BankerVision

Excel Services in Office 2007

There are lots of Microsoft bashers around, and they have lots of material to discuss at the moment. Apart from the recent cancellation of WinFs - probably the most singularly important feature of Windows Vista - there's the impending departure of Bill Gates, as well as the ongoing (if somewhat inflated) news of the clash between Google and Office, now that Google has a spreadsheet.

And its on the subject of spreadsheets that I thought I'd comment today. You see, Microsoft are about to release - as part of the next version of Office - a server version of Excel. And this is a release of some importance for banks.

Recently, I was working with a bank in Australia that told me - and I believe them - that it was possible that several hundred million dollars of value passed through them daily on the basis of figures calculated by Excel spreadsheets. Excel is an intuitively easy tool to use, and this makes it the best choice for business people that need to do things, such as traders who have to react quickly to market changes, or analysts who like to develop their models quickly. I've come across quite a few cases where Excel models are embedded in live, production systems in banks.

So Excel delivers business agility, but have you considered the potential liability if any of those spreadsheets are wrong? Imagine a multibillion dollar transaction going astray, simply because a calculation in a spreadsheet wasn't carefully checked by anyone other than the trader or analyst who created it in the first case. And Excel calculations are simply not that easy to check. How often have you been given a spreadsheet, and tried in vain to understand the logical behind the authors calculations? 

That's where Excel Services comes in. Excel Services lets you impose IT disciplines on a business focused tool. With Excel Services, you load a spreadsheet into an environment where it can use live data from systems, be accessed by a browser, or be embedded into other applications. And this can all be done under change control, with the full set of dev, test, and production environments that are the norm for other mission critical systems. Even more importantly than that, it lets a bank do a couple of things that have been very complicated before: ensuring that there is only one source of the truth across a multitude of potential model authors; protecting any intellectual property and business secrets that might be embedded in the model; and finally, making a model universally accessible, regardless of whether a someone has a copy of Excel or not.

All this is very nice of course, since in a regime of Basel II and operational risk, you almost have to be looking at your library of Excel models and getting control of them back from the business people that created them. It is simply unacceptable - and potentially very expensive - to have a mission critical spreadsheet in existence outside the control of those processes which control every other system in a bank. Going back to the Australian bank I referred to earlier: they told me they had about 50,000 spreadsheets they needed to review and get control of to be sure they could comply with the latest regulations.

Banks thought they had a problem with islands of data in Access? The Excel problem is way, way, bigger for a financial institution. Frankly, I'd be willing to bet that the more entrepreneurial and fast moving the bank, the bigger the Excel problem must be.

Credit to Microsoft for providing a graceful way of handling the situation. Loading existing spreadsheets in a server that knows Excel is going to be way less expensive - and certainly quicker - than recoding all that business critical functionality. Microsoft, despite what detractors might say, have built a feature that more than justifies the cost of upgrading to the latest version if you're in financial services.

Although, to be quite frank, the primary feature of the Google spreadsheet is also that it can read Excel models and load them in a server. Not a server running on the premises of the bank of course, but its a server nonetheless. Perhaps not quite there in terms of what a bank needs, but an interesting, and indicative, development nonetheless (read my previous comments on Google in financial services here).

The service arms race

There are, in my view, some interesting parallels between the fall of the Soviet Union and the present trend of differentiation on the basis of service in retail banking.

Let's look at the recent history of the former super power. In the late 80's, both the US and the Soviets were engaged in the end stages of a massive race to outgun each other militarily. The fact that both countries were in a position to destroy each other several times over, thereby rendering further investment in additional destructive capability redundant, was not a consideration as vast sums were spent on ensuring that each had the best destructive proposition. And then, along came the US's Starwars programme, an endeavour so ambitious, so expensive, that it basically broke the back of the USSR, who had to match it dollar for dollar.

So let's reflect on banking.

The current mantra is service, as in, doing it better than competitors and thereby getting some sustainable competitive advantage. Why sustainable? Because the economics of people (who drive the service offer) are such that they can never be commoditised. Real wages growth in every major economy has been substantial year on year. And recent figures I've seen show that worker productivity in the financial services sector has declined by about 1% per year since the 1980's. In other words, the amount of work that a dollar buys gets less every year. These are economics of scarcity. If you get the best people, you have an advantage that is hard to defeat.

But surely there comes a time where you have the right level of service, and everyone else has it as well. Strategically, there isn't much option but to invest in raising the bar. Spend more money on people, invest in bigger systems, open more branches. Customers might already be over-banked, but when differentiation is based on the service proposition, what choice is there but to take that next step?

Here are some signs that this is occurring: the rise of the term "mass affluent", individuals that wouldn't ordinarily qualify for high touch service, but now do because of pressures from competitors. The premium banking account with an assigned relationship manager, who delivers a level of service which - whilst it might not be of quite the service level of a personal banker- comes remarkably close. And let's not forgot the spending spree that is presently occurring in the branch space; I was speaking with a medium size bank in Europe yesterday, and they have plans to double their number of branches in three years. Service indeed.

Coming back to the point I opened with, isn't this rather like the superpowers arms race? Carl Sagan once famously described that overkill with the analogy of "two men standing waist deep in gasoline; one with three matches, the other with five.", which seems an apt way of describing the service proposition for banks at the present time.

So, at what point might the level of investment in service in a bank be so high that banks can no longer participate in the banking business? And wouldn't this mean that those banks with the biggest pockets - continuing with the analogy of Superpowers and StarWars - be the only ones who can possibly last until the end of the game?

And if that's so - and there's a natural level of service beyond which further investments in service don't make sense - where is the next place a bank can turn to show its customers it is different?

