Case Study
Determining Systems Alignment To Business Strategy
When “New” Is Not Necessarily “Cheaper, Faster, or Better”
Acquirer and Acquired
A major east coast financial
institution (our client) was acquired by a larger, super-regional
institution. In order to achieve the promised
economies of the merger, the acquiring (parent) organization planned to convert
the acquired (client) company to the parent’s internal information systems
platform. w j branan | consulting was asked
by the client to determine the impact of completing the conversion and to
clearly define any negative impacts on their technical efficiency and “book of business”.
Two Different Worlds
Although the two institutions
were part of the same holding company, they could not have been more different
in terms of management philosophy, product sets, typical customers, and systems
approach. The parent institution was a
very large organization that had been built primarily by acquiring smaller
institutions and integrating them into a streamlined and fairly rigid retail customer
approach. Management philosophy was essentially
top-down. Systems and back-office
operations were run by a wholly owned subsidiary, and had been built from complex
commercial application packages, heavily customized, over a number of
years. Many of these systems were
running older software versions, as a history of significant alterations to the
packages made upgrades in the software expensive or impracticable. The systems unit had significant experience
in running large technology projects, but these projects primarily focused on
achieving a narrow and limited set of goals within aggressive timeframes.
The client institution, also
a product of mergers in a highly competitive market, serves primarily commercial
business customers and enjoys a reputation for extreme flexibility in
accommodating customer needs. As a
result, the organization has acquired and been able to retain a large portfolio
of customers that would potentially be difficult for competitors to service,
due to flexible and customized processes and systems that supported all of a
customer’s requirements. These
requirements included a heavy emphasis on outsourced corporate finance and
treasury processes including: fraud
protection, payroll check processing, check image capture, storage, and
research, and other specialized services customized to each customer. Accounting for these services had been
integrated into a robust account analysis system through the development of a
large number of interfaces to the core processing system. Core processing itself was outsourced, but
the application utilized was extremely flexible and well-suited to
customization. A significant portfolio
of ancillary systems and interfaces had also been purchased to support specific
client needs. Finally, the culture of
the client organization was one that emphasized serving business customers well
by understanding their requirements and efficiently delivering cost-effective
products that cemented these relationships.
Management Concerns: Customers, Efficiency and Trade-offs
As the project began, client
management voiced three chief concerns.
These were:
- That conversion to the parent organization’s
systems and processes, and the relocation of some key processes to the parent’s
service centers could result in a loss of management control. This in turn could have a negative
impact on the client’s efficiency ratio;
- That as a result of the inability to
continue to offer critical products, the loss of key product
functionality, or potential reductions in service levels, customers might
begin to defect to competitors; and
- That decisions on functional, process,
and technology gaps, and the trade-offs that would have to be made to
effect the conversion, could have a significant adverse impact on the
culture of the organization and its ability to serve customers. A method for making rational decisions
about trade-offs was needed.
An almost unvoiced concern
was that, dependent as the client organization was upon relationship officers to
cultivate and retain business, these officers could conceivably become so
discouraged by the loss of familiar process and system support that they would
take their “book of business” and defect to competitors with stronger systems. Executive management wanted an “impact
analysis” that would show how profits and customer relationships could
potentially be affected by the systems conversion project, and that would
pinpoint, in advance, specific areas of risk.
Analysis Objectives
In order to develop an analysis
that would determine the likely degree of business impact due to systems
change, a number of objectives for the analysis were selected. One objective was that the analysis had to
clearly show the impact of changes to the flagship corporate services products
(primarily cash management, corporate checking, recon and image products), and
to define how those changes would be perceived by large business customers. Another objective was to develop an analysis
that clearly showed the impact of systems change on business processes,
customers, products, and the risk profile of the client in a way that was
easily understandable to line managers and executives, and could be used to
guide change management processes as the systems conversion progressed. It was not an objective to somehow
halt the progress of the conversion, the objectives reflect the concern of
executive management that it would reflect very poorly on them if they did not
anticipate and react to potential threats to earnings and profits arising from
the impending systems change.
