Citigroup's two-decade march of acquisitions has created a global banking network that is disjointed and fragmented, largely because of an antiquated system called COSMOS. An overhaul would modernize its banking empire and enable Citi to deal with rapidly changing customer, business and regulatory needs nter Jeff Berg.
Have this regional center in Dublin. Before this project, you would literally see sections of the center cordoned off with flags-France, Italy, Germany, etc.," says Jeff Berg, executive director of program management for Citigroup. The idea behind the center was an attempt to regionalize the more than 100 banks around the world that Citi had acquired during its long period of M&A activity. But when Berg took a glance at those efforts, most of what he really saw were people from different parts of the world sitting in different parts of an office, ID'd by the flags of their respective nations. "While you had them in one place, you didn't get the economies of scale from that," he says. "You had all of the Scandinavian countries together, for example. Here were similar countries, in cultures and in the way they think, yet they were fighting among themselves."
Berg, whose group handles technology projects that span different Citi businesses, is in the midst of a massive technology swap out that's aimed at bridging some of the largest gaps standing between dozens of banks in dozens of countries that make up the Citigroup empire. His objective is to replace the old, largely individualized legacy systems that grew out of the old COSMOS platforms installed at each bank with new cross-border, cross-institutional platforms allowing for efficient sharing of data, information and function at each bank and in each region of the world. At its completion, the project will enable the bank and customers to efficiently manage complex financial relationships that themselves are also increasingly without borders. "We want to develop a regional orientation to IT structure," Berg says. "We want to ensure databases were reconstructed so you could link them together."
The project, like most major IT initiatives at Citi, started in corporate banking and is now moving into the consumer banking arm of the business. The enormous project-integrating different technology systems within a far-flung banking group composed of many businesses-is one faced by large institutions, particularly those that followed a "growth by acquisition" strategy. Citi and banks like it are simultaneously grappling with a variety of issues that render legacy systems functionally obsolete: globalization, technological innovation, strict corporate governance, heightened security needs, increasing exposure to money laundering schemes and the influx of applications from the Internet and CRM revolution. If any of this is to play in a bank's favor, then hundreds of millions of dollars of technology developed with a different age in mind has to quickly catch up with the macro and micro business issues now driving strategy.
At Citi, the efforts begin with turning its banking units into something more closely resembling the United Nations. The ongoing project will move the global banker beyond its COSMOS (Consolidated Online Modulated Operating System), the technology platform Citi first implemented during the 1970s when it began to grow quickly as an international bank. COSMOS was designed to be efficiently deployed at a new bank, which could offer a standard suite of products such as foreign exchange, letters of credit, funds transfer and regulatory reporting. "We would go into a country, and we would lead with corporate banking," Berg says. "We'd hire local people, and we'd have it up and running as a self-contained bank."
That worked fine for many years, but as the number of banks owned by Citi grew and technological and economic needs expanded rapidly during the late 1990s, the parent bank wound up maintaining and managing many different technology platforms, each with its own set of nuances in terms of local regulations, currency, culture and economic conditions. "The one flaw is we gave away the source ach country had to take the source and modify it and adapt it," Berg says, adding Citi eventually wound up with 100 different technology platforms in its international banking division alone. That's since been pared through consolidation and integration, but Berg says there are more than 60 systems to manage. "You can imagine the overhead anytime you want to do something on a corporate scale."
The expense in maintaining COSMOS became immense. Citigroup, which sources say spends about $5 billion per year on IT across the entire franchise, spent $400 million on Y2K compliance alone for COSMOS, for example. Salomon Smith Barney, another Citi unit, spent $140 million upgrading all of its systems. "We decided to retire COSMOS," Berg says.
Berg began with a pilot in Finland and has been gradually retiring COSMOS one nation at a time in Europe, Latin America and in the Asia- Pacific region. The integration has included changes both simple and complex, including some as basic as the standardization of customer transaction codes. Other changes have included upgrading and integrating entire platforms of different banks. The key has been identifying the similarities in practices being handled differently by COSMOS systems in different nations and regions, similarities Berg says his group are just beginning to exploit.
Like many major institutions with a global technology overhaul on its hands, Citi is using an outside vendor, iFlex, to help with the conversions. R. Rabisankar, CEO of international operations for iFlex, says that as the variety of financial channels increases, the integration of the technology behind those channels has not kept up, leaving banks behind, and that's at the core of current integration efforts. "If you look at balances and all sorts of transactions, you are looking at the same information at ATMs, branches, phones, etc.," he says.
