SCFB Transformation Story… from IMF to recent financial crisis for SNU students

1. SCFB Transformation Story… from IMF to recent financial crisis for SNU students May 15, 2009

2. “Banks are Dinosaurs.” - Attributed to Bill Gates, c. 1995

3. Outline • Introduction • New Bridge Era • Challenges after IMF • New Business environment • Systems Architecture • Other external factors • Acquisition in 2005 • What’s after this now? • Summary

4. IMF crisis – story of transformation

5. The IMF crisis has Created a Trigger Point in the Demands Placed Upon IT • The focus of the IT has been on supporting the Business needs as best as it can with resources available at the time – No Bank executives position in IT function • The focus of the Business Leaders has varied from frustration with ‘IT responsiveness’ to demands for restructuring of the bank World Class Banking Practice IMF Crisis Expected Performance Some PCs Applications Departmental Computers Mainframes Was IT caused crisis? 1980 s & 90s 1998 2000 -->

6. Korean Banks Regulation Competition Korean Bank Example New Playing Fields: Very competitive market space in Korean Banking industry was pressing all banks to DO something immediately! - Survival mode!!! Changing Architectures Old Systems Share Holders Expectation

7. After IMF crisis hit the Korea, all the Korean banks shifted its focus from Corporate Banking to Retail Banking and others to minimize the risks – why? Retail Banking Corporate Banking Corporate Banking Others Mortgage? Credit Card? Major management strategy changes Everyone in the banking industry were impacted by the changes Time to market is the most critical success factor Risk management capability became the topic of the bankers IT became major impedance to the changes required Fee Income? Layoff? NGBS? In order to survive from the fierce competition, we had to react quickly to turn around an aircraft carrier with the antiquated IT infrastructure

8. New Trends in Banking industry after IMF: Banks/IT Reflect Specialized Business Based Herds of Dinosaurs 2004 2003 2005 2002 2000 M&A Phase 2 Bankasurance M&A Phase 1 Retail Banking IMF ???

9. In general, Korean Banking Industry was Doing Just Fine, thanks to Korean consumers • Dino made lots of money in 2001, 2002 and 2004 but not in 2003 due to credit card crisis • Spread remains relatively stable but it’s shrinking out of competition • Retail banking was a battle field for all the dino • Household loan including mortgage loan business is growing • Credit cards business was becoming a nightmare in 2003 • Also, Corporate business was shrinking but will be growing... • Business Volume (market share) over Profitability until 2005… • Fee business will be the target for every banks

10. Soul Searching…What’s wrong with us( I mean, IT professional in banks)?

11. IT Business Structure Assessment As a part of soul searching process, both the business and technical infrastructures should be assessed Strategy Customer Satisfaction Organization KFB IT Cost IT Management Practices Technical Infrastructure Assessment Application and Data Data Center &SystemSoftware End User Computing & Office Auto. Anybody heard Client/Server? Network Client Server

12. Business process Issue – Too many Manual Process

13. Working environment: Traditionally, Business and IT are spending more time fighting over priorities than solving the business issues of the bank. Business and IT must complement each other to support common goals; management business strategy

14. Conflicts between IT and business – first on the Clash Over Product Delivery Business Large, mainframe applications has been changed over the years so it is so difficult to support new initiatives and IT staffs are not trained in new technologies Development efforts are far too slow, too costly, unresponsive, fail to keep pace with ‘user-friendly’ third party packages We don’t look at our competitors!!! IT Focus : Support with Legacy

15. Legacy systems issue - Old Korean Bank’s Systems diagram

16. Why do we have this problem? Evolutionary process of Bank’s IT systems Branch Teller Depart- mental MIS Systems CAP Legacy Core Banking Systems

17. To add new channels - legacy systems has become very complicated to support fast-to-market requirements - ex. complicated interfaces Customer: Access to products, services and integrated retail delivery Technology: Expensive, Channel specific Duplicated efforts Long time to market Internet Branch Telephone 365Corner Sales Kiosk Call Ctr. Agent ATM Device Tellor Server Server Server Call Mgm’t Remote Banking ATM Processor IVR Complex Interfacing Depart- mental MIS Systems CAP Legacy Core Banking Systems

18. New channel strategy including internet banking is a new trend in Korea -- more complexity is added to its already complicated interfaces Branch Telephone Internet 365 corner Mobile Banking? TV Banking? Remote Banking Sales Kiosk Call Ctr. Agent ATM Device Branch Server Server Server Server Call Mgm’t Remote Banking ATM Processor IVR Depart- mental MIS Systems CAP Legacy Core Banking Systems

19. New IT Strategy - Switching from the current point to point connection to the connection through EAI will simplify the application integration job, in return we will have a fast to market capability Old Integration Method EAI Integration Method “With EAI strategy in place, what applications do we need to replace/develop?”

