Big Thinking

With over 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa, HSBC is one of the largest banks in the world. It tags itself the world’s local bank, and with its HQ based in London, it can certainly be described as the biggest bank in Europe. Providing a comprehensive range of financial services across the globe demands robust technology. And the man ultimately responsible for delivering that technology is Group CIO, Ken Harvey.

Since he assumed this role in 2004, Harvey has been a busy man. Tasked by the Board with the goal of cutting HSBC’s unit processing costs by 10 percent each year, and managing an annual IT budget of around £2.5billion, the last three years have seen a comprehensive investment in the global giant’s systems.

This activity has included the development of a global card platform, an international internet banking platform, and the consolidation of the company’s data centres from more than 100 different locations into four global centres. HSBC’s general technology strategy it appears is to drive home the scale efficiencies its size should confer, and we ask Harvey about some of the specific developments. For example, what benefits has the new internet platform bought the business?

Harvey describes the platform as a comprehensive sales and servicing system. “The system does selective suggesting for the next best product for you,” he explains. “It creates an environment that the customer can customise. It provides access to cross-border, cross-currency portfolios.”

To illustrate he gives the example of a UK based customer with a summer home in France. “You have a current account in euros in France, but you're paid in pounds sterling. Now you can log on and see both accounts in one place. You can move money between them. You can do things that other people can't do, that other banks can't do.”
This functionality does “far more” than the 40 or 50 regionally developed internet systems HSBC had previously developed and deployed around the world, and Harvey describes it as being at the “cutting edge” in the industry. He acknowledges though that this development hasn’t come cheap.

“This particular system cost US$200 million to develop, and there's no way a single bank, even a bank our size in the UK, could easily afford a $200 million build,” he says. However, the economics of spreading that cost across 83 countries make the cost manageable for HSBC. As Harvey points out: “It actually becomes more reasonably priced than the lower grade system that would have been built regionally.”

And how far has the roll out of the new platform got – has it reached Europe yet? “It’s going into Europe as we speak. It's almost completely converted in the UK, with a lot of our customers, like the First Direct brand, already using it. By the end of the year I think we'll be live in seven European countries.” Aside from converting existing customers, Harvey is also obviously excited by the prospect of using the platform as a competitive advantage in newer markets. “We’re re-launching in Central Europe in a more significant way, and the system will be there the day we go live.

Away from the internet banking platform HSBC has also developed a global card platform. Whirl, as it is named, now serves 86 million accounts across 16 countries. How has this implementation been developing? “This is a more mature implementation,” Harvey replies. “We've converted the bulk of our card base, and ultimately we will convert it all. We have several more countries and a number of new launches that will go on this year.”

Harvey again impresses the logic of being a global operator. “We're able to do new launches because we can go into new countries at a very affordable price point. We're not building a brand new platform. We're not buying hardware. We're not licensing new software. It's just another incremental account on an already large plant.” This allows HSBC to expand into markets like Poland and the Czech Republic without having to worry so much about the number of customers it is going to reach from day one.

“It's viable at a much lower threshold, because you're only paying incremental growth,” Harvey argues. “The reason converting old countries on this particular platform went more quickly than some of our other group systems is the cost/benefit was absolutely material and first year.” Before Whirl, HSBC had outsourced credit card processing in many countries. “Our bill to run this internally is now between a half and a third of what the outsourced bill was.”

The advantage of this speed of deployment has been realised beyond just the pure year-on-year cost saving. “Now that some of the countries have had Whirl for two or three years, they've been having this incredible growth by using the features of the software. So it saves money day one, and your card growth is much stronger using the features of the platform.”

These two initiatives sit within what Harvey calls a “leverage squared” strategy – using HSBC’s scale and global presence to develop solutions internally, and then rolling them out across the group to maximise the benefit (see box copy). Is HSBC developing all its software internally on this basis we ask?

The approach HSBC takes, Harvey explains, is to look at the type of software they are developing. “We have a principle that says that if you are building software to create a competitive advantage, it is built in house. If it's a parity issue, we tend to buy it.” He gives the example of a general ledger system – as no customer would care what the general ledger system was, HSBC bought this package in. However, the internet- and staff-facing systems, or the systems that do trades or create derivatives are built in house. As he summarises “where there's differentiation, we build it. Where there's not, we buy it.” In practice, Harvey estimates this equates to around 70 percent of software developed in-house.

And how much more work is to be done in terms of building and implementing new systems across the group? Innovating and rolling out new systems is a constant process, Harvey admits, but in terms of its current attempts to build a global infrastructure he estimates the work is “more than half done”. It is now a question of exploiting the functionality of the new systems to make a difference to customers.

“The core infrastructure build, and therefore the bulk of the spending on a global basis, is behind us,” he says. “Now we’re adding feature, function and product that differentiates us.” Having said that, the return on the investment is already beginning to manifest itself. And Harvey expresses some pleasant surprise that so far much of this return has been coming from revenue generation.

“The benefit has been 85 percent on the revenue generation side, with only 15 percent on the cost reduction side,” he states. “Going into this we certainly would have viewed a ratio that would as much, if not more, benefit out of reduced operating costs. But the truth is most of it has been showing up in incremental volume and incremental revenue.”

As the leader at the heart of this billion-dollar technology investment, with commitments to cutting operating costs by 10 percent each year, what are the main challenges Harvey faces personally? Without sounding too insouciant, Harvey is fairly relaxed about his role, almost making it sound like an easy job.

“The way we're structured, the internal IT structure is really all within my control – so that goes quite easily. And the customer facing propositions, like the new internet proposition we’ve talked about, is quite easy as well. You go out to the region and say ‘you get this new function for this price’. That’s going very, very well, and so it is very easy right now.”

For Harvey, the most difficult part of his role is balancing internal spends on improvements that don’t have a significant revenue benefit or cost reduction attached in the year they are implemented. “Systems like transfer pricing systems or enhancements in the human resource systems, are the most difficult ones to discuss as a CIO,” he muses.

This is because of the focus among the rest of the executive team on improving the customer experience. “Most of the senior management team would say ‘put the money up front where it makes the difference with the customer’,” he explains. “Yet you have to take care of your internal structures – your SAP or Oracle structures. And that is the most difficult to get justified, and the spend that comes under the most scrutiny.”

Harvey does argue that one of the problems with justifying this kind of programme is that improvements to internal systems are not always exploited efficiently by their users. “To be honest, I believe internal customers in general, not uniquely at HSBC, are actually not good at monetising the value of improved software within their own organisations,” he remarks. “When you put a new product out that makes a difference to a consumer, the sales organizations really feel compelled to make a difference in it, to really use it, whereas you don't find as easy, I think, with improvements in your internal structure.”

Having said that over half the investment in global infrastructure was now complete, there is still work to be done. From a technology perspective, how close is HSBC to maximising the efficiency of its systems? “I would use one of our CEO Mike Geoghegan’s favourite sayings – we’re probably in the foothills of the benefits here,” Harvey replies. “We’ve starting monetising the benefit of our investment, and going public with some of the numbers we’re achieving. But this has been after two and a half years of heavy lifting – where the benefits haven’t been immediately apparent. So we've just started monetising it, and I think 2008 will be a much more powerful year than 2007. And going forward, I think it's just going to continue to amplify.”