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The Development Bank Of Singapore Information Technology Essay

DBS started out as the Development Bank of Singapore in 1968. The Banks name was changed only on July 2003 to DBS. It was the Singaporean Governments development financing arm and had grown to be one of the largest banks by assets in Southeast Asia. It aimed to be the “Best regional Bank” and have operations in Hong Kong, China, Taiwan, India, Indonesia and investments in Philippines.

In 2000, DBS IT operations thrust was to grow emerging/foreign talent under Soo Nan. This was to prepare the Bank for regional expansion. As a result IT staffing levels saw significant increases. By 2001, DBS bought Dao Heng Bank (Hong Kong) and the additional headcount of combined operations further ballooned the staff costs to over 911 million. As the IT operations further grew into ‘an empire it became a ‘Big Elephant. It was around this time that Steve Ingram, came into DBS as the CIO/consultant.

Mr Ingram was a ‘visionary and quickly saw that the DBS IT operations would not be sustainable. Further, the mind set of the IT group needed a change. At the time, the IT group took the lead in projects and demand was not driven by the different business groups. Mr Ingram wanted the Business groups to take the lead in driving the IT services and for the IT operations to ‘support the business objectives. “We are a bank and not a tech company. So our core competency is banking”.

Gartner then came in and made proposal to outsource the IT department. Tenders were evaluated and eventually awarded to IBM who won the 10 year contract worth S$ 1.2 billion and was one of largest services agreement for IBM in Singapore to date [1]

Several reasons cited by Gartner for the outsource agreement were: [2]

Allows DBS to focus on more value-adding and strategic issues,

Allows DBS to realize the merger benefits across the IT operations of Singapore and Hong Kong,

Allows DBS to implement datacenter consolidations and finally,

Provide staff with ‘broader career opportunities.

Press releases highlighted the outsourcing deal as a utility model:

50 SGD million savings in the first 3 years and 20% over 10 years

The avoidance of staff transfer cost to IBM

It was in fact a transformational outsourcing from the start. “The initial deal was a mix of utility and enhancement-type services, with a view to grow the relationship to incorporate transformation services” “The IT organization was transformed from a value-sustaining to a value-enhancing focus” [4]

Staff were to have been reduced had it not been for IBMs need to have subject matter experts to provide the needed resources for the service level agreements. While the exact details of the outsourcing are not publicly known, some Banking industry sources indicate that IBM gave in to the generous terms in hopes of bagging the more lucrative Core-banking outsourcing deal.

IBM absorbed over 500 SMEs (Subject Matter Experts) of DBS IT staff that knew the Core-banking application, and had hoped that this move would provide it with the edge in winning the tender. It would have been hard to deliver results without the SMEs. However, the deal went to Accenture and Infosys instead.

Ms Elsie Foh: “Our approach with technology is to be customer-centric, improving services and operations to serve our customers better. Another way to leverage todays technology is to work with implementation partners to deliver quality solutions, honing on universal skills and methods and tools. Our choice of Finacle from Infosys, and the use of other banking solutions, is integral in powering our business transformation plan. We would like to leverage on advances in such technology to drive product innovation and differentiate ourselves to meet the various oncoming challenges of operating in a dynamic region” (Finnacle Connect Issue 12)

At the time of the decision to outsource, bank insiders fought for retaining the SME on core-banking application but lost out. As a result, five years later, that decision came back to haunt DBS. [5]

Gartner heaped praises for the implementation and the phased transition of the outsourcing agreement between DBS and IBM [6] citing:

Savings of ‘around 20 percent

Successful transfer of 100% of the 500 affected staff with NO SEVERANCE pay.

Contractual arrangements, service levels and pricing models that are consistent with Gartners best practices and at the top end of the industry performance.

Data center consolidation and application services process improvements incorporated in the deal.

Transition successfully completed on time

However another Gartner report mentions some ‘adjustments were made [4] “There were initial problems with the RFS (request for service) process requiring an improved and faster process”. “Also initially, there were different interpretations of contract terms with respect to scope of work and financial responsibilities, especially in the statement of work (SOW) and the price book (charging mechanism)”

The above generated some friction between DBS and IBM. For example, a RFS would take IBM say 5 man hours to do and would start to charge DBS for 5 billable hours, to which DBS would reject outright as the ‘learning process should not be charged to DBS.

