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SCFB Transformation Story… from IMF to recent financial crisis for SNU students. May 15, 2009. “ Banks are Dinosaurs.”. - Attributed to Bill Gates, c. 1995. Outline. Introduction New Bridge Era Challenges after IMF New Business environment Systems Architecture - PowerPoint PPT Presentation
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1Confidential Information - Do not copy or distribute
SCFB Transformation Story…
from IMF to recent financial crisis
for SNU students
May 15, 2009
2Confidential Information - Do not copy or distribute
“Banks are Dinosaurs.”
- Attributed to Bill Gates, c. 1995
3Confidential Information - Do not copy or distribute
Outline
Introduction
New Bridge Era
Challenges after IMF New Business environment Systems Architecture Other external factors
Acquisition in 2005
What’s after this now?
Summary
4Confidential Information - Do not copy or distribute
IMF crisis – story of transformation
5Confidential Information - Do not copy or distribute
The IMF crisis has Created a Trigger Point in the Demands Placed Upon IT
ExpectedPerformance
World Class Banking Practice
1980 s & 90s 1998 2000 -->
IMF Crisis
Mainframes
DepartmentalComputers
Some PCsApplications
The focus of the IT has been on supporting the Business needs as best as it can with resources available at the time – No Bank executives position in IT function
The focus of the Business Leaders has varied from frustration with ‘IT responsiveness’ to demands for restructuring of the bank
Was IT caused crisis?
6Confidential Information - Do not copy or distribute
New Playing Fields: Very competitive market space in Korean Banking industry was pressing all banks to DO something immediately! - Survival mode!!!
Changing Architectures
Competition
Old Systems
Korean Banks
Share Holders Expectation
Regulation
Korean Bank Example
7Confidential Information - Do not copy or distribute
Corporate Corporate BankingBanking
RetailRetailBankingBanking
OthersOthers
After IMF crisis hit the Korea, all the Korean banks shifted its focus from Corporate Banking to Retail Banking and others to minimize the risks – why?
Major management strategy changes
Everyone in the banking industry were impacted by the changes
Time to market is the most critical success factor
Risk management capability became the topic of the bankers
IT became major impedance to the changes required
In order to survive from the fierce competition, we had to react quickly to turn around an aircraft carrier with the antiquated IT infrastructure
Corporate Corporate BankingBanking
Mortgage?
Credit Card?
Fee Income?
Layoff?
NGBS?
8Confidential Information - Do not copy or distribute
New Trends in Banking industry after IMF: Banks/IT Reflect Specialized Business Based Herds of Dinosaurs
Bankasurance M&A Phase 1
Retail Banking
IMF
20002002200320042005
M&A Phase 2
???
9Confidential Information - Do not copy or distribute
In general, Korean Banking Industry was Doing Just Fine, thanks to Korean consumers
Dino made lots of money in 2001, 2002 and 2004 but not in 2003 due to credit card crisis
Spread remains relatively stable but it’s shrinking out of competition
Retail banking was a battle field for all the dino
Household loan including mortgage loan business is growing
Credit cards business was becoming a nightmare in 2003
Also, Corporate business was shrinking but will be growing...
Business Volume (market share) over Profitability until 2005…
Fee business will be the target for every banks
10Confidential Information - Do not copy or distribute
Soul Searching…What’s wrong with us( I mean, IT professional in banks)?
11Confidential Information - Do not copy or distribute
IT Business Structure
Assessment
As a part of soul searching process, both the business and technical infrastructures should be assessed
Applicationand Data
NetworkClientServer
DataCenter &System
Software
End User Computing &Office Auto.
Technical Infrastructure Assessment
Strategy
CostIT
ManagementPractices
CustomerSatisfaction
Organization
KFB IT
Anybody heard Client/Server?
12Confidential Information - Do not copy or distribute
Branches
Dealing Room 40% of Functions Automated
Foreign Funding Capital Mgmt60% of Functions Automated
Won Currency Capital Mgmt50% of Functions Automated
Branch Profit Mgmt25% of Functions Automated
Risk Mgmt.30% of Functions Automated
Human Resources 35% of Functions Automated
Inspection 15% of Functions Automated
Strategic Marketing50% of Functions Automated
Trust
30% of Functions Automated
Deposit
35% of Functions Automated
Foreign Exchanges
50% of Functions Automated
Loans
20% of Functions Automated
Mortgages
15% of Functions Automated
Financial Accounting40% of Functions Automated
General Affairs15% of Functions Automated
Overseas Branches 0% of Functions Automated
Security 25% of Functions Automated
Remittance (Incoming)/Demand Draft100% of Functions Automated
Credit Card
25% of Functions Automated
Current Business Functions and Departments Automation
Hea
d-O
ffic
e
Business process Issue – Too many Manual Process
13Confidential Information - Do not copy or distribute
Working environment: Traditionally, Business and IT are spending more time fighting over priorities than solving the business issues of the bank.
Business and IT must complement each other to support common goals; management business strategy
14Confidential Information - Do not copy or distribute
BusinessBusiness
Development efforts are far too slow, too costly, unresponsive, fail to keep pace with ‘user-friendly’ third party packages
Development efforts are far too slow, too costly, unresponsive, fail to keep pace with ‘user-friendly’ third party packages
IT Focus : Support with LegacyIT Focus : Support with Legacy
Large, mainframe applications has been changed over the years so it is so difficult to support new initiatives and IT staffs are not trained in new technologies
Large, mainframe applications has been changed over the years so it is so difficult to support new initiatives and IT staffs are not trained in new technologies
Conflicts between IT and business – first on the Clash Over Product Delivery
We don’t look at our competitors!!!
