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R U

I O

Overview of Best Practice Business Architecture for the Bank

Background and Strategic


Context

Banking in China today


State owned banks have close input from the government
Main banks all have similar product and service offerings
Limited competition e.g. interest rates are not set
competitively
Some increased competition resulting in distinct market
positions
IT being used to drive innovation and efficiency
Non-performing loans being identified and managed
Slowing loan growth as policy lending is replaced by
commercial lending with individual accountability
Increasing centralisation of operations

Banking in China in the future


WTO entry increases competition in high margin business
lines not requiring large branch networks
Full foreign competition five years after WTO entry
Big four banks will continue to run large branch networks
Interest rate liberalisation creates price competition and the
need for each bank to manage interest rate risk
Former state owned banks answerable to shareholders
following privatisation
Impact of currency liberalisation
Polarisation into product providers and/or customer owners

Characteristics of successful banks


Management decisions are driven only by strategic imperatives
Management uses high quality information
Centralisation of operations and technology to gain economies of
scale
Financial management is a key strength
IT enables efficient banking operations
Two disciplines: customer relationship owner or product provider
Change in the role of the branch to distribution not processing
Separate management of customers/distribution channels,
product/operations
Organisational design changes constantly
Use external advice and experience to stimulate large operational
transformations often involving 2-5% of total workforce
Risk management strategies are clearly defined and consistently
implemented

Model of a best practice bank


Customer management

D
o

Distribution channel
management

Operations

S
Human Resources
u
p
p Information Technology
o
Finance
r
t

Strategy

M
a
n
Risk Management
a
g
Management Information e
Governance

Marketing

Transformation
From
Account focus
Operational emphasis is on daily processing
Price insensitivity
Credit risk applied to individual loan applications
Limited risk management
Information used to track geographic performance
Organisational focus is based on geography
People allocated as a resource
Objectives are loan volume and cost driven
Business planning is resource allocation focused
Business controls developed ad hoc
Understanding of capital as a constraint
Use of technology is geographically diverse

Transformation
To
Customer, product and distribution channel focused
Operational emphasis is cost effectiveness given defined
service levels
Price sensitive decisions
Credit risk applied to the individual, group and portfolio
Comprehensive financial, operations and credit risk
management
Information used to provide a multidimensional business
view
Organisational focus is based on function
People developed as an asset
Objectives are profit driven
Business planning considers external factors
Business controls developed as part of overall framework
Use of capital as a decision making tool

The Best Practice Business


Architecture for the New
Bank

Sub title

Current Capabilities of China


Construction Bank

Strategy formulation: current capability


External factors only considered in National five year plan
Five year plan is a mixture of long term vision and current
activities
Targets are cost and volume not profitability driven
Head Office interaction with branches is weak
- Policies do not contain sufficient operational direction
- Implementation of group policies within branches is weak

Customer management: current capability


Identification of important customer relationships has
started
Cross selling to customers is weak except where there is
a statutory obligation
Most systems do not support proactive customer
management
Focus is on products, not customers
Reward structures do not support customer
management
Product development is inconsistent

Corporate governance: current capability


Committee structure dilutes the accountability of individual
managers
Decision making is slow, passing through a number of
levels
Grouping of functions is not always logical
Spans of control result in inappropriate division of functional
activity

Human Resources: current capability


External factors prevent implementation of fully effective HR
strategy
Organisational culture requires significant change to enable
delivery the five year strategic plan
HR strategy is not comprehensive
HR processes can be improved
- Manpower resource planning
- Performance management
- Reward management

Training does not maximise the investment made


Change management processes needed to support reform

Operational efficiency: current capability


Mortgage
per member
of staff

Guangdong Shangdong Ningxia International


Benchmark

Deposits per
member of
staff

Guangdong Shangdong Ningxia International


Benchmark

Credit risk management: current


capability
Policy is generally poorly implemented at a procedural level
Portfolio management not in place
Targets are loan volume not quality
No loan application automation
Credit risk information is poor

Management information: current


capability
Management information is mainly
-

past focused
financial
internally oriented
not used as an active management tool
undervalued as a management tool
geographically based
inflexible in its structure

