12/2002/#6

journal
the journal of financial transformation

Technology
Financial
Banking
Investments

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.

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Editor
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
 TABLE OF CONTENTS
FINANCIAL
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.

Sincerely,

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

operate.

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.

Sincerely,

Shahin Shojai

Editor
 Financial

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
infrastructure
As the Linux operating system continues to gain ground in the
enterprise, more financial services companies are incorporat-
ing it as an alternative to UNIX and Windows. Now a rapidly
expanding business platform, Linux is expected to grow from
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
sound exciting, but adoption of Linux is accompanied by risks
that financial companies need to manage.
Few would argue that Linux today constitutes the ideal oper-
ating environment for the enterprise. One of its strengths —
the open source development community — is also potentially
a weakness in enterprise environments. Aberdeen Group
points out that the lack of software management tools, and
the challenge of managing hundreds of shared components
and libraries in an open source environment, is only now being
addressed in ways that will help Linux become more widely
adopted (Bill Claybrook, Aberdeen Group, March 2002).
Just what does Linux have that makes it so attractive to the
financial industries? Well, here are just a few of its advan-
tages:
■ Lower IT cost of ownership. Linux runs on industry-stan-
dard Intel architectures, eliminating reliance on any single
hardware platform and providing increased economies of
scale.
■ Smaller IT footprint. Servers and processor arrays are
smaller, thus shrinking the IT footprint and enabling more
systems to occupy the same physical space.
■ Stability. Linux is built on a single, stable modular kernel
providing exceptional reliability and flexibility for cus-
tomization.
■ World’s largest development environment. Linux boasts
a huge, worldwide development community, which is driv-
ing independent software vendors to shift to Linux with
increasing momentum.
8 - The Journal of financial transformation
Barriers to adoption are coming down
Given all the benefits of Linux, particularly in these times of
budget reductions in financial companies worldwide, its adop-
tion rates are certain to increase. Former barriers — such as
concerns about security, high availability, manageability, and
support — are now gradually being eliminated.
Early Linux adopters among financial companies focused pri-
marily on web appliances (firewall, caching, load-balancing,
etc.), file and print applications, web serving, compute clusters
and farms, and low-end solutions. Today, Linux use is gradual-
ly expanding to other areas of the enterprise, driven by new
applications and tools as they become available. Recent devel-
opments indicate that momentum toward Linux should accel-
erate. Some examples involving our partners, customers, and
technologies support this expectation.
■ Reuters is currently porting its Market Data System
(RMDS) to Linux, in response to growing interest in and
deployment of Linux in financial industries among leading
firms including Morgan Stanley.
■ One of the world’s largest financial institutions, Brazil’s
HSBC, is currently using Linux to automate bank branch
operations, and Bolivia’s Futuro de Bolivia AFP, which
administers retirement pension funds for half the working
population of Bolivia, chose Linux for faster, more scalable
Oracle performance.
■ The first Linux TPC-C benchmark results have been
released, based on Oracle 9i Real Application Clusters on
the Red Hat Linux Advanced Server operating system on
HP servers. This is the first industry-standard platform to
offer enterprise-class performance for a clustered Oracle
database in a Linux environment.
Industry-wide, Aberdeen identifies new suppliers of Linux
software management and places them in two groups: emerg-
ing Linux companies and heterogeneous computing environ-
ment network and systems management solution providers.
The emerging companies include Aduva, BladeLogic, The SCO
Group (formerly Caldera), Red Hat, RLX, Sun Cobalt, Turbolin-
ux and Ximian — all of which provide Linux software manage-
ment solutions.
In the second group, Aberdeen includes larger Linux solution
companies including BMC, Computer Associates (CA), HP and
Tivoli, all of whom offer Linux management solutions
designed for compatibility with enterprise environments.
Many of the larger companies have the ability to incorporate
specialized tools from the emerging group as required for a
specific customer solution.
Other recent Linux news also supports the view that Linux use
is growing. Red Hat is currently at work on a PC version of its
operating system designed specifically for business users,
hoping to duplicate the company’s success in Linux on the
server side. In the meantime, four other Linux players have
teamed up to produce UnitedLinux, a common Linux version
about to be released for its first public distribution. These ven-
dors are SuSe, the SCO Group, Connectiva and TurboLinux.
Though their combined market share is currently only half
that of Red Hat, they have a strong presence in Europe, Latin
America, and Asia.
Linux end-to-end
Key to the adoption of enterprise Linux solutions is working
with technology partners who understand the complete IT
investment lifecycle. Most Linux business solutions should
address requirements across applications, deployment, man-
agement, high availability, security, database, distribution, and
platform configurations. Activities and services involved are
likely to include porting, migrating, architecting, project man-
agement, consulting, deployment, training, and support. All of
these factors play in a complete end-to-end solution.
For financial companies, the best Linux technology partners
will offer capabilities that make Linux work for the enterprise.
These include a track record with enterprise Linux; expertise
in the definition and delivery of enterprise Linux business
solutions; ability to provide Linux on a variety of platforms
(server, desktop, storage); security for the Linux operating sys-
tem; high availability server, storage and network implemen-
tations; hardware management tools; multi-O/S management
tools; integrated network management tools; application
source code and binary compatibility; a portfolio of services
for migration, architecting, project management, deployment,
training and support; partnerships with leading Linux vendors;
and participation in Linux standards organizations
The fact that technology partners exist today who can actual-
ly meet these criteria is an indication of just how far Linux has
come. Not long ago, Linux was a technology on the fringe,
implemented only by those on the bleeding edge of risk tak-
ing. Today, Linux has moved well into the early adopter stage
of the technology adoption lifecycle, and indications are that
it will successfully cross the chasm to mainstream adoption in
the next several years.
Look for Linux technology partners who can address business
needs and how these needs intersect a financial company’s
specific business drivers. A partner should be able to work
hand-in-hand with the financial company’s IT organization to
address all aspects of solution definition until the right com-
bination of applications, middleware, hardware, services, train-
ing, and support are identified and assembled in support of a
successful launch. This approach results in an end-to-end
solution that can speed time to solution identification and
implementation. The right Linux expertise can save a financial
company months of research.
The stability and reliability of Linux, coupled with increasing
applications in financial and other industries, illustrate that
the operating system is establishing itself successfully among
enterprise IT organizations. In financial services, where com-
panies are under continuous pressure to balance cost-cutting,
regulatory requirements, and the need to develop innovative
products and services, a well-managed Linux adoption offers
a hopeful alternative to traditional and more costly applica-
tion technologies.
9
 Web services: Feel the burn
Josh Lee
Lead Technical Strategist – Financial Services, Microsoft
I must say that I find Star Trek™ very entertaining, especially
the newer series. Sure, there are a few quirks that I find
humorous, like the fact that while outer space is three dimen-
sional all the spacecraft still seem to travel in the same plane
and polar alignment. Nevertheless, they are very enjoyable. I
suppose one of the most intriguing and probably overlooked
features of the program is the ubiquitous nature of computing
portrayed in the show. You hardly, if ever, see system opera-
tors griping about systems being incompatible. So, I guess one
could say that the Star Trek™ computing model represents
what many of us perceive to be the future of computing? Per-
haps not. I guess a more important question to ask is what is
the future of computing? Admittedly, that is a little too broad
a topic. How about the future of networked computing? Still
too broad? Probably! Then, let’s just focus on the web, and
yes, the topic du jour…web services.
Quickly it will become apparent how idyllic it is to assume that
web services (or any other system) are an island of computing.
Computing is an end-to-end process. Some systems store data
in vast repositories: databases and data warehouses. Others
collect the data, which is entered by machines and humans.
And, then there are systems that analyze and display that
same data in a thousand different permutations. Somewhere
among all those electrons, in all those 1’s and 0’s, lies the
Internet, as yet another type of client/server infrastructure
for doing 'things' with that data and related systems.
The ubiquitous nature of computing is the 'Holy Grail' of sys-
tem design, and web services can help. But, before diving into
web services and all the 'love' that brings to systems, the
recent past bears some investigation. It is about symbiosis.
The world where the business user can explain the problem
and the technologist can return in short order and
announce…'done'. And, changes and fixes… no problem. Does
the use of cutting edge technology always solve business
problems? No, but it should try, and it can usually give users
and systems designers new ways to look at issues and
avenues of attack. In the simplest of instances the technology
can be a way to execute business faster, just from sheer pro-
cessing power. Hopefully not just a function of chipset engi-
neering, technology can be an enabler for the business user
10 - The Journal of financial transformation
and can become the bridge for understanding between the
business and the technical community. In more complex cases,
and with building momentum, technology can learn, adapt,
and fix itself based on system parameters, user needs, and
preferences. This is largely a function of software, with more
and more processing power, devices, and connectivity sup-
porting each component.
War of the worlds
In the world of technology, 15 years is a very long time. Look-
ing back 15 years in computing is a glimpse into what chil-
dren’s calculators are today. For enterprise computing, the
picture at that time was a look into the true 'glass house', the
special climate controlled room where technicians hunched
over monochrome terminals debugging by line number and
character position. It was a place where the constant whirr of
reel to reel storage and mainframe disks could be heard after
hours. Requests for business reports would take weeks as
large flat file data structures were queried with languages like
Focus™ and reports designed for and routed to large green
bar dot matrix printers. Truly, the last 15 years has seen great
advances in technology programming and platforms that
serve the needs of businesses.
One of the things that these enterprise systems created were
large closed cultures eventually termed as Information Tech-
nology… IT. Business leaders not only loathed IT, but they did
not even make the effort to understand the ins and outs of the
systems that drove the business applications and stored the
data. In return, IT personnel did not have high regard for busi-
ness units that demanded too much in too short a timeframe.
Both groups were justified in their angst. IT did not have sys-
tems that allowed for fast integration with business needs.
And simple application of a greater number of bodies on a
project was unable to speed up project delivery in a linear
fashion. In fact, most would agree that is still the case. The
systems that the enterprise was using 15 years ago were nei-
ther flexible nor user friendly. Business units by the same
token did not make any major efforts to understand the com-
plexities involved in developing on those 'legacy' platforms.
This caused no small rift between both of those units. One of
those units’ parameters has changed drastically over the last
decade… and it hasn’t been the business units’.
Businesses have had the same issues for quite some time.
Lower costs, comply with regulatory changes, increase sales
and distribution, streamline transactions, and raise profit mar-
gins. Take your pick of one or all, and you have today’s typical
business problems. Five decades ago, when IT first entered
the scene, it attempted to alleviate some of these issues. And
it achieved its objective within a short few decades. Transac-
tions were processed in ways they never were, and faster.
Sales and distribution increased as electronic information was
a tiny bit more accessible. However, this all came at the cost of
building IT infrastructures. Coming up to 15 years ago, those
infrastructures began to age, were probably amortized, and
were unable to provide the kinds of innovative leaps required
to truly add value to the large enterprise’s business needs.
Then came desktop operating system, which empowered the
end-user. These pieces of software were so user-friendly that
today a large percentage of senior executives read and send
their own e-mails. As a by product, business executives have
become ever more interested in Total Cost of Ownership
(TCO). It is no longer adequate for IT solutions or services
providers to simply get the system done. They also need to
disclose all the costs for the system, software, hardware, and
services. The commoditization that pursued resulted in sub-
stantial reductions in costs. Those commodity parts make up
the computing landscape. Once it was death by a thousand
parts. Today, it is possible to unite these parts into a function-
al organism that can adapt and sustain it.
The computing landscape
The features of a computing environment are legion. Without
knowing how each part relates to others in the ecosystem, it
can appear a chaotic cacophony of disparate and oft compet-
ing interests. In order to really understand what is truly valu-
able to the enterprise, all of these disparate systems have to
be distilled down to their foundational elements and demon-
strate how they in fact synergistically relate to each other.
Of the entire collection of things in the computing landscape,
from devices to programming interfaces to networks, there
are two items that are of paramount importance, data assets
and transaction assets. Computing assets either add value as
providers of data, or as providers of transaction services.
When the Starship Enterprise encounters an abandoned alien
vessel the first thing they often do is to download the ship’s
log (get the data) or try to start the engine (perform a trans-
action). When users access an application or web site, the user
interface is a necessary evil, a window dressing to either the
data or initiation for a transaction. For example, when one
accesses one's bank account online, they may see the infor-
mation in a browser or in a traditional personal finance man-
ager. They may interact with their bank in a number of differ-
ent ways, but what they want most is the ability to 1) see accu-
rate data for their accounts and 2) be able to perform trans-
actions on them. And they demand that both of these opera-
tions must be fast. The benefits of a user interface are simply
in the way that it allows data to be manipulated and the
speed/ease of performing operations or transactions. Without
the data or ability to transact with the hosting system, user
interfaces are only fun to play with, adding little value to
enterprise business.
Computing assets are not always classified as ‘providers’ of
both data and transaction assets. Computing systems may
also act as consumers of resources at times. Consumers could
also be termed subscribers, as we will see shortly in the web
services sense. Consumers of data or transaction services are
either self-serving or apathetic to the provider, with con-
sumers of data services or data assets falling into the former
bucket. The operations that the consumer performs on the
provider of a data asset are typically to pull or query data for
personal use. Of course, it is not uncommon for the consumer
to take that data, massage to fit some need, and in turn act as
a provider of a service for another constituent. For the pur-
poses of this paper, let’s focus on the point-to-point relation-
ship. A consumer of a transaction asset is likely to be ambiva-
lent to the overall ecosystem. The primary difference between
this consumer and the consumer of a data asset is that this
consumer is allowed to push or provide information back to
the provider. In a good system design, a pure data provider
11
 does not allow consumers to interact with the data other than
to read it. This is because there are business rules and rela-
tionships that are maintained with that data that are more
appropriately accessed from within a transaction. That is
where a transaction provider enters, sometimes they are the
same business entity and sometimes not.
So, data and transactions are the key assets in the computing
landscape. However, like oil, they are buried under the depths
of that landscape. Littering the landscape is the cornucopia of
devices, applications, user experiences, and client/server net-
works that use the data and leverage transactions. It is on this
landscape that we see the blossoms of what will be lush fields
of web services. Unfortunately, it is nearly impossible to give
a holistic definition of the term web services, in anything short
of a multi-chapter book. Consequently, I will just focus on
those areas that I believe are most important to readers.
As already established, there are data assets and transaction
assets. In fact, data assets are hidden by transaction assets
classified as queries. All of those transactions are engines,
plain and simple. That may seem odd, to some who think that
the etymology of 'web services' is based on some new
abstraction to the visual fiasco that was the dot-com bubble.
The fallacy that produced the now rampant delisting notices
on the big boards was based on not a few bad business mod-
els. The technology fallacy is that many of those businesses
were not based on core data or transactions that anyone
cared about. The supposed consumers of the dot-com assets
found the output either redundant, of little value, or just plain
silly as stand alone corporations.
Web services are not directly related to the dot-com craze.
Web services are the real reason the Internet should exist. The
Internet is not a platform, it’s a global transport. At the risk of
delving into all the deep technical aspects of protocol level
programming, at least a veneer of a web services infrastruc-
ture needs to be leveled. Remember what it used to take to
get two systems to communicate over a long distance. Pre-
Internet if you could get past the connectivity, usually on
leased lines or some amalgam, you still had to have many
meetings to get the data feeds correct. And then if you could
12 - The Journal of financial transformation
get past that, the first change to either system usually broke
things. In addition, the EDI formats, en vogue in earlier times,
was fairly loquacious and bulky in data description. Then came
the Internet, which could replace the expensive leased line.
Although, the data format conundrum remained.
In addition to highly distributed systems, which were in use
inside the firewall, there were component technologies. The
issue really became more plumbing than anything else. Hav-
ing objects communicate with one another, be described in a
binary format, and do all the things that allow objects to be
logical units of operation. A few object technologies emerged,
like COM and CORBA, but bridging the diverse object’s bound-
aries was fairly hard, requiring specialized bridging technolo-
gies. This technology did allow for some communication
between the different object invocation and instantiation
architectures, but it also had some inherent issues with per-
formance, management, scale, and redistribution.
Standards — To be or not to be
This is where web services enter the scene. Web services are
the web standards encapsulation of objects, engines of pro-
cessing that are highly distributed, based on Internet protocol
standards that can be invoked at will. Web services are based
on XML. XML (eXtensible Markup Language) is a data descrip-
tion markup which is a global industry standard. Far from past
markups and file formats, it is one that has broad industry
support and is lightweight in its description and format. XML
is in turn the basis for Simple Object Access Protocol (SOAP),
which is the basis for Web Services Description Language
(WSDL). All of these standards are text-based standards.
There are also ways to capture binary data as a part of the
text standard, but that is beyond the scope of this paper. The
fact that these standards build on each other is a powerful
testament to the work that has gone into message-based
architectures and the flexibility of XML and XML-based web
services. Each one of these protocols and description lan-
guages are XML-based mechanisms for passing data, invoking
remote processes, or encapsulating message parameters and
metadata.
There are inherent benefits to having these be text-based
standards. They can be accessible from a number of different
devices, as well as being interoperable between platforms.
This means that from mainframes to UNIX to Windows, as long
as there is the ability to read text and parse a certain repre-
sentation of data web services can be linked to corporate
intranets and over the Internet from any number of disparate
systems. This is the true definition of standards, open for par-
ticipation and permissive of interoperation between systems.
Each computing platform has inherent benefits and draw-
backs. Each of those systems has developed interfaces to opti-
mize computing on that platform. Over time even those inter-
faces have in turn been optimized for. What those systems did
not need was yet another runtime masquerading as a stan-
dard. The runtime essentially diminishes a system's unique
ability to process and optimize the work that is processed on
that platform. Web services act as a message-based standard
that allow system optimization of the message internally.
Admittedly, web services are rather new, commercially avail-
able in late 2001. Permit me to explain how it works. Large
companies, IT providers, and other institutions have two
assets, remember? As data and transaction providers these
organizations are making choices right now. As they evaluate
the architectures and platforms for integrating between dis-
parate systems and among disparate trading partners, they
will, without question, have to use integration technology like
web services. Sure they could choose, yet again, to move into
the proprietary connectivity and data format, but the possible
integration of a number of different web services compel
these organizations to manufacture under the auspices of
truly global industry standards. Once the web services, the
core engines, are developed, they can then be exposed using
XML-based directory services. These directory services are
likely to be hosted by either a global directory for those serv-
ices that are available globally, or directories of services that
are hosted within large organizations.
When looking at integrations of the past, one of the biggest
impediments to full interoperability was that each operation
from one application to another was different than the next.
There were different interfaces, different techniques. Howev-
er, with web services and the associated standards, those
things are all in the past. Besides fully encapsulating the
engines for processing, the web services infrastructure offers
a set of standards that also standardize the method of con-
necting with that engine. When coupled with new emerging
tools that also provide development capabilities for creating
web services, it becomes very easy to create, subscribe, and
consume a web service that is developed by another entity. And
all of these steps in the process are based on global standards.
The gratuitous momentum towards web services did have one
interesting side effect. What quickly became apparent was
that there were still missing components necessary to make
web services ready for the enterprise. In the infancy of this
identification there were a few technology and tools vendors
that banded together under the governance of some aging or
irrelevant standards bodies, like OASIS or CEFACT, but adop-
tion does not seem to be forthcoming from either of these
organizations, even with the newer ebXML specifications. It
also appears, from the list of participants, that there are a
number of ulterior motives, which are impeding adoption and
trending towards proprietary data formats or tools. Learning
from that experience, the industry has now developed a num-
ber of alternate initiatives to solve a myriad of these problems
in a plug and play fashion.
When web services first entered the scene they were very
demonstrable as point-to-point transactions, as well as several
proofs of concept. These proofs of concept showed that web
services, as a full blown enterprise architecture, can be valu-
able and that there are possibilities beyond just the point-to-
point transaction. However, for each one of those experiments
there was a significant amount of heavy lifting due to the lack
of quality tools for that development. It is clear that while the
base technology was great, the use of the technology and the
need for that type of standards-based application infrastruc-
ture can greatly decrease the time to market. Though missing
were the analogous pieces in a web connected solution world
that system designers took for granted in a client/server envi-
ronment, where they had control over memory, transactions,
disk commits, and application versioning. These items that have
13
 been taken for granted now needed to be simulated in a highly
distributed environment so that a multi-tier and reliable set of
applications can be built on this new XML-based architecture.
For example, this new emerging architecture allows transac-
tions to be routed through multiple intermediaries with each
one adding additional value to a transaction or being inserted
based on rules encapsulated in the message. When put in the
context of an enterprise application, it becomes clear how
that specific part of functionality can be valuable in a complex
transaction based environment. Other specific components of
developing web services infrastructure include security and
authentication, business processes, identification, and inspec-
tion. All of these components have a single purpose, and that
is to create in a distributed Internet-centric world; the same
capabilities that are taken for granted in a connected and
tightly coupled system.
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.
System A may process three steps in a process all on the same
system, send a message to System B on the same network,
and then perform two steps that are dependant on services
from System C, which is based at a separate business entity.
In that case, only some of the web standard architecture is
required, although the message standards can be applicable
to all and lend consistency across the life of that transaction,
workflow, or application.
Looking forward into the not too distant future, there will be
many logical units of processing. Those will be the engines
that are found littering the landscape that populate and
encapsulate logic that is valuable to the business entities that
might consume that service. This will in turn allow the con-
sumers of these services to create a best of breed architec-
ture. Best of breed is a term that also means that the solution
is risk mitigated and allows specialization of the hosting sys-
tem. Business specialization of systems has long been proven
as the system division of labor that optimizes the system
based on varying resources that are available to or are in use
by the system.
14 - The Journal of financial transformation
System specialization
I have a gas powered water heater in my home. It is adequate
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
electric model. You could call it domestic hedging, or maybe I
am anticipating supporting my children’s upcoming teenage
years. In any event I had some ideas for something a little
more custom for adding a second water heater. I wanted load
balancing between the two systems so that I could equalize or
dial up or down the proportional usage between the two units.
So, based on cost of utilities or speed of system restore, I
wanted a switch that would let me control usage and rules for
that usage. But when I called my local plumber to explain, the
silence on the other end of the telephone told me what I want-
ed to know. My only alternative was to either spend an inordi-
nate amount of money with more expert tradesmen or to per-
form some MacGyver-esque operation after multiple trips to
Home Depot.
The hardware that makes up the apparatus that I call a water
heater is specialized for a certain operation. It is that opera-
tion that makes that system affordable, and the corollary to
that specialization creates a system that is virtually unman-
ageable in cost. Systems that are specialized by functional
areas allow optimization along those functional lines. Banking
institutions likely have core engines monitoring transactions
for fraud detection that are specialized for high performance
transaction throughput, monitoring, and system intelligence.
Other systems may be optimized for large storage of data with
very little transaction throughput. Those systems would opti-
mize on storage compaction, on demand retrieval, archival or
analysis routines. Those are two separate systems. It is per-
fectly reasonable that each be specialized in their own ways.
Consequently they add more value and generate lower system
cost by creating superlative performance.
Web services are just that, specialized units of operation that
are optimized for what they do. Each one may or may not be
dependant on another for full cycle transaction processing. In
reality, the web service is no different from the classic 'object'
of the past. The main difference in the web service, as for-
merly mentioned, is the encapsulation of global communica-
tion standards that provide easier discovery, integration, and
consumption of the services. In addition to those base fea-
tures of the web service, the further development of stan-
dards for security, routing, etc. ensure that the infrastructure
required for massive scale projects and integration will con-
tinue to grow with participation by a global community of
technology providers, web service providers, and web service
consumers.
Without the specialization of systems that can also run on the
communication transport of the Internet, the Internet remains
nothing more than pretty pages. In fact, in the words of Kevin
S. Kelly, Managing Director of Financial Services at Microsoft,
it is the 'global colorful dumb terminal network'. To be sure,
the realization that there is a better use for the Internet and
more standard ways that applications can interact is gratify-
ing to those that desire to bring applications to market faster.
It is more rapid time to market that solves a few of the issues
that have been evidenced by information technology. Lethar-
gic responsiveness to the business needs and a megalomani-
acal need for IT to own every piece of code, become mere flim-
sy excuses when stacked against specialized assets built by
web service programmers.
Enabling new business
A customer once told me that the products did not matter;
after all it was only electrons. And a more true statement
could not have been made for the subject at hand. That is
largely what we have discussed to this point. It is the business
interests that are paramount. Many times, in the art of pro-
gramming, those interests are lost in memory management
routines and data input and output. As far as a typical finan-
cial consumer is concerned, they reasonably assume they
have single access to a number of financial instruments,
accounts, and institutions from a number of different vehicles.
That assumption is well and proper. The reach beyond pure
financial institutions is also obvious. Remember that web
services can be valuable as providers of transactions and
data. Events are a special type of transaction that can add
additional value to the web services environment, as well as
being applicable to enterprise applications and users. Events
are a notification transaction that can add real time context to
business applications.
Several months ago, I had planned a trip to the U.K. that
included the purchase of an airline ticket with my corporate
credit card. A number of weeks prior to that trip I had opened
a new credit card account strictly for travel. During the trip I
visited an ATM machine. The credit account withdrawal was
denied. When I called the institution, the reason given was
that a fraudulent event was detected in that withdrawal
because I had not notified them of my travel. Experiences like
that happen to consumers and businesses on an hourly basis.
My situation is not far from being alleviated with use of web
service based events, institutional subscription models, and
user preferences. But in order to tie all of those institutions
together — airlines, banks, ATMs, and user applications — we
need to have an open message-based standards.
When it is possible to describe a number of components in a
standard format that can be found by a standard location
mechanism integrated using tools, and layered to create a
multi-tier enterprise application, then it should be done. There
are already a number of new business models that can and
should exist under the umbrella of enabling technology. It has
been a number of years since the airlines introduced elec-
tronic tickets. What is going to be the next innovation? Per-
haps the next innovation is a way to describe airline miles in
terms of money and perhaps link them to a credit card
account. Of course, airline miles are not as liquid as cash so
that would require the web service transactions to capture the
exchange rate and perform the funds transfer, as well as allow
the user to maintain preferences. When intelligent devices are
introduced there are many permutations for new computing
models and new avenues for business. There are complex or
fiscally creative models as well as those that are as common
as balance transfers, credit scoring, or equity settlement that
are beginning to migrate from the proprietary and complex
component integration methods of the past.
In a very real sense, there are institutions today that are using
15
 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

 Financial

Evolution of
the financial
software market

Paul Gardiner
Calypso Technology

Abstract
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.

