring (BAM) is
the name for a new class of solutions that will underpin the
Why is such a real-time view of enterprise events becoming real-time enterprise. To interpret real-time events, BAM will
essential to financial companies? Primarily, because firms leverage the models and frameworks that business process
need to make intelligent business decisions faster than ever. In management and business intelligence offer today. BAM pro-
order to make the best decisions firms must be able to put vides real-time access to critical business-performance indica-
their hands on a total view of the business in real time. This tors to improve the speed and effectiveness of business oper-
need is becoming more urgent as financial companies seek to ations. It also provides a broad and rich view of business activ-
develop and implement operational risk strategies. Without ities by drawing on information from multiple application sys-
being able to track histories and make predictive risk analyses tems and other internal and external (inter-enterprise)
in near-time, it will remain difficult, if not impossible, for firms sources. Compared with traditional real-time process monitor-
to control rogue trading and other operational risks that can ing, a good BAM system will draw its information from multi-
threaten the existence of the entire firm. ple application systems for a broader view of all business
activities. In so doing, it will optimize investments already
Today’s business and IT managers have overview tools for made in back-end data systems by using that data to create a
managing the network, the servers and storage, and the appli- real-time, instant-insight view of the business.
cations. However, they lack the integrated tools to look at the
overall business operation, which may be an order, a return, a Today, key business data is collected by financial firms and
new product introduction or a new customer sign up. typically stored in separate information silos. Accessing, filter-
ing, and understanding these separate pieces of information
The business operation is comprised of many distinct ‘arti- and then attempting to make a business decision without hav-
facts,’ such as the applications (e.g., ERP, EAI, CRM), the busi- ing a full picture results in increased operational costs and
ness process engines, and the supplier and customer interac- risks to a financial company. In addition, much of the collect-
tions via paper mail, email, fax, EDI, XML, or web services. ed data remains at the infrastructure level. While it is critical
However, even when all business systems are functioning cor- for IT to know about a down server, for example, it is not nec-
rectly, the business may still experience errors and exceptions essarily of immediate importance to a line of business man-
in the overall operation. Take a case where all the systems ager. The LOB manager needs to know the immediate busi-
used to process new checking account applications work flaw- ness impact the down server will have. That is the type of busi-
lessly. Nonetheless, checking account applications are down ness question that can not be answered with the aid of current
20 percent over the previous year. That’s an indicator that the technology.
enterprise needs to track online as carefully as it is now track-

Needed: Real-time insight using an integrated better able to align the bank’s IT infrastructure and payment
display of enterprise data processing systems with the business goals of the organiza-
As BAM solutions are introduced, they will provide LOB man- tion. Once the alignment was established, the BAM system
agers with the ability to view an intuitive, interactive, and could help the manager proactively manage the payments
graphical representation of information in real-time. Both process and receive an early alert whenever the bank is at risk
business and IT managers will benefit from key performance of not delivering services or performing critical processes.
indicators for real-time measurement of business perform- Should a potential problem loom, the bank manager would be
ance, historical analysis of trends and the ability to spot recur- able to immediately determine the business impact and
ring problems, the ability to reduce operational costs and risks decide on an educated course of action.
and increase opportunities for growth, and the ability to
ensure that the business process meets customer expecta- The BAM system for a bank might also assist with penalty
tions and business commitments. avoidance and regulatory compliance by warning of potential
failures or events before they occur. It could enhance work-
Ideally, individual BAM users will work with a customized dash- flow by anticipating bottlenecks and potential problems. Fur-
board or cockpit focused on their area of responsibility, which thermore, it could analyze business data in real-time and com-
includes historical analysis and trending information, with pare it with historical data, increasing the bank’s ability to per-
metrics and thresholds monitored in real-time. Although some form straight-through processing.
preliminary BAM approaches are already being sold, they are
for the most part simply monitoring scorecards, with various Key to the success of a BAM implementation will be the abili-
degrees of latency built in. The challenge for the next genera- ty to identify and prioritize the business events often hidden
tion of BAM solutions is to provide real-time access to enter- within business practices. It will be essential for financial com-
prise information that allows a manager to make the right panies to work with a BAM technology partner experienced in
decision and act upon business events quickly. the evaluation of global best practices in business. Typical
issues customers can expect to face include:

An integrated view of the enterprise in real-time will pro-

■ Identifying business processes and events important
vide enhanced operational efficiencies such as the ability to:
enough to measure — Financial companies deal with
■ Report mission-critical business performance metrics
thousands of events. Which ones are meaningful and have
to support real-time decisions.
material impact on the firm?
■ Track process change initiatives across the enterprise,
■ Estimating potential exposure from identified process
charting their impact on active projects or campaigns,
events — Costs may be regulatory, financial penalty, loss
or on established business lines, products, and services.
of competitive position or customers, and others. Each
■ Measure business performance to service-level objec-
type of event can emanate from either business process-
tives and provide audit trails.
es and/or technology breakdowns within or without the
■ Optimize workflows and workload balancing.
■ Generate notification of service-level degradations or
■ Monitoring across internal and external events — Busi-
performance aberrations and trigger subsequent
ness processes and technologies cross company borders,
yet they must be monitored and reported on with suffi-
■ Monitor adherence to regulatory and compliance rules.
cient time to enable managers to take preemptive actions.
■ Monitor exposure and apply the appropriate risk man-
■ Preserving existing IT, workflow, and business process
agement processes.
investments while also interfacing with components from
external organizations and global environments.
Retail banking scenarios
In addition to offering an enormous acceleration in opera- Each financial enterprise needs to assess its own readiness to
tional efficiencies, BAM technologies also promise costs sav- implement a BAM solution and to identify its best partners for
ings and faster routes to identifying new revenue and cus- designing, developing, and implementing the real-time decision-
tomer service opportunities. As an example, the business making views that will best enhance the company’s ability to
operations manager of a bank’s payment systems would be compete in today’s increasingly complex business environment.

42 - The Journal of financial transformation


Implementation of
e-private banking in
a Swiss private bank

Olaf Schwarz
Head of e-Banking, Bank Vontobel

Since 2001, Bank Vontobel, a medium-size Swiss private bank
with activities in private banking, investment banking, asset
management, and investment funds, has been offering its pri-
vate banking clients an e-private banking application that is
tailored to the specific needs of high net worth individuals.
The following article focuses on the development of the e-
banking strategy as well as its implementation. Furthermore, it
describes how this new communication channel has been
received by clients and client advisors.

Implementation of e-private banking in a Swiss private bank

How do Swiss investors use the Internet? increasingly difficult to turn a blind eye to the Internet.
To what extent do investors in Switzerland use different chan-
nels such as the print media, TV, or the Internet to gather How do Swiss private banking clients use the
financial information? In 2000 – at a time when Bank Vonto- Internet?
bel drafted its e-private banking strategy — the Swiss Banking We find that investors can be typically placed into three cate-
Institute at the University of Zurich1 answered this question gories with regard to their Internet habits:
extensively with its comprehensive study ‘Equity Ownership in
Switzerland’. So, how did the Internet fare with other well ■ Internet informers only — those who browse the web to
established channels in different age and income groups? gather bits and pieces of information relevant to their
investment decisions. 44% of Swiss private banking
They found that more than half of those under the age of 40 clients fall into this category. In comparison, only 24% of
seeking financial information turned to the Internet. However, retail banking customers fell into this category, indicating
the percentage of those switching on the TV (60%) or read- that private banking clients have an above average affini-
ing a newspaper or magazine (90%) to get information on the ty for the Internet when it comes to financial matters.
financial markets were still higher, indicating that the Internet ■ Internet investors — those who also use online brokerage
is used largely as a complimentary channel by the younger accounts to place orders over the Internet. This groups
generation. Only one in eight investors in the 60-76 age brack- represents 15% of the clients of Swiss private banks.
et accesses financial information on the web. These results ■ Old fashioned investors — investors who stick to tradi-
seem to confirm the long held preconception that the younger tional offline channels. This group represents 41% of the
generation is generally faster in embracing new technology. In clients of Swiss private banks.
addition to substantiating this generally accepted assertion,
the study generated a number of results that were quite unex- Focusing on client needs: Information or transac-
pected. For example it found that while only a third of Swiss tions?
investors in the lower income bracket (income of up to CHF Private banks that intend to invest in an Internet banking serv-
6,000 per month) use the web to retrieve information on the ice aimed at high net worth individuals ought to focus on the
financial markets, more the half of those in the upper income primary needs of this client segment and thus above all pro-
bracket (more than CHF 10,000 per month) turn to the elec- vide a wide array of high quality financial information and
tronic channel prior to making investment decisions. This
comparatively high Internet usage among the affluent and
Print media TV Internet
high net worth individuals comes first and foremost at the
expense of television; newspapers and magazines remain the
% of respondents 92% 63% 40%
favorite source of information for this group with a rating of
Age of respondents
well above 90%.
18-29 88% 64% 61%

The study further shows that in 2000 younger Swiss investors 30-39 90% 56% 56%
with above average incomes used the Internet much more
40-49 95% 71% 47%
intensively to retrieve financial information than their older or
50-59 94% 67% 33%
less affluent peers. As this young and affluent segment of the
population is one of the prime target groups of Swiss private 60-76 93% 63% 12%

banks attempting to reduce the median age of their clientele Figure 1: Usage of different channels in Switzerland as sources of financial information
and to expand in the onshore market, these institutions find it according to age

1 Cocca, T., and R. Volkart, 2000, ‘Equity Ownership in Switzerland’ Versus Verlag,
44 Zurich
Implementation of e-private banking in a Swiss private bank

Print media TV Internet manager and that most of our clients have accounts with
retail banks to process most of their regular payments, we
Monthly income
decided not to provide online payment processing.
Less than CHF 3000 94% 67% 33%

CHF 3000 - 4500 83% 69% 31%

E-private banking: An essential part of a high
CHF 4500 - 6000 94% 67% 29% level of service
CHF 6000 - 8000 91% 61% 42% PricewaterhouseCoopers stated in the 2001 edition of their
CHF 8000 - 10000 96% 68% 51% ‘European Private Banking/Wealth Management Survey’ that
CHF 10000 - 15000 90% 54% 52% service quality is the single most important factor for select-
CHF 15000 - 20000 96% 71% 50% ing a wealth manager by private banking clients. The second
and third most important factors were the image of an insti-
More than CHF 20000 100% 41% 53%
tution and the quality of its staff. The quality of service has
Figure 2: Usage of different channels in Switzerland as sources of financial information
topped this ranking in the survey for some time now and is
according to income
expected to do so for the foreseeable future.
advice. Attempting to lure active Internet traders with fancy
online trading facilities will be very difficult as medium size Studies that analyze why private banking clients switch wealth
private banks will find it hard to compete in an online broker- managers find that the reasons given most often by dissatis-
age market that is dominated by bigger players who can ben- fied clients are poor service (29%), poor investment perform-
efit from significant economies of scale and thus offer lower ance (25%), consolidation of assets (20%), and lack of proac-
transactions costs. tive service (18%).

Those Swiss private banks offering online brokerage to high Many different elements contribute to what is perceived by
net worth individuals have often found to their dismay that clients as 'good service’ and they each have to be addressed
clients will check their accounts and custody accounts online by different means. However, some important aspects of good
only to call their client advisor on the phone in order to place service can be provided by an e-banking solution, convenience
a stock market order rather than use the online facilities pro- and access to comprehensive information and advice.
vided by the wealth manager. There are two main explana-
tions for this client behavior. On one hand clients seek reas- E-private banking: A client retention tool
surance regarding their investment decisions from their per- Acquisition costs in private banking continue to rise as com-
sonal investment advisor prior to placing an order, which is petition intensifies especially in the onshore market; hence,
why most of them chose a private bank in the first place. On retaining the existing clients becomes ever more important
the other hand clients prefer to transfer the work as well as for the long term success of a private bank. While exact fig-
the risks associated with manual order entry to the bank. This ures on average acquisition costs in the industry are hard to
is especially true for some of the more complex transactions come by, it is generally accepted that acquiring a new private
that are quite common in private banking. banking client is five to eight times as expensive as retaining
an existing one. Therefore Bank Vontobel´s primary strategic
Based on the available information on client behavior and goal in implementing a comprehensive e-private banking solu-
preferences available, we took the decision to focus on the fol- tion is to raise the quality of service that it offers to its clients,
lowing functionalities in our e-banking: detailed client report- thereby improving client loyalty and raising the client reten-
ing, stock quotes and financial news, and equity and mutual tion rate. As the Internet becomes ever more pervasive in
fund research. Given that our bank is positioned as a wealth daily life and younger clients increasingly regard e-banking as

Implementation of e-private banking in a Swiss private bank

a 'must', the ability of private banks to attract and retain the ■ Increased strength of the Vontobel brand.
younger generation of private banking clients depends
increasingly on the ability of an institution to offer an attrac- While the penetration rates of e-private banking applications
tive internet package. at most Swiss private banks remain well below the somewhat
overoptimistic expectations that were formed during the hey-
E-private banking vs. e-retail banking days of the Internet bubble, the number of active users does
Many retail banks embrace e-banking because it allows them rise continually. As the amount of money that is passed on to
to substantially reduce the number of routine transactions younger generations with higher Internet affinity increases
processed by their branch network. Furthermore, some labor steadily, as a result of current demographic trends, the per-
intensive tasks, such as entering payment instructions or centage of clients using e-private banking will climb further in
stock market orders into the backend systems of a bank can the coming years.
be transferred back to the customer through an e-banking
application resulting in significant cost savings. Implementation of the e-private banking strategy
In autumn 1999, a group of senior managers and client advi-
Most small- to medium-size private banks face a very different sors at Bank Vontobel formulated their vision of a perfect e-
situation. The number of their clients is considerably lower, private banking application tailored exclusively to the needs
most of them do not have a large and costly branch network, of high net worth individuals. Early in the process it became
and they focus on providing their clients with a combination evident that the investment in an e-banking application ought
of advice and complex individual wealth management solu- to be leveraged by providing not just an e-private banking
tions, rather than on selling a limited number of standardized application for the clients but also an enhanced look-alike
products. desktop for the client advisors to ensure optimal collabora-
tion. This ensures that clients and client advisors are working
When setting out to design an e-private banking application with the same data displayed in the same fashion, thereby
these banks face a situation that is very different from those greatly facilitating the communication and reducing possible
of large universal banks. They do not have a legacy e-banking misunderstandings between the two of them.
system tailored for the retail market, which can be adapted to
the particular requirements of the private banking market. Once the vision had been drafted, a beauty contest was held
While this might seem to be a disadvantage at first sight, it with potential suppliers of e-banking systems to determine
also offers the private banks the opportunity to concentrate which of the ideas could be implemented at reasonable costs
on the unique requirements of their clients. with the available technology. The beauty contest demon-
strated that some of the requested features such as session
Unrealistic expectations? sharing between client and client advisor or the extensive use
What payback does Bank Vontobel expect from ‘Vontobel inter- of web cams were not yet compatible with either the available
active banking’, its e-private banking application? bandwidth or the strict requirements of the bank regarding IT
security. When reviewing the offerings in the market it quick-
■ Increased client satisfaction. ly became evident that no off-the-shelf product could meet
■ Increased client loyalty, resulting in higher retention rates. the bank's requirements regarding business functionality.
■ Higher efficiency of client advisors by reducing the num- Thus the bank focused on highly flexible frameworks that pro-
ber of routine inquiries and thereby allowing the advisors vided basic business functionality and could easily accommo-
to focus on higher value activities. date the additional requirements of the bank.
■ Increased acquisition of young onshore clients.

46 - The Journal of financial transformation

Implementation of e-private banking in a Swiss private bank

After carefully weighing the pros and cons of the frameworks ommendations, warrants and options, as well as all research
and systems on offer, the bank decided to opt for Hewlett reports on a particular stock, can be accessed through links
Packard — Nimius e-banking solution, which had a very good from a specific custody account position. Furthermore, all
track record in Switzerland and Liechtenstein. It had a number transactions (including corporate actions) carried out in a par-
of successful e-banking implementations at private and retail ticular stock during the last two years can be displayed. Icons
banks under its belt (Bank Sarasin, VP-Bank, Raiffeisen indicate on which stocks news are available and which stocks
banks). are covered by Vontobel Research.

The functionality The client-reporting module allows clients to view their assets
During the specification phase of the project the bank decid- not just by asset classes but also by risk currency, sector, or
ed to stick to its core competencies in wealth management; maturity. The portfolio can be displayed either as a conven-
thus, no lifestyle or other non-banking elements were to be tional list or as a combination of pie (assets) and bar (assets &
included in 'Vontobel Interactive Banking'. This turned out to liabilities) charts. Drill down functionalities enable clients to
be a fortunate decision as most attempts in the industry to access information, such as details of a particular transaction,
combine banking and leisure elements in an Internet portal very quickly.
did not generate the hoped for enthusiastic response from
clients. The asset analysis allows clients to analyze the structure of
their portfolio by combining different criteria such as asset
The most important and by far most popular functionality is a class, risk currency, or sector.
comprehensive client reporting covering a client's accounts,
as well as custody accounts. Since most private banking The stock market quotes and news module contains numerous
clients consider time to be a very precious commodity, the ways to search and display the information. A multiple view
bank put a lot of effort in ensuring that all relevant informa- window on each security displays not only the latest stock
tion is easily accessible. What does this mean? A client who market quotes but also company news, customizable charts,
has a certain stock position in his portfolio might ask some of analyst recommendations, as well as warrants and Eurex
the following questions: options. The quotes & news module also allows clients to set
up watch lists and virtual portfolios and to configure their per-
■ What is the position currently worth? sonal quote or news tickers using convenient drag & drop nav-
■ When has the stock been bought? igation. Stocks or news categories can also be dragged on the
■ How much was the last dividend and what is the yield? desktop where they can be saved and thus easily accessed at
■ What is the latest corporate news on this stock? a later date.
■ What is the opinion of the Vontobel Research on this stock
in particular and the sector in general? The equity research produced by the Vontobel Brokerage can
■ What warrants and options are available on this underlying be accessed through Interactive Banking. This can be done by
asset? either starting out with a stock quote or a position in a port-
folio and then activating the link to the research on this stock
In order to provide quick and satisfactory answers to these or by going through the sector and company lists provided in
and several other questions that a client might pose, all infor- the research module. Besides company reports, it also fea-
mation on a single stock has to be closely linked, thus enabling tures sector reports and macroeconomic research.
a client to get a full picture in a minimum amount of time. As
a consequence, real time quotes, corporate news, analyst rec- Furthermore, the Vontobel Fund Research provides informa-

Implementation of e-private banking in a Swiss private bank

tion on approximately 200 recommended third party invest- can be considered as safe e-mail boxes. The general folder
ment funds in more than 50 categories. This information contains documents that the bank regards as interesting for
includes not only data on the performance of each fund in all clients. These range from the current investment policy to
several reference currencies but also volatility figures as well press releases, updates on new products, and the latest stock
as the Sharpe ratio. The latest fund fact sheets provided by and bond guides. The 'personal folder' allow the client advi-
the (third party) fund managers could also be downloaded as sors to securely transmit documents to a particular client. The
pdf-files while a direct link to the in-house fund database audio and video folder contains the 12 daily audio market
exists for Vontobel funds. To ensure compliance with strict updates as well as the video interviews with analysts.
legal requirements regarding mutual fund distribution, a
client may see only the funds that are registered for sale in Early in the specification phase the bank had to decide
his/her country of residence. whether a Java or HTML would better suit the needs of its
clients and client advisors. While an HTML-client is easier to
When designing the application the bank wanted to harness handle (no installation required) it offers fewer possibilities
the new opportunities offered by multimedia technologies. when its comes to personalization and it does not support fea-
Several times a day updates on the Swiss, German, and U.S. tures such as 'drag and drop' navigation, which greatly
bourses are provided in the form of audio files. Clients can lis- enhance the usability of the Java desktop. The extensive drill-
ten to these through the real player which is provided as part down features, as well as the context menus offered by the
of the whole software package. The audio files are sourced Java desktop, allow for a very intuitive navigation, thus great-
from AFX and routed straight into the application without any ly reducing the amount of time required to access detailed
manual intervention, thus ensuring minimal delay. Further- information. After weighing all the pros and cons, we decided
more, video interviews with analysts or strategists are con- to opt for a Java desktop — a decision that has not been
ducted whenever a major research report is released or unex- regretted to date.
pected events happen in the financial markets.
The first feedback from client and client advisors
In order to justify the title ‘Interactive Banking', which implies After an implementation period that lasted nine months, the
that this e-banking solution provides not just one way com- bank launched release 1.0 in April 2001. This version was made
munication, a chat room has been included in the application. available to a limited number of pilot clients and pilot client
About once a month an expert on a frequently discussed advisors. The purpose of the pilot phase, which lasted 6
financial topic (e.g. taxation, estate planning, stock market val- months, was to gather a maximum amount feedback through
uations, macro economics, investment policy, structured prod- questionnaires, usage statistics, and help line staff to enable
ucts etc.) answers questions online that are submitted by the bank to determine which enhancements or adjustments
clients either prior to or during the session. In order to ensure ought to be made for the next release.
maximum confidentiality for the clients, all participants are
required to chat under an assumed name. The transcripts of The first feedbacks from the clients showed that they were
these discussions can be downloaded as pdf-files by the generally quite satisfied with the functionality, as well as the
clients. quality and quantity of data provided. The fact that the some-
what complex installation of the Java client on the home or
In order to provide additional information to clients, the appli- office PCs and laptops of the clients did not pose any signifi-
cation includes the so called 'information folders'. These fold- cant problems came as a pleasant surprise. However, there
ers which are capable of accommodating different data for- were quite a few clients whose PCs did not meet the minimum
mats such as plain text, pdf, audio, video, or links to website requirements for hardware and operating system. As a result,

48 - The Journal of financial transformation

Implementation of e-private banking in a Swiss private bank

they were forced to either upgrade their PCs or defer the ed to installation problems or questions regarding specific
installation of Interactive Banking. More than one and a half functionalities, such as printing. Although client advisors were
years later this problem has almost disappeared as the mem- initially at hand to answer any questions related to banking
ory available in the average PC has soared. Nevertheless, a issues, this service was not frequented by the clients who
small minority of Apple enthusiasts remain disappointed as no were accustomed to dealing only with their personal client
version is available for their favorite computer. advisors. Consequently, this service was quickly discontinued.