By this time IBM was starting to bleed financially as a result of the wrong estimates put in. This drove IBM to start using its resources in India. This however, produced even more pain as India was 2 hours behind Singapore and DBS needed support at THEIR office hours. Further, some the lack of core-banking expertise and cultural differences exacerbated the situation. As service levels fell, IBM was slapped with further penalties.

This drove the necessity to switch from fixed pricing to variable based pricing. However, due to ‘contractual straighjacket” [7] DBS changed its mind about farming out software development to IBM. “Five years into the agreement, the bank decided to do application development in-house and recalled …tech staff previously transferred to IBM”

The Business Times reports (Jan 29.2007) “This exercise is part of our ongoing effort to refine and improve this arrangement based on new developments in technology. There will not be a decrease in the overall cost savings..”

Introduction

2.1 Institution Profile:

DBS Bank Limited was previously called the Development Bank of Singapore Limited which was set up in 1968. Today DBS Bank is the largest in South East Asia by assets and dominates the market in areas of consumer banking, treasury, asset management, securities, brokerage, equity and debt fund- raising[1]. DBS Bank is one of Singapore's main sources of medium and long-term financing, and is actively engaged in providing short-term banking facilities, to almost five million customers, operating in 14 markets [2].

2.2 Acquisition Of Dao Heng Bank:

DBS aimed to be the “Best regional Bank” and have operations in Hong Kong, China, Taiwan, India, Indonesia and investments in Philippines. Asia's banking market splits roughly between Southeast Asia and greater China and DBS lacked a significant presence in China. Hence DBS decided to purchase Hong Kongs leading Dao Heng Bank for $5.7 Million in 2001, almost 3 times the price book.

This acquisition made DBS fourth largest bank in one of Asias major financial centers. Dao Heng provided retail and commercial accounts, mortgage loans and online banking to businesses primarily in Far East. Dao Heng had about 70 branches and posted revenue of $1,563.2 million in 1999.As a result of acquisitions of Kwong On Bank and Dao Heng Bank in Hong Kong, DBS in one single sweep positioned itself tightly in the midst of Chinas rapid growth [3].

This deal by itself was one the biggest and also the most criticized by experts in its time, mainly because of the price paid by DBS, in the past transactions in Hong Kong, smaller banks sold at a price-to-book ratio of utmost 1.5, and DBS bought Dao Heng at 3.3 times its book value [4]. Also, DBS had to absorb about $3 billion of goodwill write-off.

DBSs purchases since 1998 — Bank of the Philippines Islands (S$1.2 billion), Post Office Savings Bank and Credit (S$1.6 billion), Kwong On Bank (S$879 million) and Dao Heng slowly yet steadily depleted DBS's once large reserves. This was confirmed by DBS officials themselves in 2005, when they blamed the high price paid for Dao Heng acquisition, for the net loss of $441 million with operating expenses increasing by 15% from previous year. [4] The staffing costs also ballooned to almost 918 million by that year.

Total Outsourcing – a solution to DBS woes:

It was around this difficult time that Steve Ingram, came into DBS as the CIO/consultant.

Mr Ingram was a ‘visionary and quickly saw that the DBS IT operations would not be sustainable. Further, the mindset of the IT group needed a change. At the time, the IT group took the lead in projects and demand was not driven by the different business groups. Mr Ingram wanted the Business groups to take the lead in driving the IT services and for the IT operations to ‘support the business objectives. “We are a bank and not a tech company. So our core competency is banking”. [5]

Some drivers for an institution like DBS Bank to outsource would be –

1. Improve focus on core business process and shift away from trying to keep up with latest IT trends and technology which is a time consuming process.

2. Reduce staffing costs without having to pay retrenchment benefits – usually outsources will absorb as many assets and employees related to outsourced services to gain subject matter. Also equipments, vehicles and licenses of current operations will usually be sold to outsourcer resulting in a cash payment that can be used in other activities.

