Abstract.doc.doc

Impact of GIS on a Global Bank

Expectations and Impacts of a Global Information System:

The Case of a Global Bank from Hong Kong

Authors :

Ken PeffersRutgers University, New Jersey

Virpi Kristiina TuunainenHelsinki School of Economics, Finland

ABSTRACT

Information system (IS) research suggests that the use of innovative information technology (IT), deployed globally with the right mix of organizational assets, may help firm performance by increasing scale and scope economies, customer value, operational efficiency and organizational effectiveness, and by providing opportunities for competitive advantage.

This interpretive case study investigates the business value created by a combination of firm and IT strategy, global assets, and the use of an innovative IS to deliver products in the international trade finance and cash management business. Hexagon, a proprietary on-line banking application that supports the international management of financial assets, was developed by HSBC Holdings, plc. HSBC has used Hexagon to leverage a presence in 79 countries to create value for the customers and marketing advantage for itself. Quantitative and qualitative analysis reveal Hexagon's impacts on HSBC in terms of performance impacts anticipated in the IS literature and in terms of firm level business objectives.

INTRODUCTION

Firms have been forced in the 1990s, as never before, to view markets and competition globally. The rapid expansion of international trade, reduced trade barriers, and political developments in Eastern Europe and China have resulted in strategic opportunities and threats for many firms. In industry after industry, multinational firms are under pressure to seek global economies of scale, to build world products, and to tailor products to customers in diverse markets (Ives & Jarvenpaa, 1992).

The banking industry plays a major role in supporting increased global trade and investment activity (Holland, Lockett, Richard & Blackman, 1994). Globally distributed manufacturing and marketing requires that firms finance these activities across national boundaries. In addition, they must manage the flow of cash among operating units in different continents with different currencies. Consequently, firms in the banking industry might be able to reap benefits from business globalization. Indeed, the globalization of competition together with deregulation of financial markets, the availability of relatively cheap IT, and the shift towards a global outlook by large industrial organizations have led to dramatic changes in the strategy and structure of the banking industry (Holland & Lockett, 1995).

To take advantage of the new scale and scope of international trade finance and international banking may require firms to build extensive networks of assets and alliances (Engardio, 1993), as well as well-designed global IT infrastructures (Cusack, 1990). This combination of assets may be impossible for all but a handful of the industry’s members to assemble. Here we investigate the use of a global IS to produce

17


a unique IT-based product, made possible by the use of a combination of firm strategy, IT strategy, global assets, and the use of an information system with a global scope. How is a firm rewarded for developing a unique product based on a global IS?

To answer this question we study the case of HSBC’s Hexagon. HSBC Holdings, plc, the world’s 10th largest bank holding company, has seized an opportunity to create business value, using global corporate assets and an innovative telecommunications technology application to support firms engaged in international trade. For more than ten years HSBC has been developing Hexagon, a proprietary system that allows individual and corporate subscribers around the world to conduct international banking transactions online through links between HSBC and the subscribers’ personal computers. Over the same period HSBC has been putting together a global system of alliances and subsidiaries. As a result, it is able to leverage Hexagon to create value for the customers as well as a marketing advantage for itself, relative to competitors.

In the next section, we develop expectations from IS literature for how such an IT-based product might affect the firm. In the following section, we describe our research objectives and methodology. In the next following section, we develop a rich case-based story about HSBC, the development of Hexagon, its features, and its anticipated future. In the next section, we analyze the effects of Hexagon in terms of customer acceptance, performance impacts, in terms of our expectations from the literature review and at the firm level, and the overall success of HSBC. Finally, in the last section, we discuss the meaning of the results, the limitations of the study, and the implications for managers.

EXPECTED IMPACTS OF GLOBAL IS IN THE FINANCIAL SERVICES INDUSTRY

Performance Objectives of a Global Information System

Empirical evidence is mixed, but it suggests that firms that make innovative IT investments have been rewarded with economic returns (Dos Santos, Peffers, & Mauer, 1993), while other IT investors have not. Furthermore, most of the benefits appear to have gone to firms that invested early, before acceptance of an innovation was assured (Dos Santos & Peffers, 1995). What happens when a firm puts together the right mix of an innovative IT, an effective global organization, and an appropriate strategy to produce value? IS researchers suggest that, depending on the purpose of the system, the firm may be able to benefit from increased scale and scope economies, improved product value, increased efficiency, improved organizational effectiveness, and competitive advantage.

Scope and Scale Economies . Economies of product scope arise when unit costs are lowered by producing two or more products using overlapping operations. If a bank offers new products that are similar to existing ones, the new products can be produced with few new resources because resources required for the new products are similar to resources already available. Economies of scope can be increased when IS, particularly interorganizational information systems (IOS), are introduced to allow the firm to perform an extended range of tasks at low marginal costs (Gurbaxani & Whang, 1991).

Economies also apply to geographic scope, the extent to which a firm competes in

18


various geographic markets. When they allow efforts to be replicated in new geographic areas at low marginal costs and reduce the cost of communication over time and space, IOS may allow firms to increase geographic economies of scope (Palvia, 1996).

Scale economies allow a firm to reduce its costs compared to firms with smaller scale production. Firms can use IS to realize scale economies by replicating systems to deliver products to many customers. IS applications often have very high economies of scale because the processing, communications, development, and maintenance costs are largely fixed and independent of the number of customers (Bakos, 1991).

