A New Balance

A New Balance

Four years is a long time for an IS program. It's a long time to maintain interest and enthusiasm both throughout the program team and the rest of the business. Many such large and lengthy projects never finish. However, Westpac's new technology infrastructure for financial management was not only completed successfully, it is now delivering significant benefits to the bank in the form of cost savings, improved margins and risk management, and better marketing [see, "Cost Benefit Analysis"].

The infrastructure consists of a three-part suite of systems based around Oracle technology.

* A centralised general ledger that uses Oracle Financials 10.7 and Oracle7.3 database, although the bank is now planning to upgrade to Oracle Financials 11, a thin-client version of the product;* A group financial data warehouse based on Oracle8 database, which at 1.25 terabytes is one of the largest in Australia; and* Oracle Financial Services Application (OFSA), Oracle's own banking-specific treasury or asset liability management system.

The suite sits over Westpac's transaction and product systems. The three systems are heavily interfaced and run on a TCP/IP network of Hewlett-Packard and Sequent Unix servers.

The centralised ledger encompasses the entire range of businesses across the Westpac Group, including New Zealand, and imports between 700,000 and a million journals a day. Most of Westpac's accounts receivables come through the bank's product systems and then get fed into the ledger. The output is then used by some 400 financial specialists in the bank, most of whom are based in Sydney.

The treasury system forecasts and manages Westpac's balance sheet and interest rate risk and provides funds transfer pricing which in turn also feeds into the centralised ledger.

Westpac previously had 13 separate general ledgers ranging from MSA ledgers to stand-alone PC-based products. According to program director John Dunne, the only way to consolidate all of these was through spreadsheets.

"They were all individual ledgers, and they only handled our financial accounting, not our management accounting," Dunne explains. "Consolidating them through Access databases and spreadsheets was a costly way of doing things, because we were re-keying data and duplicating effort.

"We also wanted to get a total view of the organisation in order to perform comparisons, as well as actually change the view of the organisation to become more customer-centred. We could never do this with hierarchical financial ledgers structured by bank, division and branch.

"Our management accounting and financial accounting were also separate, because the two sets of data were on different systems. Consequently, we were wasting time arguing the veracity of the numbers instead of determining what the numbers were actually telling us."The new infrastructure program had its origins in 1995, when Westpac, in conjunction with Andersen Consulting, set a new strategy for its financial management. From a long list of initial technology suppliers, Westpac rapidly shortlisted Oracle, SAP and Universal OLAS. According to Dunne, the ledgers on offer from all three were a close functional fit.

However, the bank had already decided to purchase OFSA as its treasury system, which was based on Oracle's database (although Oracle didn't actually own the application at that stage). Additionally, Dunne says, the bank wanted to go with Oracle for the group data warehouse database, so strategically it made sense for Westpac to partner with Oracle for the ledger and maintain consistency across the suite of systems.

"We looked at Oracle's future direction and liked what we saw. The company also seemed to have a better installed customer base at that stage, and the product was better priced than SAP," Dunne adds.

Oracle, Hewlett-Packard and Andersen Consulting all took part in developing and deploying the new infrastructure, which began in earnest in July 1995. Oracle and Hewlett-Packard worked together to size the required servers for the applications and advised Westpac on how to build up its client/server expertise. Oracle and Andersen assisted Westpac to configure the centralised ledger. Andersen also helped the bank in its business transformation and process redesign and in realising the benefits of the project.

Westpac's own technical resources also had to build some 80 interfaces to the centralised ledger, given that every value system in the Westpac Group feeds data into it.

Implementation began in October 1997. According to Dunne, the biggest task in rolling out the infrastructure was testing. As well as testing all the communications between the 400 fat clients and the server, this involved simulating the performance of the ledger, given that Westpac's project was very much at the high end of Oracle ledger implementations, in the range of 200Gbytes and more than 2.5 million code combinations.

