HSBC Bank Organization as an Open SystemThe Open-Systems View HSBC bank Input stageOrganization acquires resources such as raw materials, money, and skilledworkers to produce goods and services. HSBC, ”The World’s Local Bank”, is oneof the largest banking organizations in the world. HSBC Holdings is headquartered inEngland and operates in 81 countries and territories. Interests are concentrated inEurope and Asia and to a lesser extent North America (United States). Profits arealmost equally divided between the Corporate, Commercial and Personal bankinglines of business. The money that a HSBC bank raises to lend is often called the capital. So, howdoes Hsbc Banks raise capital is something that has to be understood in thisbackground. Hsbc Banks have to raise money from sources in order to have itwith them to be lent to customers, from whom they charge a rate of interest thatis higher than that at which they borrow. This accounts for their profit. Sincecapital is one of the critical components of a Hsbc Banking business, it isimportant to understand how Hsbc Banks raise its capital.
Capital from stakeholders: Hsbc Banks can do this in a number of ways. Themost common, and in fact, a mandatory method of raising capital is for theorganizers (in most cases, these are the stakeholders or founders) of the HSBCbank to put in money from their pockets. Usually, while the amount needed tostart a HSBC bank varies from one American state to another, the ratio at whichHsbc Banks get their capital from their organizers varies between 10 and 15percent. These organizers are the investors in the Hsbc Bank, and have a deepinterest in the functioning of this lending institution. How do Hsbc Banks raisecapital is understood in a clearer fashion in this context –the greater the abilityof the organizers to raise money, the greater the money the HSBC bank can lendout , so that it runs healthily and profitably. Raising capital from shareholders: While organizers make up between 10 and15 percent of the Hsbc Bank’s investment, how to Hsbc Banks raise capital isunderstood when it is seen that the reminder of the money is raised fromshareholders. The term ‘shareholder’ implies those who invest in the HSBC bankthrough public borrowing. The number of shareholders and their individualcontributions can vary by a very wide margin, as can their contribution. As withany other kind of partnership, this kind of financial relationship too, is such thatevery stakeholder earns from the profit in proportion to the investment made. The markets as lending source for capital: How do Hsbc Banks raise capital isa question that can be answered in another manner. Hsbc Banks look for othersources in raising capital. For instance, they can borrow from the financialmarkets. This option is usually exercised in free market, capitalist economies, aprime example of which is the US. In these economies, it is a useful source tohave someone borrowing from the markets because this can be used as a bufferin markets, which by their very nature are volatile and prone to a lot of flux.When markets are in need of money in case of a crunch, they can always go backto the Hsbc Banks to which they have lent money. Of course, there are somedrawbacks in this system for both the lender and the borrower. The lender maynot be fully sure of getting back money it has given to Hsbc Banks when it needsit the most, since they normally ask money back from Hsbc Banks only when it isfaced with an emergency, and it is always difficult to get it at such short notice.For Hsbc Banks, too, there are problems with this kind of option, because theycannot invest this money on long term plans. The government as a source of capital: Getting money from the governmentis another option for Hsbc Banks when it comes to how do Hsbc Banks raisecapital. In governments in which the free market is less powerful a force toreckon with, government bonds can be a good source by how do Hsbc Banksraise capital. In economies that are either fully or partly controlled, as in the caseof China or India, government lending can be a very useful source of how doHsbc Banks raise capital. This is a lesser possibility in free market, consumeristeconomies such as the US, but more common in the countries just mentioned. Inthese situations, governments lend Hsbc Banks through bonds and other suretiesfor a number of reasons. Since it is not always the consumer who dictates
demand, governments lend Hsbc Banks as a kind of safety valve. When the keysectors of the economy, mostly agriculture in these and other related countries,face problems, the governments can straightaway approach these Hsbc Banks towhich it has lent capital and direct them to divert the money due to thegovernments back to the people in need of the money. In most cases, this isusually a case of money transfer. In other words, the question of how do HsbcBanks raise capital needs to be looked at from a different perspective in somecountries. Other ways: How do Hsbc Banks raise capital is to be understood when it onelooks at another queer way by which Hsbc Banks raise capital. In the days of theeconomic slowdown, some financial companies came to Hsbc Banks to advisethem on how to raise capital. The aim was to get these Hsbc Banks to imparttheir experience to these companies on how to liaise with the government andget money from it. These companies, such as Wells Fargo and Morgan Stanleyetc, had to pay a huge consultancy fee for these Hsbc Bankers. There were alsosome financial arrangements by which these Hsbc Banks got a cut in the amountof money they helped the companies raise! The money that these Hsbc Banks gotfrom these transactions was put back into the market and other sources, as thistoo, turned out to be its capital in many ways. In this way, Hsbc Banks raisecapital was a question that was answered in a very unusual fashion. HSBC bank Conversion stage Inputs are transformed into outputs of finished goods as listed below: Current Accounts Mortgages Savings Accounts Internet HSBC banking Personal Current Accounts Savings Accounts Mortgages Investments Credit cards Loans Insurance International Services Internet HSBC banking Financial Planning HSBC Premier HSBC Advance Putting your finances in order Newsroom
Output stage Finished goods are released to the external environmentClosed System Closed system A self-contained system that is not affected by changes in its externalenvironment. Likely to experience entropy and lose its ability to control itself but Hsbcbank is likely to be very much affected by the external environment up to certainlevel. Synergy The performance gains that result from the combined actions of individualsand departments Possible only in an organized system. When Hsbc Banks merge they do so in order to gain synergies. Simply put, asynergy occurs when two firms are more productive together than they wereapart. Synergies are not guaranteed, however, so managers, investors andbusiness scholars should carefully consider the potential synergies of a HSBCbank merger. Although most synergies will be positive, negative synergies can beprofound.