Product Value. Systems that integrate internal processing for the firm with that of its customers create value for the customer by increasing operating efficiencies (Jelassi & Figon, 1994) or convenience and flexibility (Peffers & Dos Santos, 1996). Advances in networking, processing, and decision analysis have allowed firms to lower their customers' costs. For example, electronic payments reduce clerical errors, increase billing speed, and lower transaction costs.

Suppliers that can combine globally integrated databases and communication systems with globally integrated customer service strategies can reduce coordination costs for their customers (Jarvenpaa, Ives & Pearlson, 1996), provided that the systems are used with specialized marketing, operations, and support infrastructures created purposefully for that purpose.

Efficiency. IOS and information sharing are often targeted at increasing operational efficiency by reducing ordering costs, inventory costs,

and supply lead times (Seidmann & Sundararajan, 1997). For instance, using an EDI system, Chrysler has achieved substantial cost savings from improved information exchanges between it and its suppliers (Mukhopadhyay, Kekre, & Kalathur, 1995).

Organizational Effectiveness. The development of global IS can give multinational firms a basis for increased coordination and control or direct competitive advantage in global markets (Palvia & Lee, 1996). For example, for Rosenbluth Travel IT has developed mechanisms for managing the complex interactions between travel agents and customers (Clemons & Row, 1991).

Competitive Advantage. Network externalities arise when the benefits to users are a function of "network size." They affect the value of an IOS when its usefulness is dependent upon whether it has sufficient scope to satisfy customer needs (Bakos, 1991). Network externalities can work to provide competitive advantage by creating barriers against competition in markets from new entrants (Palvia, 1996). A global information infrastructure, requiring a huge investment, may be difficult to imitate. Consequently, its owner may be able to retain “exclusive access," for some time, to customers who want the set of features provided by the system.

Performance Impacts of IT Investments in the Financial Services Industry

Banks have expanded internationally, facilitated by falling trade barriers, to market to increasingly global customers. Global customers expect consistent product and service offerings, expertise, worldwide service standards, and local multilingual and

19


multicurrency support (Jarvenpaa et al., 1996). IT and communications technology are critical tools to enable the effective satisfaction of these expectations, along with other resources, such as branch locations and corporate image (Martinsons, 1992). Accordingly, bank spending for IT has increased dramatically and the high rate of investment is continuing (Takac, 1994).

Such spending raises many questions about whether the investments pay off for the firm, in terms of improved performance (Peffers & Saarinen, 1998; Hallikainen, Heikkila, Peffers, Saarinen, & Wijnhoven, 1998). Empirical studies in the industry have focused on how firms have sought competitive advantage from IS that reduce costs, enhance management information, or improve responsiveness to customers, e.g., (Clemons & Weber, 1992). All industry competitors in the have access to similar technology, so firms must focus on how information is used and on building a supportive strategic infrastructure (Fletcher and Wright, 1996). Taken as a whole these studies suggest the potential for financial services firms to impact performance through investments in innovative global IS. Such impacts depend upon the use of IT, the strategy of the firm and the resources that the firm can deploy for the benefit of its customers.

RESEARCH OBJECTIVES AND METHODOLOGY

In this study we investigated the development and implementation of a global IS to support an innovative product, the system’s relationship to the strategy and resources of the firm, and its impact on firm performance. We wished to understand how the subject of our study uses a global IS to provide a unique product for its customers. We hoped to understand more about the

relationship between the use of this system and the performance of the firm, both in terms of expectations derived from our literature review and in terms of firm-level performance.

This is an interpretive case study involving one firm, HSBC, and a particular product, Hexagon. We studied HSBC’s strategy, its use of technology, and its performance, using qualitative and quantitative data. The data gathering involved reviews of documents and publications, annual reports and data from commercial information services. It included many hours of interviews with HSBC executives, including HongkongBank chairman, John Strickland. We interviewed technical and product managers about such issues as the reasons for approving the development of Hexagon, Hexagon operations in Hong Kong and elsewhere, and the firm’s plans for Hexagon’s future. We also interviewed managers and reviewed documents and data from a number of HSBC’s competitors.

We chose to study HSBC and Hexagon for three reasons. First, HSBC is one of the largest and most successful bank holding companies in the world and it has an explicit strategy to focus on the use of innovative IT to create new products for customers. Secondly, while studying the use of technology to support trade finance and cash management services among banks in Hong Kong, the authors learned about the Hexagon system and became excited about the Hexagon story. Thirdly, HSBC agreed to participate in the study. This last reason was very important because, in general, firms in Hong Kong were very cautious about revealing anything about operations to researchers. The other firms mentioned in the analysis were chosen because they are major firms in trade finance and cash management, they do business in Hong

20


Kong, where our initial investigative efforts were focused, and they agreed to participate in the study.

THE HEXAGON SYSTEM

HSBC Holdings, plc.

HSBC Holdings, plc is one of the world's largest financial services organizations. Its founding member, The Hongkong and Shanghai Banking Corporation Limited (known as Hongkong Bank) was established in 1865 to finance trade between China, Europe and North America. Formally organized as HSBC Holdings, plc in 1991, it has grown dramatically, acquiring Marine Midland in the US in 1987 and Midland Bank in 1992, as well as a score of other firms. Currently HSBC's international network comprises more than 5,500 offices in 79 countries and territories, operating in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa. It has 120,000 employees in 79 countries, a global girth only Citibank can match (Chowdhury, 1998).

