Impact of GIS on a Global Bank

      Expectations and Impacts of a                      competition globally. The rapid e...
Impact of GIS on a Global Bank

                                                            Empirical evidence is mixed, b...
Impact of GIS on a Global Bank

production. Firms can use IS to realize scale         competitive advantage in global mark...
Impact of GIS on a Global Bank

     Heikkila, Peffers, Saarinen, & Wijnhoven,            HongkongBank chairman, John Stri...
Impact of GIS on a Global Bank

Bank in 1992, as well as a score of other             for the world’s most important banki...
Impact of GIS on a Global Bank

The Hexagon concept focused on providing             Six new technical people recruited fr...
Impact of GIS on a Global Bank

delivery mechanism for communication                 online links with all sites.
between ...
Impact of GIS on a Global Bank


                                                  Hexagon

                             H...
Impact of GIS on a Global Bank



Figure 2. Conceptual model for Hexagon architecture




Some routine transactions requir...
Impact of GIS on a Global Bank

transmitted online to Hexagon. Examples               their accounts, in over 40 currencie...
Impact of GIS on a Global Bank

processed. The information on the template            system that provides information upd...
Impact of GIS on a Global Bank

    software. Customers, however, will have to           overall firm-level performance.
 ...
Impact of GIS on a Global Bank



                           30,000

      Number of corporate customers
                 ...
Impact of GIS on a Global Bank


                                 Geographic Focus (1997)
                      Home      ...
Impact of GIS on a Global Bank

firms in terms of their cost of funds and            than all but one other of the selecte...
Impact of GIS on a Global Bank

Hong Kong, Manila, or Toronto. This                     (OFX) and Integrion, could pose a ...
Impact of GIS on a Global Bank



     50%




                                                                           ...
Impact of GIS on a Global Bank

Finally, the scale and scope of the system           In any case, our intent here is to un...
Impact of GIS on a Global Bank

    provide lower costs or custom services to                   Risk. Proceedings of the 2...
Impact of GIS on a Global Bank

HSBC (1997b). Press release: ”New Spex EDI Link
with HSBC Hexagon Software”, May 1997.    ...
Impact of GIS on a Global Bank

Commerce and in a number of international
conferences.




                               ...
Upcoming SlideShare
Loading in …5
×

Abstract.doc.doc

877 views
840 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
877
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
8
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Abstract.doc.doc

