strategic investment prioritisation in investment banking it division

Post Graduate Diploma in Organizational Leadership

Title of the project:

Investment Strategy of Investment Banking Trading

Information Technology Department

Submission date: 24-Nov-2009

Word total: 9500

Examination candidate number: DOL0918

Investment Strategy of Investment Banking Trading Information Technology Department.

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Diploma in Organizational Leadership: Own work Declaration

Candidate Number: DOL0918

Title of Course: Post Graduate Diploma in Organizational Leadership

Submission Date: 24-Nov-2009

Title of Work: Investment Strategy of Investment Banking Trading Information

Technology Department.

I confirm that all this work is my own except where indicated, and that I have:

Clearly referenced/listed all sources as appropriate

Referenced and put in inverted commas all quoted text (from books, web, etc)

Given the sources of all pictures, data etc that are not my own

Not made any use of the essay(s) of any other student(s) either past or present

Not sought or used the help of any external professional agencies for the work

Acknowledged in appropriate places any help that I have received from others (e.g.

fellow students, statisticians, external sources)

Complied with any other plagiarism criteria specified in the course handbook

I understand that any false claim for this work will be reported to the Proctors and will

be penalized in accordance with the University regulations.

SIGNED (insert candidate number) ______________________________________

Do not sign your name


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ACKNOWLEDGEMENTS

Bestowing adequate recognition to all those, who contributed to give shape to this

dissertation is a tough task. At the risk of inadvertently omitting some, I wish to single

out of few who have been directly associated with this work.

I record my deep gratitude to my guides Prof. Chris Sauer of Said Business School,

University of Oxford and the director of the investment bank for their valuable,

relentless guidance and candid suggestions at every stage of this project.

Last, but not the least, I am grateful to the other colleagues of the investment bank and

Said Business School, University of Oxford for their necessary support.


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ABSTRACT

This present work is based on critical strategic analysis of investment strategy of

Investment Banking (IB) Trading (trading of various financial instruments)

Information Technology (IT) department. The work has been carried-out at the

premises of “Trading IT” department of an investment bank.

IT management of the bank wishes to know the strategic options and direction

available to achieve effective alignment between IT and business organization, better

harmonization of similar functional systems across various business units regionally

and globally, improve the awareness of common strategic goals and objectives across

the overall organization so that, IT department can work with business about the

future investment strategies fulfilling the overall strategic goal of the business and

technology regionally and globally. To achieve these objectives more emphasis is

required on IT investment prioritisation.

A critical strategic analysis view has been taken by the author to analyse the current

situation. Current issues, over-all system dynamics, and current approach have been

considered along with various strategic models to identify the number of strategic gaps

and challenges faced by the "Trading IT" department of an investment bank (IB). The

project work has achieved to provide strategic solutions to mitigate those challenges

and explained the investment requirement to act on it. Finally benefit analysis on

proposed strategic IT investment direction has been carried-out over existing

operational IT investment strategy and rational conclusion has been made.


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TABLE OF CONTENT

1. INTRODUCTION:..........................................................................................................................7

1.1 OUTLINE OF THE PROJECT THESIS:...............................................................................................81.2 OVERVIEW OF AN INVESTMENT BANK:.......................................................................................91.3 OVERVIEW OF TRADING DEPARTMENT:....................................................................................101.4 PROBLEM DEFINITION:..............................................................................................................111.5 OBJECTIVES:..............................................................................................................................121.6 SCOPE:......................................................................................................................................12

2. LITERATURE REVIEW & IT STRATEGY:......................................................................13

2.1 WHAT IS STRATEGY? :...............................................................................................................132.2 CHARACTERISTICS OF STRATEGY:.............................................................................................132.3 STRATEGY & COMPETITIVE ADVANTAGE:.................................................................................172.4 SUSTAINING COMPETITIVE ADVANTAGE:..................................................................................222.5 CORE COMPETENCIES ANALYSIS:..............................................................................................242.6 CREATING VALUE TO CUSTOMER:.............................................................................................272.7 IT GOVERNANCE:......................................................................................................................292.8 IT INNOVATION :.......................................................................................................................322.9 IT SAVVY:.................................................................................................................................342.10 IT GROWTH PYRAMID:.........................................................................................................352.11 EMERGING VIEW OF IT MANAGEMENT :...............................................................................362.12 SWOT ANALYSIS:................................................................................................................382.13 SCENARIO PLANNING:...........................................................................................................39