The use of innovative IT is an explicit part of HSBC’s strategy (HSBC, 1997a). Its IT staff of 6000 worldwide are heavily involved in product development. With John Strickland, as CEO of HongkongBank, HSBC is thought, among the business and academic communities in Hong Kong, to be the largest corporation, outside the computer industry, with a computer programmer as such a senior executive. Strickland originally joined HSBC in 1966 as Chief Programmer to install HongkongBank’s first computer. Hexagon is a key component of HSBC’s IT strategy, as indicated by the use of the Hexagon symbol, a six-sided figure, made up of six red and white triangles, as HSBC’s corporate logo.

The Development of Hexagon

The Hexagon idea originated in 1982 in the Technical Services Department, then headed by Strickland. Citicorp and Chase Manhattan were already providing corporate customers with mainframe computer terminals, through which they could access within-country transactions and balance data about their accounts. This was a strategic threat to the HongkongBank because these products focused on business customers engaged in intercontinental trade and, potentially, high-end retail customers who used global banks to manage their personal global finances. Such customers might favor a bank that could deliver a system to manage cash worldwide. If competitors developed such a global system first, HSBC could find itself sidelined in the competition for the world’s most important banking customers.

To meet this threat HSBC would need to leapfrog the concept of a simple global inquiry system, otherwise it might find itself trying to compete with a product that was always functionally one step behind that of the competitors. To turn the threat into a positive strategic thrust, concluded Strickland’s group, HSBC had to develop the most ambitious concept possible. The Hexagon vision was to deliver the resources of a worldwide banking system right to the desktop of the manager. “At the time their systems were just dumb terminals,” not capable of two-way communication. “We envisioned intelligence on the desktop,” Strickland told us. While competitors systems were offering only cash management, Hexagon was to be a complete banking system. The global scope of the system was a major component of the idea.

In the simplest sense, the system would be a new channel to deliver information that the

21


bank already offered to the customer. The primary beneficiary was expected to be the customer, who would have access to better information, rather than more paper. Eventually the customer might also benefit from automated handling of data from the bank. The objective for the bank was to use this added value to capture market share by meeting and surpassing the capability of the systems offered by competitors.

At the same time the bank expected to benefit from automating information delivery by reducing data handling costs. According to David McMyn, one of the original project team members and now Senior Executive, Group IT, HSBC, the value created by the system was originally expected to be 80% from increased customer value and 20% from cost reductions for the bank.

The Hexagon concept focused on providing infrastructure support for firms engaged in multicontinental trade, especially in Europe, North America and the fast growing Western Pacific. Such firms need real time information on cash, receivables, and securities balances worldwide; they need to be able to manage those assets by shifting them to where they are needed; they need effective delivery of trade financing services; and they need real time information on foreign exchange and securities prices. The concept also focused on upscale retail customers who traveled extensively for business or professional reasons. Such an upscale customer might have, for example, a home and family in Vancouver, a home office in London, and work extensively in Hong Kong, Japan and China.

Retail bankers in the firm were cool to the idea, so after studying its feasibility, the bank decided in 1983 to go ahead with the

project focused toward multinational business customers. “It was the most exciting business decision of [our] lives,” said Strickland. Although spending on IT had been steadily increasing in the bank for a number of years, this was the firm’s first major competitive thrust using innovative IT in more than 15 years.

Technically, there seemed to be no serious barriers to the system. Packet switching was new, but had been proved elsewhere to be reliable. Personal computers, an important component of the new system, were very new, not much used in business, and not considered to be very reliable. "This was a problem the system could live with." If a PC went down “it was only one customer and anyway it was his PC, so that wasn’t considered to be much of a problem.” Transactions security, however, was a major concern and it was expected to require a fair amount of the project’s effort.

Six new technical people recruited from outside the bank, two experienced bankers, and some additional programmers made up the design team that put together the original design over the next 18 months. Figure 1 shows the development of the system over time, in terms of features and geographic scope. By 1985 the first operational version, offering basic account information and allowing payment instructions, was launched to five Hong Kong corporate customers. In 1986 it was launched to five additional customers in each of the US, UK, Singapore, and Japan. This version offered customers access to transaction account statements and balances, multicurrency payments (within the HongkongBank system), interaccount transfers, and electronic mail between the customer and his/her own bank branch. Hexagon’s infrastructure was enhanced in 1987 to provide greater cross-border

22


functionality and in 1989 a more functionally-rich version was released across 30 countries. Since 1989 HSBC has continuously worked to develop Hexagon’s functionality and geographic scope. Important milestones include the launch of an MS Windows version in 1991 and features implemented in 1994 that allowed routine transactions to be automatically initiated through Hexagon software on the customer’s PC and carried out in the back offices of HSBC member banks worldwide.

The Current System

Today Hexagon is a global electronic banking service that gives customers direct access to a range of banking services, worldwide 24 hours a day, 365 days a year from their offices through their own PC’s. Hexagon runs on all platforms and in all languages supported by MS Windows.

Hexagon's defining features are its global geographic scope and functional generality. Hexagon is first an internal network, a delivery mechanism for communication between the bank and its customers worldwide. Communication with other banks is handled largely through SWIFT, a messaging network of about 4000 banks in over 110 countries, and the Automated Clearing House (ACH), which provides clearance for checks and electronic transactions within the US. Other links use telex, global clearing systems and cellular

phones. About 500 banks, other than those in the HSBC group, currently use Hexagon to support their own cash management needs as well as to provide these services to their clients. For example, according to Kurtis Giehl, a JPMorgan associate, JPMorgan uses Hexagon to provide cash management services for its private banking customers, using its own “private label” interface. Some of the sites have online links with Hexagon, while others process transactions through an electronic banking center. HSBC is working toward having online links with all sites.