  1. 1. Impact of GIS on a Global Bank Expectations and Impacts of a competition globally. The rapid expansion of international trade, reduced trade barriers, Global Information System: and political developments in Eastern The Case of a Global Bank from Europe and China have resulted in strategic Hong Kong opportunities and threats for many firms. In industry after industry, multinational firms Authors : are under pressure to seek global economies of scale, to build world products, and to Ken Peffers tailor products to customers in diverse Rutgers University, New Jersey markets (Ives & Jarvenpaa, 1992). Virpi Kristiina Tuunainen The banking industry plays a major role in Helsinki School of Economics, Finland supporting increased global trade and investment activity (Holland, Lockett, ABSTRACT Richard & Blackman, 1994). Globally distributed manufacturing and marketing Information system (IS) research suggests requires that firms finance these activities that the use of innovative information across national boundaries. In addition, they technology (IT), deployed globally with the must manage the flow of cash among right mix of organizational assets, may help operating units in different continents with firm performance by increasing scale and different currencies. Consequently, firms in scope economies, customer value, the banking industry might be able to reap operational efficiency and organizational benefits from business globalization. effectiveness, and by providing Indeed, the globalization of competition opportunities for competitive advantage. together with deregulation of financial markets, the availability of relatively cheap This interpretive case study investigates the IT, and the shift towards a global outlook by business value created by a combination of large industrial organizations have led to firm and IT strategy, global assets, and the dramatic changes in the strategy and use of an innovative IS to deliver products structure of the banking industry (Holland in the international trade finance and cash & Lockett, 1995). management business. Hexagon, a proprietary on-line banking application To take advantage of the new scale and that supports the international management scope of international trade finance and of financial assets, was developed by HSBC international banking may require firms to Holdings, plc. HSBC has used Hexagon to build extensive networks of assets and leverage a presence in 79 countries to alliances (Engardio, 1993), as well as well- create value for the customers and designed global IT infrastructures (Cusack, marketing advantage for itself. Quantitative 1990). This combination of assets may be and qualitative analysis reveal Hexagon's impossible for all but a handful of the impacts on HSBC in terms of performance industry’s members to assemble. Here we impacts anticipated in the IS literature and investigate the use of a global IS to produce in terms of firm level business objectives. a unique IT-based product, made possible by the use of a combination of firm strategy, INTRODUCTION IT strategy, global assets, and the use of an information system with a global scope. Firms have been forced in the 1990s, as How is a firm rewarded for developing a never before, to view markets and unique product based on a global IS? 17
  2. 2. Impact of GIS on a Global Bank Empirical evidence is mixed, but it suggests To answer this question we study the case that firms that make innovative IT of HSBC’s Hexagon. HSBC Holdings, plc, investments have been rewarded with the world’s 10th largest bank holding economic returns (Dos Santos, Peffers, & company, has seized an opportunity to Mauer, 1993), while other IT investors have create business value, using global corporate not. Furthermore, most of the benefits assets and an innovative appear to have gone to firms that invested telecommunications technology application early, before acceptance of an innovation to support firms engaged in international was assured (Dos Santos & Peffers, 1995). trade. For more than ten years HSBC has What happens when a firm puts together the been developing Hexagon, a proprietary right mix of an innovative IT, an effective system that allows individual and corporate global organization, and an appropriate subscribers around the world to conduct strategy to produce value? IS researchers international banking transactions online suggest that, depending on the purpose of through links between HSBC and the the system, the firm may be able to benefit subscribers’ personal computers. Over the from increased scale and scope economies, same period HSBC has been putting improved product value, increased together a global system of alliances and efficiency, improved organizational subsidiaries. As a result, it is able to effectiveness, and competitive advantage. leverage Hexagon to create value for the customers as well as a marketing advantage Scope and Scale Economies. for itself, relative to competitors. Economies of product scope arise when unit costs are lowered by producing two or In the next section, we develop expectations more products using overlapping operations. from IS literature for how such an IT-based If a bank offers new products that are product might affect the firm. In the similar to existing ones, the new products following section, we describe our research can be produced with few new resources objectives and methodology. In the next because resources required for the new following section, we develop a rich case- products are similar to resources already based story about HSBC, the development available. Economies of scope can be of Hexagon, its features, and its anticipated increased when IS, particularly future. In the next section, we analyze the interorganizational information systems effects of Hexagon in terms of customer (IOS), are introduced to allow the firm to acceptance, performance impacts, in terms perform an extended range of tasks at low of our expectations from the literature marginal costs (Gurbaxani & Whang, 1991). review and at the firm level, and the overall success of HSBC. Finally, in the last Economies also apply to geographic scope, section, we discuss the meaning of the the extent to which a firm competes in results, the limitations of the study, and the various geographic markets. When they implications for managers. allow efforts to be replicated in new geographic areas at low marginal costs and EXPECTED IMPACTS OF GLOBAL IS IN reduce the cost of communication over time THE FINANCIAL SERVICES and space, IOS may allow firms to increase INDUSTRY geographic economies of scope (Palvia, 1996). Performance Objectives of a Global Information System Scale economies allow a firm to reduce its costs compared to firms with smaller scale 18
  3. 3. Impact of GIS on a Global Bank production. Firms can use IS to realize scale competitive advantage in global markets economies by replicating systems to deliver (Palvia & Lee, 1996). For example, for products to many customers. IS applications Rosenbluth Travel IT has developed often have very high economies of scale mechanisms for managing the complex because the processing, communications, interactions between travel agents and development, and maintenance costs are customers (Clemons & Row, 1991). largely fixed and independent of the number of customers (Bakos, 1991). Competitive Advantage. Network externalities arise when the Product Value. benefits to users are a function of "network Systems that integrate internal processing size." They affect the value of an IOS when for the firm with that of its customers create its usefulness is dependent upon whether it value for the customer by increasing has sufficient scope to satisfy customer operating efficiencies (Jelassi & Figon, needs (Bakos, 1991). Network externalities 1994) or convenience and flexibility can work to provide competitive advantage (Peffers & Dos Santos, 1996). Advances in by creating barriers against competition in networking, processing, and decision markets from new entrants (Palvia, 1996). A analysis have allowed firms to lower their global information infrastructure, requiring customers' costs. For