Lecture 6 ( February 22, 2003)

1
Lecture 6( February 22, 2003)

• Designing and Organizing Information Systems
  Resources
• Case Analysis
• Banking industry American National Bank

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strategic analysis

• IS not only help to cut costs, but to gain
  competitive advantage, e.g. control over
  distribution channels linked electronically to
  suppliers and customers
• On the other hand, strategic IS can be expensive,
  difficult to build and easily imitated.
  Government regulations can also impact strategic
  initiatives
• The application of strategic systems requires a
  thorough understanding of the organization,
  including its internal and external environment.
  The most difficult aspect is the decision to
  pursue ideas that will give the firm a
  competitive advantage, especially those with a
  reasonable cost
• Michael Porters five external forces model can
  help identify competitive advantages for the
  business

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Michael Porters five competitive forces
potential entrants

competitors
bargaining power of suppliers
bargaining power of buyers
rivalry among existing firms
substitutes of products/services
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some considerations

• Competitive advantage conferred by IS are
  generally short-term. However, the impact are
  normally very significant.
• Strategic applications of IS lock-in customers
  and suppliers by raising the cost of switching.
• Level of acceptance by users/customers is
  critical to the success.
• The various risks associated with new technology
  are always high.
• The decision whether and when to invest in new
  technology is critical

5
Systems Development

• Systems development are typically difficult,
  especially for large projects.
• Most projects that are deemed failures either
  cost too much or did not produce useful systems.
• Project overruns and huge backlogs are common in
  all industries.
• To deal with all these difficulties, various
  methodologies and approaches are used to provide
  some control over the process.
• One of the most formalized techniques used is
  SDLC (Systems Development Life Cycle)
• Other methods include prototyping, end-user
  development, joint application development and
  object-oriented development.

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Systems Development Life Cycle

• Feasibility study
• Examine, analyze and evaluate the benefits,
  goals, costs, problems and implications of the
  proposed system solution.
• The objective is to determine whether a system is
  the right procedure to solve the situation
• Planning
• Developing a schedule for the project
• Appointing team leaders
• Laying out a plan
• System analysis
• Determine the present system procedures and
  problems
• Breaks the current system into smaller, more
  manageable pieces.

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SDLC
(contd. 1)

• System design
• Describes the system on paper, including a
  detailed description of its modules and
  inter-relationships.
• Define program specifications
• Programming
• Coding of the program specifications into
  computer readable language programs.
• Testing of the individual programs.
• System testing
• Also known as string test or final test.
• Testing to uncover interlink, multiple and
  concurrent access and stress problems.
• Sign off
• Acceptance tests
• All documentations completed
• A common requirement by organizations such as
  audit requirements
• By regulatory requirement for some sensitive
  systems

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SDLC
(contd. 2)

• System implementation
• Installing the new system
• Training end-users
• Making work adjustments
• Conversions (from old systems or from manual)
• Temporary human resources requirement
• Maintenance
• Working systems must be maintained and modified
  as business needs arise.
• Fix problems not found during testing and
  implementation.
• Address changes required due to changing
  hardware, software or other operating environment
  such as keeping up with the industry and
  regulatory bodies.
• Evaluation
• Post-implementation reviews
• Effectiveness, reliability, stability, speed,
  ease of use etc
• Other criteria to judge the new system for future
  project reference

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Systems not considered as successful

• Systems developed which did not support business
  strategies and objectives.
• Poor systems planning and inadequate project
  management.
• Failure to define or understand user
  requirements.
• Negligence in estimating costs and benefits of
  the systems project.
• Creation of a myriad of design defects and
  errors.
• Acquisition of computers and software that no one
  needs or knows how to use.
• Installation of incompatible or inadequate
  technology.
• Negligence in implementing adequate controls.
• Development of unstructured, unmaintainable
  software.
• Inadequate implementation tasks.

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Centralization vs Decentralization

• The never-ending struggle between centralization
  and decentralization has not bypassed MIS.
• Since the advancement of technology into PCs, the
  trend towards decentralization has been more
  pronounced. Distributed processing have been
  giving way and there were even talks on the dying
  of mainframes. However, mainframes are still
  here to stay with even more increasing usage.
• The client/server approach has bridge the gap
  between centralization and decentralization while
  capturing the benefits of both.
• Centralization or decentralization not only
  affects hardware and software, but areas such as
  data and human resources are also affected.

