Outsourcing is in vogue all over the financial world, but at many institutions it remains just a talking point. Not so at DBS Group Holdings, the parent of Singapore’s largest bank, DBS Bank.
A year ago, after a ten-month search, DBS awarded IBM Corp. a S$1.2 billion ($684 million), ten-year contract to take over its back-office processing. Roughly half of DBS’s 1,000 information technology employees have transferred to IBM along with much of the bank’s computer infrastructure. “Fixed, depreciating assets have come off our books, and we have begun to provision IT on a variable, pay-as-you-go basis,” explains chief information officer Steve Ingram.
The results? DBS’s operating income climbed 4 percent in the first nine months of 2003, to S$1.79 billion, as expense reductions helped offset an 18 percent, or S$70 million, rise in loss provisions. Operating profit in the third quarter alone jumped 25 percent, to S$655 million. Third-quarter operating expenses, at S$458 million, were 11 percent below the S$516 million peak in the fourth quarter of 2001 -- just before top management turned Ingram loose on outsourcing.
Overall, the bank has shaved its cost-to-income ratio from 46 percent in September 2002 to 41.2 percent in the most recent quarter. That level of efficiency puts the S$160 billion-in-assets ($91 billion) DBS ahead of such well-regarded industry pacesetters as the U.K.'s Royal Bank of Scotland Group ($745 billion in assets, 43 percent cost-to-income ratio) and U.S. regional Fifth Third Bancorp ($89 billion, 44.8 percent).
Ingram, however, says it’s too soon to credit the IBM deal for all of the efficiency gains. “That improvement stems from a more disciplined approach to executing business strategies across the group,” he explains.
In other words, DBS has only begun to hack away at its costs. Because of the way the IBM deal is structured, the bulk of the benefits won’t kick in until later in the de-cade, Ingram says.
But cost efficiencies are only part of outsourcing’s payoff. Says Ingram, “There are also intangibles: improvements in ser-vice quality, a reduction in risk as we relocate data centers and access to IBM’s thought leadership.”
Ingram vows not to let an obsession with costs distract the bank from making necessary investments. “Activities having to do with identifying sources of technology and business value to the bank -- strategy, architecture, design and some types of engineering -- we need to be very good at,” he asserts. Trawling for new ideas, Ingram hobnobs with peers as a member of IBM’s e-business advisory board and of the Working Council for CIOs, a global research group serving technology executives. He also scouts out emerging technologies as an adviser to San Franciscobased venture capital firm FTVentures.
“Steve is not Asia-centric in his thinking, and there are no half-measures or desperation in his tech strategy,” says FTVentures co-founder Robert Huret. “DBS is being very aggressive in deciding where it can drive down costs and how it wants to control its technology.”
A native of the small U.K. town of Fareham, Ingram, 53, holds an advanced degree in computing from Monash University in Australia. He spent 15 years as an Ernst & Young IT consultant in Australia and the U.S. before becoming CIO of Dallas-based Excel Telecommunications in 1998. He joined DBS in July 2000.
Ingram discussed DBS’s approach to outsourcing in a recent interview with Institutional Investor Assistant Managing Editor Jeffrey Kutler.
Institutional Investor: How has your job evolved?
Ingram: Initially, I acted as a kind of bridge between the business and technology sides of the bank. There was a sense that while DBS had a deserved reputation for technical excellence, the relationship with the businesses wasn’t as close or responsive as it could have been. On April 1, 2001, I was made CIO, and since September [2003] I’ve been running the technology and operations group, which includes processing, real estate and administrative functions.
How did the outsourcing decision come about?
It was grounded in the strategies we set for IT when I took over as CIO. The process starts with an understanding of business strategy and making sure IT aligns with that strategy. One of our objectives was to focus on the things we had to be really, really good at to bring a distinctive advantage to the bank. Those include the front-end matters of defining strategy and overall architecture, which we keep in-house.
Although we were quite good at such things as managing and enhancing technology solutions and maintaining the technical infrastructure on which they run, these required a great deal of management attention and capital investment. Over time, someone else could perform these functions better than we, at a lower unit cost.
Did nontechnology managers buy into the outsourcing decision?
Although the idea originated within IT, the decision was shared by the management committee, and there was no change of direction when there was a change in CEO. [Former COO Jackson Tai succeeded Philippe Paillart in May 2002.] I am a member of the management committee, which tells you that technology has a voice at the most senior level of the bank. The management committee has oversight of major technology investments. One level down we have a project council that approves, manages and monitors the technology investments. I chair that council, which has representation from every business unit.
What does IBM do for you now?
Day-to-day operations of our infrastructure -- everything from laptop and desktop computers to the local area networks, servers, mainframes, data centers and the wide area network.
Is IBM rationalizing or consolidating the infrastructure?
It will. The plan for the first six months, through June, was essentially to do nothing. That was a transition period, which was followed by a transformation phase, consolidating our remote Hong Kong and Singapore operations. One of the benefits of this relationship is that we get to relocate to a centralized server farm, and with IBM doing the work, we think the risk is low. These are people who consolidate data centers for a living.
Did DBS go about outsourcing in unique or different ways, compared with what you’ve seen elsewhere?
We’re pretty shameless about adopting what we consider best practices. But we made sure to do things our way. We led the process ourselves; this project was too critical to our future to be delegated to a consulting firm. We also provided very detailed operational specifications in our request for proposals, so we didn’t get bogged down in months and months of contract negotiations. And we took pains to keep our IT people informed throughout the process, so when we announced the vendor decision, there was no disquiet. We offered 500 people jobs with IBM, and 499 accepted.
Did the tech bubble change your outlook on technology investing?
In 2000'01 we introduced discipline, oversight and scrutiny. But we never stopped investing. This isn’t like a tap that you turn on and off. We believe in paced and sustained investments. Within our relationship with IBM, we can continue to make those investments, but we can pace them to be in line with the revenue growth of the bank. This business is like a train. Sometimes it goes faster than other times, and my guys’ job is to be out in front of the train laying track so it doesn’t have to stop. The trick is to recognize the need for investments to be very business-driven; we’re not fad surfers.
What nonfaddish innovations do you find exciting?
There’s a lot of talk about open-source software and wireless technology, and we pay attention to those. But I’m more interested in IBM’s notion of e-business on demand -- the idea of pay-as-you go, utility computing -- and the evolution of software from suites to component-based applications. We’re talking about the ability to bring the development cycle down from months to days and create solutions essentially overnight -- a tremendous advance in speed and flexibility.