Figure 2 shows the conceptual architecture for Hexagon, which can be thought of as a three-layered electronic banking platform. At the center Hexagon acts as the core of the global banking systems; everything else is “bolted” onto it. The second layer includes HSBC banking systems in each location, where all accounts and balances are kept and all transactions are performed, as well as links to other banks and banking networks. The third layer includes the client’s Hexagon software, based on his or her PC, and the client’s transaction partners. As much of Hexagon as possible is contained in PC-based software so that information processing can be performed on the client’s machine and a minimum amount of data is transmitted through the Hexagon communication systems.

23


Figure 1: Development Timeline for Hexagon.

24


Figure 2. Conceptual model for Hexagon architecture

Some routine transactions require no intervention by either the client or by bank

25


employees. These operations can be initiated by a time trigger in Hexagon software on the PC and automatically executed through Hexagon. Some of the services of Hexagon can be run also off-line or can first be processed off-line, then transmitted online to Hexagon. Examples include direct deposits of employee salaries, bonus, insurance premiums, fee collections, loan installments, regular payments to suppliers, and other automatic payments. These features are continuously expanding.

Data security in Hexagon is a very high priority. Data is encrypted and access is governed by a two level password control. The first level requires a user ID and password and the second level requires a session password that is given to the user by the system at the end of the previous session. Hexagon also supports authorization and delegation control; that is, it is possible to control who is allowed to use which services. Since 1998, a smartcard alternative for security is also available in addition to password control. An on-line audit trail shows transactions over the past 30 days.

Many customers, increasingly including medium sized companies, wish to integrate their financial applications with their own back office systems so that information does not have to be re-keyed, according to Y.B. Yeung, Assistant General Manager, Head of IT, HongkongBank. Today’s Windows version allows data to be exported and imported easily between Hexagon and other applications in the firm.

Hexagon ServicesContinual expansion of Hexagon's functionality is intended to ensure the flexibility of the system. The main service groups offered by Hexagon are cash management services, trade services, EDI

services, Electronic Trade-Related Services (ETRS), securities services and information services.

Cash Management was Hexagon’s original feature. It has two components: information and funds transfers. Customers can access balance and activities information about all their accounts, in over 40 currencies, regardless of the country, for any banks within the HSBC group. Funds can be transferred online among any accounts and any currencies with members of the HSBC group worldwide. Payments can be made to trading partners with accounts within the group or to any payee through any beneficiary or intermediary bank. These processes have been automated as much as possible. Finally, Hexagon can format paper checks for use to draw funds against any bank account at any bank in any of more than 100 countries.

These are powerful features. For example, an electronics manufacturer purchases components in China, assembles them in Hong Kong and, through contractors, in the Mauritius Islands and the Philippines, and sells them in retail stores in the US. Sunday night, from her offices in London, the comptroller uses Hexagon to transfer surplus US dollars from the firm’s accounts at Marine Midland Bank in New York to pay the Chinese manufacturer through its account at the Shanghai Branch of the HongkongBank. She also transfers funds through SWIFT to the contractor’s account at the Philippine National Bank in Lapu City, Philippines. She uses Hexagon PC-based software to format a paper check in the local currency for the Mauritius Islands and to prepare direct transfers of employee salaries to employees' individual accounts in Hong Kong. All of the electronic transactions are completed by the end of business on Monday.

26


Trade services involves financing the international sale of goods. With Hexagon the whole trade cycle is automated. In the Asia and Pacific region letters of credit (LC) are heavily used to finance trade. The first step, an LC application, is traditionally a laborious task. With Hexagon the client uses a software template to transmit the LC to HSBC electronically, where it is printed and processed. The information on the template can be reused for the next LC application, making appropriate changes. The LC is then transmitted electronically, through the SWIFT network, to the trading partner’s bank, which can advance the funds to the trading partner. Insurance services are also provided through the system.

HSBC was one of the first banks to make electronic banking EDI capable. EDI and ETRS services facilitate the exchange of electronic documents in standard international EDI formats between trading partners. Hexagon ETRS has the capability to interface with the company’s existing computer applications, enabling the electronic exchange of business documents. Hexagon supports UN/EDIFACT purchase orders, allowing both outward and inward EDI messages to be sent and received with trading partners. Some third-party EDI software packages can link to Hexagon. For example, users of Spex, an export documentation package, can submit their HSBC documentary collections to HSBC Trade Services electronically. Direct send exporters are able to produce their collections documents (the ‘paperwork’ necessary to collect funds from the importer) in Spex and send them electronically to HSBC via their Hexagon software. The usual costs involved in setting up EDI links are avoided and there is no need to join a value added network (HSBC, 1997b).

Through information services customers can access stock market and foreign exchange information. For example, dealers and analysts in trading centers around the world provide advice through the system on which currencies to buy. Precious metal prices include the closing gold prices for the New York and London exchanges, and prices of different localized gold products. Stock prices and index values are received through a direct link to the stock index system that provides information updated about every half-hour.

In the securities services module a customer can access his/her global investment portfolio and buy or sell securities online in more than 15 countries. The customer can also move idle funds to interest-bearing accounts, time deposits or overnight money markets.

Each of the HSBC member banks prices Hexagon services for its own customers. Currently most corporate customers are charged a flat monthly fee for all services. For retail customers Hexagon is priced differently, that is, cheaper. Later services may be “unbundled” to separate services and fees; there may be different prices for on-line and off-line use and a la carte pricing for service modules. Moving more and more of the functionality of Hexagon to the PC further pushes the cost of the services down.