Channel diversification rather than integration

Here is something new: a new study that is forecasting that multichannel integration will be dropped by 30% of institutions presently engaged in it by 2010. Why? Complexity of deployment and cost.

This something I've talked about before. Many multichannel integration projects are so complicated - because they touch every back end system and every single channel - that it wouldn't matter how much money was spent, they were never going to succeed in the first place. So this new report is actually consistent with much of what I've been coming across talking with various banks around the world.

On the other hand, the study suggests that if multichannel integration isn't the new thing, then channel diversification must be. Rather than concentrate on having a great customer experience by integrating process across channels, you should add more channels so that you can reach more customers. They suggest that the multiple (independent) channel strategy is taking off: a rise from 30% to 40% by 2010.

I don't for one minute doubt the veracity of the study, but there are some problems with this, in my view.

Firstly, if nothing else, multichannel integration has forced institutions to consider the way they make channel investments. You almost never see banks allowing a business line to have a product specific on-line channel for example: it just doesn't make sense from a cost perspective, even though technically it might be easier to have a credit card, mortgage and savings/deposits site. Wouldn't channel independence and diversification suggest that a business line would have its own channels to the customer? And if not, we would seem to be back in the boat of multichannel integration again.

Secondly, no matter what this study suggests, customers do cross channels, and with increasing frequency, according to Forrester data. It is unsupportable that a customer would get a different balance on their mobile phone compared to the one they get on-line, or that when they ring the call centre, the agent doesn't know that they do mobile banking. So if you add new channels, thereby getting new customers, you may not have them long before they churn away to someone who is at least consistent. Frankly, you want consistency from a bank.

Thirdly, and perhaps most importantly, what are these new channels that will enable you to reach new customers? There's been much evidence to suggest that the concept of channel substitution is false: customers don't move to a new channel and stop using their old ones - rather, they add the new channel to their repertoire of ways to visit their money with the overall effect of a nett increase in transaction volume. So surely the concept of a new channel attracting new customer segments requires that the new channel is so compelling that customers will substitute channels - remember, we'd be asking a customer to churn away from their existing banking relationship on the strength of a new way of interacting.

On the other hand, new customer segments might mean customers who are presently unbanked: the very young, the very poor, or the very isolated (geographically, or otherwise). It is conceivable that new channels might attract some of these customers, I suppose, but really, would there be a business case?

In my mind, these two strategies (integration vs. diversification) can be boiled down quite simply: integration is a strategy that makes the experience of a customer good enough so that they stay and buy more; diversification is about broadening the reach to get more customers, so it doesn't matter if they buy more or stay.

The latter is a volume play. Many great businesses are built on the basis of getting many punters through the door and serving them efficiently in a short term way. Fast moving consumer goods are an example of this. It is a model which probably works equally well for financial services. You can see short-termism already creeping into some segments such as mortgage, where the average time a customer keeps a product is now down to 2 years, I believe. Volume businesses are about broad distribution and getting rid of costs: in other words, it is product that's king.

Multichannel integration, on the other hand, is about relationships:  so  you can get customers and keep them long term. You  don't need broad distribution, and each individual interaction doesn't need to be as efficient. In multichannel integration, customer is king, not product.

Of course, both strategies are valid and have the potential to make money. But I can't help wondering if diversification is really most applicable to those markets with large segments of unbanked or unsophisticated customers. And if, as those markets develop, they'll be right back doing the integration strategy to keep the - increasingly sophisticated and valuable - customers they've already got.

Managed Branch

Today, we at Getronics, in conjunction with Microsoft, are announcing something quite interesting - retail branch banking solutions using a utility based model for delivery and pricing. We're calling it the Managed Branch.That's a radically different way to get a branch network for several reasons.

Firstly, bank branches are capital intensive. They cost a lot to set up, a lot to run, and most importantly, a lot to keep up to date. Since most banks are engaged in some kind of branch renewal activity, there's quite a lot of money being spent. The thing is, when you rent your branch infrastructure (this is a utility model, remember), you don't have these capital cycles. In fact, you can get quite a lot of the capital back from the branch network and use it for something else. Lend it, don't spend it.

Next, a bank branch is pretty complicated to keep running. There is one bank I'm working with that has thousands of transactions and even more thousands of user screens in their teller application. The upshot? They do a branch wide roll out of their application every week. Expensive. But with Managed Branch, all of that roll out is included as part of the deal. You don't pay extra to keep those applications going. And lets not forget that even if the apps aren't getting patched, the OS certainly is.

Thirdly, and perhaps most importantly, the cost to run the branch network is less. Way less, in some cases. We're estimating that Managed Branch could slice up to 30% of the cost of a branch network in some cases. Why? Because Managed Branch is delivered as an appliance. It comes from the factory to the location, is plugged into power and the Internet, and is configured remotely by Getronics. You don't need leased lines, and you don't lots of people.

I've actually written about this appliance before, on an occasion some months ago when it was accidentally leaked  to the press. Back then, I suggested that this was an innovative way of delivering services: package them in hardware and make them reusable. It is a similar model as that used for packaged software, except here it is large services bills, rather than development dollars, which are saved.

I think, though, the the chief thing that is important about Managed Branch is that it deals with what is commodity about the branch channel. I've previously written on the concept that it isn't the branch itself that matters (also note my post on the mega-branch concept), but the way it is combined innovatively with process and people. With emphasis on the last.

The press release went out about 20 minutes ago on the wires. It will be interesting to see what the market makes of it. Analysts have told us we're the first to do utility based pricing and delivery in the branch, so it should be interesting to see what the day brings.