The comprehensive documentation provided to the clients, The functionality group that was not only accessed most
which included an 'installation & security guide', a 'quick ref- often by clients and client advisors during the pilot phase but
erence guide', and a short introductory video was well that also got the best reviews was 'accounts/custody
received. However, the calls to the help line showed that only accounts'. The second most popular functionality group was
a few clients actually turned to the manuals whenever ques- 'quotes and news'. It received mixed reviews as its feature
tions arose. The same can also be said of the context sensitive content in the first release did not yet meet all demands.
online help, which was hardly frequented. 'Equity and fund research' received some rather critical
reviews as the structure of the information provided was
The pilot users rated the usability of interactive banking as based more on the internal organization than on the needs of
'fair to good'. This less than enthusiastic endorsement result the clients. Since adjustments have been made in Release 1.1,
came as no big surprise to the bank as some of the more com- which was release in November 2001, the popularity of the
plex features that are considered a 'must' by expert users do research has risen considerably. The functionality group mul-
at times tend to confuse the casual user. However, the fact timedia was and remains the least visited part of the applica-
that the navigation is generally based on well established tion. While it has some dedicated followers, the majority of
Microsoft standards, such as drop down menus and an explor- users prefer the more traditional text formats.
er, make it relatively easy for novice users to get started. The
drag & drop feature, as well as the wide array of extensive per- What were the main enhancements that clients asked for?
sonalization features, which are rather uncommon for this First and foremost they desperately missed the opportunity to
type of application, continue to receive rave reviews from fre- print account and custody account statements. The bank had
quent users. decided to forego this functionality because of the consider-
able costs involved in implementing a Java printing function-
The competence and the friendliness of the help line staff ality that meets the high quality requirements of private bank-
were rated as 'very good'. Because the help line staff had ing clients. The second most frequent suggestion concerned
been intensively involved in the project from the beginning the client reporting. While the detailed information on the sta-
and actually did a lot of the testing themselves, they were inti- tus quo was deemed very good, the users wished for more his-
mately familiar with the strengths and weaknesses of the torical data on the development of their portfolio and the
application when operations started. This allowed them to investment performance. While printing is now already avail-
solve many complex issues right away without having to able, the planning for an overhaul of the reporting module will
resort to the 2nd level support. The call volume was consider- begin shortly.
ably lower than expected; after an initial surge following the
launch of the service the number of calls dropped so far that Value added for clients and client advisors
service hours were actually reduced from 08:00-22:00 to What value add has 'Interactive Banking' provided for its two
08:00-21:00 CET, while the Saturday service was discontinued main target audiences, the clients and client advisors during
altogether. Most of the calls the help line received were relat- its first year of operation?

Implementation of e-private banking in a Swiss private bank

The clients generally appreciate the convenience that this of the major financial markets. During a normal workday, the
service offers. They value the ability to access their accounts first users start to log in at around 06:30 am CET. After this
and custody accounts around the clock and from any PC on time, the number of concurrent users increases steadily to
which the software has been installed. Additionally, they reach a peak for the day at around 10:00 am. After a slight
appreciate the near real-time access to all Vontobel equity slump between 12:00 am and 2:00 pm traffic increases again
and fund research, as well as stock market quotes and the lat- and hits a second lower peak as the U.S. markets open in the
est general and financial news. middle of the afternoon. Then traffic decreases steadily only
to rise again between 8:00 and 10:00 pm – incidentally the
The fact that clients and client advisors work with different period between the main evening news shows on Swiss TV.
version of the same desktop greatly reduces the number of The overnight traffic generated by clients residing in different
misunderstandings, thus making the communication easier time zones (Americas, Asia) remains marginal.
and more efficient for both sides. Putting a lot of emphasis on
this type of collaboration early in the project proved to be a The statistics show that a large number of clients obviously
worthwhile decision. The client advisors also welcome the use the application from their offices as there is no other way
simplified communication with their clients that results from to explain the high number of logins during working hours.
seeing the same data presented in the same way. As clients This came as somewhat of a surprise as the bank had expect-
can easily check account balances online or download docu- ed limited administration rights and restrictive firewalls to
ments such as the current investment policy, the client advi- prevent successful installations on most office workstations.
sors have to deal with fewer routine inquires, such as provid-
ing information on account balances, and allows them to focus Lessons learned
more on the actual advisory (high value added) part of their With hindsight what were the most important critical success
job. factors in implementing an e-banking solution?

Since account and custody account data, as well as stock mar- ■ A clear medium- to long-term strategy accompanied by a
ket quotes and research reports, are closely linked, the client buy-in from the senior management.
advisors can work more efficiently. In the old days they had to ■ The business rather than IT drove the project.
switch between the Host (account/custody account data), the ■ Business and IT worked closely together toward a com-
market data system (quotes, news), and the Intranet mon goal.
(Research, Investment policy, etc.) to comprehensively answer ■ The system integrator cooperated closely with the busi-
a question from a client. With Interactive Banking they can ness and the internal IT department.
respond much faster, as all the information is contained in a ■ The system integrator was familiar with the banking sec-
single application. tor and local customs.
■ Client advisors were involved at a very early stage.
Usage statistics ■ A slow phase-in of the application gave the bank the
During the early days, in spring 2001, most users logged on to opportunity to quickly react to client feedback and make
'Interactive Banking' during weekends. However, these days, the necessary adjustments before the application was
weekends are the times when traffic is at its lowest. We find rolled out to a wider audience.
that most of the traffic takes place during the opening hours

50 - The Journal of financial transformation

Implementation of e-private banking in a Swiss private bank

Plans for the future

The pace of the development has slowed considerably during
the past year, as a result of a deteriorating investment climate.
Nevertheless, Vontobel Interactive Banking will continue to be
enhanced. Future releases will focus on adopting the more
modular architecture of the latest version of HP Nimius, which
should not only improve the maintainability of the system but
also reduce the response times. The planned functional
improvements will focus on an even better client reporting, as
well as further upgrades of the 'information folders' that
would allow clients to subscribe to news on specific topics.


Internet banking
in the U.K.:
From new distribution channel
to new business models

Feng Li
Chair of e-Business Development,
The Business School, University of Newcastle upon Tyne

The Internet is shaking the foundation of the banking industry.
Simply deploying the Internet as a more efficient distribution
channel will not bring sustainable strategic advantages. To
compete effectively, banks will need to embrace a new set of
strategic thinking, based on the ‘unbundling’ of banking serv-
ices and processes and the ‘deconstruction’ of the integrated
banking model. Based on my research of Internet banking in
the personal banking area in the U.K. since the late 1990's, this
paper explores a series of emerging issues, such as the adop-
tion of various strategies and business models, channel devel-
opment and coordination, and product and service offering
through the Internet. As a new distribution channel for finan-
cial services, the Internet has lowered barriers to entry, allow-
ing new players, often equipped with new technologies and
business models, to enter the market. These new players are
posing a serious threat to existing banks by changing the rules
of competition and raising the general expectation of cus-
tomers for services from all financial companies. Established
banks and building societies must radically overhaul their busi-
ness strategies to maintain their competitive position, and
indeed, to survive in the long-term.
Internet banking in the U.K.: From new distribution channel to new
business models

Introduction Key issues in Internet banking

Financial deregulation, combined with rapid technological Internet banking is the use of the Internet as a delivery chan-
developments and increasing competition, has facilitated rad- nel for the provision of financial services. It allows the inter-
ical changes in the banking industry. Until recently, the active communication between financial companies and their
monopolization of distribution channels has been the corner- customers, where an extensive amount of information can be
stone of most banks’ strategy; and in the last few years, the exchanged electronically, and banking transactions can be
Internet has increasingly been used as a new distribution conducted through the Internet and other technologies such
channel. The Internet not only allows banks to serve existing as mobile phone and iDTV. So far most Internet banking trans-
customers more cheaply and conveniently, but also acquire actions are conducted from the clients’ PCs, but increasingly
new customers in previously unreachable markets. At the other devices — mobile phone, Personal Digital Assistances
same time, the Internet lowers barriers to entry in the bank- (PDAs), and Digital TV — are enabled by financial companies.
ing industry, allowing new players, often equipped with new
technologies and new business models, to enter the market. In In the U.K., Internet banking services have been provided by
particular, some emerging strategies and business models are both existing banks with ‘brick and mortar’ branches, and
leading to the deconstruction of the integrated banking value branch-less, Internet-only banks, offering both traditional
chain and are challenging the competitiveness of the inte- products and new services such as Electronic Bill Payment
grated banking model that has been dominating the industry and Presentment (EBPP) and Account Aggregation. Internet
for centuries. Social changes, such as the changing demogra- banking also facilitates the delivery of products and services
phy and life style of customers, have put new pressure on the in innovative manners. According to Reuters (2000) the main
banking industry. The development of other new technologies, benefits to banks can be classified into three main categories.
such as mobile phones and interactive digital TV (iDTV), has In the first year after launching, the banks could gain short-
further complicated the scenario. term benefits in competitive equality, customer retention, and
customer acquisition. During the first 12-18 months, compa-
This paper reports the main findings of my research on Inter- nies would gain mid-term benefits, such as multi-channel inte-
net banking in the personal banking area in the U.K. since the gration, information management, customer segmentation,
late 1990's. The first phase of the research was based on consolidated views of the customer, and customers’ migration
intensive studies of six banks and building societies in the U.K. to appropriate channels. In the long-term, organizations could
that offered Internet services. The study highlighted the main expect cost savings, target products and services, cross-sell-
opportunities and threats posed by the Internet in personal ing, and new revenue generation. Implementing Internet
banking and identified two strategic scenarios and eight banking also enables the provision of non-traditional banking
emerging business models (Li, 2001). Following that, using the services, such as insurance and stock brokerage. Most of all,
frameworks developed in the first phase and from other stud- Internet banking is adopted firstly by affluent, young, better
ies, we surveyed 26 banks offering Internet services in the educated, and usually the more profitable customers. Hence
U.K., supplemented by eight intensive case studies.1 The investing in Internet banking is strategically important to most
research revealed that new entrants in their various forms are financial companies.
posing a serious threat to incumbent banks, not necessarily in
eroding the latter’s market share and ‘cherry picking’ their most The Challenge from new entrants
profitable customers, but primarily in changing the rules of New entrants are threatening existing banks by offering cus-
competition and raising the general expectation of customers tomers better price and greater choices, and they often target
for services from all financial companies. This and a series of the most profitable segments of customers in the most lucra-
other related issues will be discussed in detail in the paper. tive product range. Many of the new entrants are also based

1 Our paper on ‘Internet Banking: Emerging Strategies and Business models in the
54 U.K.’, was awarded the Blackwells Prize for E-Business & Technology Management at
the British Academy of Management Conference (BAM2002), 9-11 September 2002,
Novotel Hotel, London.
Internet banking in the U.K.: From new distribution channel to new
business models

on different business models, geared towards exploiting their Lastly, the Internet allows the provision of new services, such
superior customer management skills. This is especially sig- as real-time share trading and fund transfer; and the cus-
nificant in the U.K., which has the highest level of new tomers can also download their account details into financial
entrants in Europe, both in the type of entrants and the prod- software so that different scenarios can be simulated on the
uct range. These new entrants together are able to offer the PC, thereby providing a clearer understanding of personal
full range of financial products currently available from financial dynamics. As the Internet increases the scope for
incumbent banks. self-service in banking, it also reduces the need for physical
distribution channels. However, the branches and call centers
Moreover, it has been predicted that information, software, will still need to be maintained because they are important for
electronic payment, and multimedia companies will also chal- complex products and services.
lenge existing players in the financial market. A series of
entrepreneurial start-ups (e.g., Mondex, First Virtual, DigiCash, Product and service offering online
and CyberCash) have emerged to provide financial services; Even though banking products and services can be copied
and established players from other industries such as AT&T, fairly easily by competitors, the invention and creativity need-
AOL, Microsoft, First Data Corporation, and ADP are also pre- ed in providing them can often bring competitive advantages
dicted to be major players in financial services in the future. to the bank, at least in the short-term. At the basic level, Inter-
Furthermore, portals are now presenting a real threat to the net banking means the setting up of a web page by a bank to
banking industry. Although portals have helped open up the give information about its product and services. At more
financial world to millions of people by offering free informa- advanced levels, it involves the provision of facilities such as
tion about the stock market, banking and insurance products, accessing accounts, funds transfer, and buying financial prod-
and other services (e.g., Microsoft's MSN MoneyCentral, ucts and services online, which is called 'transactional' online
Yahoo! Finance, and AOL's Personal Finance), as well as pro- banking.
viding an effective means of advertisement for banks and
stock brokers, they are increasingly seeking control of the It is increasingly recognized that the Internet should not just
interface between banks and customers. The changing com- be treated as another distribution channel, but also as a new
petitive environment has called for a radical rethinking of the medium with its own capabilities and requirements. Creating
strategies and business models of the banking industry that digital brands involves the provision of broader consumer
have brought them success in the past. benefits than those of the offline world. The development of
online products and services should be linked to the objec-
The Internet as part of a multi-channel distribution strat- tives of Internet banking. Objectives such as cutting cost,
egy reducing check volumes, increasing customer base, and
Controlling the distribution channel has been critical to the increasing customer retention should be mapped into specific
long-term competitiveness of most banks. As the number of product and service offerings.
Internet users continues to grow rapidly, Internet banking is
increasingly seen as a compulsory channel for most banks. The main functions of Internet banking can be classified into
Using the Internet as a distribution channel has three main four broad categories: view-only functions, account control
attractions. Firstly, the convenience of conducting banking functions, new services application functions, and reconcilia-
transactions from an open and low cost channel anytime, any- tion functions. View only functions are concerned with
where. Secondly, the Internet allows customers to view their addressing details about balances and the last few transac-
account details on the screen, which minimizes miscommuni- tions made by the customers, thus reducing the workload of
cation that may be present when using telephone banking. bank staff at both branches and call centers and the conges-

Internet banking in the U.K.: From new distribution channel to new
business models

tion at ATM. Account control functions are required to provide the creditors; as well as streamlining the traditional billing
customers with a broad range of access and control over their process by eliminating paper work and reducing lead-time in
accounts, such as transferring funds between accounts, the billing operation. Datamonitor predicted that electronic bill pay-
creation or amendment of standing orders, and paying bills to ment and presentment (EBPP) would grow from U.S.$175 million
third parties (usually utilities companies). New banking service at the end of 2000 to U.S.$2.5 billion by the end of 2004.
application functions (applying for new accounts — saving
accounts, mortgage, loans, etc.) are seen as crucial to banks, Account aggregation
as they provide an opportunity to attract new customers, as In early 2001, two American IT vendors, Yodlee and Ver-
well as retaining existing ones. To maximize profit and rev- ticalOne, introduced account aggregation. In the U.S., major
enue from their customer base, it is essential that banks also players such as Merrill Lynch, Chase, Citigroup, OnMoney.com,
offer their customers other financial services, such as credit Ameritrade, Centura Bank, and Fiserv have recently signed
cards, mortgages, and insurance through cross selling. Finally, contracts with the two vendors. Account aggregation is usual-
since an increasing number of customers today use individual ly provided by financial institutions, web portals, and other
software packages to manage their finance, banks should companies (aggregators), and involves the retrieval and dis-
offer the facility of integration with these packages for play of information from various financial accounts and
account reconciliation. With this function, customers are able monthly bills. The most common method used today is
to reconcile their accounts by downloading their own financial ‘screen-scraping’, in which the consumer provides the aggre-
information from their bank accounts onto their financial gator with his or her ID codes and passwords; these are then
management software. This framework will be used to analyze used to access online accounts and to scrape information
the product and service provision in the 26 banks offering from the account site. Generally, a third-party aggregator has
Internet services in the U.K. no contract with the account-holding financial institution
(AHFI) and the AHFI assumes no responsibility for the accu-
Electronic bill presentation and payment (EBPP) rate display of this information by the aggregator. Through
As a new service offered by some Internet banks, electronic account aggregation, customers gain 24-hour access to all of
bill payment service helps to solidify and maintain the bank's their financial (and some other) information on one web page,
status as the primary provider of financial services (KPMG, including insurance, brokerage, banking, loans, frequent flyer
2000). EBPP involves the online collection of information miles, and personalized news. Furthermore, customers can
from billers about bills and the payment of those bills, usually run analytics on the newly aggregated portfolio to help them
for a small monthly fee. With this system, certain bills are plan for their future, including tax and accounting tools, and
remitted to consumers over the Internet or a paper bill is risk calculators providing information on how their total port-
scanned and presented online. It allows customers to set up an folio is weighted.
arrangement in advance to make an automatic funds transfer
to billers through an Internet banking system, direct payment Unsurprisingly, there has been strong resistance from many
(automated clearing house), PC banking, the telephone, or a banks to account aggregation, as they do not like the idea of
third-party provider. a third party having access to their clients’ information. Con-
cerns were also voiced because of the rapid growth in the past
The purpose of electronic billing is said to not just obtain pay- two years of small aggregators with few assets. It was feared
ment but also empower the customer. Thus the shift from that these aggregators would create problems for financial
paper-based presentment to EBPP may transform biller-cus- institutions, specifically that account information would be
tomer relationship. Furthermore, it encourages the electronic reflected inaccurately or that consumers might act in reliance
alliances between banks, the bill issuers, the customers, and on such data and then turn to banks to solve their problems.