20. EAI integrates its diverse delivery channels with back-office systems and data center function. Therefore Korean Bank can provide better customer service and leverage customers relationships across all service offerings which is crucial for the retail banking operation MIS Revamp Replace Core Banking Backend Server OLTP Cleanup Phase 3 Phase 1 Middleware ＣＲＭ Data Warehouse EAI Delivery Channel Phase 2 SellStation Unified Delivery Channel Infrastructure The next question is “How does it look?”

21. EAI Architecture

22. Legacy Architecture Transformation – More Flexibility Before After SellStation workstaion Customer Facing Channels Host Applications Middle Tier EAI Other Applications Host Applications Backend Servers Branch Terminal

23. BranchSystem Architecture – Before and After Accounting MIS DW/CRM CRMS FBT FBT BP(NTC) e*Gate Transaction oriented Branch System Internet Banking SS Server(WEB) Call Center LPC Before MTS/MSSPC Sales oriented Branch System After

24. TCP/IP SNA SNA ODBC SNA TCP/IP ODBC SNA HTTP HTTP ODBC LU0 ODBC RPC LU6.2 LU0, ITOC LU6..2 MUX MUX MUX MUX MUX TCP/IP R/R TCP/IP R/R TCP/IP R/R TCP/IP R/R TCP/IP R/R Systems architecture External Links • BC CARD • 은행연합회 (Korean Bank) • NICE TANDEM • 한국감정원(KAB) • 중앙감정원 • NARA OLTP MIS EXPERIAN CRMS IB (KAB) DW ALLTEL ALLTEL (Holiday) e*Gate (LPC, CallCenter, DW/CRM) Branch CSC SellStation Web Server CRM Web Server LPC Web Server CallCenter Web Server SMS Server (2002.12) Client Client Client Client

25. Korean Bank Example You must know how to build new Architecture Vision - Newly developed Korean Bank’s IT architecture will allow more consistent and leveraged approach for new technology adoption resulting in cost saving from the leverage Customer Centric Bank Operation “Most Profitable Bank in Korea” Credit Scoring System New Delivery Channel Core Banking Credit Cards Internet Banking Call Center Financial Reporting System HR System CRM Business Architecture New Delivery Channel Call Center CRM Information Architecture Application Architecture Infrastructure Architecture Legacy Transformation Middleware - EAI Newly structured OLTP/MIS Infrastructure Refresh Consistent Office Environment Existing Brick & Mortar Operation

26. Human Resource Issue

27. Total of 251 staff(First Data 80 included) Korean Bank Example In 2000, about 60% of staffs were assigned to application development team, but more than 60% of application development resources were working on maintenance and fixing bugs from previous works Focus of IT Resources Focus of IT Resources(2) Administration Application Development & Maintenance 7% Systems Management Development Application Maintenance 28% 40% 60% 60% 5% New Systems • Reasons for excessive maintenance work • IT projects are not managed properly. Specially no QA(Quality Assurance) process are being used. • Usually an IT project is driven by dates • New business directions to pursue retail banking required many changes in the existing products and new products • Project plan does not cover every deliverables which must be a part of the rollout(People’s mindset) Note: (1) IT organization as of 30 June 2000

28. Korean Bank Example Then, more than 59% of IT are classified as a manager(above Guajang) and only 41% of IT are working level staffs. Therefore, another 31% of resources to fill the gap is provided by First Data Systems “Too many chiefs, Not enough Indians” Too much dependency on First Data Systems resources - Major threat to Korean Bank employees

29. What about the skill set? The study shows the Korean Bank needs skill sets mixed of new technologies and current technologies(interestingly 60%) to support its transformation strategy With all these issues, what are the solutions to the problems?