example, electronic a huge investment, may be difficult to payments reduce clerical errors, increase imitate. Consequently, its owner may be billing speed, and lower transaction costs. able to retain “exclusive access," for some time, to customers who want the set of Suppliers that can combine globally features provided by the system. integrated databases and communication systems with globally integrated customer service strategies can reduce coordination Performance Impacts of IT Investments costs for their customers (Jarvenpaa, Ives & in the Financial Services Industry Pearlson, 1996), provided that the systems are used with specialized marketing, Banks have expanded internationally, operations, and support infrastructures facilitated by falling trade barriers, to created purposefully for that purpose. market to increasingly global customers. Global customers expect consistent product Efficiency. and service offerings, expertise, worldwide IOS and information sharing are often service standards, and local multilingual and targeted at increasing operational efficiency multicurrency support (Jarvenpaa et al., by reducing ordering costs, inventory costs, 1996). IT and communications technology and supply lead times (Seidmann & are critical tools to enable the effective Sundararajan, 1997). For instance, using an satisfaction of these expectations, along EDI system, Chrysler has achieved with other resources, such as branch substantial cost savings from improved locations and corporate image (Martinsons, information exchanges between it and its 1992). Accordingly, bank spending for IT suppliers (Mukhopadhyay, Kekre, & has increased dramatically and the high rate Kalathur, 1995). of investment is continuing (Takac, 1994). Organizational Effectiveness. Such spending raises many questions about The development of global IS can give whether the investments pay off for the multinational firms a basis for increased firm, in terms of improved performance coordination and control or direct (Peffers & Saarinen, 1998; Hallikainen, 19
  4. 4. Impact of GIS on a Global Bank Heikkila, Peffers, Saarinen, & Wijnhoven, HongkongBank chairman, John Strickland. 1998). Empirical studies in the industry We interviewed technical and product have focused on how firms have sought managers about such issues as the reasons competitive advantage from IS that reduce for approving the development of Hexagon, costs, enhance management information, or Hexagon operations in Hong Kong and improve responsiveness to customers, e.g., elsewhere, and the firm’s plans for (Clemons & Weber, 1992). All industry Hexagon’s future. We also interviewed competitors in the have access to similar managers and reviewed documents and data technology, so firms must focus on how from a number of HSBC’s competitors. information is used and on building a supportive strategic infrastructure (Fletcher We chose to study HSBC and Hexagon for and Wright, 1996). Taken as a whole these three reasons. First, HSBC is one of the studies suggest the potential for financial largest and most successful bank holding services firms to impact performance companies in the world and it has an through investments in innovative global IS. explicit strategy to focus on the use of Such impacts depend upon the use of IT, the innovative IT to create new products for strategy of the firm and the resources that customers. Secondly, while studying the use the firm can deploy for the benefit of its of technology to support trade finance and customers. cash management services among banks in Hong Kong, the authors learned about the RESEARCH OBJECTIVES AND Hexagon system and became excited about METHODOLOGY the Hexagon story. Thirdly, HSBC agreed to participate in the study. This last reason In this study we investigated the was very important because, in general, development and implementation of a firms in Hong Kong were very cautious global IS to support an innovative product, about revealing anything about operations to the system’s relationship to the strategy and researchers. The other firms mentioned in resources of the firm, and its impact on firm the analysis were chosen because they are performance. We wished to understand how major firms in trade finance and cash the subject of our study uses a global IS to management, they do business in Hong provide a unique product for its customers. Kong, where our initial investigative efforts We hoped to understand more about the were focused, and they agreed to participate relationship between the use of this system in the study. and the performance of the firm, both in terms of expectations derived from THE HEXAGON SYSTEM our literature review and in terms of firm-level performance. HSBC Holdings, plc. This is an interpretive case study involving HSBC Holdings, plc is one of the world's one firm, HSBC, and a particular product, largest financial services organizations. Its Hexagon. We studied HSBC’s strategy, its founding member, The Hongkong and use of technology, and its performance, Shanghai Banking Corporation Limited using qualitative and quantitative data. The (known as Hongkong Bank) was established data gathering involved reviews of in 1865 to finance trade between China, documents and publications, annual reports Europe and North America. Formally and data from commercial information organized as HSBC Holdings, plc in 1991, services. It included many hours of it has grown dramatically, acquiring Marine interviews with HSBC executives, including Midland in the US in 1987 and Midland 20
  5. 5. Impact of GIS on a Global Bank Bank in 1992, as well as a score of other for the world’s most important banking firms. Currently HSBC's international customers. network comprises more than 5,500 offices in 79 countries and territories, operating in To meet this threat HSBC would need to the Asia-Pacific region, Europe, the leapfrog the concept of a simple global Americas, the Middle East and Africa. It has inquiry system, otherwise it might find itself 120,000 employees in 79 countries, a global trying to compete with a product that was girth only Citibank can match (Chowdhury, always functionally one step behind that of 1998). the competitors. To turn the threat into a positive strategic thrust, concluded The use of innovative IT is an explicit part Strickland’s group, HSBC had to develop of HSBC’s strategy (HSBC, 1997a). Its IT the most ambitious concept possible. The staff of 6000 worldwide are heavily Hexagon vision was to deliver the resources involved in product development. With of a worldwide banking system right to the John Strickland, as CEO of HongkongBank, desktop of the manager. “At the time their HSBC is thought, among the business and systems were just dumb terminals,” not academic communities in Hong Kong, to be capable of two-way communication. “We the largest corporation, outside the computer envisioned intelligence on the desktop,” industry, with a computer programmer as Strickland told us. While competitors such a senior executive. Strickland systems were offering only cash originally joined HSBC in 1966 as Chief management, Hexagon was to be a complete Programmer to install HongkongBank’s banking system. The global scope of the first computer. Hexagon is a key component system was a major component of the idea. of HSBC’s IT strategy, as indicated by the use of the Hexagon symbol, a six-sided In the simplest sense, the system would be a figure, made up of six red and white new channel to deliver information that the triangles, as HSBC’s corporate logo. bank already offered to the customer. The primary beneficiary was expected to be the The Development of Hexagon customer, who would have access to better information, rather than more paper. The Hexagon idea originated in 1982 in the Eventually the customer might also benefit Technical Services Department, then headed from automated handling of data from the by Strickland. Citicorp and Chase bank. The objective for the bank was to use Manhattan were already providing corporate this added value to capture market share by customers with mainframe computer meeting and surpassing the capability of the terminals, through which they could access systems offered by competitors. within-country transactions and balance data about their accounts. This was a strategic At the same time the bank expected to threat to the HongkongBank because these benefit from automating information products focused on business customers delivery by reducing data handling costs. engaged in intercontinental trade and, According to David McMyn, one of the potentially, high-end retail customers who original project team members and now used global banks to manage their personal Senior Executive, Group IT, HSBC, the global finances. Such customers might favor value created by the system was originally a bank that could deliver a system to expected to be 80% from increased manage cash worldwide. If competitors customer value and 20% from cost developed such a global system first, HSBC reductions for the bank. could find itself sidelined in the competition 21