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advantage comparison

• centralization
• economies of scale
• easier upgrades and compatibility
• increase control over access and sharing
• easier training and hiring of specialists

• decentralization
• lower prices of PCs
• increased flexibility
• easier access and personal control
• faster and more personal response time for users

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hardware
their advantages
centralized Although PCs may cost substantially less than mainframes at about 1000 times less per processing second, economies of scale can still be achieved due to other associated peripherals, software and the total number required.
de- centralized Diminishes the chance for a total breakdown. Equipment can be personalized and the hardware is usually cheaper.
client / server The benefits of the extremes can be realized. Centralized concurrency and security controls of data. Peripherals can be more personalized by residing in the client or PC
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software
their advantages
centralized Lower cost on a per-user basis. Fewer compatibility problems
de- centralized More flexibility for end-users in what software they use and faster access to software residing on the individual workstation. Support and configuration software applications can still be integrated.
client / server This arrangement can provide advantages by maintaining some software on the server and some on the individual clients or PCs
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data
their advantages
centralized Easier to share data with all users. Easier to control access to the data. Easier to do backup and recovery.
de- centralized Users have better and faster access to the data. Users know where and how their data are organized. Users control their own data, having more privacy than sharing.
client / server Shared data resides on the server while more personalized or departmental data such as electronic mails and confidential documents can be sent to the client or PCs.
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personnel
their advantages
centralized Working together with other MIS workers can lead to team efforts and faster solutions to complicated problems. More diversified career path opportunities.
de- centralized The MIS worker is closer to the end users and more familiar with users particular needs
client / server MIS staff take care of the servers and the issues that surround them. Other IT personnel scattered throughout the organization to assist client end-users. Or using Help Desk approach. Users call a central number and IT personnel dispatched to the location if the problem cannot be resolved over the phone.
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Training and Education

• Traditionally, IS and IT training and education
  has been focused on training the IT
  professionals. As technology advances at a
  faster and faster speed, training and re-training
  become more prominent.
• However, IS and IT training and education has
  been more and more important for users. Anyone
  except aggressive risk takers will be nervous
  about a new system or new technology to be
  implemented if they know nothing about it.
• Training on new systems or tools to be used for
  the mass workers are vital to a successful
  implementation strategy.
• Companies nowadays not only provide IS training
  to all affected workers, they even subsidized
  general IS or IT related education.
• As an incentive, government has the Skills
  Development Fund for companies to tap on for a
  vast variety of courses.

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End-user computing

• Involving end-users in the design, education and
  training is important because it programs system
  flexibility, recognizes the impact of the new
  system on the business and reduces the resistance
  to change from the end-users to the new system.
• The slow response to user requirements and the
  huge backlog of projects and maintenance in most
  corporate IT departments prompted for end-user
  development.
• End-users could use their own computing resources
  to support their job requirements instead of
  waiting for the indirect support of corporate IT
  departments.
• The other reason for end-user development is the
  proliferation of more powerful and user-friendly
  software tools coupled with the increased IT
  knowledge of users.
• One clear advantage of user development is less
  communication is required which in turn speeds up
  the process and avoids possible misunderstanding
  the requirements.

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End-user computing (contd. 1)

• However, end-user development is not without its
  problems.
• Most of these problems arise from the fact that
  users generally lack the training and experience
  of MIS professionals.
• Systems produced by end-users tend to be written
  for only one person to use and hence oriented for
  working only on a stand-alone PC.
• Lack of documentation creating problems for
  others to use the product.
• Due to lack of training, users rarely perform as
  much testing as they should.
• Lack of security control and audit trails.
• Poor maintenance.
• Data integrity problems often occurs.

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End-user
computing (contd. 2)

• Duplication of resources as different people in
  different parts of an organization could be
  working on the same type of problem which the IT
  department could solve it once for all.
• Lack of standard generates incompatibilities
  making it difficult to combine systems created by
  different departments when the need arises.
• End-user development takes time away from the
  users job. Some users spend months creating and
  modifying systems that might have been created by
  MIS professionals in a fraction of the time.