30. We must transform IT resources from maintenance to more strategic development - Korean Bank must utilize its resources more efficiently old’s Allocation Vision for Future Allocation Recruiting Development Development Training Maintenance Maintenance Outsourcing New Technology Legacy New Technology Legacy

31. With all these impedance IT department has, Korean Bank’s business transformation is outpacing IT’s ability to provide timely support Overall Business Performance Desired Position Bank’s Vision Execution Gap Bridge Value creating IT organization Systems Plan Current Capabilities Fragmented Legacy Financial Systems Newly developed Application Portfolio Information Systems Capabilities “How are we currently planning to do to fill the execution gap?”

32. In summary, the KFB needs to resolve its HR issues immediately • Recommended solutions to KFB/IT • Prioritize IT projects rigorously to utilize KFB/IT resources the most efficient way – based on the business values • Rotate middle level staffs or transfer them to different to business units • Consolidate similar functional teams – e.g. server management • Packaged applications need to be considered over in-house development • Conduct 3-5 years of resources planning • Separate production support from development group • Separate business skills (BA, PM) from IT skills (TA, TEG,etc) • Create pool of resources for the applications development • Adopt IT career development program for IT staffs and continue IT training to support individuals career goals • Aggressively outsource non-value IT services areas • Utilize First Data Systems resources as an interim solution • Provide training to IT staffs and adopt performance based compensation systems Problems in utilizing ISD resources • Too many chiefs, not enough indians • Over 40 years old staffs with legacy skills only – 50% of total staffs • Mentality of “Everything must be done in-house” • No incentive for the good performance • Shortage of skills needed in the strategic areas – “Loan” KFB will be able to shift its resources to the more value-added services from legacy systems works

33. KFB Story KFB IT Transformation IT Supports Business Strategy IT Creates New Capabilities and Roles Value Creating • Rapid development of new initiatives • Best-in-class products and services • Synchronized IT and Business strategy • Execution of Project Portfolio • Effective IT resource leverage • Future Products • New Customer Interfaces Proactive • IT Strategy Planning Roadmap (“ISP Roadmap”) • Project Portfolio Creation(SS, CMM, PMO, Middleware, Call Centre/CRM, ATMs, Loan Servicing and Document Imaging) • Infrastructure Containment Reactive Business Value Aligning Business Strategy with Technology • KFB’s IT inability to absorb change quickly • IT skill set remains legacy focused • Fragmented disparate systems increase cost of operations • KFB business units bridge gap w/ additional staff • Additional capital will be necessary to refresh IT

34. Korean Bank Example 2000 Korean Bank Applications Portfolio - Most of the Korean Bank applications were low in quality of business functionality and technical functionality 100 A Meeting functional requirements - costly to maintain technically - can be improved B Poor technical and functional quality - candidates for replacement C Meeting technical quality - functional quality improvements needed D Excellent functional and technical quality - efficient - easy to maintain - target for high importance systems A D 75 B Internet Banking Functional Quality 50 C Core Banking MIS TeleBanking ATM 25 25 50 75 100 Technical Quality

35. Korean Bank Example New Korean Bank Applications Portfolio - Most of the newly developed applications have high quality in business and technical functionality CRMS. SellStation CRM Internet Banking. 100 A Meeting functional requirements - costly to maintain technically - can be improved B Poor technical and functional quality - candidates for replacement C Meeting technical quality - functional quality improvements needed D Excellent functional and technical quality - efficient - easy to maintain - target for high importance systems D A 75 Functional Quality 50 B C 25 Data Mining 25 50 75 100 Legacy Systems Technical Quality

36. A Solution that Korea First bank chose:

37. Korean First Bank IT established processes to discuss all the IT projects related issue with every pertinent parties including CEO Korean Bank Example Korean First Bank realized the importance of the relationship between business and IT • Better manage the relationship between IT and business • Bank wide PMO (Project Management Office) to manage all the IT related projects in the bank. • Every executives including CEO’s participation in monthly major IT projects status update meeting • BA and PM teams are created to be professional BA and PMs. • CMM level 3 was achieved in October 2004.