Hexagon’s Future

With few exceptions, PC-based banking has not been very successful yet with retail customers (Heikkinen, 1997). Hexagon is now available to individual retail customers, however HSBC is still waiting for a “change in mood” in this sector. Of course, Hexagon is not an ordinary “PC home banking”

27


product. Only the relatively small number of retail customers who perform a substantial number of international transactions may be interested in its sophisticated features.

For retail customers most HSBC subsidiaries use the same Hexagon PC banking software that is provided to corporate customers, but other approaches are also being tried. First Direct, a UK unit of HSBC, is to launch a banking service using generic Internet browser software, such as Microsoft Explorer or Netscape Navigator, instead of the proprietary PC software. Customers, however, will have to dial a special number to gain access to the banking service, rather than connecting through the Internet (Graham, 1997). HSBC does not currently offer banking services over the Internet because of security concerns, although it has created a site on the World Wide Web for display at http://www.hsbcgroup.com.

HSBC and Microsoft Corp. have signed an agreement to link Hexagon to MS Money software (Reguly, 1997). Retail customers would use this for financial management as well as electronic banking. Customers would be able to execute electronic banking transactions, obtain account statements, reconcile accounts, prepare budgets and investment objectives, plan loan facilities and analyze cash flow, 24 hours a day (HSBC, 1996). HSBC is also looking into possibilities of interactive television.

HEXAGON PERFORMANCE IMPACTS

To understand Hexagon’s impact on HSBC we first look at its acceptance among HSBC customers. Secondly, we look at the way the Hexagon has affected performance at HSBC, both in terms of expected functional impacts of a global information system,

revealed by our review of the literature, and in terms of resulting firm level performance impacts. Finally, we examine HSBC’s overall firm-level performance.

Customer Acceptance

Figure 3 shows how the number of corporate Hexagon accounts has grown over time since its 1985 introduction; most of the growth has occurred since 1990. In 1997 HSBC executives estimated that 50% of all electronic international corporate banking transactions worldwide are done through the Hexagon system which was by then being used by 80,000 individual corporate and retail customers in more than 79 countries (Graham, 1997). By comparison, an estimated approximately 50,000 individuals used the New Citibanking system as of 1998, according to John Conte, Citicorp, Head of Group Information Network. These figures may not be directly comparable, however, because some of the features of Citibanking and Hexagon are also provided by other Citicorp systems.

Impacts in terms of Hexagon’s purpose

Scale and Scope Economies. HSBC enjoys substantial economies of geographic scope through Hexagon. When offering services to customers in new locations, there is no need for the bank to develop new software or to reinvent Hexagon’s overall architecture. Hexagon

28

http://www.hsbcgroup.com/


Figure 3: Number of corporate Hexagon customers since its introduction

also increases economies of scale because Hexagon transactions have only trivial marginal costs; the system’s operating costs are nearly all fixed and the total costs for the system are very tiny, relative to other HSBC operating costs.

Hexagon’s potential use by retail customers represents a performance benefit in terms of economies of “product scope.” The retail version of Hexagon, in whatever form it is finally rolled out, will be the same application, repositioned by changing the interface and pricing, for different customers. Because the product has already been developed for one target group of customers, it can be repositioned at a minimal cost. The development investments have already been made and the operating costs are already being covered.

Economies of scale and scope result in decreased costs relative to size and scope.

To the extent that Hexagon increases economies of scale and scope for HSBC, the firm should realize low operating expenses compared with similar firms. Table 1 shows scale and geographic scope characteristics of HSBC and selected competitors. These banks were selected for comparison because they compete directly with HSBC for trade finance business, particularly in the fast growing Asia-Pacific region. Two measures of geographic scope are the number of offices and number of countries in which the bank operates. Among these six banks, HSBC operates in more countries with more offices than any of its competitors, except Citicorp. Another indicator of geographic scope is the percentage of loans made by the firm outside of its own continent. In this respect, Citibank is the only comparable competitor. Total assets is a measure of economic scale. By this measure, HSBC is

29


Geographic Focus (1997)

Home Country

Assets(US$ Millions)

Number of Countries

Number of Offices

Percentage of Loans 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

Canada 48,616 12 724 93.5**

Royal Bank of Canada

Canada 179,664 36 1558 80.7*

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; Citicorp and Bank of America are smaller and similar in size to each other.

Geographic scope is not obtained for free. Firms pay an expense penalty to have more offices and to operate in more countries. Consequently, we would expect firms with the highest geographic scope to have higher operating expenses, relative to size. Higher economies of scope and scale might change that, however. Among the firms, Bank of America and Citicorp have the highest operating expenses, relative to assets, of the selected banks. This is consistent with their high levels of geographic scope. HSBC has the lowest operating expenses, as a percentage of assets. By this measure, the other banks in this group appear to pay a substantial penalty for higher levels of geographic scope, but HSBC does not. HSBC is the largest of the six selected banks in terms of total assets, a measure of

scale. Consequently, HSBC's low operating expenses, relative to size, are also consistent with high economies of scale.

Product Value. Hexagon offers customers opportunities to reduce costs by saving transactions processing steps. For example, when using letters of credit (LC), a customer can submit an application from his/her office and save the effort and cost of physically submitting the application. Furthermore, the first LC application can be used as an online template for future applications, minimizing the staff time required for this activity. Finally, the entire LC process can be monitored through Hexagon, saving phone calls and follow-ups.

