Management
6.8 Management of Information Systems in Corporate Banking: Critical Aspects
On the basis of what has been investigated and on the basis of some analy- ses previously undertaken it is possible to identify a series of criticalities with regard to Information Systems for corporate banking which can be- come wither barriers or aids for the strategy of market division. In the fol- lowing part these criticalities are shown:
- First of all considering corporate banking Information Systems as a simple specialization of existing systems can be a serious error which is difficult to reverse. Not explicitly defining the level of differentiation and separation of the Information Systems while at the same time defin- ing the business models can lead to a "mismatch" of the systems which in a situation of unsatisfactory results requires a radical review which cannot be obtained through marginal adjustments. Using the much- abused but still useful example of the construction of a building, we are talking about defining at once the type of building in order to plan the available foundations. The choice of using what is available on the retail side, which appears to be relatively diffused, is an example of this type of decision. The problem is saying whether this practice is only an ini- tial response or whether it has been strategically considered.
- It is then fundamental to plan the systems to measure performance re- sults consistently with the logic of divisionalization and all the other dimensions of the business adopted to deal with corporate banking (e.g.
attribution of costs and revenues by area of responsibility). This does not seem to be currently available in the actual structures of application portfolios. Even in this case we are faced with decisions/projects where we have to address the obvious problem of coordinating and linking the systems to manage the firm's processes.
- Many of the individual criteria for segmentation, in particular the more articulated ones which are based on more dimensions, rely on the avail- ability of information about client firms, which is not always easily available or existing in IS. This lack of availability could nullify or make it difficult to adopt segmentations which are not based on infor- mation which is already available. To avoid "circular" discussions on segmentation criteria and availability of information, it will be necessary to gradually introduce more sophisticated segmentations by synchroniz- ing data availability and the models for reading the market.
- A further area for attention regards the comparison which will eventu- ally be made (in individual cases it has already happened) between the level of performance and the solutions adopted by client firms for cor- porate banking services and bank IS. For this reason it is fundamental to assess the level of sophistication reached by client Information Sys- tems. In particular criticalities can arise from valuations which are con- centrated generically on market potential without taking account of the technology chain which must support the relationships in the world of business with particular reference to all those services/products which will be supplied through IT channels or though computer-to-computer integration. In all these cases the Information Systems for corporate banking will be "in direct contact" with those of the client firm, and any missing information or inconsistency will become immediately impor- tant and could lead to a loss of credibility for the individual bank or the financial system. At this point we do not want to state that the quality of Bank Systems for corporate banking is or will necessarily be lower than that of the client firm, but only to underline that gaps must be rapidly eliminated. It will therefore be necessary to show an updated picture of the ways in which firms are tackling corporate banking offerings from the IT point of view. For example, we are thinking of the topic of treas- ury and the software products which have been adopted by client firms.
When faced with these areas of special attention such as those previ- ously listed, there is also a first series of aspects which from now on re- quire interventions. Amongst these it is useful to remember the following:
- the transfer of the "inspiring principles" from the retail area to corporate banking (people, decisional autonomy, response times, quality of ser- vice, of mechanisms of economic responsibility) without rewarding the specificity of corporate banking;
- the risk of generating response times which are not phased with the needs of client firms and so not measured on clients' time scale (e.g.
time required to adapt a service to new needs);
- the lack of devices for the specific allocation of resources to the area of Information Systems for corporate banking such as the existence of budgets for costs, specific investments allocated clearly in terms of re- sponsibility;
- the use of lock-in information such as a system for creating client loy- alty in the Corporate area without having closely considered whether the products/services offered through telecommunications are aligned with the market both in terms of technology and in terms of pricing.
In summary some critical aspects can be shown:
The level of maturity of ICT architectures to support corporate banking is modest. None of those interviewed was able to provide documentary evidence or descriptions of Information Systems architectures for corpo- rate banking. Furthermore common models based on consolidated or- ganizational architectures or resulting from structured planning proc- esses did not emerge. The aspects chosen are in many cases expression of an initial response given to the problem of ICT support to corporate banking. In other cases the topic of the organizational structure to give to the IS for corporate banking had still not been completely faced.
Other banks only mentioned "work in progress" on the topic, the limits and objectives of which are not yet clear.
None of the banks interviewed could be considered a benchmark for the others. Best practices or at least experiences to use as benchmarks are few or inexistent.
In a start-up context, greater concentration on the essence of the prod- ucts/services to be offered (type, target) before designing the Informa- tion Systems seems to be reasonable and normal. However, this clashes against the fact that many of the corporate products can only be offered when automatic corporate banking Information Systems are offered.
The asymmetry between the organization of the bank Information Sys- tems and those of the client is transformed into a point of strength.
Hitherto the organization of banks has matched very little that of busi- ness.
In the area of professional service and application offerings there do not seem to be common experiences and proposals. It will not therefore be easy to pursue a way to accelerate the adoption of adapted solutions through leveraging only on the external competencies of consultancy companies and ICT service and product suppliers.
The widespread diffusion of Information Systems of the "make" type can create a link with the time needed to create new functionalities.