56 - The Journal of financial transformation

Internet banking in the U.K.: From new distribution channel to new
business models

There were also concerns that inadequate security would away from offering mostly voice services to offering a variety
result in a significant increase in unauthorized transactions of data-based services, which will provide the basis for full-
for which someone would be financially liable. This was fur- fledged m-banking. It remains to be seen whether such pre-
ther magnified because private consumer information was dictions will materialize, and when.
being accessed in a manner outside the AHFI's control, poten-
tially producing dramatic increases in the amount of financial Interactive television banking
data available at small, unknown, non-financial companies’ Interactive digital TV (iDTV) was first introduced in the early
web sites. Issues in terms of customer privacy, the lack of ade- 1980’s. In the U.S., northeastern powerhouse Chase Manhat-
quate regulation for aggregators, and liability when things go tan Bank saw great potential in the ubiquitous TV as a medi-
wrong also need to be resolved. um for their earliest home banking pilots; and interactive tel-
evision is seen a means of introducing on-line financial servic-
Mobile banking es to a much bigger market than the PC based Internet. Today,
Wireless communications may fundamentally change the way with the Internet still considered unfriendly by many, iDTV
organizations interact with their customers. Maude et al. provides an ideal medium to bring e-commerce to customers,
(2000) discussed some of the transactional services that are even for those ignorant of new technologies.
rapidly appearing, such as stock-trading using a mobile phone
or Personal Digital Assistances (PDAs) (e.g., in Fraser Securi- The reality, however, has been very different. Contrary to com-
ties-Singapore, Fidelity-U.S. and Fimatex-France), mobile bill- mon belief that U.K. banks will be leading the way in iDTV
payment services (e.g., HSBC, MeritaNorbanken-Scandinavia), adoption, Brine (2001) identified several reasons why its roll-
and using mobile phones as POS (point-of-sale) payment out has fallen behind all predictions, including digital technol-
devices. They predicted that over the next five years, as the ogy availability, the set-top boxes, and site content. In the U.K.,
data transmission speeds increase and mobile devices grow in the majority of high street banks were quick to recognize the
sophistication, the range of mobile banking services will advantages of iDTV technologies, and they have enabled a
increase too. Secure online verification will enable the cus- wide range of services, such as access to current, savings and
tomers to apply for a loan using a mobile device for example, credit card accounts, standing orders and direct debits, bills
and receive an instant authorization so that they could use payment, and transfer money between accounts. Whilst
the money to pay for things electronically there and then. expectations have been running high, some iDTV experts
believe that banking by interactive television is not going to
The current mobile technology platforms have limited the happen anytime soon as problems exist in many areas. The
actual applications of m-banking. The speed of transmission is television is not a good device for financial services, especial-
too slow for Internet access in many applications, the Internet ly when banks already have their hands full developing and
enabled handsets are still not user friendly (especially the managing more crucial channels like the Internet, telephone,
phone keypads), and the web content is often poorly displayed and wireless access. Nevertheless, the potential of this chan-
on the small screen. Security is also a main issue with current nel is still there and we will examine the provision of this serv-
mobile devices. However, with the coming third generation ice by U.K. banks.
(3G) mobile network, it has been predicted that an entirely
new mobile telephony experience will be on offer, with the Retail branches and call centers
ability to send and receive vast quantities of data at high With the development of Internet banking, most incumbent
speeds. The 3G networks will provide graphics and multimedia banks are redefining their branch networks. Branch closure
data at a speed several times quicker than most PC modems. has been happening at a rapid pace, but at the same time
Additionally, with 3G networks mobile operators will shift some banks are building mini branches in places like the

Internet banking in the U.K.: From new distribution channel to new
business models

supermarkets or petrol stations, and others have introduced larly, Sharpe (2000) identified four models that can be imple-
mobile branches (e.g., Bank of Scotland); or changed the for- mented by a traditional bank to have an online presence, i.e.,
mat of their branches into Cafés (e.g. Abbey National). In addi- pure Internet only banking, on-line hybrids extending existing
tion, new generations of ATMs are now used to perform some brand presence, on-line bank-branded alliances with third par-
functions of branches (e.g., Halifax, with its branch based ‘Web ties, and on-line white labeling of financial services sold
Kiosk’). Through partnership, the post office branch network through third parties. My own research (Li, 2001) identified
is also increasingly deployed as an alternative to bank branch- eight business models (Table 1), which will be used to assess
es for some services (e.g. Cahoot). the adoption of different business models by the 26 Internet
banks in the U.K..
Today, call centers have become a very important part of
Internet banking services. They now serve as the supporting Summary
channel and are seen as crucial in providing a more person- In this section, previous studies on Internet banking are criti-
able customer service due to the need for live assistance for cally examined and a wide range of issues were discussed. In
online transactions. In fact in many banks the call centers are particular, the review highlighted several emerging issues in
increasingly evolving into multi-channel contact centers. terms of the threats from new entrants, channel development,
product and service offering, business model adoption, new
Internet banking business models product development, and a number of other issues. These
Internet banking can be implemented through several busi- issues provide the basis for analyzing the empirical evidence
ness models. The Federal Reserve Bank of Chicago identified gathered from the U.K.
three Internet banking models. The ‘hybrids model’ — a tradi-
tional bank with Internet delivery channel known as ‘brick and Internet banking in the U.K.: A survey of 26 banks offering
click’; the ‘spin-off e-bank model’ — setting up a pure electron- Internet services
ic or virtual spin-off bank with its own new brand; and the An online survey of all banks and building societies offering
‘alliances model’ — developing strategic partnerships to create Internet services in the U.K. were carried out. We identified a
new products and broaden a partner’s product offering. Simi- total of 26 banks (Baby e-banks set up by incumbents are

Business Models Characteristics

New Distribution Channel Internet as part of multi-channel strategy but no radical change in the basic strategy and business model of the bank.
e-banking Use the Internet to underpin key processes and integrate different channels, and transform the main brand into an
Baby e-bank Launched by incumbent banks and other financial companies with its own e-brand name and product range,
often based on new business models.
Pure play new entrants Pure virtual bank set up by non-financial companies.
Portals Aggregate financial product information from multiple sources and act as the access point for customers, often focusing
on particular product range or customer segments.
On-line alliances A bank out-sources its internet banking solution to a third party, but the services bear the bank’s own brand name.
White labelling Through partnership an incumbent bank enables a non-bank company to provide Internet banking services but not
bearing the bank’s brand name.
Brand stretching Non-bank players with an established brand providing banking services through the Internet.

Table 1: Internet banking models in the U.K.

Source: Summarised from Li (2001)

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Internet banking in the U.K.: From new distribution channel to new
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counted as separate banks). The web sites of these banks Number of companies
were examined using the frameworks developed by previous (Percentage)
studies. Secondary information from newspapers, published Business models:
New distribution channel 7 (27%)
studies, and other sources was also collected. A relatively
e-banking 10 (38%)
complete profile of each of the 26 banks was produced. Baby e-bank 6 (23%)
Pure play new entrants N/A
Internet banking business models in the U.K. Portals 6 (23%)
On-line alliances 8 (31%)
The survey examined the adoption of various business models
White labeling 3 (12%)
in Internet banking in the U.K. (Table 2). The total percentage Brand stretching 3 (12%)
is more than 100% as some of the 26 banks are pursuing more
than one model. One issue that emerged from the survey is Product offering:
Current account 19 (73%)
that new entrants – especially Internet only banks and non-
Savings account 19 (73%)
financial new entrants — are posing a serious threat to the Loan 15 (58%)
incumbent banks. The number of baby e-banks has been Mortgage 13 (50%)
growing rapidly since the success of Egg who pioneered this Credit card 14 (54%)

model. The main rationales for launching baby e-banks

include acquiring new customers, exploring the cost advanta- View functions 25 (96%)
geous of being 'Internet only', creating a new brand to break Account control functions
away from the constraints of the parent’s main brand, and Funds transfer between accounts 16 (62%)
Funds transfer to other banks 12 (46%)
exploiting the opportunity of a new technological platform in
Bill payments 12 (46%)
offering existing and new services. In addition, several baby e- Bill presentment N/A
banks are evolving into portals through partnerships with Application functions 26 (100%)
other companies, which led to the development of new prod- Integration and reconciliation functions 11 (42%)
Account aggregation 2 (8%)
ucts, such as credit cards specially developed for Internet pur-
Share trading 12 (46%)
chases and e-wallets. Since physical contacts with customers
would still be necessary for some transactions and services, Other Channels
some of these banks have formed partnerships with the Post Phone banking 26 (100%)
Mobile banking 16 (62%)
TV (iDTV) banking 10 (39%)

Table 2. Internet banking in the U.K.: Business models, products, and distribution channels
Several supermarkets also entered the financial services mar-
ket. The logic behind their launch was to exploit their existing
customer base, using in-store facilities, and direct phone serv- reflected in the results of the survey. Most of the 26 banks are
ices, as well as the Internet to serve customers. There has using Internet banking as part of their multi-channel distribu-
been much discussion about the threat from such new tion strategy – including branches, telephone, call centers, IFA
entrants to incumbent banks but so far, despite their financial networks, mobile devices, and interactive digital TV — in an
success, they have failed to eat into the market share of the attempt to satisfy customer demands and to remain competi-
main banks. tive. However, this can be achieved via different business mod-
els. 38% of the banks have adopted the so-called e-banking
The changing competitive environment in the banking indus- business model, using the Internet to underpin all key process-
try has called for a radical rethinking in the strategies and es and integrate different systems and channels, essentially
business models of the banking industry. This is clearly transforming their main brand into an e-brand supplemented

Internet banking in the U.K.: From new distribution channel to new
business models

by the physical branches, ATM networks, and phone banking. been enabled by many banks, but as will be discussed in the
The Internet provides the new platform to link up previously next section, our case studies indicated that due to techno-
separate systems, enabling the provision of integrated servic- logical limitations they have so far failed to live up to expec-
es anytime anywhere, enhancing customer loyalty, and cross tations, and there is still enormous uncertainty about their
selling. In contrast, 27% of the banks regarded the Internet as future.
a new distribution channel, just like the branches, ATM, and
the telephone. These banks generally believe the future is in Key issues emerging from the case studies
multi-channel banking, but the Internet will not redefine the In addition to the online survey, eight of these banks were also
basic strategies and business models of the banking industry. interviewed in order to examine some issues in more detail. All
interviewees were senior managers with overall responsibili-
Product and service offering through the Internet ties for the Internet operation of the bank (e-directors).
The product range offered by online banks varies significantly
(Table 2), although most of them offer standard products, The threat from new entrants
such as current and saving accounts (73%), mortgages Most people we interviewed believed that new entrants pose
(50%), loan (58%) and credit cards (54%). 28% of banks a serious threat to established banks even though these new
offered Internet only products to reflect the low cost of the entrants have so far failed to gain substantial market share.
Internet; while many of the rest have made it their policy that However, competing with their low cost base, new technologi-
the product offering on- and off-line should be identical. cal platform, strategic alliance and partnership, and best of
breed products and services, new entrants have played a key
Most banks offer viewing function (96%), but other functions role in raising the general expectations of consumers and
vary significantly from bank to bank, allowing different levels changing the rule of competition in the financial market.
of account control, integration, and reconciliation. All banks Incumbent banks have had to compete at all these fronts to
offer online application facility, and the integration function is maintain their market position.
offered by 42% of them. The integration function allows cus-
tomers to reconcile their accounts by exporting the informa- The biggest threats come from the Internet only banks, espe-
tion from their bank accounts to software packages, such as cially baby e-banks. Despite the low cost base of the Internet
word processors, spreadsheets; financial packages (e.g., as a distribution channel, this benefit is difficult to exploit by
Sage); or using specific formats — QIF (Quicken), OFC (e.g., most incumbents as their customers often use this channel
Quicken, Money), and OFX (Money). EBPP and account aggre- alongside other channels. Unless they can scale back the pro-
gation are introduced in a few banks – for example, only two vision of other channels at the same time, the Internet repre-
(8%) of the banks allow account aggregation, namely: sents a significant additional cost to the banks. In contrast, the
Citibank and Egg. Internet-only banks could effectively explore this advantage
and build up a sizeable customer base within a short period of
An increasing number of banks are providing share dealing time.
service (46%), allowing customers to deal in shares on the
Stock Exchange in real-time. Eight of the twenty-six banks Initially, many established banks felt seriously threatened by
(31%) have forged alliances. The partner companies usually this but their views have evolved in the last year or so. Sever-
are ISPs (such as BT Click), technology companies (such as al people from incumbent banks felt that the competition
Yodlee), and portals (such as Yahoo). In most cases, Internet between Internet-only banks and incumbents is not necessar-
banking is supported by call center based phone banking. ily a ‘head on collision’. The market segment of Internet-only
Finally, mobile banking (62%) and Interactive TV (39%) have banks is very different from the customer base of most incum-

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Internet banking in the U.K.: From new distribution channel to new
business models

bent banks. People switching to Internet-only banks are often threats from non-financial new entrants. The success of GE
thought to be much more price-sensitive and less loyal com- Capital (General Electric) has proven that new entrants can be
pared with the customers of established banks. Therefore, the very successful. Technology companies such as Yodlee and
price issue is much less a threat than it was originally antici- Vertical One, through software licensing and profit sharing,
pated, and incumbent banks can compete on ‘customer expe- have enabled the so-called ‘integrators’ to provide new finan-
rience’, which is significantly more sophisticated than simple cial services, such as account aggregation, hence attracting
price competitiveness. Moreover, the loyalty and trust of cus- customers away from the incumbent banks’ own websites.
tomers to established banks means the new entrants have so Financial portals are improving market transparency by allow-
far failed to stage ‘an equal competition’. Even for baby e- ing customers to compare financial products and services eas-
banks set up by incumbent banks, the original brand loyalty ily — putting enormous pressure on the incumbent banks to
and trust for the parent company have often failed to be offer the best products, services, rates and prices, and chan-
transferred to the baby e-banks, and the brand building exer- nels. Incumbent banks are watching developments in these
cises have been very costly. As a result, it has been very hard areas closely although most of them regard the threat as less
for the new entrants to successfully compete with the estab- than imminent.
lished players and eat into the latter’s market share. However,
the low price proposition of new entrants has led customers of New distribution channels: The Internet, mobile phones,
established banks to demand similar benefits from their exist- and iDTV
ing banks, putting enormous pressure on the incumbent Today, most banks regard the deployment of the Internet as a
banks to reduce prices, and provide more innovative products necessity and are adopting it as part of their multi-channel
and greater choices. distribution strategy. Of the 8 banks we interviewed, 7 of them
use the Internet to complement their existing distribution
The competition from non-financial new entrants, especially channels. However, further discussions with the banks
the supermarkets, has also presented a major threat to the revealed that 3 of them regarded the Internet merely as a dis-
existing banks. Unlike baby e-banks and pure play new tribution channel. The other four banks are using the Internet
entrants, most non-financial new entrants have strong brand to underpin and transform key processes and provide inte-
presence. However, according to some people we interviewed grated service to customers, essentially transforming them-
in incumbent banks, the brand presence is only strong in their selves into e-banks (the remaining one is an Internet-only
core market and is difficult to ‘stretch’ to financial services. bank). Three of the banks used the Internet to reduce their
This has led to considerable difficulties for these companies in transaction costs, but one bank argued that the Internet
building trust that is crucially needed to compete successful- would not save costs, because its customers use the Internet
ly in banking in the U.K.. Two of the most successful super- as well as other channels. Another bank believed that that it
markets have actually been in the financial service industry is unlikely that the Internet will produce either cost savings or
for quite some time, yet they have hardly ‘made a dent on any- sales increases in the short-term.
body’ especially in terms of market share, according to one
senior manager we interviewed. The incumbent banks believe Similarly, although mobile phones, as a delivery channel, offer
that their customers are loyal and they have a strong brand unique opportunities for financial services institutions, most
reputation, and it is very unlikely for the non-financial com- case studies regarded the current WAP (Wireless Application
petitors to actually compete with them equally in the short- to Protocol) based mobile devices as an inadequate platform for
medium-terms. mobile banking. Technically the mobile phones today are still
inadequate for carrying out complex transactions, mainly
Nevertheless, some incumbent banks recognized the potential because of the limitations of the second-generation platforms

Internet banking in the U.K.: From new distribution channel to new
business models

of mobile communication (e.g. GSM) for data transmission. ing insurance, brokerage, banking, loans, frequent flyer miles,
Most banks are currently taking a ‘wait and see’ stance in and personalized news. In addition, they are able to run ana-
adopting mobile banking; and to a large extent the offering of lytics on the newly aggregated portfolio to help them plan for
WAP banking services is merely an attempt to stay competi- their future, including tax and accounting tools, risk calcula-
tive by making all channels available to customers. As a sen- tors, and many more. However, account aggregation threatens
ior manager stated: ‘You can’t afford not to be exploring the incumbent banks because it allows products from differ-
everything on channels available’; and everyone is waiting for ent banks to sit side by side on the customer’s screen, there-
the third generation mobile services to materialize. by putting enormous pressure on all banks to come up with
best-in-class products and services. In the last year or so, all
All banks we interviewed are pessimistic about the future of the banks we interviewed are getting together with trade
Interactive Digital TV banking, even though several banks associations to look at the risks and principles of account
enabled it. Despite various predictions, most senior managers aggregation. The Financial Services Authority (FSA — the
we interviewed believed that, at least at the current stage, the financial regulator in the U.K.) is seriously concerned about
TV is not a good device for financial services, as it is mainly the legal and security issues related to this service. Today,
used for family entertainment. The different platforms for most banks are reluctant to introduce this service as yet
iDTV services and the diverse pricing policies for using this because of the many unresolved issues, such as security,
medium in different regions of the U.K. are all discouraging legality, liability (who is liable if anything goes wrong), and
the widespread adoption of iDTV banking services. Therefore, technical factors. Even the one bank that implemented this
TV banking is predicted not to be a mass market. Only one service recognized the enormous risks involved in account
bank predicted that iDTV will become a useful channel to com- aggregation.
pliment other channels, even though it admitted the technol-
ogy is not yet ready today. The rationale behind the provision of this service is mainly for
customer satisfaction. One senior manager claimed that at
Internet banking products and services the end of the day ‘everyone is going to implement this serv-
None of the seven incumbent banks with branches that we ice as it is what customers want.’ In contrast, another senior
interviewed offer the full range of branch products through manager argued that account aggregation is predominately a
the Internet (one of the case studies is an Internet only bank U.S. phenomenon and it is unlikely to take off in the U.K., due
without branches). Rather, the Internet is used to provide to the very different banking platforms, even though it is
information and offer uncomplicated products. Some prod- rationally interesting. A senior manager from a large bank
ucts are only offered through the Internet and are not avail- with presence in over 70 countries argued that the population
able through other channels. In fact, five of the eight case is perhaps even more interested in account aggregation than
studies offer online products that are different from their in the U.S., but most people are not willing to use this service
branch products to reflect the cost advantage of the Internet. due to unresolved legal, security, liability, and technical issues.
Several people we interviewed are of the view that the future
One service that has been repeatedly discussed during inter- of this service is yet to be seen and if used widely it could rad-
views is account aggregation. There are obvious potential ically reshape the banking industry.
benefits to customers but the main technique used today (i.e.
screen-scrapping) to aggregate data is prone to fraud. The future of the branch network and call centers
Account aggregation provides customers with greater control Most banks we interviewed are using the Internet as part of a
over their finances by giving them 24-hour access to all of multi-channel strategy, and the physical branch network will
their financial and related information on one website, includ- not be eliminated by this development. In fact, one bank even

62 - The Journal of financial transformation

Internet banking in the U.K.: From new distribution channel to new
business models

opened several new branches recently to provide easy access including baby e-banks and non-financial new entrants – have
for customers. One senior manager pointed out that it would put enormous competitive pressure on incumbent banks to
not reduce its branches because of the increasing demand for change. The new entrants have adopted many different busi-
integrated service. In contrast, the Internet only bank we inter- ness models, including baby e-bank, brand stretching, white
viewed is targeting 'Internet aware' customers, so it has no labeling, and portals. Even though they have so far failed to
intention to build a physical presence. However, several banks stage an equal competition and take away market shares from
we interviewed pointed out that the nature of the branches incumbent banks, they have significantly raised customer
should be redefined with the rapid development of other expectations in many ways, forcing incumbent banks to
channels. One bank recently installed prototype multimedia improve their services and develop more competitive prod-
terminals in selected branches in order to ‘provide a user ucts. Most people we interviewed believed that the adoption
friendly system that would enable customers to browse of Internet banking calls for an increasing integration of all
through our complete range of products and services to meet activities and distribution channels within the bank. It also
their expectation more effectively.’ Another bank has plans to played a key role in making sense of the overall business
transform its branches from transaction-based into more processes and in understanding the customers.
advice-based centers. In one of the banks we studied, some of
its branches have been changed into Cafes, providing facilities Conclusions and future research
for children and iDTV for the latest product offerings. Several This research examined the current situation of Internet bank-
banks are also using branches to educate customers on new ing in the U.K. and discussed a number of emerging issues.
technology in order to migrate them to cheaper channels. Today, customers are increasingly demanding a ‘Martini’ style
banking – ‘anytime, anywhere, and anyhow’, which calls for a
Alongside the introduction of Internet banking and new devel- multi-channel strategy and channel integration in incumbent
opment in branches, call centers that were originally devel- banks. The Internet has become an important distribution
oped for phone banking are now evolving into multi channel channel that can not be ignored.
contact centers, and are a cornerstone of most banks’ multi-
channel strategy. For most banks their future success depends A wide variety of business models have been adopted for
on maintaining a proper balance between the traditional ‘brick Internet banking in the U.K.. In particular, many incumbent
and mortar’ structure and electronic channels. The contact banks have realized that the Internet is much more than a new
centers provide the missing link between them. In several distribution channel and they are using the Internet to inte-
banks, the Internet provides the platform to integrate cus- grate different systems in the banks and underpin all key busi-
tomer information on different systems. This enables call cen- ness processes — essentially evolving from the new distribu-
ters to manage customer relations in new ways. Several peo- tion model to the e-banking model. At the same time, some
ple we interviewed highlighted problems in integrating differ- baby e-banks are evolving towards a ‘click and mortar’ strate-
ent channels so that information in the database can be gy by expanding their online presence into the offline world —
retrieved from any channel. However, the pace of develop- either through their parent’s branches, their own new branch-
ment is accelerating, as problems with legacy systems are es, or other physical outlets, such as the post office, petrol sta-
being resolved. tions, or supermarkets.