3. CURRENT STRATEGIC METHODOLOGY & APPROACH:..........................................41

3.1 CURRENT METHODOLOGY & APPROACH:..................................................................................413.2 CURRENT STRATEGIC CHALLENGES:..........................................................................................44

4. PROPOSED STRATEGIC DIRECTION:....................................................................................46

4.1 PROPOSED STRATEGY:...............................................................................................................464.2 BENEFITS OF THE PROPOSED STRATEGY:...................................................................................524.3 CONCLUSION:............................................................................................................................53

APPENDIX A:............................................................................................................................... 55

APPENDIX B:............................................................................................................................... 56

APPENDIX C:............................................................................................................................... 57

APPENDIX D:............................................................................................................................... 58

APPENDIX E:............................................................................................................................... 59

APPENDIX F:............................................................................................................................... 60

APPENDIX G:............................................................................................................................... 61

APPENDIX H:............................................................................................................................... 62

References:.............................................................................................................................................63

LIST OF FIGURES


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FIGURE PAGE NUMBER

1.0 10

1.1 14

1.2 19

1.3 23

1.4 25

1.5 27

1.6 29

1.7 32

1.8 35

1.9 39

2.0 42

2.1 47

2.2 48

2.3 50

LIST OF ABBREVIATIONS

SHORT NAME FULL NAME

IT Information Technology

IB Investment Banking

PB Private Banking

REPO Repurchase Order

OTC Over The Counter

VAR Value At Risk

P & L Profit and Loss

STP Straight Through Processing

FX Foreign Exchange

PV Present Value

R & D Research and Development

EMEA Europe Middle East Africa

APAC Asia Pacific Economic Cooperation

NA North America

1. Introduction:


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This project has been carried-out on the subject of “Investment Strategy of Investment

Banking IT Trading Department”. Detailed analysis has been carried out in business

as well as IT arena of the trading department of an investment bank.

Over the last two decades investment banking business has grown significantly all over

the world. The business has crossed the boundary of the national geographic region

and reached landscape of the international arena. From the end of 20th century the

exceptional growing trend of business has been noticed in international trade &

investment, international merger & acquisition, exploitation of the arbitrage conditions

of different international market, the emergence of various complex investment

instruments of investment. However, over last two years (2007 & 2008) all major

investment banks have faced a huge decline in revenue because of credit crunch,

triggered by sub-prime mortgage in America. It has eventually reduced the overall

growth rate of the industry.

Rapid development & innovation of Information Technology and strong emphasis of a

medium to large-scale organizations on investment in Information Technology infra-

structure from last two decades helped an organization to grow significantly beyond

the national boundaries. Without the presence of Information Technology, it could

have been the practically impossible task for an organization to reach the current level

of growth and business innovation.

Today we have noticed that Information Technology is a key factor for an

organization’s growth and sustainability. Strategic investment in IT can put an

organization on the edge of competitive advantage and can help an organization to


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evaluate more innovative ideas of business nationally and internationally. Today and

coming future IT can and must play an important role in the organization’s business

strategy.

1.1 Outline of the project thesis:

The present thesis work highlights suitability of the aspects of strategic

analysis, planning, modelling of strategic management. The first chapter of this thesis

covers the brief overview, problem definition, objectives, scope etc.

The second chapter deals with the literature survey on various strategic management

aspects including analysis & planning, modelling, and strategic leadership, which are

relevant to the IB IT trading department.

The third chapter will provide detailed strategic analysis of the IB IT trading

department using strategic models and identify current strategic challenges of the

existing system.