  6. 6. Impact of GIS on a Global Bank The Hexagon concept focused on providing Six new technical people recruited from infrastructure support for firms engaged in outside the bank, two experienced bankers, multicontinental trade, especially in Europe, and some additional programmers made up North America and the fast growing the design team that put together the Western Pacific. Such firms need real time original design over the next 18 months. information on cash, receivables, and Figure 1 shows the development of the securities balances worldwide; they need to system over time, in terms of features and be able to manage those assets by shifting geographic scope. By 1985 the first them to where they are needed; they need operational version, offering basic account effective delivery of trade financing information and allowing payment services; and they need real time instructions, was launched to five Hong information on foreign exchange and Kong corporate customers. In 1986 it was securities prices. The concept also focused launched to five additional customers in on upscale retail customers who traveled each of the US, UK, Singapore, and Japan. extensively for business or professional This version offered customers access to reasons. Such an upscale customer might transaction account statements and balances, have, for example, a home and family in multicurrency payments (within the Vancouver, a home office in London, and HongkongBank system), interaccount work extensively in Hong Kong, Japan and transfers, and electronic mail between the China. customer and his/her own bank branch. Hexagon’s infrastructure was enhanced in Retail bankers in the firm were cool to the 1987 to provide greater cross-border idea, so after studying its feasibility, the functionality and in 1989 a more bank decided in 1983 to go ahead with the functionally-rich version was released project focused toward multinational across 30 countries. Since 1989 HSBC has business customers. “It was the most continuously worked to develop Hexagon’s exciting business decision of [our] lives,” functionality and geographic scope. said Strickland. Although spending on IT Important milestones include the launch of had been steadily increasing in the bank for an MS Windows version in 1991 and a number of years, this was the firm’s first features implemented in 1994 that allowed major competitive thrust using innovative routine transactions to be automatically IT in more than 15 years. initiated through Hexagon software on the customer’s PC and carried out in the back Technically, there seemed to be no serious offices of HSBC member banks worldwide. barriers to the system. Packet switching was new, but had been proved elsewhere to be The Current System reliable. Personal computers, an important component of the new system, were very Today Hexagon is a global electronic new, not much used in business, and not banking service that gives customers direct considered to be very reliable. "This was a access to a range of banking services, problem the system could live with." If a worldwide 24 hours a day, 365 days a year PC went down “it was only one customer from their offices through their own PC’s. and anyway it was his PC, so that wasn’t Hexagon runs on all platforms and in all considered to be much of a problem.” languages supported by MS Windows. Transactions security, however, was a major concern and it was expected to require a fair Hexagon's defining features are its global amount of the project’s effort. geographic scope and functional generality. Hexagon is first an internal network, a 22
  7. 7. Impact of GIS on a Global Bank delivery mechanism for communication online links with all sites. between the bank and its customers worldwide. Communication with other Figure 2 shows the conceptual architecture banks is handled largely through SWIFT, a for Hexagon, which can be thought of as a messaging network of about 4000 banks in three-layered electronic banking platform. over 110 countries, and the Automated At the center Hexagon acts as the core of the Clearing House (ACH), which provides global banking systems; everything else is clearance for checks and electronic “bolted” onto it. The second layer includes transactions within the US. Other links use HSBC banking systems in each location, telex, global clearing systems and cellular where all accounts and balances are kept phones. About 500 banks, other than those and all transactions are performed, as well in the HSBC group, currently use Hexagon as links to other banks and banking to support their own cash management networks. The third layer includes the needs as well as to provide these services to client’s Hexagon software, based on his or their clients. For example, according to her PC, and the client’s transaction partners. Kurtis Giehl, a JPMorgan associate, As much of Hexagon as possible is JPMorgan uses Hexagon to provide cash contained in PC-based software so that management services for its private banking information processing can be performed on customers, using its own “private label” the client’s machine and a minimum amount interface. Some of the sites have online of data is transmitted through the Hexagon links with Hexagon, while others process communication systems. transactions through an electronic banking center. HSBC is working toward having 23
  8. 8. Impact of GIS on a Global Bank Hexagon Hexagon proposal 1982 Decision to go ahead with the project 1983 Group Chairman endorses strategic plan and vision for electronic banking 1984 "Hexagon" becomes brand name; launch in PC, DOS based version. Account information 1985 HK with five customers. and payment instructions. Roll out of pilot to Hong Kong, US, UK, Japan, and Singapore. Five customers in each 1986 Online payment transfers. site. Global online transactions involving time Remote authorization, 3rd party SWIFT, some 1987 deposits, securities purchases ACH. Stock market information. 1988 Cash management, trade finance, securities Hexagon version 1.2 launch to 30 countries. 1989 market information. Marine Midland (US) launches Hexagon. 1990 Electronic statements, securities information 1991 Windows version launched. EDI added. 1992 Midland Bank (UK) launches Hexagon 1993 Online monitoring of trade loans Automated link to back-end systems 1994 15,000 subscribers in 50 countries. 1995 Integration with corporate back-office systems. Enables banks to use Hexagon for their Version 4.0 1996 customers. 1997 Links to all ACHs where HSBC has presence. 30,000 customers in 80 countries, e.g., 1998 Smartcard alternative to password security. Azerbaijan. Year 2000 compliant. Internet-based retail version? 1999 Figure 1: Development Timeline for Hexagon. 24
  9. 9. Impact of GIS on a Global Bank Figure 2. Conceptual model for Hexagon architecture Some routine transactions require no software on the PC and automatically intervention by either the client or by bank executed through Hexagon. Some of the employees. These operations can be services of Hexagon can be run also off-line initiated by a time trigger in Hexagon or can first be processed off-line, then 25