Summary Along with the implementation of Internet banking, the nature

These case studies highlighted a series of important issues. of bank branches and call centers has also evolved. In most
The competitive structure of the banking industry is changing cases branches are evolving into leaner, more flexible, adviso-
as the Internet has reduced barriers to entry. New entrants – ry-based, rather than transaction based centers, and some

Internet banking in the U.K.: From new distribution channel to new
business models

banks are using the branches to educate customers with new mentation of Internet banking represents a significant techni-
technologies in order to migrate them to cheaper digital chan- cal challenge to most banks. As such, many banks have forged
nels. At the same time, some banks are adding new functions strategic alliances with ISPs, Portals, telecom, and other tech-
to their existing branches by developing them into Cafés for nology companies. This has enabled banks to reduce time to
example; or building mini-branches within other popular out- market for their Internet banking services by tapping into the
lets, such as supermarkets, petrol stations, and even McDon- experiences and skills of the partners. Another issue that was
alds. The importance of call centers are increasing rapidly, not not discussed in detail is the rapid growth of financial portals
only to support the back-end of Internet banking implementa- /supermarkets. In fact, some banks are transforming their
tion but also to act as multi-channel contact centers. Internet banking operations into financial portals to exploit
the benefits of cross-selling. By providing advanced invest-
This research also discussed issues concerning mobile and ment and personalization tools and high degrees of integra-
iDTV banking. Today, the wireless platform for banking has tion between banking, brokerage, investment, and other value
failed to take off, mainly due to the limited technical capabili- added services, they aim to become one-stop financial shops
ty of WAP phones and other mobile devices for data trans- for their customers.
mission, even though many banks have enabled this service. It
will be interesting to see what happens when the third gener- The threat from Internet only banks is certainly not over. So
ation mobile devices become widely adopted. The future of far, Internet only banks have failed to eat into the market
iDTV banking is still uncertain even though the U.K. is often share of established banks in a significant manner for several
regarded as a leader in this service. The message from the reasons, but this situation may change in the medium- to
interviews is generally pessimistic, as the nature of television long-term. First, the established banks and building societies
does not match with financial services. The different plat- have invested very heavily in the last few years in their own
forms used in providing iDTV services in different regions, as internet channels and offered their customer multi-channel
well as the initial investment required for the service have also banking, as well as a range of benefits that Internet only banks
hindered the adoption of TV banking in U.K.. Nevertheless, the have offered. This has played a key role for these established
future possibility of this channel cannot be ruled out. players in retaining their customers and maintaining their
market shares. Second, banking on the Internet involves radi-
One interesting development emerged from the research is cal changes in consumer behavior, which will take time to
account aggregation. At the moment, all leading banks in the establish. When people gradually get used to doing more and
U.K. and the FSA are getting together to address the legal and more things online, the psychological barriers in banking
security issues of this service, and a few banks have started online will reduce. Third, the recent dot com crash made it
providing it. The demand in the U.S. has been high and many very difficult for Internet only banks to compete aggressively
banks there have or are considering offering this service. But, with established players. However, this does not change the
several banks in the U.K. have decided not to introduce this fundamentals of Internet banking and the advantages of Inter-
service, as they believe the situation in the U.K. is very differ- net only banks. Finally, there has been a lot of talk about cus-
ent and currently the customer demand is low. However, its tomer loyalty and trust with established banks, which is true
implementation could lead to many radical changes in the to some extent. However, in many cases, it is the difficulties
banking industry in the U.K. and hassles involved in switching banks that have prevented
people from leaving their existing banks, even when they are
A number of other issues were also highlighted in the unhappy with the services. Some new services will make
research but not discussed in detail. One is that the imple- switching banks much easier. The banking industry has

64 - The Journal of financial transformation

Internet banking in the U.K.: From new distribution channel to new
business models

changed significantly, but more radical shake-ups are still to

come — and they may come much sooner than many have
expected. References
• Brine, G.R., 2001, 'iDTV killed the Internet star,' The Banker, 151 (200): 87, February
A lot remains to be done to fully appreciate and conceptualize • Datamonitor, 2000, Best Practice in U.K. eBanking, Datamonitor, August 2000.
the complicated issues in Internet banking. We believe • JP Morgan, 2000, JP Morgan Online Banking Europe. London: JP Morgan
Securities Ltd., September 7, 2000.
research along the following themes is particularly needed. • KPMG, 2000, Awaking Giants: How Europe’s big banks will win the e-Commerce
First, this research has only examined Internet banking from revolution, KPMG, London
• Li, F., 2001, 'The Internet and the De-Construction of the Integrated Banking Model,'
the banks’ perspective. A thorough examination is also need- British Journal of Management, Vol 12, 307-322.
ed from the customer’s perspective on issues including new • Maude, D., R. Raghunath, A. Sahay, and P. Sands, 2000, 'Banking on The device,'
The McKinsey Quarterly, 3.
strategies and business models, new products and services, • Reuters Business Insight, 2000, The Future of European Retail Banking. Reuters
and other innovations implemented with Internet banking. Limited, May.
• Sharpe, G., 2000, Bank of Scotland Research May 2000 Quarterly Research. Edin-
This is crucial because the success of Internet banking will
burgh: Bank of Scotland.
depend on the support of customers. Second, with the rapid • Young, D., 2001, Wireless banking apps: The calm and the storm, Wireless Review,
development of mobile communications, in-depth studies of, 18 (2): 9, January 15, 2001.

as well as insights from, the telecom industry are needed to

explore mobile banking with regard to the upcoming 3G plat-
form. The same applies to iDTV services for banking. Thirdly,
continued research is needed to monitor how Internet banking
is evolving in the U.K., what new strategies, business models,
and new products and services are being developed, and how
current strategies and business models are evolving. In par-
ticular, some specific new developments need to be closely
monitored – such as account aggregation and EBPP.

In addition, the next stage of my research will also focus on

developing strategic solutions to a range of problems in Inter-
net banking. I welcome collaborations with banks and building
societies, consulting companies, and other researchers.


Cost out, future in:

Can IT management lower costs while keeping
financial institutions geared for long-term business success?

Web Services:
The enabler of the new business service operating model

A transformation odyssey

Return on investments in information technology:

Beyond the productivity paradox

Achieving ROI from e-business systems in financial services

Cost out, future in: Can IT management
lower costs while keeping financial institutions
geared for long-term business success?
Owen Kemp
Vice President and General Manager, HP Financial Industries Business Unit

Inside financial services companies today, information tech- Financial companies determined to remain leaders are looking
nology organizations face the necessity of reconciling three beyond simple, short-term cost cutting. They also seek to
seemingly incompatible goals. They must continue to reduce implement programs for operational excellence. For these
costs, develop systems and applications required to ensure a firms, the downturn provides a breather and a chance to
successful future, and ensure that the company maintains its restructure intelligently in preparation for the next growth
current income. No philosopher or circus high wire juggler phase. They understand that overly complex IT systems can
ever groped for balance among a more complex set of ele- delay their ability to develop new applications and bring new
ments. products to market, and they actively seek technology part-
ners whose integration strengths can help them simplify and
Reducing cost and complexity improve developer productivity.
While Business and IT managers may disagree about who is to
blame for excess costs and complexities in existing IT infra- Increasing future revenues
structures, they typically agree that the current market down- Amid market tumult, financial companies determined to
turn makes belt-tightening a necessity. According to Gartner, remain leaders must simultaneously maintain their revenue
in 2001 about 20% of IT spending was wasted on consulting, streams while seeking new ways to bring in future revenues.
software, and services that failed to achieve their desired Savvy companies are using these turbulent times to set the
goals. With the economy still faltering, budgets that remained stage for the future. Planning and implementing for new
flat in 2002 are expected to shrink for 2003. Shrinking budg- processes continues, and most firms have programs to
ets intelligently is the task faced by every financial services address STP, process continuous improvement, and other
company. The emerging top strategic initiatives for removing future-oriented initiatives. These initiatives are not focused
costs from IT infrastructures are: solely on IT processes, but are accompanied by business infra-
structure improvements designed to tightly integrate busi-
■ Structuring IT to support current revenues on a lower cost ness and operations management. New financial products are
basis. also required to present both a revenue and cost containment
■ Consolidation or efficiencies in three areas: IT systems, plan in their rollout.
applications, and customer channels.
■ Re-engineering of business processes. A changed world
Though the boom years of the late 1990's seem like a long-
While removing costs is relatively straightforward, reducing IT gone era now, it is not simply economic stagnation that has
complexity is more challenging, although equally essential. created a sense that the world is different. Globalization, ter-
Though IT complexity is easy to identify, it is not always sim- rorism, and large-scale accounting scandals have brought
ple to change. Examples include: business into the political spotlight and set the stage for a new
level of regulation. In response, financial and other industries
■ 500 consultants required to install a new application. are required to architect, install, and maintain applications
■ The 5-inch thick cable harness running out of the back of and systems that can supply an unprecedented amount of
a trader’s desk, spilling out data in incompatible formats. data needed to meet the needs of the new regulatory envi-
■ Years of patched code maintaining millions of lines of ronment. These new regulations include:
legacy Cobol code.
■ Excess servers and desktops throughout the enterprise ■ Identification of money-laundering activities, required by
that are difficult and costly to maintain, raising the firm’s the U.S. Patriot Act.
overall costs of technology ownership.

68 - The Journal of financial transformation

■ Response to Basel II Accords for operational risk models in no way reduce the future-in importance of the Inter-
management. net. A clear example of delivering the future while driving cost
■ Requirements to record and supervise all electronic com- out was the growth of online brokerage firms, which were able
munications, including instant messaging. to dramatically reduce overheads while increasing speed and
access for their retail customers. In addition to offering fast
trades, these early Internet adopters have today the potential
Finding balance to cross-sell products with the click of a mouse, simultane-
I must say that we have been privileged to work with a num- ously offering credit cards, home mortgages, and insurance to
ber of global financial industry leaders that are successfully account holders.
finding the balance between driving down current costs and
building up for future revenues. One example is a leading The Internet brings efficiency, cost savings, and often simplic-
global exchange that is instituting a new automated trading ity by taking 20th century processes on-line in the 21st centu-
system, designed to provide both higher levels of security, and ry. One example of this efficiency is webproxy.com, an online
reporting and messaging infrastructure that will position site for voting stock proxies. Or, consider the huge costs
them for continued excellence. Exchanges are not alone in removed when mutual fund companies, for example, started
looking for the right balance. Table 1 provides an overview of offering 'paper suppression' options. Paper suppression stops
a typical IT initiative customers are undertaking in a changed the flood of mail about each individual security that is sent to
world. every shareholder. Instead of printing and mailing documents,
shareholders have the option to receive statements online.
Managing the conflicting priorities of cost control, revenue The resulting savings stay with the fund. Other financial com-
maintenance, and business innovation is by no means easy. panies, such as credit card companies, increasingly offer
Nonetheless, leading financial companies tend to be able to online statement and bill-payment options to their customers.
identify ways to move forward in spite of the obstacles. The
economy may be stagnant, but business must still rely on These aforementioned examples illustrate just how new tech-
innovation, and the pathways to innovation itself must change nologies can help us achieve what might seem like contradic-
with the times. tory objectives, lowering costs and preparing for success.

The web brought the future in — now it’s deliver-

ing efficiency
The dot com meltdown and shortage of profitable business

Line of Business Cost Out Future In

Retail banking Integrate multi-channel back office systems Build/enhance CRM, wealth management
Consumer payments Re-engineer payment systems Build/enhance fraud prevention, security
Wholesale banking Re-engineer payment systems, back office, treasury Enhance risk management, wealth management, compliance
Exchanges and clearing Automate processes Integrate compliance
Brokerage and asset management Automate trading floor Add/enhance/integrate risk management, wealth management,
Insurance Integrate back office claims processing Add CRM, mobile workforce

Table 1: Typical IT initiatives prevalent across the industry

Web services:
The enabler of the new business service
operating model
Predrag Dizdarevic, Partner, Capco
Shahin Shojai, Director of Strategic Research, Capco
When one looks at today's financial services industrial land- nologies. In those circumstances, where online capabilities
scape, it becomes immediately apparent that it is largely con- have been added to the mix, the maze has got that much more
tradictory. We find that while certain parts of our industry are complicated. Of course, there were many casualties on the
continuously inventing new and exciting new products, such as way. Our industrial graveyard is littered with many large devel-
the financial engineering departments of banks, and operating opment projects of over U.S.$20 million, some even over
models, such as Deutsche Bank's highly efficient back-office U.S.$100 million, that failed due to complexity and impatience
operations (as described in Mitchel Lenson's paper in this issue of the business to support lengthy and costly development. As
of the Journal), others prefer to largely maintain the status a result, most organizations found themselves with opera-
quo. Even within the same banking group you can find divisions tional technologies that were simply an amalgam of many sys-
that are highly innovative and others that are not. For example, tems cobbled together. As volumes of trade, and revenues as
when one looks at the retail-banking arms of most of the major a consequence, increased, so did the number of distinct tech-
global universal banks, one finds that they were among the nologies that were introduced, making the already complicat-
first types of businesses, even when compared with other ed shape of the financial services industry's operational IT
industries outside of the financial services, that instituted a even more spaghetti-like.
highly efficient and effective online capability to improve the
way they serviced their clients1. The capital markets divisions of As a consequence of these reactive investment strategies, the
those same banks, however, have yet to show much enthusi- present state of financial services IT is not a pretty picture.
asm for this important new medium. For example, when com- Built on legacy systems, using different generations of tech-
pared to the well-known online brokers, such as Schwab and nology from different vendors and/or built in house, present
E*Trade that place great emphasis on the user-experience, the day IT systems are typically a tangle of applications operating
capital markets divisions of most universal banks have tended without common standards for technology and content. The
to rely more heavily on the more traditional modes of commu- sheer number of applications in a typical operation is mind-
nication rather than take advantage of these new technologi- staggering – very large organizations typically run over a
cal capabilities to improve their overall service offering. Very thousand applications within the company firewall. When
few, if any broker-dealers allow clients to monitor transactions applications operate in silos, as is the case today, the data and
across their online networks. We believe that this industrial logic of one application is unavailable for use by other appli-
dichotomy will come to end in the very near future, when we all cations. This kind of fragmentation is endemic in the financial
get a better understanding of how these new technologies can services industry. Applications are siloed in myriad ways: by
improve the way we conduct business. product – such as equity or risk-region, and the business use
of the application, whether 'front-end' or 'back-end'. Because
However, before we arrive at that stage, let us take a short of this compartmentalization, the base number of applications
stroll through the recent history of the capital markets indus- in use at any time is multiplied many times over – thousands
try, which is the focus of this paper. Looking back at our recent of applications are running without standards and no means
technological past, we find that generally most organizations to communicate.
have tended to behave in a similar fashion. During the boom-
ing years of the 1990's, most financial institutions spent large The situation became so bad that in most institutions it was
sums of money investing in technological capabilities that not possible to identify which business units were truly
were typically reactive to the external environment. To keep adding value to the bottom-line. Simple, yet mission-critical,
up with ever-increasing volumes of transactions, most invest- activity-based costing information that is prevalent among
ment banks, investment managers, and exchanges invested most other industrial sectors is still not available to most
heavily in building scale on rather old and incongruent tech- financial executives.

