Article 2- The Commonwealth Bank of Australia - strategizing from outsourcing to the cloud PDF

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Journal of Information Technology Teaching Cases (2014) 4, 86–98

© 2014 JITTC Palgrave Macmillan All rights reserved 2043-8869/14 palgrave-journals.com/jittc/

Teaching case

The Commonwealth Bank of Australia – strategizing from outsourcing to the cloud part 1: perennial challenges amidst turbulent technology Leslie Willcocks1, Peter Reynolds2 1 2

London School of Economics and Political Science, London, UK; Centre for Information Systems Research, MIT, Boston, USA

Correspondence: L Willcocks, Department of Management, London School of Economics and political Science, Houghton Street, London WC2A 2AE United Kingdom. Tel: +02079556045; Fax: +02079556046; E-mail: [email protected]

Abstract This teaching case examines the challenges of using Information Technology (IT) outsourcing, adopting new technologies, undertaking business transformation, and evolving the IT function’s structure, governance arrangements and capabilities – all in a dynamic business context. The Commonwealth Bank Australia has over the last 20 years experienced similar IT management dilemmas as countless organizations across the globe. The case foregrounds six perennial issues in IT management. First, what form of outsourcing is suitable at different stages of an organization’s development, and how can that outsourcing be managed? The case here covers the challenges of single and multi-supplier outsourcing. Part 2 will focus on sourcing issues with cloud computing. Second, what are the key IT capabilities that must be retained within a large corporation? Part 2 will ask whether these capabilities change with cloud computing. Third, what are the mechanisms for developing, nurturing, maintaining, and evolving retained capabilities? Fourth, how should IT be governed in the face of changing business needs, new technologies, and changing organization structures? Fifth, Parts 1 and 2 of the case question the roles of the CEO, CIO, and business managers in leveraging IT performance for business value, the building of project and program management capabilities, and how to organize IT to support a business transformation program. Finally, the case raises the challenge for students of how an organization with its history and legacy in technology and sourcing partners can then move into even newer technologies – in this scenario cloud computing – the primary focus of Part 2 of the case. Overall, the two cases raise the fundamental challenge – what perennial management practices are effective, over time, in dealing with the challenges raised by changing technologies, and what new practices may be required, in contemporary dynamic business contexts. Journal of Information Technology Teaching Cases (2014) 4, 86–98. doi:10.1057/jittc.2014.6

Keywords: outsourcing; multi-sourcing; information technology governance; strategy; change projects; core IT capabilities; role of the CIO; business-IT alignment; digital enterprise

Introduction his case looks at the history and progress at a major bank of applying major new technologies to achieving business effectiveness and competitive advantage. Such a history,

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and the challenges faced, will be very familiar to most major corporations, and not just those in the financial sector. As a student of the management of Information Technology (IT),

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you are asked – what lessons can be learned from looking at the 15 year history of IT in such an organization, and how does understanding these lessons and history support the next phase of development – in this case the strategic step into cloud computing that began at Commonwealth Bank Australia (CBA) from 2006 (see Figure 1). The cloud computing challenge from 2006 to 2015 will be picked up in much more detail in Part 2 of the case. In Part 1, we focus your attention on the years 1996–2011 and the major events and challenges. Looking at this history, perennial challenges and management lessons emerge for CIOs, and all those charged with managing advanced, ever changing, information and communications technologies (ICTs). Why is this important? Because such ICTs in the period 1996–2015 became central and critical to operations and competitive positioning of contemporary organizations worldwide. What are the perennial challenges and decisions that face CIOs? In Part 1 we see that the overarching challenge is to arrive at and update an IT strategy, technology platform and applications that serve the ever changing needs of the business. This concern occurs all the way through Parts 1 and 2 of the case. A second challenge is to decide on and manage a sourcing strategy – whether single or multi-supplier – that leverages the external services market while supporting business direction. This concern is particularly prevalent in the 1996–2011 period, but arises subsequently, particularly in the context of adopting cloud computing (see Case Part 2). A third challenge is to build the retained capabilities needed to deliver on the business, IT and sourcing strategies. The CIO Bob McKinnon begins to tackle this issue from 2001 to 2006, and it is constantly revisited in Part 1 of the case, and by Michael Harte from 2006 to 11 into the adoption of cloud computing. A fourth challenge is IT governance and structure. Both CIOs have to make new IT governance arrangements, and also restructure their IT functions as a result of changing business demands on the IT function. A fifth challenge is IT’s role in business transformation projects. CBA had to play ‘catch-up’ against their competitors and launch several major projects throughout the 2000s and eventually gained a reputation by 2011–2014 of leading the way in the banking sector, including into the use of cloud, internet and digital technologies. How did CBA deal with this