The bank then had to put all the users through basic Oracle training first, followed by Westpac-specific training so they could understand all the procedural changes and learn to write reports to Westpac's standards.

For the centralised ledger, this was a mixture of classroom training, "train the trainer", and on-the-job training as required. The bank also trained up a small, decentralised unit to manage the treasury system, which has a much smaller user base as its operation is a more specialised discipline.

The data warehouse, which has additional users to the ledger, required less user training, owing to the nature of its front-end query tools, although Dunne says there was some specific training associated with the use of data, such as from the bank's customer profitability system.

The treasury system was the first of the three applications to go live, followed by the ledger and data warehouse, all in phased implementations finishing in December 1998. However, while the program itself is over, the new systems never stay still.

The bank has to maintain the centralised ledger every time there is a change in any of its product systems, as they all must interface to and reconcile with the ledger. The data warehouse continues to grow as new systems get added on in front of it to enrich the data and provide more management information. Westpac is also implementing satellite data marts for direct marketing. In addition, the bank is upgrading the treasury system to the latest release.

According to Dunne, the length of the program was not a huge challenge in itself.

"People in the business take a lot of interest when you kick off a program like this and again when you get close to implementation. But keeping their interest up in between is difficult. However, we had very senior-level involvement in the steering committee and in business user groups throughout, and the program was continually under review.

"The program was sponsored by the chief financial officer of the Westpac Group from the outset, so that gave it quite a bit of push and ensured it was appropriately resourced. During the program itself, as long as you're getting access to the business resources, you can ensure that the solution is what the business requires. And then you don't need the full engagement of the whole organisation," Dunne says.

Rather, the main challenge for Dunne came towards the back end of the program, when it came to testing and changing procedures and structures. While he says enough was done to get the new systems in and realise the benefits, he doesn't think there was enough done to fully prepare the organisation for the new view of its data.

"In hindsight, I would have done more to educate the users about why we were moving from a branch-based view to a customer-based view, and how that would translate once they saw the numbers," Dunne says.

"It took us about three months to bed down the new view of the organisation and that was painful. I also would have exercised more control initially over user-driven reporting and then gradually let the users use the full power of the system. There were a lot of bad reports written when the new systems first went live and this caused processing problems. There were also a lot of needless reports written which created capacity issues."Other challenges tended to revolve around the pioneering nature of the program.

For example, while average daily balancing is a process fundamental to all banks, Westpac was the first to use the Oracle general ledger for it. Westpac's information systems have traditionally been mainframe-based and this program's suite of systems was the first and biggest Unix-based one to go into the bank's data centre. However, Dunne considers all of these challenges standard to what he's accustomed to in any large project.

"We have an internal methodology and a very strict and comprehensive systems development life cycle that caters for package implementation, and which has been developed over quite a long time," he says. "We also have a lot of experience and disciplines within the organisation for dealing with different problems. Our partners also have methodologies, disciplines and experience in place. Oracle, Andersen Consulting and Hewlett-Packard are all very experienced in large implementations and large-scale management of Unix."On the other side of the balance sheet, Dunne attributes the program's success to a clear statement of the business objectives, a choice of proven technology from a good partner, and engaging the right resources.

"Westpac has had a long history of large projects. Some have been disasters, and we've learned from them; some of them have been highly successful, and we've learned from them as well," he reflects.

New CIO Role at AGC

After successfully managing Westpac's new technology infrastructure for financial management, in January this year John Dunne took over as chief information officer for the Australian Guarantee Corporation (AGC), a wholly-owned subsidiary of Westpac.

With more than one million accounts, AGC is one of Australasia's largest companies and makes up about 10 per cent of the Westpac Group's total business.

The CIO position had been unfilled for 12 months before Dunne's arrival, and with 120 IT staff, he says his new role is broader than his former one.

