Adventures with core systems: part I

Michael Harte first walked into his Sydney office at the Commonwealth Bank at 9.15am on 10 April 2006.

Fresh from stints working in the finance sector in New York and London, the bank's new group executive and chief information officer had had plenty of opportunities to kick the tyres during the recruitment process and understood the challenges ahead.

When he finally got to lift the bonnet on the bank's IT group he uncovered: "A group of fragmented business IT teams and a dysfunctional relationship between the central tech services organisation and key third-party suppliers.

"There had been ten years' worth of embattled relationships as a result of big bang outsourcing and all the attendant contract management issues that go with an outsourcing relationship that's coming toward the end of its contractual term," says Harte.

"Most business units were doing their own IT and Tech Services was trying to keep the wheels on these third-party arrangements."

Things had to change.

"We set out to create a group wide IT function that leveraged the existing capability where there were pockets of best practice, and to leave the business units to determine what the customers needed in terms of products and services.

"Then on the supply side we sought to standardise the way we design, develop and deploy solutions and the way we run and operate the infrastructure."

These services could then be "Reused as utility services across the group…so we could save IT operating costs. We had a target to save $200 million in IT savings."

When the CBA announces its year-end financial results shortly, it will also reveal that it has met that IT savings milestone, says Harte.

But greater savings are required from the bank's $580 million core systems' revamp announced in May.

When Harte came on board in 2006, 19 per cent of the CBA's expenses were being directed to IT. He and the IT group have now cut that to 13 per cent.

Although the trend in the cost to income ratio for the IT group will run negative over the next three years while the revamp takes place, Harte says he hopes that the efficiency ratio (IT expenses compared to total group operating expenses including investment) will thereafter be shaved down to 11 per cent.

He says he's achieved 12 per cent in previous roles and believes the 11 per cent is possible - a figure he claims would place the bank in analyst Meta Group's global top ten for banking IT efficiency.

While the bank has to invest heavily to get there, Harte says: "What we want to do over the next three years is stay as efficient, but become more effective."

Assuming the core systems revamp goes to plan, that is.

Long before Harte arrived there had been insistent mutterings that the bank's core legacy computing systems could no longer sustain CBA's ambitions.

While some of the CBA's legacy systems run in Assembler on mainframes, and are highly efficient in pure computing terms, they were developed when banking was a five day a week, short working day proposition. They don't cut it in the contemporary world.

"We have got legacy assets that are efficient, the costs written off a long time ago, running on proprietary code, and the mainframe is extraordinarily efficient. But the model has changed. We live in a 24x7 world, not a Monday to Friday 10-4 world," says Harte.

Consumers, he says, are getting more sophisticated and are demanding "Their financial interactions to be how they want, where they want and when they want."

CBA's customer satisfaction had gone off the boil but Harte says, "We have as an organisation an ambition to be number one in terms of customer satisfaction and IT has an obligation to help."

All banks face the same challenges - they need agile and efficient information systems to meet customer needs and compete. But while all the Australian banks were driving the computing equivalent of FJ Holdens it didn't really matter too much.

Now one has signed up for what it's touting as some sort of computing HSV, everyone else will have to follow or be left to suck dust.

While Harte will drive the IT changes, chief executive Ralph Norris has been "fundamental" to the bank's first mover status, according to Harte. Until 1991 Norris was the CIO of New Zealand's ASB Bank before rising to become its CEO: he "gets it and is the prime mover," says Harte.

"CEOs who are cost conscious or uni-dimensional around cost saving may not take this decision. The multi-dimensional decision involves wanting to serve customers well, have a stable and flexible platform for international growth, and tackle the reduction of risk and the reduction of cost.

"Ageing systems are old and highly complex and from a cost perspective every time you want a new product you are writing and integrating code so your architecture is extending the Tower of Babel that exists."
Harte says that the combination of a "courageous board and adventurous CEO" coupled with his own track record, and a strong core IT team headed by Dave Curran means that the "stars aligned" for the CBA's core systems' revamp.

Just six years ago CBA's IT firmament was nowhere near as benign

In early 2002, the then chief executive of the Commonwealth Bank, David Murray, attracted blazing headlines with his comment that: "The IT industry in the US has single handedly wrecked the world economy because the promises were large and by the time they were turned into investor promises at the casino end of the equity markets then the investments were entirely unrealistic."

The antipathy toward IT at the bank didn't bode well for a major systems overhaul.

By 2006 when Norris and Harte had taken up the reins at CBA, Murray had toned his technology attacks down.

In an interview shortly after moving to head the Australian government's newly established Future Fund, he said that he was never anti technology per se, rather: "In my long experience at the bank I learned that the IT system can make or break the bank - it can be a source of competitive advantage or a big mess up."

CBA can't afford a big mess up. It can't afford a CS90-style disaster, which left Westpac and IBM with $125 million worth of egg on their faces when their attempts to build a computing platform for the future imploded.

CBA can't afford that with the competition nipping at its heels.

Harte isn't too concerned about his three major local competitors (he thinks the first mover advantage with core systems could give the bank anything from 18-36 months' head-start) but he does keep a keen eye on the international threats.

"You have rapidly modernising financial institutions and I'm not calling them banks - they are banc assurance and managers of financial products right across asset management, insurance banking and brokerage," says Harte.

It's not the recent entrants such as BankWest and ING Direct that are the competitive triggers for CBA's core systems revamp, but financial services companies which have yet to arrive.

"We have an extraordinary set of circumstances where one of the most agile organisations, ICICI is in the European market. They're an Indian bank…and they are as I understand it applying for a licence here," says Harte.

European players such as Unicredit, Spain's Santander and Royal Bank of Scotland should no longer be seen just as European challengers, he warns, but global challengers with efficient modern IT systems.

Given that competitive landscape, a core systems revamp is "Above and beyond survival. It is to create a step change in the ability to serve customers in a very flexible way. To grow and outsmart the competition as well as set up a multi-lingual, multi-jurisdictional capability for regional growth."

While Harte acknowledges, "We've got a few things to get right before we declare we're an assertive acquirer around Asia," he adds, "We'll clean up our household in the next three years."

(Part II: What the next three years will involve, tomorrow.)