Many of the Hexagon features allow customers to treat Hexagon as extensions of their own corporate finance departments. For example, by submitting a payroll file

30


and transferring funds through Hexagon, the firm can allow surplus funds in one country to be used to make payroll payments overnight in another country. This saves firms in terms of their cost of funds and management attention.

To take full advantage of Hexagon’s value, customers are encouraged to use HSBC group banks for more of their banking functions. If a firm uses Hexagon to perform international banking transactions, why not use an HSBC affiliated bank for domestic banking in the firm’s next new market?

If Hexagon provides value by improving customer efficiency, effectiveness, and scale and scope economies, then this value should be reflected in what customers are willing to pay, i.e., it should affect HSBC's market share and revenue. We compared net interest income plus other revenue (hereafter referred to as ‘revenue’) for HSBC and its competitors for 1990-1997. HSBC has experienced exceptional revenue growth, compared to its competitors, after 1991, during the same time that use of Hexagon has shown dramatic growth.

Efficiency. Tens of thousands of HSBC’s best customers use Hexagon to perform banking transactions themselves, through software on their desktop PCs, rather than through HSBC employees. As a result, customers enter transactions data that would otherwise have been entered by bank staff, reducing operational staff tasks. Transactions volumes have not reached levels that result in lower overall average costs for Hexagon-based transactions, compared with transactions done through other media. Because Hexagon costs are mostly fixed, however, rapid transactions growth should soon lead to such a situation.

Hexagon's impact on efficiency within HSBC should be reflected in operating expenses. We compared operating expenses as a percentage of revenue for HSBC and competitors. HSBC’s expenses are lower than all but one other of the selected firms.

If Hexagon is successfully used by HSBC to reduce operating expenses, we might expect staff expenses to be affected as corporate customers used the automated features of Hexagon to perform activities that normally required human intervention. We might also expect premises expenses, i.e., rent, heat and light, to be effected if more corporate staff stayed in their offices or at home to conduct transactions, reducing the need for branch office space.

In terms of staff expenses as a percentage of operating income, HSBC appears to be in the middle among the selected banks. This is consistent with HSBC executives’ conclusion that Hexagon has not reduced average transaction expenses. When we examine premises and equipment expenses as a percentage of revenue, HSBC’s expenses are the lowest among the selected banks. This suggests that Hexagon is successfully substituted for physical bank branch space, resulting in a cost reductions that wouldn’t show up when measuring Hexagon’s transaction costs. The values of these firm performance measures are consistent with a conclusion that Hexagon reduces operating expenses even though average Hexagon transaction costs are not less than the average for other media.

Organizational Effectiveness. Hexagon integrates many of the back office operations of the bank, such as payments and securities trading. The effort to make sure that these operations can work effectively together has resulted in

31


processing improvements. The system also provides a standard interface for many different operations in many countries. That these operations take place in separate systems in a variety of countries is transparent to the user as he or she experiences a smooth transition while initiating transactions that are performed in Hong Kong, Manila, or Toronto. This standard interface increases flexibility for HSBC because it provides opportunities for low cost product extensions and it increases flexibility for the customer as it allows the customer to extend its reach to new locations or new products at little incremental cost.

Competitive Advantage. Hexagon’s full value depends on its geographic scope, a form of “network externality.” The system is more valuable to a firm if it reaches every country in which the firm may wish to do business and Hexagon reaches more than 100 countries. A system built on a smaller scale, which covered a smaller number of locations, would be much less valuable. Consider the electronic goods manufacturer that we mentioned earlier. Suppose the comptroller was unable to use Hexagon to process its Hong Kong payroll or to transfer funds to its contractor in the Philippines because HSBC had no presence in those localities. The consequence would be that she would have to find other ways to accomplish these tasks. This would substantially reduce the effectiveness of Hexagon as a global cash management system.

These network externalities create a “barrier to entry” for all but the very largest financial services firms. Only a global system could compete with Hexagon. An alliance, such as the one between Open Financial Exchange (OFX) and Integrion, could pose a threat, however. OFX is a partnership between CheckFree, Intuit, and Microsoft and Integrion is a partnership among 20 banks and IBM. Among them they wish to develop a common standard for branded electronic banking products.

For customers who want to do international banking online, there aren’t many alternatives to Hexagon. Many large banks have sophisticated online systems, which are restricted to domestic banking. Hexagon is the only application that provides the mix of cash management, trade finance, insurance, and securities features with global scope. Consequently, HSBC benefits from an “exclusive access to customers” who want to use all of its features within a single, integrated global system.

Does Hexagon provide HSBC with competitive advantage by providing exclusive access to customers and favorable network externalities, backed up by a barrier to entry? If so, it should allow HSBC to obtain high business margins. Figure 4 shows pretax profit as a percentage of revenue, a reasonable proxy for margins. Since 1993 HSBC has earned higher margins than any of the selected competitors. This suggests that HSBC enjoys a competitive advantage as a result of Hexagon.

32


-10%

0%

10%

20%

30%

40%

50%

1990 1991 1992 1993 1994 1995 1996 1997

HSBC

Nat. B. ofCan.

Citibank

BofA

R.B. ofCan.

StandardChartered

Figure 4: Pretax profit as a percentage of revenue (net interest income plus other revenue)

Success of HSBC

HSBC’s explicit strategy includes a focus on the development of cutting-edge IT to support its global business. The centerpiece of this strategy is Hexagon. If the strategy is successful, one might expect this success to affect profits. Is HSBC profitable?