  10. 10. Impact of GIS on a Global Bank transmitted online to Hexagon. Examples their accounts, in over 40 currencies, include direct deposits of employee salaries, regardless of the country, for any banks bonus, insurance premiums, fee collections, within the HSBC group. Funds can be loan installments, regular payments to transferred online among any accounts and suppliers, and other automatic payments. any currencies with members of the HSBC These features are continuously expanding. group worldwide. Payments can be made to trading partners with accounts within the Data security in Hexagon is a very high group or to any payee through any priority. Data is encrypted and access is beneficiary or intermediary bank. These governed by a two level password control. processes have been automated as much as The first level requires a user ID and possible. Finally, Hexagon can format paper password and the second level requires a checks for use to draw funds against any session password that is given to the user by bank account at any bank in any of more the system at the end of the previous than 100 countries. session. Hexagon also supports authorization and delegation control; that is, These are powerful features. For example, it is possible to control who is allowed to an electronics manufacturer purchases use which services. Since 1998, a smartcard components in China, assembles them in alternative for security is also available in Hong Kong and, through contractors, in the addition to password control. An on-line Mauritius Islands and the Philippines, and audit trail shows transactions over the past sells them in retail stores in the US. Sunday 30 days. night, from her offices in London, the comptroller uses Hexagon to transfer Many customers, increasingly including surplus US dollars from the firm’s accounts medium sized companies, wish to integrate at Marine Midland Bank in New York to their financial applications with their own pay the Chinese manufacturer through its back office systems so that information does account at the Shanghai Branch of the not have to be re-keyed, according to Y.B. HongkongBank. She also transfers funds Yeung, Assistant General Manager, Head of through SWIFT to the contractor’s account IT, HongkongBank. Today’s Windows at the Philippine National Bank in Lapu version allows data to be exported and City, Philippines. She uses Hexagon PC- imported easily between Hexagon and other based software to format a paper check in applications in the firm. the local currency for the Mauritius Islands and to prepare direct transfers of employee Hexagon Services salaries to employees' individual accounts in Continual expansion of Hexagon's Hong Kong. All of the electronic functionality is intended to ensure the transactions are completed by the end of flexibility of the system. The main service business on Monday. groups offered by Hexagon are cash management services, trade services, EDI Trade services involves financing the services, Electronic Trade-Related Services international sale of goods. With Hexagon (ETRS), securities services and information the whole trade cycle is automated. In the services. Asia and Pacific region letters of credit (LC) are heavily used to finance trade. The first Cash Management was Hexagon’s original step, an LC application, is traditionally a feature. It has two components: information laborious task. With Hexagon the client uses and funds transfers. Customers can access a software template to transmit the LC to balance and activities information about all HSBC electronically, where it is printed and 26
  11. 11. Impact of GIS on a Global Bank processed. The information on the template system that provides information updated can be reused for the next LC application, about every half-hour. making appropriate changes. The LC is then transmitted electronically, through the In the securities services module a SWIFT network, to the trading partner’s customer can access his/her global bank, which can advance the funds to the investment portfolio and buy or sell trading partner. Insurance services are also securities online in more than 15 countries. provided through the system. The customer can also move idle funds to interest-bearing accounts, time deposits or HSBC was one of the first banks to make overnight money markets. electronic banking EDI capable. EDI and ETRS services facilitate the exchange of Each of the HSBC member banks prices electronic documents in standard Hexagon services for its own customers. international EDI formats between trading Currently most corporate customers are partners. Hexagon ETRS has the capability charged a flat monthly fee for all services. to interface with the company’s existing For retail customers Hexagon is priced computer applications, enabling the differently, that is, cheaper. Later services electronic exchange of business documents. may be “unbundled” to separate services Hexagon supports UN/EDIFACT purchase and fees; there may be different prices for orders, allowing both outward and inward on-line and off-line use and a la carte EDI messages to be sent and received with pricing for service modules. Moving more trading partners. Some third-party EDI and more of the functionality of Hexagon to software packages can link to Hexagon. For the PC further pushes the cost of the example, users of Spex, an export services down. documentation package, can submit their HSBC documentary collections to HSBC Hexagon’s Future Trade Services electronically. Direct send exporters are able to produce their With few exceptions, PC-based banking has collections documents (the ‘paperwork’ not been very successful yet with retail necessary to collect funds from the customers (Heikkinen, 1997). Hexagon is importer) in Spex and send them now available to individual retail customers, electronically to HSBC via their Hexagon however HSBC is still waiting for a “change software. The usual costs involved in setting in mood” in this sector. Of course, Hexagon up EDI links are avoided and there is no is not an ordinary “PC home banking” need to join a value added network (HSBC, product. Only the relatively small number of 1997b). retail customers who perform a substantial number of international transactions may be Through information services customers interested in its sophisticated features. can access stock market and foreign exchange information. For example, dealers For retail customers most HSBC and analysts in trading centers around the subsidiaries use the same Hexagon PC world provide advice through the system on banking software that is provided to which currencies to buy. Precious metal corporate customers, but other approaches prices include the closing gold prices for the are also being tried. First Direct, a UK unit New York and London exchanges, and of HSBC, is to launch a banking service prices of different localized gold products. using generic Internet browser software, Stock prices and index values are received such as Microsoft Explorer or Netscape through a direct link to the stock index Navigator, instead of the proprietary PC 27