15Confidential Information - Do not copy or distribute
Legacy systems issue - Old Korean Bank’s Systems diagram
Mortgage Loans
Beneficiary Cert.
Profit Mgmt
Nat Treasury, Giro
Customer Contribution
Loans
Customer Mgmt
Cost Mgmt
Performance Mgmt
Credit Scoring
Human Resource
Audit
IMS
DB2
DB2
DB2
DB2
IMS DB2
IMS DB2
IMS DB2
DB2
DB2
DB2
DB2
IMS DB2
MIS
PL/I, SQL IBM OS 390
PC (Web)
WebSphereSNA, MTS
SecuritiesWeb server
NT
LOG
PC (SAS)
AIX
PC (VB)
BTRS
GNT
DB2/6000
AIX
X-Windows
SWIFTORACLE
SUN Solaris
ExternalAffairs
TANDEMNonstop
Kernel
KFTC
ORACLE
VAX/VMS COBOL
ISAM
EDI
DEC OSF
PC (C++)
PC (VB)
TCP/IP
UDB
MSG HUB
AIX
C-ISAM
PCBanking
SUN Solaris
IGEX, ESCON
Dumb terminal
TeleBanking
AIX
ARS SVR
SCO UNIX
Telephone
DB2/6000
Human Resource
AIX
PC (VB)
UDB
COLD
SCO UNIX
PC (VB)
DB2
AnalysisBusiness
AIX
PC (OLAP)
PC (WEB)
IntermediaryBusiness
ALM
Int. Finance
Loans
Deposits
FX
Nat Treasury, Giro
B/C Card
Cust. Info. Service
Beneficiary Certificate
Trusts
CD,Tmp Dep,e-money
IMS
IMS DB2
IMS DB2
IMS DB2
IMS
DB2IMS
DB2
IMS DB2
Short Term FundsIMS
IMS
IMS
General LedgerIMS DB2
DB2
PL/I, SQL
Accounting
IBM OS 390
SWIFT
CreditInfo
Provider
Banker'sassociati
on
Domesticcompanies
AppraisalBoard Supreme
Court
PC (WEB)
TIS Web Server
NT
Websphere,Apache, CICS
client
CICS6000
UDB
Formal Business
AIX
UDB
InternetBanking
AIX
WebsphereApache
IGEX Web
UDB
Portal
AIX
WebsphereApache
C-ISAM
ESSBASE
SAS
operator PC
UDB
Informal Business
AIX
PC (VB,ASP)SQL SERVER
Delinquency
NT VB, IIS
Securities
NT
SQLSERVER
CreditInfo
Provider
X.25 COMMSERV
SUN SOlaris
X.25
CURRENT KFB'S SYSTEM INTEGRATION
16Confidential Information - Do not copy or distribute
Why do we have this problem? Evolutionary process of Bank’s IT systems
Branch
Teller
CAPLegacy Core Banking Systems
Depart-mental
MIS Systems
17Confidential Information - Do not copy or distribute
CallMgm’t
ATMProcessor
Call Ctr.Agent
SalesKiosk
RemoteBanking
ATMDevice
IVR
Telephone 365CornerInternet Branch
ServerServer Server
Tellor
ComplexInterfacing
CAPLegacy Core Banking Systems
Depart-mental
MIS Systems
Customer: Access to products, services and integrated retail delivery
Technology: Expensive, Channel specific Duplicated efforts Long time to market
To add new channels - legacy systems has become very complicated to support fast-to-market requirements - ex. complicated interfaces
18Confidential Information - Do not copy or distribute
CallMgm’t
ATMProcessor
Call Ctr.Agent
Branch
RemoteBanking
ATMDevice
IVR
Telephone 365 cornerInternetBranch
ServerServer Server
SalesKiosk
Server
CAPLegacy Core Banking Systems
Depart-mental
MIS Systems
RemoteBanking
New channel strategy including internet banking is a new trend in Korea -- more complexity is added to its already complicated interfaces
Mobile Banking?TV Banking?
19Confidential Information - Do not copy or distribute
Figure 1—Point-to-Point ConnectionsFigure 1—Connection Using EAI Architecture
New IT Strategy - Switching from the current point to point connection to the connection through EAI will simplify the application integration job, in return we will have a fast to market capability
Old Integration Method EAI Integration Method
“With EAI strategy in place, what applications do we need to replace/develop?”
20Confidential Information - Do not copy or distribute
Backend Server
OLTP Cleanup
Middleware
EAI
MIS Revamp
Data Warehouse
CRM
Delivery ChannelSellStationUnified Delivery
Channel Infrastructure
EAI integrates its diverse delivery channels with back-office systems and data center function. Therefore Korean Bank can provide better customer service and leverage customers relationships across all service offerings which is crucial for the retail banking operation
The next question is “How does it look?”