challenge? Careful analysis of Cases Part 1 and 2 yields the secrets of the company’s success on all these challenges, and will provide multiple lessons for how to manage IT strategically for competitive advantage in dynamic contemporary business contexts. Background – commonwealth bank Australia (CBA) The CBA was established in 1911, and until 1959 also served as the country’s Reserve Bank. The Bank completed its privatization process in 1996. The background to this case is a period of business changes that saw a merger, several changes in organizational structure and numbers of business units, and two business transformations strategies launched (2001, and a large one in 2003). Throughout most of the period, until he retired in 2005, the CEO was David Murray by training an accountant. By 1996, he and many Board members had become skeptical about internal IT performance and began supporting outsourcing as a major solution. They sought improvements in IT cost control, performance, and innovation. However, as a business CBA was relatively successful, and this continued right through to 2006. By 2006, CBA was one of the top five companies in Australia and was rated as one of the top 25 banks in the world by market capitalization,1 totalling US $36billion. It provided (and as at forthcoming still provided) a full range of banking services to more than nine million clients with 33,000 employees across four major business units to service the needs of retail, commercial, corporate and institutional sectors. The bank operates the largest financial services distribution network in Australia serviced, even in 2006, by more than 1000 branches, 3800 agencies, 3200 ATMs, more than 135,000 EFTPOS terminals and internet banking services to more that 2.5 million customers. On IT, much had been achieved up to 2006. Over the previous 10 years, CBA had re-built its IT capabilities since its initial single-source outsourcing of all of IT in 1997, and managed their development in response to subsequent business and IT changes including a large merger, internal restructuring, a move to multi-sourcing and a major IT-based business transformation. We follow the story of the Bank’s CIO, Bob McKinnon, who took over in mid-2000 following the large-scale single source supplier of IT outsourcing in 1997

(Source: Thorogood, Schlagwein and Willcocks, Case Part 2)

Figure 1 Timeline of IT sourcing modes and major IT-related events at CBA. Source : Thorogood, Schlagwein and Willcocks, case part 2

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CBA IT Operating Modeland CIO Direct Reports 1997-2000: Group Technology GT located within one of the divisions

CIO

CEO FIN

TS

TM

VA

CM

SD

RM

TOP supplier

Finance Tech Mgmt Strat

Outsourced: Centralised Corporate Service

2001-2002

GT located within one of the divisions

RBS

TOP

Transition Value Mgmt Add

Contract Service RelationMgmt Delivery ship Mgmt

Divisional IT

CIO CEO

IIS

Overall inherited Minimal Multiple IT function Responsible (Colonial) suppliers (reliant on for IT (IT&T) vendors)

IBS IT built up internally

Multiple internal IT functions Multi-sourced: Federal Corporate Service

FIN PM

AP

VM

Arch Value itecture Mgmt Planning

CIO support functions: • Finance • Project Management

CFS

Colonial First State (via merger)

IBTO

(new divisional IT function)

SD Service Delivery (Inc. CM, RM)