  12. 12. Impact of GIS on a Global Bank software. Customers, however, will have to overall firm-level performance. dial a special number to gain access to the banking service, rather than connecting Customer Acceptance through the Internet (Graham, 1997). HSBC does not currently offer banking services Figure 3 shows how the number of over the Internet because of security corporate Hexagon accounts has grown over concerns, although it has created a site on time since its 1985 introduction; most of the the World Wide Web for display at growth has occurred since 1990. In 1997 http://www.hsbcgroup.com. HSBC executives estimated that 50% of all electronic international corporate banking HSBC and Microsoft Corp. have signed an transactions worldwide are done through the agreement to link Hexagon to MS Money Hexagon system which was by then being software (Reguly, 1997). Retail customers used by 80,000 individual corporate and would use this for financial management as retail customers in more than 79 countries well as electronic banking. Customers (Graham, 1997). By comparison, an would be able to execute electronic banking estimated approximately 50,000 individuals transactions, obtain account statements, used the New Citibanking system as of reconcile accounts, prepare budgets and 1998, according to John Conte, Citicorp, investment objectives, plan loan facilities Head of Group Information Network. These and analyze cash flow, 24 hours a day figures may not be directly comparable, (HSBC, 1996). HSBC is also looking into however, because some of the features of possibilities of interactive television. Citibanking and Hexagon are also provided by other Citicorp systems. HEXAGON PERFORMANCE IMPACTS Impacts in terms of Hexagon’s purpose To understand Hexagon’s impact on HSBC we first look at its acceptance among HSBC Scale and Scope Economies. customers. Secondly, we look at the way the HSBC enjoys substantial economies of Hexagon has affected performance at geographic scope through Hexagon. When HSBC, both in terms of expected functional offering services to customers in new impacts of a global information system, locations, there is no need for the bank to revealed by our review of the literature, and develop new software or to reinvent in terms of resulting firm level performance Hexagon’s overall architecture. Hexagon impacts. Finally, we examine HSBC’s 28
  13. 13. Impact of GIS on a Global Bank 30,000 Number of corporate customers 25,000 20,000 15,000 10,000 5,000 0 1984 1986 1988 1990 1992 1994 1996 1998 Year Figure 3: Number of corporate Hexagon customers since its introduction also increases economies of scale because To the extent that Hexagon increases Hexagon transactions have only trivial economies of scale and scope for HSBC, the marginal costs; the system’s operating costs firm should realize low operating expenses are nearly all fixed and the total costs for the compared with similar firms. Table 1 shows system are very tiny, relative to other HSBC scale and geographic scope characteristics of operating costs. HSBC and selected competitors. These banks were selected for comparison because Hexagon’s potential use by retail customers they compete directly with HSBC for trade represents a performance benefit in terms of finance business, particularly in the fast economies of “product scope.” The retail growing Asia-Pacific region. Two measures version of Hexagon, in whatever form it is of geographic scope are the number of finally rolled out, will be the same offices and number of countries in which application, repositioned by changing the the bank operates. Among these six banks, interface and pricing, for different HSBC operates in more countries with more customers. Because the product has already offices than any of its competitors, except been developed for one target group of Citicorp. Another indicator of geographic customers, it can be repositioned at a scope is the percentage of loans made by the minimal cost. The development investments firm outside of its own continent. In this have already been made and the operating respect, Citibank is the only comparable costs are already being covered. competitor. Total assets is a measure of economic scale. By this measure, HSBC Economies of scale and scope result in is decreased costs relative to size and scope. 29
  14. 14. Impact of GIS on a Global Bank Geographic Focus (1997) Home Assets Number of Number of Percentage of Loans Country (US$ Millions) Countries Offices in Home Continent Bank of America US 260,159 38 1944 82.9* Citibank US 310,897 98 3400+ 41.6* HSBC UK 452,498 79 5688 45.2 National Bank of Canada 48,616 12 724 93.5** Canada Royal Bank of Canada 179,664 36 1558 80.7* Canada Standard Chartered HK 74,546 48 600+ 71.0 * Percentage of loans in home country. ** Percentage of assets in home continent. Table 1: Geographic Scope of HSBC and Selected Competitors larger than any of the competitors shown; with high economies of scale. Citicorp and Bank of America are smaller and similar in size to each other. Product Value. Hexagon offers customers opportunities to Geographic scope is not obtained for free. reduce costs by saving transactions Firms pay an expense penalty to have more processing steps. For example, when using offices and to operate in more countries. letters of credit (LC), a customer can submit Consequently, we would expect firms with an application from his/her office and save the highest geographic scope to have higher the effort and cost of physically submitting operating expenses, relative to size. Higher the application. Furthermore, the first LC economies of scope and scale might change application can be used as an online that, however. Among the firms, Bank of template for future applications, minimizing America and Citicorp have the highest the staff time required for this activity. operating expenses, relative to assets, of the Finally, the entire LC process can be selected banks. This is consistent with their monitored through Hexagon, saving phone high levels of geographic scope. HSBC has calls and follow-ups. the lowest operating expenses, as a percentage of assets. By this measure, the Many of the Hexagon features allow other banks in this group appear to pay a customers to treat Hexagon as extensions of substantial penalty for higher levels of their own corporate finance departments. geographic scope, but HSBC does not. For example, by submitting a payroll file HSBC is the largest of the six selected and transferring funds through Hexagon, the banks in terms of total assets, a measure of firm can allow surplus funds in one country scale. Consequently, HSBC's low operating to be used to make payroll payments expenses, relative to size, are also consistent overnight in another country. This saves 30
  15. 15. Impact of GIS on a Global Bank firms in terms of their cost of funds and than all but one other of the selected firms. management attention. If Hexagon is successfully used by HSBC to To take full advantage of Hexagon’s value, reduce operating expenses, we might expect customers are encouraged to use HSBC staff expenses to be affected as corporate group banks for more of their banking customers used the automated features of functions. If a firm uses Hexagon to perform Hexagon to perform activities that normally international banking transactions, why not required human intervention. We might also use an HSBC affiliated bank for domestic expect premises expenses, i.e., rent, heat banking in the firm’s next new market? and light, to be effected if more corporate staff stayed in their offices or at home to If Hexagon provides value by improving conduct transactions, reducing the need for customer efficiency, effectiveness, and scale branch office space. and scope economies, then this value should be reflected in what customers are willing to In terms of staff expenses as a percentage of pay, i.e., it should affect HSBC's market operating income, HSBC appears to be in share and revenue. We compared net the middle among the selected banks. This interest income plus other revenue (hereafter is consistent with HSBC executives’ referred to as ‘revenue’) for HSBC and its conclusion that Hexagon has not reduced competitors for 1990-1997. HSBC has average transaction expenses. When we experienced exceptional revenue growth, examine premises and equipment expenses compared to its competitors, after 1991, as a percentage of revenue, HSBC’s during the same time that use of Hexagon expenses are the lowest among the selected has shown dramatic growth. banks. This suggests that Hexagon is successfully substituted for physical bank branch space, resulting in a cost reductions Efficiency. that wouldn’t show up when measuring Tens of thousands of HSBC’s best Hexagon’s transaction costs. The values of customers use Hexagon to perform banking these firm performance measures are transactions themselves, through software consistent with a conclusion that Hexagon on their desktop PCs, rather than through reduces operating expenses even though HSBC employees. As a result, customers average Hexagon transaction costs are not enter transactions data that would otherwise less than the average for other media. have been entered by bank staff, reducing operational staff tasks. Transactions Organizational Effectiveness. volumes have not reached levels that result Hexagon integrates many of the back office in lower overall average costs for Hexagon- operations of the bank, such as payments based transactions, compared with and securities trading. The effort to make transactions done through other media. sure that these operations can work Because Hexagon costs are mostly fixed, effectively together has resulted in however, rapid transactions growth should processing improvements. The system also soon lead to such a situation. provides a standard interface for many different operations in many countries. That Hexagon's impact on efficiency within these operations take place in separate HSBC should be reflected in operating systems in a variety of countries is expenses. We compared operating expenses transparent to the user as he or she as a percentage of revenue for HSBC and experiences a smooth transition while competitors. HSBC’s expenses are lower initiating transactions that are performed in 31