Phase 2
Phase 1
Phase 3
Replace Core Banking
21Confidential Information - Do not copy or distribute
EAI Architecture
Security Alarm event Logging Auditing HTTPServer
Enterprise services
CALLCentre
Wirelessserver
Delivery channel
Legacysystem
DataWarehouse
CRM
Internal systems
ERP Govt body Otherbanks
Suppliers
External systems
22Confidential Information - Do not copy or distribute
Middle Tier EAI
Legacy Architecture Transformation – More Flexibility Legacy Architecture Transformation – More Flexibility
Host Applications
Branch Terminal
Customer Facing Channels
Host Applications
Backend Servers
Other Applications
SellStation workstaion
AfterBefore
23Confidential Information - Do not copy or distribute
CRMS
BP(NTC)
FBT
Transaction orientedBranch System
Accounting MIS DW/CRM
Branch System Architecture – Before and AfterBranch System Architecture – Before and After
e*Gate
SS Server(WEB)
MTS/MSS PCSales oriented Branch System
InternetBanking
Call Center LPC
FBT
Before
After
24Confidential Information - Do not copy or distribute
Systems architecture
ExternalLinks
CSCBranch
ALLTEL
LU6..2
SNA
DW
ODBC
ODBC
IB(KAB)
ODBC
ODBC
CRMS
HTTP
HTTP
EXPERIAN
RPC
TCP/IP
MIS
LU0, ITOC
SNATCP/IP
OLTP
LU0
SNA
TANDEM
e*Gate (LPC, CallCenter, DW/CRM)
SellStationWeb Server
MUX
TCP/IP R/RCRM
Web Server
MUX
TCP/IP R/RLPC
Web Server
MUX
TCP/IP R/RCallCenterWeb Server
MUX
TCP/IP R/RSMS
Server(2002.12)
MUX
TCP/IP R/R
ALLTEL(Holiday)
LU6.2
SNA
• BC CARD• 은행연합회 (Korean Bank)
• NICE• 한국감정원 (KAB)
• 중앙감정원• NARA
Client ClientClientClient
25Confidential Information - Do not copy or distribute
You must know how to build new Architecture Vision - Newly developed Korean Bank’s IT architecture will allow more consistent and leveraged approach for new technology adoption resulting in cost saving from the leverage
New Delivery Channel
Call CenterCRM
Legacy Transformation
Internet Banking
Middleware - EAI Newly structured OLTP/MIS Infrastructure Refresh Consistent Office Environment
CreditCards
Core Banking
CreditScoringSystem
FinancialReportingSystem
HR System
Customer Centric Bank Operation“Most Profitable Bank in Korea”
Call Center
New Delivery Channel
CRM
Existing Brick & Mortar Operation
Business Architecture
Application Architecture
Infrastructure Architecture
Information Architecture
Korean Bank Example
26Confidential Information - Do not copy or distribute
Human Resource Issue
27Confidential Information - Do not copy or distribute
Focus of IT ResourcesFocus of IT Resources
60%
5%
28%
7%Application Development &
Maintenance
Administration
Systems
Management
New Systems
Note: (1) IT organization as of 30 June 2000
Total of 251 staff(First Data 80 included)
Focus of IT Resources(2)Focus of IT Resources(2)
60%
40%
Application Maintenance
Development
In 2000, about 60% of staffs were assigned to application development team, but more than 60% of application development resources were working on maintenance and fixing bugs from previous works
Reasons for excessive maintenance work
• IT projects are not managed properly. Specially no QA(Quality Assurance) process are being used.
• Usually an IT project is driven by dates
• New business directions to pursue retail banking required many changes in the existing products and new products
• Project plan does not cover every deliverables which must be a part of the rollout(People’s mindset)
Korean Bank Example
28Confidential Information - Do not copy or distribute
Then, more than 59% of IT are classified as a manager(above Guajang) and only 41% of IT are working level staffs. Therefore, another 31% of resources to fill the gap is provided by First Data Systems
IT Staffs
0
20
40
60
80
100
G.M. D.G.M. S.A.G.M. A.G.M. S.Clerk Clerk FirstD.S.
Title
Num
ber
Too much dependency on First Data Systems
resources - Major threat to Korean Bank
employees
Too much dependency on First Data Systems
resources - Major threat to Korean Bank
employees
“Too many chiefs, Not enough Indians”
“Too many chiefs, Not enough Indians”
Korean Bank Example
29Confidential Information - Do not copy or distribute
Required skills(KFB/ISD)
IMS DB15%
PL/I 16%
DB215%MVS
10%
CAP8%
J AVA4%
Teradata Basic &SQL3%
Unix MP-RAS Basic3%
Windows NT or20003%
New Technology(33%)
Legacy SystemTechnology(67%)
What about the skill set? The study shows the Korean Bank needs skill sets mixed of new What about the skill set? The study shows the Korean Bank needs skill sets mixed of new technologies and current technologies(interestingly 60%) to support its transformation technologies and current technologies(interestingly 60%) to support its transformation strategystrategy
With all these issues, what are the solutions to the problems?With all these issues, what are the solutions to the problems?
30Confidential Information - Do not copy or distribute
We must transform IT resources from maintenance to more strategic development - Korean Bank must utilize its resources more efficiently
Development
Maintenance
Legacy NewTechnology
old’s Allocation
Development
Maintenance
Legacy
Vision for Future Allocation
NewTechnology
Recruiting
Training
Outsourcing
31Confidential Information - Do not copy or distribute
With all these impedance IT department has, Korean Bank’s business transformation is outpacing IT’s ability to provide timely support
Information Systems Capabilities
Overall Business Performance
Fragmented Legacy Financial Systems
Current Capabilities
Newly developed Application
Portfolio
Desired Position
Brid
ge
Systems Plan
Bank’s Vision
Value creating IT organization
Execution Gap
“How are we currently planning to do to fill the execution gap?”