HSBC easily outperformed each of its competitors in profits and in profit growth over the period from 1990 through 1997. For 1997 its pretax profits were nearly USD $8 billion. Indeed, of the 100 largest financial services firms, as of the end of 1997, HSBC was 10th largest in assets, but it was 1st in pretax profits for each of the three years from 1995 through 1997 (Steinmetz,

Bray, Friedland & Kamm, 1998).

DISCUSSION, LIMITATIONS, AND IMPLICATIONS FOR MANAGERS

Discussion

The results strongly suggest that Hexagon affects HSBC’s performance by increasing economies of scale and scope, providing additional value to customers, increasing efficiency within HSBC, and improving organizational effectiveness. In addition, network externalities in the product provide disproportionately more value to the customer when every location at which the customer wants to do business is covered by the system. Hexagon provides HSBC with

33


exclusive access to customers who want the all of Hexagon’s features in a global system. Finally, the scale and scope of the system provide substantial barriers to entry, potentially allowing HSBC to earn exceptional returns. When we looked at HSBC’s firm level performance, in terms of measures related to HSBC’s apparent performance impacts, we found that it is consistent with these conclusions.

The results suggest that HSBC’s worldwide corporate assets, including its staff, its offices, and its domestic IT infrastructure, are complementary to Hexagon and create together more value for customers than would be created by each separately. Hexagon's extensive portfolio of services, together with HSBC’s worldwide operations, creates value that is not available to customers of other banks. At the same time Hexagon creates strong incentives for corporate customers to become customers of other HSBC banks in order to take full advantage of Hexagon’s international features.

Limitations

None of the analysis that we have presented, qualitative and quantitative, nor all of it together, proves that Hexagon positively affected HSBC’s performance. Firm level performance is affected by many factors, while our analysis focused on one broad product line, albeit the centerpiece of HSBC’s global IT strategy. Quantitative firm level performance data that more precisely measures the performance impacts of Hexagon’s features was not available to us. Consequently, the connection between the qualitative functional impacts on within-firm performance, observed by HSBC managers, and firm level effects is not directly observable in terms of precisely targeted measures. Nonetheless, since the

results of analyses that we are able to present are very strong, we believe that they are quite persuasive.

In any case, our intent here is to understand how one firm used an innovative global IS, along with its business and IT strategies and a global network of business assets, to achieve its business strategy and obtain superior performance, rather than to provide empirical proof that the impacts were actually realized. We think that the analysis contributes much to our understanding of Hexagon’s impacts, as well as providing us with insights about the use of global IS to create value for the firm and its customers.

Implications for Managers

For firms in the global financial services industry, this is further evidence of the extreme importance of IT infrastructure to their business. Customers will continue to demand faster transaction speeds, more transparent interfaces, lower transaction costs, and geographic scope. Only highly integrated global systems, which are, themselves, well integrated with back office processes, can hope to compete on this level. There are thousands of financial services firms in the world, but not many firms can compete in this manner.

Of course, not every customer needs global systems. Contrast Hexagon’s complex infrastructure with that of another bank that operates from a single location in Hong Kong and focuses on financing bilateral trade with other provinces in China. Its services are delivered entirely at one physical location and without substantial IT support. Its expenses are low, its business is very focused, and it competes on the basis of price. Its customers' service level expectations are in line with the services provided and it is very profitable.

34


For now the financial services industry seems likely to move in the direction of two or more distinct levels of service: integrated, global services with intense IT infrastructures and niche products, which provide lower costs or custom services to customers who don’t require products with global scope. Many of these niche products can be very profitable, but they might not be stable. The firm with the global IT-based structure and consequent low economies of product and geographic scope may eventually be able to incorporate the niche.

For multi-national firms in other industries there may also be an analogical lesson. This case provides a revealing example of an IT-based product that was intended to create value for the customer, but also reduced costs for the firm, created economies of scale and scope, and created difficult-to-imitate competitive advantages.

ACKNOWLEDGMENTS:

We are very grateful for the excellent recommendations of the three reviewers and the editor in chief, which contributed so much to the quality of this article. This research was supported in part by grants from the Christian R. & Mary F. Lindback Foundation, the Research Foundation of the Helsinki School of Economics, and The University of Hong Kong.

REFERENCES

Bakos, Y.J. (1991). Information Links and Electronic Marketplaces: The Role of Interorganizational Information Systems in Vertical Market. Journal of Management Information Systems, 8(2), 31-52.

Chowdhury, N. (1998). Why HSBC is Sailing Through the Storm. Fortune, March 2, 1998, 16-17.

Clemons, E.K. & Row, M.C. (1991). Information Technology at Rosenbluth Travel: Competitive Advantage in a Rapidly Growing Global Service Company. Journal of Management Information Systems, 8(2), 53-79.

Clemons, E.K. & Weber, B.W. (1992). National Westminster’s Strategic IT Infrastructure: Redefining Branch Banking with £500 Million, Making the Investment Decision, Managing the Risk. Proceedings of the 25th Hawaii International Conference on System Sciences, Vol. IV, 697-705.

Cusack, S. (1990). Bankers Trust Architects a Global Plan. ComputerWorld Premier 100, 31-34.

Dos Santos, B.L. & Peffers, K. (1995). Rewards to Investors in Innovative Information Technology Applications: First Movers and Early Followers in ATMs. Organization Science, 6(3), 241-259.

Dos Santos, B.L., Peffers, K. & Mauer, D.C. (1993). The Impact of Information Technology Investment Announcements on the Market Value of the Firm. Information Systems Research, 4(1), 1-23.