17
 Evolution of the financial software market
The fragmented financial software market
Banks have traditionally organized themselves by asset class.
Within a typical bank there might be separate groups for for-
eign exchange, FX options, money markets, futures, loans,
bonds, interest-rate derivatives, credit derivatives, equities,
equity derivatives, and so on. Each group was run as a sepa-
rate business, with its own budget and systems decisions. As
a result, each group invested in its own front, middle, and
back-office systems, which were isolated from the systems of
other groups. Moreover, regional offices exercised their
autonomy to choose systems different from those in the head-
office, thereby exacerbating the problem for global firms. So
prevalent was this structure that the groups became known as
product 'silos' or 'stovepipes'.
Silo-based systems selection determined the structure of the
financial software market. In fact, it is a little misleading to
speak of a single financial software market. Up until now,
there has been an equity derivatives front-office market, a for-
eign-exchange front-office market, a foreign exchange back-
office market etc. These may be further subdivided by geog-
raphy. The European and American fixed-income markets are
very different. Each market has the same set of target cus-
tomers (the banks) but different sets of competitors.
A financial software start-up targets its product at one of
these small markets. Often the product is co-developed with
the first customer. If the company is successful, it can sell to
other banks in the same niche. Since financial software tends
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
survive almost indefinitely on the maintenance revenues from
those customers. Consequently, the financial software market
became very fragmented with many small suppliers.
Where have all the customers gone?
Ten years ago, a software company could look to sell to Man-
ufacturers Hanover, Chemical Bank, Chase Manhattan, and JP
Morgan. Now, all these reputable banks have joined to create
JP Morgan Chase. Mergers and acquisitions have shrunk the
number of banks, and there is no reason not to expect this
18 - The Journal of financial transformation
trend to continue. While the finance industry was booming,
software companies could ignore this consolidation. Banks
had plenty of money to spend on new technology.
Finance is now in a recession and banks are reducing their IT
budgets. Banks are deferring the purchase and rollout of new
systems. But, that is only a temporary solution. Maintaining
the systems it already owns is a far greater drain on a bank’s
IT budget than buying new ones. A recession does not natu-
rally reduce maintenance costs. They are a function of the
number of systems the bank has to maintain, not of the num-
ber of trades going through those systems. To reduce mainte-
nance costs, a bank must reduce the number of systems it
maintains.
Even before the recession hit, the IT selection process within
banks was changing. Banks were making global systems deci-
sions rather than letting regions decide for themselves. They
were trying to break down the product silos and look for
cross-asset systems rather than single-asset systems and for
front-to-back systems rather than separate front and back-
offices.
Software companies thus face a doomsday scenario:
■ There are fewer potential customers.
■ The potential customers are buying much less new soft-
ware.
■ Existing customers are eliminating systems, reducing the
maintenance revenue on which the suppliers depend.
The remaining market opportunity is for these global, cross-
asset, front-to-back systems. Can existing systems satisfy this
opportunity?
Consider again our typical software start-up. It focuses initial-
ly on one small niche and builds up a loyal user base in that
niche. If the firm is really successful, it might reach 100 cus-
tomers. But it won’t reach 1,000 because the market is not
that big. Sooner or later, the firm has to look to adjacent nich-
es for growth. And this turns out to be surprisingly difficult.
The reason is that software systems are organic. When they
Evolution of the financial software market
are young, they are very flexible. When they are older, they
are harder to change. If a system is used exclusively for, say,
interest-rate derivatives and has many happy derivatives
users, it will be very hard to make it a good bonds or foreign
exchange system. The very design decisions that made it a
good derivatives system in the first place may prevent it from
being a good system for other instruments. The software firm
may attract some customers in the adjacent niches but they
will invariably be banks that are already using the system in its
core niche. For these banks, the advantages of having a single
system from a trusted supplier outweigh the disadvantage of
having a system that is not a best-of-breed system in that
niche. Most will need a new system.
Build-versus-buy
It is important to remember that there were originally good
reasons for letting each silo make its own decisions. Each silo
has particular issues that it needs to address. A securities sys-
tem needs to talk to depositories; a foreign exchange system
does not. A derivatives system needs to capture volatility sur-
faces and correlations; a securities system does not. Require-
ments change rapidly in the front office, less frequently in the
back. If a new system is not better than the system it is
designed to replace, the silos will veto its implementation.
The first question to ask is whether the new cross-asset sys-
tems will be built internally or bought from vendors? This is an
age-old discussion: is it better to have a system that the bank
can tailor to its precise requirements or to have a system that
is much cheaper and has no development risk? To understand
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
software vendor to make the modification. The supplier may
be genuinely committed to supporting its product but it has to
balance requests from all its customers. Other enhancement
requests may be more important, either because more clients
would benefit from them or because a sale depends on them.
Even if the vendor agrees to the enhancement request, the
bank will have to wait until the next general release of the
product. This may be 12 or 18 months away, particularly if it is
a mature product.
If the requested enhancement would require a lot of work, the
vendor may ask the bank to pay for it. Since only the vendor
can make enhancements to its product, it can charge a
monopoly price for doing so. Moreover, when the modification
that the bank has paid for is complete, the vendor can inte-
grate the enhancement into its product and resell it to other
banks. If the bank regards the enhancement as proprietary, it
can request a customized version of the product. Customized
versions are wonderful, until they have to be maintained.
When the vendor releases a new version of its product, the
bank must forego the new features in that release or pay (and
wait) for the new features to be ported to the bank’s cus-
tomized version. Customized versions are also inherently
more buggy. It is impractical for the vendor to spend as much
time testing each customized version as it does testing the
general release version.
Rather than be dependent on the vendor in this way, banks
often request the source code to the product so that they can
make whatever modifications they want on their own sched-
ule. Unfortunately, this is only a short-term solution. Once a
bank makes a modification, the vendor can no longer support
its product. If a user has a problem, the vendor cannot know
whether the problem is in its software or in the modifications
that the bank has made, because it does not know what mod-
ifications have been made and where. Moreover, when the
vendor releases a new version, the bank has to re-implement
all the features it has added. Thus, although budget con-
straints force most banks to buy, they yearn for the flexibility
that an internal build brings.
Application programming interfaces
What does flexibility mean? From a technical perspective, flex-
ibility means providing Application Programming Interfaces
(APIs). An API defines a set of functions that the bank’s devel-
opers must implement to achieve a desired goal. For example,
a trading application may have an API to add a new product or
a new option-pricing algorithm. The promise of APIs is that
banks can make extensions using the APIs whenever they
want and yet still benefit from all the standard features of the
product. Unfortunately, APIs are not a yes or no feature. It
19
 Evolution of the financial software market
does not make sense to say that system A and system B are
equally flexible because they both have APIs. It is necessary to
dig deeper and ask such questions as:
■ How many APIs does a system have? Crudely, the more
the better.
■ What do the APIs allow banks to do? An API for adding a
new product to the system is good but it is even better if
there are also APIs for hedging, confirming, settling, and
accounting for trades of the new product.
■ How easy is it to use the APIs? Does the bank need to have
the vendor’s source code?
In general, the skill of the vendor’s development team deter-
mines the ease of use of the APIs, but technology plays its
part too. Some old programming languages do not support
APIs at all. Others, such as C++, force developers to recompile
every system component that needs to know about an exten-
sion built through an API. Modern languages, such as Java,
make it much easier. The developers do not need to touch the
original system. They just have to place the code for their exten-
sions in a particular directory and the system will automatically
find and use them. Keeping the bank’s code and the vendor’s
code in clearly separate places has several advantages.
■ The bank can continue to accept new releases from the
vendor. When a new release comes out, the bank just
copies its code to the right directory for the new release.
The new version will simply find and use the bank’s exten-
sions in the same way that the old version did.
■ The vendor can support its product. If there is any doubt
about whether a problem is with the vendor’s code or the
bank’s code, the bank can quickly remove its extensions
and try to reproduce the problem.
■ Good APIs allow banks to forget about buy-versus-build
and to adopt a buy-and-extend strategy.
High performance
Computer speeds increase at a much faster rate than trade
volumes. The number of trades on the NYSE increased 19-fold1
between 1988 and 2001. The speed of a standard micro-
1 Consolidated tape trades grew from 17,738,727 in 1988 to 338,097,835 in 2001.
20 Source: NYSE.
processor increased 120-fold2 over the same period. A soft-
ware system that took six hours to process a firm’s trades 13
years ago should take less than 60 minutes today. And yet
post-trade processing remains a bottleneck for many firms.
We know of one securities firm whose end-of-day process can
take until 11am the next day. If banks consolidate systems
across assets and geographies, this problem will get even
worse. Fewer systems will have to handle more trades.
Why have firms not seen their end-of-day times shrink? A
principal reason is that the architecture of most processing
systems prevents them from taking advantage of increased
CPU (Central Processing Unit) speeds. Let us take a quick tour
of three technologies that can address the problem.
Multi-threading
It is intuitively obvious that distributing a task across multiple
processors will enable it to run much faster than it would on a
single processor. But, if a program that was designed for a sin-
gle processor architecture is run on a 64-processor system, it
will not run any faster. The design of the program must allow
different 'threads' to be spun off and run in parallel on differ-
ent processors. To make an existing single-threaded program
multi-threaded is extraordinarily difficult because the entire
program structure is affected. Programs must be designed to
be multi-threaded.
Every major operating system has supported multi-threaded
programs for at least five years. High throughput applications
such as databases and web servers have been multi-threaded
for several years. The Java programming language tools pro-
vides support for threads as a standard feature. Anyone set-
ting out today to design a trade processing application would
make it multi-threaded. But most trade processing applica-
tions on the market are not multi-threaded because they were
originally designed so long ago.
Compute pools
Consider the problem of hedging a large portfolio. Described
crudely, all hedge algorithms produce a hedge recommenda-
tion by valuing the trades in a portfolio under a variety of pos-
2 The Intel386 SX CPU introduced in 1988 worked at 16 MHz (2.5 MIPS) and had
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
require a complex Monte Carlo simulation, there may be thou-
sands of individual trades in a portfolio and the portfolio may
have to be valued in thousands of possible future market sce-
narios. Computing the hedge can take hours. But a hedge
analysis is not a single complex calculation. It consists of mil-
lions of independent calculations (e.g. the valuation of a single
trade under a single market scenario) whose results are com-
bined to produce the final result. Instead of being run sequen-
tially on one processor, the calculations can be divided among
a compute pool of 10, 100, or even 1000 computers. If one
processor takes three hours to perform a calculation, one
hundred processors should be able to do it in about two min-
utes3. That is the difference between running a calculation at
the end of the day and being able to run it intra-day.
Most financial software programs cannot break portfolios and
hedge calculations into the small units that compute pools
need. They were designed at a time when compute pools did
not exist — standard products that support compute pools
have emerged only in the last two years.
Application components
Application components are separate programs that co-oper-
ate to perform a task with each component being responsible
for a particular part of the task. For example, a trade process-
ing application has to accept trade input, produce confirma-
tions, update positions, calculate payments, generate
accounting postings, and display results to users. Each of
these tasks could be performed by a separate application
component.
A component-based architecture has several advantages:
■ The components can be easier to support and maintain
than a single monolithic application because each compo-
nent is focused on a particular task.
■ It improves scalability because the components do not
have to run on the same computer.
■ It is easier to add new functionality to the system because
it is easier to add a new component than to modify a
monolithic program.
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.
For a component-based architecture to work, a program on
one computer must be able to call a program on another com-
puter and get a result back. How does the first program know
where the second program is running? How does it know what
functions are available for it to call? How does it know what
data the second program needs and in what format? How
does it know what format the result will be in? What if the two
programs are written in different programming languages or
run on machines with different operating systems? These are
complex technical issues. The early attempts to address them,
such as CORBA and Microsoft’s DCOM, were awkward to use
and debug. They tended to be used more for communication
between systems than for communication within a system.
Modern programming languages such as Java make it much
simpler to build a system of integrated components. Only
within the last four or five years has it even been possible to
build a component-based system.
The Worldwide web
There is no need to describe here the worldwide web and its
enormous potential. It suffices to say that a modern system
must be able to deliver its functionality over the web. The sys-
tem may not always, or even often, need to be used over the
web, but it must be an option. Many software firms have
attempted to give facelifts to old products by providing web
front-ends to them. These have had limited success. Success-
ful facelifts may keep an existing customer’s attention from
wandering to the competitor’s attractive new product, but
they cannot disguise for long that the body underneath is still
old, inflexible, and liable to break down.
Anatomy of a modern system
Let us review the system that the current technology allows
us to build:
■ It can be cross-asset and/or front-to-back.
■ It can supply the market-standard functionality that every
bank needs but which provides no bank with a competitive
advantage. This includes all back-office and many front-
office functions.
■ It has APIs that banks can use to extend the system’s func-
tionality easily.
21
 Evolution of the financial software market
■ It offers dramatically faster performance, both for trade
processing and risk management.
■ Its functionality can be deployed over the web.
Such a system has enormous value:
■ The new system replaces many existing systems, reducing
the bank’s systems maintenance costs.
■ 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-
cessing enables them to price deals quicker.
■ Firm-wide risk management is easier because positions
come from fewer systems and calculations can be run
intra-day instead of overnight.
■ It is easier to calculate and manage exposure to a single
credit because the new cross-asset system contains all the
positions. Witness the difficulty certain bulge-bracket
firms had in calculating their exposure to Enron.
■ The bank can do a better job of managing its corporate
client base because traders and account representatives
can get a global view of a client’s positions in one place.
S-curves and adoption of new technologies
Let’s step back for a moment. The progress of a technology
over time is usually depicted with an S-curve. In the early
stages, while the technology is being developed, a lot of work
produces relatively little user benefit. After a time the tech-
nology becomes 'proven' and the marginal user gain from
additional development of the technology is high. Ultimately,
however, the technology reaches its natural limit and addi-
tional development effort attracts diminishing returns. An
emerging new technology will follow a similar S-shaped curve.
It may initially offer poorer performance than the older tech-
nology but its higher performance ceiling will enable it to sup-
plant the older eventually.
When we translate this to financial software, the S-curve
applies to the architecture and underlying technologies used
to build a system.
22 - The Journal of financial transformation
User
benefit
from Distributed
Technology components
Client-server
systems
Monolithic
systems
Cumulative effort at developing technology
The first generations of financial software systems were
monolithic. A single program supported all the users, per-
formed all the processing, and maintained all the data. They
ran on mainframes or mini-computers and were written in
arcane programming languages. Many of these systems are
still in use today, particularly in the back-office, even though
the improvements in each release are only marginal. The sec-
ond generation of systems used a client-server architecture.
Instead of logging in to a central computer to run an applica-
tion, users ran individual copies of the application on their
own PCs. These applications (called clients) then connected
over the LAN (Local Area Network) to a shared database run-
ning on a central server. The first client-server systems were
built in the early 1990's. Since they take advantage of the
computing power on user’s desktops, they were particularly
suitable for front-office applications. Most such systems were
built in C, C++, or Basic. These systems have also now reached
the point of diminishing returns. Users see relatively little
improvement in each release even though the vendors are
spending a lot of effort adding features and fixing bugs.
The technologies described in this article form a third gener-
ation. The early versions of these systems were technically
strong but functionally weak: the developers had not had time
to add all the features users care about. The initial customers
were those for whom the architectural strengths outweighed
the functional weaknesses. Those systems have now passed
Evolution of the financial software market
the first inflection point in the curve and can be considered
'proven'. The pace of improvement is much higher because
their superior design enables developers to add features more
quickly. In many ways, the newer systems are now functional-
ly better as well as architecturally better. The new technolo-
gy’s S-curve has surpassed the peak of the old technology’s
S-curve.
Why don’t existing software firms adopt the new
architecture?
We have described how hard it is to take a system that han-
dles one asset class well and make it handle other asset class-
es equally well. And we have seen how difficult it is to make a
system multi-threaded, or to have it use compute pools, or to
break it up into components. Even if it is not possible for an
existing system to satisfy the market opportunity, surely the
vendors that produce those systems will develop new prod-
ucts than can? Can’t they see the writing on the wall?
Clayton Christensen has studied the adoption of new tech-
nologies to see what factors determined whether existing
firms in an industry or new entrants would adopt them. In his
book4, he distinguished between sustaining and disruptive
technology changes. Sustaining technology changes gave
'existing customers something more and better in what they
wanted', in which case 'the leading practitioners of the prior
technology led the industry in the development and adoption
of the new.’ Disruptive technology changes redefined the
basis of competition in the industry even though they were
usually not radically new. 'Disruptive innovations were tech-
nologically straightforward. They generally packaged known
technologies in a unique architecture.'
Consider the technologies that have been discussed here.
They are not radical: all have been widely accepted by the
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.
No firm is going to embark on a radical re-engineering of its
product line that its customers are not demanding when those
customers are asking it to do other things that are easily
achievable. Christensen noted that 'the firms that led the
industry in every instance of developing and adopting disrup-
tive technologies were entrants to the industry, not its incum-
bent leaders.'
Sketch of the future
It is my opinion that our future industrial landscape will be
quite different from what we have today. Firstly, new firms
whose products are based on the technologies described here
will displace the incumbent leaders in each category. Second-
ly, the need for cross-asset systems will increase barriers to
entry so that those new leaders will be few but large. New
start-ups will be concentrated in the analytics and pre-trade
decision support areas because there is always a market for
products, however immature, that promise to help traders
make more money.
What will happen to the incumbent leaders? They will become
zombies or cash cows. Zombies are the walking dead: they
sustain themselves based on the maintenance stream from
their installed base but make few or no new sales. They can-
not grow but can persist in this state for years until their
clients have all migrated away. Zombies are natural acquisi-
tion targets. The product is mature and does not require a lot
of product development investment. Nor does it need a large
sales force because there are few new sales to be had. The
acquirer can cut back on product development and sales,
eliminate duplicate functions, such as accounting and human
resources, and milk the highly profitable maintenance revenue
stream. The largest global financial software firms specialize
in buying zombie companies and turning them into cash cows.
The years ahead promise rich pickings for them.
23
 Financial