32Confidential Information - Do not copy or distribute
KFB will be able to shift its resources to the more value-added services from legacy systems works
KFB will be able to shift its resources to the more value-added services from legacy systems works
In summary, the KFB needs to resolve its HR issues immediately
Problems in utilizing ISD resourcesProblems in utilizing ISD resources
Recommended solutions to KFB/IT
• Prioritize IT projects rigorously to utilize KFB/IT resources the most efficient way – based on the business values
• Rotate middle level staffs or transfer them to different to business units
• Consolidate similar functional teams – e.g. server management
• Packaged applications need to be considered over in-house development
• Conduct 3-5 years of resources planning
• Separate production support from development group
• Separate business skills (BA, PM) from IT skills (TA, TEG,etc)
• Create pool of resources for the applications development
• Adopt IT career development program for IT staffs and continue IT training to support individuals career goals
• Aggressively outsource non-value IT services areas
• Utilize First Data Systems resources as an interim solution
• Provide training to IT staffs and adopt performance based compensation systems
Too many chiefs, not enough indians
Over 40 years old staffs with legacy skills only – 50% of total staffs
Mentality of “Everything must be done in-house”
No incentive for the good performance
Shortage of skills needed in the strategic areas – “Loan”
33Confidential Information - Do not copy or distribute
KFB IT Transformation
• IT Strategy Planning Roadmap (“ISP Roadmap”)
• Project Portfolio Creation(SS, CMM, PMO, Middleware, Call Centre/CRM, ATMs, Loan Servicing and Document Imaging)
• Infrastructure Containment
ValueCreating
Reactive
Proactive
• Rapid development of new initiatives• Best-in-class products and services• Synchronized IT and Business
strategy• Execution of Project Portfolio• Effective IT resource leverage• Future Products• New Customer Interfaces
IT Supports Business Strategy IT Creates New Capabilities and Roles
• KFB’s IT inability to absorb change quickly • IT skill set remains legacy focused• Fragmented disparate systems increase cost of operations • KFB business units bridge gap w/ additional staff• Additional capital will be necessary to refresh IT
Aligning Business Strategy with Technology
Bu
sin
ess
Val
ue
KFB Story
34Confidential Information - Do not copy or distribute
2000 Korean Bank Applications Portfolio - Most of the Korean Bank applications were low in quality of business functionality and technical functionality
50 1007525
100
75
50
25
A
B
C
D
A Meeting functional requirements- costly to maintain technically- can be improved
B Poor technical and functional quality- candidates for replacement
C Meeting technical quality- functional quality improvements
needed
D Excellent functional and technical quality- efficient- easy to maintain- target for high importance systems
Technical Quality
Fu
nct
ion
al Q
ual
ity
Core BankingMIS
TeleBankingATM
Internet
Banking
Korean Bank Example
35Confidential Information - Do not copy or distribute
50 1007525
100
75
50
25
A
B C
DA Meeting functional requirements
- costly to maintain technically- can be improved
B Poor technical and functional quality- candidates for replacement
C Meeting technical quality- functional quality improvements
needed
D Excellent functional and technical quality- efficient- easy to maintain- target for high importance systems
Technical Quality
Fu
nct
ion
al Q
ual
ity
Legacy Systems
CRMS.
Internet Banking.CRM
SellStation
Data Mining
New Korean Bank Applications Portfolio - Most of the newly developed applications have high quality in business and technical functionality
Korean Bank Example
36Confidential Information - Do not copy or distribute
A Solution that Korea First bank chose:
37Confidential Information - Do not copy or distribute
Korean First Bank realized the importance of the relationship between business and IT
• Better manage the relationship between IT and business
• Bank wide PMO (Project Management Office) to manage all the IT related projects in the bank.
• Every executives including CEO’s participation in monthly major IT projects status update meeting
• BA and PM teams are created to be professional BA and PMs.
• CMM level 3 was achieved in October 2004.
Korean First Bank IT established processes to discuss all the IT projects related issue with every pertinent parties including CEO
Korean Bank Example
38Confidential Information - Do not copy or distribute
KFB IT Transformation Journey started in 2000 – first things first
Delivery Channels Enhancement - Internet Banking, ATMs, Call Center, Tele Marketing, etc
Products Diversification – Mortgage, Credit Cards, Templeton Product, Revolving Loan, etc
Process Improvement – Centralized Loan Processing Center, Collection, Customer Service Center, HRMS, Branch Reconfiguration Project, New Audit Policy
US Standard Accounting Practice – MRS, ABS, ALM
Risk Management Introduction – CRMS, Models Based Consumers Risk Management
All of these must be done quickly while the operation of the bank continues All of these must be done quickly while the operation of the bank continues
KFB Story
39Confidential Information - Do not copy or distribute
Recommended Road Map for IT Organization Transformation
Phase 1: Stop the bleeding
Phase 2: Develop Capability
Phase 3: World Class IT
Process Oriented Organization
Adopt SEI/CMM as a model
Develop/Hire/Alliance newly required skills
Enterprise wide Technological Directions
Performance based Organization
Reduce Non Value added work
Focus on Strategic Value added activities
Industry Agenda setting IT operations
Achieve CMM Level 5
Korean Bank2000
Strategic IT capabilitiesSecond to None
Build new capabilities portfolio
Korean Bank/IT needs to transform itself to be more flexible and nimble organization to support its aggressive business strategy. The next question is “How fast can we do it?”
Implement the fundamentals required to run IT organization
Current IT Inventory Analysis
Establish PMO Office
Assign Business Relationship Manager(COO/CFO/CCO/CBO)
Organizational Change
Agree on the priority of Business Initiatives
Korean Bank Example
40Confidential Information - Do not copy or distribute
Acquisition in 2005 – story of integration
41Confidential Information - Do not copy or distribute
Why acquisition? Mergers Free Up IT Spending. Is it real?
500
130
SCB KFB
Group data centers/networks solutions
Best of breed common apps.