In the fourth and final chapter proposed strategic direction, benefit analysis and

conclusion have been made.

1.2 Overview of an Investment Bank:

An investment bank is a financial institution that raises capital from the market, trades

in securities (equities, bond, repo, fixed income instruments, commodity, foreign

exchange, money market instruments and many more), manages corporate mergers and


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acquisitions. Investment banks mainly transact with institutional clients, corporate

clients and government sectors.

An investment bank traditionally divided into three parts front, middle and back office.

Large full-service investment banks offer all the lines of businesses, both sell side and

buy side including sales, trading, market research, investment management etc. Front

office of an investment bank directly involves with trading with another financial

institutions, corporate clients, sales activities, market research, custody, private equity

and merger & acquisition activities. Middle office is responsible for proper trade

execution, financial control, reconciliation, risk analysis & control, controls &

compliance, and legal activities. Back office of an investment bank mainly carries out

trade settlement, claims, valuation, payment, and operational controls etc.

Information Technology is used in all three parts of the investment banking and the

key element for running successful investment banking business. Today, without IT,

very minimum operation can be done in an Investment Bank starting from front,

middle to back office. The project is concentrated on IT investment strategy of

trading & sales department of Front office business area.

HSBC, JP Morgan, Citigroup, Goldman Sachs, UBS, Deutsche Bank, Credit Suisse,

and Royal Bank of Canada are few big names in the field of investment banking.

Following figure shows the percentage of increase in share prices of major investment

banks over 12 months.


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Figure 1.0

Source: http://www.nyse.com/ , Period: 03- Nov-2008 to 02-Nov-2009

1.3 Overview of Trading Department:

Investment Banking trading department consists of institutional trading of various

asset classes (Foreign Exchange, Money Market, Equity, Equity Options, OTC

Derivatives, Exchange Traded Derivatives, Credit Default Swaps, Credit Default

Options, Bank Notes, Commercial Papers, Term, REPO, Govt. & Corporate Bonds,

Structured Products etc.).

In each of the asset classes, there are several functions like Trade capture, Pricing,

Market risk management (End of the day and Real time), VAR, P&L management,

Profit Attribution Analysis, Straight Through Processing, Trade aggregation, Exposure

/ Position management, Risk control, Trade life cycle management, Reconciliation,

Settlement etc.


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http://www.nyse.com/

Robust and integrated IT architecture is required to support all the above functions and

to enable the business to carryout competitive trading.

1.4 Problem Definition:

Currently, the IB IT trading department is facing several challenges to enable them to

support business unit more effective way, so that the business unit can get the edge of

market competitiveness and state of the art IT infrastructure. Some of major challenges

in the IB IT trading department are listed below.

Improvement of strategic analysis in the department for optimal IT investment

prioritisation and allocation of IT budget strategically.

Better alignment of business strategy and IT strategy.

Fewer consensus among IT people about business values and benefits.

Harmonization of multiple systems with similar functionality within the

national and international region.

Increase emphasis of strategic planning within IT line organization.

More re-usability of software and components, duplicate development effort.

Eliminate operational problems within current systems.

Address end of the life cycle issues.

More attention to secure people with the right skills.

This project takes a strategic management approach to address these challenges.


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1.5 Objectives:

Main objectives of this thesis work are given below.To create the road map of

strategic management of the IB IT trading department which will facilitate the better

alignment of IT and the business, optimum utilization resource, cost, and time over

long run.

To identify the missing basis for top-down IT investment prioritisation: risk

that values of IT spend is sub-optimal.

To provide strategic solutions of challenges identified in previous section.

1.6 Scope:

The scope of this project work is only limited to the overall strategic analysis of

an Investment Banking IT department. It will not cover detailed strategic scrutiny of

each application and IT function in the department. Literature review & IT strategy:

1.7 What is strategy? :

A strategy is the pattern or plan of actions, which is designed to integrate an

organization’s various goals, objectives, major policies and plans to achieve a specific

goal or effect.