And the benefits can go far beyond saving on maintenance, easy product implementation and improving customer management for multinational corporate clients and high-net-worth consumer accounts. Berg says the project will also yield gains in the accuracy of corporate reporting and in business continuity-issues drawing a lot of attention these days. Having a global standard for data management enhances Citi's ability to rely on systems from around the world in case one center becomes inoperable. "We have a data center in New York and in Weehawken, NJ. That's generally in the same area. What we'd like to do is have Europe back up New York, or Poland back up Japan. We wouldn't have to have duplicate data centers; we could simply use centers from around the world."
Analysts familiar with the COSMOS replacement say it will cost Citi as much as $400 million before it's completed in 2005. Berg wouldn't disclose cost or project how much it is expected to save in long-term IT expense, though he says the project is "self-funding." He also says savings will come in a number of areas since business structure is also being reengineered along with the technology xisting processes, both in terms of technology and business practices, are in many cases being exchanged for something standard across an entire region. "Each country implementation is like a merger. We're not getting savings in just the technology, but by reducing support resources. We don't have 29 systems to maintain in a region, but one."
That's music to many bankers' ears. "Systems integration is the number one priority for banks this year," says Lee Kidder, director of wholesale banking research for TowerGroup. "Not just because integration is the objective, but because it's a critical prerequisite to get into a lot of other objectives that banks have on their plate." Citi's not the only big bank using systems integration to rein in a heap of acquisitions. Bank One is in the process of integrating nearly 15 years' worth of acquisitions, while others are adopting the practice of immediately integrating or overhauling core systems of their latest acquirees on the fly. "Some of these institutions are realizing that after you get about 15 systems, it gets cumbersome to maintain," Kidder says.
Effectively integrating systems means that it is possible to handle vast information storage and data-reporting requirements; this, in turn, enables institutions to deal with risk management, cyber terrorism and other acts of sabotage, compliance with the Patriot Act and Basel II and achieving ROI on technology that's already been purchased. Since most banks are still struggling with core systems that date to the 1970s and 1980s, a serious overhaul is needed in order to meet the demands of a changing world. "These new requirements will force banks to be able to aggregate and analyze it to a far more granular degree than they ever had to do before," Kidder says. "You can't do that unless you have well-integrated systems-unless you have a full, holistic view of all of your relationships."
Banks find themselves in this boat because most of the core processing technology developed during the past 30 years was based on automating the hand-written ledgers that preceded any electronic functions. Those ledgers were based on account records, not fully formed customer records. Richard Phillimore, chief marketing officer of Sanchez, a technology firm specializing in migrating legacy technology and batch processing systems to real-time IT infrastructures, says these electronic account records created an architecture that eventually evolved into separate records for separate lines of business, such as mortgages, lending and credit cards. In recent years, new technology was simply heaped onto older systems, creating a patchwork of disparate systems, applications and outcomes. "Even though banks have spent billions on technology, they haven't gone though the sort of infrastructure change that other industries, such as the manufacturing industry, have gone though," Phillimore says.
The technology infrastructure migration facing the banking industry is something that manufacturing passed through a decade ago, says Phillimore. "Banks are reactionary; they will only do things when something is really hurting," he says. "So banks spend a lot of time trying to squeeze cost out of an inefficient infrastructure. But they haven't yet taken this fundamental step to really achieve a change in cost efficiency structure." He suggests CRM was little more than an attempt to add new functions to an existing technology infrastructure rather than acknowledging the bigger issue. "The returns on investment in CRM just haven't been there. That's largely because CRM was just another silo. It was never fully integrated into the banks' infrastructures. Our view is it has to be part of every application. To achieve real CRM, you need real-time interaction. Batch processing doesn't give you CRM, because it's too late. You get a good picture, but it's too late to take action."
Jim Beams, research director for IDC, says for a typical "top ten" multinational institution, integrating core systems can save hundreds of millions of dollars in total cost of technology ownership, including line items such as human resources, maintenance and processing. And as a period of extreme merger activity slows, in part because of a reduction in banks available to be acquired, a new period of growth in the banking industry is emerging. And slicing costs by eliminating traditional sources of expense is one of the catalysts that will drive new growth. "You can't hide behind growth by merger and acquisition anymore; you need to be able to show organic growth. And you can reduce costs simply by upgrading the systems you have-integration enhances that even more."
The time is right for these projects, says Tower's Kidder. With Y2K and CRM projects out of the way, banks have little excuse but to confront the shortcomings of their IT architecture. "It's a matter of sooner or later, you're going to have to pay the piper," Kidder says. "Starting around the time banks were gearing up for Y2K, they had recognized the need to do this sort of integration, to take a look at their antiquated legacy systems, perhaps in part because of the Y2K issue itself ow they're realizing they can't put integration off for much longer. They have to bite the bullet and just do it."