Buyer pressure on suppliers
Oversea branches
Conversion costs
Reinvest in new IT
$ millions$ millions 20
Yes, Expected cost saving of banks merger is happening at SCFB
42Confidential Information - Do not copy or distribute
The FutureThe Future
StrategicConsistent
Core BusinessApplications
WorldClass
The Vision (Blueprint)
?
AS/400 (Cobol Microfocus, Cobol II, Synon)FoxPro - Clipper - UNIX/Databus -
Datapoint
ICBE
Today
AS/400 (Cobol Microfocus, Synon)FoxPro - UNIX/Databus
Datapoint WholeSale
AS/400 (Cobol, Microfocus, Synon)
UNIX/Databus Datapoint
DLPGROW
PlatinumWholesale II
GROWPlatinum
Wholesale - DLP
WholesaleRewrite
Sequel PlatinumGROWDLP, Wholesale II
Wholesale IIDLP Grow Expansion
Construction Projects
Strategic IT Plans
GMAC-I Systems
EDS1994-1997
Core Business Applications
Foundation
UnderConstruction
Infrastructure
Planning
You must know how to create a common vision acceptable by SCB & KFB
43Confidential Information - Do not copy or distribute
Point of Departure – Quick turnaround of KFB to support SCB’s business goals
KFB has completed most of business process restructuring initiatives such as, centralization of underwriting /collection process, adoption of new CRM process, establishment of Decision Science capability
KFB staffs has been through a largest transformation in its history from the old way of doing banking to new way of banking business. This includes centralization of underwriting processes, separation of sales roles from the teller functions and centralization of all the required document storage functions, etc
KFB staffs also felt that tight risk management and some bank policies was leading them to lose many business opportunities and their outcry for changes was ignored by management team
Merger with SCB is a big challenge to KFB mentally since it has been a predominantly domestic bank for 75 years of history. Now it continues to do business in Korea and also to be a part of SCB member bank
SCB management team is expecting to grow KFB business in Wholesale banking, Consumer Banking and Global market area where fiercest competition between korean banks exist today
SCB wants to offer products linking to its global network
SCB wants to distribute all advanced solutions KFB currently using to other SCB operating countries where it makes sense
In the mean time, KFB has to adopt SCB’s global policy and practices
44Confidential Information - Do not copy or distribute
Point of Departure – Quick turnaround of KFB/IT to support SCB’s business goals
KFB/IT has completed the largest transformation initiatives in its history. During last 5 years, it revamped its infrastructure completely to support newly defined business strategy
For that, KFB/IT has been utilizing EAI (Enterprise Application Integrator) technology to develop new products and services fast to the market and this will shorten SCB’s products introduction time significantly.
KFB/IT strategy has been a bench mark target amongst Korean banks since it brought very cost efficient IT solutions to KFB
There seems some expectation gap exist between SCB and KFB on BCP. KFB’s BCP was firstly built amongst korean banks and it satisfied every requirements of korean regulators but it fell short to meet SCB’s BCP requirements.
SCB wants to transfer KFB’s advanced technology solutions like mobile banking, internet banking, TV banking, IC Chip operation, etc to other countries where it makes sense.
SCB currently operates several core banking systems, running on a variety of technology platforms and it has a road map to rollout a common core banking architecture. But is it right timing for KFB?
SCB’s 4 tier architecture model: Channel Delivery for Multi channel distribution, Sales and Services for Market place differentiation, Transaction Processing for Operational quality and Enterprise Processing for Management excellence
Prioritization of requested projects and PM capability will be critical success factors!!!
45Confidential Information - Do not copy or distribute
Why is it so difficult? – Understanding the unique history of korean banking industry will be helpful before we jump to a conclusion.
Korean banking industry is at least 10 years behind western banks in terms of IT management. Examples: Outsourcing, enterprise architecture planning, and adoption of new technologies were not actively pursued in Korea. Why?
Korean banking industry adopted the Japanese IT management style where core banking systems must provide all services to run a bank, whereas, Western banks choose the best package solution to support the bank strategy that brings the highest revenue for the bank. Centralized systems services vs. distributed systems services
As a result of this Japanese management style, the IT department assumes that everything must be done and managed in-house, cutting themselves off in a closed environment to the outside world. The labor union often resorts to using IT as a deal breaker whenever there is a big dispute with management
Therefore, IT became a black box and headache to the CEOs of Korean banks, frustrated with the lack of results from huge investment on new systems development each year
SCFB led the industry with the first transformation (IT infrastructure refresh) of IT and it is ready to tackle the second transformation of IT with HR issues, cost containment, etc.
SCFB must know the cost structure of running IT operation better and create a plan to improve its high cost and low efficiency cost structureSCFB must know the cost structure of running IT operation better and create a plan to improve its high cost and low efficiency cost structure
46Confidential Information - Do not copy or distribute
Point of Departure – SCB should know about KFB’s culture
IMF syndrome – Video Tape of Tear
KFB pride – 75 years of history
NB mistakes
ignore local culture - account maintenance fee, lack of understanding on korean customers banking need
lack of trust issue: advertisement (foreign company), no advertisement link to PR
lack of KFB’s staffs participation in the planning stage (Pro-Branch project)
promote people who speak English, no simultaneous English translator was provided at first
poor government relationship, no executives’ direct contact to korean news media, no HR changes
Unique korean characters: They want to know everything in detail. Thirst for vision and goals
Strong Execution Capability – ex. Mortgage Loan Growth- shinbaram fever like world cup fever
Hiddink Leadership – vision, tough training, selection of talented players, ignore local influence, 100% ready preparation, shinbaram
If you convince your vision, the team will make it happen!
Skin ship works: Critical component to lead korean company – Pocktanjoo is a must!