Strategy is different from tactics. Tactics are very much circumstance and situation

oriented plan to achieve one specific measurable objective. In over all strategy of an


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organization, there could be many tactical plans as per situation, which will eventually

meet the overall strategic goal and objective of the organization.

Source: Contemporary Strategy Analysis, Sixth edition, by Robert M Grant, pp: 17

http://en.wikipedia.org/wiki/Strategy,

1.8 Characteristics of strategy:

Source: Contemporary Strategy Analysis, Sixth edition, by Robert M Grant, pp: 7-12

Some common characteristics of a successful strategy of an organization are given

below.

Vision, Goals & Objectives: A strong strategy should have a clear vision which is an

ideal picture of what the company could be in future associated with simple,

consistent, and long term goals and objectives combining major organizational

policies. In an investment banking IT organization, the strategy should have set of

goals and objectives, which can be directly integrated with Investment Banking

business goals and objectives.


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http://en.wikipedia.org/wiki/Strategy

Source: Contemporary Strategy Analysis, Sixth edition, by Robert M Grant, pp: 7

Profound understanding of the competitive environment : Deep vein understanding

of the surrounding competitive environment is the key fundamental to a successful

strategy. The insightful appreciation of the arena can be used for strategic analysis and

development of a strategic plan. In an investment banking IT organization,

understanding of importance of IT for investment banking business and knowledge of


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available IT platform in the market which are used by competitors can be used for

strategic analysis and planning.

From last 7-8 years, focus on IT from business has been changed quite significantly.

Business is not directly involved in tactical aspects of IT like (IT infrastructure scale,

data security and back-up, disaster recovery etc.). For business, it is more important to

grasp the new market, new business opportunity and IT should help business to gain

those opportunities. Business expects that as IT industry is now matured, tactical

aspects of IT will be taken care automatically, just as we expect the lights to go on

when we flip on the switch. That’s where the non-core and non-differentiating

functions of IT are getting “commoditized”. It has been observed by the author in two

major investment banks.

In the current highly competitive environment business organizations are becoming

more and more agile, hence business changes need to be adopted quickly in the IT

system. IT department should try to make their process more flexible and agile to

cope-up with business demand. Today, IT department cannot go into seclusion and

work on a project for few months at a given time. The hyper competitive environment

will make your IT project irrelevant during that time.

Source: http://itstrategyblog.com/

Objective appraisal of resources: An organization should develop the strategy by

effective exploitation of its internal resource strengths, while improving areas of

weakness. Some key tasks in an investment banking IT organization leading to

objective appraisal of resources are given below..


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http://itstrategyblog.com/

Development of teams with common goals and objectives.

Creation of attitude towards continuous learning, change adoptability,

knowledge sharing, team working etc.

Placement of a right person with right skill for a right job.

Effective utilization of the existing IT infrastructure and platform.

Enhancement of existing trading and operational platform on line with the

current market trend (In the investment banking trading arena; Straight

Through Processing, Electronic trading, Risk and P&L aggregation across all

asset classes, Common trading portals, Real time risk, Real time p&l, and

Real time trade blotter are few examples of current market trend).

Decommissioning of age old platforms with old technologies and replace them

with current market leading technological platform.

Strategy analysis & planning: Strategy analysis & planning is a broad area in

strategic management. Various strategic models used for strategy analysis & planning

will be discussed later of this chapter. In a nutshell, strategy analysis is associated with

detailed analysis of organization’s goals, objectives, values in association with internal

resources, capabilities, structure, systems, competitors, customers, and suppliers.

Detailed strategic plan is drawn based on the analysis results to create a well executed

strategic fit.

Effective implementation: The best-laid strategies are of little use without effective

utilization. Effective execution, focused monitoring & controlling, formulation of a


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strategy team, and quick responses to changes in the competitive environment are

critical to the success of a strategy plan.