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

Allan Rosenstein
Managing Principal, Capco

Abstract
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
25
supporting research in the future.
 Research technology priorities for broker-dealers in the U.S.
Introduction
In recent months, we have all been subject to a barrage of
negative information concerning the potential conflicts of
interest that exist within the research reports produced by the
broker-dealer community. This information overload has been
so excessive that many believe that so long as the trust issue
is managed effectively, these institutions have nothing else to
worry about. The fact is, of course, that in addition to regain-
ing public trust; these institutions will need to continue to
compete with their historical archrivals. What this paper aims
to provide is how new technologies can help these institutions
improve their competitive position vis-à-vis their competitors
through better research report production and dissemination.
To achieve this objective, I have separated this paper into 3
sections. Initially, I will begin with a short review of what the
current environment looks like. Secondly, I will highlight what
the priorities are and should be for research organizations.
And finally I will conclude my recommendations.
The current environment
The number of challenges facing research report producers is
simply too many to be covered effectively in a few pages. How-
ever, my intention is to provide a non-exhaustive overview of
the major challenges facing sell-side research producers.
These challenges, which typically fall into one of these four
major buckets, include:
■ Erosion of trust: By far the most visible issue driving
change in research today is the erosion of public trust in
sell-side research. In the last economic boom year of
1999, there were just 125 ‘sell’ ratings out of a total of
33,169 stock recommendations.1 The bullish ratings, fol-
lowed by declines in the corresponding security prices,
have led to a thorough examination of the research pro-
vided by broker-dealers. Resulting from these examina-
tions was the recent SEC approval of new research ana-
lyst behavior and disclaimer rules, NASD 2711 and NYSE
472. These rules have a material effect on how research
gets reviewed prior to distribution, and
disclaimers/disclosures that must me published as part of
each research product.
1 Fortune Magazine, ‘A Whole New Ball Game’, July 24, 2000
26
■ Commoditization of the research product: The amount
of available research has become overwhelming to institu-
tional brokerage clients, making it very difficult for any sin-
gle broker-dealer’s research to stand out. First Call alone
now claims 800 different contributors of research.2 Com-
bination of an institution’s subscription to First Call and
Multex, Bloomberg terminals, access to commingled and
single dealer research web sites, and inbound email chains
from several broker-dealers (not to mention old-fashioned
printed research sent via fax and snail mail), have resulted
in a substantial information overload for the end-users. In
addition, while the standardized format of certain
research products has assisted with distribution, it has
turned some research into a cookie-cutter product with
very little opportunity for differentiation. Very few money
managers have the time or energy to wade through this
sea of research. As a result, research producers now focus
a lot more of their attention on receiving high grades from
publications, such as the Institutional Investor, to draw
interest in their analysts. And, of course, Institutional
clients go with those analysts whom they either know or
whose names are familiar.
■ Growing distance between the producer and the con-
sumer: The continued success of 3rd party research dis-
tributors, such as First Call and Multex, has essentially cre-
ated a middleman between the dealer and their clients
with regards to research and published trade advice. In
some cases, a broker-dealer’s client ends up paying others
for the research product, and then ‘freeriding’ (executing a
trade with broker B when the trade idea came from broker A)
off the information. The existence of a middleman also
inhibits the ability of research publishers to determine
what their clients are finding valuable, and what products
and services to target to them.
■ Rising cost of research publication and delivery: The
complexity of offering research on a growing number of
the financial securities through a growing number of disparate
distribution platforms is placing a strain on the IT groups
supporting the research function. The Tower Group esti-
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-
lion on just the delivery of research and analytical infor-
mation to institutional clients in 2003.3
Reviewing the aforementioned challenges, it becomes clear
quite quickly that improved production and more effective
dissemination of this information can help significantly
improve the broker-dealers' ability to attract attention to their
recommendations. I believe that technological solutions exist
today that can help in this process. In the next section I will
discuss how these technologies can be employed effectively.
Research technology priorities
While a technology platform cannot solve the above-men-
tioned issues on its own, it can help improve the efficiency of
the process of research production. For example, sell-side
firms still have some deep thinking to do regarding the busi-
ness value proposition of research, and how it gets produced
within their organizations. What improved technology can do,
however, is enable rapid adaptation to regulatory changes,
open up new operational efficiencies, and at the same time
create new capabilities that will allow for better decision-
making regarding the research product.
In order to effectively introduce and employ new technologies
within their research production processes, broker-dealers
need to achieve 3 important priorities. At this stage, I would
like to apologize from the readers for the use of a number of
technical terms. I hope that it will not cause too much dis-
comfort. With your permission, therefore, here are the three
priorities that I have identified.
■ Priority #1: Utilize XML and traditional database tech-
nologies to differentiate your research and make your
tools more flexible
Delivering a flexible set of authoring tools to handle the many
ongoing changes to research disclosure regulations is a diffi-
cult proposition, especially in the research analyst’s world of
word processing and spreadsheet templates. Many of these
authoring templates are built into the word processor or
3 Tower Group, Andy Nybo, February 2001
spreadsheet software, using embedded Visual Basic and
Active X controls. However, these host office applications are
generally not intended to be software development environ-
ments. As a result, version control of authoring template
across multiple releases of office suites is a continuing strug-
gle for research technology groups.
Nevertheless, there are ways to make these authoring tem-
plates more flexible, within the framework of a full research
architecture, and that are less challenging (and more desir-
able) than trying to wean research analysts off of their
favorite office suite. First, put as much of the data associated
with research as possible into a database, outside of the
authoring template. This allows for standardized storage and
maintenance of critical, proprietary research information, and
frees the authoring template to focus only on formatting and
automation tools to make the analyst’s life easier. Many bro-
ker-dealers already have a ‘numbers’ database in their equi-
ties area, containing security identifiers, actual and estimated
earnings data, as well as previous day market data (among
other information). Given the scrutiny surrounding analyst
conflicts of interest, this database should be enriched to
include disclosure, company mentioned, and earnings foot-
notes text. This way, the text used in presenting disclaimers
and disclosures in reports can be standardized, free from
human error. Also, once database-driven, new disclaimer
types can be added and removed without changing the tem-
plate itself. Some firms have taken this further, by linking the
disclosure text data with the investment banking relationship
data, automating most of the disclosure process from start to
finish.
Another important key to flexibility, and to product differenti-
ation, is in how the research is indexed, stored, and distrib-
uted. Many market participants have joined RIXML.org, which
is focused on designing an industry-wide XML (Extensible
Markup Language) standard for how research content should
be tagged and delivered. While this noble pursuance contin-
ues, however, firms can reap immediate benefits by altering
their current research tools to generate and store research in
their own XML format. The flexibility that storing research in
27
 Research technology priorities for broker-dealers in the U.S.
XML provides is hard to ignore. Research stored in XML can be
rendered, in real-time, in the multiple formats (such as PDF,
HTML and ASCII) required by various research destinations.
Use of XML can also allow firms to differentiate their research,
through the employment of new searchable tags, and the
opportunity to piece different portions of research together to
custom-tailor the end product for different uses.
Just the potential storage space saved alone may make XML
implementation worth the effort, let alone the reduction in
manual effort needed to manage and manipulate the many
formats and versions of research today. XML can be generat-
ed either at the point of authorship, within the authoring tool,
or as an initial step in the distribution process. Where it gets
created depends on the firm’s specific implementation of
research technology.
■ Priority #2: Automate the distribution process to
reduce costs
Taking action on priority number 1 will certainly remove some
of the costs from the research publication process. Still more
cost savings opportunity exists in research distribution. The
term ‘distribution’ is meant to describe the process whereby
research content is rendered, tagged, and delivered to the
myriad of research destinations broker-dealers support today.
For instance, a short equity morning note needs to be deliv-
ered to First Call, Multex, and various other destinations. To do
this, the research content (usually in Microsoft Word or maybe
in XML if priority number 1 has been acted upon) must be
transformed into at least three other formats: ASCII text for
First Call, a PDF (Acrobat) file for Multex, and potentially
HTML for the dealer’s proprietary website. Once the correct
formats are generated, they must be ‘tagged’ with identifiers
that are put into a ‘control file’. Some of these tags describe
the research itself, such as who the analyst is or what compa-
ny the research is covering. Other tags are specific to the des-
tination, such as what menu the research should show up
under on a Bloomberg terminal, or which First Call users are
entitled to see the report. Finally, the correctly formatted
research is sent along with the control file (in a couple of
28 - The Journal of financial transformation
cases both are combined into one file) to their destination,
usually via FTP (File Transfer Protocol).
For many firms, little of the distribution process is automated,
leading to large support staffing requirements and human
error. Firms can recognize significant savings by building (or buy-
ing) a distribution engine to automate and manage these tasks.
When distribution is boiled down to its technical steps, it is
easy to picture a highly automated, rules-based solution:
■ Apply data mapping rules — Once the research content is
created and inputted into the system, the distribution
engine can first match the research to its appropriate des-
tinations, and map the appropriate identifier fields to what
is required by each vendor. These mappings should be
table-driven and kept out of the distribution engine itself.
■ Apply format transformation rules — Based on the dif-
ferent destinations, the appropriate format for each can
be automatically rendered. This is where storing research
as XML has enormous advantages. A few formats, such as
the high-resolution files required for hardcopy printing,
may still require an external process.
■ Apply vendor key rules and send — Now that the content
is in the correct format with the correct content-specific
tags, the control file is enriched with destination-specific
information and sent out.
If the solution is built in a modular and data-driven fashion,
adding new research formats and destinations could be as
simple as adding additional mapping rules and writing a for-
mat sheet (for those more technically inclined, this would
most like be an XSL style sheet).
Overall, development or purchase of a proper distribution
engine can have the complimentary effects of reducing distri-
bution costs while speeding up the delivery of the research
product. There are several vendors in the marketplace offer-
ing automated research distribution systems today.
Research technology priorities for broker-dealers in the U.S.
■ Priority #3: Use of peer-to-peer and instant messaging
technologies to increase the timeliness and quality of
research feedback and consumption information
Of the three major priorities, nothing peaks the interest of
analysts more than providing them, and their management,
with an easier way to communicate with their clients on
research, to track what their clients are reading, and what
actions are taken as a result. Measuring the economic value of
research, always a tricky issue for research producers, has
become even more difficult in recent years with the prolifera-
tion of research aggregator ‘middlemen’ and new e-commerce
trading platforms. While many firms get very good informa-
tion from their own online web research portals, they do not
get uniform or timely feedback from other research distribu-
tion channels.
There are three significant barriers to obtaining feedback on
research. The first barrier is the obvious technical complexity
of trying to collect feedback data from the many non-uniform
research destinations (each with its own format), as men-
tioned above. Second is the right to privacy of the research
consumers, which causes ‘embargo periods’ of various
lengths before some research aggregators (i.e. First Call, Mul-
tex) will share research readership information with produc-
ers. Third is the acknowledgement that research delivery has
become rather impersonal in nature. Sure, analysts pay very
close attention to important customers. But, the majority of
research, particularly on the retail side, is accessed through a
third party aggregator, eliminating any chance of real-time
discussion and feedback on the product itself.
Many broker-dealers are already trying to address these bar-
riers, by participating in dealer consortium websites that pro-
vide many of the same commingled search capabilities as the
research aggregators. When users select a research title on
these websites, they are directed to the broker-dealer's pro-
prietary web portal for the research content (and subsequent
readership tracking mechanisms). However, these consor-
tiums share many aspects of their technology platform and
business model with the existing research aggregators like
First Call. As a result, they have added yet another source of
research to the fray, without adding many additional benefits
to the research consumer or adding tools to increase client
interaction.
A better industry strategy for obtaining feedback on research
and readership is to leverage new technologies to improve the
overall research value proposition for institutional and retail
consumers. Peer-to-Peer (P2P) technology can be deployed
for real-time commingled distribution of research to client
desktops, using a full-time Internet-enabled application
instead of the multitude of website addresses clients use
today. Integrate strong research filtering capabilities and
instant message/chat functionality into this tool, and you have
given the research consumer more control over what they
see, while at the same time providing a mechanism for ‘live’
discussion and feedback on the research that is delivered.
Obviously, privacy issues would still prevent ‘real time’ report-
ing on what clients are reading. But, providing a place for ana-
lysts and sales personnel to engage customers on the
research they are reading, besides the serial nature of the
telephone, should shed a bright light on what’s working or not
working in the research product itself.
This concept can be extended throughout the broker-dealer
community. A joint industry directive to offer research direct-
ly to clients via P2P is a viable way for broker-dealers to dis-
tribute and aggregate research without the aggregators. This
might very well upset the established research aggregation
players, who are already working on next generation client
research products of their own (most recently evidenced by
First Call’s acquisition of Worldstreet, a P2P technology com-
pany). But the concept of removing the middleman from the
research delivery process is certainly compelling.
Beyond the highly integrated solution suggested above, there
are a few less grandiose, shorter-term actions that research
producers can take to improve research-tracking capability:
29
 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)
3rd
Electronic
Party Ftp
Distribution
Analysts Control
Compliance Review Engine
(various formats and stages) File
Http Third
Ad-Hoc
Reporting Financial Party
Models Commingled
Bloomberg/ Publish/Subscribe Portals
Market Compliance P2P Filters
Workbench Dashboard/Single Signon

Information Disclosure
Product-
Data
Specific
ResearchData Email Fax
Authoring
Applications Distribution
Manager
Production Publishing Email Clients
Research
Supervisory Reference Applications (Institutional
Analysts Audio/Video
Data & Retail)
Recording
Printers Hard Copy
Tools

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

31
 Banking

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
sides. Globalization and increased competition, together with
advancing technology and regulatory requirements, are caus-
ing unprecedented change in the financial sector. Retail banks,
in particular, are faced with multiple challenges from share-
holders, customers, and regulators. Shareholders want bigger
returns, investors are looking for cost-effective management,
and regulatory authorities demand stricter rules.
The three key challenges, therefore, facing the banking indus-
try are to improve profits, to improve customer service, and to
ensure compliance with new regulations such as the Basle II
Accord. Meeting this triple challenge, inevitably, relies on tech-
nology. More effective technology can push profits up through
better productivity and greater efficiency. It can also improve
customer service, through better use of data, and enable reg-
ulatory compliance.
In the current economic climate, maintaining profitability is no
easy task. Banks are faced with fundamental changes in infra-
structure and need to make significant investment. The shift
to areas such as telephone and Internet banking, for example,
has not only placed an additional burden on over-stretched
technology, it requires a radical overhaul of business process-
es. Emphasis is moving away from the traditional branch infra-
structure to an integrated multiple channel-model, where cus-
tomers expect consistent service. The business processes and
the technology that supports them must adapt to these
changes.
Faced with the need for such radical change in business
processes and infrastructure, some banks are considering
outsourcing some of the processing load as a means of
improving profitability. Outsourcing bank office activities,
such as cheque processing can, for example, bring savings of
as much as 40%. Not only can these savings be passed on to
customers to increase competitiveness; they can also feed
back into re-positioning the bank's brand identity. Fast, effi-
cient processing can help to redefine a traditional brand and
align it with contemporary expectations.
34 - The Journal of financial transformation
Infrastructure renewal must, of course, be accompanied by
rigorous performance monitoring to ensure that gains in prof-
itability are maintained. The banking industry is moving
towards standardized performance metrics that can give sen-
ior executives and board directors a fast and effective
overview of performance and aid important decision making.
Infrastructure renewal also enables banks to improve cus-
tomer service effectively to turn retail banking into bank
retailing. The decline of the branch infrastructure demands
that banks redefine their relationship with customers.
Changes to business processes and infrastructure must take
account of steadily evolving technology and customers expec-
tations. Currently the focus is on telephone and Internet bank-
ing. But, soon mobile telephones and digital television will
offer additional channels. Business process and infrastructure
must be able to accommodate them. Customers expect con-
sistency regardless of the channel they choose and banks
must be able to deliver.
As if accommodating new forms of banking and satisfying
customers were not enough, banks are also faced with the
specter of new regulations governing their activities. The
Basle II Accord places a burden on banks to put comprehen-
sive risk management policies in place. It places particular
emphasis on 'completeness' in that an organization must be
able to demonstrate that it is able to measure and control risk
across its whole operation.
The common thread running through all three of these chal-
lenges is integration. Indeed, banks now face the same inte-
gration issues that were experienced by the manufacturing
industry during the 1990's, as it moved towards enterprise
resource planning (ERP). Banks need to bring together a wide
range of different processes, based on different technologies,
and synthesize them into a coherent whole.
Over the last three decades, different layers of business
process have grown up around whatever technology vogue
was in favor at the time — from mainframe and minicomputers
in the 1970’s, through PC’s and networks in the 1980’s, to the
Internet and the Web in the 1990's. Clearly this patchwork of
processes and technologies must be brought together and
rationalized.
The first integration priority is channel integration. Banks can
achieve this by putting common processes in place that are
capable of serving any combination of channels. If a customer
phones a call center with a query about an item on the web-
site, the call center agent must be able to access the web page
and customer account details simultaneously. The rationaliza-
tion of business processes offers substantial savings and effi-
ciency improvements. It also impresses customers. But, it is
not only front-end, customer facing processes that need inte-
grating. Further gains in profitability can also come from inte-
grated back office processes. More importantly integrated
back office processes enable compliance with the demands of
risk management and reporting regulations.
Technology integration underpins the drive to integrate chan-
nels and business processes. Banks need a common frame-
work on which to accommodate existing communications
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.
Hansabank, the leading financial institution in the Baltic
States, provides an example of how integration can work.
Hansabank has been a pioneer in the implementation of com-
prehensive, innovative IT and e-banking solutions. The Hansa-
bank banking system, which covers three markets with specif-
ic requirements, different currencies and languages, runs on a
single integrated platform. It manages current accounts, loan
accounts, securities, cross-border payments, and leasing solu-
tions. It is managed from a single centre in Estonia, where the
automation of most of the back-office processes has enabled
Hansabank to cut its IT infrastructure costs. Over 340,000
customers use Hansabank's on-line banking facility.
There can be no doubt that retail banks face some formidable
challenges. Against a background of uncertain economic con-
ditions, structural change in the financial markets, growing
customer demand and ever advancing technology, they must
increase their profits, please their customers, and meet
increasingly strict regulations. While this may seem a tall
order, it is not impossible. Integration of channels, of business
processes, and of technology systems is the essential first
step that will lay the foundation for the changes yet to come.
35
 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-
dation, and regulation long enough to entrench these market
factors in the competitive landscape, competitive challenges
continue to rise. For example, new specialist providers are re-
defining the nature of the processes that will underlie com-
mercial and institutional transaction management in the near
future.
At the same time, the basics of good wholesale banking have
not changed. Shareholder value and Return on Investment
(ROI) remain the cornerstone of the bank’s business plan.
Development of new revenue streams and delivery of excep-
tional service to customers continue to be the key to success.
The need for client retention and growth has been the driver
behind profitability and service quality for at least a decade.
What’s new today, compared with the 1990’s, are requirements
for cost reduction and increased operational excellence.
Delivering on the basics while meeting key business require-
ments is a challenge most banks are now addressing, at least
in part, via seamless integration of business process strategy
and information technology (IT) implementation. Through this
union of business and IT, banks believe they can improve
processes, reduce costs and complexity, optimize core
strengths, consolidate disparate systems, mitigate risks, and
grow revenues. It is a tall order but increasingly necessary, if
banks are to drive margins in line with business growth. On
the technology side the alignment of business solutions and IT
requires strategic, end-to-end IT, and business solutions over
a wide variety of distinct yet flexible and highly secure deliv-
ery channels.
Wholesale payments processing: Where it’s been
Although still among the most profitable services in the bank-
ing industry, wholesale payments processing margins are
shrinking. The arena is currently experiencing excess capaci-
ty, and payments processing is under market pressure, as re-
investment, regulatory, and infrastructure costs rise and unit
prices fall. Globalization threatens to push wholesale banking
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
entiate and excel, wholesale banks must establish, invest in,
and leverage core competencies. To effectively manage costs,
it is critical for banks to align innovations with business
processes and information technology.
Thought leaders in financial services are helping institutions
around the globe stem margin erosion and take advantage of
business opportunities that are inherent in the move towards
Real Time Gross Settlement (RTGS). This can be achieved with
integrated payments systems that offer comprehensive liq-
uidity and risk management. It is not uncommon for a bank’s
payments systems to turn over its total assets three or more
times per day. Historically, the business processes involved in
payments have not been streamlined or integrated and
numerous duplications still exist. Many current payments sys-
tems are badly in need of replacement.
Typical problems faced by payments systems today arise from
the following factors:
■ Many banks have gone through one or more mergers
since implementing their payments applications. They
may now have several different systems. They may also
have consolidated all their systems into one, but with sev-
eral compromises in product presentation and operations.
■ Several banks have been unable to keep up with recent
operating system, hardware, and application software
changes. Bank IT staff find it particularly difficult to pro-
vide the continual testing and support needed.
■ Some payments system vendors have ceased to support
applications, leaving banks with orphaned technology.
■ Various payments system vendors are unable or unwilling
to respond to a bank’s requirements within a reasonable
time frame or at a reasonable price, or both.
■ Numerous institutions have a backlog of new products
and functions, which they have been unable to implement
safely and cost effectively. This quickly reduces individual
bank competitiveness and could cost a bank the business
of its most important customers.
The next-generation payments processing:
Where it’s going
Today banks seek payment technologies that will, at a mini-
mum, help them streamline processing throughout the pay-
ments system; provide new customer services, such as recur-
ring payments, telephone payments and cash management;
automate accounting interfaces to multiple systems within
the bank; and accommodate geographic expansion. In addi-
tion, they are also looking for advanced capabilities that sup-
port new business initiatives, including the following.
■ Risk management — Banks and other financial institutions,
in their role as payment processors, are incurring increas-
ing levels of payment risk. Bank mergers; unsupported
systems; increasing payment values, volumes, and pro-
cessing speeds; plus the increasing number of worldwide
payment-system participants, are contributing to an over-
all systemic and operational risk. To reduce these risks and
add stability to the global payments system, market regu-
lators have mandated real-time gross settlement (RTGS).
■ Straight-through-processing — Today more than 70 per-
cent of wholesale payments processed by financial institu-
tions receive individual clerical attention. This manual
intervention is driving operational costs and risks to unac-
ceptable levels. Without STP, banks will not be able to
reduce costs and conform to RTGS mandates.
■ Liquidity and cash management — Given the high values
associated with wholesale payments, banks and corpora-
tions are requesting solutions that will help them better
manage funds, reduce risk, and lower interest payments
on intra-day loans. To meet this goal, banks require pack-
aged solutions to integrate back-office legacy systems and
implement STP.
■ Corporate customers — In today’s 24x7 global market,
corporate customers need real-time payment initiation
and notification of settlement. Wholesale banks are being
forced to offer improved payment services or lose their
highly profitable customers to the competition.
To help them achieve their objectives, leading banks believe
that the ideal payment and funds transfer system should have
the following attributes:
■ Reliability — the system must function reliably and
employ the level of hot backup that each institution has
come to expect.
■ Expandability — banks must be able to add resources to
the system (or subtract from it) as their business changes,
without having to change software.
■ Usability — there must be a choice of modern and efficient
user interfaces to meet the needs of both the expert and
the occasional user. Multiple languages may be required.
■ Completeness — the system must either incorporate all
necessary reference data or provide standard methods of
obtaining and updating such data regularly.
■ Volume — the system must handle predicted volumes and
peaks without issue. The infrastructure must be capable of
supporting volumes several times above current traffic.
■ Support — the system must be designed, implemented,
and supported by individuals who know payments. Banks
do not want to be left with an orphaned system.
■ Integration of payments — the system must be an inte-
grated worldwide payments environment, encompassing
liquidity management, operations, and systems manage-
ment.
■ Ease of migration — the migration path must be clear and
manageable, with effortless reconfiguration and modifica-
tion capabilities.
Next-generation technology: Available today
Although the aforementioned list of requirements seems
overwhelming, it is important to note that such capabilities
are already available in the market. When we advise our
wholesale banking clients, we tell them to look for a solution
that has already implemented the following functionalities
and features:
■ The solution must have been in the market for a number
of years and is fully operational — tested in the real world.
■ It must have been regularly updated and enhanced to
37
 incorporate evolving market, regulatory, and customer
requirements.
■ The vendor has a track record and a team with expertise
and commitment to wholesale banking.
■ The solution must work both at the enterprise-wide level
and globally. Domestic and international functionality
must be inherent and must fulfill legal requirements.
■ Must be possible to integrate wholesale banking-related
applications with data and processing functions, resulting
in more efficient and cost effective processing.
■ Must include extensive, configurable risk management
and position tracking facilities for accounts and cus-
tomers; the bank; SWIFT, Fedwire and CHIPS; and other
banks.
■ Full support for intra-day liquidity.
■ The system should cover an end-to-end payment
approach that covers payment initiation through payment
finality.
■ A complete suite of banking solutions that can be added to
as needed, in an integrated environment. The suite of
solutions could encompass Internet banking, ACH Pro-
cessing, financial EDI, CLS, B2B electronic bill present-
ment and payment, foreign exchange, trade finance, busi-
ness process management, Internet access, comprehen-
sive cash management, and behavior detection.
In addition to business functionality requirements, the ideal
solution should provide equally robust technology, including:
■ High availability for mission-critical banking
■ Scalable and extensible platform
38 - The Journal of financial transformation
■ Web-enabled banking products and services — within the
bank as well as to corporate, commercial, and small busi-
ness customers
■ Choice of production-proven operating environments
■ Services and support in a 24x7 global environment
■ Adaptable software:
• Straightforward configuration, requiring little custom
development
• User-managed parameters to control workflow, pro-
cessing steps, and default actions and values
• Capability to handle a wide range of payments and
volumes effectively and efficiently
• Flexibility — adjustable as business needs change.
Towards operational excellence
A premium payments system integrates business require-
ments with information technology and helps the bank
achieve operational excellence. An operationally excellent sys-
tem facilitates exceptional services for customers as well as
new revenue streams for the institution. It supports the bank’s
objectives of reducing costs, capitalizing on core competen-
cies, delivering shareholder value, and retaining customers.
Comprehensive, real-time, high-value payments processing
should help improve STP rate, operating margins, liquidity and
risk management, and services for customers, while at the
same time reducing costs. Moreover, it can help simplify inte-
gration with current and future applications and compliance
with RTGS mandates.
These are all crucial components of the wholesale banking
industry’s passage to operational excellence.
Trends in payments:
The move towards payments factories
Mark Webster
Partner, Capco
Prior to the industrial revolution, most manufacturing was
done on a unit-by-unit basis using manual labor. Each product
created was unique, and required a large investment in time
and labor. The industrial revolution, with the introduction of
the automation and machinery simplified the situation. But it
wasn’t until Eli Whitney originated the concept of inter-
changeable parts, and Henry Ford introduced the concept of
assembly line production that modern factories became pos-
sible. Today, most manufacturing is done in highly automated
factories, with a minimum of manual labor, and a high degree
of productivity. Even products that are 'made to order' are
usually created on an assembly line with automation doing
most of the work.
The same, however, cannot be said for most service industries.
Although automation has improved the productivity of most
white-collar workers, manual efforts and custom processes
are still quite common. The banking industry in general and
payments in particular are no exception. Modern banking has
made heavy use of computers and automation to streamline
check processing, funds transfers, and card payments. Much
of what is done today would be impossible without a heavy
investment in technology. Unfortunately, there is still a signif-
icant amount of manual intervention and custom processing
needed to make today’s payments systems work. The per-
centage of straight through processing is nowhere near what
it needs to be from a cost perspective, and manual processing
of exception items is one of the biggest operational problems
that most banks face.
There are a variety of causes for this situation. Most financial
institutions have a wide variety of payments processing plat-
forms, almost always operating in their own management
silos. At a minimum, any given bank will usually have separate
processes (and operational silos) for check, electronic pay-
ments, and cards. In most cases, this is further complicated by
the legacy of various systems resulting from prior mergers
and acquisitions. Beyond that, most banks have built specialty
applications to meet specific customer requirements or to
provide new services that the existing systems cannot handle,
or to meet regulatory requirements around such things as risk
management and electronic payments. Finally, technology
has been adopted piecemeal and applied to improve existing
processes rather than redesign the processes to take full
advantage of modern technology.
The end result is the need to maintain multiple processing
platforms, many legacy systems that need to be updated or
replaced, and all performing essentially the same function.
Few of the existing platforms communicate with each other,
none of their 'parts' are interchangeable, and they rarely use
a common database. The lack of communication and cooper-
ation leads to high levels of exception processing and rework
with minimal straight through processing. The bottom line is
high cost, low productivity, and an inability to respond rapidly
to external opportunities and customer demands.
Today’s financial institutions are facing pressure from a vari-
ety of directions. Regulators are demanding more and more
information regarding operations and transaction processing,
much of it requiring manual intervention or systemic work-
arounds to deal with the existing processing silos. Customers
are demanding lower costs, faster processing, increased
transparency, and combined reporting across all delivery
channels. Management is demanding lower cost, faster devel-
opment time, and improved risk management – again across
all channels and platforms. At the same time, operations man-
agers are faced with aging legacy systems, many of which no
longer have vendor support, fewer resources, new delivery
channels, and the difficult task of coordinating development
and operations across multiple silos.
One potential solution is to apply the lessons we’ve learned in
manufacturing and build payments factories to replace our
existing fractured payments operations. A payments factory
would be a single consolidated payments platform using com-
ponentized technology and a common repository for both
data and operating rules. A payments factory, by design, can
handle multiple payments media through multiple payments
channels in a highly automated fashion. Using modern rules-
based and message-based systems, it is possible to build a
payments platform that can automate most of the existing
39
 exception processing, practically eliminating manual interven-
tion, and providing a significant degree of straight through
processing. By eliminating processing silos and redundant
processing, we reduce costs and improve productivity. By
using componentized, interchangeable software we reduce
resource requirements and improve development speed. By
using a common data repository we gain a cohesive view of
our customers and their transactions, improve internal risk
management, simplify regulatory and customer reporting,
and gain the potential for new value-added services.
If the solution is so simple, why hasn’t someone already done
it? Again there are multiple reasons. First, the technology
needed to support a true payments factory has not existed
until fairly recently. Many of the concepts and systems need-
ed to make the idea a reality are being tested and tried today.
Fortunately, or unfortunately depending upon your point of
view, many of these new technologies can also be used to put
'Band-Aids' on the existing hodge-podge of payments plat-
forms to allow financial institutions some of the expected pro-
ductivity gains and defer the need for change. Second, build-
ing a true payments factory will be expensive. While there is
significant payback over time, the up-front investment is sub-
stantial. Given today’s economy, very few institutions are will-
ing to make a long-term investment of this type when existing
systems still work. Finally, and perhaps most importantly, pay-
ments systems represent the lifeblood of modern financial
institutions. Bankers, for many legitimate reasons, tend to be
conservative. Very few are willing to run the risk of being first
to make major changes to their payments networks and
processes, unless they absolutely have to. The pain level is not
that high yet. And probably won’t be until someone else
40 - The Journal of financial transformation
demonstrates that it can be done.
The good news is that various parties are exploring options to
build the first payment factories. Several of the large, multi-
national banks are looking to payments factories as a solution
for the various operational problems that they currently face
in processing payments. They are also looking at white-label-
ing the factories to smaller institutions as a method of cover-
ing some of the related costs. Some smaller financial institu-
tions are looking at creating payments factories as jointly
owned payments utilities to reduce costs, meet customer
demands, and compete more effectively with the larger banks.
Finally, several vendors are in discussion with both banks and
industry trade associations regarding creating jointly owned
payments utilities that will use the factory concept to provide
processing capabilities for members and fee revenue for the
owners.
Banking is, to a large extent, a 'me too' industry. As soon as
one successful payments factory is created, others will be
built. Given the lead-time needed to create a payments facto-
ry, there is certainly an advantage to being a leader in this
area. Considering the operational and cost advantage that
such a utility will create, there is absolutely a disadvantage in
not having one, once they become a reality. Looking to what
factories and automation have done for manufacturing, it is
only a matter of time till we see similar gains in banking, now
that the technology exists. Henry Ford took an extreme risk
when he built the first automobile assembly line, but the
results were unimaginable. The question now is, who will be
the Henry Ford of the payments world?
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
on events in near-time promises to become the next milestone
in the integration of information technology with business
operations. The question is, how long will financial companies
have to wait for enterprise event management to become a
day-to-day reality. Although IT has taken enormous strides in
transforming lines of business silos into enterprise-wide busi-
ness systems, technology today is still far from able to deliver
a single real-time view of the entire business operation. But, the
pressure is on technology developers to provide this capability.
Why is such a real-time view of enterprise events becoming
essential to financial companies? Primarily, because firms
need to make intelligent business decisions faster than ever. In
order to make the best decisions firms must be able to put
their hands on a total view of the business in real time. This
need is becoming more urgent as financial companies seek to
develop and implement operational risk strategies. Without
being able to track histories and make predictive risk analyses
in near-time, it will remain difficult, if not impossible, for firms
to control rogue trading and other operational risks that can
threaten the existence of the entire firm.
Today’s business and IT managers have overview tools for
managing the network, the servers and storage, and the appli-
cations. However, they lack the integrated tools to look at the
overall business operation, which may be an order, a return, a
new product introduction or a new customer sign up.
The business operation is comprised of many distinct ‘arti-
facts,’ such as the applications (e.g., ERP, EAI, CRM), the busi-
ness process engines, and the supplier and customer interac-
tions via paper mail, email, fax, EDI, XML, or web services.
However, even when all business systems are functioning cor-
rectly, the business may still experience errors and exceptions
in the overall operation. Take a case where all the systems
used to process new checking account applications work flaw-
lessly. Nonetheless, checking account applications are down
20 percent over the previous year. That’s an indicator that the
enterprise needs to track online as carefully as it is now track-
ing calls to its customer support center.
What makes the automation of business operation tracking so
appealing is the potential of real-time business views to
respond when something goes wrong. But, more critically, to
predict when something may go wrong in time to take pre-
ventive action.
Business activity monitoring
According to Gartner, business activity monitoring (BAM) is
the name for a new class of solutions that will underpin the
real-time enterprise. To interpret real-time events, BAM will
leverage the models and frameworks that business process
management and business intelligence offer today. BAM pro-
vides real-time access to critical business-performance indica-
tors to improve the speed and effectiveness of business oper-
ations. It also provides a broad and rich view of business activ-
ities by drawing on information from multiple application sys-
tems and other internal and external (inter-enterprise)
sources. Compared with traditional real-time process monitor-
ing, a good BAM system will draw its information from multi-
ple application systems for a broader view of all business
activities. In so doing, it will optimize investments already
made in back-end data systems by using that data to create a
real-time, instant-insight view of the business.
Today, key business data is collected by financial firms and
typically stored in separate information silos. Accessing, filter-
ing, and understanding these separate pieces of information
and then attempting to make a business decision without hav-
ing a full picture results in increased operational costs and
risks to a financial company. In addition, much of the collect-
ed data remains at the infrastructure level. While it is critical
for IT to know about a down server, for example, it is not nec-
essarily of immediate importance to a line of business man-
ager. The LOB manager needs to know the immediate busi-
ness impact the down server will have. That is the type of busi-
ness question that can not be answered with the aid of current
technology.
41
 Needed: Real-time insight using an integrated
display of enterprise data
As BAM solutions are introduced, they will provide LOB man-
agers with the ability to view an intuitive, interactive, and
graphical representation of information in real-time. Both
business and IT managers will benefit from key performance
indicators for real-time measurement of business perform-
ance, historical analysis of trends and the ability to spot recur-
ring problems, the ability to reduce operational costs and risks
and increase opportunities for growth, and the ability to
ensure that the business process meets customer expecta-
tions and business commitments.
Ideally, individual BAM users will work with a customized dash-
board or cockpit focused on their area of responsibility, which
includes historical analysis and trending information, with
metrics and thresholds monitored in real-time. Although some
preliminary BAM approaches are already being sold, they are
for the most part simply monitoring scorecards, with various
degrees of latency built in. The challenge for the next genera-
tion of BAM solutions is to provide real-time access to enter-
prise information that allows a manager to make the right
decision and act upon business events quickly.
An integrated view of the enterprise in real-time will pro-
vide enhanced operational efficiencies such as the ability to:
■ Report mission-critical business performance metrics
to support real-time decisions.
■ Track process change initiatives across the enterprise,
charting their impact on active projects or campaigns,
or on established business lines, products, and services.
■ Measure business performance to service-level objec-
tives and provide audit trails.
■ Optimize workflows and workload balancing.
■ Generate notification of service-level degradations or
performance aberrations and trigger subsequent
actions.
■ Monitor adherence to regulatory and compliance rules.
■ Monitor exposure and apply the appropriate risk man-
agement processes.
Retail banking scenarios
In addition to offering an enormous acceleration in opera-
tional efficiencies, BAM technologies also promise costs sav-
ings and faster routes to identifying new revenue and cus-
tomer service opportunities. As an example, the business
operations manager of a bank’s payment systems would be
42 - The Journal of financial transformation
better able to align the bank’s IT infrastructure and payment
processing systems with the business goals of the organiza-
tion. Once the alignment was established, the BAM system
could help the manager proactively manage the payments
process and receive an early alert whenever the bank is at risk
of not delivering services or performing critical processes.
Should a potential problem loom, the bank manager would be
able to immediately determine the business impact and
decide on an educated course of action.
The BAM system for a bank might also assist with penalty
avoidance and regulatory compliance by warning of potential
failures or events before they occur. It could enhance work-
flow by anticipating bottlenecks and potential problems. Fur-
thermore, it could analyze business data in real-time and com-
pare it with historical data, increasing the bank’s ability to per-
form straight-through processing.
Key to the success of a BAM implementation will be the abili-
ty to identify and prioritize the business events often hidden
within business practices. It will be essential for financial com-
panies to work with a BAM technology partner experienced in
the evaluation of global best practices in business. Typical
issues customers can expect to face include:
■ Identifying business processes and events important
enough to measure — Financial companies deal with
thousands of events. Which ones are meaningful and have
material impact on the firm?
■ Estimating potential exposure from identified process
events — Costs may be regulatory, financial penalty, loss
of competitive position or customers, and others. Each
type of event can emanate from either business process-
es and/or technology breakdowns within or without the
organization.
■ Monitoring across internal and external events — Busi-
ness processes and technologies cross company borders,
yet they must be monitored and reported on with suffi-
cient time to enable managers to take preemptive actions.
■ Preserving existing IT, workflow, and business process
investments while also interfacing with components from
external organizations and global environments.
Each financial enterprise needs to assess its own readiness to
implement a BAM solution and to identify its best partners for
designing, developing, and implementing the real-time decision-
making views that will best enhance the company’s ability to
compete in today’s increasingly complex business environment.
 Banking