Union strategy: skinship works
Hindrance (or opportunities) – HR, union, generalist, Local vs foreigner mentality
Unfamiliar with Matrix organization structure
Very strict hierarchy and many layers – more managers than workers
47Confidential Information - Do not copy or distribute
Corporate Corporate BankingBanking
RetailRetailBankingBanking
OthersOthers
First question - After KFB shifted its focus from Corporate Banking to Retail Banking and others to minimize the risks, SCB wants to grow its business by adding product capability and distribution models
New management strategy – grow business and profit
SCB’s global network will be a huge selling point
“Can-Do” attitude is a must for everyone.
Time to market is the most critical success factor
Integration will be a challenge for SCB due to size
Stable operation is critical
IT will become an enabler to the changes required
In order to differentiate from the our competition, we have to shift gear fast
Corporate Corporate BankingBanking
RetailRetailBankingBanking
Global MarketsGlobal Markets
Cross Selling
Trade, Cash and Global market products
Personal LoansCredit Cards
48Confidential Information - Do not copy or distribute
Second question - Industry deconstruction is creating an environment in which banks have specialized in roles across the value chain
Paths of Progression
Industry Networks
Enterprise Optimized
Process Optimized
Preliminary Deconstruction
Enterprisewide Reconstruction
Industry Deconstruction
Industry deconstruction is the specialization of enterprises in assuming particular roles of the value chain
Enterprise reconstruction is breaking down siloed processes into core components that can be more easily shared across the bank
Adaptive Business Model
49Confidential Information - Do not copy or distribute
Recap of what’s happening in industry - Deconstruction of Industries and the EnterpriseB
us
ine
ss
U
nit
O
pti
miz
ed
Vertically Integrated
Industry Networks
En
terp
ris
e
Op
tim
ize
dP
roc
es
s
Op
tim
ize
d
Widespread vertical integration
Seamless and dynamic links between enterprises
Best of breed components used across enterprises
Each business line owns and operates specialized processes using proprietary technology
Preliminary Deconstruction
En
terp
rise
D
eco
nst
ruct
ion
Industry Deconstruction
What are the Attributes of The New Environment?
Components shared extensively across business lines within enterprise
Partial deconstruction with hardwired links between firms
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Third question - Industry trends – gradual channel transformation to e-channels
- Internet banking shares keep growing.•Internet Banking portion is keeping higher than ATM’s after 4Q ’03.
- 2004 automation rate plan (80%) was accomplished on June ’04.
(Unit: Transaction, %)
19.3%22.1%
20.2%
20.0%22.9%
23.4% 23.1%
27.4%
24.4%
25.4% 29.8%29.6%
29.8% 29.6%
30.6%
33.4% 31.6%34.3%37.9%
37.6%
16.6%16.6% 16.6%
15.7%16.7%15.7% 16.4%17.0%
16.2%16.8%
34.4%34.7%33.4%31.7%
29.7%
28.9%
27.6%
24.5%
20.0%18.4%
0%
10%
20%
30%
40%
6-02 9-02 12-02 3-03 6-03 9-03 12-03 3-04 6-04 9-04
Teller CD/ATM Tele Internet
Channel migration is for cost saving
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“High Touch” Everywhere
Relationship ManagerManager BranchBranch
Phone Reps
Call Call CenterCenter
Paper-Paper-BasedBased
KioskKiosk InternetInternet
High TouchHigh Touch High TouchHigh Touch
Cost per Transaction (US $)
$4.05
$3.35
$2.30
$1.40
$0.40 $0.25 $0.20
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
Branch Platform Back OfficeCall Center Agent Branch TellerATM IVRInternet Banking
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Fourth question - Industry trends - Dealing with Risk after 911 accident
• Security Risk– High-level threat on the Internet– Terrorists don’t want to hurt the Internet
– they want to use it!
• Basel II– A risky strategy?
• Credit Risk
– “Bankruptcy” hits hard in Korea– Credit Cards crisis– SME loans delinquency
– Personal debt increase
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Fifth question – Recent financial crisis – A bnak’s recent share price
0
100
200
300
400
500
600
700
800
Jan 0
7
Mar
07
May 0
7
Jul 0
7
Sep 0
7
Nov 0
7
Jan 0
8
Mar
08
May 0
8
Jul 0
8
Sep 0
8
Nov 0
8
£p
Mar 07ABN Bid announced
June 07ABN Bid sweetened with £2.4bn equity raised (330m shares at 720p each) to CDB & Temasek
Oct 07RBS wins ABN bid
July 08£3.7bn equity issued (1.3bn shares at c. 282p to Qatar / institutional investors)
Sept 08Lehman US acquired for £1.5bn (funded partly by £0.7bn of equity (226m shares at 320p)
Oct 08£7.3bn to be raised from Qatar and Sheikh Mansour (4.3bn shares at c. 170p)
July 08Completes acquisition of Expobank, Russia
July 08Announces sale of Barclays Life to Swiss Re
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Prioritization Criteria – Development/implementation projects to be done in 2005
Priority 1: IT’s Integration Tasks – must be done to meet SCB requirements or as a part of basic infrastructure
Email system Integration, Network Integration, DR2&3
Priority 2: Revenue Generating Initiatives by Cross Selling – Should be done in 3-6 months
Unsecured Loan, Mortgage Loan, T/F
Delivery Channel Expansion
Priority 3: Revenue Impacting Initiatives – Should be done by the end of 2005
Credit Cards, CMA, Trade Finance, Global Market Products, CRM
Priority 4: Operation Efficiency Improvement Initiatives – Should be done within 2006
Tandem De-mission Project, Server Consolidation
Finance and HR systems Integration
Priority 5: IT’s Integration Tasks – nice to have for 2007
Core Banking strategy, Other applications
Note: Within Priorities, fill up blanks in the application portfolio with what’s available first. Then if KFB and SCB both have same application, conduct best of breed selection process. If both do not have it, develop/purchase based on SCB’s business priorities
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Given all that, the following questions will help us create a strategy for the next 5 years of KFB/IT
Should we expand (invest) or maintain?
