Does It Payoff Strategies of Two Banking Giants

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HKU753

ALI FARHOOMAND

DOES IT PAYOFF? STRATEGIES OF TWO BANKING GIANTS
You can see the computer age everywhere but in productivity statistics. - Robert Solow (1987)

In the previous 20 years, there had been a debate concerning whether or not IT paid off in the long run. While some questioned the positive contribution of IT to productivity, others attributed the so-called IT paradox to measurement methodology and to the lack of measurable data, such as increased quality, variety, customer service, speed and responsiveness. To make matters worse, a controversial article published in Harvard Business Review argued that, as IT was being commoditized, the opportunities of gaining IT-based competitive advantages were rapidly disappearing (Carr, 2003). If this was true, then companies should spend less, wait longer to invest in more matured technologies and should be more careful about the costs of IT investments. Financial services firms had long been among the most intensive users of information technology (IT), starting in 1867, when the stock ticker began bringing current Wall Street information to Main Street. Starting in the 1980s, the development of the Internet and telecommunication technologies had further facilitated the development of new banking products and introduced alternative delivery and distribution channels. It was estimated that IT spending accounted for 20-25% of non-interest costs and around 6% of annual revenue for financial institutions (Kauffman and Weber 2002). The global banking industry was expected to spend US$241.2 billion in 2007 on IT, including hardware, software, IT services, internal services and telecommunications (Moskalyuk 2007). Despite these behemoth investments, it is not all that clear whether IT investment pays off for banks. It is also not clear whether these investments would improve just the operational efficiency of banks or if they would also enhance their strategic positioning and sustainable competitive advantage. This case tries to shed light on these two important issues by evaluating the IT investments at HSBC and Citigroup, two large global banks of similar size but with different IT strategies. Would the IT

This case was nominated for the Best Paper Award at the International Conference on Information Systems (ICIS) 2007.

Minyi Huang prepared this case under the supervision of Prof. Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2007 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 07/366C

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07/366C

Does IT Payoff? Strategies of Two Banking Giants

investment strategies adopted by HSBC and Citigroup enable them to improve their financial performance in the future? Which of the two banks would see higher returns on their IT investments in the long run? How should they measure such returns?

Global Banking Industry
Three tectonic forces had reshaped the strategic landscape of the financial industry in the previous two decades: deregulation, the advent of new technologies, and globalization of business. Deregulation, which had started in the 1980s with the removal of many important regulatory barriers to international banking, allowed banks to expand the scope of their operations globally. The advent of the internet and advanced telecommunication technologies allowed financial institutions to operate more easily and cost-effectively across borders. Finally, while globalization of business had led to a surge in demand for international financial services, it also intensified competition, leading to declining interest margins and fee incomes.1 In the face of such sweeping forces, banks were under pressure to find...
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