1 Please note that we are not suggesting that having an online capability will necessarily eliminate the maze of the back office systems. In fact in many cases it has exacerbated the sit-
70 uation. It is the willingness of the retail banks to introduce more innovative channels of communication with their clients that we are praising here. For a fuller discussion on Internet
banking, please refer to Prof. Li's paper in this issue of the Journal of Financial Transformation.
Obviously, our world has changed considerably since the 1990’s. ■ Application/Business service providers – These service
Volumes, and proportionally revenues, have fallen dramatically providers can provide a range of services to financial insti-
and, for all but the very best, Investment banking revenues have tutions. They can range from managing the institutions
further still. Understandably, financial institutions are looking at online capabilities to managing certain processes. Exam-
ways to cut costs. One option that is open to management is to ples include outsourcing of cheque clearing by a number
start new projects to integrate the maze of existing systems, or of banks to an external service provider or subscription to
even replace them in order to increase efficiency and signifi- a reference data processing ASP, such as Synetix.
cantly reduce fixed and variable costs. However, these types of
projects come with costs and risks that some will find difficult to ■ Selling parts of back- and/or middle-office – Currently a
justify in today's markets. Alternatively, the institutions can use number of financial institutions are in the process of out-
services from third-party companies, at least for some part of sourcing large parts of their operations to third party ven-
their operations, outsource some of their systems to lower dors. Complete lift-outs of the back-office are becoming
costs, and focus internally only on the systems that can not be very prevalent among asset managers who wish to mitigate
taken from outside. This allows management to cut costs and the costs and the headaches associated with managing
more importantly focus on their core competencies. Of course, these services in-house. Under this arrangement, the asset
the decision to outsource should not be dependent on market management firm sells the entire back office to in-sourcers
downturns. We genuinely believe that the decision to remove in order recoup some of the investments made in their
non-core processes is an essential step for business no matter operations and to convert their fixed costs to variable ones.
what the external environment. However, for reasons that we all
know, no one has the time to consider these options when It is our belief that over time the use of service providers will
volumes and profits are going through the roof and we are all become much more prevalent within our industry. We prog-
playing catch-up with introducing operational capabilities that nosticate that in the near future most financial institutions will
can keep up with our demands. choose to subscribe to a number of services from third-party
providers. These service providers can either be the actual
It used to be said that the recessions are good for two things: providers of the end-service or aggregators of the services
cutting excess fat accumulated during boom times and creat- provided by a number of providers. In other words, even
ing an opportunity to invest in operations and strategies nec- though they themselves might not be the providers of the
essary for a successful future at a fraction of the cost. We end-service, they take on the role of managing the institu-
guess the current recession has helped highlight how both of tion's relationship with a number of providers.
these objectives can be met through outsourcing.
How current technology can help
Assuming readers are somewhat convinced that outsourcing Imagine an organization that chooses to: outsource certain
can help their businesses let us look at the types of outsourc- functions to an in-sourcer, subscribe to certain functions from
ing options open to them, with a view to identifying how new a service provider, and retain other parts of its core opera-
disruptive technologies have made certain types of arrange- tions. If you take the current infrastructures prevalent within
ments more attractive to management. our industry as the benchmark, then you can be certain that
the technology becomes prohibitive. Current technology does
Outsourcing options open to management not allow for seamless operations of systems that have been
The management of financial institutions has a number of outsourced with the systems that service providers use and
options open to them when considering outsourcing certain those that are used internally. Consequently, companies can
aspects of their businesses. not do what is best for them due to technology limitations.
However, just as our current market environment has very serious alternative, and the fact that web services have
changed, so have, fortunately, the solutions that are available removed the barrier related to lack of interoperability
to us to rectify these types of problems. Taking the example of between systems, means that their utilization within the out-
networked computers, within just 25 years we have gone from sourcing business may be the killer application that propels
punched cards, to dumb terminals that were networked inter- the acceptance of web services. As a result, this new medium
nally, to external networks within organizations, to global net- will significantly increase the number of non-client facing
works that are able to communicate and transact outside our operations that are outsourced by financial institutions. As
own institutions. This last phase is what is known as Internet the numbers of these types of arrangements increase, we will
era. It is during this era that web services, enterprise applica- witness the evolution of most financial institutions into virtu-
tions that speak an industry-standard language based on al organizations. In the same vein, managing so many rela-
XML2, provide a new way for the different components of the tionships will increase the demand for aggregators of busi-
overall system (including people, devices, and applications) to ness solution providers that will take away the headache of
communicate. What web services do is to help organizations managing a number of service agreements. These aggrega-
that have relationships with a number of third-party solutions tors will provide a single face to a number of providers of best-
providers communicate with them without the need to modi- in-class services with the financial institutions, who in turn will
fy their current respective technological infrastructures. In be the single face to the end-user.
other words, web services interpret the language used by a
particular system into a language that other systems can
understand. This capability is very important to most financial
executives, who have raised the issue of having to deal with
massive enterprise application integration projects as a draw-
back of partial outsourcing or taking partial business service.
Consequently, web services, by enabling distinct systems to
talk to each other, provide the mechanism that allows finan-
cial institutions to outsource those parts of their business that
they would like without having to worry about how those
businesses can be integrated with those that are retained or
those that are replaced by external business services. This
interoperability also means that financial institutions are no
longer required to make a 0 or 1 decision, either outsource
everything or nothing. They are now able to decide, at a very
granular level, which specific parts of their business they wish
to outsource, what services they wish to subscribe to, and
what parts they wish to manage in-house. As a result, we
believe that we will soon witness a large number of such
arrangements taking place within our industry.

Where do we go from here?

Providers of web services capabilities could not have timed
the introduction of their services any better. Given the current
focus on managing costs, the realization that outsourcing is a

2 Even though we believe that focusing on the intricacies of web services per se is
72 not a bad thing, we opt to leave that task to Josh Lee, who has highlighted its
benefits in more depth in this issue of the Journal of Financial Transformation.
We prefer to focus on how it can help within a service provision environment.

2001 :
A transformation

Mitchel Lenson
Chief Information Officer,
Global Technology and Operations,
Deutsche Bank AG London

Creating a technology and operations organization that can
become a trusted partner of the business and at the same time
contribute to an increase in the value of the business franchise
is difficult in stable market conditions. In times of economic and
market turbulence this becomes a Herculean task. In this paper,
we look at the substantial achievements and progress that
Deutsche Bank has made and provide some practical insights
and tools for others that may be facing similar challenges.

2001 : A transformation odyssey

Deutsche Bank into two distinct business streams — Corporate

“Excellence can be attained if you Care more Investment Bank (CIB) and Private Client and Asset Manage-
than others think is wise, Risk more than others ment (PCAM). As a part of this reorganization, we worked with
think is safe, Dream more than others think is the business areas to ensure that the technology and opera-
practical and Expect more than others think is tions functions were better aligned to support the business
possible”. lines. This gave rise to our current organization — Global Tech-
nology and Operations (GTO), within the Corporate and Invest-
For those people who only read the first few lines of
ment Bank.
an article

The strategy
Immediately following this reorganization, we decided to
Over the next few pages we will attempt to provide a sense of develop a strategic business plan for GTO that would be a cat-
the challenges we faced, what we have done and are continu- alyst for change, focused action and a unifying force to win
ing to do to leave a legacy we can be proud of for years to the hearts and minds of people who had traditionally been
come. We hope this will also provide some insights that can part of a series of operations and technology shops. In devel-
help other people learn from our experience as they navigate oping our strategic business plan we took a number of steps
through their own challenges. to ensure that we were going in the right direction. Firstly, it
was important to establish where Deutsche Bank, and CIB in
Context particular, was heading; paying particular attention to the
The five years between 1995 and 2000 were a period of sig- longer-term goals and objectives. In order to put these goals
nificant growth for Deutsche Bank. During this period, we and objectives into a relevant context, the next stage was to
went from being a German commercial bank to a truly 'bulge- examine the external environment, both in terms of the indus-
bracket' firm and the leading European bank. But this period try and the broader economic factors, and identify key areas
of growth came at a cost. The drive of time to market result- that would have an impact on CIB’s ability to continue in it’s
ed in the creation of a complex infrastructure with overlap- chosen direction. Part of defining any journey is not only
ping initiatives and the resulting cost overlay. Basically, knowing where the destination is but also knowing the starting
Deutsche Bank Global Corporates and Institutions (GCI or DB point, so we needed to analyze and understand the current sit-
Investment Bank) were driven by 'top line' considerations as uation within GTO. All of our findings indicated that this was
opposed to cost. going to be an eventful and engaging journey of transformation.

Thus when this journey started in September 2000 we faced To help align our people with our overall objectives, we need-
the challenge of driving massive changes in attitude and ed a vision statement. The vision we articulated reflects the
actions of the operations and technology world in a market, need to excel in our execution but also the need to add value
were we to know it, that was about to face a massive disrup- to our business franchise. 'To be the technology and opera-
tion. Our challenge was to make a massive cultural shift in the tions services partner of choice, with the knowledge, power,
operations and technology organization of GCI (at that time creativity and credibility to deliver superior solutions that
4,500 people) to enable us to drive long-term and sustainable increase the value of our business franchise, and to be the
changes in the value of the organization. employer of choice for high quality people.'

By the end of January 2001, the size of the challenge had Having defined the start point of the journey and an overall
grown to 15,000 people following the reorganization of destination, the next stage was to define the objectives we

74 - The Journal of financial transformation

2001 : A transformation odyssey

needed to achieve. An essential part of any journey is know- client satisfaction, best-in-class cost performance, scaleable
ing when one has arrived and the very explicitness of the and resilient capability and risk-weighted control. We were
objectives set provides the mechanism for measuring then able to take the internal analysis of GTO and articulate
progress and success. Taking the journey theme further, hav- this as the starting point of our journey in terms of the four
ing defined the start and end point, the next stage was to end-state objectives.
articulate what path that journey would take.
As a part of this goal definition, we also developed a broad
Figure 1 is a visual illustration of our belief that the journey vision of how we saw the GTO organization developing over
from inconsistency and variability to peak performance the life of our Strategic Business Plan (Figure 2). Starting in
should be undertaken through having a combination of a clear 2001 we identified the high-level tasks that we needed to
direction, a balanced strategy, coherent plans, good people, focus on to allow us to make the journey towards continuous
and massive action where all these activities are inter- optimization. These tasks were refined in each further year to
dependent. expand their scope and build on the significant progress made
in previous years.
Clear direction
Dealing with each part of the journey in turn, we realized that People often fall into the trap of starting on journeys and
we needed to firstly establish a clear direction. Having ana- expecting success too early. When this success is not immedi-
lyzed internal and external influences and a vision of how we ately apparent or easily achievable or when seemingly insur-
wished to behave, we were able to identify and articulate our mountable difficulties appear, they change direction. People
overall end-state objectives. These are summed up by the for- must be made aware that sometimes deviation from the path
mation of four very clear goals for GTO: consistently high is ok if the direction is clear and plans and actions exist to

■ Consistently High Client Satisfaction

■ Best-in-class Cost Performance
■ Scalable & Resilient Capability
■ Risk-Weighted Control


■ Inconsistent Client Satisfaction

■ Unsustainable Cost Performance
■ Variable Capability
■ Inadequate Control

Figure 1: Journey from Inconsistency

2001 : A transformation odyssey

bring things back on track. An analogy to this is the Apollo ■ Build architecture driven capabilities — Smart source
space missions, where a detailed course is set out at the start component-based solutions within a consistent business,
of the mission, but for 97% of the journey the craft is not pre- technical and application architecture.
cisely on the prescribed course. A continual series of adjust- ■ Drive industry standardization — Drive industry initia-
ments are made to ensure that the craft reaches the point tives and shape standards to stay ahead of the curve on
where it needs to be at the conclusion of the mission. market developments.
■ Professionalize management practices — Embed world-
Balanced strategy class practices to maximize return on energy and enable
Having defined the vision we aspired to live up to and the end the transition from ad-hocracy to operational excellence.
goals we wanted to achieve, we needed a strategy to move
from the current state. This was defined as five broad pillars Coherent plans
supporting everything we do. All strategies are only as good as the implementation that fol-
lows. To this end, during the first senior management meeting
■ Strengthen business partnerships — Align vision, strate- of the top 100 people in GTO, participants were tasked with
gy, structure, goals and plans to enable joint ownership, producing an action plan for their area which clearly drove
decision making, and governance. towards the end-state objectives and supported our defined
■ Establish commercial viability — Lead disciplined execu- strategies. These plans were then made part of our perform-
tion of commercially viable plans to maximize return on ance management system and tracked as a part of that
investment and deliver sustainable best-in-class perform- process. This way we drove personal accountability and
ance. responsibility for the actions we needed to achieve our goals.

GTO Directional Clarity
Business Alignment Business Areas' Directional Clarity

IT & Ops Alignment Disciplined Execution 2003

Business & Operating
Functional Absorption Resource Transparency Models Alignment 2004
Operating & Technology Continuous Optimisation
Team Strengthening Portfolio Governance
Models Optimisation
Financial Transparency Risk Transparency Collaborative
Investment Governance Operating Models Clarity

Cost-base Stabilisation Co-operative Management

Independent Management

Figure 2: GTO Evolution Framework

76 - The Journal of financial transformation

2001 : A transformation odyssey

Recognizing that the detailed plans were largely business-unit expenditure, future efficiencies, etc. In addition, the business
focussed, we also needed clear plans across GTO that allowed line for which it is intended must sponsor all CTB spend. Con-
us to achieve some of the broader strategic goals. sequently, additional revenues or savings are then incorporat-
ed in the budget for the year in which they were promised.
The first task we undertook was to design and implement our
investment governance processes (Figure 3). This necessitat- Given that most of the growth in the investment banking arm
ed introducing new terminology into the way our spending had come from acquisitions, there were a plethora of different
was divided. Two terms were introduced that have since systems, tools, and processes that needed to be rationalized in
become part of the Lingua Franca of the Bank — run-the-bank order to achieve the right technology model to support a glob-
(RTB), defined as everything that must be spent in order to al business. In order to achieve this objective we created a vir-
keep the bank running and change-the-bank (CTB), defined tual team of enterprise architects whose task was to identify all
as discretionary spend required to change the bank for the existing development tools, middle-ware, web tools, platforms,
future. All CTB spend must now be approved as part of the and environments in use throughout the bank and classify
investment governance process before any work can com- them as invest, maintain or dis-invest. Where products fell in
mence and they must clearly demonstrate the benefits to the the dis-invest category, there would not further CTB spend.
financial business in terms of increased revenues, saved

Business +
IT Strategy

RTB Operations Risk CTB

1. Squeeze 2. Understand
Risk of Squeeze
Fund CTB
5. Reduce RTB
as Result of 3. Make Change
4. Understand
Impact of Change

■ Cannot Spend Forever In order to make this work we need:

■ Need to understand how far we can push down RTB ■ Good Operations Risk Management
(Understanding & Monitoring Risk of Squeeze) ■ Firm Management of Costs
■ Use What we Free up in RTB to Invest in CTB ■ Good Strategy for Investment

Figure 3: Investment Governance Decisions

2001 : A transformation odyssey

Consistently High Best-in-class
Client Cost Good people
Satisfaction Performance

Excellence You can’t achieve great things without great
Personal Responsibility

Scalable & Risk- people. Many companies create strategy, then

Resilient Weighted
Capability Control try to rally people around it; good-to-great com-
panies start with great people and build great
results from their efforts.
Anarchy Bureaucracy
Good to Great, Jim Collins, 2001

- Professional Practices +
One of the biggest challenges faced in every transformation-
Figure 4: Move to Operational Excellence
al journey is of getting the balance right between engender-
ing and maintaining responsibility and embedding sustainable
professional practices. While anarchy is clearly a dangerous
Consistently High Best-in-class
state to be in for too long and bureaucracy is just another
Client Cost
Satisfaction Performance euphemism for slow-death, world-class organizations need
Peak the energy of ad-hocracy progressively underpinned by
Personal "WIIFM" Clarity

repeatable models of action and behavior to drive operational

Scalable & Risk-
Resilient Weighted excellence. Excessive Ad-hocracy can appear to be fun for
Capability Control
individuals and very expensive for organizations. We set out
very clear expectations for our people that we valued opera-
Confusion Disillusionment tional excellence way beyond ad-hocracy and used the model
in figure 4 to reinforce this point.

- Organisational Clarity + Having established behavioral expectations, the next chal-

Figure 5: Personal & Organizational Clarity
lenge was to increase the human ROE. Fundamental to this was
the recognition that human beings are teleological creatures.
With this inherent goal orientated behavior, it is essential that
people have something to work towards. You may recall the
scene from Alice’s Adventures in Wonderland when Alice met
the Cheshire cat: ‘Would you tell me, please, which way I ought
Hard Decision Easy Decision to go from here?’ ‘That depends a good deal on where you
2nd chance Retain & Develop
want to get to,’ said the Cat. In the absence of clear goals, peo-
ple either drift aimlessly letting things happen to them or sim-

ply follow the crowd and let their environment dictate what
they do and how they feel. Clear goals, i.e. what we want to
Easy Decision Hard Decision
Out Out achieve, and clear strategies, i.e. how we can achieve the goals,
helps us maximize our personal ROE, i.e. return on energy.

- Performance +
Figure 5 illustrates how a lack of personal clarity (which is the
Figure 6 - Performance and Values Matrix basis of understanding 'what’s in it for me), combined with a

78 - The Journal of financial transformation

2001 : A transformation odyssey

lack of organizational clarity can lead to frustration, confu- We understood that it was essential to retain and develop our
sion, or disillusionment (or all three) and limit people's ability best staff and needed a model to drive this through all levels
to act effectively. Here we can see that when people have of our organization. The model shown here clearly articulates
clear direction from the organization, and can understand and the relationship between objective setting, continuous per-
accept what this means for them, they have a better opportu- formance management and personal development. When
nity to experience peak performance and contribute in a more combined, the quality of the internal resource pool is
effective manner. improved and leads, over time, to less and less reliance on the
external resource pool. The model also shows that the
In terms of peak performance, it was also essential to have a rewards for people are much more than just a total compen-
measure of the people we wish to retain and grow to be able sation package, they must include personal and career devel-
to contribute to our vision of GTO. To this end we adopted the opment plans for a total package. Again this brings the bene-
well-known model whereby values are just as, if not more, fits of integrated succession planning and individual develop-
important than actual performance (Figure 6). Our ideal peo- ment to bear on the internal resource pool.
ple will show a combination of both and those who don’t or
more importantly can’t have to be addressed as early as pos- In order to achieve this we implemented an online perform-
sible while always ensuring whatever action we take is under- ance management tool for all levels of our organization that
pinned by commitment to preservation of dignity. measures individuals on business, personal, and values-based

DB Mission,
Values & Objectives Financial Reward
CIB Vision & Compensation)

GTO Vision, Values
& Goals Performance
GTO Management and
Individual Objectives &
Team Member Feedback
Performance Measures

Career & Personal


Manpower Sourcing

Development Succession Promotion

Job Definition

External Internal Individual

Resource Resource Development
Pool Pool Plans

Figure 7: Performance and Development Model

2001 : A transformation odyssey

objectives. To date we have achieved in excess of 97% partic- for CIB GTO involved defining, planning, and tracking the
ipation, a remarkable fact considering we have a presence in business-unit and cross organization goals and plans
45 countries globally and in excess of 13,500 people. described earlier. Consistency, simplicity, and repetition is
essential to make sustainable progress, which is backed up by
Massive Action a quotation from Jack Welch:
It is very easy to say what people want but without the correct
level of investigation and planning, the resulting outcome is ‘The only way to change people's minds is with consistency.
often an inadequate level of detail on how to get to where they Once you get the ideas, you keep refining them and improving
want to be. Therefore, not only was it important to develop the them; the more simply your idea is defined, the better it is.
overall strategies but also to develop detailed action plans to You communicate, you communicate, and then you communi-
drive each strategy and to provide an ongoing measurement cate some more. Consistency, simplicity and repetition is what
of continuing success. The final part of setting the direction it's all about.’


Mitchel Lenson Controlling


Infrastructure & Global Global Markets, Global Securities Global Cash Management Global
Control HR
Cross Product Services Equities GRT & GCF Services & Global Trade Finance Management Services




CIB - CIO Direct Report Global Functional Unit GTO Regional HR & Controlling - Global Functional & Regional Face-off

Figure 8: Business Aligned Organisation

80 - The Journal of financial transformation

2001 : A transformation odyssey

Organizational issues shared vision and goals, belief and bloody hard work.
As described in the evolution model earlier, we needed to
ensure that we had IT and back office operations in alignment The most sobering lesson we learned was that even though
and, just as importantly, both of those in alignment with the we have handled significant challenges and continue to build
business. As a part of this process we created business-silos on success every day, the transformation odyssey will never
within GTO that allowed, for example, the application develop- end……..but then welcome to the real world.
ment and back office operations for business streams to be
grouped together, in one reporting line, under one Chief Infor-
mation Officer (CIO) (Figure 8). The next stage of this align- ‘Every morning a gazelle wakes up. It knows it
ment was to agree with the business that the CIO would be the must run faster than the fastest lion, or it will be
GTO representative on the business line management team, killed.
thus achieving business ownership of technology decisions Every morning a lion wakes up. It knows it must
and strategy. This became a very powerful feature in our drive outrun the slowest gazelle, or it will starve to
towards benefits driven investment governance. This also death.
enabled us to drive the transformation from our multi region- It doesn't matter whether you are a lion or a
al model to our desired global model. gazelle, when the sun comes up, you had better
be running.’
Lessons Learned
There is no simple painless panacea.

This odyssey is about massive sustainable cultural shifts.

Phase 1 was about understanding what we had and strength-
ening the team. Phase 2 was about understanding our dash-
board and the basis on which we make decisions. Phase 3 was
about driving client focus, cost, capability enhancement, and
control. Phase 4 was about building on success and leveraging
our strengths to drive continuous optimization through
smarter people, processes, and practices.