CS

–

(CommSee Subsidiary

Reports to Group CIO Reports to Business Head

Capabilities IT Gov & Leadership

Delivery of IT Services

Design of IT Architecture

Business Vision and Adoption

Delivery Capability

Figure 2 CBA operating model and direct reports 1997–2000 and 2001–2002.

and subsequent 2-year transition. At this time internal capabilities were depleted and we examine how he consciously adopted a core IT capabilities framework and started to build internal IT capabilities in the central IT team, and then across the group between 2001 and 2002. In 2003 and until 2005, when the major IT-based business transformation was underway, we see how this placed new demands on the IT group, in particular from the business units, to deliver the business change. By the time McKinnon left the Bank at the end of 2005 to eventually take a CEO role in the industry, there were significant capabilities built across the Bank, providing the arriving CIO with fresh challenges on how to organize and leverage enhanced capabilities to deliver focused execution to the business. The new CIO Michael Harte took over in April 2006. He identified several existing challenges within his inheritance. Between 2006 and 2011 he also ran into new challenges. He found the technology group run separately from the banking operations group, and demotivated by the duplication of effort, high incidence of errors and lack of communication. There was no portfolio approach to projects. A leaner IT organization, program coordination and project management disciplines were required, technical delivery needed to be improved on speed and quality, service to the business needed to be improved, costs needed to be contained, while major projects had to be delivered. The projects included a core banking system replacement using SAP, and a strategic longterm evolution to cloud computing and digitization through an internal cloud, an Oracle platform and the use of external service providers (see Figure 1). Under Harte’s leadership from 2006, and responding to business demand, the bank also had to successfully launch CommSee, a new customer interface system at the branch and call center; Netbank, an online

and mobile banking solution with around 6 million registered users; CommBiz, a secure online business banking solution; and FirstChoice, real-time system for superannuation and retirement investment transactions. Big challenges indeed. In Part 1 of the case we look at both the earlier period from 1996 to 2006, and also this intensive period of activity from 2006 to 2011, and examine the major management challenges faced, and practices adopted, by the technology leadership and senior business executives. We divide the history into five main Phases, and will ask you to analyse and comment on the learning for each Phase. Phase 1: large-scale single supplier IT outsourcing 1997–2000 On October 10 1997, CBA entered into a 10-year Aus$ 5 billion single-source joint venture deal with EDS for all IT services, the largest financial service outsourcing deal in the world for its time. To secure the strategic nature of the outsourcing relationship, CBA purchased a third share in EDS Australia’s equity holdings. EDS had been eager to get a prestigious client based in Sydney, its only other major Australian client at the time being South Australia Government. It had agreed to slim profit margins, believing that money could be made on additional services CBA would need during the course of a 10-year contract. CBA’s newly established internal IT function, Group Technology (GT), was led by Howard Morris, an IT professional, former IBM service manager and CIO of the Australian Stock Exchange. He reported to the head of Technology, Operations, and Procurement (TOP) – initially John Mulcahy, the architect of the IT outsourcing deal, and later Russell Scrimshaw. In the CBA IT operating model (see Figure 2 for 1997–2000) TOP acted as a

