SCFB Transformation Story… from IMF to recent financial crisis for SNU students

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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 Other external factors

Acquisition in 2005

What’s after this now?

Summary


IMF crisis – story of transformation


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?


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


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


Mortgage?

Credit Card?

Fee Income?

Layoff?

NGBS?


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

???


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


Soul Searching…What’s wrong with us( I mean, IT professional in banks)?


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?


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


Foreign Exchanges


Loans


Mortgages


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


Current Business Functions and Departments Automation

Hea

d-O

ffic

e

Business process Issue – Too many Manual Process


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


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!!!


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


Why do we have this problem? Evolutionary process of Bank’s IT systems

Branch

Teller

CAPLegacy Core Banking Systems

Depart-mental

MIS Systems


CallMgm’t

ATMProcessor

Call Ctr.Agent

SalesKiosk

RemoteBanking

ATMDevice

IVR

Telephone 365CornerInternet Branch

ServerServer Server

Tellor

ComplexInterfacing


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


CallMgm’t

ATMProcessor

Call Ctr.Agent

Branch

RemoteBanking

ATMDevice

IVR

Telephone 365 cornerInternetBranch

ServerServer Server

SalesKiosk

Server


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?


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?”


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


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


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


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


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


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


Human Resource Issue


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


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


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?


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


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?”


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”


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


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


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


A Solution that Korea First bank chose:


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


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


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


Acquisition in 2005 – story of integration


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


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


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


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!!!


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


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




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



Global MarketsGlobal Markets

Cross Selling

Trade, Cash and Global market products

Personal LoansCredit Cards


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


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


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


“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


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


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


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


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?


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


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?


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


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……


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…


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


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


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


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)


What’s more to prepare for the future...


CMM - Continuing ImprovementCMM - Continuing Improvement

LevelLevel 1 1

LevelLevel 3

Level 4Level 4

Level 5Level 5

20 January 2003

Congratulations!

KoreaKorea

First BankFirst Bank


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


Disaster Recovery Capability Issue

What will happen if there is a disaster in Seoul?

First question SCB asked!!!


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


• 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


<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 -


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


BCP Center Tour







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 !


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


Thanksand Have a Great Day!


“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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SCFB Transformation Story… from IMF to recent financial crisis for SNU students

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