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Does IT Payoff Strategies Of Two Banking Giants Case Solution

Solution Id Length Case Author Case Publisher
1906 2963 Words (12 Pages) Ali Farhoomand, Minyi Huang University of Hong Kong : HKU753
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The case study is a long held debate regarding whether the information technology segmentation of a business enhances the business operational and financial statistics and performance.

Following questions are answered in this case study solution

  1. Introduction

  2. Background

  3. Problems

  4. Analysis of Alternative Solutions

  5. Recommended Solutions

  6. Case Questions Solutions:
  • Some have argued that companies should spend less on IT and wait longer to invest in more matured technologies because IT is a commodity and brings little competitive advantage. If this is the case, how could these two banks justify their multi-billion dollar annual investment in IT? 

  • How would you assess IT investment strategies at HSBC and Citigroup? Do they invest in IT primarily as a way of cutting costs and improving their operational efficiencies, or do they invest strategically with a view to entrenching their competitive positions?

  • In general, how should companies go about assessing the value of their IT investments? In your assessment, which of the two banks is cleverer in its investments?

Case Analysis for Does IT Payoff Strategies Of Two Banking Giants

2. Background

Information Technology is a rather critical decision for any organization because it streamlines numerous activities.

Investing without any contingency plans or without any future outlook for a certain business line or an investment strategy can be rather dangerous. During the transition of 1990s and onward, outsourcing and off shoring has reinforced investment in information technology. Looking at the industry within bounds of rules and regulations implemented by the state whereby no bank or financial institution could create a subsidiary in another country makes a rather stringent picture of the concept of controlled growth. At the point where this rule was dismissed marks the point of unleashed financial giants across the globe. These financial giants realized in time that operative tendencies within bounds limited their strength and thus initiated the process of off shoring and outsourcing to other countries where they realized that the demand was rather elastic and suppliers limited in numbers and quality.

The financial industry at this point started to face operational difficulties maintaining quality standards and core business supervision and other value tasks. Information Technology provided a solution. IT came in with a promise to streamline all business tasks and operational deficiencies and create a system of unparalleled business perception.

The implication of addition of this new variable added a rather huge cost which in the future would rise steeply.

3. Problems

Consolidation allowed the perpetuating of mergers and acquisitions of banks within the country and outside the country. The reason was the lowering of costs depicted after consolidation; for example, the higher fixed costs of maintaining and operating a merged bank’s IT system can be distributed over many users. However, the differences between the more stringent US General Accepted Accounting Principles (GAAP) and the more deviant IFRS are coming towards common grounds and thus may pose restrictions on the way consolidation takes place (Vashistha, 2007).

Increase in banks offshore IT spending from 6% of the industry’s $44 Billion total annual IT budget to 30%. While on the flip side, according to a research carried out by Deloitte, nearly half of all off shoring activities or operations could save more than 40 per cent of the cost of running the same business onshore.

Another important problem that can in part be considered an extension of the consolidation problem explained previously is with respect to the growing burden of complying with complicated and intricate government rules and regulations which may range from Sarbanes-Oxley to anti laundering regulations. Shell bank activities raised the probability of the occurrence of such anti-laundering activities as was the case of Citibank undergoing numerous litigation sections due to involvement in such activities. Of the 40 private banks reviewed by the Federal Reserve during its industry wide examination of private banking in the 1990s, only one “Citibank” was reviewed in detail by Federal Reserve examiners three years in a row (Farhoomand, 2009).

HSBC based its philosophy on outstanding customer services and effective operations. Between 1998 and 2003, its strategy was “Managing for Value” which meant satisfactory return for the shareholders. Later the strategy was changed to “Management for Growth” which implied becoming the world leading financial services firm. However, analysing the trend of HSBC activities, it failed to attain the underlying lead in financial services, it did; however, attain growth on an organizational level(Chang, 2000).It failed to emphasise on the fifth golden pillar which stated to grow with respect to deposit taking and striking a balance between risk and return. It over emphasized the sixth pillar which stated the effective use of technology for customer convenience (Anderson, 1999).

4. Analysis of Alternative Solutions

To analyse the problems certain models can be utilized to organize the thought process and direct the case study analysis towards the right length.

i. Porters Five Forces

Let’s do a Porters five forces analysis of both the businesses i.e. HSBC and Citibank:

• Bargaining Power of Suppliers

The important point to note here is that in case the inputs or money from federal reserve’s is a huge portion compared to the overall cost in the case, suppliers i.e. the federal bank has a huge bargaining power. However, it must not be neglected that customers of any bank are also the suppliers; in fact the major portion of the supply is held by the deposits injected in a bank. Thus, keeping this in mind, suppliers have little bargaining power (Quittner, 2006). In the banking industry, there are lots of suppliers if analysed in depth including but not limited to suppliers of credit cards, computers, integrated operating systems, so on and so forth. In the context of Information technology, it can be said that the supplier bargaining power is high because although there exist numerous programmers in the IT industry, there is a need for a very intricate operating system that can tie up the global system of such giants as HSBC and Citibank. 

• Bargaining Power of Buyers

Bargaining power of buyers is relatively medium because there are numerous giants in the international banking industry including Standard Chartered, Citibank, and HSBC whilst; the customer base is very large and impacts the sensitivity of customers (Weber, 2002). It must be noticed that with the advent of the World Wide Web, much information can be accessed online thus providing customers with more information regarding their banks.

• Threat of New Entrants

This threat is relatively low because the requirements of capital and other costs are too excessive to allow for easy entry. The barrier to entry is way upscale to allow for quick emergence of any entrant especially in the case of international banking industry (Eckenrode, 2007). It is tedious to construct a brand image like Citibank or HSBC who are able to provide a convenience of money needs in numerous countries around the globe.

• Rivalry

Due to the existence of a standardized product, the rivalry standards are very high. This high standard rivalry can be viewed with a flip side of low switching cost of customers and easy duplication of similar product by another bank; the willingness to compete aggressively on the basis of the new package creation and providing with lower or higher interest rates (Eckenrode, 2007).

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