Employee SavingsA study of HSBC bank merger synergies by Erik Devos, Palani-RajanKadapakkam and Srinivasan Krishnamurthy in the "Review of Financial Studies"in March 2008 found that all 10 of the HSBC bank mergers in their study resultedin synergies through staff reductions. When two HSBC banks merge it createsredundancies. Calculate the synergies from a HSBC bank merger by calculatingstaff savings. For example, when Chemical HSBC banking Corporation and ChaseManhattan HSBC bank merged in 1996, they eliminated 12,000 jobs and closed100 branches, saving $1.5 billion annually. Estimate the the number of positionsslated for elimination and the associated cost savings to determine the synergyof the merger.Cross-SellingAccording to Charles W. Calomiris of Columbia Universitys Graduate School ofBusiness, HSBC banks can achieve synergies by cross-selling products. In onecase that he studied, the only synergies created between two merged HSBCbanks were the result of cross-selling products to each others customers. Forexample, if a HSBC bank that specializes in savings plans merges with a HSBCbank that specializes in loans, it can offer its savings products to the customers ofthe other HSBC bank while the other HSBC bank would gain access to potentialcustomers for its loan products. Synergy can be calculated by estimating theadditional sales from cross-selling.Economies of ScaleAccording to H. David Sherman and Timothy J. Rupert, writing in the "EuropeanJournal of Operational Research," HSBC bank synergies can be created througheconomies of scale. The Federal Reserve HSBC bank of San Francisco describeseconomies of scale in HSBC bank mergers as the "relationship between theaverage production cost per unit of output and production volume." Economiesof scale take place where it becomes cheaper to produce a product or servicewith increased production. This potential synergy can be calculated byestimating the average cost of offering a HSBC banking product, such as a loan,before and after the merger. The reduction in cost post-merger is the measure ofsynergy.Negative SynergiesFirms tend to focus on the positive synergies that occur in a merger, but negativesynergies should also be considered. Negative synergies occur when the twoHSBC banks are actually less efficient together than they were as independentfirms. For example, Sherman and Rupert explain that diseconomies of scope canoccur when two HSBC banks merge. Diseconomies of scope happen when thenew firm becomes too broad, and the costs of coordinating activities becomeslarger than the savings. Calculate the negative synergies by estimating theadditional costs that the firms will incur to coordinate activities.
Contingency Theory Contingency Theory (External Enviornment) The idea that the organizational structures and control systems managerchoose, are contingent on characteristics of the external environment in whichthe organization operates. To maximize the likelihood of gaining access to resources, managers mustmust allow departments to obtain resources , given the constraints of theenvironment they face An important characteristic of the external environment that affects an organization’s ability to obtain resources is the degree to which environment is changing Changes in the organizational environment include : Changes in technology e.g internet banking , forex etc. The entry of new competitors e.g Citibank, ING, JP Morgan Chase, Bank of America and Deutsche Bank. Unstable economic conditions e.g “2001 was an "annus horribilis" for the world economy in general and for the banking sector in particular” according to Rolf-E Breuer, spokesman for the managing directors of Deutsche Bank and one of HSBC’s global banking competitors. The slowing of the United States economy and its follow-on effect to the Asian exporters adversely affected HSBC’sresults. However, it was the economic collapse of Argentina was the major problem for HSBC, resulting in a $1.1 billion charge (HSBCAnnual Report). Other popular contingency variables are : Organization size Environmental uncertainty The routineness of task technology Indıvidual differences competition economy government interference (laws, regulations) location demographics consumer behaviorMajorTrends in the Hsbc global banking environment increasing mergers and acquisitions increasing market share by the larger banks declining cost to income ratios shrinking interest margins decreasing dependence upon interest margins.