38. KFB Story KFB IT Transformation Journey started in 2000 – first things first • Delivery Channels Enhancement - Internet Banking, ATMs, Call Center, Tele Marketing, etc • Products Diversification – Mortgage, Credit Cards, Templeton Product, Revolving Loan, etc • Process Improvement – Centralized Loan Processing Center, Collection, Customer Service Center, HRMS, Branch Reconfiguration Project, New Audit Policy • US Standard Accounting Practice – MRS, ABS, ALM • Risk Management Introduction – CRMS, Models Based Consumers Risk Management All of these must be done quickly while the operation of the bank continues

39. Korean Bank Example Recommended Road Map for IT Organization Transformation Phase 3: World Class IT • Reduce Non Value added work • Focus on Strategic Value added activities • Industry Agenda setting IT operations • Achieve CMM Level 5 Phase 2: Develop Capability • Process Oriented Organization • Adopt SEI/CMM as a model • Develop/Hire/Alliance newly required skills • Enterprise wide Technological Directions • Performance based Organization Phase 1: Stop the bleeding • Current IT Inventory Analysis • Establish PMO Office • Assign Business Relationship Manager(COO/CFO/CCO/CBO) • Organizational Change • Agree on the priority of Business Initiatives Strategic IT capabilities Second to None Korean Bank 2000 Build new capabilities portfolio Implement the fundamentals required to run IT organization Korean Bank/IT needs to transform itself to be more flexible and nimble organization to support its aggressive business strategy. The next question is “How fast can we do it?”

40. Acquisition in 2005 – story of integration

41. Why acquisition? Mergers Free Up IT Spending. Is it real? 20 130 $ millions Reinvest in new IT 500 Conversion costs Oversea branches Buyer pressure on suppliers Best of breed common apps. Group data centers/networks solutions SCB KFB Yes, Expected cost saving of banks merger is happening at SCFB

42. The Vision (Blueprint) Infrastructure I CBE Construction Projects Core Business Applications Wholesale II DLP Grow Expansion GROW Platinum Wholesale - DLP ? Planning Sequel Platinum GROW DLP, Wholesale II DLP GROW Platinum Wholesale II AS/400 (Cobol, Microfocus, Synon) UNIX/Databus Datapoint Under Construction Wholesale Rewrite AS/400 (Cobol Microfocus, Synon) FoxPro - UNIX/Databus Datapoint Whole Sale Foundation Today AS/400 (Cobol Microfocus, Cobol II, Synon) FoxPro - Clipper - UNIX/Databus - Datapoint Strategic IT Plans GMAC-I Systems 1994-1997 EDS World Class Strategic Consistent Core Business Applications You must know how to create a common vision acceptable by SCB & KFB The Future

43. Point of Departure – Quick turnaround of KFB to support SCB’s business goals • KFB has completed most of business process restructuring initiatives such as, centralization of underwriting /collection process, adoption of new CRM process, establishment of Decision Science capability • KFB staffs has been through a largest transformation in its history from the old way of doing banking to new way of banking business. This includes centralization of underwriting processes, separation of sales roles from the teller functions and centralization of all the required document storage functions, etc • KFB staffs also felt that tight risk management and some bank policies was leading them to lose many business opportunities and theiroutcry for changes was ignored by management team • Merger with SCB is a big challenge to KFB mentally since it has been a predominantly domestic bank for 75 years of history. Now it continues to do business in Korea and also to be a part of SCB member bank • SCB management team is expecting to grow KFB business in Wholesale banking, Consumer Banking and Global market area where fiercest competition between korean banks exist today • SCB wants to offer products linking to its global network • SCB wants to distribute all advanced solutions KFB currently using to other SCB operating countries where it makes sense • In the mean time, KFB has to adopt SCB’s global policy and practices

44. Point of Departure – Quick turnaround of KFB/IT to support SCB’s business goals • KFB/IT has completed the largest transformation initiatives in its history. During last 5 years, it revamped its infrastructure completely to support newly defined business strategy • For that, KFB/IT has been utilizing EAI (Enterprise Application Integrator) technology to develop new products and services fast to the market and this will shorten SCB’s products introduction time significantly. • KFB/IT strategy has been a bench mark target amongst Korean banks since it brought very cost efficient IT solutions to KFB • There seems some expectation gap exist between SCB and KFB on BCP. KFB’s BCP was firstly built amongst korean banks and it satisfied every requirements of korean regulators but it fell short to meet SCB’s BCP requirements. • SCB wants to transfer KFB’s advanced technology solutions like mobile banking, internet banking, TV banking, IC Chip operation, etc to other countries where it makes sense. • SCB currently operates several core banking systems, running on a variety of technology platforms and it has a road map to rollout a common core banking architecture. But is it right timing for KFB? • SCB’s 4 tier architecture model: Channel Delivery for Multi channel distribution, Sales and Services for Market place differentiation, Transaction Processing for Operational quality and Enterprise Processing for Management excellence Prioritization of requested projects and PM capability will be critical success factors!!!