Implementation of
e-private banking in
a Swiss private bank

Olaf Schwarz
Head of e-Banking, Bank Vontobel

Abstract
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.

43
 Implementation of e-private banking in a Swiss private bank

How do Swiss investors use the Internet?
To what extent do investors in Switzerland use different chan-
nels such as the print media, TV, or the Internet to gather
financial information? In 2000 – at a time when Bank Vonto-
bel drafted its e-private banking strategy — the Swiss Banking
Institute at the University of Zurich1 answered this question
extensively with its comprehensive study ‘Equity Ownership in
Switzerland’. So, how did the Internet fare with other well
established channels in different age and income groups?
They found that more than half of those under the age of 40
seeking financial information turned to the Internet. However,
the percentage of those switching on the TV (60%) or read-
ing a newspaper or magazine (90%) to get information on the
financial markets were still higher, indicating that the Internet
is used largely as a complimentary channel by the younger
generation. Only one in eight investors in the 60-76 age brack-
et accesses financial information on the web. These results
seem to confirm the long held preconception that the younger
generation is generally faster in embracing new technology. In
addition to substantiating this generally accepted assertion,
the study generated a number of results that were quite unex-
pected. For example it found that while only a third of Swiss
investors in the lower income bracket (income of up to CHF
6,000 per month) use the web to retrieve information on the
financial markets, more the half of those in the upper income
bracket (more than CHF 10,000 per month) turn to the elec-
tronic channel prior to making investment decisions. This
comparatively high Internet usage among the affluent and
high net worth individuals comes first and foremost at the
expense of television; newspapers and magazines remain the
favorite source of information for this group with a rating of
well above 90%.
increasingly difficult to turn a blind eye to the Internet.
How do Swiss private banking clients use the
Internet?
We find that investors can be typically placed into three cate-
gories with regard to their Internet habits:
■ Internet informers only — those who browse the web to
gather bits and pieces of information relevant to their
investment decisions. 44% of Swiss private banking
clients fall into this category. In comparison, only 24% of
retail banking customers fell into this category, indicating
that private banking clients have an above average affini-
ty for the Internet when it comes to financial matters.
■ Internet investors — those who also use online brokerage
accounts to place orders over the Internet. This groups
represents 15% of the clients of Swiss private banks.
■ Old fashioned investors — investors who stick to tradi-
tional offline channels. This group represents 41% of the
clients of Swiss private banks.
Focusing on client needs: Information or transac-
tions?
Private banks that intend to invest in an Internet banking serv-
ice aimed at high net worth individuals ought to focus on the
primary needs of this client segment and thus above all pro-
vide a wide array of high quality financial information and
Print media TV Internet
% of respondents 92% 63% 40%
Age of respondents
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
net worth individuals have often found to their dismay that
clients will check their accounts and custody accounts online
only to call their client advisor on the phone in order to place
a stock market order rather than use the online facilities pro-
vided by the wealth manager. There are two main explana-
tions for this client behavior. On one hand clients seek reas-
surance regarding their investment decisions from their per-
sonal investment advisor prior to placing an order, which is
why most of them chose a private bank in the first place. On
the other hand clients prefer to transfer the work as well as
the risks associated with manual order entry to the bank. This
is especially true for some of the more complex transactions
that are quite common in private banking.
Based on the available information on client behavior and
preferences available, we took the decision to focus on the fol-
lowing functionalities in our e-banking: detailed client report-
ing, stock quotes and financial news, and equity and mutual
fund research. Given that our bank is positioned as a wealth
Many different elements contribute to what is perceived by
clients as 'good service’ and they each have to be addressed
by different means. However, some important aspects of good
service can be provided by an e-banking solution, convenience
and access to comprehensive information and advice.
E-private banking: A client retention tool
Acquisition costs in private banking continue to rise as com-
petition intensifies especially in the onshore market; hence,
retaining the existing clients becomes ever more important
for the long term success of a private bank. While exact fig-
ures on average acquisition costs in the industry are hard to
come by, it is generally accepted that acquiring a new private
banking client is five to eight times as expensive as retaining
an existing one. Therefore Bank Vontobel´s primary strategic
goal in implementing a comprehensive e-private banking solu-
tion is to raise the quality of service that it offers to its clients,
thereby improving client loyalty and raising the client reten-
tion rate. As the Internet becomes ever more pervasive in
daily life and younger clients increasingly regard e-banking as

45
 Implementation of e-private banking in a Swiss private bank
a 'must', the ability of private banks to attract and retain the
younger generation of private banking clients depends
increasingly on the ability of an institution to offer an attrac-
tive internet package.
E-private banking vs. e-retail banking
Many retail banks embrace e-banking because it allows them
to substantially reduce the number of routine transactions
processed by their branch network. Furthermore, some labor
intensive tasks, such as entering payment instructions or
stock market orders into the backend systems of a bank can
be transferred back to the customer through an e-banking
application resulting in significant cost savings.
Most small- to medium-size private banks face a very different
situation. The number of their clients is considerably lower,
most of them do not have a large and costly branch network,
and they focus on providing their clients with a combination
of advice and complex individual wealth management solu-
tions, rather than on selling a limited number of standardized
products.
When setting out to design an e-private banking application
these banks face a situation that is very different from those
of large universal banks. They do not have a legacy e-banking
system tailored for the retail market, which can be adapted to
the particular requirements of the private banking market.
While this might seem to be a disadvantage at first sight, it
also offers the private banks the opportunity to concentrate
on the unique requirements of their clients.
Unrealistic expectations?
What payback does Bank Vontobel expect from ‘Vontobel inter-
active banking’, its e-private banking application?
■ Increased client satisfaction.
■ Increased client loyalty, resulting in higher retention rates.
■ Higher efficiency of client advisors by reducing the num-
ber of routine inquiries and thereby allowing the advisors
to focus on higher value activities.
■ Increased acquisition of young onshore clients.
46 - The Journal of financial transformation
■ Increased strength of the Vontobel brand.
While the penetration rates of e-private banking applications
at most Swiss private banks remain well below the somewhat
overoptimistic expectations that were formed during the hey-
days of the Internet bubble, the number of active users does
rise continually. As the amount of money that is passed on to
younger generations with higher Internet affinity increases
steadily, as a result of current demographic trends, the per-
centage of clients using e-private banking will climb further in
the coming years.
Implementation of the e-private banking strategy
In autumn 1999, a group of senior managers and client advi-
sors at Bank Vontobel formulated their vision of a perfect e-
private banking application tailored exclusively to the needs
of high net worth individuals. Early in the process it became
evident that the investment in an e-banking application ought
to be leveraged by providing not just an e-private banking
application for the clients but also an enhanced look-alike
desktop for the client advisors to ensure optimal collabora-
tion. This ensures that clients and client advisors are working
with the same data displayed in the same fashion, thereby
greatly facilitating the communication and reducing possible
misunderstandings between the two of them.
Once the vision had been drafted, a beauty contest was held
with potential suppliers of e-banking systems to determine
which of the ideas could be implemented at reasonable costs
with the available technology. The beauty contest demon-
strated that some of the requested features such as session
sharing between client and client advisor or the extensive use
of web cams were not yet compatible with either the available
bandwidth or the strict requirements of the bank regarding IT
security. When reviewing the offerings in the market it quick-
ly became evident that no off-the-shelf product could meet
the bank's requirements regarding business functionality.
Thus the bank focused on highly flexible frameworks that pro-
vided basic business functionality and could easily accommo-
date the additional requirements of the bank.
Implementation of e-private banking in a Swiss private bank
After carefully weighing the pros and cons of the frameworks
and systems on offer, the bank decided to opt for Hewlett
Packard — Nimius e-banking solution, which had a very good
track record in Switzerland and Liechtenstein. It had a number
of successful e-banking implementations at private and retail
banks under its belt (Bank Sarasin, VP-Bank, Raiffeisen
banks).
The functionality
During the specification phase of the project the bank decid-
ed to stick to its core competencies in wealth management;
thus, no lifestyle or other non-banking elements were to be
included in 'Vontobel Interactive Banking'. This turned out to
be a fortunate decision as most attempts in the industry to
combine banking and leisure elements in an Internet portal
did not generate the hoped for enthusiastic response from
clients.
The most important and by far most popular functionality is a
comprehensive client reporting covering a client's accounts,
as well as custody accounts. Since most private banking
clients consider time to be a very precious commodity, the
bank put a lot of effort in ensuring that all relevant informa-
tion is easily accessible. What does this mean? A client who
has a certain stock position in his portfolio might ask some of
the following questions:
■ What is the position currently worth?
■ When has the stock been bought?
■ How much was the last dividend and what is the yield?
■ What is the latest corporate news on this stock?
■ What is the opinion of the Vontobel Research on this stock
in particular and the sector in general?
■ What warrants and options are available on this underlying
asset?
In order to provide quick and satisfactory answers to these
and several other questions that a client might pose, all infor-
mation on a single stock has to be closely linked, thus enabling
a client to get a full picture in a minimum amount of time. As
a consequence, real time quotes, corporate news, analyst rec-
ommendations, warrants and options, as well as all research
reports on a particular stock, can be accessed through links
from a specific custody account position. Furthermore, all
transactions (including corporate actions) carried out in a par-
ticular stock during the last two years can be displayed. Icons
indicate on which stocks news are available and which stocks
are covered by Vontobel Research.
The client-reporting module allows clients to view their assets
not just by asset classes but also by risk currency, sector, or
maturity. The portfolio can be displayed either as a conven-
tional list or as a combination of pie (assets) and bar (assets &
liabilities) charts. Drill down functionalities enable clients to
access information, such as details of a particular transaction,
very quickly.
The asset analysis allows clients to analyze the structure of
their portfolio by combining different criteria such as asset
class, risk currency, or sector.
The stock market quotes and news module contains numerous
ways to search and display the information. A multiple view
window on each security displays not only the latest stock
market quotes but also company news, customizable charts,
analyst recommendations, as well as warrants and Eurex
options. The quotes & news module also allows clients to set
up watch lists and virtual portfolios and to configure their per-
sonal quote or news tickers using convenient drag & drop nav-
igation. Stocks or news categories can also be dragged on the
desktop where they can be saved and thus easily accessed at
a later date.
The equity research produced by the Vontobel Brokerage can
be accessed through Interactive Banking. This can be done by
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
or by going through the sector and company lists provided in
the research module. Besides company reports, it also fea-
tures sector reports and macroeconomic research.
Furthermore, the Vontobel Fund Research provides informa-
47
 Implementation of e-private banking in a Swiss private bank
tion on approximately 200 recommended third party invest-
ment funds in more than 50 categories. This information
includes not only data on the performance of each fund in
several reference currencies but also volatility figures as well
as the Sharpe ratio. The latest fund fact sheets provided by
the (third party) fund managers could also be downloaded as
pdf-files while a direct link to the in-house fund database
exists for Vontobel funds. To ensure compliance with strict
legal requirements regarding mutual fund distribution, a
client may see only the funds that are registered for sale in
his/her country of residence.
When designing the application the bank wanted to harness
the new opportunities offered by multimedia technologies.
Several times a day updates on the Swiss, German, and U.S.
bourses are provided in the form of audio files. Clients can lis-
ten to these through the real player which is provided as part
of the whole software package. The audio files are sourced
from AFX and routed straight into the application without any
manual intervention, thus ensuring minimal delay. Further-
more, video interviews with analysts or strategists are con-
ducted whenever a major research report is released or unex-
pected events happen in the financial markets.
In order to justify the title ‘Interactive Banking', which implies
that this e-banking solution provides not just one way com-
munication, a chat room has been included in the application.
About once a month an expert on a frequently discussed
financial topic (e.g. taxation, estate planning, stock market val-
uations, macro economics, investment policy, structured prod-
ucts etc.) answers questions online that are submitted by
clients either prior to or during the session. In order to ensure
maximum confidentiality for the clients, all participants are
required to chat under an assumed name. The transcripts of
these discussions can be downloaded as pdf-files by the
clients.
In order to provide additional information to clients, the appli-
cation includes the so called 'information folders'. These fold-
ers which are capable of accommodating different data for-
mats such as plain text, pdf, audio, video, or links to website
48 - The Journal of financial transformation
can be considered as safe e-mail boxes. The general folder
contains documents that the bank regards as interesting for
all clients. These range from the current investment policy to
press releases, updates on new products, and the latest stock
and bond guides. The 'personal folder' allow the client advi-
sors to securely transmit documents to a particular client. The
audio and video folder contains the 12 daily audio market
updates as well as the video interviews with analysts.
Early in the specification phase the bank had to decide
whether a Java or HTML would better suit the needs of its
clients and client advisors. While an HTML-client is easier to
handle (no installation required) it offers fewer possibilities
when its comes to personalization and it does not support fea-
tures such as 'drag and drop' navigation, which greatly
enhance the usability of the Java desktop. The extensive drill-
down features, as well as the context menus offered by the
Java desktop, allow for a very intuitive navigation, thus great-
ly reducing the amount of time required to access detailed
information. After weighing all the pros and cons, we decided
to opt for a Java desktop — a decision that has not been
regretted to date.
The first feedback from client and client advisors
After an implementation period that lasted nine months, the
bank launched release 1.0 in April 2001. This version was made
available to a limited number of pilot clients and pilot client
advisors. The purpose of the pilot phase, which lasted 6
months, was to gather a maximum amount feedback through
questionnaires, usage statistics, and help line staff to enable
the bank to determine which enhancements or adjustments
ought to be made for the next release.
The first feedbacks from the clients showed that they were
generally quite satisfied with the functionality, as well as the
quality and quantity of data provided. The fact that the some-
what complex installation of the Java client on the home or
office PCs and laptops of the clients did not pose any signifi-
cant problems came as a pleasant surprise. However, there
were quite a few clients whose PCs did not meet the minimum
requirements for hardware and operating system. As a result,
Implementation of e-private banking in a Swiss private bank
they were forced to either upgrade their PCs or defer the
installation of Interactive Banking. More than one and a half
years later this problem has almost disappeared as the mem-
ory available in the average PC has soared. Nevertheless, a
small minority of Apple enthusiasts remain disappointed as no
version is available for their favorite computer.
The comprehensive documentation provided to the clients,
which included an 'installation & security guide', a 'quick ref-
erence guide', and a short introductory video was well
received. However, the calls to the help line showed that only
a few clients actually turned to the manuals whenever ques-
tions arose. The same can also be said of the context sensitive
online help, which was hardly frequented.
The pilot users rated the usability of interactive banking as
'fair to good'. This less than enthusiastic endorsement result
came as no big surprise to the bank as some of the more com-
plex features that are considered a 'must' by expert users do
at times tend to confuse the casual user. However, the fact
that the navigation is generally based on well established
Microsoft standards, such as drop down menus and an explor-
er, make it relatively easy for novice users to get started. The
drag & drop feature, as well as the wide array of extensive per-
sonalization features, which are rather uncommon for this
type of application, continue to receive rave reviews from fre-
quent users.
The competence and the friendliness of the help line staff
were rated as 'very good'. Because the help line staff had
been intensively involved in the project from the beginning
and actually did a lot of the testing themselves, they were inti-
mately familiar with the strengths and weaknesses of the
application when operations started. This allowed them to
solve many complex issues right away without having to
resort to the 2nd level support. The call volume was consider-
ably lower than expected; after an initial surge following the
launch of the service the number of calls dropped so far that
service hours were actually reduced from 08:00-22:00 to
08:00-21:00 CET, while the Saturday service was discontinued
altogether. Most of the calls the help line received were relat-
ed to installation problems or questions regarding specific
functionalities, such as printing. Although client advisors were
initially at hand to answer any questions related to banking
issues, this service was not frequented by the clients who
were accustomed to dealing only with their personal client
advisors. Consequently, this service was quickly discontinued.
The functionality group that was not only accessed most
often by clients and client advisors during the pilot phase but
that also got the best reviews was 'accounts/custody
accounts'. The second most popular functionality group was
'quotes and news'. It received mixed reviews as its feature
content in the first release did not yet meet all demands.
'Equity and fund research' received some rather critical
reviews as the structure of the information provided was
based more on the internal organization than on the needs of
the clients. Since adjustments have been made in Release 1.1,
which was release in November 2001, the popularity of the
research has risen considerably. The functionality group mul-
timedia was and remains the least visited part of the applica-
tion. While it has some dedicated followers, the majority of
users prefer the more traditional text formats.
What were the main enhancements that clients asked for?
First and foremost they desperately missed the opportunity to
print account and custody account statements. The bank had
decided to forego this functionality because of the consider-
able costs involved in implementing a Java printing function-
ality that meets the high quality requirements of private bank-
ing clients. The second most frequent suggestion concerned
the client reporting. While the detailed information on the sta-
tus quo was deemed very good, the users wished for more his-
torical data on the development of their portfolio and the
investment performance. While printing is now already avail-
able, the planning for an overhaul of the reporting module will
begin shortly.
Value added for clients and client advisors
What value add has 'Interactive Banking' provided for its two
main target audiences, the clients and client advisors during
its first year of operation?
49
 Implementation of e-private banking in a Swiss private bank
The clients generally appreciate the convenience that this
service offers. They value the ability to access their accounts
and custody accounts around the clock and from any PC on
which the software has been installed. Additionally, they
appreciate the near real-time access to all Vontobel equity
and fund research, as well as stock market quotes and the lat-
est general and financial news.
The fact that clients and client advisors work with different
version of the same desktop greatly reduces the number of
misunderstandings, thus making the communication easier
and more efficient for both sides. Putting a lot of emphasis on
this type of collaboration early in the project proved to be a
worthwhile decision. The client advisors also welcome the
simplified communication with their clients that results from
seeing the same data presented in the same way. As clients
can easily check account balances online or download docu-
ments such as the current investment policy, the client advi-
sors have to deal with fewer routine inquires, such as provid-
ing information on account balances, and allows them to focus
more on the actual advisory (high value added) part of their
job.
Since account and custody account data, as well as stock mar-
ket quotes and research reports, are closely linked, the client
advisors can work more efficiently. In the old days they had to
switch between the Host (account/custody account data), the
market data system (quotes, news), and the Intranet
(Research, Investment policy, etc.) to comprehensively answer
a question from a client. With Interactive Banking they can
respond much faster, as all the information is contained in a
single application.
Usage statistics
During the early days, in spring 2001, most users logged on to
'Interactive Banking' during weekends. However, these days,
weekends are the times when traffic is at its lowest. We find
that most of the traffic takes place during the opening hours
50 - The Journal of financial transformation
of the major financial markets. During a normal workday, the
first users start to log in at around 06:30 am CET. After this
time, the number of concurrent users increases steadily to
reach a peak for the day at around 10:00 am. After a slight
slump between 12:00 am and 2:00 pm traffic increases again
and hits a second lower peak as the U.S. markets open in the
middle of the afternoon. Then traffic decreases steadily only
to rise again between 8:00 and 10:00 pm – incidentally the
period between the main evening news shows on Swiss TV.
The overnight traffic generated by clients residing in different
time zones (Americas, Asia) remains marginal.
The statistics show that a large number of clients obviously
use the application from their offices as there is no other way
to explain the high number of logins during working hours.
This came as somewhat of a surprise as the bank had expect-
ed limited administration rights and restrictive firewalls to
prevent successful installations on most office workstations.
Lessons learned
With hindsight what were the most important critical success
factors in implementing an e-banking solution?
■ A clear medium- to long-term strategy accompanied by a
buy-in from the senior management.
■ The business rather than IT drove the project.
■ Business and IT worked closely together toward a com-
mon goal.
■ The system integrator cooperated closely with the busi-
ness and the internal IT department.
■ The system integrator was familiar with the banking sec-
tor and local customs.
■ Client advisors were involved at a very early stage.
■ A slow phase-in of the application gave the bank the
opportunity to quickly react to client feedback and make
the necessary adjustments before the application was
rolled out to a wider audience.
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.