While there is no simple painless panacea, what has worked

for us is an ever-changing combination of:

Clarity, focus, knowing what we needed to do, understanding

where we were, developing a strategy and action plans, con-
gruent communication, commitment and control reinforce-
ment (personal), putting in place the measurement tools,
financial dashboard, control dashboard (operational risk),
project / change / investment dashboard, common language,
investment governance, transparency, constant reinforce-
ment of consistent messages, visible values based leadership,
demonstrable competence, energy, commitment, drive,


Return on investments
in information
Beyond the productivity
Bruce Dehning
Assistant Professor, The Argyros School of Business
and Economics, Chapman University

Vernon J. Richardson
Associate Professor, School of Business,
University of Kansas

Understanding the return on investments in information tech-
nology is the focus of a large and growing body of research. In
this paper we develop an overall framework for understanding
the research on the relation between information technology
investments and accounting or market measures of firm per-

Return on investments in information technology: Beyond the
productivity paradox

Introduction a direct effect is improving inventory management, which

A large and growing body of academic Information Systems reduces inventory levels, inventory holding costs, waste, and
(IS) research investigates the return on investments in infor- spoilage. An example of an indirect effect is improving deci-
mation technology (IT). In an age where management careful- sion making from having information that was not available in
ly weighs the benefits of every discretionary investment dol- a prior information system. The bottom half of Figure 1 shows
lar, finding evidence of positive returns on IT investments is how researchers have measured IT, business process per-
critical. This paper summarizes recent research on the returns formance, or firm performance. Generally, investments in IT
to IT investments that uses large samples, archival data, and have been examined three ways: (1) the amount of money
accounting or market measures of firm performance. spent on IT, (2) the type of IT purchased, and (3) how IT assets
are managed. Researchers have looked at total IT spending, IT
training expenditures, and IT staff expenditures. Researchers
that examine IT investments using IT strategy usually examine
Returns on investments in IT: The Productivity IT deployments such as type of system (e.g. electronic com-
Paradox and beyond. merce or ERP), performance advantages from early deploy-
The 'Productivity Paradox' refers to the early IS literature that ment of technology (first mover advantages or proprietary
found no relation between spending on IT and productivity or technology advantages), or IT-enabled strategies such as
profitability. Research on the paradox exists on two levels. The improved product quality due to new IT. Researchers that
first is at the industry or economy-wide level. In 1987 Noble quantify the explanatory variables based on IT management
Prize winning economist Robert Solow summed it up by writ- or capability examine differences in the emphasis on IT or
ing, 'We see the computer age everywhere except in the pro- level of ability within an organization. For example,
ductivity statistics.' The second Productivity Paradox was researchers classify firms as successful users of IT or as those
observed at the company level, where 'there was no correla- that have systems personnel in upper management positions.
tion whatsoever between expenditures for information tech-
nologies and any known measure of profitability.'2 It is the Researchers examine the relation between IT and firm per-
second version of the Productivity Paradox that most formance through one or more of five paths of Figure 1. Path 1
intrigues researchers in IS [Brynjolfsson (1993), Landauer is a direct link between IT and overall firm performance,
(1995), Strassmann (1990, 1997a)]. These early studies con- bypassing the effect of IT on business processes. In this
firm either no relation or a slightly negative relation between research, researchers usually measure firm performance
firm-level spending on IT and firm performance. However, by using market measures or accounting measures. Market per-
the late 1990’s several studies found that there were positive formance measures are based on stock price or stock market
payoffs from investments in IT [Brynjolfsson and Hitt (1995, returns. Accounting performance measures include ratios
1996), Dewan and Min (1997), Hitt and Brynjolfsson (1996), such as return on assets (ROA), return on equity (ROE), and
Lichtenberg (1995), Stratopoulos and Dehning (2000)]. There- return on sales (ROS).
fore, in recent research, the question has generally changed
from 'is there a payoff?' to 'when and why is there a payoff?' Path 2 of Figure 1 describes the relation between IT and busi-
ness processes. Business process performance measures
Literature review include gross margin, inventory turnover, customer service,
We present a general framework for analyzing this research in quality, efficiency, etc. Path 3 shows how these process meas-
Figure 1. The top portion of Figure 1 shows that IT has a direct ures combine or interact to determine overall firm performance.
and indirect effect on business processes, which together
determine the overall performance of the firm. An example of The link between IT and performance often depends on other

1 New York Times Book Review, July 12, 1987, as quoted in Brynjolfsson and Hitt
84 (1998). This version of the paradox is sometimes referred to as the ‘Solow Paradox.’
2 Strassmann 1997b, p. 2.
Return on investments in information technology: Beyond the
productivity paradox

Impact of IT on the firm

Direct effects
Information Business Business
technology Indirect effects processes processes

As measured by researchers

path 1

Information technology: Process measures Firm performance measures:

1. Spending e.g. gross margin, inventory A. Market
2. Strategy path 2 turnover, customer service, path 3 e.g. event study, association study,
3. Management or capability quality, efficiency Tobin’s q, market value
B. Accounting:
e.g. ROA, ROE, ROS
market share
path 4

Contextual factors
e.g. industry, size, financial path 5
health, IT intensity

Figure 1: Framework for evaluating research on the benefits of IT investments

factors, which we refer to as Contextual Factors in our frame- market reaction to salient IT events. One such event is a press
work. Path 4 of Figure 1 represents the Contextual Factors that release announcement of an IT investment. Event studies
link business processes and firm performance measures. allow researchers to investigate which attributes of IT invest-
Examples of Contextual Factors include firm size, industry, ments influence shareholders’ interpretation of such
financial health of the firm, growth options, and IT intensity. announcements as measured by abnormal movements in the
As shown in Figure 1, these Contextual Factors affect business investing firm’s stock price.
processes through Path 4 and overall firm performance
through Path 5. In the first event study of market reactions to IT investment
announcements, Dos Santos et al. (1993) only observe a posi-
IT Spending: Stock market reactions to tive stock market reaction to innovative IT investments. This
announcements of IT related expenditures suggests that stockholders carefully consider the nature of
In this section, we review five studies that have examined announced IT investments and the impact investments have
Paths 1 and 5 of Figure 1. One stock market-based method of on the firm’s net present value of future cash flows, and then
determining if IT investments pay off is to see if shareholders buy or sell accordingly. Dos Santos et al. define an innovative
believe IT investments are value-relevant. Event-study meth- IT investment as a first use of a technology, a new product or
ods serve as a useful tool in an IT context to study the stock service, or a new IT application within an industry.

Return on investments in information technology: Beyond the
productivity paradox

Im et al. (2001) expand the Dos Santos et al. (1993) data set finds a positive relation between IT spending and market
and find positive returns for announcements of IT invest- value. Where these studies differ is in their approach to meas-
ments for small but not large firms (Path 5 in Figure 1). Fur- uring market value, and the effect of contextual factors (Path
ther, they find evidence of increasing returns over the more 5 in Figure 1) on firm performance.
recent 1991-1996 sample period as compared to the earlier
1981-1990 sample period. In the more recent sample period, Bharadwaj et al. (1999) examine the relation between spend-
they also find increasing returns from IT investment ing on IT and the ratio of the market value of a firm’s assets to
announcements by financial but not manufacturing firms. the replacement cost of those assets. Using 631 firms from
1988-1993, they find that the coefficient on IT spending varies
Dehning, Richardson, and Zmud (2002) extend this work by from a low of 1.7 to a high of 10.3 in five, single-year regres-
proposing that the strategic role that IT plays within an indus- sions. Brynjolfsson and Yang (1999) and Brynjolfsson et al.
try affects the stock market response to IT announcements. (2000) regress the market value of computer capital, other
They find evidence that suggests that firms in industries in assets, and numerous control variables (e.g. R&D, advertising)
the midst of IT-driven transformation have higher stock mar- on the market value of the firm. Brynjolfsson and Yang find
ket returns around the IT investment announcements than that one dollar of computer capital is valued at ten times one
firms in industries at lower levels of IT-driven transformation dollar of conventional capital. Brynjolfsson et al. add an addi-
such as using IT to automate business processes. tional explanatory variable, work practices, to the model of
Brynjolfsson and Yang. They posit that work practices such as
Oh and Kim (2001) is an example of yet another contextual the greater use of teams, broader decision making authority,
effect that affects the overall stock market reaction to IT and increased worker training are complements to IT spend-
(Path 5 in Figure 1). The authors show that financial conditions ing. Overall they find that one dollar of spending on IT is asso-
facing the firm affect the stock market reaction to IT invest- ciated with approximately a five dollar increase in the market
ments. They show that the market-to-book ratio and the vari- value of the firm; significantly higher than the value placed on
ability of daily stock returns affect the investor’s reaction to IT other capital expenditures.
investment announcements.
Two studies in this line of research examine Path 1 in Figure 1
Other market measures using the market’s valuation of Y2K expenditures. Krishnan and
In this section, we examine recent studies that use other mar- Sriram (2000) find that the market value of the firm relates
ket performance measures to investigate Path 1 in Figure 1. positively to Y2K expenditures, but the coefficient is less than
Hitt and Brynjolfsson (1996) examine the relation between the the coefficient on earnings or book value, and less in IT-inten-
value of a company’s IT and one-year market return. Hitt and sive industries. Anderson et al. (2001) examine Y2K spending
Brynjolfsson find a positive relation between IT Stock and one- relative to the median industry spending on Y2K compliance.
year stock market return in only one of five years examined. They hypothesize that the reward for spending more than the
The fact that they find little relation between IT value and industry median will be higher relative market values of com-
stock market returns is unsurprising. There may be multi-year mon equity, and spending less than the industry median will
differential firm performance, but no difference in stock mar- result in lower relative market values. They find that on average
ket returns due to market participants’ anticipation of a per- the market value of the firm increases by 20.3 times the amount
formance advantage. spent on Y2K when firms spend more than the industry median
and the market value decreases by 40.5 times Y2K spending
Five studies investigate Path 1 in Figure 1 using the market when firms spend less than the industry median. These studies
value of the firm to measure firm performance. Each study provide strong evidence that the market values IT investments.

86 - The Journal of financial transformation

Return on investments in information technology: Beyond the
productivity paradox

Accounting performance measures process performance and overall firm performance, making
In this section, we examine six studies that use accounting inferences about Path 3 without testing Path 3 directly. The
performance measures to investigate Path 1 and Path 2 in Fig- first of these, Mitra and Chaya (1996), examines the relation
ure 1. Each of these uses IT spending measures to classify IT between IT spending and various measures of productivity
investments. Hitt and Brynjolfsson (1996) and Tam (1998) and efficiency. They find that higher IT spenders have lower
examine Path 1 in Figure 1 using the relation between levels of operating expenses and cost of goods sold, and higher selling,
IT and firm performance. Using U.S. data, Hitt and Brynjolfs- general, and administrative expenses (SG&A). They also find
son find a positive relation between IT stock (the market value that large companies spend a greater percentage of their rev-
of a company’s IT systems plus three times the company’s enue on IT than smaller firms do. Shin (1997) finds a very dif-
spending on IT labor) and ROA in three out of five years, but ferent result. Using the same basic data, Shin finds that IT
no relation between IT stock and ROE. Tam uses data from spending relates negatively with coordination costs, which are
four Asian countries and finds similarly mixed results. He finds SG&A minus non-administrative expenses such as advertising
a positive relation between computer capital (CC) and ROA in and R&D. This implies that the positive relation between IT
Singapore, a negative relation between CC and ROA in Taiwan, spending and SG&A that Mitra and Chaya find is due to non-
a positive relation between CC and ROE in Singapore and administrative expenses, despite Shin’s findings that advertis-
Malaysia, a negative relation between CC and ROE in Taiwan, ing and R&D are positively related to coordination costs.
and a negative relation between CC and ROS in Hong Kong.
A contradiction to the above results is an extensive study by
These studies raise an interesting question. Specifically, given Strassmann (1997b). He does not find any of the significant
the increasing investment in IT by firms: Why do researchers relations of other researchers. Strassmann examines Path 1
not find a stronger relation between IT stock and stock mar- and Path 2 in Figure 1, using IT spending data from 539 U.S.,
ket performance? The following studies attempt to answer European, and Canadian companies to examine the relation
this question by examining the relation between IT spending between IT spending and firm performance. Using a single
and financial performance. Most researchers do this by inves- year (1994), he found no correlation between IT spending per
tigating Path 1 and Path 2 in Figure 1 [Mitra and Chaya (1996), employee and ROE. The only significant results reported are a
Rai et al. (1997), Strassmann (1997b)]. If researchers find a sig- positive relation between IT spending on order-entry and
nificant relation between IT and both business process per- back-office operations and sales growth and productivity.
formance measures (Path 2) and overall firm performance
measures (Path 1), then they make inferences regarding Path Sircar et al. (2000) take a slightly different approach to this
3 even if there is no direct test of Path 3. A seminal study by line of research. In an exploratory study they use Canonical
Barua et al. (1995) follows a different approach. Barua et al. Correlation Analysis to examine the relation between various
identify relations between various IT and non-IT inputs and IT spending measures, various business process measures,
business processes (Path 1), and relations between these busi- and overall firm performance measures. They find numerous
ness processes and overall firm performance (Path 3). They correlations between IT measures and firm performance
find a positive impact of IT on business processes, and that measures, but are unable to determine causality.
certain business processes relate positively to overall firm
performance. The overall conclusion of these studies is that the relation
between IT spending and financial performance is tenuous. It
Three studies follow the more common approach of examin- is possible that on average IT has increased productivity or
ing Path 1 and Path 2 from Figure 1. With the exception of Shin output, but not profitability. One explanation for productivity
(1997), each of these studies relates IT spending with business increases without corresponding profitability increases is that

Return on investments in information technology: Beyond the
productivity paradox

the cost of IT investments offsets the increase in productivity. tive advantage. Using ROS and Market Share, they identify
If the cost of IT exactly equaled its benefit, success would companies that gain and sustain a competitive advantage due
depend on IT use and not on its mere acquisition. Studies that to their IT deployments for five and ten-year periods after
classify IT investments based on IT use (IT strategy or IT man- implementation. This classification allows them to see what
agement/capability) attempt to provide insight into this issue. factors distinguish sustainers (15 companies) from the non-
The following sections review this type of research. sustainers (13 companies). They find that the strong discrimi-
nating factors were investment intensity, cash flow, and indus-
IT strategy: Stock market reaction to strategic try competitiveness. Moderately discriminating factors were
IT investments R&D intensity, times interest earned, and cost efficiency. Asset
In this section we consider the stock market reaction to vari- base and working capital were weak, but still significant dis-
ous strategic IT investments. As opposed to simply announc- criminating factors.
ing that a firm is investing in information technology, recent
studies analyze specific IT investments that affect a firm’s Poston and Grabski (2001) examine Path 2 in Figure 1; the
overall or IT strategy (Path 1 and 5 of Figure 1). Subramani and effect of ERP implementation on business process perform-
Walden (2001) investigate the stock market reaction to 251 e- ance. They compare performance before implementation to
commerce initiatives announced by firms between October one, two, and three years after implementation. In all cases, a
and December 1998. Their results suggest that e-commerce matched control group of non-ERP firms had superior per-
initiatives do indeed lead to positive excess returns for firms’ formance relative to the firms implementing ERP’s.
shareholders. This paper presents some of the first empirical
tests of the ‘dot com’ effect, which validates popular anticipa- The literature on the strategic uses of IT has given little insight
tions of significant future benefits to firms entering into e- into why some firms are able to leverage their investments in
commerce arrangements. The findings of Subramani and IT into competitive advantage while others are not. For exam-
Walden (2001) have recently been reexamined by Dehning et ple, Floyd and Wooldridge (1990) demonstrate an interaction
al. (2002). They find that although there was a ‘dot com’ effect between IT and strategy, but their study is limited to a single
in the fourth quarter of 1998, it had disappeared by the fourth industry. Kettinger et al. (1994) identify contextual factors
quarter of 2000. that discriminate firms with a sustained competitive advan-
tage from non-sustainers, but they have a small sample of pri-
Accounting performance measures marily large companies, and do not consider which IT factors
Floyd and Wooldridge (1990) jointly examine Paths 1, 3, and 5 lead to a sustained competitive advantage. Poston and Grabs-
in Figure 1, the interactive relation between strategy, IT, and ki (2001) find little benefit from the adoption of ERP systems,
financial performance. They find that product breadth is a despite the continued popularity and adoption of ERP systems
predictor of the use of product technology, and that segmen- by companies, and a positive market reaction to ERP imple-
tation is a predictor of process technology. Product technolo- mentation announcements (Hayes et al. 2001).
gy likewise predicts ROA, whereas process technology does
not. They conclude that the strategic context enhances the IT- IT management: Stock market reaction to
ROA relation, and that successful strategies might require the appointments of IT positions and executives
adoption of certain IT. In this section, we examine two studies that consider the stock
market reaction to the creation of an executive IT position
Kettinger et al. (1994) examine Path 1 and 5 in Figure 1. They within the firm and to the naming of directors to the board of
survey the popular press, academic literature, and case stud- Internet companies. These studies all examine the market
ies and find strategic deployments of IT that lead to competi- effects of the investment in IT management (Path 1 of Figure

88 - The Journal of financial transformation

Return on investments in information technology: Beyond the
productivity paradox

1) as well as the contextual effects surrounding these invest- Accounting performance measures
ments in IT management (Path 5 of Figure 1). Various studies assert that managing IT assets is more impor-
tant than the amount of money spent on IT [Strassmann
In the first study, Chatterjee, Richardson, and Zmud (2001) (1997a), Stratopoulos and Dehning (2000)]. Two studies use
argue that the strategic importance of a firm’s IT capabilities this motivation to examine the relation between IT and firm
is prompting an increasing number of companies to appoint performance without focusing on IT spending. These studies
Chief Information Officers (CIO’s) to effectively manage these attempt to provide insights into the advantage granted by the
assets. These moves reflect changes in top management successful management or use of IT by focusing on compa-
thinking and policy regarding the role of IT and firms’ nies with high organizational IT capabilities.
approaches to IT governance. They find a positive abnormal
stock market reaction to the creation of a CIO position, espe- Bharadwaj (2000) examines Path 1 and 2 in Figure 1 by com-
cially for firms competing in industries undergoing IT-driven paring “High IT Capable” companies to a matched control
transformation. group. She compares the two groups on numerous business
process performance measures and overall firm performance
The second study of investments in IT management comes measures over four years. She finds that the High IT Capable
from a recent event study of the nomination of members to firms have higher profitability ratios in all four years, lower
the Board of Directors of Internet companies. Richardson and operating expenses as a percentage of sales in all four years,
Zmud (2002) examine the differential impacts of the experi- and lower cost of goods sold as a percentage of sales in two
ences or abilities of new board members within Internet com- out of the four years. She concludes that increasing IT capa-
panies. This study finds strong support for the notion that bility increases a firm’s competitive advantage.
shareholders of Internet startups value new board members
capable of aiding the executive team in developing and/or Dehning and Stratopoulos (2002) take a similar approach to
refining the innovative strategies in the e-business economy. examine Path 1, 2, and 3 in Figure 1 by comparing a group of
In particular, they find that before the NASDAQ crash of April companies with a competitive advantage due to an IT-enabled
2000, shareholders valued board nominees that had e-com- strategy to a matched control group of companies for seven
merce experience. Following the NASDAQ crash, shareholders years on ROA, ROS, and Asset Turnover. They find that the IT
valued board nominees that had IT experience. companies have higher ROA for the entire time period cov-
ered. In addition, ROS is higher four out of the seven years,
These studies suggest that investments in IT management are and Asset Turnover is higher all seven years. To provide a con-
value relevant. Shareholders apparently realize the impor- text for interpretation, they identify 87 companies with a com-
tance of executive-level status for IT management and the petitive advantage not due to an IT-enabled strategy. This
importance of board members with e-commerce and IT expe- second group of companies had higher ROA and ROS over the
rience. It is clear that the transformation of IT investments, seven years examined, but in no year was Asset Turnover
i.e., funding directed toward acquiring hardware, software, and higher for this group of companies. They conclude that com-
skills, as well as developing capabilities and processes into petitive advantage due to IT-enabled strategies differs from
value-adding outputs require what is increasingly recognized as one due to non IT-enabled strategies.
a very complex production engine that involves an enterprise’s
custodians of IT resources (i.e., IT managers and IT profession- These studies help explain the findings of a positive reaction
als) in the support of business strategies and operations. to firm announcements of appointment of IT executives.
Effective management of IT assets can provide substantial
performance advantages over direct competitors. The mar-

Return on investments in information technology: Beyond the
productivity paradox

ket’s ability to recognize and impound this into stock price is

evidence of an efficient market with respect to IT investments.