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shared service provider to its host business unit – Retail Banking – to other business units – Institutional Banking and International Financial Services, and the later acquired Colonial First State Investment Group. Of the team of 35 people, approximately half were retained from the internal function. This included the heads of Service Delivery, Transition Management and Relationship Management. The other direct reports of the CIO were new, including the Financial Manager, Contract Manager, Technology Strategy Manager and Value-Added Manager. This process introduced new experience and capabilities into CBA. For example, the Finance Manager brought audit experience from a major accounting firm. The initial focus of GT was on managing the 2-year transition to the new service provider’s processes. This focus was closely followed by ensuring the requirements were met for Year 2000 (Y2K) and the introduction of the country’s Goods and Services Tax (GST) in July 2000. By early 2000, good progress had been made on the outsourcing objectives of controlling costs and improving IT service levels. CBA declared transition successful and that IT outsourcing was providing benefits. CBA achieved its objectives in relation to IT cost reduction, decreased as a proportion of non-interest expense from 16.3% in 1998 to 15.5%.2 Total service outages were reduced by over a third, and the critical ‘Severity 1 errors’ reduced by a factor more than double of this. By mid-2000, however, the internal IT staff had dwindled – almost half of the internal staff had left or retired, including the CIO. At the same time, the business was undergoing significant changes following the Aus$ 10 billion3 merger with Colonial Bank. There was also internal restructuring around customer segments (Figure 2) and the first steps to multi-sourcing with the selection of a specialized telecommunications partner – NZ Telecom – in addition to EDS. Think point: 1. Can you see flaws in the set up and management of the longterm single supplier arrangement from 1997 to 2000? Could CBA have done things differently? Phase 2: the move to a core capabilities model: 2001 In June 2000, Bob McKinnon was appointed Group CIO. A business executive, he was formerly CEO of State Street’s

Australian operation and had a finance background including as CFO of Mutual Life Corporation (MLC)/ Lend Lease. As the new Group CIO, he was faced with major challenges including: ● ●

●

● ●

integration of CBA and Colonial IT; realignment of the Bank’s IT strategy to its new business mix; transitioning from a single supplier to two suppliers for IT and telecommunications; extracting ‘value-added’ services4 from the suppliers; maintaining service levels and reducing costs.

McKinnon conducted an initial set of discussions with the business to understand their business and IT challenges. It was clear that, despite the cost and service improvements, there were significant relationship problems between the business units, IT function and vendors. In addition, there was also tension within these groups. There was poor coordination between business units of their IT needs, resulting in a loss of scale and integration. There was lack of IT governance across the central IT team. Moreover, new business unit IT functions had evolved or were acquired through the merger with Colonial First State Bank. Finally, there was tension between the vendors, with boundary and demarcation disputes. The benefits from IT outsourcing, and of IT to the business, were under threat. As described by CBA’s service delivery manager: Being distracted by Y2K and other bank integrations, we basically had no capability to manage service performance or the performance of the service providers, in terms of their obligations, as we had established them. By 2001–2002 there were multiple internal IT functions, and several IT suppliers, in addition to the major EDS contract (see Figure 2). Recognizing the need to strengthen Group Technology, McKinnon looked for best practice models for managing large-scale IT outsourcing deals. This led to a conscious adoption of a core IT capabilities model which suggested the retention of nine core IT capabilities (Table 1). An initial assessment against the model in July 2001 showed that the strongest internal IT capabilities sat within the Contract Management function. The relationship was being driven from a contractual standpoint without the necessary Contract Facilitation or Informed Buying capabilities. This was damaging to any Vendor Development capability. While a relationship

Table 1 Core IT Capabilities Model adopted by CBA

Capability

Code

Leadership Informed Buying Business Systems Thinking Relationship Building Contract Facilitation Architecture Planning and Design Vendor Development Contract Monitoring Making Technology Work

(L) (IB) (BST) (RB) (CF) (AP)

Description

Integrates the IT effort with business purpose and activity. Manages the IT sourcing strategy to meet the needs of the business. Ensures that IT capabilities are envisioned in every business process. Gets the business constructively engaged in operational IT issues. Ensures the success of existing contracts for external IT services. Creates the coherent blueprint for a technical platform that responds to present and future needs. (VD) Identifies the potential added value from IT service suppliers. (CM) Protects the business’s contractual position present and future. (MTW) Rapidly trouble-shoots problems which are being disowned by others across the technical supply chain.

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management team was in place to build the relationship between GT and the business, their focus was being dragged into contractual disputes, creating a void in Relationship Building and Business Systems’ Thinking. The limited number of retained staff who understood the complexity of the existing systems, combined with the small number of technical architects, left the bank with a deficit of Making Technology Work and Architecture Planning capabilities. Leadership, however, was seen as strong, w...