51
 Banking

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

Abstract
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.
53
 Internet banking in the U.K.: From new distribution channel to new
business models
Introduction
Financial deregulation, combined with rapid technological
developments and increasing competition, has facilitated rad-
ical changes in the banking industry. Until recently, the
monopolization of distribution channels has been the corner-
stone of most banks’ strategy; and in the last few years, the
Internet has increasingly been used as a new distribution
channel. The Internet not only allows banks to serve existing
customers more cheaply and conveniently, but also acquire
new customers in previously unreachable markets. At the
same time, the Internet lowers barriers to entry in the bank-
ing industry, allowing new players, often equipped with new
technologies and new business models, to enter the market. In
particular, some emerging strategies and business models are
leading to the deconstruction of the integrated banking value
chain and are challenging the competitiveness of the inte-
grated banking model that has been dominating the industry
for centuries. Social changes, such as the changing demogra-
phy and life style of customers, have put new pressure on the
banking industry. The development of other new technologies,
such as mobile phones and interactive digital TV (iDTV), has
further complicated the scenario.
This paper reports the main findings of my research on Inter-
net banking in the personal banking area in the U.K. since the
late 1990's. The first phase of the research was based on
intensive studies of six banks and building societies in the U.K.
that offered Internet services. The study highlighted the main
opportunities and threats posed by the Internet in personal
banking and identified two strategic scenarios and eight
emerging business models (Li, 2001). Following that, using the
frameworks developed in the first phase and from other stud-
ies, we surveyed 26 banks offering Internet services in the
U.K., supplemented by eight intensive case studies.1 The
research revealed that new entrants in their various forms are
posing a serious threat to incumbent banks, not necessarily in
eroding the latter’s market share and ‘cherry picking’ their most
profitable customers, but primarily in changing the rules of
competition and raising the general expectation of customers
for services from all financial companies. This and a series of
other related issues will be discussed in detail in the paper.
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.
Key issues in Internet banking
Internet banking is the use of the Internet as a delivery chan-
nel for the provision of financial services. It allows the inter-
active communication between financial companies and their
customers, where an extensive amount of information can be
exchanged electronically, and banking transactions can be
conducted through the Internet and other technologies such
as mobile phone and iDTV. So far most Internet banking trans-
actions are conducted from the clients’ PCs, but increasingly
other devices — mobile phone, Personal Digital Assistances
(PDAs), and Digital TV — are enabled by financial companies.
In the U.K., Internet banking services have been provided by
both existing banks with ‘brick and mortar’ branches, and
branch-less, Internet-only banks, offering both traditional
products and new services such as Electronic Bill Payment
and Presentment (EBPP) and Account Aggregation. Internet
banking also facilitates the delivery of products and services
in innovative manners. According to Reuters (2000) the main
benefits to banks can be classified into three main categories.
In the first year after launching, the banks could gain short-
term benefits in competitive equality, customer retention, and
customer acquisition. During the first 12-18 months, compa-
nies would gain mid-term benefits, such as multi-channel inte-
gration, information management, customer segmentation,
consolidated views of the customer, and customers’ migration
to appropriate channels. In the long-term, organizations could
expect cost savings, target products and services, cross-sell-
ing, and new revenue generation. Implementing Internet
banking also enables the provision of non-traditional banking
services, such as insurance and stock brokerage. Most of all,
Internet banking is adopted firstly by affluent, young, better
educated, and usually the more profitable customers. Hence
investing in Internet banking is strategically important to most
financial companies.
The Challenge from new entrants
New entrants are threatening existing banks by offering cus-
tomers better price and greater choices, and they often target
the most profitable segments of customers in the most lucra-
tive product range. Many of the new entrants are also based
Internet banking in the U.K.: From new distribution channel to new
business models
on different business models, geared towards exploiting their
superior customer management skills. This is especially sig-
nificant in the U.K., which has the highest level of new
entrants in Europe, both in the type of entrants and the prod-
uct range. These new entrants together are able to offer the
full range of financial products currently available from
incumbent banks.
Moreover, it has been predicted that information, software,
electronic payment, and multimedia companies will also chal-
lenge existing players in the financial market. A series of
entrepreneurial start-ups (e.g., Mondex, First Virtual, DigiCash,
and CyberCash) have emerged to provide financial services;
and established players from other industries such as AT&T,
AOL, Microsoft, First Data Corporation, and ADP are also pre-
dicted to be major players in financial services in the future.
Furthermore, portals are now presenting a real threat to the
banking industry. Although portals have helped open up the
financial world to millions of people by offering free informa-
tion about the stock market, banking and insurance products,
and other services (e.g., Microsoft's MSN MoneyCentral,
Yahoo! Finance, and AOL's Personal Finance), as well as pro-
viding an effective means of advertisement for banks and
stock brokers, they are increasingly seeking control of the
interface between banks and customers. The changing com-
petitive environment has called for a radical rethinking of the
strategies and business models of the banking industry that
have brought them success in the past.
The Internet as part of a multi-channel distribution strat-
egy
Controlling the distribution channel has been critical to the
long-term competitiveness of most banks. As the number of
Internet users continues to grow rapidly, Internet banking is
increasingly seen as a compulsory channel for most banks.
Using the Internet as a distribution channel has three main
attractions. Firstly, the convenience of conducting banking
transactions from an open and low cost channel anytime, any-
where. Secondly, the Internet allows customers to view their
account details on the screen, which minimizes miscommuni-
cation that may be present when using telephone banking.
Lastly, the Internet allows the provision of new services, such
as real-time share trading and fund transfer; and the cus-
tomers can also download their account details into financial
software so that different scenarios can be simulated on the
PC, thereby providing a clearer understanding of personal
financial dynamics. As the Internet increases the scope for
self-service in banking, it also reduces the need for physical
distribution channels. However, the branches and call centers
will still need to be maintained because they are important for
complex products and services.
Product and service offering online
Even though banking products and services can be copied
fairly easily by competitors, the invention and creativity need-
ed in providing them can often bring competitive advantages
to the bank, at least in the short-term. At the basic level, Inter-
net banking means the setting up of a web page by a bank to
give information about its product and services. At more
advanced levels, it involves the provision of facilities such as
accessing accounts, funds transfer, and buying financial prod-
ucts and services online, which is called 'transactional' online
banking.
It is increasingly recognized that the Internet should not just
be treated as another distribution channel, but also as a new
medium with its own capabilities and requirements. Creating
digital brands involves the provision of broader consumer
benefits than those of the offline world. The development of
online products and services should be linked to the objec-
tives of Internet banking. Objectives such as cutting cost,
reducing check volumes, increasing customer base, and
increasing customer retention should be mapped into specific
product and service offerings.
The main functions of Internet banking can be classified into
four broad categories: view-only functions, account control
functions, new services application functions, and reconcilia-
tion functions. View only functions are concerned with
addressing details about balances and the last few transac-
tions made by the customers, thus reducing the workload of
bank staff at both branches and call centers and the conges-
55
 Internet banking in the U.K.: From new distribution channel to new
business models
tion at ATM. Account control functions are required to provide
customers with a broad range of access and control over their
accounts, such as transferring funds between accounts, the
creation or amendment of standing orders, and paying bills to
third parties (usually utilities companies). New banking service
application functions (applying for new accounts — saving
accounts, mortgage, loans, etc.) are seen as crucial to banks,
as they provide an opportunity to attract new customers, as
well as retaining existing ones. To maximize profit and rev-
enue from their customer base, it is essential that banks also
offer their customers other financial services, such as credit
cards, mortgages, and insurance through cross selling. Finally,
since an increasing number of customers today use individual
software packages to manage their finance, banks should
offer the facility of integration with these packages for
account reconciliation. With this function, customers are able
to reconcile their accounts by downloading their own financial
information from their bank accounts onto their financial
management software. This framework will be used to analyze
the product and service provision in the 26 banks offering
Internet services in the U.K.
Electronic bill presentation and payment (EBPP)
As a new service offered by some Internet banks, electronic
bill payment service helps to solidify and maintain the bank's
status as the primary provider of financial services (KPMG,
2000). EBPP involves the online collection of information
from billers about bills and the payment of those bills, usually
for a small monthly fee. With this system, certain bills are
remitted to consumers over the Internet or a paper bill is
scanned and presented online. It allows customers to set up an
arrangement in advance to make an automatic funds transfer
to billers through an Internet banking system, direct payment
(automated clearing house), PC banking, the telephone, or a
third-party provider.
The purpose of electronic billing is said to not just obtain pay-
ment but also empower the customer. Thus the shift from
paper-based presentment to EBPP may transform biller-cus-
tomer relationship. Furthermore, it encourages the electronic
alliances between banks, the bill issuers, the customers, and
56 - The Journal of financial transformation
the creditors; as well as streamlining the traditional billing
process by eliminating paper work and reducing lead-time in
billing operation. Datamonitor predicted that electronic bill pay-
ment and presentment (EBPP) would grow from U.S.$175 million
at the end of 2000 to U.S.$2.5 billion by the end of 2004.
Account aggregation
In early 2001, two American IT vendors, Yodlee and Ver-
ticalOne, introduced account aggregation. In the U.S., major
players such as Merrill Lynch, Chase, Citigroup, OnMoney.com,
Ameritrade, Centura Bank, and Fiserv have recently signed
contracts with the two vendors. Account aggregation is usual-
ly provided by financial institutions, web portals, and other
companies (aggregators), and involves the retrieval and dis-
play of information from various financial accounts and
monthly bills. The most common method used today is
‘screen-scraping’, in which the consumer provides the aggre-
gator with his or her ID codes and passwords; these are then
used to access online accounts and to scrape information
from the account site. Generally, a third-party aggregator has
no contract with the account-holding financial institution
(AHFI) and the AHFI assumes no responsibility for the accu-
rate display of this information by the aggregator. Through
account aggregation, customers gain 24-hour access to all of
their financial (and some other) information on one web page,
including insurance, brokerage, banking, loans, frequent flyer
miles, and personalized news. Furthermore, customers can
run analytics on the newly aggregated portfolio to help them
plan for their future, including tax and accounting tools, and
risk calculators providing information on how their total port-
folio is weighted.
Unsurprisingly, there has been strong resistance from many
banks to account aggregation, as they do not like the idea of
a third party having access to their clients’ information. Con-
cerns were also voiced because of the rapid growth in the past
two years of small aggregators with few assets. It was feared
that these aggregators would create problems for financial
institutions, specifically that account information would be
reflected inaccurately or that consumers might act in reliance
on such data and then turn to banks to solve their problems.
Internet banking in the U.K.: From new distribution channel to new
business models
There were also concerns that inadequate security would
result in a significant increase in unauthorized transactions
for which someone would be financially liable. This was fur-
ther magnified because private consumer information was
being accessed in a manner outside the AHFI's control, poten-
tially producing dramatic increases in the amount of financial
data available at small, unknown, non-financial companies’
web sites. Issues in terms of customer privacy, the lack of ade-
quate regulation for aggregators, and liability when things go
wrong also need to be resolved.
Mobile banking
Wireless communications may fundamentally change the way
organizations interact with their customers. Maude et al.
(2000) discussed some of the transactional services that are
rapidly appearing, such as stock-trading using a mobile phone
or Personal Digital Assistances (PDAs) (e.g., in Fraser Securi-
ties-Singapore, Fidelity-U.S. and Fimatex-France), mobile bill-
payment services (e.g., HSBC, MeritaNorbanken-Scandinavia),
and using mobile phones as POS (point-of-sale) payment
devices. They predicted that over the next five years, as the
data transmission speeds increase and mobile devices grow in
sophistication, the range of mobile banking services will
increase too. Secure online verification will enable the cus-
tomers to apply for a loan using a mobile device for example,
and receive an instant authorization so that they could use
the money to pay for things electronically there and then.
The current mobile technology platforms have limited the
actual applications of m-banking. The speed of transmission is
too slow for Internet access in many applications, the Internet
enabled handsets are still not user friendly (especially the
phone keypads), and the web content is often poorly displayed
on the small screen. Security is also a main issue with current
mobile devices. However, with the coming third generation
(3G) mobile network, it has been predicted that an entirely
new mobile telephony experience will be on offer, with the
ability to send and receive vast quantities of data at high
speeds. The 3G networks will provide graphics and multimedia
data at a speed several times quicker than most PC modems.
Additionally, with 3G networks mobile operators will shift
away from offering mostly voice services to offering a variety
of data-based services, which will provide the basis for full-
fledged m-banking. It remains to be seen whether such pre-
dictions will materialize, and when.
Interactive television banking
Interactive digital TV (iDTV) was first introduced in the early
1980’s. In the U.S., northeastern powerhouse Chase Manhat-
tan Bank saw great potential in the ubiquitous TV as a medi-
um for their earliest home banking pilots; and interactive tel-
evision is seen a means of introducing on-line financial servic-
es to a much bigger market than the PC based Internet. Today,
with the Internet still considered unfriendly by many, iDTV
provides an ideal medium to bring e-commerce to customers,
even for those ignorant of new technologies.
The reality, however, has been very different. Contrary to com-
mon belief that U.K. banks will be leading the way in iDTV
adoption, Brine (2001) identified several reasons why its roll-
out has fallen behind all predictions, including digital technol-
ogy availability, the set-top boxes, and site content. In the U.K.,
the majority of high street banks were quick to recognize the
advantages of iDTV technologies, and they have enabled a
wide range of services, such as access to current, savings and
credit card accounts, standing orders and direct debits, bills
payment, and transfer money between accounts. Whilst
expectations have been running high, some iDTV experts
believe that banking by interactive television is not going to
happen anytime soon as problems exist in many areas. The
television is not a good device for financial services, especial-
ly when banks already have their hands full developing and
managing more crucial channels like the Internet, telephone,
and wireless access. Nevertheless, the potential of this chan-
nel is still there and we will examine the provision of this serv-
ice by U.K. banks.
Retail branches and call centers
With the development of Internet banking, most incumbent
banks are redefining their branch networks. Branch closure
has been happening at a rapid pace, but at the same time
some banks are building mini branches in places like the
57
 Internet banking in the U.K.: From new distribution channel to new
business models

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

58 - The Journal of financial transformation

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

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

Services/Functionality:
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%)
Office.
TV (iDTV) banking 10 (39%)

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

59
 Internet banking in the U.K.: From new distribution channel to new
business models
by the physical branches, ATM networks, and phone banking.
The Internet provides the new platform to link up previously
separate systems, enabling the provision of integrated servic-
es anytime anywhere, enhancing customer loyalty, and cross
selling. In contrast, 27% of the banks regarded the Internet as
a new distribution channel, just like the branches, ATM, and
the telephone. These banks generally believe the future is in
multi-channel banking, but the Internet will not redefine the
basic strategies and business models of the banking industry.
Product and service offering through the Internet
The product range offered by online banks varies significantly
(Table 2), although most of them offer standard products,
such as current and saving accounts (73%), mortgages
(50%), loan (58%) and credit cards (54%). 28% of banks
offered Internet only products to reflect the low cost of the
Internet; while many of the rest have made it their policy that
the product offering on- and off-line should be identical.
Most banks offer viewing function (96%), but other functions
vary significantly from bank to bank, allowing different levels
of account control, integration, and reconciliation. All banks
offer online application facility, and the integration function is
offered by 42% of them. The integration function allows cus-
tomers to reconcile their accounts by exporting the informa-
tion from their bank accounts to software packages, such as
word processors, spreadsheets; financial packages (e.g.,
Sage); or using specific formats — QIF (Quicken), OFC (e.g.,
Quicken, Money), and OFX (Money). EBPP and account aggre-
gation are introduced in a few banks – for example, only two
(8%) of the banks allow account aggregation, namely:
Citibank and Egg.
An increasing number of banks are providing share dealing
service (46%), allowing customers to deal in shares on the
Stock Exchange in real-time. Eight of the twenty-six banks
(31%) have forged alliances. The partner companies usually
are ISPs (such as BT Click), technology companies (such as
Yodlee), and portals (such as Yahoo). In most cases, Internet
banking is supported by call center based phone banking.
Finally, mobile banking (62%) and Interactive TV (39%) have
60 - The Journal of financial transformation
been enabled by many banks, but as will be discussed in the
next section, our case studies indicated that due to techno-
logical limitations they have so far failed to live up to expec-
tations, and there is still enormous uncertainty about their
future.
Key issues emerging from the case studies
In addition to the online survey, eight of these banks were also
interviewed in order to examine some issues in more detail. All
interviewees were senior managers with overall responsibili-
ties for the Internet operation of the bank (e-directors).
The threat from new entrants
Most people we interviewed believed that new entrants pose
a serious threat to established banks even though these new
entrants have so far failed to gain substantial market share.
However, competing with their low cost base, new technologi-
cal platform, strategic alliance and partnership, and best of
breed products and services, new entrants have played a key
role in raising the general expectations of consumers and
changing the rule of competition in the financial market.
Incumbent banks have had to compete at all these fronts to
maintain their market position.
The biggest threats come from the Internet only banks, espe-
cially baby e-banks. Despite the low cost base of the Internet
as a distribution channel, this benefit is difficult to exploit by
most incumbents as their customers often use this channel
alongside other channels. Unless they can scale back the pro-
vision of other channels at the same time, the Internet repre-
sents a significant additional cost to the banks. In contrast, the
Internet-only banks could effectively explore this advantage
and build up a sizeable customer base within a short period of
time.
Initially, many established banks felt seriously threatened by
this but their views have evolved in the last year or so. Sever-
al people from incumbent banks felt that the competition
between Internet-only banks and incumbents is not necessar-
ily a ‘head on collision’. The market segment of Internet-only
banks is very different from the customer base of most incum-
Internet banking in the U.K.: From new distribution channel to new
business models
bent banks. People switching to Internet-only banks are often
thought to be much more price-sensitive and less loyal com-
pared with the customers of established banks. Therefore, the
price issue is much less a threat than it was originally antici-
pated, and incumbent banks can compete on ‘customer expe-
rience’, which is significantly more sophisticated than simple
price competitiveness. Moreover, the loyalty and trust of cus-
tomers to established banks means the new entrants have so
far failed to stage ‘an equal competition’. Even for baby e-
banks set up by incumbent banks, the original brand loyalty
and trust for the parent company have often failed to be
transferred to the baby e-banks, and the brand building exer-
cises have been very costly. As a result, it has been very hard
for the new entrants to successfully compete with the estab-
lished players and eat into the latter’s market share. However,
the low price proposition of new entrants has led customers of
established banks to demand similar benefits from their exist-
ing banks, putting enormous pressure on the incumbent
banks to reduce prices, and provide more innovative products
and greater choices.
The competition from non-financial new entrants, especially
the supermarkets, has also presented a major threat to the
existing banks. Unlike baby e-banks and pure play new
entrants, most non-financial new entrants have strong brand
presence. However, according to some people we interviewed
in incumbent banks, the brand presence is only strong in their
core market and is difficult to ‘stretch’ to financial services.
This has led to considerable difficulties for these companies in
building trust that is crucially needed to compete successful-
ly in banking in the U.K.. Two of the most successful super-
markets have actually been in the financial service industry
for quite some time, yet they have hardly ‘made a dent on any-
body’ especially in terms of market share, according to one
senior manager we interviewed. The incumbent banks believe
that their customers are loyal and they have a strong brand
reputation, and it is very unlikely for the non-financial com-
petitors to actually compete with them equally in the short- to
medium-terms.
Nevertheless, some incumbent banks recognized the potential
threats from non-financial new entrants. The success of GE
Capital (General Electric) has proven that new entrants can be
very successful. Technology companies such as Yodlee and
Vertical One, through software licensing and profit sharing,
have enabled the so-called ‘integrators’ to provide new finan-
cial services, such as account aggregation, hence attracting
customers away from the incumbent banks’ own websites.
Financial portals are improving market transparency by allow-
ing customers to compare financial products and services eas-
ily — putting enormous pressure on the incumbent banks to
offer the best products, services, rates and prices, and chan-
nels. Incumbent banks are watching developments in these
areas closely although most of them regard the threat as less
than imminent.
New distribution channels: The Internet, mobile phones,
and iDTV
Today, most banks regard the deployment of the Internet as a
necessity and are adopting it as part of their multi-channel
distribution strategy. Of the 8 banks we interviewed, 7 of them
use the Internet to complement their existing distribution
channels. However, further discussions with the banks
revealed that 3 of them regarded the Internet merely as a dis-
tribution channel. The other four banks are using the Internet
to underpin and transform key processes and provide inte-
grated service to customers, essentially transforming them-
selves into e-banks (the remaining one is an Internet-only
bank). Three of the banks used the Internet to reduce their
transaction costs, but one bank argued that the Internet
would not save costs, because its customers use the Internet
as well as other channels. Another bank believed that that it
is unlikely that the Internet will produce either cost savings or
sales increases in the short-term.
Similarly, although mobile phones, as a delivery channel, offer
unique opportunities for financial services institutions, most
case studies regarded the current WAP (Wireless Application
Protocol) based mobile devices as an inadequate platform for
mobile banking. Technically the mobile phones today are still
inadequate for carrying out complex transactions, mainly
because of the limitations of the second-generation platforms
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 Internet banking in the U.K.: From new distribution channel to new
business models
of mobile communication (e.g. GSM) for data transmission.
Most banks are currently taking a ‘wait and see’ stance in
adopting mobile banking; and to a large extent the offering of
WAP banking services is merely an attempt to stay competi-
tive by making all channels available to customers. As a sen-
ior manager stated: ‘You can’t afford not to be exploring
everything on channels available’; and everyone is waiting for
the third generation mobile services to materialize.
All banks we interviewed are pessimistic about the future of
Interactive Digital TV banking, even though several banks
enabled it. Despite various predictions, most senior managers
we interviewed believed that, at least at the current stage, the
TV is not a good device for financial services, as it is mainly
used for family entertainment. The different platforms for
iDTV services and the diverse pricing policies for using this
medium in different regions of the U.K. are all discouraging
the widespread adoption of iDTV banking services. Therefore,
TV banking is predicted not to be a mass market. Only one
bank predicted that iDTV will become a useful channel to com-
pliment other channels, even though it admitted the technol-
ogy is not yet ready today.
Internet banking products and services
None of the seven incumbent banks with branches that we
interviewed offer the full range of branch products through
the Internet (one of the case studies is an Internet only bank
without branches). Rather, the Internet is used to provide
information and offer uncomplicated products. Some prod-
ucts are only offered through the Internet and are not avail-
able through other channels. In fact, five of the eight case
studies offer online products that are different from their
branch products to reflect the cost advantage of the Internet.
One service that has been repeatedly discussed during inter-
views is account aggregation. There are obvious potential
benefits to customers but the main technique used today (i.e.
screen-scrapping) to aggregate data is prone to fraud.
Account aggregation provides customers with greater control
over their finances by giving them 24-hour access to all of
their financial and related information on one website, includ-
62 - The Journal of financial transformation
ing insurance, brokerage, banking, loans, frequent flyer miles,
and personalized news. In addition, they are able to run ana-
lytics on the newly aggregated portfolio to help them plan for
their future, including tax and accounting tools, risk calcula-
tors, and many more. However, account aggregation threatens
the incumbent banks because it allows products from differ-
ent banks to sit side by side on the customer’s screen, there-
by putting enormous pressure on all banks to come up with
best-in-class products and services. In the last year or so, all
the banks we interviewed are getting together with trade
associations to look at the risks and principles of account
aggregation. The Financial Services Authority (FSA — the
financial regulator in the U.K.) is seriously concerned about
the legal and security issues related to this service. Today,
most banks are reluctant to introduce this service as yet
because of the many unresolved issues, such as security,
legality, liability (who is liable if anything goes wrong), and
technical factors. Even the one bank that implemented this
service recognized the enormous risks involved in account
aggregation.
The rationale behind the provision of this service is mainly for
customer satisfaction. One senior manager claimed that at
the end of the day ‘everyone is going to implement this serv-
ice as it is what customers want.’ In contrast, another senior
manager argued that account aggregation is predominately a
U.S. phenomenon and it is unlikely to take off in the U.K., due
to the very different banking platforms, even though it is
rationally interesting. A senior manager from a large bank
with presence in over 70 countries argued that the population
is perhaps even more interested in account aggregation than
in the U.S., but most people are not willing to use this service
due to unresolved legal, security, liability, and technical issues.
Several people we interviewed are of the view that the future
of this service is yet to be seen and if used widely it could rad-
ically reshape the banking industry.
The future of the branch network and call centers
Most banks we interviewed are using the Internet as part of a
multi-channel strategy, and the physical branch network will
not be eliminated by this development. In fact, one bank even
Internet banking in the U.K.: From new distribution channel to new
business models
opened several new branches recently to provide easy access
for customers. One senior manager pointed out that it would
not reduce its branches because of the increasing demand for
integrated service. In contrast, the Internet only bank we inter-
viewed is targeting 'Internet aware' customers, so it has no
intention to build a physical presence. However, several banks
we interviewed pointed out that the nature of the branches
should be redefined with the rapid development of other
channels. One bank recently installed prototype multimedia
terminals in selected branches in order to ‘provide a user
friendly system that would enable customers to browse
through our complete range of products and services to meet
their expectation more effectively.’ Another bank has plans to
transform its branches from transaction-based into more
advice-based centers. In one of the banks we studied, some of
its branches have been changed into Cafes, providing facilities
for children and iDTV for the latest product offerings. Several
banks are also using branches to educate customers on new
technology in order to migrate them to cheaper channels.
Alongside the introduction of Internet banking and new devel-
opment in branches, call centers that were originally devel-
oped for phone banking are now evolving into multi channel
contact centers, and are a cornerstone of most banks’ multi-
channel strategy. For most banks their future success depends
on maintaining a proper balance between the traditional ‘brick
and mortar’ structure and electronic channels. The contact
centers provide the missing link between them. In several
banks, the Internet provides the platform to integrate cus-
tomer information on different systems. This enables call cen-
ters to manage customer relations in new ways. Several peo-
ple we interviewed highlighted problems in integrating differ-
ent channels so that information in the database can be
retrieved from any channel. However, the pace of develop-
ment is accelerating, as problems with legacy systems are
being resolved.
Summary
These case studies highlighted a series of important issues.
The competitive structure of the banking industry is changing
as the Internet has reduced barriers to entry. New entrants –
including baby e-banks and non-financial new entrants – have
put enormous competitive pressure on incumbent banks to
change. The new entrants have adopted many different busi-
ness models, including baby e-bank, brand stretching, white
labeling, and portals. Even though they have so far failed to
stage an equal competition and take away market shares from
incumbent banks, they have significantly raised customer
expectations in many ways, forcing incumbent banks to
improve their services and develop more competitive prod-
ucts. Most people we interviewed believed that the adoption
of Internet banking calls for an increasing integration of all
activities and distribution channels within the bank. It also
played a key role in making sense of the overall business
processes and in understanding the customers.
Conclusions and future research
This research examined the current situation of Internet bank-
ing in the U.K. and discussed a number of emerging issues.
Today, customers are increasingly demanding a ‘Martini’ style
banking – ‘anytime, anywhere, and anyhow’, which calls for a
multi-channel strategy and channel integration in incumbent
banks. The Internet has become an important distribution
channel that can not be ignored.
A wide variety of business models have been adopted for
Internet banking in the U.K.. In particular, many incumbent
banks have realized that the Internet is much more than a new
distribution channel and they are using the Internet to inte-
grate different systems in the banks and underpin all key busi-
ness processes — essentially evolving from the new distribu-
tion model to the e-banking model. At the same time, some
baby e-banks are evolving towards a ‘click and mortar’ strate-
gy by expanding their online presence into the offline world —
either through their parent’s branches, their own new branch-
es, or other physical outlets, such as the post office, petrol sta-
tions, or supermarkets.
Along with the implementation of Internet banking, the nature
of bank branches and call centers has also evolved. In most
cases branches are evolving into leaner, more flexible, adviso-
ry-based, rather than transaction based centers, and some
63
 Internet banking in the U.K.: From new distribution channel to new
business models
banks are using the branches to educate customers with new
technologies in order to migrate them to cheaper digital chan-
nels. At the same time, some banks are adding new functions
to their existing branches by developing them into Cafés for
example; or building mini-branches within other popular out-
lets, such as supermarkets, petrol stations, and even McDon-
alds. The importance of call centers are increasing rapidly, not
only to support the back-end of Internet banking implementa-
tion but also to act as multi-channel contact centers.
This research also discussed issues concerning mobile and
iDTV banking. Today, the wireless platform for banking has
failed to take off, mainly due to the limited technical capabili-
ty of WAP phones and other mobile devices for data trans-
mission, even though many banks have enabled this service. It
will be interesting to see what happens when the third gener-
ation mobile devices become widely adopted. The future of
iDTV banking is still uncertain even though the U.K. is often
regarded as a leader in this service. The message from the
interviews is generally pessimistic, as the nature of television
does not match with financial services. The different plat-
forms used in providing iDTV services in different regions, as
well as the initial investment required for the service have also
hindered the adoption of TV banking in U.K.. Nevertheless, the
future possibility of this channel cannot be ruled out.
One interesting development emerged from the research is
account aggregation. At the moment, all leading banks in the
U.K. and the FSA are getting together to address the legal and
security issues of this service, and a few banks have started
providing it. The demand in the U.S. has been high and many
banks there have or are considering offering this service. But,
several banks in the U.K. have decided not to introduce this
service, as they believe the situation in the U.K. is very differ-
ent and currently the customer demand is low. However, its
implementation could lead to many radical changes in the
banking industry in the U.K.
A number of other issues were also highlighted in the
research but not discussed in detail. One is that the imple-
64 - The Journal of financial transformation
mentation of Internet banking represents a significant techni-
cal challenge to most banks. As such, many banks have forged
strategic alliances with ISPs, Portals, telecom, and other tech-
nology companies. This has enabled banks to reduce time to
market for their Internet banking services by tapping into the
experiences and skills of the partners. Another issue that was
not discussed in detail is the rapid growth of financial portals
/supermarkets. In fact, some banks are transforming their
Internet banking operations into financial portals to exploit
the benefits of cross-selling. By providing advanced invest-
ment and personalization tools and high degrees of integra-
tion between banking, brokerage, investment, and other value
added services, they aim to become one-stop financial shops
for their customers.
The threat from Internet only banks is certainly not over. So
far, Internet only banks have failed to eat into the market
share of established banks in a significant manner for several
reasons, but this situation may change in the medium- to
long-term. First, the established banks and building societies
have invested very heavily in the last few years in their own
internet channels and offered their customer multi-channel
banking, as well as a range of benefits that Internet only banks
have offered. This has played a key role for these established
players in retaining their customers and maintaining their
market shares. Second, banking on the Internet involves radi-
cal changes in consumer behavior, which will take time to
establish. When people gradually get used to doing more and
more things online, the psychological barriers in banking
online will reduce. Third, the recent dot com crash made it
very difficult for Internet only banks to compete aggressively
with established players. However, this does not change the
fundamentals of Internet banking and the advantages of Inter-
net only banks. Finally, there has been a lot of talk about cus-
tomer loyalty and trust with established banks, which is true
to some extent. However, in many cases, it is the difficulties
and hassles involved in switching banks that have prevented
people from leaving their existing banks, even when they are
unhappy with the services. Some new services will make
switching banks much easier. The banking industry has
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.
A lot remains to be done to fully appreciate and conceptualize
the complicated issues in Internet banking. We believe
research along the following themes is particularly needed.
First, this research has only examined Internet banking from
the banks’ perspective. A thorough examination is also need-
ed from the customer’s perspective on issues including new
strategies and business models, new products and services,
and other innovations implemented with Internet banking.
This is crucial because the success of Internet banking will
depend on the support of customers. Second, with the rapid
development of mobile communications, in-depth studies of,
References
• Brine, G.R., 2001, 'iDTV killed the Internet star,' The Banker, 151 (200): 87, February
2001.
• Datamonitor, 2000, Best Practice in U.K. eBanking, Datamonitor, August 2000.
• JP Morgan, 2000, JP Morgan Online Banking Europe. London: JP Morgan
Securities Ltd., September 7, 2000.
• KPMG, 2000, Awaking Giants: How Europe’s big banks will win the e-Commerce
revolution, KPMG, London
• Li, F., 2001, 'The Internet and the De-Construction of the Integrated Banking Model,'
British Journal of Management, Vol 12, 307-322.
• Maude, D., R. Raghunath, A. Sahay, and P. Sands, 2000, 'Banking on The device,'
The McKinsey Quarterly, 3.
• Reuters Business Insight, 2000, The Future of European Retail Banking. Reuters
Limited, May.
• Sharpe, G., 2000, Bank of Scotland Research May 2000 Quarterly Research. Edin-
burgh: Bank of Scotland.
• Young, D., 2001, Wireless banking apps: The calm and the storm, Wireless Review,
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.