45. Why is it so difficult? – Understanding the unique history of korean banking industry will be helpful before we jump to a conclusion. • Korean banking industry is at least 10 years behind western banks in terms of IT management. Examples: Outsourcing, enterprise architecture planning, and adoption of new technologies were not actively pursued in Korea. Why? • Korean banking industry adopted the Japanese IT management style where core banking systems must provide all services to run a bank, whereas, Western banks choose the best package solution to support the bank strategy that brings the highest revenue for the bank. Centralized systems services vs. distributed systems services • As a result of this Japanese management style, the IT department assumes that everything must be done and managed in-house, cutting themselves off in a closed environment to the outside world. The labor union often resorts to using IT as a deal breaker whenever there is a big dispute with management • Therefore, IT became a black box and headache to the CEOs of Korean banks, frustrated with the lack of results from huge investment on new systems development each year • SCFB led the industry with the first transformation (IT infrastructure refresh) of IT and it is ready to tackle the second transformation of IT with HR issues, cost containment, etc. SCFB must know the cost structure of running IT operation better and create a plan to improve its high cost and low efficiency cost structure

46. Point of Departure – SCB should know about KFB’s culture • IMF syndrome – Video Tape of Tear • KFB pride – 75 years of history • NB mistakes • ignore local culture - account maintenance fee, lack of understanding on korean customers banking need • lack of trust issue: advertisement (foreign company), no advertisement link to PR • lack of KFB’s staffs participation in the planning stage (Pro-Branch project) • promote people who speak English, no simultaneous English translator was provided at first • poor government relationship, no executives’ direct contact to korean news media, no HR changes • Unique korean characters: They want to know everything in detail. Thirst for vision and goals • Strong Execution Capability – ex. Mortgage Loan Growth- shinbaram fever like world cup fever • Hiddink Leadership – vision, tough training, selection of talented players, ignore local influence, 100% ready preparation, shinbaram • If you convince your vision, the team will make it happen! • Skin ship works: Critical component to lead korean company – Pocktanjoo is a must! • Union strategy: skinship works • Hindrance (or opportunities) – HR, union, generalist, Local vs foreigner mentality • Unfamiliar with Matrix organization structure • Very strict hierarchy and many layers – more managers than workers

47. First question - After KFB shifted its focus from Corporate Banking to Retail Banking and others to minimize the risks, SCB wants to grow its business by adding product capability and distribution models Personal Loans Credit Cards Cross Selling Retail Banking Retail Banking Corporate Banking Corporate Banking Global Markets Others New management strategy – grow business and profit SCB’s global network will be a huge selling point “Can-Do” attitude is a must for everyone. Time to market is the most critical success factor Integration will be a challenge for SCB due to size Stable operation is critical IT will become an enabler to the changes required Trade, Cash and Global market products In order to differentiate from the our competition, we have to shift gear fast

48. Second question - Industry deconstruction is creating an environment in which banks have specialized in roles across the value chain Paths of Progression Enterprise Optimized Adaptive Business Model Enterprisewide Reconstruction Enterprise reconstruction is breaking down siloed processes into core components that can be more easily shared across the bank Process Optimized Preliminary Deconstruction Industry Networks Industry deconstruction is the specialization of enterprises in assuming particular roles of the value chain Industry Deconstruction

49. Recap of what’s happening in industry - Deconstruction of Industries and the Enterprise What are the Attributes of The New Environment? • Widespread vertical integration • Partial deconstruction with hardwired links between firms • Seamless and dynamic links between enterprises • Best of breed components used across enterprises Enterprise Optimized • Components shared extensively across business lines within enterprise Process Optimized Enterprise Deconstruction • Each business line owns and operates specialized processes using proprietary technology Business Unit Optimized Vertically Integrated Preliminary Deconstruction Industry Networks Industry Deconstruction

50. Third question - Industry trends – gradual channel transformation to e-channels • Internet banking shares keep growing. • Internet Banking portion is keeping higher than ATM’s after 4Q ’03. • 2004 automation rate plan (80%) was accomplished on June ’04. (Unit: Transaction, %) Channel migration is for cost saving