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outsourcing

• Outsourcing is a new term for an old concept in
  MIS. To outsource is nothing more than to
  contract or sub-contract part or all of an
  organizations IS operations out.
• Typically companies outsource software
  development, procurement and support to
  application service providers (ASPs). These ASPs
  provide and support business application and
  other software directly or via internet and
  intranets to all of a companys employee
  workstations.
• However, many companies choose to let a
  specialized firm run the entire computer
  operations for them. This could be anything from
  machine operation and maintenance to development
  of new systems and maintenance of existing
  systems to telecommunciation services.

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outsourcing (contd. 1)

• Some companies outsource their whole IS
  operations by selling their entire computer
  installation and operations and transfer their
  existing staff to the service company.
• Some leading outsourcing companies include EDS
  and IBM.
• There are others who spin off their IS
  operations into IS subsidiaries that offer IS
  services back to their parent company as well as
  to external organizations. Typical of this are
  .com companies or business units of an
  organization taking care of the e-commerce and
  internet-related businesses.

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outsourcing (contd. 2)

• Outsourcing has primarily been used to decrease
  operating costs or to get the initial money from
  the sale of the installation. There are other
  companies who outsource to focus on their core
  business and not to worry about other areas
  especially the technologies.
• However, on examining and studying those
  companies who outsource, the benefits and cost
  savings are not always clear.
• The debate is still continuing on the
  controversial subject of outsourcing
• Complex markets that benefit from strategic
  applications require the experience and knowledge
  of employees who work for the company.
• Situations requiring tight security are easier to
  control if they remain in-house.
• The outsourcing firm have to pay the same costs
  that a company face plus an additional profit
  margin.

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The trade-offs

• Outsourcing is not a simple decision. The scope
  of the outsource can make the issue more complex.
  It must be carefully and fully analyzed, both
  financially, managerially and strategically.
• If the focus is on development of strategic
  applications and leading-edge applications, it is
  usually better to use an internal development
  team and if necessary, get outside assistance as
  consultancy services for the latest technology.
• If the main job is still dealing with older
  technology used mostly for transaction
  processing, it may be cheaper to hire an outside
  firm to maintain the applications.

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Case analysis American National Bank

• In 1933, American National Bank (ANB) opened for
  business in Chicago with capital funds of
  1,400,000 and deposits totaling approximately
  13,000,000. ANB showed a consistent growth in
  deposits and capital funds at a time when the US
  was recovering from the great depression and the
  people were actively involved in the war raging
  in Western Europe.
• In 1945, deposits were already over 200 m. Post
  war conditions brought ANB to look bravely toward
  a future world where trade between nations would
  once again be possible. An International Banking
  Department was formed.
• During World War II, savings were high because
  few consumer goods were available. As
  individuals spent accumulated savings during the
  post war years, there was no growth for the next
  three years in accordance with the banking
  industry as a whole.
• Since then, ANB continued to grow tremendously in
  every area of operations. Along the growth in
  customers, employees, services offered, income
  and deposits, came the development of new
  departments and procedures to support the
  organizations.

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The use of information technology

• The superb location helped ANBs growth in its
  services to midsize corporations in a wide range
  of industries.
• In 1961, an electronic data processing center was
  developed and the entire cheque handling
  operations was converted to an automated
  electronic system the following year.
• The conversion was not without its problems.
  Although no staff were terminated because of this
  conversion, a number of individuals were
  transferred to other departments and still more
  were extensively retrained to operate effectively
  in the data processing field.
• In 1963, an additional computer was ordered to
  handle the increase in cheque volume.
• In 1966, ANB purchased Tel-A-Data Corpn, a data
  processing center providing modern online
  customer account service for correspondent banks
  and savings and loans associations.
• In 1968, ANB joined the growing network of bank
  credit card issuers through its entry into the
  MasterCharge system.

