ISSIP Service Innovation Weekly Speaker Series Pres 109_Javier Busquets Jan 13 2016

1. DISCOVERY PATHS: EXPLORING
EMERGENCEAND IT EVOLUTIONARY
DESIGN IN M&A
Analysing the Grupo Santander’s
acquisition of Abbey (2004-2009)
Javier Busquets, PhD
ESADE Business School
California, USA, January the 13th 2016
1

2. Agenda
•Introduction
•The evidences
•The gap between theory and reality
•Method
•Findings
•The proposal
•Insights
2

3. Introduction
• The merger and acquisition (M&A) between Grupo
Santander (GS) and Abbey National (2004-2009) was the
first cross-border operation to take place in the history of
European banking.
• During the M&A, GS transferred its Information and
Communication Technology (ICT) platform, Partenón, in
an unprecedented strategy in global banking
• The results exceeded the forecast synergies by 35%
Santander became the most efficient bank in the world in
2012
• We argue that the synergies obtained represent a sign of
the emergence of a new system (radical novelty) where
efficiency is a sign of emergence
3

4. The Evidence
4

5. 0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80 100
Wells Fargo
Santander
BBVA
BNP Paribas
HSBC
Standard
Chartered
ING Group
Nordea
JP Morgan Chase
Itaú
Intesa
Sanpaolo
Royal Bank of
Canada
Credit
Suisse
Mitsubishi
UBS
Unicredito
Number of countries where
banks have some presence
Number of countries
where banks reach a
leadership position
(ranked between 1 and 5)
Global banks with some
presence in other countries
Banks focused on one
market
Banks with strong
orientation towards
private and
corporate banking
(between 40 and
60% of revenue)
Citi

6. 3.331
1.435
2.838
2.977
2.620
2.456
2.3352.319
1.997
1.4381.492
1.5001.648 1.615
2004* 2005 2006 2007 2008 2009
-15%
-6%
Income
Costs
25% during two first years
Income Without model
Costs without model
Income
Costs
Efficiency
Ratio
Real
No Model
86,1 70,6 61,1 56,9 48,3 43,1
59,7 58,3 56,9
Aprox 14 ppt.
Efficiency to the
model

7. The Gap
7

8. M&A’s
• In the long run more than 70% of M&A fail due to
technology integration; culture gaps and differences in
regulation
• Main problems
• Synergies are a metaphor of short term efficiencies ignoring the
inherent transformations in the long run
• Normally scholars consider technology as an “artifact” that enables
organizational processes ignoring the nature of different
components of digital technologies
• In fact many M&A’s do not scale-up since we assume
organizations fail to manage complexity
8

9. Evolution
9
Variations Selection
Retention
Competition
Strategic
initiatives
Expressions
Industry ecology
“Best practices”
Routines
Processes
algorithms
Incorporations
Exit
Organizational learning

10. Evolution and Modularity
• In contrast, evolutionary theories hone on variations and
see firms as systems
• formed by a set of subsystems (or modules) with a specific function
and
• a set of relationships between them
• The organizational learning process: modules are the
result of problem-solving to frame complexity (Simon,
1996)
• For the purposes of our research, we can view these
modules as
• organisational task systems (Zhou, 2013) and
• technological components (Arthur, 2011)
10

11. Evolution as Imitation
(Planned Synergies)
Evolution as problem solving
(Emergent Synergies)
Modular
Architectures
Scale & Scope (Dialectical Variations
between existing components and new
processes)
 Eficiency through cost-effective re-
use of components
Morphogenesis (variations through system
design)
 Eficiency ?
Indivisible
Architectures
Economies of Scale (No variations)
 Eficiency through decreasing unit
costs
Learning (Dialectical variations as
synthesis between IT knowledge and
“emergent” knowledge)
 Eficiency through cost-effectiveness
and “rapid integrations”

12. The Method
12

13. Deduction Induction Problem-Solving
Law
Case
Case
Results
Unforeseen
Results
Laws
Result Law Case
Research method

14. The Findings
14

15. 50%62%Efficiency Ratio
13%
15,5
33%
6-9%% IT / Margin
8Employees per branch
6-9%% Sales Opp’s (back office)
Gap
Abbey
2004
Santander
“Elevator pitch”

16. Britannia (2005-2006)
• Mortgages and cards were in-sourced, and outsourcing
contracts were re-negotiated.
Gain control over the
business
• Some 1000 IT staff were made redundant
• Reduction of back office staff: some 5,600 people.
• Consolidation to one call centre in UK (1,000 agents) and
one call centre in India (1,200 agents): cut of 100 staff.
IT staff and customer
operations (€286m)
• From five data centres to just two centres
• Hardware and software maintenance contract re-
negotiation
• Cancellation of new 127 IT initiatives. Re-negotiation of
IBM, BT and EDS
IT consolidation (€114m)
• Only ten people were maintaining the systemThe critical resource was
staff.
• (1) replacing the cables of the old data centre with fibre
optic cables
• (2) although Abbey’s UNISYS system was practically
obsolete,
A programme of IT
infrastructure investments:
€50 million:

17. 3.331
1.435
2.838
2.977
2.620
2.456
2.3352.319
1.997
1.4381.492
1.5001.648 1.615
2004* 2005 2006 2007 2008 2009
-15%
-6%
Income
Costs
25% during two first years
Income Without model
Costs without model
Income
Costs
Efficiency
Ratio
Real
No Model
86,1 70,6 61,1 56,9 48,3 43,1
59,7 58,3 56,9
Aprox 14 ppt.
Efficiency to the
model

18. A vision vs. Main Contingencies
• (Vision)Customer centricity vs.
• Technological cycles and scale
• Cultural gaps
• Regulation
18

19. Task systems
(Internal de-
composability)
Technology
(“External”)
Rules of design
- Production
- Use
Runtime
User
Experience
Data Quality
Assurance
and Global
Automation
IT infrastructures
Software and
programming
languages
Core banking
systems
IT automation Software R&D
Produban Isban HQ
“local Isbans”
System
administration
Geoban
Main Process
Design Principles

20. Geoban
Isban
Software
R&D
Software Project
Governance
Global
Infrastructure
Management
IT/IS
Manufacturing
Global
Telecom
Produban
Media Management
Business
Processes
Architecture
Driven
Demand
User Experience and
Productivity
Bank`s business model and
efficiency ratio
Global
Back office
Operations
Customer
Data
Management
Global
Automation
Regulation
Compliance
Local Isban
(Local Adaptations and
Innovations)
Bank’s Regulators IT Infrastructure
Vendors
Sofware Vendors
Consulting Firms
Adaptation control
for “selectiion”
variables
Constant variable

21. 3.331
1.435
2.838
2.977
2.620
2.456
2.3352.319
1.997
1.4381.492
1.5001.648 1.615
2004* 2005 2006 2007 2008 2009
-15%
-6%
Income
Costs
25% during two first years
Income Without model
Costs without model
Income
Costs
Efficiency
Ratio
Real
No Model
86,1 70,6 61,1 56,9 48,3 43,1
59,7 58,3 56,9
Aprox 14 ppt.
Efficiency to the
model
Pitch to analysts
Translating into analyst
language the
transformational project
Short and Long term
A new Hybrid organization
for the strategic interaction
between IT and the
organization
Technology cycles, culture
and Regulation
The limits of “system
integration” – Isban UK
The limits of IT internal
dynamics (infrastructure;
sofware and administration)
Business model optimization,
not cost cutting plans

22. The Proposal
22

23. Evolution as Imitation
(Planned Synergies)
Evolution as problem solving
(Emergent Synergies)
Modular
Architectures
Scale & Scope (Dialectical Variations between
existing components and new processes)
(1) Re-Use of some core bankking components,
routines and algorythms into new taks systems
(2) Integrative capabilities : Sales portal to “connect”
new commercial policies and information
presentation with old system
 Eficiency through cost-effective re-use of
components
Morphogenesis (variations through system design)
(1) Media Management: translating business-technology
knowledge domains
(2) New IT organizational organs: Isban, Produban anb
Geoban and new IT governance
(3) Capabilities: encapsulating complexity by the use of
technology
 Eficiency through increasing returns (customer
level) and avoiding dis-economies of scale by
encapsulating complexity
Indivisible
Architectures
Economies of Scale (No variations)
(1) Automation: flat-back office procedures
(2) Consolidations and elimination of redundancies at IT
and back office personnel
(3) De-investments in resources, business lines and
assets
 Eficiency through decreasing unit costs
Learning (Dialectical variations as synthesis between IT
knowledge and “emergent” knowledge)
(1) Hybrid temporal structures : Sales Portal and IT
integrations between old and new IT architecture
(2) Capabilities: (a) Experiments, improvisations,
prototyping and learning by doing ; and (b) translation
between different paradigms
 Eficiency through cost-effectiveness and “rapid
integrations”
(a)
(b)

24. The Insights
24

25. Emergence as radical novelty (1)
Variations through system design
(1)Hybrid Organizations as paradigm translation: Media
Management: translating business-technology
knowledge domains (“system integration”) and business
needs
(2)Morphogenesis: New IT organizational organs: Isban,
Produban anb Geoban and new IT governance
(1)Reduction of software dis-economies of scale
(2)Substitution of costly expatrations by the use of technology (Front
Office processes; Portals and Front-Office applications ,e.g.)
(3)Sofware as engines for growth at customer level (externalities)
(3)Organizational Learning and Capabilities: (a) short
and long term (b) encapsulating complexity by
endogenizing technology
25

26. Emergence as radical novelty (2)
• Organizations have been studied mainly as
“functions of production” what about functions of
innovation?
• Technology is an enabler for business design? Or
business models emerge from systems of
technology?
26