1.9 Strategy & Competitive advantage:

Source: Contemporary Strategy Analysis, Sixth edition, by Robert M Grant, Chapter: 5, 7

The basic definition of competitive advantage is “When two or more firms compete

within the same market, one firm possesses a competitive advantage over its rivals

when it earns (or has the potential to earn) a persistently higher rate of profit.”

However, superior profitability is not the only competitive advantage. Competitive

advantage can be achieved on specific business market share, technology, customer

service & loyalty, employee hire & retention, executive perks, and robust & simplified

process.

As per http://www.bankingtech.com/content/ipi/bankingtech/pdf/BTAwards_2009.pdf,

Deutsche Bank has a competitive advantage on STP technology, HSBC has a

competitive advantage on Treasury / Cash management technology, Citi has a

competitive advantage on Green IT initiatives. Similarly, one bank has a competitive

advantage over others on their business processes, methods, practices and ability to

attract bright and talented people from the market.

There is another modern aspect of competitive advantage is the firm’s ability to

respond to change on an external and internal impact. A quick turnaround against the

impact will make the firm on the edge of competitive advantage. In today’s world


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http://www.bankingtech.com/content/ipi/bankingtech/pdf/BTAwards_2009.pdf

where IT enables the business to take a new opportunity and respond to the change, it

is very much necessary for the IT department to provide quick solutions to the business

and reduce or simplify the process and bureaucratic obstacles. Adoption of agile

development methodology and rapid development methodology in IT department will

increase the software delivery frequency to the business.

Source: http://agilemethodology.org/ ,

http://en.wikipedia.org/wiki/Rapid_application_development ,

http://www.mariosalexandrou.com/methodologies/rational-unified-process.asp

World famous strategist Michael Porter suggested four "generic" business strategies

that could be adopted in order to gain competitive advantage. Following figure

displays the model suggested by Michael Porter.


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http://www.mariosalexandrou.com/methodologies/rational-unified-process.asp

http://en.wikipedia.org/wiki/Rapid_application_development

http://agilemethodology.org/

Source: http://tutor2u.net/business/strategy/competitive_advantage.htm

The differentiation and cost leadership strategies seek competitive advantage in a

broad range of market or industry segments. By contrast, the differentiation focus and

cost focus strategies are adopted in a narrow industry segment.


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http://tutor2u.net/business/strategy/competitive_advantage.htm

Strategy – Differentiation: This strategy involves selecting one or more criteria used

by investment banking business, positioning the IT organization and platform uniquely

to meet those criteria. This strategy is usually associated with high cost and an extra

value-added feature provided for the business. It also provides business customers

clear reasons to prefer the product over other, less differentiated products. As example,

Cross Currency Basis Swaps, FX Options, Inflation Linked Bond, Structured Bond,

Bond Options Futures are some investment banking products, where more specialized

and complicated pricing and risk models are required.

Strategy - Cost Leadership: With this strategy, the objective is to become the lowest-

cost producer in the industry. Many (perhaps all) market segments in the industry are

supplied with the emphasis placed minimizing costs. This is not different for IT

organization. In IT organization, this can be achieved by utilizing the arbitrage

opportunities of low cost IT professional in emerging markets via vendor, using

standardize IT infrastructure and IT platform from the market and aggregating IT

platform globally. But, this strategy will provide little to moderate differentiation and

competitive advantage over rivals. However, there is nothing wrong with this strategy

as it will serve all basic purpose to sustain in the market and most importantly reduce

the cost. This strategy is very useful for standardized asset classes in an investment

bank like vanilla Interest Rate Derivatives, FX, standard Money Market products,

Futures, Equities, and Options.


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Strategy - Differentiation Focus: In the differentiation focus strategy, a business aims

to differentiate within just one or a small number of target market segments. The

special customer needs of the segment mean that there are opportunities to provide

products that are clearly different from competitors who may be targeting a broader

group of customers. The important issue for any business adopting this strategy is to

ensure that customers really do have different needs and wants - in other words, that

there is a valid basis for differentiation - and that existing competitor products are not

meeting those needs and wants. If any part of investment banking business goes for

above strategic model, IT organization also has to adopt a similar model by focusing

on development of customized IT platform to support the business organization to

achieve its goal. However, it will incur more costs due to customizations of IT

platform to meet the specific need. In an investment bank Complex, Hybrid, Structured

and Exotic products are few examples where the above strategy will be very useful.

