UK: WHY BARCLAYS CHOSE TO GO FOR DIY. - Run as a commercial organisation, Barclays Computer Operations gives the bank access to the leading edge in computing and a place at the heart of the brave new world of financial services.

by Jane Bird.
Last Updated: 31 Aug 2010

Run as a commercial organisation, Barclays Computer Operations gives the bank access to the leading edge in computing and a place at the heart of the brave new world of financial services.

Two years ago, when most large-scale computer users were looking for ways to cut their computing costs by subcontracting, Joseph De Feo, chief executive of IT at Barclays, made a radical decision. Instead of handing IT over to outsiders, he would create his own organisation in-house - Barclays Computer Operations (BCO) - to be run as a commercial enterprise in its own right.

The theory was that if BCO could compete on the open market for computer services, internal users would also benefit. The new organisation would provide a full spectrum of services - hardware and software resources, data processing, printing and advice regarding system design. However, Barclays' IT users would not be obliged to go to BCO - they were free to buy services on the open market if they felt they could get a better deal. 'In addition to being a source of revenue, this was the best possible way of ensuring that Barclays' computer users had access to the leading edge in computer services,' says De Feo.

His gamble seems to be paying off. Research by Compass, an IT benchmarking company, puts BCO ahead of most leading IT service suppliers in Europe in productivity and performance. Moreover, BCO's overall data centre cost efficiency improved 23% during 1992.

Getting the best out of technology is crucially important for Barclays as it strives to cope with the revolution in financial services. A 300-year history, pre-tax profits of £335 million for the first six months of 1993, and a presence in 70 countries, are no guarantee of success in the future, says De Feo. The killer weapon of the 1990s is IT. Hence Barclays' annual budget of between £800 million and £1 billion for computers and telecoms worldwide. This compares with a total expenditure of around £3 billion on IT by financial services companies in the UK, according to ICL. After British Telecom, Barclays is the UK's largest investor in IT.

IT in banking has come full circle, reckons 46-year-old De Feo who has been in the industry for 23 years. In the 1960s automated cheque-handling systems transformed the business. During the '70s and '80s, however, technology began to get the upper hand. IT departments took on a life of their own and became disconnected from the original aims of the businesses they were supposed to serve. 'Inevitably, that led to a great deal of tension between the IT community and the business community in institutions such as Barclays, and we attracted quite a lot of negative publicity.' Now technology is becoming the driving force once again, creating a myriad of new business opportunities. For example, telebanking and dial-up services have been deployed by a host of new competitors targeting the market for flexible and convenient banking without the need to visit branches. Technologies such as video and multi-media will enhance these services during the next few years. The new electronic delivery channels are extremely unlikely to be controlled by the banks, says De Feo. The infrastructure will be too expensive to justify the investment by a single institution, and in any case customers will want to use the same means of access for all services including home shopping, dial-up news, electronic mail, theatre reservations, travel bookings and home entertainment. Banking, although important, will become a niche product. 'We're being entirely disenfranchised from our clients,' says De Feo.

Hole-in-the-wall automated teller machines (ATMs) for cash, which were pioneered by Barclays in the UK, will also come under attack. 'Once programmable plastic cards become widely available, what's to stop BT putting card readers in its public payphones?' If you ran out of cash on the high street you would only need to go to the nearest payphone to download more funds. 'Our ATM franchise would then be almost worthless.' De Feo, an outspoken American, was brought in to Barclays in 1989 by Andrew Buxton, then managing director, who recognised the need for an IT expert who could think at the strategic level. At that time, IT was mainly dealt with by the Central Information Systems Department (CISD). 'It was like a curse word in the organisation. In people's minds it meant unresponsive, impossible, incapable, dumb, and remote from anything that was going on in the business.' But unlike other organisations faced with out-of-touch IT departments, he could not just axe the entire IT operation, it was too central to the bank's business.

So he drew up a detailed plan aimed at evaluating the role of IT against Barclays' business requirements and setting the agenda to maximise the opportunities for the future. The plan, dubbed 'Culture Change', examined the structure of IT within the group, the skills base, and the work practices in areas such as the development and testing of systems. The exercise also encompassed communications issues such as how well IT staff understood and communicated their mission and objectives throughout the group.

As a result, the centralised structure was abandoned in favour of 26 individual IT departments catering for separate business lines. Each has its own director with the freedom to select technologies and business solutions to suit the requirements of that specific business. All IT directors use the services of BCO although some have also used outside suppliers for specific applications.The IT directors meet regularly to ensure that they are all moving in the same direction. Overall, computing strategy continues to be set by an IT board, chaired by De Feo, which reports to the group board.

The Culture Change programme also identified a disturbing ignorance of IT among many managers. De Feo is adamant that all managers must become fluent in the business issues of technology. That is not to say that everyone has to be able to write programs, operate computers, or wire up local area networks. But he believes, 'A person cannot call himself a business man in this industry if he doesn't understand anything about technology. That's like someone in the automobile industry saying they don't know anything at all about the manufacturing of automobiles. It's unimaginable; it's absurd.' The hallmark of De Feo's own career is the marriage of business and technology. After serving in Air Rescue in Vietnam, his first job was in computer operations for a US retail chain. He progressed through systems programming and development in various US commercial and investment banking groups, picking up academic qualifications in business, finance and economics from Harvard Business School and Cambridge University. Prior to joining Barclays, he was director of systems and operations at Morgan Grenfell in the UK.