  16. 16. Impact of GIS on a Global Bank Hong Kong, Manila, or Toronto. This (OFX) and Integrion, could pose a threat, standard interface increases flexibility for however. OFX is a partnership between HSBC because it provides opportunities for CheckFree, Intuit, and Microsoft and low cost product extensions and it increases Integrion is a partnership among 20 banks flexibility for the customer as it allows the and IBM. Among them they wish to customer to extend its reach to new develop a common standard for branded locations or new products at little electronic banking products. incremental cost. For customers who want to do international Competitive Advantage. banking online, there aren’t many Hexagon’s full value depends on its alternatives to Hexagon. Many large banks geographic scope, a form of “network have sophisticated online systems, which externality.” The system is more valuable to are restricted to domestic banking. Hexagon a firm if it reaches every country in which is the only application that provides the mix the firm may wish to do business and of cash management, trade finance, Hexagon reaches more than 100 countries. insurance, and securities features with A system built on a smaller scale, which global scope. Consequently, HSBC benefits covered a smaller number of locations, from an “exclusive access to customers” would be much less valuable. Consider the who want to use all of its features within a electronic goods manufacturer that we single, integrated global system. mentioned earlier. Suppose the comptroller was unable to use Hexagon to process its Does Hexagon provide HSBC with Hong Kong payroll or to transfer funds to competitive advantage by providing its contractor in the Philippines because exclusive access to customers and favorable HSBC had no presence in those localities. network externalities, backed up by a barrier The consequence would be that she would to entry? If so, it should allow HSBC to have to find other ways to accomplish these obtain high business margins. Figure 4 tasks. This would substantially reduce the shows pretax profit as a percentage of effectiveness of Hexagon as a global cash revenue, a reasonable proxy for margins. management system. Since 1993 HSBC has earned higher margins than any of the selected These network externalities create a “barrier competitors. This suggests that HSBC to entry” for all but the very largest financial enjoys a competitive advantage as a result services firms. Only a global system could of Hexagon. compete with Hexagon. An alliance, such as the one between Open Financial Exchange 32
  17. 17. Impact of GIS on a Global Bank 50% HSBC 40% Nat. B. of Can. 30% Citibank 20% BofA 1 0% R.B. of Can. Standard 0% Chartered 1 990 1 991 1 992 1 993 1 994 1 995 1 996 1 997 -1 0% Figure 4: Pretax profit as a percentage of revenue (net interest income plus other revenue) Success of HSBC DISCUSSION, LIMITATIONS, AND HSBC’s explicit strategy includes a focus IMPLICATIONS FOR MANAGERS on the development of cutting-edge IT to support its global business. The centerpiece Discussion of this strategy is Hexagon. If the strategy is successful, one might expect this success to The results strongly suggest that Hexagon affect profits. Is HSBC profitable? affects HSBC’s performance by increasing economies of scale and scope, providing HSBC easily outperformed each of its additional value to customers, increasing competitors in profits and in profit growth efficiency within HSBC, and improving over the period from 1990 through 1997. organizational effectiveness. In addition, For 1997 its pretax profits were nearly USD network externalities in the product provide $8 billion. Indeed, of the 100 largest disproportionately more value to the financial services firms, as of the end of customer when every location at which the 1997, HSBC was 10th largest in assets, but it customer wants to do business is covered by was 1st in pretax profits for each of the three the system. Hexagon provides HSBC with years from 1995 through 1997 (Steinmetz, exclusive access to customers who want the Bray, Friedland & Kamm, 1998). all of Hexagon’s features in a global system. 33
  18. 18. Impact of GIS on a Global Bank Finally, the scale and scope of the system In any case, our intent here is to understand provide substantial barriers to entry, how one firm used an innovative global IS, potentially allowing HSBC to earn along with its business and IT strategies and exceptional returns. When we looked at a global network of business assets, to HSBC’s firm level performance, in terms of achieve its business strategy and obtain measures related to HSBC’s apparent superior performance, rather than to provide performance impacts, we found that it is empirical proof that the impacts were consistent with these conclusions. actually realized. We think that the analysis contributes much to our understanding of The results suggest that HSBC’s worldwide Hexagon’s impacts, as well as providing us corporate assets, including its staff, its with insights about the use of global IS to offices, and its domestic IT infrastructure, create value for the firm and its customers. are complementary to Hexagon and create together more value for customers than Implications for Managers would be created by each separately. Hexagon's extensive portfolio of services, For firms in the global financial services together with HSBC’s worldwide industry, this is further evidence of the operations, creates value that is not extreme importance of IT infrastructure to available to customers of other banks. At their business. Customers will continue to the same time Hexagon creates strong demand faster transaction speeds, more incentives for corporate customers to transparent interfaces, lower transaction become customers of other HSBC banks in costs, and geographic scope. Only highly order to take full advantage of Hexagon’s integrated global systems, which are, international features. themselves, well integrated with back office processes, can hope to compete on this Limitations level. There are thousands of financial services firms in the world, but not many None of the analysis that we have presented, firms can compete in this manner. qualitative and quantitative, nor all of it together, proves that Hexagon positively Of course, not every customer needs global affected HSBC’s performance. Firm level systems. Contrast Hexagon’s complex performance is affected by many factors, infrastructure with that of another bank that while our analysis focused on one broad operates from a single location in Hong product line, albeit the centerpiece of Kong and focuses on financing bilateral HSBC’s global IT strategy. Quantitative trade with other provinces in China. Its firm level performance data that more services are delivered entirely at one precisely measures the performance impacts physical location and without substantial IT of Hexagon’s features was not available to support. Its expenses are low, its business is us. Consequently, the connection between very focused, and it competes on the basis the qualitative functional impacts on within- of price. Its customers' service level firm performance, observed by HSBC expectations are in line with the services managers, and firm level effects is not provided and it is very profitable. directly observable in terms of precisely targeted measures. Nonetheless, since the For now the financial services industry results of analyses that we are able to seems likely to move in the direction of two present are very strong, we believe that they or more distinct levels of service: integrated, are quite persuasive. global services with intense IT infrastructures and niche products, which 34