Someone who intends to build a "make" model could be exposed to lengthy delays in delivering new solutions. Clearly the actual existence of valid market alternatives remains to be investigated.
Many client firms, in particular those of a medium to large size, have substantially improved their Information Systems during the past years due to the "millennium bug" and the introduction of the euro. These
firms are no longer willing to interact with suppliers who do not have IT levels of performance which are at least comparable.
- Structures dedicated to the theme with sufficient critical mass. The the- ory that, as for the virtual banks and new internet banks, it will be nec- essary to create separate ICT structures to obtain satisfactory perform- ance from the IS remains to be verified.
- The idea that economies of scale and scope exist is still important, but in the area of Information Systems these synergies tend to diminish. This is even truer in the presence of an ICT market in a phase of stagnation.
In this context Information Systems could soon become a significant limit for the diffusion of corporate banking. As usual, when faced with problems of this kind, the Information System variable can become, for those who are able to manage it with success, a source of competitive ad- vantage at least in the short to medium term. The level of awareness of this appears to be low and based on trust which is barely supported by strong evidence. In summary some considerations can be useful to focus the at- tention on the main aspects which emerged from the research:
- We see the risk of a general underestimation of the problem of IS as critical for the development of corporate banking.
- Overall no preliminary work seems to be being done in order to align corporate banking and IS (IS governance not managed or only referred to).
- The dimension and type of investments made in IS in the world of bank- ing are currently a strong constraint on the possibility of choosing the best application solutions for corporate banking (cost levels, technology solutions). We could talk about a phenomenon of internal "lock-in" due to the fact that the overall mass of investments, competencies and organ- izational solutions granted to IS could play a part in delaying appropri- ate solutions.
- Only radical solutions in terms of managerial autonomy can bring about innovative solutions. In this case there is the problem of having the time to reconstruct application portfolios (which have strong overlaps with existing applications) starting from zero.
- The common choice of data warehouses as the first projects dedicated to corporate banking can be a sign of poor initiative about IS. In other terms, people prefer to bring existing information together rather than generate new information and develop more specific applications.
The attention to the combination of corporate banking and the Internet can be seen as an attempt to save on investments which are not always focused on re-orientation towards corporate banking. This orientation towards corporate banking via the Internet seems to repeat what has al- ready happened with the move from Business to Consumer to Business to Business in the world of e-business.
There is a doubt that the services actually offered (e.g. remote banking) would not be easy to sell separately if prices were based on the internal costs of realization and management. The IT budgets of banks are al- ways significant in quantitative terms. The feeling that this sector is still absorbing a "price premium" which is to the advantage of the supplier can lead to a difference between the IS costs of banks and the economic spaces in the market. At a historical moment when the IT components of the product/service systems are on the increase, this could lead to higher
"production costs" for these components. If the banks wanted to incor- porate part of their IT services into their own products they should look closely at the level of IS sophistication and the costs of their own target clients and use them as benchmarks.
A greater separation and specificity of IS for corporate banking could be desirable and even fundamental to support corporate banking structures in a timely and focused manner. We should remember that the most successful e-business projects were often obtained thanks to a "special team" who had autonomy even on the IS side.
The competitiveness of Information Systems for corporate banking in the face of solutions adopted by some firms will be difficult to obtain in the short term. Furthermore it should be remembered that firms are changing entities in continuous evolution. The research undertaken shows that, except for a few rare exceptions (Bank W), this effort is not yet perceptible or only hinted at.
Giacomo De Laurentis
The drivers explaining the evolution of the organizational structures in large-size companies along the three basic configurations (functional, functional-unit holding and multi-divisional) suggested by Williamson (1975) have been identified in literature in the levels of the following vari- ables:
a) business diversification, b) business correlation,
c) availability of appropriate systems for performances valuation and cor- porate management (planning and control).
Apart from one specification, the same theoretical framework can be applied to financial institutions and justify the delayed departure of the di- visionalization process (which started almost a quarter of a century later than in the industrial segment). The specification lies in that literature has typically studied divisionalization drivers irrespective of the type (i.e. geo- graphical, by business/product, or by client/market segment), whereas banks need to distinguish the various typologies because geographical di- visionalization is almost innate in their type of business and product divi- sionalization has a definitely different scope from that by market segment.
The bank has always been a "divided" firm, in which the business and the management of corporate processes have always been characterized by a certain share of territorial decentralization. In fact, despite the attempt to disconnect production from distribution phases, the bank continues to pro- vide services rather than products (though in the banking language it is quite common to use the latter to indicate the former). As a result, a large section of "production" is decentralized and requires a strong interaction with the client. The most traditional organizational structures are founded on the functional model (which maximizes business specialization by shared technical aspects) and provide for decentralized management struc- tures in the sales function.
Therefore banks are not new to geographical divisionalization in their domestic markets, which has been attributed to coordination needs (in par- ticular, the need for a reduced span of control on the part of head offices).
In front of more global financial services and less differentiated national
regulations, geographical divisionalization implemented by big interna- tional banks is aimed at exploiting arena-driven linkages, servicing clients more efficiently in one arena as a result of having an active presence in an- other arena (Smith and Walter 1997). Yet, intermediate organizational units for geographical coordination are still present in the domestic context even in banks divisionalized by product or by market segment, though the size and the role of such structures vary significantly in the various divi- sions.