Never before has IT played such a critical role in the opera-
tions and strategies of the firm, yet the overall impact of IT on
firm performance remains a largely unexplained puzzle. Most
researchers tend to agree that managerial IT skills can be a
source of competitive advantage and that it is imperative to
manage the risk associated with IT investments. IS
researchers have shown that IT cannot be considered a
panacea, but that IT investments, including the risks and
returns of IT projects, must be carefully considered. The
investments that are the most likely to have high returns are
investments in innovative IT, or investments in IT that allow
for the bypassing of traditional value chain participants.
Another implication of this research is that the context sur-
rounding IT investments has a dramatic effect on the effective
conversion of IT investment into firm performance.

90 - The Journal of financial transformation

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different measures of information technology. MIS Quarterly. 20(2): 121-142.


Achieving ROI from

e-business systems
in financial services
Bryan Foss
Customer Management Executive,
Global Financial Services, IBM

Paul McDaid
e-Business Infrastructure Solutions Architect,
Financial Services Sector, IBM

Colin P. Devonport
Market Manager - Integration,
IBM Software Group, IBM

Many, even most, Customer Management projects are said to
fail to complete or fail to deliver return on investment. This
article outlines an approach which has been proven to accel-
erate project implementation, business transformation and
ROI, while reducing project costs and risks of failure. Based on
extensive research and the global implementation experience,
a complete and unbroken journey from business abstract to
systems specifics will be clearly explained in this paper.

Achieving ROI from e-business systems in financial services

The Networked Financial Institution (NFI) Rapid development and deployment of new products and
business solution components services often force increases in the number of transaction sys-
The Networked Financial Institution (NFI) is a thorough investi- tems, as traditional in-house transaction systems may be rela-
gation and representation of the current and future integrated tively inflexible or cumbersome in the development and launch
financial services business. The NFI representation identifies of new products. However, to simplify process operations and to
the integrated business capabilities required to be successful in reduce costs, companies usually try to merge and reduce the
the e-business world of financial services. Figure 1 represents number of transaction systems. This is especially true where
the major business capabilities required by a leading financial more systems exist than are required, or duplicate systems exist
institution. These capabilities apply to banks, insurers, and due to previous mergers and acquisitions that have taken place.
financial markets companies whether in B2C (business to con-
sumer) or B2B (business to business) operations or both. Key Some very substantial projects have been funded to create
alliance partner (value chain) and employee management totally flexible transaction systems that can represent any
(B2E) processes are also included to complete the integrated combination of financial services product or service. However,
view. Figure 1 is a representation of the Networked Financial almost without exception these projects have failed to achieve
Institution. It is not a business or systems architecture, but it their design targets and most have been abandoned. A few
does provide a checklist of key capabilities and highlights their have achieved production but have failed to absorb more than
dependencies visually. This article will comment on the Net- a limited range of products, leaving the corporation with a
workFI structure as a backdrop for implementing e-business continuing mix of transaction systems and very many places
and CRM systems projects in Financial Services. (typically 50 to 150) where customer, relationship, and event
data is held. Some of this data is held by alliance partner sys-
Traditionally financial services companies have focused on the tems in the extended ‘value net’.
provision of transaction systems and more recently on an
increased selection of customised channels, these are shown Customised channels have developed from the traditional
in the boxes to the right and left (respectively) of Figure 1. branch and sales force structures to include mail, call center,
e-business, e-mail, WAP, PDA, and digital TV services. In this
Selection & Leverage & environment corporations need an integrated view of the cus-
Integration Alliances and Partners Management
tomer to enable them to make appropriate offers and service
the customer effectively, at the right cost. New channel pilots
Customised Knowledge Management Transaction may need to be implemented through addition to this inte-
Channels Systems
grated channel infrastructure. If successful, they can be rapid-
Customer Management
Pervasive Systems of
access Risk Management Record ly scaled up. If not, they can be retained or removed.
Profit Management
User Enhanced
recognition Processes
To satisfy customer needs integrated contributions from part-
Flexible Service Management Market ners and alliances are increasingly needed. These could be
content Consistent Quality linkages
Integration ‘sold through’ branded goods and services, or ‘white label’
Channel Value net
integration Enterprise Infrastructure linkages products with the retailer’s own branding. Wealth manage-
Security & Privacy
ment operations are an example of such an approach, where
aggregation and advice are required to complete the client
Culture New Business Models
portfolio. Many financial institutions are just now becoming
Figure 1: The networked financial institution
comfortable with the new business models and culture
Author: Boxley Llewellyn, IBM changes required to integrate such alliances into their opera-

94 - The Journal of financial transformation

Achieving ROI from e-business systems in financial services

tions. Others, such as Legal and General Insurance in the UK, A recent AM Best article1 highlighted the current pressure for
appear to be deploying a ‘first mover’ alliance strategy. North American and European Insurers to invest in e-busi-
ness projects only where internal ROI cases have been
Customer needs and expectations are met through exception- proven and accepted. This implies that the insurance indus-
al service management processes. In addition to current try (and no doubt other financial services) made many previ-
expectations of consistent quality and integrated operations, ous investments without such ROI cases. Best suggested that
corporations will be expected to meet exceptional security the main components of ROI were simply an understanding
and privacy requirements in future. As each aims to acceler- of costs, benefits and time-scales, which are of course some
ate its implementation and results from competitive achieve- of the major headings.
ments, learning from best practices internally and externally
is seen as a speedy and lower risk route to success. Assessing The standard development approach for a business case is
and understanding current capabilities and gaps can be the frequently described in articles. But, if the ROI approach to e-
basis for an enterprise-wide knowledge management program business programs is relatively simple to implement why do
that launches the company to new and pervasive levels of so many projects fail to deliver? Our research suggests that
competitiveness (both broad and deep). The successful net- this is primarily because the broad assessment and manage-
worked financial institution will use knowledge management ment of costs, benefits, time-scales, and project risks (mar-
for improved customer management, operational risk man- ketplace, business, and technical) proves much harder than
agement, and profit achievement. anticipated.

Gaining a good return on investment from Today, many more financial services companies are setting
e-business project actions ‘hurdle rates’ for ROI cases. As shareholder funds are being
There is already substantial research to suggest that the invested (not investor or policyholder funds), corporate
majority of e-business and CRM projects fail. Failure can be finance departments set ROI objectives which are linked to
defined in different ways, depending on the business and situ- target rates of return on capital employed (ROCE), market
ation. Clearly failure to achieve any result at all from an e- expectations, and other commitments. Typical ROI objective
business project is one possible outcome. However, more fre- rates can be 15, 25 or even 40% using this approach. Of
quently some positive results are achieved but these projects course the process for financial modelling of these internal
are still not considered to be successful. Failure to achieve business cases is usually well known within the executive
anticipated Return on Investment (ROI) is perhaps the most management team, and cases are often proposed in a man-
frequent outcome and biggest potential risk for any e-busi- ner that demonstrates achievement of ROI targets without
ness project or CRM program, where a program is a series of sufficient assessment of eventual costs, benefits, time-scales
interdependent CRM projects. and risks. This effect is lessened if the proposers are reward-
ed for the ownership and successful achievement of their
As business becomes more competitive, executive manage- cases over time. However, even this motivational approach is
ment become more focused. Although many priorities are jug- tough to implement as other factors can and do affect
gled simultaneously, there is evidence that financial services achievement. These include management and organizational
companies are now focused on gaining short- and medium- changes, as well as dependencies and executive decisions
term ROI through two core objectives: outside of the project teams control.

■ Becoming customer centric Our research highlights that stages 2 through 5 of the criti-
■ Becoming more efficient cal path for a business case are the most common areas for

1 Insurers Want to See Payoff From Technology Investments - By Lorraine Gorski,

associate editor, Best's Review: gorskil@ambest.com, www.ambest.com/bestline 95
Achieving ROI from e-business systems in financial services

business case failure, including: mate are probably those that are extrapolations of currently
successful activities. For example, where a limited pilot project
■ Rigorous identification of relevant costs and benefits. has demonstrated successful retention or cross selling and
■ Prior assessment of customer experience and likely can now be implemented in a more scalable or broad manner.
responses. However, many e-business projects are steps into uncharted
■ Selection of appropriate IT architecture. territory most companies. In this case extrapolation of busi-
■ All aspects of readiness, program, and change manage- ness benefit is not an option. When mobile WAP financial serv-
ment. ices were first considered, it proved very difficult to gain suf-
■ All aspects of risk assessment and mitigation. ficient confidence of consumer reactions, likely behaviors, and
■ Identification of appropriate dependencies and related business values using market research techniques. For new
efforts. business areas pilot or ‘learning’ projects may need to be
funded and implemented to increase business understanding
Project costs can be seriously underestimated, as it is very and financial confidence. Not all such projects will prove suc-
common that the full extent of the issues to be tackled is not cessful. Consequently, these pilot projects need to be imple-
well known early in the project. One of the most common cur- mented at low cost (but not necessarily reduced function) to
rent reasons for project failure is the difficulties caused by limit financial write-off if they prove unsuccessful. In the event
poor quality and dispersed customer data. Using traditional of enormous success the pilot needs to be ready to expand
project approaches, the extent of these problems is normally very rapidly to gain extrapolation of benefits.
encountered during the mid- or late-project stages, rather
than in the estimation process. Automated techniques are Where a strong e-business infrastructure is already in place,
now available to assess the structure and quality of data additional pilots can be more easily put in place, at relatively
sources. These sources are primarily ‘legacy’ systems (where known costs and risks. Immediate integration will tend to rein-
a legacy system is defined as one that has achieved produc- force the achievement of business benefits (for example by
tion status!). But, they can also include database deliverables better directing, supporting, and measuring the new channel
from previous project stages, for example a marketing data- or product) and enable lowest cost entry with rapid exploita-
base, or operational customer database. tion through scalability-on-demand.

There are many other areas where project costs are under- The achievement of anticipated benefits usually depends on
estimated. It is critically important that a realistic assessment many factors beyond the immediate control of the project
of costs is made at an early stage to avoid projects exceeding team. This is why it is so important to anticipate risks and
time and other resource limitations later on. It is not unknown dependencies, building a plan to address them where possible
for project teams to return many times to request the alloca- or appropriate, or to mitigate and/or keep watch on other
tion of additional resources to address ‘problems not antici- risks that are identified. As any project or program has bound-
pated’, until eventually the ROI case is completely under- aries, some executive and business management areas may
mined, and little or no confidence remains that the project can be outside the scope of the project, yet a dependency exists
ever provide any useful deliverable at a reasonable cost. At which could limit or nullify the achievement of expected ben-
this point the project and prior investments may be written efits. Despite strong work to anticipate customer response, we
off. In some cases this is done multiple times before a new cannot prescribe or fully predict the results of our e-business
approach is taken. actions on the market. Many benefit-related items remain out-
side the project team’s control, but these can often be antici-
Financial benefits are hard to estimate. The easiest to esti- pated and considered to help assure the achievement of ROI.

96 - The Journal of financial transformation

Achieving ROI from e-business systems in financial services

E-business integration drives ROI nies. This is a very full assessment that makes an excellent
Elsewhere in our writings we have demonstrated that there is starting point (or regular review point) for any major cus-
a strong relationship between customer management capabil- tomer management program.
ities and business results. Joined up capabilities imply a rea- ■ Customer Value Management — An assessment of the
sonable level of achievement across all the eight customer needs of the customers of a given financial services com-
management capabilities defined in the QCi model, which in pany, the value these customers would attribute to capa-
turn implies coordination and integration between them as bility and offer improvements and an understanding of the
there are mutual dependencies built into a successful busi- actions required to put these in place. This assessment
ness implementation of the model. Of course business sys- should be deployed if the Customer Management Assess-
tems and processes can hardly be successfully joined up if the ment identifies lack of understanding of customer needs
underlying systems are not. Breakages in the integration of and the development of appropriate proposition and cus-
data (which ensure that the appropriate data is in the right tomer management activities.
place and of sufficient quality to be used) will undoubtedly ■ Segment and target the market based on both the current
cause breakages in business processes. and future value of a customer or segment. This targets
customers for cost- or price-appropriate personalized treat-
E-business implementations are very dependent upon inte- ment, as well as channel-optimization.
gration to achieve ROI. One example is the required integra- ■ Assessment of the achievement of enhanced ROI during
tion of customer offers with prior analysis of data to deter- or following the call center, sales force automation, or
mine the most appropriate and successful promotions to be multi-channel implementation of the e-business channel
made. Another example is the integrated service require- solution.
ments of the customer, supporting the e-business channels ■ Xchange Customer Value Management (‘Real-time’ rules
with help desks, telephone services, mailings, fulfilment, and engine deployment) looks specifically at the ROI case for
complaints management. Various assessments of potential deployment of a real-time rules engine that provides data-
ROI and the business and IT actions are required to achieve it based personalization of e-business channel offers, which
exist. A subset are listed below. Each combines a method and may also be made to customers in a consistent manner
tool to help assess current status, potential ROI from improve- across complementary channels (e.g. call center, branch
ment and specifically identifies where benefits are derived etc).
from integration efforts. ■ Enterprise Customer Analytics (ECA) services method
combines all of the above (and others, as required in any
■ Becoming Customer Centric (BCC) – A self-assessment custom situation) from strategy through to execution, and
of the status of customer centric change and achieve- from analytics to operational deployment.
ment in a financial services organization. This is an
excellent place to start when educating the executive Of course there are many less tangible or intangible benefits
management team and involving them in an active dis- that can eventually form the most significant part of the final
cussion about customer centricity efforts and results in business case. These are much more likely to be included,
their organization. acted upon, and achieved if the business case is owned and
■ Customer Management Assessment (CMAT) – An assess- implemented by a profit center business unit (e.g. customer,
ment across eight key areas of customer management channel or alliance management) rather than an internal or
capability, looking at intention, reality, and effect. As evi- cost center such as IT.
dence is checked and the results should be carefully cali-
brated and benchmarked against other leading compa-

Achieving ROI from e-business systems in financial services

Accelerating ROI achievement in e-business proven industry data models. While many CRM and e-business
projects applications (and utilities) are cross-industry, the business
There are tried and tested techniques for accelerating the problems they need to address are industry specific. Consider
achievement of ROI from e-business projects or staged e-busi- for a minute a situation where we make financial services
ness programs. This section focuses on some of the e-busi- offers to customers based entirely on their likelihood to
ness infrastructure fast-start capabilities that can assist. respond and buy, rather also considering their value potential
or risk to the profitability of our business. Credit or claims risk
■ Rapid assessment of source data can easily outweigh other benefits or losses if not considered
Research and experience suggests that almost all existing in the acquisition, retention, and development of selected cus-
source data (for example in legacy and existing e-business tomers. This additional knowledge tends to be based on indus-
systems) is inadequate for CRM purposes and for additional e- try-specific data fields such a fraud or risk indicators, com-
business applications. In a US based project a three-year-old bined with knowledge of the activity-based costs associated
system was shown to have poorly structured and documented with estimating customer value. Over time these data fields
data. Existing processes had allowed data of insufficient qual- have been defined and built into readily available industry
ity and accuracy to be captured and stored. In a European models, usually in the operational and analytical common
project with literally hundreds of existing sources of customer data-stores. Most cross-industry applications can be made to
data, the company decided that the only reliable data source allow ready access to these more effective data sources with
was a recent e-business application that encouraged self- only limited integration effort.
maintenance of the data by the customer.
Pre-designed data models are available to validate existing
Assessing the quality of these data sources is traditionally a data models. In staged projects where ROI is expected within
laborious and expensive task taking many months. Rather months, there is no time to redevelop existing models – with-
than delay project start through assessing the situation as out even considering the additional costs and risks involved in
input to the sizing and prioritization of project actions, com- this redevelopment. Originally industry data models were
panies normally allowed inherent data issues to be encoun- deployed to redevelop core systems, although this approach
tered during the project, causing time and cost overrun, has generally been overtaken by a move to packaged applica-
rework and eventually many abandoned projects or ROI cases. tion purchases as rapid deployment of multiple new product
systems has been seen as the way to launch new products and
Automated tools are now available to achieve the prior new lines of business rapidly. More recently industry data
assessment of data structure and quality, even recreating models are being deployed to accelerate e-business and CRM
missing metadata documentation if required. With accurate application component deployment, for example where a
and appropriate data available in the right place at the right campaign management tool requires a data-mart to be devel-
time the business process is more effectively supported, oped as its data source, or where real-time customer man-
accelerating and confirming ROI achievement. Over time a agement applications require the existence of a single opera-
sequence of projects can use the same tools and techniques tional view of the customer (operational data store, or ODS) to
to add more integrated components into a consistent enter- integrate the management of multiple customer channels.
prise integration approach, without being overwhelmed by
ever increasing complexity. Perhaps the most recent and most forward-thinking deploy-
ments of industry data models are to support the integration
■ Pre-existing financial services data models of many existing core systems and new CRM systems to pro-
Further project acceleration and ROI can be achieved using vide a consistent enterprise-wide approach as the basis of a

98 - The Journal of financial transformation 2 See Bethany McLean, Mutual Funds, May 2000 pp 53-56 for more on this.
Achieving ROI from e-business systems in financial services

customer centric business – as outlined earlier. The three guages etc). As a result, an externally purchased data model
major industry data-model based components of such an usually provides a more mature, future proof, and commonly
approach are: acceptable base for all countries or businesses to migrate to.