  19. 19. Impact of GIS on a Global Bank provide lower costs or custom services to Risk. Proceedings of the 25th Hawaii International customers who don’t require products with Conference on System Sciences, Vol. IV, 697-705. global scope. Many of these niche products Cusack, S. (1990). Bankers Trust Architects a Global can be very profitable, but they might not be Plan. ComputerWorld Premier 100, 31-34. stable. The firm with the global IT-based structure and consequent low economies of Dos Santos, B.L. & Peffers, K. (1995). Rewards to Investors in Innovative Information Technology product and geographic scope may Applications: First Movers and Early Followers in eventually be able to incorporate the niche. ATMs. Organization Science, 6(3), 241-259. For multi-national firms in other industries Dos Santos, B.L., Peffers, K. & Mauer, D.C. (1993). there may also be an analogical lesson. This The Impact of Information Technology Investment Announcements on the Market Value of the Firm. case provides a revealing example of an IT- Information Systems Research, 4(1), 1-23. based product that was intended to create value for the customer, but also reduced Engardio, P. (1993). Global Banker. Business Week, costs for the firm, created economies of May 24, 50-52. scale and scope, and created difficult-to- Fletcher, K. & Wright, G. (1996). The Strategic imitate competitive advantages. Context for Information Systems Use: An Empirical Study of the Financial Services Industry. ACKNOWLEDGMENTS: International Journal of Information Management, 16(2), 119-131. We are very grateful for the excellent Graham, G. (1997). First Direct spurns HSBC home recommendations of the three reviewers and banking software. Financial Times, April 30. the editor in chief, which contributed so much to the quality of this article. This Gurbaxani, V. & Whang, S. (1991). The Impact of research was supported in part by grants Information systems on Organizations and Markets. Communications of the ACM, 34(1), 59-73. from the Christian R. & Mary F. Lindback Foundation, the Research Foundation of the Hallikainen, P. Heikkila, J. Peffers, K., Saarinen, T. Helsinki School of Economics, and The and Wijnhoven, F. (1998). Evaluating Information University of Hong Kong. Technology Projects: Procedures, Follow-through, Decision-making and Perceived Evaluation Quality. Forthcoming in Journal of Global Information REFERENCES Management. Bakos, Y.J. (1991). Information Links and Electronic Heikkinen, M-P. (1997). Internet maksuliikenne etsii Marketplaces: The Role of Interorganizational muotoaan (Payments on the Internet are looking for Information Systems in Vertical Market. Journal of the right form). Helsingin Sanomat, 16.07.1997 (in Management Information Systems, 8(2), 31-52. Finnish). Chowdhury, N. (1998). Why HSBC is Sailing Holland, C.P. & Lockett, A.G. (1995). Strategy and Through the Storm. Fortune, March 2, 1998, 16-17. Structure of Global Payment Systems. Proceedings of the Third SISnet Conference, September 18-19. Clemons, E.K. & Row, M.C. (1991). Information Technology at Rosenbluth Travel: Competitive Holland, C.P., Lockett, G., Richard, J.M. & Advantage in a Rapidly Growing Global Service Blackman, I. (1994). The Evolution of a Global Cash Company. Journal of Management Information Management System. Sloan Management Review, Systems, 8(2), 53-79. 36(1), 37-47. Clemons, E.K. & Weber, B.W. (1992). National HSBC (1996). Press release, February 29, 1996. Westminster’s Strategic IT Infrastructure: Redefining Branch Banking with £500 Million, HSBC (1997a). HSBC Holdings plc, Annual Report Making the Investment Decision, Managing the and Accounts 1997. 35
  20. 20. Impact of GIS on a Global Bank HSBC (1997b). Press release: ”New Spex EDI Link with HSBC Hexagon Software”, May 1997. Seidmann, A. & Sundararajan, A. (1997). Building and sustaining interorganizational information Ives, B. & Jarvenpaa, S.L. (1992). Global sharing relationships: The competitive impact of Information Technology, Some Lessons from interfacing supply chain operations with marketing Practice. International Information Systems, July, strategy”, Proceedings of the Eighteenth Annual 1-15. Conference on Information Systems, Atlanta, Georgia, December 14-17, 1997, 205-222. Jarvenpaa, S.L., Ives, B. & Pearlson, K. (1996). Global Customer Service for the Computer and Steinmetz, G., Bray, N., Friedland, J. & Kamm, T. Communications Industry. In Palvia, P.C:, Palvia, (1998). As a Global Rival, Citicorp/Travelers Won’t S.C & Roche, E.M. (Eds.), Global Information Be Alone. The Wall Street Journal, April 7, 1998, Technology and Systems Management, Key Issues A13-A14. and Trends, Ivy League Publishing, 483-509. Takac, P.F. (1994). Outsourcing: a key to controlling Jelassi, T. & Figon, O. (1994). Competing Through escalating IT costs? International Journal of EDI at Brun Passot: Achievements in France and Technology Management, 9(2), 139-155. Ambitions for the Single European Market. MIS Quarterly, 18(4), 337-352. Ken Peffers, Ph.D. (Purdue, 1991) is Martinsons, M.G. (1992). Global success with Assistant Professor of MIS at Rutgers electronic banking: the Hongkong Bank and University. His research articles on the HEXAGON. Journal of Strategic Information business impacts of IT investments and Systems, 1(5), 290-296. evaluating new IT projects have been published in such journals as Information Mukhopadhyay, T., Kekre, S. & Kalathur, S. (1995). Business Value of Information Technology: A Study Systems Research, IEEE Transactions on of Electronic Data Interchange. MIS Quarterly, June Engineering Management, and 1995, 137-156. Organization Science. His current interests include the value of investments in Palvia, P.C. (1996). Strategic Applications of electronic commerce applications and the Information Technology in Global Business: Using the “GLITS” Model and Instrument. In Palvia, P.C:, development of new methods for IS Palvia, S.C & Roche, E.M. (Eds.), Global planning and evaluation. Dr. Peffers is also Information Technology and Systems Management, the publisher of a new student-edited and Key Issues and Trends, Ivy League Publishing, managed electronic IT journal, the Journal 510-533. of Information Technology Theory and Palvia, S. & Lee, K. (1996). Developing and Application(JITTA). Implementing Global Informaiton Systems: Lessons from Seagate Technology. In Palvia, P.C:, Palvia, See http://crab.rutgers.edu/~peffers/ and S.C & Roche, E.M. (Eds.), Global Information http://www.jitta.org. Technology and Systems Management, Key Issues and Trends, Ivy League Publishing, 559-576. Virpi Kristiina Tuunainen is a Peffers, K. & Dos Santos, B. (1996). Performance researcher at the Electronic Commerce Effects of Innovative IT Applications over Time. Institute of Helsinki School of Economics IEEE Transactions on Engineering Management. 43(4), 381-392. (HSE). She received her M.Sc.(Econ.) and Lic.Sc.(Econ.) degrees from the HSE, and is Peffers, K. & Saarinen, T. (1998) Measuring the currently finishing her doctoral dissertation Business Value of IT Investments: Inferences From a on electronic commerce. Her research Study of Senior Bank Executives, Forthcoming in Journal of Organizational Computing and focuses on interorganizational information Electronic. systems, electronic commerce and economics of IS. She has published articles Reguly, E. (1997). BT to take key stake in digital in Journal of Management Information venture. The Times (London), February 6. Systems, International Journal of Electronic 36
  21. 21. Impact of GIS on a Global Bank Commerce and in a number of international conferences. 37

×