65
 Investments

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

2001:
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-
nology organizations face the necessity of reconciling three
seemingly incompatible goals. They must continue to reduce
costs, develop systems and applications required to ensure a
successful future, and ensure that the company maintains its
current income. No philosopher or circus high wire juggler
ever groped for balance among a more complex set of ele-
ments.
Reducing cost and complexity
While Business and IT managers may disagree about who is to
blame for excess costs and complexities in existing IT infra-
structures, they typically agree that the current market down-
turn makes belt-tightening a necessity. According to Gartner,
in 2001 about 20% of IT spending was wasted on consulting,
software, and services that failed to achieve their desired
goals. With the economy still faltering, budgets that remained
flat in 2002 are expected to shrink for 2003. Shrinking budg-
ets intelligently is the task faced by every financial services
company. The emerging top strategic initiatives for removing
costs from IT infrastructures are:
■ Structuring IT to support current revenues on a lower cost
basis.
■ Consolidation or efficiencies in three areas: IT systems,
applications, and customer channels.
■ Re-engineering of business processes.
While removing costs is relatively straightforward, reducing IT
complexity is more challenging, although equally essential.
Though IT complexity is easy to identify, it is not always sim-
ple to change. Examples include:
■ 500 consultants required to install a new application.
■ The 5-inch thick cable harness running out of the back of
a trader’s desk, spilling out data in incompatible formats.
■ Years of patched code maintaining millions of lines of
legacy Cobol code.
■ Excess servers and desktops throughout the enterprise
that are difficult and costly to maintain, raising the firm’s
overall costs of technology ownership.
68 - The Journal of financial transformation
Financial companies determined to remain leaders are looking
beyond simple, short-term cost cutting. They also seek to
implement programs for operational excellence. For these
firms, the downturn provides a breather and a chance to
restructure intelligently in preparation for the next growth
phase. They understand that overly complex IT systems can
delay their ability to develop new applications and bring new
products to market, and they actively seek technology part-
ners whose integration strengths can help them simplify and
improve developer productivity.
Increasing future revenues
Amid market tumult, financial companies determined to
remain leaders must simultaneously maintain their revenue
streams while seeking new ways to bring in future revenues.
Savvy companies are using these turbulent times to set the
stage for the future. Planning and implementing for new
processes continues, and most firms have programs to
address STP, process continuous improvement, and other
future-oriented initiatives. These initiatives are not focused
solely on IT processes, but are accompanied by business infra-
structure improvements designed to tightly integrate busi-
ness and operations management. New financial products are
also required to present both a revenue and cost containment
plan in their rollout.
A changed world
Though the boom years of the late 1990's seem like a long-
gone era now, it is not simply economic stagnation that has
created a sense that the world is different. Globalization, ter-
rorism, and large-scale accounting scandals have brought
business into the political spotlight and set the stage for a new
level of regulation. In response, financial and other industries
are required to architect, install, and maintain applications
and systems that can supply an unprecedented amount of
data needed to meet the needs of the new regulatory envi-
ronment. These new regulations include:
■ Identification of money-laundering activities, required by
the U.S. Patriot Act.
■ Response to Basel II Accords for operational risk
management.
■ Requirements to record and supervise all electronic com-
munications, including instant messaging.
Finding balance
I must say that we have been privileged to work with a num-
ber of global financial industry leaders that are successfully
finding the balance between driving down current costs and
building up for future revenues. One example is a leading
global exchange that is instituting a new automated trading
system, designed to provide both higher levels of security, and
reporting and messaging infrastructure that will position
them for continued excellence. Exchanges are not alone in
looking for the right balance. Table 1 provides an overview of
a typical IT initiative customers are undertaking in a changed
world.
Managing the conflicting priorities of cost control, revenue
maintenance, and business innovation is by no means easy.
Nonetheless, leading financial companies tend to be able to
identify ways to move forward in spite of the obstacles. The
economy may be stagnant, but business must still rely on
innovation, and the pathways to innovation itself must change
with the times.
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
Retail banking Integrate multi-channel back office systems
Consumer payments Re-engineer payment systems
Wholesale banking Re-engineer payment systems, back office, treasury Enhance risk management, wealth management, compliance
Exchanges and clearing Automate processes
Brokerage and asset management Automate trading floor
Insurance Integrate back office claims processing
Table 1: Typical IT initiatives prevalent across the industry
models in no way reduce the future-in importance of the Inter-
net. A clear example of delivering the future while driving cost
out was the growth of online brokerage firms, which were able
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
to cross-sell products with the click of a mouse, simultane-
ously offering credit cards, home mortgages, and insurance to
account holders.
The Internet brings efficiency, cost savings, and often simplic-
ity by taking 20th century processes on-line in the 21st centu-
ry. One example of this efficiency is webproxy.com, an online
site for voting stock proxies. Or, consider the huge costs
removed when mutual fund companies, for example, started
offering 'paper suppression' options. Paper suppression stops
the flood of mail about each individual security that is sent to
every shareholder. Instead of printing and mailing documents,
shareholders have the option to receive statements online.
The resulting savings stay with the fund. Other financial com-
panies, such as credit card companies, increasingly offer
online statement and bill-payment options to their customers.
These aforementioned examples illustrate just how new tech-
nologies can help us achieve what might seem like contradic-
tory objectives, lowering costs and preparing for success.
Future In
Build/enhance CRM, wealth management
Build/enhance fraud prevention, security
Integrate compliance
Add/enhance/integrate risk management, wealth management,
compliance
Add CRM, mobile workforce
69
 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-
scape, it becomes immediately apparent that it is largely con-
tradictory. We find that while certain parts of our industry are
continuously inventing new and exciting new products, such as
the financial engineering departments of banks, and operating
models, such as Deutsche Bank's highly efficient back-office
operations (as described in Mitchel Lenson's paper in this issue
of the Journal), others prefer to largely maintain the status
quo. Even within the same banking group you can find divisions
that are highly innovative and others that are not. For example,
when one looks at the retail-banking arms of most of the major
global universal banks, one finds that they were among the
first types of businesses, even when compared with other
industries outside of the financial services, that instituted a
highly efficient and effective online capability to improve the
way they serviced their clients1. The capital markets divisions of
those same banks, however, have yet to show much enthusi-
asm for this important new medium. For example, when com-
pared to the well-known online brokers, such as Schwab and
E*Trade that place great emphasis on the user-experience, the
capital markets divisions of most universal banks have tended
to rely more heavily on the more traditional modes of commu-
nication rather than take advantage of these new technologi-
cal capabilities to improve their overall service offering. Very
few, if any broker-dealers allow clients to monitor transactions
across their online networks. We believe that this industrial
dichotomy will come to end in the very near future, when we all
get a better understanding of how these new technologies can
improve the way we conduct business.
However, before we arrive at that stage, let us take a short
stroll through the recent history of the capital markets indus-
try, which is the focus of this paper. Looking back at our recent
technological past, we find that generally most organizations
have tended to behave in a similar fashion. During the boom-
ing years of the 1990's, most financial institutions spent large
sums of money investing in technological capabilities that
were typically reactive to the external environment. To keep
up with ever-increasing volumes of transactions, most invest-
ment banks, investment managers, and exchanges invested
heavily in building scale on rather old and incongruent tech-
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.
nologies. In those circumstances, where online capabilities
have been added to the mix, the maze has got that much more
complicated. Of course, there were many casualties on the
way. Our industrial graveyard is littered with many large devel-
opment projects of over U.S.$20 million, some even over
U.S.$100 million, that failed due to complexity and impatience
of the business to support lengthy and costly development. As
a result, most organizations found themselves with opera-
tional technologies that were simply an amalgam of many sys-
tems cobbled together. As volumes of trade, and revenues as
a consequence, increased, so did the number of distinct tech-
nologies that were introduced, making the already complicat-
ed shape of the financial services industry's operational IT
even more spaghetti-like.
As a consequence of these reactive investment strategies, the
present state of financial services IT is not a pretty picture.
Built on legacy systems, using different generations of tech-
nology from different vendors and/or built in house, present
day IT systems are typically a tangle of applications operating
without common standards for technology and content. The
sheer number of applications in a typical operation is mind-
staggering – very large organizations typically run over a
thousand applications within the company firewall. When
applications operate in silos, as is the case today, the data and
logic of one application is unavailable for use by other appli-
cations. This kind of fragmentation is endemic in the financial
services industry. Applications are siloed in myriad ways: by
product – such as equity or risk-region, and the business use
of the application, whether 'front-end' or 'back-end'. Because
of this compartmentalization, the base number of applications
in use at any time is multiplied many times over – thousands
of applications are running without standards and no means
to communicate.
The situation became so bad that in most institutions it was
not possible to identify which business units were truly
adding value to the bottom-line. Simple, yet mission-critical,
activity-based costing information that is prevalent among
most other industrial sectors is still not available to most
financial executives.
Obviously, our world has changed considerably since the 1990’s.
Volumes, and proportionally revenues, have fallen dramatically
and, for all but the very best, Investment banking revenues have
further still. Understandably, financial institutions are looking at
ways to cut costs. One option that is open to management is to
start new projects to integrate the maze of existing systems, or
even replace them in order to increase efficiency and signifi-
cantly reduce fixed and variable costs. However, these types of
projects come with costs and risks that some will find difficult to
justify in today's markets. Alternatively, the institutions can use
services from third-party companies, at least for some part of
their operations, outsource some of their systems to lower
costs, and focus internally only on the systems that can not be
taken from outside. This allows management to cut costs and
more importantly focus on their core competencies. Of course,
the decision to outsource should not be dependent on market
downturns. We genuinely believe that the decision to remove
non-core processes is an essential step for business no matter
what the external environment. However, for reasons that we all
know, no one has the time to consider these options when
volumes and profits are going through the roof and we are all
playing catch-up with introducing operational capabilities that
can keep up with our demands.
It used to be said that the recessions are good for two things:
cutting excess fat accumulated during boom times and creat-
ing an opportunity to invest in operations and strategies nec-
essary for a successful future at a fraction of the cost. We
guess the current recession has helped highlight how both of
these objectives can be met through outsourcing.
Assuming readers are somewhat convinced that outsourcing
can help their businesses let us look at the types of outsourc-
ing options open to them, with a view to identifying how new
disruptive technologies have made certain types of arrange-
ments more attractive to management.
Outsourcing options open to management
The management of financial institutions has a number of
options open to them when considering outsourcing certain
aspects of their businesses.
■ Application/Business service providers – These service
providers can provide a range of services to financial insti-
tutions. They can range from managing the institutions
online capabilities to managing certain processes. Exam-
ples include outsourcing of cheque clearing by a number
of banks to an external service provider or subscription to
a reference data processing ASP, such as Synetix.
■ Selling parts of back- and/or middle-office – Currently a
number of financial institutions are in the process of out-
sourcing large parts of their operations to third party ven-
dors. Complete lift-outs of the back-office are becoming
very prevalent among asset managers who wish to mitigate
the costs and the headaches associated with managing
these services in-house. Under this arrangement, the asset
management firm sells the entire back office to in-sourcers
in order recoup some of the investments made in their
operations and to convert their fixed costs to variable ones.
It is our belief that over time the use of service providers will
become much more prevalent within our industry. We prog-
nosticate that in the near future most financial institutions will
choose to subscribe to a number of services from third-party
providers. These service providers can either be the actual
providers of the end-service or aggregators of the services
provided by a number of providers. In other words, even
though they themselves might not be the providers of the
end-service, they take on the role of managing the institu-
tion's relationship with a number of providers.
How current technology can help
Imagine an organization that chooses to: outsource certain
functions to an in-sourcer, subscribe to certain functions from
a service provider, and retain other parts of its core opera-
tions. If you take the current infrastructures prevalent within
our industry as the benchmark, then you can be certain that
the technology becomes prohibitive. Current technology does
not allow for seamless operations of systems that have been
outsourced with the systems that service providers use and
those that are used internally. Consequently, companies can
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.
 Investments

2001 :
A transformation
odyssey

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

Abstract
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.

73
 2001 : A transformation odyssey
“Excellence can be attained if you Care more
than others think is wise, Risk more than others
think is safe, Dream more than others think is
practical and Expect more than others think is
possible”.
For those people who only read the first few lines of
an article
Over the next few pages we will attempt to provide a sense of
the challenges we faced, what we have done and are continu-
ing to do to leave a legacy we can be proud of for years to
come. We hope this will also provide some insights that can
help other people learn from our experience as they navigate
through their own challenges.
Context
The five years between 1995 and 2000 were a period of sig-
nificant growth for Deutsche Bank. During this period, we
went from being a German commercial bank to a truly 'bulge-
bracket' firm and the leading European bank. But this period
of growth came at a cost. The drive of time to market result-
ed in the creation of a complex infrastructure with overlap-
ping initiatives and the resulting cost overlay. Basically,
Deutsche Bank Global Corporates and Institutions (GCI or DB
Investment Bank) were driven by 'top line' considerations as
opposed to cost.
Thus when this journey started in September 2000 we faced
the challenge of driving massive changes in attitude and
actions of the operations and technology world in a market,
were we to know it, that was about to face a massive disrup-
tion. Our challenge was to make a massive cultural shift in the
operations and technology organization of GCI (at that time
4,500 people) to enable us to drive long-term and sustainable
changes in the value of the organization.
By the end of January 2001, the size of the challenge had
grown to 15,000 people following the reorganization of
74 - The Journal of financial transformation
Deutsche Bank into two distinct business streams — Corporate
Investment Bank (CIB) and Private Client and Asset Manage-
ment (PCAM). As a part of this reorganization, we worked with
the business areas to ensure that the technology and opera-
tions functions were better aligned to support the business
lines. This gave rise to our current organization — Global Tech-
nology and Operations (GTO), within the Corporate and Invest-
ment Bank.
The strategy
Immediately following this reorganization, we decided to
develop a strategic business plan for GTO that would be a cat-
alyst for change, focused action and a unifying force to win
the hearts and minds of people who had traditionally been
part of a series of operations and technology shops. In devel-
oping our strategic business plan we took a number of steps
to ensure that we were going in the right direction. Firstly, it
was important to establish where Deutsche Bank, and CIB in
particular, was heading; paying particular attention to the
longer-term goals and objectives. In order to put these goals
and objectives into a relevant context, the next stage was to
examine the external environment, both in terms of the indus-
try and the broader economic factors, and identify key areas
that would have an impact on CIB’s ability to continue in it’s
chosen direction. Part of defining any journey is not only
knowing where the destination is but also knowing the starting
point, so we needed to analyze and understand the current sit-
uation within GTO. All of our findings indicated that this was
going to be an eventful and engaging journey of transformation.
To help align our people with our overall objectives, we need-
ed a vision statement. The vision we articulated reflects the
need to excel in our execution but also the need to add value
to our business franchise. 'To be the technology and opera-
tions services partner of choice, with the knowledge, power,
creativity and credibility to deliver superior solutions that
increase the value of our business franchise, and to be the
employer of choice for high quality people.'
Having defined the start point of the journey and an overall
destination, the next stage was to define the objectives we
2001 : A transformation odyssey
needed to achieve. An essential part of any journey is know-
ing when one has arrived and the very explicitness of the
objectives set provides the mechanism for measuring
progress and success. Taking the journey theme further, hav-
ing defined the start and end point, the next stage was to
articulate what path that journey would take.
Figure 1 is a visual illustration of our belief that the journey
from inconsistency and variability to peak performance
should be undertaken through having a combination of a clear
direction, a balanced strategy, coherent plans, good people,
and massive action where all these activities are inter-
dependent.
Clear direction
Dealing with each part of the journey in turn, we realized that
we needed to firstly establish a clear direction. Having ana-
lyzed internal and external influences and a vision of how we
wished to behave, we were able to identify and articulate our
overall end-state objectives. These are summed up by the for-
mation of four very clear goals for GTO: consistently high
Coherent
Plans
Balanced
Strategy
Clear
Direction
■ Inconsistent Client Satisfaction
■ Unsustainable Cost Performance
■ Variable Capability
■ Inadequate Control
Figure 1: Journey from Inconsistency
client satisfaction, best-in-class cost performance, scaleable
and resilient capability and risk-weighted control. We were
then able to take the internal analysis of GTO and articulate
this as the starting point of our journey in terms of the four
end-state objectives.
As a part of this goal definition, we also developed a broad
vision of how we saw the GTO organization developing over
the life of our Strategic Business Plan (Figure 2). Starting in
2001 we identified the high-level tasks that we needed to
focus on to allow us to make the journey towards continuous
optimization. These tasks were refined in each further year to
expand their scope and build on the significant progress made
in previous years.
People often fall into the trap of starting on journeys and
expecting success too early. When this success is not immedi-
ately apparent or easily achievable or when seemingly insur-
mountable difficulties appear, they change direction. People
must be made aware that sometimes deviation from the path
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
Massive
Action
Good
People
75
 2001 : A transformation odyssey

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

2001
GTO Directional Clarity
2002
Business Alignment Business Areas' Directional Clarity

IT & Ops Alignment Disciplined Execution 2003

Functional Absorption
Team Strengthening
Financial Transparency
Investment Governance
Business & Operating
Resource Transparency Models Alignment 2004
Operating & Technology Continuous Optimisation
Portfolio Governance
Models Optimisation
Risk Transparency Collaborative
Management
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
focussed, we also needed clear plans across GTO that allowed
us to achieve some of the broader strategic goals.
The first task we undertook was to design and implement our
investment governance processes (Figure 3). This necessitat-
ed introducing new terminology into the way our spending
was divided. Two terms were introduced that have since
become part of the Lingua Franca of the Bank — run-the-bank
(RTB), defined as everything that must be spent in order to
keep the bank running and change-the-bank (CTB), defined
as discretionary spend required to change the bank for the
future. All CTB spend must now be approved as part of the
investment governance process before any work can com-
mence and they must clearly demonstrate the benefits to the
financial business in terms of increased revenues, saved
RTB
1. Squeeze
5. Reduce RTB
as Result of
Change
■ Cannot Spend Forever
■ Need to understand how far we can push down RTB
(Understanding & Monitoring Risk of Squeeze)
■ Use What we Free up in RTB to Invest in CTB
Figure 3: Investment Governance Decisions
expenditure, future efficiencies, etc. In addition, the business
line for which it is intended must sponsor all CTB spend. Con-
sequently, additional revenues or savings are then incorporat-
ed in the budget for the year in which they were promised.
Given that most of the growth in the investment banking arm
had come from acquisitions, there were a plethora of different
systems, tools, and processes that needed to be rationalized in
order to achieve the right technology model to support a glob-
al business. In order to achieve this objective we created a vir-
tual team of enterprise architects whose task was to identify all
existing development tools, middle-ware, web tools, platforms,
and environments in use throughout the bank and classify
them as invest, maintain or dis-invest. Where products fell in
the dis-invest category, there would not further CTB spend.
Business +
IT Strategy
Operations Risk CTB
2. Understand
Risk of Squeeze
Fund CTB
3. Make Change
Monitor
4. Understand
Impact of Change
In order to make this work we need:
■ Good Operations Risk Management
■ Firm Management of Costs
■ Good Strategy for Investment
77
 2001 : A transformation odyssey

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

Operational
Ad-hocracy
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
Frustration
Performance
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-
Values

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

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

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

Career & Personal

Development

Manpower Sourcing
Planning

Development Succession Promotion

Competencies
Job Definition

External Internal Individual

Resource Resource Development
Pool Pool Plans

Figure 7: Performance and Development Model

79
 2001 : A transformation odyssey

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

CIO - CIB GTO CIB

Mitchel Lenson Controlling

CIB
HR

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

Europe

Americas

Asia
Pacific

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

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,

81
 Investment

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

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

Abstract
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-
formance.