■ Operational single view of the customer (ODS), enabling Development costs for operational data store, for data ware-
consistent and integrated management of the customer housing, and for integration of existing and new systems, are
relationship across multiple touch points. almost always underestimated. In practice not only are these
■ Analytical single view of the customer (Enterprise data estimates usually unrealistic, but also many such projects (as
warehouse or EDW), enabling consolidated planning of they are very large developments) fail to deliver the expected
customer development activities. solution or ROI. As data models become more widely used and
■ Standards for message or data interchange formats, prevalent in the marketplace, they are tending to fall in price
enabling the linkage of any or all past, present and future and be made more widely available to both users and suppli-
systems as required. ers as a potential development or integration standard. These
models can contribute to the control of development costs
As integration proceeds, companies start to realize the busi- and acceleration of project implementation.
ness value of systems integration at higher functional levels.
Integration of disparate data is only the start. Soon it becomes So, substantial project and ROI acceleration can be gained
apparent that the business processes that span systems pro- from the use of industry data models, both at the component
vide an end-to-end workflow approach that supports the oper- implementation stage and as disparate systems are integrat-
ational business model more directly. The reusable process ed to leverage much higher ROI from an enterprise approach.
steps (or functions) are already defined in these same indus-
try models and are being consolidated with various integra- ■ Pre-assembly can accelerate custom CRM projects –
tion tools (batch, real-time, and asynchronous) to support the data models
achievement of maturity in systems integration in the time- Enough projects have been run in financial services to demon-
scales required. strate that the Network FI model and underlying technical
architecture can be used as a common basis for most, if not
As companies merge or acquire others, they often look for the all, financial services companies. The challenge is to acceler-
ability to link the increased number of current systems and ate the development of CRM capabilities through acceleration
share the combined set of customer data for analysis and of each project stage. However, there are many potential
operational use as required. This is exactly the stage where starting points and prioritized routes depending on the com-
they realize the need for the approaches and assets listed pany and customer set involved. Using a custom mix of exist-
above, however it is almost inevitable that they also consider: ing, current, and future systems has been proven to be practi-
cal. However, this is best achieved around common industry
■ The global applicability of locally developed versions of data stores (operational and analytical) and a through deploy-
these models. ment of re-usable approach to integration (combining batch,
■ The relative cost and value of developing them in-house. asynchronous, and real-time connectivity). Re-use of proven
methods can help with any combination of CRM systems proj-
Most locally developed models tend to be applicable primarily ects in any sequence. However, where combinations of assets
to the country business in which they were developed, often can be predicted as likely, pre-integration by suppliers is prac-
with very limited ability to be expanded or applied elsewhere tical. This pre-integration can reduce time, cost, and risk even
(e.g. to other countries, to manage multi-currencies, multi-lan- further. It is important for most financial services companies

Achieving ROI from e-business systems in financial services

that they achieve this without becoming committed to propri- achieved using a message switching technology. Examples of
etary asset combinations, which reduce future options. when to use this approach include:

■ Pre-assembly can accelerate custom CRM projects – ■ When (like real-time) a process waits on a rapid response,
Integration for example when a customer service representative is
In most CRM programs, very different methods, tools, and entering an address change.
techniques are used to integrate disparate CRM and legacy ■ When a change is propagated to multiple systems, for
systems, so as to link the channels, administration, and ana- example the customers address change causes multiple
lytics required to complete closed-loop business processing. systems to be updated. This can be achieved AFTER the
As a result, the full benefits of integration remain beyond the customer is informed that their request has been captured
reach of many companies. Of course, integration is not and acknowledged.
achieved overnight. But, if a company does not work to a con- ■ When a process requires multiple transactions to be com-
sistent view of how it will be achieved over time, using com- pleted, as a workflow process, over a short or extended
mon approaches at each program stage, it will fail. time (for example a complete customer application for an
additional product).
To get the ‘right data to the right place at the right time’ to
support the defined CRM activities, data needs to be moved ■ Real-time
and restructured in one of three ways: This is used where the data needs to be moved immediately,
and the process must wait on confirmation that the data is
■ Batch successfully moved (for example a real-time ordering or other
This is used where the data can be moved overnight, usually transaction process, with immediate confirmation). E-business
in large quantities, and still is sufficiently timely for the busi- implementation would normally be achieved using a Java tool.
ness activity. Processes that use this approach may be week- Examples of use include:
ly or monthly, for example revenue results, or overnight
updates. Batch implementation is usually achieved using vari- ■ ‘Straight through processing’ or STP, of trading transac-
ous ETL (extract, transform, load) tools. The choice of batch tions requiring confirmation of settlement price and
movement of data is usually for one of these reasons: authority.
■ Teller transactions with immediate effect on working
■ The data is not required by the business user/process to account balances.
be updated in a more immediate manner (for example
quarterly or annual regulatory reporting). These integration options could take place within a company’s
■ The data sources are not updated more frequently than own systems, or to provide connections to the systems of
this (for example data updates are only received from external companies (e.g. in business to business applications,
some intermediaries on a daily, weekly, or monthly basis). for wider access to customer through intermediaries, or for a
■ The costs of complexity of other types of data movement wider product and services portfolio through additional sup-
outweigh (so far) the value of more timely data provision. plier relationships). In practice all three types of integration
need to be combined in planning and implementation, where-
■ Asynchronous as they have normally been considered and implemented very
This is used where the data needs to be moved in a timely separately in different CRM-related projects. For example a
manner, usually in small quantities, the timeliness may be sub- Siebel Systems or PeopleSoft implementation could require
second, or some longer time. Implementation is normally the batch build of a core database, with later update through

100 - The Journal of financial transformation

Achieving ROI from e-business systems in financial services

a combination of batch, asynchronous, and real-time updates customer access to multiple services, the same portal tech-
for different data types with different requirements for timeli- nologies are now exploited for any e-business user, including:
ness of update. The same is true for new analytical or admin-
istrative systems components within the CRM program. ■ Employees providing supported service to customers, for
example call center sales and service agents, advisers, key
As a result, a common approach to planning integration needs account managers, and others.
to be taken, so that: ■ Employees with non-customer facing roles, including sup-
ply chain managers (aggregated product and service sup-
■ Different build and update techniques can be deployed pliers in financial services), administrative support staff,
against the same systems and databases. help desks etc.
■ A variety of update techniques can be implemented coop- ■ Customers accessing direct self-service systems, offering
eratively against the same systems and databases. a combined and full support service.
■ Update frequency and methods can be more easily ■ Business partners and intermediaries, offering services to
changed at a later date when business requirements their customers that include your services.
change or cost/benefit equations change (for example, ■ Business partners and intermediaries using the company’s
due to the reducing costs of technology over time). sales and support systems.
■ Over time all the disparate systems (legacy, CRM, analyti-
cal, external etc) can be integrated without being thwart- A typical portal application that demonstrates an ‘on the
ed by horrendous complexity. screen’ integration example could be that of a financial advis-
er to high net worth individuals. The adviser needs to view the
A common approach to industry data mapping and metadata customers aggregated investment position, carry out a needs
management has been developed to be deployed across all of analysis and risk assessment, search for, price, propose and
batch, asynchronous, and real-time integration, supporting contract appropriate financial offers with automated fee or
the required mix and match and migration between these commission management. To achieve this in real-time during
techniques. While batch integration requires direct mapping a customer conversation it is important to link seamlessly
from source to target data models, asynchronous and/or real- between these steps, often requiring data and function
time connectivity require mapping from source to target via (process) integration. It is also important for the adviser (and
an interim message format, each of these can be achieved perhaps the customer) to be able to view a number of these
using common industry models and rapid 'drag and drop' data different work items, or ‘portlets’, simultaneously and to move
mapping techniques. data between them to avoid making notes and re-keying data.

In summary, pre-integration of best practice and customizable Within the user screen or portal, each task has its own part of
components is practical when a common method and archi- the screen and is a separate portlet, with each portlet being
tecture are employed. The next part of this article outlines the supported by a separate application. As these applications are
proven e-business infrastructure that provides a checklist for disparate (it is likely that a number of them are applications
any financial services CRM integration program. accessed in external company systems) They may have limit-
ed data or function integration. A utility capability can assist
Pulling it all together on the screen – The inte- in the accelerated deployment of a portal that combines these
grated portal many disparate application sources.
The portal provides integration ‘on the screen’ to users.
Although the portal is a term most commonly associated with

Achieving ROI from e-business systems in financial services

Collaboration Business operations Analysis

Data Transformation and Integration

Assisted Customer Core Business Processing Data Warehouse

Desktop Interaction
Call Center Banking • Enterprise
Producer Processing • Transaction Svcs. • Extraprise
(Agent) Marketing • Account Mgt.
Branch Telephony • Prospecting Insurance
FAX • Campaign Execution • Quotation
Mail • Campaign Mgt. • Underwriting
Sales • Police Admin. Data Marts
Internet • Claim Processing
Self Service • Cross Sell & Up Sell • Activity Analysis
• Needs Analysis Securities • Segmentation
Internet • Illustration • Trade Execution • Maket Mgt.
E-mail Wireless Service • Clearing & Settlement • Profitability
Kiosk • Customer Care Cross Industry • Campaign devt
WAP • Case Mgt. • Credit & Cash Mgt. • Campaign Assessment
ATM • Bus. Txn. enablement • Statement & Billing
PDA E-mail Advice & Guidance • Accounting
• Aggregation
Partner Business
B2B Processing Data Analysis
B2B Portal
Partners & Reporting
Portals • Data Mining
Channel • Mgt. Reporting
Enablement Personalization Enterprise Client File & ODS • Predictive Modeling

Enterprise Applications Integration

Figure 2: E-Business infrastructure

Author: Paul Mc Daid, IBM

Eventually integration is required at multiple levels: tion systems too, to act as the ‘brain’ to the CRM systems
‘hands’. Over time, research and experience have shown that
■ Data level — where consistency of interchange data is closed loop integration of complete business processes (e.g.
required. retention) is key to achieving return on investment. Commen-
■ Function level — where reusable functions build towards tators have updated their boundaries and terminology to
unbroken processes. reflect this. We now use the terminology that has become
■ Portal or on-the-screen integration — where a single and most accepted and explanatory although it has not changed
appropriate user view is provided. our view and experience of the boundaries of CRM integra-
EBI – e-business Infrastructure
Only a few years ago most commentators and analysts con- Figure 2 introduces an updated and more detailed represen-
sidered the scope of CRM systems to address customer con- tation of this architecture and Figure 3 adds a typical business
tact channels only (whether assisted, self service, or excep- process and supporting systems scenario.
tionally B2B). In our writings we were already proposing that
the closed loop needed to included analytics and administra- Analysis (to the right of Figure 3), sometimes called analytics

102 - The Journal of financial transformation

Achieving ROI from e-business systems in financial services

Collaboration Business operations Analysis

Example of the 'breaks' in closed loop marketing

Assisted Customer 'Legacy'

Core Business Processing Data Warehouse
Desktop Siebel
Interaction systems
Call Center Banking • Enterprise
Producer Processing • Transaction Svcs. • Extraprise
(Agent) Marketing • Account Mgt.
Branch Telephony IBM Warehouse
• Prospecting Insurance
FAX • Campaign Execution • Quotation
Mail • Campaign Mgt. • Underwriting
Sales • Police Admin. Data Marts
Internet MQS FSE • Claim Processing
Self Service • Cross Sell & Up Sell • Activity Analysis
• Needs Analysis Securities • Segmentation
Internet • Illustration • Trade Execution • Maket Mgt.
E-mail Wireless Service • Clearing & Settlement • Profitability
Kiosk • Customer Care Cross Industry • Campaign devt
WAP • Case Mgt. • Credit & Cash Mgt. • Campaign Assessment
ATM Retention & development
• Bus. Txn. enablement • Statement & Billing
PDA E-mail Kana • Accounting
Advice & Guidance
• Aggregation
Partner Business
B2B xChangeApps Processing Data Analysis
B2B Portal
Partners & Reporting
Resellers Intelligent
Portals • Data Mining
Channel • Mgt. Miner
Enablement Personalization Enterprise Client FileCIIS
& ODS • Predictive Modeling

Enterprise Applications Integration

Figure 3: Example implementation

Author: Paul Mc Daid, IBM

or Business Intelligence (BI), is probably the place where the Collaborative channels (to the left of Figure 3) suggest more
process should start. For example, in a retention exercise we than a multi-channel operation. Collaboration implies inte-
would need to aggregate holdings to determine which cus- grated channels working cooperatively to acquire, retain, and
tomers were most valuable, which were most likely to leave, develop customer relationships in the most productive and
how best to recognize these customers and predict lapsing, cost-effective manner. Collaborative channels may be self-
how best to address their needs to retain them while remain- service, assisted, or B2B, although these channels often share
ing profitable. This knowledge (the brain) could then be the same technologies beneath (e.g. e-business, telephone,
deployed for benefit through the most appropriate customer wireless etc). Branch systems renewal is a major focus of
touch points (the hands). The analysis area typically contains banks and insurers, as basic transactions are moved to call
a common data warehouse (preferably with an industry data center and the web, allowing the new branch to focus skilled
model), data extracts and/or views (data-marts) and applica- resources on productive advice for consumers.
tions (data mining, OLAP etc) to analyze and present or pre-
pare data (reports, interchange tables etc) for subsequent Business operations imply the core systems which will
stages of the closed loop. account for financial services transactional business, includ-
ing product structures, pricing tables, transaction logs etc.

Achieving ROI from e-business systems in financial services

These systems are the core of business operations, from ple, using many of the full-scale applications provided as
wherever accessed. They are often referred to as ‘legacy sys- examples above. This example has been implemented as the
tems’ as if these are the systems that we are stuck with. There basis for demonstrations and financial services proof-of-con-
is an increasing recognition that the opposite is true, that cept projects.
these systems are valuable assets, often providing the rugged,
reliable, and scaleable characteristics of the business. In fact, While these diagrams can look too idealized, or seem unreal-
a recently offered definition of a legacy system was ‘any sys- istic or unachievable for your organization, they can provide:
tem that had achieved production'; highlighting the fact that
many new or replacement systems still do not make the grade. ■ A checklist to assess what components are already in
Alltel owns a core banking systems example. An increasing place in your business.
priority in this area is new compensation systems to refocus ■ A checklist for projects underway, including integration
employee effort. dependencies.
■ An opportunity to highlight where effort would be better
To develop a true collaborative channel approach, which sup- rewarded if focused on integration of existing components
ports consistent customer knowledge and personalization rather than the additional or more components.
across all touch points (or varies it deliberately rather than by ■ A map for the long-term, which can include past, current,
omission – for example to value price differently when assist- and future systems.
ed or self service) certain components need to be common ■ A common language for a cross-enterprise CRM program.
across all touch points. These components are the Enterprise ■ A checklist and map for further mergers and acquisitions.
client file (or ODS), any real-time personalization engine, and ■ A checklist for supplier decisions, and/or standard compo-
the common control of customer interaction processing that nents to be shared across an enterprise.
assures consistent customer management as an enterprise. ■ A mature and proven approach to delivering ROI from an
Unfortunately most channel-related applications are devel- otherwise disparate application set.
oped with one or more of these capabilities within the chan-
nel, where it is impractical in a large and complex financial Critical success factors and conclusions
services organization to expect that one application or chan- Research and experience suggest that return on investment is
nel technology will meet all current and future needs. Sharing difficult, limited, and even impractical for most stand-alone
these capabilities across channels, and deploying the common CRM projects. Integrated and closed-loop business processes
integration methods already outlined in this article, provide an including the ‘brain and hands’ are required to obtain and
enterprise-wide solution that can be justified and developed in leverage ROI. Integrated business processes in complex finan-
stages, but also allows achievement of the collaborative goal. cial services organizations require integrated systems to
deliver the most appropriate and supporting data at the ‘right
Behind and below Figure 3 lies the consistent batch, asyn- place, right time’. If the systems linkages are broken, then the
chronous, and real-time integration required to gradually business processes will be broken too.
complete each example of closed loop processing, to develop
aggregated views of customer relationships, and to be able to As the financial services customer is encouraged to use more
deploy this knowledge most effectively across integrated self-service systems the inadequacies of processes, systems,
channels and transact using high performance, reliable and and data will become more apparent, thus limiting the organi-
secure systems. zation's development. Poor productivity and high costs result
from the same issues in a customer-assisted environment.
Figure 3 introduces a real closed-loop implementation exam- B2B relationships and value will suffer when the same issues

104 - The Journal of financial transformation

Achieving ROI from e-business systems in financial services

become apparent to alliance partners who act as channels,

intermediaries, or suppliers to your business.

Many, if not most, CRM projects fail to deliver anticipated ROI.

A practical and experienced focus needs to be applied to busi-
ness cases, projects and programs. Industry data models are
required for best practice CRM, for the development of com-
mon data stores (operational and analytical), and for the def-
inition of data interchange formats between disparate sys-
tems and businesses (e.g. via XML).

Combining and customizing best-of-breed applications with

existing systems, while keeping options open for future sys-
tems selection does not mean a company cannot take advan-
tage of pre-integration and re-use benefits. Methods, tools,
skills, and reusable application combinations are available to
help. Sufficient research, experience and supplier develop-
ments are available to avoid most issues before faced,
although experienced skills are in short supply.

Finally, IT is critically important for large financial services

companies, but at the same time is only an enabler. Many
other management, cultural, people, learning and sharing of
knowledge, program management, and other aspects of CRM
programs must also be addressed to achieve success. Make
some good mutual support contacts, as you will need them.

Guidelines for manuscript submissions
Guidelines for Authors Manuscript Guidelines
In order to aid our readership, we have established some guidelines to All manuscript submissions must be in English
ensure that published papers meet the highest standards of thought lead-
ership and practicality. The articles should, therefore, meet the following Manuscripts should not be longer than 5000 words each. The maximum
criteria: number of A4 pages allowed is 10, including all footnotes, references,
charts and tables.
1. Does this article make a significant contribution to this field of
research? All manuscripts should be submitted e-mailed directly to the
2. Can the ideas presented in the article be applied to current business editor@capco.com in the PC version of Microsoft Word. They should all
models? If not, is there a road map on how to get there. use Times New Roman font, and font size 10.
3. Can your assertions be supported by empirical data?
4. Is my article purely abstract? If so, does it picture a world that can Where tables or graphs are used in the manuscript, the respective data
exist in the future? should also be provided within a Microsoft excel spreadsheet format.
5. Can your propositions be backed by a source of authority, preferably
yours? The first page must provide the full name (s), title (s), organizational affili-
6. Would senior executives find this paper interesting? ation of the author (s), and contact details of the author (s). Contact
details should include address, phone number, fax number, and e-mail
Subjects of Interest
All articles must be relevant and interesting to senior executives of the Footnotes should be double-spaced and be kept to a minimum. They
leading financial services organizations. They should assist in strategy should be numbered consecutively throughout the text with superscript
formulations. The topics that are of interest to our readership include: Arabic numerals.

• Impact of e-finance on Financial Markets & Institutions For monographs

• Marketing & Branding Jensen, M., Corporate Control and the Politics of Finance. Journal of
• Organizational Behavior & Structure Applied Corporate Finance (1991), pp. 13-33.
• Competitive landscape
• Operational & Strategic issues For books
• Capital Acquisition & Allocation Copeland, T., T. Koller, and J. Murrin. Valuation: Measuring and Managing
• Structural Readjustment the Value of Companies. John Wiley & Sons, New York, New York (1994).
• Innovation & New sources of liquidity
• Leadership For contributions to collective works
• Financial Regulations Ritter, J. R., 1997, Initial Public Offerings, in Logue, D. and J. Seward, eds.,
• Financial Technology Warren Gorham & Lamont Handbook of Modern Finance, South-Western
College Publishing, Ohio.
Manuscript submissions should be sent to
Shahin Shojai, Ph.D. For periodicals
The Editor Griffiths, W., Judge, G., 1992, ‘Testing and estimating location vectors
Editor@capco.com when the error covariance matrix is unknown’, Journal of Econometrics
54, 121-138.
Clements House For unpublished material
14-18 Gresham Street Gillan, S., and L. Starks. Relationship Investing and Shareholder Activism
London EC2V 7JE by Institutional Investors. Working Paper, University of Texas (1995).
Tel: +44-20-7367 13 21
Fax: +44-20-7367 1001

Request for Papers — Deadline May 31th, 2002
The world of finance has undergone tremendous change in recent years.
Physical barriers have come down and organizations are finding it harder
to maintain competitive advantage within today’s truly global market
place. This paradigm shift has forced managers to identify new ways to
manage their operations and finances. The managers of tomorrow will,
therefore, need completely different skill sets to succeed.

It is in response to this growing need that Capco is pleased to announce

the launch of the ‘journal of financial transformation.’ A journal dedicated
to the advancement of leading thinking in the field of applied finance.

The journal, which provides a unique linkage between scholarly

research and business experience, aims to be the main source of
thought leadership in this discipline for senior executives, management
consultants, academics, researchers, and students. This objective can
only be achieved through relentless pursuit of scholarly integrity and
advancement. It is for this reason that we have invited some of the
world’s most renowned experts from academia and business to join our
editorial board. It is their responsibility to ensure that we succeed in
establishing a truly independent forum for leading thinking in this new

You can also contribute to the advancement of this field by submitting

your thought leadership to the journal.

We hope that you will join us on our journey of discovery and help shape
the future of finance.

Shahin Shojai

For more info, see page 106

© 2002 The Capital Markets Company. VU: Shahin Shojai, Groenenborgerlaan 16,
B-2610 Antwerp
All rights reserved. All product names, company names and registered trademarks in
this document remain the property of their respective owners.

Design, production, and coordination: Cypres — Van Gorp & Verboven, Hilde Princen,
and Pieter Vereertbrugghen
Printing: www.stockmans.be
© 2002 The Capital Markets Company, N.V.
All rights reserved. This journal may not be duplicated in any way without the express
written consent of the publisher except in the form of brief excerpts or quotations for
review purposes. Making copies of this journal or any portion there of for any purpose
other than your own is a violation of copyright law.
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At Deutsche Bank, we’ve built our reputation

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