Engardio, P. (1993). Global Banker. Business Week, May 24, 50-52.

Fletcher, K. & Wright, G. (1996). The Strategic Context for Information Systems Use: An Empirical Study of the Financial Services Industry. International Journal of Information Management, 16(2), 119-131.

Graham, G. (1997). First Direct spurns HSBC home banking software. Financial Times, April 30.

Gurbaxani, V. & Whang, S. (1991). The Impact of Information systems on Organizations and Markets. Communications of the ACM, 34(1), 59-73.

Hallikainen, P. Heikkila, J. Peffers, K., Saarinen, T. and Wijnhoven, F. (1998). Evaluating Information Technology Projects: Procedures, Follow-through, Decision-making and Perceived Evaluation Quality. Forthcoming in Journal of Global Information Management.

Heikkinen, M-P. (1997). Internet maksuliikenne etsii muotoaan (Payments on the Internet are looking for the right form). Helsingin Sanomat, 16.07.1997 (in Finnish).

35


Holland, C.P. & Lockett, A.G. (1995). Strategy and Structure of Global Payment Systems. Proceedings of the Third SISnet Conference, September 18-19.

Holland, C.P., Lockett, G., Richard, J.M. & Blackman, I. (1994). The Evolution of a Global Cash Management System. Sloan Management Review, 36(1), 37-47.

HSBC (1996). Press release, February 29, 1996.

HSBC (1997a). HSBC Holdings plc, Annual Report and Accounts 1997.

HSBC (1997b). Press release: ”New Spex EDI Link with HSBC Hexagon Software”, May 1997.

Ives, B. & Jarvenpaa, S.L. (1992). Global Information Technology, Some Lessons from Practice. International Information Systems, July, 1-15.

Jarvenpaa, S.L., Ives, B. & Pearlson, K. (1996). Global Customer Service for the Computer and Communications Industry. In Palvia, P.C:, Palvia, S.C & Roche, E.M. (Eds.), Global Information Technology and Systems Management, Key Issues and Trends, Ivy League Publishing, 483-509.

Jelassi, T. & Figon, O. (1994). Competing Through EDI at Brun Passot: Achievements in France and Ambitions for the Single European Market. MIS Quarterly, 18(4), 337-352.

Martinsons, M.G. (1992). Global success with electronic banking: the Hongkong Bank and HEXAGON. Journal of Strategic Information Systems, 1(5), 290-296.

Mukhopadhyay, T., Kekre, S. & Kalathur, S. (1995). Business Value of Information Technology: A Study of Electronic Data Interchange. MIS Quarterly, June 1995, 137-156.

Palvia, P.C. (1996). Strategic Applications of Information Technology in Global Business: Using the “GLITS” Model and Instrument. In Palvia, P.C:, Palvia, S.C & Roche, E.M. (Eds.), Global Information Technology and Systems Management, Key Issues and Trends, Ivy League Publishing, 510-533.

Palvia, S. & Lee, K. (1996). Developing and Implementing Global Informaiton Systems: Lessons from Seagate Technology. In Palvia, P.C:, Palvia,

S.C & Roche, E.M. (Eds.), Global Information Technology and Systems Management, Key Issues and Trends, Ivy League Publishing, 559-576.

Peffers, K. & Dos Santos, B. (1996). Performance Effects of Innovative IT Applications over Time. IEEE Transactions on Engineering Management. 43(4), 381-392.

Peffers, K. & Saarinen, T. (1998) Measuring the Business Value of IT Investments: Inferences From a Study of Senior Bank Executives, Forthcoming in Journal of Organizational Computing and Electronic.

Reguly, E. (1997). BT to take key stake in digital venture. The Times (London), February 6.

Seidmann, A. & Sundararajan, A. (1997). Building and sustaining interorganizational information sharing relationships: The competitive impact of interfacing supply chain operations with marketing strategy”, Proceedings of the Eighteenth Annual Conference on Information Systems, Atlanta, Georgia, December 14-17, 1997, 205-222.

Steinmetz, G., Bray, N., Friedland, J. & Kamm, T. (1998). As a Global Rival, Citicorp/Travelers Won’t Be Alone. The Wall Street Journal, April 7, 1998, A13-A14.

Takac, P.F. (1994). Outsourcing: a key to controlling escalating IT costs? International Journal of Technology Management, 9(2), 139-155.

Ken Peffers, Ph.D. (Purdue, 1991) is Assistant Professor of MIS at Rutgers University. His research articles on the business impacts of IT investments and evaluating new IT projects have been published in such journals as Information Systems Research, IEEE Transactions on Engineering Management, and Organization Science. His current interests include the value of investments in electronic commerce applications and the development of new methods for IS planning and evaluation. Dr. Peffers is also the publisher of a new student-edited and managed electronic IT journal, the Journal of Information Technology Theory and Application(JITTA).

36


See http://crab.rutgers.edu/~peffers/ and http://www.jitta.org.

Virpi Kristiina Tuunainen is a researcher at the Electronic Commerce Institute of Helsinki School of Economics (HSE). She received her M.Sc.(Econ.) and Lic.Sc.(Econ.) degrees from the HSE, and is currently finishing her doctoral dissertation on electronic commerce. Her research focuses on interorganizational information systems, electronic commerce and economics of IS. She has published articles in Journal of Management Information Systems, International Journal of Electronic Commerce and in a number of international conferences.

37

Abstract.doc.doc

Documents

Transcript of Abstract.doc.doc