Focusing on Strategy and Process
In order to accomplish these
objectives, the project team chose tools that were business strategy and
process engineering tools, rather than technical systems analysis tools (such
as TCO metrics or payback analysis).
Essentially, the team undertook to perform a process analysis to define
processes and systems at risk, and then used activity based costing techniques to
understand the implications of moving from processes that were well formed,
efficient, and robust toward future states that were less well defined, less
efficient, and potentially less able to meet the client’s objectives. Once the implications of systems change were
defined, the team used portfolio analysis to understand how any degradation of
systems or process capabilities would impact the strategic objectives of the institution,
specifically focusing on objectives like maintaining relationships with
customers, maintaining high efficiency, offering competitive products, and
controlling risk.
Analyzing Corporate Services
The project split into
several parts, corresponding to the business functions being examined. A separate analysis was completed for
corporate services, deposits, lending, and “banking services”. The corporate services project utilized data
from the client and comparative information from industry databases to identify
processes at risk. At the time, it was
thought that many corporate services products would need to be discontinued,
because the acquiring organization’s applications platform did not support the
products and it was not contemplated that software or applications to deliver
the products could be acquired and integrated.
An initial analytical task was to determine what products were typically
offered in a corporate services or cash management product portfolio by
competitive institutions. This gave the
project team a set of critical products and supporting business processes and
systems to evaluate. The team then
looked at how specific process and system changes would affect critical
processes – would the organization be able to continue to offer its full suite
of customized image products, for instance?
Would positive pay and various account reconciliation plans still be
offered, and would new systems be as efficient with regard to delivering these
products? Process analyses of inputs and
outputs to actions and activities showed gaps – missing risk data would affect
internal client processes; more cumbersome CD formats and changes in viewer technology
would impact internal business processes of customers. A host of other small and large changes, in
some cases adding up to revocations of entire products from the marketplace, revealed
significant risk to the portfolio of corporate services customers.
Valuing Customers by the Products They Use
But how important were these
customers? It was axiomatic within the organization
that corporate services clients were the “bread-and-butter” customers, but was
it really true? And if certain services
were taken away or just “impaired”, would these customers bolt, taking deposits
with them, or would existing lending relationships keep them in the fold? Two subsequent analyses looked at the degree
of penetration of corporate services products within the customer
portfolio. The products were grouped
into 7 major categories, and the degree to which important customers used
multiple product categories was quantified.
The top 25 product customers in each category were identified, and the
degree to which they were also top 25 in other categories was collated with
this information. For instance,
customers that were top 25 in any category were highly likely to be top 25 in
use of image products. Indeed, image was
a common thread among corporate services clients, so that any change to image
products was seen as something that would unduly impact all customers. It became clear that removing or impairing
certain products would potentially alienate top corporate services customers,
and interviews with existing customers and line personnel about the importance
of these services reinforced the view that certain threatened services were
critical and should be retained, if at all possible.
So if the corporate services
customers were so important, what was the financial impact of losing some or
many of these customers? A final
analysis showed executive management and staff the importance of doing what was
necessary to avoid the loss of corporate services and cash management services
and products. When the use of corporate
services products was collated with the size of depository and lending
relationships, astonishing facts began to emerge. The customers that were the biggest users of
threatened cash management, risk management and image products, though
contributing only about 20% of corporate services revenue, actually contributed
almost 80% of the deposits attributable to corporate services customers, and held
the lion’s share of loans. The other 80%
of corporate services customers, primarily small to medium-sized businesses,
used more common services, but did not bring much in the way of deposits, and
had few “fully realized” customer relationships that included loans or lines of
credit. The small number of very large
customers that used the more esoteric and customized products (the ones most at
risk of being unsupported on the new platform) and that had loans or lines generated
almost 80% of the institution’s profits attributable to corporate services
clients. Losing corporate services
products and processes probably meant significant losses to the deposits,
bleed-off of the loan portfolio, and possible changes to capital requirements
and ratios.