But making business managers become more aware of technology was not enough to secure the future for Barclays, De Feo reckoned. Hence his decision to set up BCO and a sister company, Barclays Network Services (BNS), targeted at the fast-growing business for computer communications. BNS exploits the fact that the bank has one of the world's largest networks - there are 80,000 workstations on-line in the UK alone. Running the network has given its staff highly saleable expertise.

He chose to introduce entrepreneurship in this way because he views business enterprise as alien to the way UK bankers think. They are too focused on lending.'For these lending guys, it's hard enough to realise that they need to manage technology. Saying you want them to create strategies to protect the group from being disenfranchised by new competitors such as the TCI/Bell Atlantic merger, is like telling them to sit in Houston and prepare for the next shuttle launch.' Even now, the strategic reasons for the formation of BCO and BNS are not well understood in the group, he says. 'I think if you asked half a dozen people you'd find that five out of the six would say BCO and BNS are the computer and network services companies. Their impression of how good or bad they are would be determined by the most recent contact they'd had with either organisation.' The real role for BCO and BNS will unfold gradually during the next couple of years, he says. He regards them as his greatest legacy. 'We may fail, but at least we've given the group the opportunity to play in the game. Unlike almost every other player in the financial services market, we are in the middle of the development of technology and applications that are going to be part of the brave new world of financial services - multimedia, smart phones, networking and systems management.' nother key strategy to arise from the Culture Change programme is the forging of business partnerships and joint ventures. The diversity of skills and technology now needed makes it prohibitively expensive for one organisation to do everything, says De Feo. Barclays has joined forces with IBM to create a printing services business, Edotech. It is also working with the Webster Group, a global claims handling agency, on an insurance product for importers and exporters. Joint ventures still in the incubator include collaborative projects with Digital, Hewlett-Packard and Olivetti.

Another result of the IT review was to focus purchasing strategy on open systems (systems designed to allow computers from different manufacturers to speak to each other) partly to keep costs down. 'If we adopted any proprietary technology we would always be the captive of a single supplier.' Open systems ensure competition among suppliers thereby reducing prices. They also make it easier to re-use technology throughout the group without having to convert programs or teach users new techniques. Moreover, open systems offer the facility to take an application developed for a small desktop system and give it to 1,000 users. 'Since we cannot define the products or markets of the future, the idea is to keep the bank's options open and avoid having to build spaghetti-like junctions to interconnect systems in future,'says De Feo.

When De Feo joined Barclays, nobody had any idea how much was being spent on computers and telecoms. His audit uncovered the figure of up to £1 billion, and the fact that it was growing at around 25-28% a year. Expenditure was quite high enough, he decided, so he capped it. Since then a steady stream of improvements in productivity has prevented a reduction in services.

ith such a high level of investment, De Feo was keen to ensure that all deals were toughly negotiated. Previously purchasing had grown organically as the need arose. De Feo brought in Toby Broome from Rolls Royce to lead a procurement team focused on volume sales for the UK and, where possible, worldwide. A minimum of three vendors are approached for each contract, and those who do not succeed are fully debriefed on the reasons for their rejection, leaving the door open for future deals. The purchasing team reports back to the board every six months on its contribution to Barclays' bottom line. Among the many suppliers it negotiates with are IBM, ICL, Digital Equipment, Tandem, Hewlett-Packard and British Telecom. Portables come from Toshiba, and database products from Ingres. But although the aim is to get the best possible prices, deals that look cheap can be deceptive, De Feo says. The cost of buying an apparently cheap IBM mainframe clone turned out, after close investigation, to be very close to Big Blue's own price.

What De Feo really wants is long-term relationships with suppliers that are prepared to add value to their products by tailoring them to Barclays' needs. This type of customer focus is one area where the IT industry has fallen behind, he says. 'Like most people in my kind of job, I've had a love/hate relationship with IBM over the years, and I can remember back in the late 1970s when it used to have some of the best people around in the banking and financial securities industry who used to develop products, programs and service packages which were very much focused on that customer segment.' Then IBM went through a phase when it had so much competitive advantage that it felt all it had to do was just push the product out the door, he says. This approach no longer works in the current climate where products have become low-margin, widely-available commodities. 'Everyone knows how much they should have to pay for a given amount of number-crunching power, and computer suppliers can no longer differentiate themselves with features such as reliablity - everyone expects their computers to work.' Now the emphasis is back on adding value.

In many ways, the upheaval in the IT industry mirrors that of financial services, says De Feo. 'Financial services used to constitute a quasi oligarchy in the UK - you could only go to one of the four banks.' That situation has now disappeared. Like the IT industry, the banking sector is exposed. People no longer value the fact that a bank can supply a current account or an instalment loan, he says. They can get that from almost anywhere. Now the challenge is to convince customers that the bank has something special to offer. 'We need to persuade them that we're concerned about their needs and about making life more convenient for them; that we want to protect their future and give them the best possible deal on their mortgage.' And, De Feo reckons, IT is the technology that can make the promises come true.

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