Is the current infrastructure prepared to support future challenges? Yes, but…
Basel II, Bancasurance, Innovative Financial Products, etc.
Should we finish the Legacy Restructuring Project? Yes
18B and 20% of IT resources (including KFDS) will be used for next 2 years
If, SCFB decide not to do it, what cost of not doing it?
More production errors from legacy code, slow to market, etc
What are the future roles for the SCFB/IT?
Is IT transformation necessary to upgrade to the next level? Yes
What role must KFDS play in doing so?
What benefits SCFB/KFDS employees would have from this transformation?
How to control IT expenses for the next 5 years?
Is there any possibility of getting back returns from last 4 years of investment?
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Since 2000, with a strong focus on cost/performance and time to market, KFB/IT came a long way to improve its performance
IT CostIndex
Improve2000's IT performance through better use of existing resources, Reduce legacy systems developments and increase new systems development, Better communication w/ business - about 20% productivity increase during 2000 - 2002
Employ better project management methodologies, Select package solutions for higher ROI, Utilize third party skilled resources, Adopt EAI strategy to simplify interfaces, Centralization of branch back office functions
Achieve higher theoretical IT performance threshold (branch efficiency ratio, fast to market thru EAI), Consolidation of servers, Restructuring of IT organization, Adopt CMM methodologies, IT staffs training
C1
C0
High
Low
IT PerformanceIndex
Low High
2000's KFB IT Curve
2002’s KFB IT Curve
Short Term improvements
Mid-long Term improvements
Today’s IT Performance
Threshold
2000's IT Performance Threshold
Cost Performance
2004’s KFB IT Curve
2004’s IT Performance
Threshold
KFB Story
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Point of Departure – IT Cost structure what’s after 4 years of huge investment on IT
The IT transformation between 2000 and 2004 was costly for KFB, although it still spent the least when compared to other Korean banks. The capital budget (FCST) of 2004 is 67.4B, previously 26B in 2000, and 2004 operating expenses has grown to 39B from 8B in 2000. It was mainly to support many new development projects and the maintenance fee for the newly implemented HW/SW.
Projects like BCP, which improve serviceability during a disaster strike, will cost an additional 5B in 2005 (and 7B, thereafter) and the Sysplex project, which provides error-free mainframe transaction processing power, will cost 0.8B annually. It’s never done in Korea but it must be done as a regulatory requirements
The current IT staffing scheme is a high cost, low efficiency structure. 43% of IT resources are consumed in maintenance work rather than more strategic development work. Why focus so much on upkeep? 20-year-old code with lots of patches calls for extensive attention in coding and testing.
SCFB can’t afford another major IT investment like 4 years ago due to its business size. Scale of economy must be pursued to justify further investment in IT.
Fortunately, other Korean banks’ IT cost efficiency are not that great for now. But once they overcome the cost inefficiency problem, SCFB may drop out of the IT investment race due to its scale of economy.
Therefore, the SCFB must resolve the High cost/Low efficiency IT structure by being an adaptive organization. How are we solving this structural problem?Therefore, the SCFB must resolve the High cost/Low efficiency IT structure by being an adaptive organization. How are we solving this structural problem?
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Recommended Road Map for IT Organization Transformation
Phase 1: Jump Start
Phase 2: Develop Capability
Phase 3: World Class IT
Continue CMMI journey
Adopt SCB’s Enterprise wide Technological Directions
Reduce Non Value added work
Focus on Strategic Value added activities
Industry Agenda setting IT operations
Korean Bank2005
Strategic IT capabilitiesSecond to None
Build new capabilities portfolio
SCFB/T&O needs to transform itself to be more flexible and nimble organization to support its aggressive business strategy. The next question is “How fast can we do it?”
Implement the fundamentals required to run IT organization
Best of breed –Applications
PMO process Integration
Align Organizational to SCB’s
Agree on the priority of Business Initiatives
Korean Bank Example
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Solution criteria
Best way of utilizing IT resources must be found – whether in SCFB or in KFDSTurning competition into win-win atmosphere
KFDS must be explored to achieve maximum benefits for SCFBLast 4 years of investment can be capitalized thru KFDSKFDS itself can be a very interesting M&A target thru the effort
IT cost must be controlled, cutting 10% every year from the basis of 2004 budgetTypical outsourcing arrangement can save 10-15% of cost saving which can be our benchmark target
SCFB’s next 5 years business strategy must be supportedROI (Returns on investment) must be justifiableNew IT plan should be executable upon approval from shareholders
Let’s see how we want to solve the problems……Let’s see how we want to solve the problems……
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Initiatives…
Adaptive organization – how we want to be flexible and capable organization
IT cost structure study – provide basis for the cost comparison with our competitors
KFDS restructuring project – Capitalize KFB’s projects experience
SCFB/IT restructuring project – Voluntary employees rotation program
This initiative requires strict control on the strategy since it is a very sensitive…This initiative requires strict control on the strategy since it is a very sensitive…
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020406080
100120140160180
2005 2006 2007
Plan Forecast(Unit:Million)
Executive Summary – T&O will contribute almost $63M from cost savings by year 2010 which will be 12% of the total cost for three years
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0
20
40
60
80
100
120
140
2005 2006 2007
Plan Forecast
Technology Cost Savings Projection – SCFB’s Technology will save almost $50M by the end of 2007 which is 14% of total technology cost for three years
Unit : Million
Note: Plan is an estimated budget with normal growth ratio FCST is an estimated budget with no major investment in 2006 and 2007•Other departmental technology cost projection was not included in this chart due to no plan for 2006 given to T&O
More than a half oftechnology cost is a depreciation whichwas from the lastthree years of majorinvestment. How to reduce depreciationis a key driver
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Operation Cost Savings Projection – SCFB’s Operation will save almost $13M by the end of 2007 which will be 9.2% of total operation cost for three years
0
10
20
30
40
50
60
2005 2006 2007
Plan Forecast
Unit : Million
Note: Plan is an estimated budget without CSC relocation FCST is an estimated budget with CSC relocation and in-sourcing of maintenance contract
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0
10
20
30
40
50
60
2005 2006 2007
Depreciation
Others
Other Fee for SVC
Tele-communication
Computer SVC
Premises
Staff Cost
Operation Cost Savings Details – CSC relocation, in-sourcing of CSC maintenance contract and VoIP will be the main drivers of $13M cost saving by 2007
Note: More than a half of operation cost is staff cost which means we have to replace high paying jobwith contractors to reduce the operation cost
(Unit:Million)
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What’s more to prepare for the future...