Information technology
Applications Portfolio

Information Automation
I/T Resources

Where
Personnel & Technology
CCB is
now Practice
I/T Management

applications
integrating
within
functions

task automation
complete, begin
second
generation of
applications

rebuilding
applications for
cross-functional
support

linkage to
external
suppliers and
customers

mainframe/batch

batch & online

online

IT specialist

user oriented
IT specialist

information
manager

intelligent
workstations

Decentralised

Decentralised

Decentralised

utility organisation
for technologies
Centralised

new
Outplacing
technologies
defusing through
organisation
IT staff in business units
Knowledge of
technologies
mix of central/decentral
Centralised

finance decides

IT Org. decides
with Mgmt

steering
committee
decides

steering
committee
decides

information
planning

data ownership

tailored planning
& control

user
participation
in systems
projects

users have
budget
responsibility

users manage
development
users manage
development

little planning

User Sophistication

cross functional systems


become industry
infrastructures

limited,
independent,
focused on cost
reduction (start
in finance)

little planning

squeaky wheel

system devpmt
methodologies

user
involvement
minimal

enthusiastic
user
involvement

Stage I
Initiation

Stage II
Contagion

Stage III
Control

Combined To Be Assessment CCB HO, GD, NX, SD

Stage IV
Integration

Where
CCB
wants to
top management top mgmt facilitates,
BU decides
committee
be
strategic planning
decides

user orgn
responsible for
acquiring & using IT

Stage V
Architecture

Stage VI
Industry
Infrastructure

Financial management: current capability


Data structure does not support performance management
objectives
Insufficient bottom-up input to the planning process
Budgeting timetable delivers the lower level budgets/ targets
too late
No consolidated accountability for financial & risk
management at senior level
Limited interest rate and liquidity risk management

Business controls: current capability


No overall operational risk management framework
Understanding of segregation of duties to provide after the
event controls
Limited appreciation of embedded controls

Capabilities Required at
China Construction Bank

Capabilities needed
Capabilities in
managing the
business
complexity

Capabilities
that enable the
rest of the
business

Capabilities in
supporting the
business

Customer
relationship
management

Product
development
management

Distribution
channel
management

Operational
management

Actively
managing risks

Financial
management

Using
technology
effectively

Setting and
implementing
strategy

Managing
scarce capital

Using
information for
decision
making

Using Human
Resources
optimally

Adapting the
organisation

Strategy formulation: required capability


Five year vision
- High level direction
- Rolling basis

Three year strategy


- Competitive strategy including economic and market
research
- Rolling basis

Annual plan
- Business level, actions, deliverables and budgets

Clear ownership and management of policy


implementation
- Develop closer interaction between HO & branches

Customer management: required


capability
Clarity on customer ownership
- Consumer
- Corporate

Customer segmentation

- Targeted product, service and distribution channel


propositions

Systems must support proactive customer management


- Single view of customer
- Customer contact log
- Customer profitability

Group ownership of product development, marketing


and brand
Focus on customer through discipline separation and
excellence
- Products

Corporate governance: required capability


Define committee and management roles and
accountabilities
- Clarity of responsibility
- Speed of decision making
- Ensure implementation of group policies c.f. strategy

Organisational design to address


- required discipline separation
e.g. customer businesses, distribution channels,
operations
- Balanced span of control at senior management level

Human Resources: required capability


Resource Management

- Recruitment
- Competency framework

HR Infrastructure management
- Information technology
- Processes

Employee contribution
-

Performance management
Reward management
Training
Health and safety

Transformational change
-

Succession management
Organisational design
Communication
Career development
Change management

Operational efficiency: required capability


Create an operations function
-

Focus on processing excellence


Service levels
Cost of service

Standardise processes and controls


-

Operational risk management


Training

Centralised operations
-

Global best practice


Gain economies of scale
Excellence through focus

Automate processes
-

Efficiency gains
Reduction in error rates
Improved reporting

Credit risk management: required


capability
Additional loan sanctioning techniques e.g stress testing
and credit scoring
Portfolio management and reporting with relevant
techniques to be introduced
Automation of the loan application process with differing
approaches for corporate and consumer
Credit policies and procedures delivered on-line to provide
consistency

Management information: required


capability
Management information should be treated as a valued
asset and be multi-dimensional
-

organisation
product
customer

Information should be linked to strategy and be consistent


as it becomes more detailed
Management information should use key performance
indicators that are balanced using a scorecard approach
Executive
information

Business vision
Objectives
Objectives
Do wells

Management
information
Control
informatio
n

Information technology: required


capability
Multi-layered applications architecture is needed to give greater
flexibility in use of systems
IT management practices and user involvement must be
enhanced significantly to achieve this
The current two initiatives, NCR and Alltel, need a wider scope to
address the business issues created by their implementation
Other systems are needed e.g. intranet, loan application
processing, cards and workflow. These must fit into the overall
architecture

Financial management: required


capability
Enhance consolidation and write off controls to move
financial reports to international reporting standards
Prepare financial and management accounts from the
same source
Introduce new management techniques to ensure
corporate performance management is accurate e.g. cost
& revenue allocation and new funds transfer pricing
Cost centre and profit centre reporting should be
developed further
Implement a new finance function organisation structure

Business controls: required capability

Implement new operational risk management framework


Internal audit should be part of a wider reorganisation
involving the set up of an Audit Committee