Thursday, 24 April 2014

The challenges facing the next RBS CIO

With the news that Mike Errington, CIO of RBSG, is retiring the bank will be looking for a replacement. The new CIO will have an overflowing inbox, so for those considering taking on the role what are some of the challenges that he or she will have to face?

The immediate on-going work is to ensure the stability of the existing systems. Having had a number of serious, customer-impacting outages over the last few years (including a problem with Ulster Bank ATMs on the day this was written), the work of applying patches to and building resilience into both hardware and software needs to continue. RBS is not the only bank that in earlier times avoided doing maintenance as a way of saving costs and subsequently is feeling the impact of doing that in terms of reliability of systems.

The second tactical exercise is the simplification of the IT infrastructure. However this is far easier said than done as the IT systems have evolved over many decades, creating great complexity and the number of people who understand the older systems and how they interrelate is rapidly declining both as the result of retirement and cost cutting within the bank. Simplification is about retiring and rationalising systems and infrastructure. Given the complexity that exists this is alike disarming a booby-trapped Second World War bomb requiring both high levels of skills and nerves of steel.

Both of these steps are akin to re-arranging the deckchairs on the Titanic, given the ages of the systems. There is no doubt that there has been significant underinvestment in IT since way before the RBS/Natwest integration. Whoever is the new CIO they should use the opportunity of as part of their taking the role to negotiate a commitment to a wholesale replacement of the core retail banking system as the likes of CBA (Commonwealth Bank of Australia), Nationwide Building Society and Deutsche Bank have carried out. However this would involve spending measured in the low to mid billions of pounds and a programme taking 3-5 years to execute. This is where making such an essential change becomes particularly difficult specifically for RBS as RBS is not just any bank, it is a state-owned bank. Such is the political pressure to see the bank returned profitably to the private sector and within the first couple of years of the next government i.e. almost certainly by the end of 2018, that it is highly unlikely that the funding for such a major investment programme will get approval from the key shareholder. However that is what both the CIO and the CEO should be looking for if RBS is to once again become a truly competitive UK bank.

There are however other major transformation programmes that the new CIO will have to pick up, drive and deliver.

Having negotiated an extension of the deadline to the end of 2016 for the disposal of the 308 branches that RBS was forced by the EU to sell as a result of receiving state aid, creating a separate clone of the RBS systems for the new Williams & Glyn’s bank to run on is another top priority for the new CIO. This is not dissimilar to the exercise that Lloyds Banking Group had to perform to create the platform for TSB to run on. However the Lloyds Banking Group platforms were in a far better state than the RBS systems benefitting from coming on the back of creating a single set of systems for the Lloyds TSB/HBoS merger. Even having that advantage for Lloyds Banking Group creating the separate TSB platform was not simple or easy with the eventual cost being in the order of £2bn. Delivering the William and Glyn’s separation to the 2016 deadline will be a major achievement.

This is not the only separation programme that the CIO will have to oversee. The IPO of the Citizens business in the US in Q4 2014 and the complete disposal by the end of 2016 will also need to be executed. This will entail the disengaging of Citizens from the Group systems.

In addition there is the question of what to do with Ulster Bank. The preferred option is to dispose of it by selling it to one of the challenger Irish banks e.g. Permanent TSB, Danske Bank. If that is to go ahead then the new CIO will have to look at the separation of Ulster Bank from the Group systems and supporting the clone until it is integrated into the buyers' systems.

One of the core strategies of RBSG is to scale back the investment bank, reducing costs to be aligned with the smaller bank and to return the bank to be more focused on the UK and supporting UK businesses. This will inevitably require changes to the investment banking platforms as businesses are closed or sold off. To achieve the reduction in costs and the required flexibility as volume drops will almost inevitably mean looking at further outsourcing of platforms and operations to third parties.

On top of the RBSG specific initiatives the new CIO will also face the plethora of transformation programmes and projects that will need to be implemented as a result of regulatory changes. One of the core ones will be the implementation of ring-fencing once that is fully defined. This will mean a significant change in the governance of RBSG and there is a question as to whether the role of Group CIO can persist under the new rules, requiring in a significant restructuring of Group Operations.

All of this will need to be delivered whilst digital, mobile and the use of data analytics for both competitive advantage and risk management continue to move at pace in an increasingly competitive banking market.

The new RBS CIO will need to face up to this hugely challenging environment all within the constraints of  a bank operating very much in the public spotlight, with the need to rebuild trust and the financial constraints imposed by  having the government as the largest shareholder. Only the bravest should apply.