83
 Return on investments in information technology: Beyond the
productivity paradox
Introduction
A large and growing body of academic Information Systems
(IS) research investigates the return on investments in infor-
mation technology (IT). In an age where management careful-
ly weighs the benefits of every discretionary investment dol-
lar, finding evidence of positive returns on IT investments is
critical. This paper summarizes recent research on the returns
to IT investments that uses large samples, archival data, and
accounting or market measures of firm performance.
Returns on investments in IT: The Productivity
Paradox and beyond.
The 'Productivity Paradox' refers to the early IS literature that
found no relation between spending on IT and productivity or
profitability. Research on the paradox exists on two levels. The
first is at the industry or economy-wide level. In 1987 Noble
Prize winning economist Robert Solow summed it up by writ-
ing, 'We see the computer age everywhere except in the pro-
1
ductivity statistics.' The second Productivity Paradox was
observed at the company level, where 'there was no correla-
tion whatsoever between expenditures for information tech-
nologies and any known measure of profitability.'2 It is the
second version of the Productivity Paradox that most
intrigues researchers in IS [Brynjolfsson (1993), Landauer
(1995), Strassmann (1990, 1997a)]. These early studies con-
firm either no relation or a slightly negative relation between
firm-level spending on IT and firm performance. However, by
the late 1990’s several studies found that there were positive
payoffs from investments in IT [Brynjolfsson and Hitt (1995,
1996), Dewan and Min (1997), Hitt and Brynjolfsson (1996),
Lichtenberg (1995), Stratopoulos and Dehning (2000)]. There-
fore, in recent research, the question has generally changed
from 'is there a payoff?' to 'when and why is there a payoff?'
Literature review
We present a general framework for analyzing this research in
Figure 1. The top portion of Figure 1 shows that IT has a direct
and indirect effect on business processes, which together
determine the overall performance of the firm. An example of
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.
a direct effect is improving inventory management, which
reduces inventory levels, inventory holding costs, waste, and
spoilage. An example of an indirect effect is improving deci-
sion making from having information that was not available in
a prior information system. The bottom half of Figure 1 shows
how researchers have measured IT, business process per-
formance, or firm performance. Generally, investments in IT
have been examined three ways: (1) the amount of money
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
IT deployments such as type of system (e.g. electronic com-
merce or ERP), performance advantages from early deploy-
ment of technology (first mover advantages or proprietary
technology advantages), or IT-enabled strategies such as
improved product quality due to new IT. Researchers that
quantify the explanatory variables based on IT management
or capability examine differences in the emphasis on IT or
level of ability within an organization. For example,
researchers classify firms as successful users of IT or as those
that have systems personnel in upper management positions.
Researchers examine the relation between IT and firm per-
formance through one or more of five paths of Figure 1. Path 1
is a direct link between IT and overall firm performance,
bypassing the effect of IT on business processes. In this
research, researchers usually measure firm performance
using market measures or accounting measures. Market per-
formance measures are based on stock price or stock market
returns. Accounting performance measures include ratios
such as return on assets (ROA), return on equity (ROE), and
return on sales (ROS).
Path 2 of Figure 1 describes the relation between IT and busi-
ness processes. Business process performance measures
include gross margin, inventory turnover, customer service,
quality, efficiency, etc. Path 3 shows how these process meas-
ures combine or interact to determine overall firm performance.
The link between IT and performance often depends on other
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-
work. Path 4 of Figure 1 represents the Contextual Factors that
link business processes and firm performance measures.
Examples of Contextual Factors include firm size, industry,
financial health of the firm, growth options, and IT intensity.
As shown in Figure 1, these Contextual Factors affect business
processes through Path 4 and overall firm performance
through Path 5.
IT Spending: Stock market reactions to
announcements of IT related expenditures
In this section, we review five studies that have examined
Paths 1 and 5 of Figure 1. One stock market-based method of
determining if IT investments pay off is to see if shareholders
believe IT investments are value-relevant. Event-study meth-
ods serve as a useful tool in an IT context to study the stock
market reaction to salient IT events. One such event is a press
release announcement of an IT investment. Event studies
allow researchers to investigate which attributes of IT invest-
ments influence shareholders’ interpretation of such
announcements as measured by abnormal movements in the
investing firm’s stock price.
In the first event study of market reactions to IT investment
announcements, Dos Santos et al. (1993) only observe a posi-
tive stock market reaction to innovative IT investments. This
suggests that stockholders carefully consider the nature of
announced IT investments and the impact investments have
on the firm’s net present value of future cash flows, and then
buy or sell accordingly. Dos Santos et al. define an innovative
IT investment as a first use of a technology, a new product or
service, or a new IT application within an industry.

85
 Return on investments in information technology: Beyond the
productivity paradox
Im et al. (2001) expand the Dos Santos et al. (1993) data set
and find positive returns for announcements of IT invest-
ments for small but not large firms (Path 5 in Figure 1). Fur-
ther, they find evidence of increasing returns over the more
recent 1991-1996 sample period as compared to the earlier
1981-1990 sample period. In the more recent sample period,
they also find increasing returns from IT investment
announcements by financial but not manufacturing firms.
Dehning, Richardson, and Zmud (2002) extend this work by
proposing that the strategic role that IT plays within an indus-
try affects the stock market response to IT announcements.
They find evidence that suggests that firms in industries in
the midst of IT-driven transformation have higher stock mar-
ket returns around the IT investment announcements than
firms in industries at lower levels of IT-driven transformation
such as using IT to automate business processes.
Oh and Kim (2001) is an example of yet another contextual
effect that affects the overall stock market reaction to IT
(Path 5 in Figure 1). The authors show that financial conditions
facing the firm affect the stock market reaction to IT invest-
ments. They show that the market-to-book ratio and the vari-
ability of daily stock returns affect the investor’s reaction to IT
investment announcements.
Other market measures
In this section, we examine recent studies that use other mar-
ket performance measures to investigate Path 1 in Figure 1.
Hitt and Brynjolfsson (1996) examine the relation between the
value of a company’s IT and one-year market return. Hitt and
Brynjolfsson find a positive relation between IT Stock and one-
year stock market return in only one of five years examined.
The fact that they find little relation between IT value and
stock market returns is unsurprising. There may be multi-year
differential firm performance, but no difference in stock mar-
ket returns due to market participants’ anticipation of a per-
formance advantage.
Five studies investigate Path 1 in Figure 1 using the market
value of the firm to measure firm performance. Each study
86 - The Journal of financial transformation
finds a positive relation between IT spending and market
value. Where these studies differ is in their approach to meas-
uring market value, and the effect of contextual factors (Path
5 in Figure 1) on firm performance.
Bharadwaj et al. (1999) examine the relation between spend-
ing on IT and the ratio of the market value of a firm’s assets to
the replacement cost of those assets. Using 631 firms from
1988-1993, they find that the coefficient on IT spending varies
from a low of 1.7 to a high of 10.3 in five, single-year regres-
sions. Brynjolfsson and Yang (1999) and Brynjolfsson et al.
(2000) regress the market value of computer capital, other
assets, and numerous control variables (e.g. R&D, advertising)
on the market value of the firm. Brynjolfsson and Yang find
that one dollar of computer capital is valued at ten times one
dollar of conventional capital. Brynjolfsson et al. add an addi-
tional explanatory variable, work practices, to the model of
Brynjolfsson and Yang. They posit that work practices such as
the greater use of teams, broader decision making authority,
and increased worker training are complements to IT spend-
ing. Overall they find that one dollar of spending on IT is asso-
ciated with approximately a five dollar increase in the market
value of the firm; significantly higher than the value placed on
other capital expenditures.
Two studies in this line of research examine Path 1 in Figure 1
using the market’s valuation of Y2K expenditures. Krishnan and
Sriram (2000) find that the market value of the firm relates
positively to Y2K expenditures, but the coefficient is less than
the coefficient on earnings or book value, and less in IT-inten-
sive industries. Anderson et al. (2001) examine Y2K spending
relative to the median industry spending on Y2K compliance.
They hypothesize that the reward for spending more than the
industry median will be higher relative market values of com-
mon equity, and spending less than the industry median will
result in lower relative market values. They find that on average
the market value of the firm increases by 20.3 times the amount
spent on Y2K when firms spend more than the industry median
and the market value decreases by 40.5 times Y2K spending
when firms spend less than the industry median. These studies
provide strong evidence that the market values IT investments.
Return on investments in information technology: Beyond the
productivity paradox
Accounting performance measures
In this section, we examine six studies that use accounting
performance measures to investigate Path 1 and Path 2 in Fig-
ure 1. Each of these uses IT spending measures to classify IT
investments. Hitt and Brynjolfsson (1996) and Tam (1998)
examine Path 1 in Figure 1 using the relation between levels of
IT and firm performance. Using U.S. data, Hitt and Brynjolfs-
son find a positive relation between IT stock (the market value
of a company’s IT systems plus three times the company’s
spending on IT labor) and ROA in three out of five years, but
no relation between IT stock and ROE. Tam uses data from
four Asian countries and finds similarly mixed results. He finds
a positive relation between computer capital (CC) and ROA in
Singapore, a negative relation between CC and ROA in Taiwan,
a positive relation between CC and ROE in Singapore and
Malaysia, a negative relation between CC and ROE in Taiwan,
and a negative relation between CC and ROS in Hong Kong.
These studies raise an interesting question. Specifically, given
the increasing investment in IT by firms: Why do researchers
not find a stronger relation between IT stock and stock mar-
ket performance? The following studies attempt to answer
this question by examining the relation between IT spending
and financial performance. Most researchers do this by inves-
tigating Path 1 and Path 2 in Figure 1 [Mitra and Chaya (1996),
Rai et al. (1997), Strassmann (1997b)]. If researchers find a sig-
nificant relation between IT and both business process per-
formance measures (Path 2) and overall firm performance
measures (Path 1), then they make inferences regarding Path
3 even if there is no direct test of Path 3. A seminal study by
Barua et al. (1995) follows a different approach. Barua et al.
identify relations between various IT and non-IT inputs and
business processes (Path 1), and relations between these busi-
ness processes and overall firm performance (Path 3). They
find a positive impact of IT on business processes, and that
certain business processes relate positively to overall firm
performance.
Three studies follow the more common approach of examin-
ing Path 1 and Path 2 from Figure 1. With the exception of Shin
(1997), each of these studies relates IT spending with business
process performance and overall firm performance, making
inferences about Path 3 without testing Path 3 directly. The
first of these, Mitra and Chaya (1996), examines the relation
between IT spending and various measures of productivity
and efficiency. They find that higher IT spenders have lower
operating expenses and cost of goods sold, and higher selling,
general, and administrative expenses (SG&A). They also find
that large companies spend a greater percentage of their rev-
enue on IT than smaller firms do. Shin (1997) finds a very dif-
ferent result. Using the same basic data, Shin finds that IT
spending relates negatively with coordination costs, which are
SG&A minus non-administrative expenses such as advertising
and R&D. This implies that the positive relation between IT
spending and SG&A that Mitra and Chaya find is due to non-
administrative expenses, despite Shin’s findings that advertis-
ing and R&D are positively related to coordination costs.
A contradiction to the above results is an extensive study by
Strassmann (1997b). He does not find any of the significant
relations of other researchers. Strassmann examines Path 1
and Path 2 in Figure 1, using IT spending data from 539 U.S.,
European, and Canadian companies to examine the relation
between IT spending and firm performance. Using a single
year (1994), he found no correlation between IT spending per
employee and ROE. The only significant results reported are a
positive relation between IT spending on order-entry and
back-office operations and sales growth and productivity.
Sircar et al. (2000) take a slightly different approach to this
line of research. In an exploratory study they use Canonical
Correlation Analysis to examine the relation between various
IT spending measures, various business process measures,
and overall firm performance measures. They find numerous
correlations between IT measures and firm performance
measures, but are unable to determine causality.
The overall conclusion of these studies is that the relation
between IT spending and financial performance is tenuous. It
is possible that on average IT has increased productivity or
output, but not profitability. One explanation for productivity
increases without corresponding profitability increases is that
87
 Return on investments in information technology: Beyond the
productivity paradox
the cost of IT investments offsets the increase in productivity.
If the cost of IT exactly equaled its benefit, success would
depend on IT use and not on its mere acquisition. Studies that
classify IT investments based on IT use (IT strategy or IT man-
agement/capability) attempt to provide insight into this issue.
The following sections review this type of research.
IT strategy: Stock market reaction to strategic
IT investments
In this section we consider the stock market reaction to vari-
ous strategic IT investments. As opposed to simply announc-
ing that a firm is investing in information technology, recent
studies analyze specific IT investments that affect a firm’s
overall or IT strategy (Path 1 and 5 of Figure 1). Subramani and
Walden (2001) investigate the stock market reaction to 251 e-
commerce initiatives announced by firms between October
and December 1998. Their results suggest that e-commerce
initiatives do indeed lead to positive excess returns for firms’
shareholders. This paper presents some of the first empirical
tests of the ‘dot com’ effect, which validates popular anticipa-
tions of significant future benefits to firms entering into e-
commerce arrangements. The findings of Subramani and
Walden (2001) have recently been reexamined by Dehning et
al. (2002). They find that although there was a ‘dot com’ effect
in the fourth quarter of 1998, it had disappeared by the fourth
quarter of 2000.
Accounting performance measures
Floyd and Wooldridge (1990) jointly examine Paths 1, 3, and 5
in Figure 1, the interactive relation between strategy, IT, and
financial performance. They find that product breadth is a
predictor of the use of product technology, and that segmen-
tation is a predictor of process technology. Product technolo-
gy likewise predicts ROA, whereas process technology does
not. They conclude that the strategic context enhances the IT-
ROA relation, and that successful strategies might require the
adoption of certain IT.
Kettinger et al. (1994) examine Path 1 and 5 in Figure 1. They
survey the popular press, academic literature, and case stud-
ies and find strategic deployments of IT that lead to competi-
88 - The Journal of financial transformation
tive advantage. Using ROS and Market Share, they identify
companies that gain and sustain a competitive advantage due
to their IT deployments for five and ten-year periods after
implementation. This classification allows them to see what
factors distinguish sustainers (15 companies) from the non-
sustainers (13 companies). They find that the strong discrimi-
nating factors were investment intensity, cash flow, and indus-
try competitiveness. Moderately discriminating factors were
R&D intensity, times interest earned, and cost efficiency. Asset
base and working capital were weak, but still significant dis-
criminating factors.
Poston and Grabski (2001) examine Path 2 in Figure 1; the
effect of ERP implementation on business process perform-
ance. They compare performance before implementation to
one, two, and three years after implementation. In all cases, a
matched control group of non-ERP firms had superior per-
formance relative to the firms implementing ERP’s.
The literature on the strategic uses of IT has given little insight
into why some firms are able to leverage their investments in
IT into competitive advantage while others are not. For exam-
ple, Floyd and Wooldridge (1990) demonstrate an interaction
between IT and strategy, but their study is limited to a single
industry. Kettinger et al. (1994) identify contextual factors
that discriminate firms with a sustained competitive advan-
tage from non-sustainers, but they have a small sample of pri-
marily large companies, and do not consider which IT factors
lead to a sustained competitive advantage. Poston and Grabs-
ki (2001) find little benefit from the adoption of ERP systems,
despite the continued popularity and adoption of ERP systems
by companies, and a positive market reaction to ERP imple-
mentation announcements (Hayes et al. 2001).
IT management: Stock market reaction to
appointments of IT positions and executives
In this section, we examine two studies that consider the stock
market reaction to the creation of an executive IT position
within the firm and to the naming of directors to the board of
Internet companies. These studies all examine the market
effects of the investment in IT management (Path 1 of Figure
Return on investments in information technology: Beyond the
productivity paradox
1) as well as the contextual effects surrounding these invest-
ments in IT management (Path 5 of Figure 1).
In the first study, Chatterjee, Richardson, and Zmud (2001)
argue that the strategic importance of a firm’s IT capabilities
is prompting an increasing number of companies to appoint
Chief Information Officers (CIO’s) to effectively manage these
assets. These moves reflect changes in top management
thinking and policy regarding the role of IT and firms’
approaches to IT governance. They find a positive abnormal
stock market reaction to the creation of a CIO position, espe-
cially for firms competing in industries undergoing IT-driven
transformation.
The second study of investments in IT management comes
from a recent event study of the nomination of members to
the Board of Directors of Internet companies. Richardson and
Zmud (2002) examine the differential impacts of the experi-
ences or abilities of new board members within Internet com-
panies. This study finds strong support for the notion that
shareholders of Internet startups value new board members
capable of aiding the executive team in developing and/or
refining the innovative strategies in the e-business economy.
In particular, they find that before the NASDAQ crash of April
2000, shareholders valued board nominees that had e-com-
merce experience. Following the NASDAQ crash, shareholders
valued board nominees that had IT experience.
These studies suggest that investments in IT management are
value relevant. Shareholders apparently realize the impor-
tance of executive-level status for IT management and the
importance of board members with e-commerce and IT expe-
rience. It is clear that the transformation of IT investments,
i.e., funding directed toward acquiring hardware, software, and
skills, as well as developing capabilities and processes into
value-adding outputs require what is increasingly recognized as
a very complex production engine that involves an enterprise’s
custodians of IT resources (i.e., IT managers and IT profession-
als) in the support of business strategies and operations.
Accounting performance measures
Various studies assert that managing IT assets is more impor-
tant than the amount of money spent on IT [Strassmann
(1997a), Stratopoulos and Dehning (2000)]. Two studies use
this motivation to examine the relation between IT and firm
performance without focusing on IT spending. These studies
attempt to provide insights into the advantage granted by the
successful management or use of IT by focusing on compa-
nies with high organizational IT capabilities.
Bharadwaj (2000) examines Path 1 and 2 in Figure 1 by com-
paring “High IT Capable” companies to a matched control
group. She compares the two groups on numerous business
process performance measures and overall firm performance
measures over four years. She finds that the High IT Capable
firms have higher profitability ratios in all four years, lower
operating expenses as a percentage of sales in all four years,
and lower cost of goods sold as a percentage of sales in two
out of the four years. She concludes that increasing IT capa-
bility increases a firm’s competitive advantage.
Dehning and Stratopoulos (2002) take a similar approach to
examine Path 1, 2, and 3 in Figure 1 by comparing a group of
companies with a competitive advantage due to an IT-enabled
strategy to a matched control group of companies for seven
years on ROA, ROS, and Asset Turnover. They find that the IT
companies have higher ROA for the entire time period cov-
ered. In addition, ROS is higher four out of the seven years,
and Asset Turnover is higher all seven years. To provide a con-
text for interpretation, they identify 87 companies with a com-
petitive advantage not due to an IT-enabled strategy. This
second group of companies had higher ROA and ROS over the
seven years examined, but in no year was Asset Turnover
higher for this group of companies. They conclude that com-
petitive advantage due to IT-enabled strategies differs from
one due to non IT-enabled strategies.
These studies help explain the findings of a positive reaction
to firm announcements of appointment of IT executives.
Effective management of IT assets can provide substantial
performance advantages over direct competitors. The mar-
89
 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.

Conclusion
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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91
 investments

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

Abstract
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.