CompetitorsThe obvious competitors are similar juggernaut sized global banking groups suchas Citibank, ING, JP Morgan Chase, Bank of America and Deutsche Bank.“…Some large multinational banks—the local subsidiaries of Citibank, HSBC, andStandard Chartered—have developed strong and profitable local franchises witha wide range of services. Others, including JPMorgan-Chase and Deutsche Bank,are much more selective and in some cases are narrowing their activities inemerging markets, refocusing on investment banking and private bankingactivities.” (Adams) However, depending upon the market segmentation virtually all sized banks canpresent competition (Westwood).StrengthsSize: The juggernaut strategy is based upon size: companies that control largemarket shares usually outperform the average industry return (Westwood).Ability to successfully grow by mergers and acquisition: HSBCs acquisition ofMidland resulted in a fall in the ratio of cost to income from over 70 percent in1992, to under 60 percent by the end of 1997 (Molyneux). Ability to successfullyimplement their custom electronic banking application. Hexagon is thefoundation of HSBC’s strategy to deliver innovative services via InformationTechnology. Hexagon is focused on business customers engaged inintercontinental trade and high-end retail customers who use global banks tomange their personal global finances. Successful multi-domestic strategycombined with global branding. Successful management structure, valued andvaluable employees.WeaknessesHSBC has a greater and perhaps increasing dependence upon emerging and lessdeveloped markets than many of its major global competitors. The $1.1 billionwrite down in 2001 being the most recent example.ThreatsHSBC’s development of emerging markets provides increased vulnerability toexternal factors that are more likely to occur than in developed markets such as:currency instability, financial market instability, adverse governmentintervention and steeper economic downturns. Obviously the benefits haveexceeded the risks. Although during 2001 HSBC fared less well than for exampleCitibank due to this increased vulnerability. HSBC is justifiably proud of itscustom information system, Hexagon. However, the importance of such systemscombined with the relatively short life-span of such products providesopportunities for competitors to overtake HSBC’s advantages in these areas.OpportunitiesHSBC stated aim is to be the World’s Leading Financial Services Company(Bond). This requires HSBC to transform itself from a global bank to a morediversified global financial services company such as Citibank. The challenge willbe to do this while increasing shareholder return, another major aim and
maintaining its already low cost base. Current directions which could beexpanded include greater diversification into equity products which is currentlybeing pursued via HSBC Merrill Lynch, increased presence in insurance and cardproducts.Despite the 2001 decrease in revenue from this line of business, Private Bankingis regarded as an important high profit opportunity for growth as it currentlyonly contributes four percent of profit.Hsbc bank’s contingency planning effort has one main goal:To get back to “business as usual” as quickly as possible, ideally within two daysafter a disaster. Quick recovery of processing capability may now be moredifficult and take longer than when your bank’s recovery strategies were firstapproved by the board of directors.Recovery / Hurt/ BenefitThe Corporate contingency planning strategy which not only reflects appropriatesupport for current business objectives, but also allows for the interdependencyof Hsbc bank product lines. The argument is directed mainly toward companiesthat already have a contingency plan and may now consider it timely to reviewand update their mainframe backup strategies. The benefits to be derived fromreviewing the present strategy include creating the opportunity to determinehow much backup is currently needed and identifying ways of spendingcontingency planning dollars more efficiently.One strategy that your board of directors may have adopted as part of its originalcontingency planning program is to “provide off-premises mainframe computercapability.” The primary focus of providing mainframe backup capability is toensure that the Hsbc bank will be able to accomodate customers and that itsproducts and services will be available as advertised. This strategy may beenhanced to provide greater protection for Hsbc bank’s product line.