Nowadays the divisionalization process of major relevance is the one being carried out within given territorial areas, in which organization is differentiated by products or by market segments. Considering the re- markably different scope of divisionalization by products and by clients, it is crucial to identify the specific approach and its drivers. Even the general term "corporate banking" is, in fact, sometimes opposed to commercial banking, sometimes to retail banking and sometimes to transactional bank- ing, thus assuming deeply different specification perspectives in terms of product/client profile relevance (Fig.7.1).
Fig. 7.1. Corporate banking perspectives
Nowadays the picture of the detailed choices made by the different banks seems quite varied, but divisionalization by market segment seems to stand out as the prevailing approach, that is as the most common and modern solution which allows running the bank according to a portfolio approach.
Divisionalization by products is typical of big international banks in non-domestic markets. This can be attributed to the need for product spe- cialization in clearly defined areas, which are characterized by limited or- ganizational correlation compared with the remaining business. Quite often the selected unit has an independent juridical configuration and, thus, more exactly, represents an element of the banking group rather than a division, which often results from the acquisition of well-known specialized compa- nies.
Divisionalization by market segment (meant as set of customers) repre- sents the most recent and the most apparent evolutionary phenomenon in bank organization; it is typical of all the main Italian banks and of the do- mestic strategy in the big, above all European, banks. This type of divi- sionalization can be easily explained with the above-mentioned perspec- tive of "diversification, correlation and measurement systems". Since the mid-eighties, there has been the attempt to extend scale and scope econo- mies by exploiting Ansoff s synergies (1965) or Porter's interrelations (1985) and by using the excess productive resources (Mottura 1996) freed by the technological innovation. As a result, products/services as well as distribution channels have multiplied with the consequent growth in the diversification of business areas. Diversification has been to a large extent
"correlated diversification", although the global level of banking business correlation has decreased; the complex nature of product and distribution processes has stimulated the development of performance valuation sys- tems (divisionalization's third driver) and led to the hypothesis of com- plexity driven diseconomies.
The first organizational reply has been that of holdings of product- companies, characterized by remarkable management independence. The development of divisionalization by market segment represents the over- coming of such management of diversified but apparently little correlated activities, thus giving evidence of banking business correlation within the customer segment. To conclude, the first research question set in the Intro- duction has a quite definite reply: bank divisionalization is led by the same drivers as those indicated in literature for non-financial firms.
Studies on the typology of divisional choices are still quite limited;
Baron and Besanko (2001) emphasize that banks choose the type of divi- sions (by customer/product/geography) according to what they believe is the most effective way to maximize the accumulation and sharing of know-how within the organization. Undoubtedly organizational differen- tiation by market segment can be interpreted as the last stage of the bank
"customer-oriented" approach, which started at least twenty years ago.
This kind of differentiation enables banks to guarantee some product spe- cialization and, at the same time, to exploit business correlation which be-
comes relevant when close to customers. This allows banks to "differenti- ate" their services through better quality or lower costs and more accurate performance valuations compared with traditionally organized competing banks. The client-perspective theoretically enables the bank to maximize cross-selling and relationship banking.
This subject leads to the second research question: can the corporate di- vision rationalize and reduce costs within cost-leadership strategies or can it modify the nature of bank services and relations through a competitive differentiation of the supply model, especially in terms of relationship ori- ented activities? In other words, is the approach to customers transaction- oriented or relationship-oriented (Moriarty et al. 1983) in the divisions de- signed for corporate banking?
The banks examined are almost equally divided when it comes to the vi- sion of corporate banking and assume opposite positions as to the basic na- ture of the business: customization or commoditization. It is not clear whether this represents a radical distinction of the competitive models or, rather, two complementary visions which have been indicated as priorities by banks where the process of divisionalization is at different stages of implementation (the initially prevailing need for rationalization, i.e. com- moditization, is then replaced by the need for competitive differentiation, i.e. supply customization).
It is difficult to perceive the explanation best suiting the panel of banks' answers because it is hard to find sufficient consistency between the an- swers provided by banks to the customization/commoditization question and the specific organization choices they have actually made, in particular as regards the configuration of the corporate banker's role and the structure of the process of credit-risk evaluation. As a matter of fact, it is evident that the corporate banker, as the sole manager of client-relationships, seems to be naturally customization and relationship oriented; on the other hand credit-risk evaluation processes tend to be substantially mechanic and they seem to aim at a short-term evaluation of the borrower's creditworthi- ness.
As for the mission of corporate banking as declared by the examined banks, the basic goal of recent re-organizations mainly consists in raising the market value of banks by increasing the volume of business and cus- tomer satisfaction. The other European banks explicitly indicate the goal of increasing the international penetration of corporate banking far more fre- quently than Italian banks. Such banks consider as top-priority the neces- sity to offer the entire system of products of corporate lending, corporate finance and asset management (often through highly reputed dedicated product-companies acquired on the market). Corporate lending and the