Too Big to Fail? or Too Big to Succeed?

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”  ~Thomas Jefferson in 1802

As you probably realise from my many postings on the current state of banking, I am not a great fan of big banks and their leaders. (see Leaders Avoiding Leadership, Retail Banking is Dying,  Why Banks Should Focus on Culture Now More Than Ever ).

So, today I learned another reason that convinces me even more that big banking is doomed.  It has to do with the leadership decisions made in relation to how IT (information technology) is managed at most big banks.

If we stop and think about it for a second, it is easy to see that everything done within a bank, big or small, has a major element of IT attached to it.  Check your balance on-line? An IT system does that.  Help the institutional traders make buy and sell decisions? Another IT system.  Withdraw cash from an ATM? Another IT system. Have a problem with your account? Another IT system handles that.  FX trading?  Another IT system.  Get the message?  IT is the backbone of the banking world today, whether it be Retail, Commercial, Institutional, Advisory Services.  Everything.

Yet IT is at the centre of much of what is broken about banking today. Very recently the NatWest/RBS IT system has been down for over a week? Imagine the chaos for retail and corporate customers.  You couldn’t check your balance or determine when and if money arrived in your account.  If you are curious, here are several articles concerning this snafu: NatWest Customers:  Keep Records for Credit Repairs and Refunds,  NatWest To Open All Weekend As Problems Persist.

So, is this just an isolated incident?  A problem only for NatWest and its customers?  I don’t think so.  I think this is the tip of the iceberg, the calm before the storm.  And the reason is not with the actual IT systems per say, but in how they are managed, and in most cases within big banks, NOT Managed.

Let me explain how this all works.  First of all, a bank is run by financial experts and executives who pay more attention to Wall Street and share price than their customers (both retail and corporate). So, decisions are made from the point of view of maximising shareholder return, and about the only thing they can directly control are the costs of doing business.  And they go after cost cutting with a vengeance. Banks are constantly cutting thousands of jobs to control costs, causing others to pick up the additional work loads. In addition, they have a crafty practice of moving staff from employee status to contractor status at various times to reduce their costs, especially when it is time to report their headcount and overhead costs to the analysts.

And one of the favourite cost control mechanisms used by most big banks is IT outsourcing.  That means that most of the people who write code for internal banking software and most of the people who provide “customer service” are located in low cost countries, mostly India, but increasingly Southeast Asia and South Africa.  So, the bank reduces its IT and Call Center costs.  But what about quality and customer service?

Here’s a quote from one of the above articles about the current IT mess at NatWest.

“The problems were caused by the corruption of a CA-7 software programme that affected the payments system, meaning millions of customers were unable to make or receive payments.

Reports suggest that an error was made by the IT support team based in India who were looking after the software update.”

And how many times have you slammed down the phone because of poor service and minimal communication skills when trying to deal with an offshore call centre about your bank account problems?

Cost reduction in exchange for massive IT errors and disenfranchised customers.  Sounds like a good deal if you are only looking at the numbers!

NatWest is the tip of the iceberg and I fully expect several other banks to have major problems with their outsourced services.  Barclays and Santander hit by online banking problems.

But here is why this is a leadership issue and not just a financial or IT issue.  The real problem with outsourced services, whether it be project management staff, call centres, code writers and developers, or systems houses, is that these people are not adequately managed by the banks they serve nor do they understand the customer.  A SLA (service level agreement), which forms the basis for the relationship between the bank and the outsourcing company,  is a set of performance objectives, not a performance management system. People need to be managed if they are to perform at their best in complex situations that impact the customer experience.  They need training, coaching, feedback, appreciation, mentoring; all the things that good managers should do to ensure effective employee engagement and performance.

And the people doing this offshore work have no real understanding of what banking is all about.  They are doing an important job without an understanding of the product or the customer.  In fact, most of the people employed by the big banks aren’t bankers!  They are functional or technical experts doing work without really understanding what banking is all about.  How can you run a successful organisation when the majority of employees don’t understand the business or the needs of the customer?

But then performance management costs money in terms of training and salaries.  So the least-cost decision is to use SLA’s and local management to ensure quality.  With these kinds of leadership decisions, I am more convinced that big banks are Too Big to Succeed!

Tight Lines . . .

John R Childress

john@johnrchildress.com

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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