3. Reduce and control Operating Costs: Companies that tries everything inhouse lands high R&D costs, marketing and deployment expenses, which is passed on to customers. Outsourcers on other hand can provide IT services at lower cost due to Economies of Scale and geographical reach.

Other benefits of outsourcing like increased productivity, access to new technologies and market, greater flexibility, improved time to market, improved predictability of costs etc.

But Outsourcing was not the ultimate panacea for DBSs problems. It has its own set of risks and challenges such as –

Loss of control

Loss of in-house expertise and intellectual capital

Dependency on outsourcer

Morale impairment within the company

Increased costs associated with vendor management

Security of Data

After analyzing in depth all such drivers and hurdles involved Gartner came in and made proposal to outsource the IT department. Tenders were evaluated and eventually awarded to IBM who won the 10 year contract worth S$ 1.2 billion and was one of largest services agreement for IBM in Singapore to date [6]. As part of the deal 500 employees were transferred to IBM (with IBM recognizing the staff's individual years of service at DBS as part of the remuneration package). Thus IBM was chosen as the leading vendor for the deal amongst its competitors to manage entire I.T operations and support of DBS (both application development/support and infrastructure was outsourced).

Several reasons cited by Gartner for the outsource agreement were: [7]

Allows DBS to focus on more value-adding and strategic issues,

Allows DBS to realize the merger benefits across the IT operations of Singapore and Hong Kong,

Allows DBS to implement datacenter consolidations and finally,

Provide staff with ‘broader career opportunities.

Press releases highlighted the outsourcing deal as a utility model:

50 SGD million savings in the first 3 years and 20% over 10 years

The avoidance of staff transfer cost to IBM

2.4 Reasons for outsourcing to IBM

In November 2002 outsourced non core IT functions to IBM, the contract, valued at an estimated S$1.2 billion, which was spread over 10 years.

DBS outsourced non core activities including all the infrastructure management of desktops, local and wide Area networks, open system servers and data centres.[8].However the bank retained its core activities such as IT strategy and architecture, and IT security.[9]

Steve Ingram states one of the objectives to go for outsourcing was “to be able to focus our attention on those core activities that add Mr Ingram was a ‘visionary and quickly saw that the DBS IT operations would not be sustainable. Further, the mind set of the IT group needed a change. At the time, the IT group took the lead in projects and demand was not driven by the different business groups. Mr Ingram wanted the Business groups to take the lead in driving the IT services and for the IT operations to ‘support the business objectives. “We are a bank and not a tech company. So our core competency is banking”.

Reasons for outsourcing

Concentrate on core activities: Allow DBS to focus on value core competencies and strategic imperatives while leveraging the power of technology in a paced and sustainable manner [10]. Chef Information Officer of DBS, Steve Ingram said DBS should be going for outsourcing as it would enable to focus their attention on those core activities that add distinctive value to the bank.

Consolidation of data centre Realize the merger benefits across the IT operations of Singapore and Hong Kong(Dao Heng Bank ) and move to common process and system. Implement data centre consolidation and relocation in Singapore and Hong Kong.[11]

Provide staff with broader career prospects and better development opportunity.

IBM has agreed to provide a comparable package in both role and compensation for the 500 DBS staff in-scope of the transfer in Hong Kong and Singapore.

Mr. Ingram said, "Joining an IT service provider will broaden the career development and opportunities for our IT staff. For those remaining, they will be playing an important role in shaping our future in supporting DBS' future business direction."Ms. Ang added “ DBSemployees coming on board will be joining a technology leader with a long history of managing the skills development, career opportunities and growth of IT professionals. Our strong local presence, 50 years in Singapore and 45 years in Hong Kong, will also ensure the smooth integration of DBS Bank's staff into our operations."[8]

Reduce the staffing cost: After the accusation of Dao Heng Bank (Hong Kong) headcount of combined operations ballooned and the staff cost was over 911 million. (Figure1). DBS successfully transferred of 100 percent of the 500 affected staff with no severance paid. There by trying reduce staffing cost

Cut down on IT cost: DBS wanted to Save IT cost by S$50 million over 3 years and cut cost by 20% over 10 years

It was in fact a transformational outsourcing from the start. “The initial deal was a mix of utility and enhancement-type services, with a view to grow the relationship to incorporate transformation services” “The IT organization was transformed from a value-sustaining to a value-enhancing focus” [12]

Conceptual Model

(Source: Gartner)

DBS adopted a phased approach.