93
 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
Marketing
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,
appear to be deploying a ‘first mover’ alliance strategy.
Customer needs and expectations are met through exception-
al service management processes. In addition to current
expectations of consistent quality and integrated operations,
corporations will be expected to meet exceptional security
and privacy requirements in future. As each aims to acceler-
ate its implementation and results from competitive achieve-
ments, learning from best practices internally and externally
is seen as a speedy and lower risk route to success. Assessing
and understanding current capabilities and gaps can be the
basis for an enterprise-wide knowledge management program
that launches the company to new and pervasive levels of
competitiveness (both broad and deep). The successful net-
worked financial institution will use knowledge management
for improved customer management, operational risk man-
agement, and profit achievement.
Gaining a good return on investment from
e-business project actions
There is already substantial research to suggest that the
majority of e-business and CRM projects fail. Failure can be
defined in different ways, depending on the business and situ-
ation. Clearly failure to achieve any result at all from an e-
business project is one possible outcome. However, more fre-
quently some positive results are achieved but these projects
are still not considered to be successful. Failure to achieve
anticipated Return on Investment (ROI) is perhaps the most
frequent outcome and biggest potential risk for any e-busi-
ness project or CRM program, where a program is a series of
interdependent CRM projects.
As business becomes more competitive, executive manage-
ment become more focused. Although many priorities are jug-
gled simultaneously, there is evidence that financial services
companies are now focused on gaining short- and medium-
term ROI through two core objectives:
■ Becoming customer centric
■ Becoming more efficient
A recent AM Best article1 highlighted the current pressure for
North American and European Insurers to invest in e-busi-
ness projects only where internal ROI cases have been
proven and accepted. This implies that the insurance indus-
try (and no doubt other financial services) made many previ-
ous investments without such ROI cases. Best suggested that
the main components of ROI were simply an understanding
of costs, benefits and time-scales, which are of course some
of the major headings.
The standard development approach for a business case is
frequently described in articles. But, if the ROI approach to e-
business programs is relatively simple to implement why do
so many projects fail to deliver? Our research suggests that
this is primarily because the broad assessment and manage-
ment of costs, benefits, time-scales, and project risks (mar-
ketplace, business, and technical) proves much harder than
anticipated.
Today, many more financial services companies are setting
‘hurdle rates’ for ROI cases. As shareholder funds are being
invested (not investor or policyholder funds), corporate
finance departments set ROI objectives which are linked to
target rates of return on capital employed (ROCE), market
expectations, and other commitments. Typical ROI objective
rates can be 15, 25 or even 40% using this approach. Of
course the process for financial modelling of these internal
business cases is usually well known within the executive
management team, and cases are often proposed in a man-
ner that demonstrates achievement of ROI targets without
sufficient assessment of eventual costs, benefits, time-scales
and risks. This effect is lessened if the proposers are reward-
ed for the ownership and successful achievement of their
cases over time. However, even this motivational approach is
tough to implement as other factors can and do affect
achievement. These include management and organizational
changes, as well as dependencies and executive decisions
outside of the project teams control.
Our research highlights that stages 2 through 5 of the criti-
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
order#301825
 Achieving ROI from e-business systems in financial services
business case failure, including:
■ Rigorous identification of relevant costs and benefits.
■ Prior assessment of customer experience and likely
responses.
■ Selection of appropriate IT architecture.
■ All aspects of readiness, program, and change manage-
ment.
■ All aspects of risk assessment and mitigation.
■ Identification of appropriate dependencies and related
efforts.
Project costs can be seriously underestimated, as it is very
common that the full extent of the issues to be tackled is not
well known early in the project. One of the most common cur-
rent reasons for project failure is the difficulties caused by
poor quality and dispersed customer data. Using traditional
project approaches, the extent of these problems is normally
encountered during the mid- or late-project stages, rather
than in the estimation process. Automated techniques are
now available to assess the structure and quality of data
sources. These sources are primarily ‘legacy’ systems (where
a legacy system is defined as one that has achieved produc-
tion status!). But, they can also include database deliverables
from previous project stages, for example a marketing data-
base, or operational customer database.
There are many other areas where project costs are under-
estimated. It is critically important that a realistic assessment
of costs is made at an early stage to avoid projects exceeding
time and other resource limitations later on. It is not unknown
for project teams to return many times to request the alloca-
tion of additional resources to address ‘problems not antici-
pated’, until eventually the ROI case is completely under-
mined, and little or no confidence remains that the project can
ever provide any useful deliverable at a reasonable cost. At
this point the project and prior investments may be written
off. In some cases this is done multiple times before a new
approach is taken.
Financial benefits are hard to estimate. The easiest to esti-
96 - The Journal of financial transformation
mate are probably those that are extrapolations of currently
successful activities. For example, where a limited pilot project
has demonstrated successful retention or cross selling and
can now be implemented in a more scalable or broad manner.
However, many e-business projects are steps into uncharted
territory most companies. In this case extrapolation of busi-
ness benefit is not an option. When mobile WAP financial serv-
ices were first considered, it proved very difficult to gain suf-
ficient confidence of consumer reactions, likely behaviors, and
business values using market research techniques. For new
business areas pilot or ‘learning’ projects may need to be
funded and implemented to increase business understanding
and financial confidence. Not all such projects will prove suc-
cessful. Consequently, these pilot projects need to be imple-
mented at low cost (but not necessarily reduced function) to
limit financial write-off if they prove unsuccessful. In the event
of enormous success the pilot needs to be ready to expand
very rapidly to gain extrapolation of benefits.
Where a strong e-business infrastructure is already in place,
additional pilots can be more easily put in place, at relatively
known costs and risks. Immediate integration will tend to rein-
force the achievement of business benefits (for example by
better directing, supporting, and measuring the new channel
or product) and enable lowest cost entry with rapid exploita-
tion through scalability-on-demand.
The achievement of anticipated benefits usually depends on
many factors beyond the immediate control of the project
team. This is why it is so important to anticipate risks and
dependencies, building a plan to address them where possible
or appropriate, or to mitigate and/or keep watch on other
risks that are identified. As any project or program has bound-
aries, some executive and business management areas may
be outside the scope of the project, yet a dependency exists
which could limit or nullify the achievement of expected ben-
efits. Despite strong work to anticipate customer response, we
cannot prescribe or fully predict the results of our e-business
actions on the market. Many benefit-related items remain out-
side the project team’s control, but these can often be antici-
pated and considered to help assure the achievement of ROI.
Achieving ROI from e-business systems in financial services
E-business integration drives ROI
Elsewhere in our writings we have demonstrated that there is
a strong relationship between customer management capabil-
ities and business results. Joined up capabilities imply a rea-
sonable level of achievement across all the eight customer
management capabilities defined in the QCi model, which in
turn implies coordination and integration between them as
there are mutual dependencies built into a successful busi-
ness implementation of the model. Of course business sys-
tems and processes can hardly be successfully joined up if the
underlying systems are not. Breakages in the integration of
data (which ensure that the appropriate data is in the right
place and of sufficient quality to be used) will undoubtedly
cause breakages in business processes.
E-business implementations are very dependent upon inte-
gration to achieve ROI. One example is the required integra-
tion of customer offers with prior analysis of data to deter-
mine the most appropriate and successful promotions to be
made. Another example is the integrated service require-
ments of the customer, supporting the e-business channels
with help desks, telephone services, mailings, fulfilment, and
complaints management. Various assessments of potential
ROI and the business and IT actions are required to achieve it
exist. A subset are listed below. Each combines a method and
tool to help assess current status, potential ROI from improve-
ment and specifically identifies where benefits are derived
from integration efforts.
■ Becoming Customer Centric (BCC) – A self-assessment
of the status of customer centric change and achieve-
ment in a financial services organization. This is an
excellent place to start when educating the executive
management team and involving them in an active dis-
cussion about customer centricity efforts and results in
their organization.
■ Customer Management Assessment (CMAT) – An assess-
ment across eight key areas of customer management
capability, looking at intention, reality, and effect. As evi-
dence is checked and the results should be carefully cali-
brated and benchmarked against other leading compa-
nies. This is a very full assessment that makes an excellent
starting point (or regular review point) for any major cus-
tomer management program.
■ Customer Value Management — An assessment of the
needs of the customers of a given financial services com-
pany, the value these customers would attribute to capa-
bility and offer improvements and an understanding of the
actions required to put these in place. This assessment
should be deployed if the Customer Management Assess-
ment identifies lack of understanding of customer needs
and the development of appropriate proposition and cus-
tomer management activities.
■ Segment and target the market based on both the current
and future value of a customer or segment. This targets
customers for cost- or price-appropriate personalized treat-
ment, as well as channel-optimization.
■ Assessment of the achievement of enhanced ROI during
or following the call center, sales force automation, or
multi-channel implementation of the e-business channel
solution.
■ Xchange Customer Value Management (‘Real-time’ rules
engine deployment) looks specifically at the ROI case for
deployment of a real-time rules engine that provides data-
based personalization of e-business channel offers, which
may also be made to customers in a consistent manner
across complementary channels (e.g. call center, branch
etc).
■ Enterprise Customer Analytics (ECA) services method
combines all of the above (and others, as required in any
custom situation) from strategy through to execution, and
from analytics to operational deployment.
Of course there are many less tangible or intangible benefits
that can eventually form the most significant part of the final
business case. These are much more likely to be included,
acted upon, and achieved if the business case is owned and
implemented by a profit center business unit (e.g. customer,
channel or alliance management) rather than an internal or
cost center such as IT.
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 Achieving ROI from e-business systems in financial services
Accelerating ROI achievement in e-business
projects
There are tried and tested techniques for accelerating the
achievement of ROI from e-business projects or staged e-busi-
ness programs. This section focuses on some of the e-busi-
ness infrastructure fast-start capabilities that can assist.
■ Rapid assessment of source data
Research and experience suggests that almost all existing
source data (for example in legacy and existing e-business
systems) is inadequate for CRM purposes and for additional e-
business applications. In a US based project a three-year-old
system was shown to have poorly structured and documented
data. Existing processes had allowed data of insufficient qual-
ity and accuracy to be captured and stored. In a European
project with literally hundreds of existing sources of customer
data, the company decided that the only reliable data source
was a recent e-business application that encouraged self-
maintenance of the data by the customer.
Assessing the quality of these data sources is traditionally a
laborious and expensive task taking many months. Rather
than delay project start through assessing the situation as
input to the sizing and prioritization of project actions, com-
panies normally allowed inherent data issues to be encoun-
tered during the project, causing time and cost overrun,
rework and eventually many abandoned projects or ROI cases.
Automated tools are now available to achieve the prior
assessment of data structure and quality, even recreating
missing metadata documentation if required. With accurate
and appropriate data available in the right place at the right
time the business process is more effectively supported,
accelerating and confirming ROI achievement. Over time a
sequence of projects can use the same tools and techniques
to add more integrated components into a consistent enter-
prise integration approach, without being overwhelmed by
ever increasing complexity.
■ Pre-existing financial services data models
Further project acceleration and ROI can be achieved using
98 - The Journal of financial transformation
proven industry data models. While many CRM and e-business
applications (and utilities) are cross-industry, the business
problems they need to address are industry specific. Consider
for a minute a situation where we make financial services
offers to customers based entirely on their likelihood to
respond and buy, rather also considering their value potential
or risk to the profitability of our business. Credit or claims risk
can easily outweigh other benefits or losses if not considered
in the acquisition, retention, and development of selected cus-
tomers. This additional knowledge tends to be based on indus-
try-specific data fields such a fraud or risk indicators, com-
bined with knowledge of the activity-based costs associated
with estimating customer value. Over time these data fields
have been defined and built into readily available industry
models, usually in the operational and analytical common
data-stores. Most cross-industry applications can be made to
allow ready access to these more effective data sources with
only limited integration effort.
Pre-designed data models are available to validate existing
data models. In staged projects where ROI is expected within
months, there is no time to redevelop existing models – with-
out even considering the additional costs and risks involved in
this redevelopment. Originally industry data models were
deployed to redevelop core systems, although this approach
has generally been overtaken by a move to packaged applica-
tion purchases as rapid deployment of multiple new product
systems has been seen as the way to launch new products and
new lines of business rapidly. More recently industry data
models are being deployed to accelerate e-business and CRM
application component deployment, for example where a
campaign management tool requires a data-mart to be devel-
oped as its data source, or where real-time customer man-
agement applications require the existence of a single opera-
tional view of the customer (operational data store, or ODS) to
integrate the management of multiple customer channels.
Perhaps the most recent and most forward-thinking deploy-
ments of industry data models are to support the integration
of many existing core systems and new CRM systems to pro-
vide a consistent enterprise-wide approach as the basis of a
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
major industry data-model based components of such an
approach are:
■ Operational single view of the customer (ODS), enabling
consistent and integrated management of the customer
relationship across multiple touch points.
■ Analytical single view of the customer (Enterprise data
warehouse or EDW), enabling consolidated planning of
customer development activities.
■ Standards for message or data interchange formats,
enabling the linkage of any or all past, present and future
systems as required.
As integration proceeds, companies start to realize the busi-
ness value of systems integration at higher functional levels.
Integration of disparate data is only the start. Soon it becomes
apparent that the business processes that span systems pro-
vide an end-to-end workflow approach that supports the oper-
ational business model more directly. The reusable process
steps (or functions) are already defined in these same indus-
try models and are being consolidated with various integra-
tion tools (batch, real-time, and asynchronous) to support the
achievement of maturity in systems integration in the time-
scales required.
As companies merge or acquire others, they often look for the
ability to link the increased number of current systems and
share the combined set of customer data for analysis and
operational use as required. This is exactly the stage where
they realize the need for the approaches and assets listed
above, however it is almost inevitable that they also consider:
■ The global applicability of locally developed versions of
these models.
■ The relative cost and value of developing them in-house.
Most locally developed models tend to be applicable primarily
to the country business in which they were developed, often
with very limited ability to be expanded or applied elsewhere
(e.g. to other countries, to manage multi-currencies, multi-lan-
guages etc). As a result, an externally purchased data model
usually provides a more mature, future proof, and commonly
acceptable base for all countries or businesses to migrate to.
Development costs for operational data store, for data ware-
housing, and for integration of existing and new systems, are
almost always underestimated. In practice not only are these
estimates usually unrealistic, but also many such projects (as
they are very large developments) fail to deliver the expected
solution or ROI. As data models become more widely used and
prevalent in the marketplace, they are tending to fall in price
and be made more widely available to both users and suppli-
ers as a potential development or integration standard. These
models can contribute to the control of development costs
and acceleration of project implementation.
So, substantial project and ROI acceleration can be gained
from the use of industry data models, both at the component
implementation stage and as disparate systems are integrat-
ed to leverage much higher ROI from an enterprise approach.
■ Pre-assembly can accelerate custom CRM projects –
data models
Enough projects have been run in financial services to demon-
strate that the Network FI model and underlying technical
architecture can be used as a common basis for most, if not
all, financial services companies. The challenge is to acceler-
ate the development of CRM capabilities through acceleration
of each project stage. However, there are many potential
starting points and prioritized routes depending on the com-
pany and customer set involved. Using a custom mix of exist-
ing, current, and future systems has been proven to be practi-
cal. However, this is best achieved around common industry
data stores (operational and analytical) and a through deploy-
ment of re-usable approach to integration (combining batch,
asynchronous, and real-time connectivity). Re-use of proven
methods can help with any combination of CRM systems proj-
ects in any sequence. However, where combinations of assets
can be predicted as likely, pre-integration by suppliers is prac-
tical. This pre-integration can reduce time, cost, and risk even
further. It is important for most financial services companies
99
 Achieving ROI from e-business systems in financial services
that they achieve this without becoming committed to propri-
etary asset combinations, which reduce future options.
■ Pre-assembly can accelerate custom CRM projects –
Integration
In most CRM programs, very different methods, tools, and
techniques are used to integrate disparate CRM and legacy
systems, so as to link the channels, administration, and ana-
lytics required to complete closed-loop business processing.
As a result, the full benefits of integration remain beyond the
reach of many companies. Of course, integration is not
achieved overnight. But, if a company does not work to a con-
sistent view of how it will be achieved over time, using com-
mon approaches at each program stage, it will fail.
To get the ‘right data to the right place at the right time’ to
support the defined CRM activities, data needs to be moved
and restructured in one of three ways:
■ Batch
This is used where the data can be moved overnight, usually
in large quantities, and still is sufficiently timely for the busi-
ness activity. Processes that use this approach may be week-
ly or monthly, for example revenue results, or overnight
updates. Batch implementation is usually achieved using vari-
ous ETL (extract, transform, load) tools. The choice of batch
movement of data is usually for one of these reasons:
■ The data is not required by the business user/process to
be updated in a more immediate manner (for example
quarterly or annual regulatory reporting).
■ The data sources are not updated more frequently than
this (for example data updates are only received from
some intermediaries on a daily, weekly, or monthly basis).
■ The costs of complexity of other types of data movement
outweigh (so far) the value of more timely data provision.
■ Asynchronous
This is used where the data needs to be moved in a timely
manner, usually in small quantities, the timeliness may be sub-
second, or some longer time. Implementation is normally
100 - The Journal of financial transformation
achieved using a message switching technology. Examples of
when to use this approach include:
■ When (like real-time) a process waits on a rapid response,
for example when a customer service representative is
entering an address change.
■ When a change is propagated to multiple systems, for
example the customers address change causes multiple
systems to be updated. This can be achieved AFTER the
customer is informed that their request has been captured
and acknowledged.
■ When a process requires multiple transactions to be com-
pleted, as a workflow process, over a short or extended
time (for example a complete customer application for an
additional product).
■ Real-time
This is used where the data needs to be moved immediately,
and the process must wait on confirmation that the data is
successfully moved (for example a real-time ordering or other
transaction process, with immediate confirmation). E-business
implementation would normally be achieved using a Java tool.
Examples of use include:
■ ‘Straight through processing’ or STP, of trading transac-
tions requiring confirmation of settlement price and
authority.
■ Teller transactions with immediate effect on working
account balances.
These integration options could take place within a company’s
own systems, or to provide connections to the systems of
external companies (e.g. in business to business applications,
for wider access to customer through intermediaries, or for a
wider product and services portfolio through additional sup-
plier relationships). In practice all three types of integration
need to be combined in planning and implementation, where-
as they have normally been considered and implemented very
separately in different CRM-related projects. For example a
Siebel Systems or PeopleSoft implementation could require
the batch build of a core database, with later update through
Achieving ROI from e-business systems in financial services
a combination of batch, asynchronous, and real-time updates
for different data types with different requirements for timeli-
ness of update. The same is true for new analytical or admin-
istrative systems components within the CRM program.
As a result, a common approach to planning integration needs
to be taken, so that:
■ Different build and update techniques can be deployed
against the same systems and databases.
■ A variety of update techniques can be implemented coop-
eratively against the same systems and databases.
■ Update frequency and methods can be more easily
changed at a later date when business requirements
change or cost/benefit equations change (for example,
due to the reducing costs of technology over time).
■ Over time all the disparate systems (legacy, CRM, analyti-
cal, external etc) can be integrated without being thwart-
ed by horrendous complexity.
A common approach to industry data mapping and metadata
management has been developed to be deployed across all of
batch, asynchronous, and real-time integration, supporting
the required mix and match and migration between these
techniques. While batch integration requires direct mapping
from source to target data models, asynchronous and/or real-
time connectivity require mapping from source to target via
an interim message format, each of these can be achieved
using common industry models and rapid 'drag and drop' data
mapping techniques.
In summary, pre-integration of best practice and customizable
components is practical when a common method and archi-
tecture are employed. The next part of this article outlines the
proven e-business infrastructure that provides a checklist for
any financial services CRM integration program.
Pulling it all together on the screen – The inte-
grated portal
The portal provides integration ‘on the screen’ to users.
Although the portal is a term most commonly associated with
customer access to multiple services, the same portal tech-
nologies are now exploited for any e-business user, including:
■ Employees providing supported service to customers, for
example call center sales and service agents, advisers, key
account managers, and others.
■ Employees with non-customer facing roles, including sup-
ply chain managers (aggregated product and service sup-
pliers in financial services), administrative support staff,
help desks etc.
■ Customers accessing direct self-service systems, offering
a combined and full support service.
■ Business partners and intermediaries, offering services to
their customers that include your services.
■ Business partners and intermediaries using the company’s
sales and support systems.
A typical portal application that demonstrates an ‘on the
screen’ integration example could be that of a financial advis-
er to high net worth individuals. The adviser needs to view the
customers aggregated investment position, carry out a needs
analysis and risk assessment, search for, price, propose and
contract appropriate financial offers with automated fee or
commission management. To achieve this in real-time during
a customer conversation it is important to link seamlessly
between these steps, often requiring data and function
(process) integration. It is also important for the adviser (and
perhaps the customer) to be able to view a number of these
different work items, or ‘portlets’, simultaneously and to move
data between them to avoid making notes and re-keying data.
Within the user screen or portal, each task has its own part of
the screen and is a separate portlet, with each portlet being
supported by a separate application. As these applications are
disparate (it is likely that a number of them are applications
accessed in external company systems) They may have limit-
ed data or function integration. A utility capability can assist
in the accelerated deployment of a portal that combines these
many disparate application sources.
101
 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
Resellers
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:
■ Data level — where consistency of interchange data is
required.
■ Function level — where reusable functions build towards
unbroken processes.
■ Portal or on-the-screen integration — where a single and
appropriate user view is provided.
EBI – e-business Infrastructure
Only a few years ago most commentators and analysts con-
sidered the scope of CRM systems to address customer con-
tact channels only (whether assisted, self service, or excep-
tionally B2B). In our writings we were already proposing that
the closed loop needed to included analytics and administra-
tion systems too, to act as the ‘brain’ to the CRM systems
‘hands’. Over time, research and experience have shown that
closed loop integration of complete business processes (e.g.
retention) is key to achieving return on investment. Commen-
tators have updated their boundaries and terminology to
reflect this. We now use the terminology that has become
most accepted and explanatory although it has not changed
our view and experience of the boundaries of CRM integra-
tion.
Figure 2 introduces an updated and more detailed represen-
tation of this architecture and Figure 3 adds a typical business
process and supporting systems scenario.
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
Evoke
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
Reporting
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
process should start. For example, in a retention exercise we
would need to aggregate holdings to determine which cus-
tomers were most valuable, which were most likely to leave,
how best to recognize these customers and predict lapsing,
how best to address their needs to retain them while remain-
ing profitable. This knowledge (the brain) could then be
deployed for benefit through the most appropriate customer
touch points (the hands). The analysis area typically contains
a common data warehouse (preferably with an industry data
model), data extracts and/or views (data-marts) and applica-
tions (data mining, OLAP etc) to analyze and present or pre-
pare data (reports, interchange tables etc) for subsequent
stages of the closed loop.
Collaborative channels (to the left of Figure 3) suggest more
than a multi-channel operation. Collaboration implies inte-
grated channels working cooperatively to acquire, retain, and
develop customer relationships in the most productive and
cost-effective manner. Collaborative channels may be self-
service, assisted, or B2B, although these channels often share
the same technologies beneath (e.g. e-business, telephone,
wireless etc). Branch systems renewal is a major focus of
banks and insurers, as basic transactions are moved to call
center and the web, allowing the new branch to focus skilled
resources on productive advice for consumers.
Business operations imply the core systems which will
account for financial services transactional business, includ-
ing product structures, pricing tables, transaction logs etc.

103
 Achieving ROI from e-business systems in financial services
These systems are the core of business operations, from
wherever accessed. They are often referred to as ‘legacy sys-
tems’ as if these are the systems that we are stuck with. There
is an increasing recognition that the opposite is true, that
these systems are valuable assets, often providing the rugged,
reliable, and scaleable characteristics of the business. In fact,
a recently offered definition of a legacy system was ‘any sys-
tem that had achieved production'; highlighting the fact that
many new or replacement systems still do not make the grade.
Alltel owns a core banking systems example. An increasing
priority in this area is new compensation systems to refocus
employee effort.
To develop a true collaborative channel approach, which sup-
ports consistent customer knowledge and personalization
across all touch points (or varies it deliberately rather than by
omission – for example to value price differently when assist-
ed or self service) certain components need to be common
across all touch points. These components are the Enterprise
client file (or ODS), any real-time personalization engine, and
the common control of customer interaction processing that
assures consistent customer management as an enterprise.
Unfortunately most channel-related applications are devel-
oped with one or more of these capabilities within the chan-
nel, where it is impractical in a large and complex financial
services organization to expect that one application or chan-
nel technology will meet all current and future needs. Sharing
these capabilities across channels, and deploying the common
integration methods already outlined in this article, provide an
enterprise-wide solution that can be justified and developed in
stages, but also allows achievement of the collaborative goal.
Behind and below Figure 3 lies the consistent batch, asyn-
chronous, and real-time integration required to gradually
complete each example of closed loop processing, to develop
aggregated views of customer relationships, and to be able to
deploy this knowledge most effectively across integrated
channels and transact using high performance, reliable and
secure systems.
Figure 3 introduces a real closed-loop implementation exam-
104 - The Journal of financial transformation
ple, using many of the full-scale applications provided as
examples above. This example has been implemented as the
basis for demonstrations and financial services proof-of-con-
cept projects.
While these diagrams can look too idealized, or seem unreal-
istic or unachievable for your organization, they can provide:
■ A checklist to assess what components are already in
place in your business.
■ A checklist for projects underway, including integration
dependencies.
■ An opportunity to highlight where effort would be better
rewarded if focused on integration of existing components
rather than the additional or more components.
■ A map for the long-term, which can include past, current,
and future systems.
■ A common language for a cross-enterprise CRM program.
■ A checklist and map for further mergers and acquisitions.
■ A checklist for supplier decisions, and/or standard compo-
nents to be shared across an enterprise.
■ A mature and proven approach to delivering ROI from an
otherwise disparate application set.
Critical success factors and conclusions
Research and experience suggest that return on investment is
difficult, limited, and even impractical for most stand-alone
CRM projects. Integrated and closed-loop business processes
including the ‘brain and hands’ are required to obtain and
leverage ROI. Integrated business processes in complex finan-
cial services organizations require integrated systems to
deliver the most appropriate and supporting data at the ‘right
place, right time’. If the systems linkages are broken, then the
business processes will be broken too.
As the financial services customer is encouraged to use more
self-service systems the inadequacies of processes, systems,
and data will become more apparent, thus limiting the organi-
zation's development. Poor productivity and high costs result
from the same issues in a customer-assisted environment.
B2B relationships and value will suffer when the same issues
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.

105
 Guidelines for manuscript submissions
Guidelines for Authors
In order to aid our readership, we have established some guidelines to
ensure that published papers meet the highest standards of thought lead-
ership and practicality. The articles should, therefore, meet the following
criteria:
1. Does this article make a significant contribution to this field of
research?
2. Can the ideas presented in the article be applied to current business
models? If not, is there a road map on how to get there.
3. Can your assertions be supported by empirical data?
4. Is my article purely abstract? If so, does it picture a world that can
exist in the future?
5. Can your propositions be backed by a source of authority, preferably
yours?
6. Would senior executives find this paper interesting?
Subjects of Interest
All articles must be relevant and interesting to senior executives of the
leading financial services organizations. They should assist in strategy
formulations. The topics that are of interest to our readership include:
Manuscript Guidelines
All manuscript submissions must be in English
Manuscripts should not be longer than 5000 words each. The maximum
number of A4 pages allowed is 10, including all footnotes, references,
charts and tables.
All manuscripts should be submitted e-mailed directly to the
editor@capco.com in the PC version of Microsoft Word. They should all
use Times New Roman font, and font size 10.
Where tables or graphs are used in the manuscript, the respective data
should also be provided within a Microsoft excel spreadsheet format.
The first page must provide the full name (s), title (s), organizational affili-
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details should include address, phone number, fax number, and e-mail
address.
Footnotes should be double-spaced and be kept to a minimum. They
should be numbered consecutively throughout the text with superscript
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.
Capco
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

106
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
discipline.

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
Editor@capco.com

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.

107
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.
Mexican flowers. Perfected by the Dutch.

Private Wealth Management.

Perfected by Deutsche Bank.

Van Gogh sought perfection, combining

powerful imagination with outstanding
technical skills. And transformed simple
sunflowers into a masterpiece.

At Deutsche Bank, we’ve built our reputation

in much the same way. We begin with a
highly personal, perceptive understanding
of your needs. Which we creatively link
with financial products that only a world-
class bank can offer.

A unique blend. And results that speak

for themselves.

Talent.
Leading to results.

www.db-privatebanking.com
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