Too Great a Risk
When presented with these facts, a rapid
reversal of course took place in the acquiring organization’s systems
management. With clear financial
implications now known, support was thrown to fixing existing systems and acquiring
more sophisticated systems to continue to support the “Best Customers”, and
adjustments were made to project plans to accommodate the time needed to
implement these applications.
Essentially, the whole direction of a multi-year, multi-million dollar
systems upgrade changed, and the change was effected at a strategic level. However, other areas of the client
organization were just as much at risk, and the type of analysis used for
corporate services clients would not be as effective there. Other tools were needed.
Basic Products & Services – Different Tools Required
In the areas of deposits,
lending, and other banking services, changes would primarily be felt inside the
institution, and mostly by the customers who were not large businesses or users
of customized, sophisticated banking products.
These changes would also be felt by loan processors, new accounts
personnel, credit administrators, tellers, and others whose job it was to make
the organization more efficient, personable, profitable, and sound.
In order to analyze the
impact of these changes, the team went back again to ascertaining the degree of
change associated with processes and the systems that supported those
processes. Based on meetings and
conversations with counterparts within the parent company, personnel were asked
to compare how “new” processes that were to be adopted compared with processes
as they were currently performed, and to judge how the client’s current
processes would change when implemented on new systems. These activity-based comparisons included
developing diagrams of information flows, reviewing forms and reports, and
identifying issues with timing, service levels, management authorizations, and
risk mitigation approaches.
500 Impacts
The process was comprehensive
and exhaustive, and identified over 500 specific and actionable impacts on the client. Some of these impacts were positive, some were
negligible, and some were truly onerous.
The majority had some appreciable impact on either operations or
customers. Where possible, the impacts
were quantified with regard to costs (in terms of the need for more personnel,
expansion of cycle times, lost sales opportunities, or the need for review or
follow-up that required additional FTEs), potential new or aggravated risks,
re-configuration or re-training to be delivered, or impact on customers (longer
wait times, less personal service, inability to complete transactions, need for
“customer retraining”). All of this
information, including process descriptions and comparisons, impacts, and
projected needs, was entered into an issues management database in order to
manage the large volume of information and to make sure that the data could be
reported, that changes could be managed, and that the “loop” could be closed,
to insure that each impact or process deficiency had a mitigating change strategy
implemented.
Faced with over 500 subtle
changes, how was the project team to communicate the magnitude of the change
management problem? It wasn’t enough to
simply call it “the death by a thousand cuts” -- the individual issues were
extraordinarily diverse, affected widely different customer sets and departments,
and on the whole did not add up to the same sort of financial impact that had
been seen in the corporate services analysis.
Some individual changes were seen as significant and the parent company
had agreed to systems changes that would mitigate the impacts of these
changes. However, the number of
significant changes that would be addressed was less than 10% of the
total. The client would have to develop
workarounds and approaches to deal with the other 90%, and the project team
needed executive and management team buy-in to push the change agenda.
Portfolio Analysis – A Simple Tool for Complex Problems
In order to show the high-level
implications of many systems and process changes, the team determined that
portfolio analysis tools would be the best choice to show how changes would
impact the subjective business environment of the client (essentially the
“quality” of the way in which business is done.) The team chose to divide the many impacts
into four major categories: impacts to
customers, impacts to products and product sets, impacts to process efficiency,
and impacts on risk exposure. In each of
these areas, the team chose two indicators of quality, and these metrics were
arrayed on a 2 x 2 matrix diagram. For
instance, the customer service quality metrics were “interaction”, the degree
to which personnel could interact with and meet the needs of the customer, and
“choice”, the breadth of choices available to and selectable by customers. A process that allowed customers to make a
wide variety of attractive choices (high choice), but also offered the customer
the ability to have customer service personnel guide, assist and serve them
(high interaction) was the type of process that the institution prided itself
on offering. The upper right quadrant of
the matrix, where such a process would reside, was called “high touch” to
describe this type of process. Other
process types included “production service” (higher interaction but lower
numbers of choices), “self-service” (lower interaction but more choices), and “limited
service” where both customer choices and the ability of customer service
personnel to assist are limited. In the product
dimension, the chosen quality metrics were function and return; in the process
dimension, they were ease of use and delivery, and in management / control
(risk), the quality metrics were control and performance. Below is a diagram showing the customer experience
impact matrix.