Main Frame Recovery StrategyThe mainframe computer continues to be the most critical operationscomponent of Hsbc bank’s ability to conduct business. It is currently crucial forsurvival, and it remains the central point for data storage and informationprocessing. The more automated and integrated Hsbc bank’s operations are, themore difficult it is to substitute manual or semiautomated activities formainframe computer processing. The conventional approach to mainframebackup strategy is to document and test procedures to restore the mainframeoperations at a remote processing center. Each test includes restoration of themain software systems and processing of selected applications as of apredetermined “disaster date.” The typical programming department has themajor responsiblity of developing procedures for backing up the applicationsystems. Installation of such procedures preserves the account information andpositions Hsbc bank to respond quickly to a disaster. The programmingdepartment also maintains a prioritized list of applications which is used inselecting systems for testing. In most banks, considerable progress has alreadybeen made in developing and testing the mainframe recovery strategy. Thesequential development of recovery plans could be strengthened by makingsome changes in procedure. Three recommendations for refining existingdisaster recovery plans. Standardize & Test Backups for Critical ApplicationsThe crux of the disaster recovery issue for Hsbc bank lies in the ability to restoreoperations in a timely manner. The timeliness factor must be emphasized, sinceit impacts customer impression and satisfaction, management, information, legaland regulatory compliance, and ultimately, market share. Hsbc bank mayimprove its chances for surviving a disaster by “standardizing” and testingbackups for the “critical” applications. Critical applications are defined assystems that will have a higher recovery priority after a disaster strikes. Ofcourse, recovery of the remaining systems will be completed in an orderlysequence after the disaster is contained. Standardizing, as used here, means thatthe same standard will be used for creating all data file backups. Recovery of theapplications can be made more efficient by developing and adopting a procedureto back up all application systems at the same stage of processing. For example,either back up the volumes before the day’s processing is started, or create thebackups after processing is completed. Recovery will be impeded if the variousvolumes are backed up at different stages of processing. Standardization ofbackups will ensure that account information is synchronized. Inherent in thisconcept is the requirement for zero generation backup. If the data file backupsare one or more generations old, additional processing of one or two days oftransactions will be needed in order to restore the data files to the disaster day.The immediate impact of such additional processing may be to increase therestoration period to three to four days, or even longer. In that additionalinterval, prompt service to Hsbc bank’s customers may be jeopardized. Thisdelay will occur because the Hsbc bank is unable to post current transactionsand deliver accurate information until the additional processing and adjustmentsto synchronize the data can be completed.
Identify the Critical Business Products Assess the criticality of the business products to determine what level ofmainframe backup is appropriate for your operations. Verify that this backup isadequate to support only the processing of production work. Plan in advance tosuspend all development and testing activities until complete recovery from adisaster is effected. Next, develop criteria for identifying the “critical” businessproducts. Following the standardization of all critical applications, involve theuser departments in assessing the Hsbc bank’s product line exposure. The goal ofthis analysis should be to determine which application systems will be regularlytested at the remote recovery site. The assessment and testing processestablishes a more accurate definition of the necessary computer hardware,storage and item processing capacity Hsbc bank requires in order to coverwhatever level of risk it is willing or able to accept. This process also benefitsHsbc bank in another way by closely linking the perceived backup requirementsto the real cost of providing them. It is imperative that you involve Hsbc bank’sbusiness units in this evaluation project. Besides the more obvious factors thatdetermine criticality (such as the negative dollar impact on the Hsbc bank if ithas an unsupported product or a product whose recovery is delayed), there areother exposures.Some issues the business units can help wrestle with include the following Criticality may also be dependent on the time of day, day of month, and month of year at which the disaster occurs. The business units should help determine how the timing of a disaster could impact their products. The term “critical” as related to disaster recovery is also a dynamic condition because the criticality of applications or products increases each day the recovery is delayed. The analysis of the applications and products should also identify the point at which the applications are (or will become) critical. This kind of analysis helps determine whether a data file backup is essential for ensuring the product’s recovery. Another factor to consider is that an application will assume a higher level of criticality because of its interdependence. As application systems evolve, they tend to become interdependent because the output of one system becomes input for other applications. A single application may eventually support multiple products. The programming department should help identify the level of application interdependence and assist in defining Hsbc bank’s major outstanding recovery issues. Test Products Rather than Applications Focus on product rather than application testing. The broad goal of a viable backupplan should be to emphasize the restoration of the business products. This approachdiffers from the procedure generally followed where the object is to test severalapplications independently of one another. The preferred approach is to performan interactive test chaining together multiple applications supporting oneproduct, as during normal operations. This revised form of testing should validatethe workability of all application system backups that support the businessproducts and will strengthen your bank’s ability to protect the interests of its
customers. When planned well, the new procedure should not increase the costsof testing. CONCLUSION The present status of contingency planning is one of completed groundwork. Atthe typical Hsbc bank that has a formal contingency plan, the foundation forattempting a successful recovery from a disaster is already in place. The nextphase of planning should emphasize shortening the estimated recovery period,and move toward a “critical products” driven planning objective while keepingcost containment goals clearly in view. Success in controlling contingencyplanning costs will ultimately also benefit the Hsbc bank’s shareholders. Thereorientation in emphasis should help your company revise its contingency planningprogram. This should lead to revitalizing each strategy for protecting the customer’sinterests. Finally, the reorientation should improve Hsbc chances of surviving amajor data processing disaster and thus taking advantage from it rather thangetting hurt.