HSBC: Re-engineer, redesign and reap the rewards17 May 2012
HSBC group finance director Iain Mackay offers a valuable insight into how simplifying business models, redesigning global functions and streamlining IT not only better connect bank employees around the world, but also deliver considerable cost savings.
HSBC started out as a Hong Kong-based trade bank in 1865. 146 years later, it is Europe's largest bank with a presence in 85 countries.
For much of its history, HSBC was effectively run as a large number of separate banks, albeit with a common culture and set of policies: Hong Kong ran Asia, London ran Europe and New York ran the US.
According to group FD Iain Mackay, the group operated like a franchise business, although there were rock-solid common policies in place regarding capital and liquidity management, and the funding of operations.
"On taking up the post in January 2011, CEO Stuart Gulliver placed a clear emphasis on the belief that the real power of HSBC comes from it being connected across a variety of locations throughout the world," Mackay says. "Properly harnessing that power would require not only a common method of managing capital, liquidity and the core resources of our brand, but also a common way of supporting customers across multiple jurisdictions with consistent products, technology and policies."
Although HSBC had the ethos of one firm, at the operational level a sense of 'franchise' still existed in each location.
"We looked at our retail banking operations and discovered that there were about 45 different ways of opening current and deposit accounts, initiating credit cards and originating mortgages," continues Mackay. "There were also around 20 different technology platforms." For instance, the commercial-banking offerings, in 68 countries around the world, had about 50 different ways to finance trade with as many different technology platforms.
Gulliver made it clear that engineering more streamlined, consistent and efficient processes and platforms formed a vital part of his ambition to make HSBC the world's leading international bank. The benefits were clear, not only from a customer perspective, but also in terms of the efficiency of the organisation.
The bank restructured its operations into four global businesses: commercial banking, retail banking and wealth management, private banking, and global banking and markets. International leaders were appointed to set strategies for each global business.
Mackay explains: "A key element of that strategy was: 'You will create common processes and standardised platforms. Get this right, and you'll not only converge on a much smaller number of platforms from a technological perspective, but from a process perspective you can also accomplish the same outcomes for a customer regardless of where it is they're banking'."
The ultimate aim was to drive a much higher level of consistency across all of HSBC's businesses.
Global vs local
Despite the push for consistency, some variability necessarily remains as a consequence of the bank's global reach.
Mackay explains that imposing a uniform standard wouldn't just be impractical, but also extremely costly to develop. He cites as an example the difficulty in developing software capable of accommodating variation in customer requirements, not least the fact that many of HSBC's products are customised for a particular transaction, customer and jurisdiction.
To Mackay, meeting somewhere in the middle, or reducing variation, is the most effective course of action, particularly from a technology standpoint - the priority is to identify existing platforms that work well, replicate best practices and create a degree of commonality.
"A very basic example is a general ledger - a common chart of accounts," posits Mackay. "When I joined the firm, there was a common chart of accounts, but everybody operated their own general ledger. So, from a consolidation and external reporting perspective, the cycle time to close the books was about 20 days, which, in my opinion, is about 16 days too long. When senior leaders make decisions about constrained resource allocation in an intensely competitive environment, they need up-to-date management information. It's therefore vital that reporting is done in a timely fashion."
In order to reduce cycle times, Mackay and his team focus on process and removing unnecessary steps in closing the books. Streamlining - not standardising - IT has been important, but the key element, according to Mackay, is streamlining and re-engineering the process.
"We don't have a particularly strong engineering culture," he says. "Getting accountants and finance folk to look at processes and fundamentally re-engineer them is enormously challenging in a 146-year-old bank. Our business teams are interested in doing deals and serving customers. Our job is to show them that looking at process can actually help them serve customers better. And when you're able to demonstrate that, embedding it deep in the culture is the next difficult step."
Process and function re-engineering
"The restructure introduced by Stuart Gulliver has given us a much clearer set of both leadership and reporting responsibilities," Mackay continues. "It's helped us strike the right balance between local variation and central control. In finance we now have strong leadership in our key centres worldwide and throughout our global businesses, but everything is bound together with those leaders reporting directly to me. We believe this will not only help drive a set of behaviours, but also a focus around process streamlining and reengineering."
The creation of the four global banking and markets, commercial banking, retail banking and wealth management, and global private banking business areas calls for business models that deliver a wholly consistent service. In order to do this, the leaders of these four businesses must, through customer engagement, identify variations across the multiple platforms served and then pinpoint the core services required in all of these operating environments.
"The point of this is to drive a much higher degree of consistency and service," sums up Mackay. "We are driving towards common standards and consistent platforms of delivery."
Over the course of 2011, HSBC's cost efficiency programmes delivered $0.9bn of sustainable savings, but the bank is determined to go further. A pipeline of further sustainable savings has been identified that is likely to deliver at the upper end of the bank's target of $2.5-$3.5bn by 2013.
Mackay says that today's market conditions only underline the importance of making swift progress. "Customers stand back from the markets because of the current uncertainty," Mackay says. "As our revenue experiences volatility, we have to go after costs more aggressively and achieve flexibility in order to gain an efficiency ratio of between 48% and 52%. Delivering against cost - the one thing we can definitely control at present - is critical."
The key difficulty with streamlining comes down to behaviours - getting people to step back, look at what they do and gain a greater perspective in terms of purpose. It is a massive challenge to achieve measurable momentum in their two to three-year timeline, and Mackay says it will actually take several years more to properly embed the culture.
The prospect of implementing change that can improve customer service, drive productivity and underpin the bank's profitability year after year, however, is what keeps Mackay and his colleagues motivated.