Phase 1A: Undertake a six-month transition to the new working environment. As part of this, put in place the initial organizational framework necessary to manage IBM (December 2002 to June 2003).

Phase 1B: In parallel, "settling down" the new service arrangement and correcting problems as they occurred (December 2002 through to December 2003).

Phase 2: Extend the outsourcing scope to cover major application projects in progress when the outsourcing began in December 2002 (done in January 2004).

Phase 3: Merge DBS's IT and business back-office operation groups into a new technology and operation group. In parallel, IBM added customer service managers with banking experience to support each major business unit in the bank — transaction services, consumer banking, trade services, and treasury and markets.

DBS and IBM established a set of guiding principles for managing their strategic outsourcing relationship and the transition process:

Be guided by the objectives and intent of the strategic relationship

Solidify the long-term strategic relationship

Use the "win-win" approach

Embrace changes for further advancement

Recognize and accept differences in the spirit of partnership

Look for ways to streamline the process and improve the quality

During the transition, DBS's IT group was reorganized to help achieve the bank's goals and incorporate new functions to govern the ongoing deal (see Figure 1).

Figure 1. DBS's IT and Outsourcing Governance Structure

Source: DBS Bank and Gartner Research

Analysis

Year

2002

2003

2004

2005

2006

2007

2008

StaffCost

911

500

606

651

808

873

782

Operating Expenses

940

550

629

562

710

737

760

1851

1050

1235

1213

1518

1610

1542

The initial year did see overall cost decline. However, the payments to IBM could not be ascertained. According to industry sources, this could be explained by DBS bank agreement with IBM to stagger the payments. Hence, the succeeding years would reflect the cost increases attributable as payments to the outsourcing deal to be reflected in the Operating expenses.

The business Times March 9, 2006, Mr Banerjea notes that the cost to income ratios for DBS group, OCBC Bank and UOB weree 44%, 40% and 38% respectively.

Conclusion

References

DBS Bank Wikipedia http://en.wikipedia.org/wiki/DBS_Bank, Accessed On: Feb 7, 2010

DBS Bank Website http://www.dbs.com/dbsgroup/Pages/default.aspx , Accessed On: Feb 7, 2010.

Deals of the Year Asia, By CFO Asia, http://www.cfo.com/article.cfm/3002742 Load Date: Jan 22, 2002

DBS Group blames loss on bank purchase, By LeeYuk-kei http://www.thestandard.com.hk/news_detail.asp?pp_cat=1&art_id=12342&sid=6722250&con_type=1 , Load Date: Feb 18, 2006

Steve Ingrams interview – WILSON Please update reference here.

IBM bags US$679 Million DBS Bank Deal, By Fran Foo (CNET Asia), http://www.zdnetasia.com/news/hardware/0,39042972,39097380,00.htm ,Load Date: Nov 12, 2002

Fast Tracking the Deal:Two Real World Examples of Success, Gartner Report, http://08024860552295660653-a-g.googlegroups.com/web/dbs_ibm_OUTSOURCING.pdf?gda=DN1CTkoAAADhOtrx72UQvcDkMhhToej2f6I8_LLWu76HAKeaFJXh4K21bRD9meZ5F4PT-4gdXxTxThVnxJBHbLojFhN89VbZ_e3Wg0GnqfdKOwDqUih1tA, Accessed on: Feb 7, 2010.

[8] Outsourcing in Singapore

[9] http://dbs.com/newsroom/2002/Pages/press021112.aspx

[10] DBS to outsource key IT services to IBM; contract worth 1.2 bln sgd”, “AFX European Focus”, November 12, 2002 Tuesday

[11] “Fast Tracking deal “ Two real world examples of success” Michel Gale, Gartner report

[12] Outsourcing not a utility but transformational model – WILSON Please include ur references here.

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