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CMM - Continuing ImprovementCMM - Continuing Improvement
LevelLevel 1 1
LevelLevel 3
Level 4Level 4
Level 5Level 5
20 January 2003
Congratulations!
KoreaKorea
First BankFirst Bank
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Long-term KFB/CMM RoadmapLong-term KFB/CMM Roadmap
2. Repeatable
1. Initial
3. Defined
4. Managed
Unpredictable and poorly controlled
Can repeat previously mastered tasks
Process characterized, fairly well understood
Process measured and controlled
Focus on process improvement
5.Optimizing
Project Management
Integrated Engineering Process
Product and Process Quality
Managing Change
Future Goal
Goal in 2003
within 2 years after CMM Level 3 achievement
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Disaster Recovery Capability Issue
What will happen if there is a disaster in Seoul?
First question SCB asked!!!
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CSC(Seoul/Busan)
CCD(Jeil Br.)
Branches
HQ-Backup
ECC(Jeil Br.)
MRT(Boarding House)
MRT(Training Center)
HITBackup
ITHQ
▣ VPN network will be used in case KFB-NET stop functioning as well as IT center & H.Q. disasters
Disaster Recovery Plan (same as BCP Plan)
VPN (INTERNET)KFB-Net
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• International Network Terminals
• FX Dealing (DR)• SIMS(DR)• First Office (DR)• Human Resources
BCP Architecture – Disaster free IT services
• Accounting• MIS• FX Dealing• e-Banking (#1)• SIMS• CRMS• DW/CRM/TIS• EDI• EAI• First Office• Human
Resources(DR)• Experian
IT CenterIT Center
• e-Banking (#2)
IDCIDC• e-Banking (#3)
IDCIDC
• DedicatedInternational Network Terminals
Alternate SiteAlternate Site Head QuartersHead Quarters
Internet Networks
RMDS Triach Bloomberg
CustomerCustomer
• Accounting (DR)• MIS (DR)• CRMS (DR)• DW/CRM/TIS (DR)• EDI (DR)• EAI (DR)• NAMS(DR)• Recording Systems
(DR)• Experian(DR)
DRCDRC
※ DRS : Disaster Recovery Systems IDC : Internet Data Center DRC : Disaster Recovery Center
• CSC
• NAMS• Recording
Systems
Card BusinessCard Business
InternationalNetworks
• CSC
Seoul CSCSeoul CSC Pusan CSCPusan CSC
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<Parallel Sysplex>
System2
Branch Terminal
(NETWORK)
System3
CL(DB)
Single system provide Image
Share Data
Diversify Process
<Current System>
Customer Ledger(CL)1
(DB)
Branch Terminal
(NETWORK)
CL2(DB)
System2
Branch Terminal
(NETWORK)
Operation Stop in case of System1 Error
Automatically Diversify to System 2 and 3 when Error in
System 1
ErrorError
Not only we can have a disaster, but also we can have a major system breakdown…Sysplex solution – Error free IT operation -
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SCFB BCP System Diagram
Business IT CSC Branch
ITCenter
IT DRCenter
H. O
BCPCenter
Branch
SeoulCSC
BusanCSC
① ②
④
②④③
②④
②④
Disaster
Main
Altern
ate
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BCP Center Tour
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BCP IT DR Center
SCFB as the First ever BCP-Enabled bank in Korea !
Model for other financial institutions in Korea to follow
Not only improve the confidence of vested interest groups, but also upgrade the corporate image of SCFB as a Forward-thinking bank !
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Summary
The financial services industry is transforming at a rate and scale that crosses traditional industry lines
Where and how one institution competes will be very much different in the next five to 10 years.
Institutions of all sizes must re-evaluate their strategic alternatives to find new sources of differentiation.
Value is what is important: Process, quality, and work ethic are must…
At SCFB, IT Transformation is the launching pad to reach to the next level
Tactical and modular approach is a winning strategy that should be used by financial institutions both big and small
Banker’s hours are gone… the continuous days of the financial services merchant has come
Then, fasten your seat belt and enjoy the ride.
Summary
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Thanksand Have a Great Day!
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“I Never Said That. I Said Banks’ Systems are Dinosaurs.”
- Bill Gates, c. 1997, after a discussion with his marketing department.
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Question?