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some technology stories

• ANB implemented Vector digitized systems to
  improve its ability to detect and address
  customer fraud
• Vector-Kite system the hope was that the kite
  system would enable the bank to pinpoint
  customers with the full intent to defraud the
  bank. However, the system shows that most
  customers of the bank are kiting suspects. This
  is because the system is limited in its ability
  to evaluate the float period.
• Vector-Signature system intent to decrease the
  time required to verify cheques and detect
  fraudulent activity. However, the goal was not
  achieved completely. Staff no longer required to
  flip through signature cards as signatures are
  now captured as images in the system, much time
  and effort have been saved. The system was not
  stable and the application shuts down frequently
  when making the transition from one signature
  image to another.
• Other projects were initiated, such as CIS,
  intranet applications and Y2K compliance.

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Into mergers and acquisitions

• In the mid-1970s, ANB expanded with branches
  overseas including Hongkong and Singapore.
• The banks Trust Department commanded worldwide
  attention and recognition, with its innovative
  investment strategy techniques, its pioneering
  concept of indexing and its practical use of
  modern investment portfolio theory.
• Critical to ANBs success has been the
  knowledgeable personalized service. Offering most
  services customers need when and where they need
  them.
• The bank allocates certain officers for
  customers. The officers deal with customers on
  an individual basis to meet specific needs.
• First Chicago Corpn, the 12th largest bank
  holding company in the US acquired ANB in 1984.
  ANB has been able to distinguish itself by
  focusing on its customers better than its
  competitors which include Bank of America.
  Smaller banks do not have the capital resources
  to penetrate the market as easily as larger banks
  which have capital resources to spend on
  technology.

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merger, acquisition and technology

• The acquisition by First Chicago gave ANB
  additional expertise to tap for technological
  solutions. New mainframe applications were
  adopted with information distribution across the
  bank through LAN.
• In 1996 after the merger of National Bank of
  Detroit, the new corporation (First Chicago NBD)
  studied the implementation of a customer
  information system (CIS) and a consolidated
  deposits application. They determined that a
  relationship-based CIS was critical to maximizing
  market penetration and customer profitability.
  Moreover, most of the existing deposit systems
  within the merged corporation were not Y2K
  compliance.
• Hogan DB2 CIS was selected for enterprise-wide
  use and Hogan Demand Deposit Accounting System
  for use in the Corporate and Institutional
  Banking Area and at ANB.

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merger, acquisition and
technology (contd.)

• Systems Application Products (SAP) were purchased
  for used in general ledger reconciliation
  processes.
• Windows-based standard were established to obtain
  the most benefit from its applications.
• The merger has resulted in increase of staff
  rather than decreases in the Information Systems
  Department due mainly to two reasons
• Working on program integration to facilitate
  lines of communications across the merged
  corporation
• To tackle the Y2K problem
• The sheer size of the systems has resulted in
  outsourcing not being embraced by either ANB or
  the parent corporation. However, in order to ease
  the manpower resources shortage, some projects
  were still outsourced.

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Performance after merger

• In a ranking of 37 Midwest banks in 1995, First
  Chicago ranks highest in revenues, deposits and
  assets. It also ranks very high in net income
  and net loans. However, it does not rank high in
  return on assets, profit margin and
  price-to-earnings ratio.
• First Chicagos high ranking in revenue, deposits
  and assets is due to the mergers, including ANB
  and National Bank of Detroit. The low ranking in
  return on assets and profit margin indicates that
  while the corporation has substantial assets at
  its disposal, it is not utilizing its resources
  to their fullest potential to generate income.
  Compare to other banks in the same region, the
  corporation is not profiting from its operations.

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Into the future

• Financial services industry is further limited
  when it comes to making investments in
  technology. Technology investments need to be
  supported by high margin products. However, for
  the most part, the products from financial
  institutions have low margin returns compared to
  other industries.
• Based on the changing nature of the banking
  industry, the driving force in the near future
  will be the convenience that a particular bank
  offers.
• Through acquisition and merger, integration of
  operations must focus on cutting costs and
  efficiently serving the customers in all core and
  noncore functions.
• Choosing the technologies that will allow the
  bank to cut costs is the way to go.
• Consider to outsource more of its information
  systems functions.

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www.bankone.com after mergers

• American National Bank
• First Chicago Corporation National Bank of
  Detroit
• First Chicago NBD Banc One
• Bank One

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resources reading materials

• Chapters 11, 12 and 13 of textbooks
• Michael Porter, Competitive Advantage
• www.bankone.com
• www.mas.gov.sg
• www.sdf.gov.sg