For each type of matrix,
based on the quality criteria, client personnel were asked to rank the
“threatened” processes in their current configuration. For instance, was a back-office process and
system to provision cash easy to use?
Did it deliver on its objectives?
If so, it would probably be ranked high in both areas and be placed in
the upper right hand “best practices” quadrant of the process matrix. Where multiple activities and systems were
involved in a single “top” process, the summary quality of the current process
was gauged by management and the process was placed on the matrix
accordingly. Ultimately, all affected
processes were arrayed on the matrix. This
usually resulted in a process “footprint” (a circle that could be drawn around
all of the processes) skewed to the upper right of the matrix (the “golden” or
“magic” quadrant in the parlance of portfolio analysis.) Below are shown the first two steps in the
process of evaluation.
Aligning to the Future
Once the current state had
been evaluated, the future state was projected.
This involved determining if changes to processes or systems primarily
affected the measure of one or both quality metrics, and the degree to which
the change affected the metric. It was
determined that changes could either result in no appreciable change, or a
positive or negative impact, and that the impact could only be quantified as either
some change or significant change.
Significant change was defined to primarily represent monetary losses,
significant additions to staff / losses in efficiency, new or increased risk
exposures, or large customer service impacts (either due to the magnitude of
the issue or the number of customers affected).
Once the degree of change for a process was ascertained, a marker
representing the “new” process was affixed to the chart, positioned relative to
the current state process based on the quality metric(s) affected and the
degree of change. Once all affected
processes had been populated on the matrix, a line could be drawn around the
“future state”. Almost invariably, this
resulted in a significant net change in the quality of the customer experience,
the perceived quality and efficiency of processes, or an increase in exposure
to risk (product changes turned out to be minimal, and were almost always
better reflected as customer or process impacts.) Following is an example of how the “future
state” is evaluated.
A Major Business Impact
Once these diagrams were completed, the
results were presented to the executive management group. Previously, some members of this group had
dismissed the changes that were to occur as primarily systems and operations
problems that had few impacts on the branch network, customer service, credit
quality, or some of the other “front-office functions”. The clearly presented changes in the client’s
“quality profile” and the significant and inarguable impacts on customer
service, process efficiency, and risk caused this group to re-engage with the
conversion problem and throw their support behind a comprehensive internal change
management program. Subsequently,
presentations to line management enlisted their cooperation in developing
mitigation strategies, process reconfiguration approaches, and retraining
efforts in order to reduce the number of impacts at conversion. At this time, the portfolio diagrams are
being used to show progress, as projects to mitigate process and systems
impacts move forward and new work methods are implemented to “bridge the gap”
between the current and future state.
Summing Up
The engagement portrayed here
was somewhat different from the traditional consulting engagement, in that it
required the analysis of the impact of moving from a “good” state of systems
effectiveness to a “not-so-good” state.
This is rather the opposite of what consultants like to do – most are
focused on improving systems and process quality. However, having seen the power of strategic
systems portfolio analysis and process engineering tools for effecting positive
systems change, it is interesting to see that the tools are just as powerful in
situations where process and systems risks need to be identified and mitigated,
and where the situation calls for doing “the best we can”, rather than “the
best we can possibly do”. Strategic
planning tools can be very powerful in gaining buy-in from executive teams, as
they can be used to reduce the many, many details of a change management plan
down to a few clear effects on business health.
They are also flexible, and in conjunction with process description
tools can be used to span control structures from the executive suite to
backroom supervision, delivering strategic information to change agents at the
point of change.
For more information about these tools and
techniques, please contact:
w j branan | consulting www.it-strategy.com