"Whereas previously I managed a very large program to re-engineer the finance function within the Westpac Group, now I have total responsibility for technology across AGC," Dunne explains. "After implementing those finance changes in the Westpac Group, I was ready to take on a CIO role.

"AGC also has a very large project in progress to replace its entire core system, so I believe the Westpac executive thought it would be good for me to be here at this time, given my experience with such projects."According to Dunne, AGC is effectively a customer of Westpac's data centre and places all of its hardware and communications infrastructure under Westpac's management. This allows AGC to focus on applications development and managing its PC and LAN infrastructure.

As CIO, Dunne is on both AGC's top business team and Westpac's top information technology team. This, he says, positions him well to link technology to the business strategy.

He believes the main focus of CIOs should be on how they can add value to the business, and says they must understand what drives profitability and growth within the business.

"You can't be seen as an order taker, you have to be seen as a partner to the business. Never position yourself as the technical expert either; always position yourself as someone who can enable the business to achieve its goals.

You need to know enough to be able to manage your technical resources, but you certainly don't have to know it in detail. In fact, I think that's impossible for anyone these days given how quickly the world changes.

"I certainly want to make a difference in AGC. It's a good business and I want to push up its profitability. The job's a new challenge for me, yes. I see it as a good opportunity to build on what I've achieved in the bank and I think I'll come out of this job with a great rounding to a 20-year career in IT," Dunne concludes.

Cost-Benefit Analysis

The total cost of Westpac's new technology infrastructure for financial management was in the order of $20 million. While program director John Dunne anticipates a payback period of about four years, tangible and intangible benefits are already flowing.

By eliminating rekeying of data and duplication of effort, the centralised ledger has enabled Westpac to reduce its accountancy complement by 57 people and save $5 million a year in operating costs. Also, in a year of declining margins for the leading Australian trading banks, Westpac has had the most stable margin, which Dunne attributes to the new treasury system.

"A 10 basis points movement on a $100 billion asset balance sheet is worth $100 million in revenue," he points out. "So there are some hard benefits to be gained from being able to manage our margin through the treasury system."However, the real return on investment is coming at another level. The capabilities of the group data warehouse enable the bank to analyse and understand customer behaviour and develop information for active decision making.

By integrating the data warehouse with Westpac's customer profitability system - also based on Oracle technology - the bank can now see who its profitable customers are. It can consequently target its processes, attention and resources on driving profitability within the organisation. As usual with a data warehouse, though, its chief use is for data mining and marketing.

"We've reduced the cost of our direct marketing campaigns and significantly increased the response rates," Dunne claims. "Before we had the data warehouse and data mining capability we would send out half a million letters and get less than 1 per cent response. With targeted marketing, we send out 200,000 letters and get a 5 to 6 per cent response rate.

"For example, we can determine what attributes are associated with customers who have recently taken out mortgages. We then take those attributes, run them against our whole customer base and produce a list of people who potentially would take out a housing loan. Then we can call or direct mail them and make them an offer.

"The other area where we get hard dollar benefits is in customer retention.

Again, we can data mine our warehouse, determine the indicators of someone who is likely to leave us and then take early action to prevent that. Over an eight-month period last year we reduced our run off of business from above the industry average to below the industry average and that's worth a lot of money."According to Dunne, the centralised ledger was relatively easy to justify on a return on investment basis, regardless of intangible benefits, and he says the predicted cost savings have been independently verified. Likewise, Dunne says, the bank could justify the treasury system both economically and in terms of liquidity and interest rate risk management. However, the group data warehouse was a harder argument.

"Data warehouses are more difficult [to cost justify] because the argument is that by building the warehouse you will discover something you don't already know that will reduce costs or generate more business. But of course if someone asks you what that is, you don't know until you actually have the warehouse.

"We'd had a lot of experience with smaller warehouses and we knew their value, but it still required a leap of faith. We came very close not to proceeding, but we stuck with it and are now reaping the rewards," Dunne says.

- K Power

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