Strategy - Cost Focus: Here a business seeks a lower-cost advantage in just one or a

small number of market segments. The product will be basic - perhaps a similar

product to the higher-priced and featured market leader, but acceptable to sufficient

consumers. Such products are often called "me-too's". To achieve this objective in IT

organization, externally or internally available standard IT platform can be used or

simplified IT platform can be developed to support the basic features of the product.

As an example, an investment bank wants to start a business in Bahrain, it makes sense

for them to deploy existing IT platform from other locations of the bank or outsourcing

non-core processes to India and China.


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Adoption of any of these above mentioned strategies depends on organization’s vision

and goal, the revenue growth, capital ratio, the present market conditions etc. After

2007-2008 credit crunch, many organizations have opted cost leadership strategy to get

the competitive advantage.

1.10 Sustaining Competitive advantage:

Source: Contemporary Strategy Analysis, Sixth edition, by Robert M Grant, Chapter: 5, 7

Once it established, competitive advantage is subject to erosion by competition. The

speed with which competitive advantage is undermined depends on the ability of

competitors to challenge either by imitation or innovation. Imitation is the most direct

form of competition; thus, for competitive advantage to be sustained over time,

barriers to imitation must exist. “Isolating Mechanisms” by Richard Rumelt, a

professor of strategy at UCLA's Anderson School of Management can be used to

sustain competitive advantage on a long run. To identify the sources of isolating

mechanisms, we need to examine the process of competitive imitation. For one firm

successfully to imitate the strategy of another, it must meet four conditions, which are

described below.


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Figure 1.3

Identification: The firm must be able to identify that a rival process a

competitive advantage.

Incentive: Having identified that a rival process is a competitive advantage, the

firm must believe that by investing in imitation, it too can earn superior returns.

Diagnosis: The firm must be able to diagnose the features of its rival’s strategy

that give rise to competitive advantage.

Resource acquisition: The firm must be able to acquire through transfer or

replication the resources and capabilities necessary for imitating the strategy of

the advantaged firm.

In investment banking industry, it is very difficult to create a strong barriers on

imitation as new product features are available to rivals through over the counter and

internal process, pricing & risk modeling, systems, structure can be easily identified by

human resource acquisition. However, an investment bank which is a first mover in

terms of optimizing process, innovation of pricing & risk models, development or


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enhancement of market leading IT platform always will have a more sustained

competitive advantage for a longer period irrespective of imitation.

On the other hand, an IT organization of an investment bank can use imitation to create

innovation, which can create another level of competitive advantage. So, the

investment banking IT organization should have a strategy which will support

innovation, creativity, simple & straight forward process, recognition, task oriented

project team and reduced hierarchical control, which will in turn create the competitive

advantage.

1.11 Core Competencies analysis:

Core Competencies are those internal and external capabilities that are critical to a

business achieving competitive advantage. The idea of Core Competencies was

developed by famous strategist C K Prahalad and G Hamel (1990) through a series of

articles in the Harvard Business Review followed by a best-selling book - Competing

for the Future. Their central idea is that over time companies may develop key areas of

expertise, which are distinctive to that company and critical to the company's long term

growth.

'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit

the core competencies that make growth possible - indeed, they'll have to rethink the

concept of the corporation itself.' C K Prahalad and G Hamel 1990.

Source: http://tutor2u.net/business/strategy/core_competencies.htm


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http://tutor2u.net/business/strategy/core_competencies.htm

http://www.amazon.co.uk/exec/obidos/ASIN/0875847161/tutor2u00

http://www.amazon.co.uk/exec/obidos/ASIN/0875847161/tutor2u00

Figure 1.4

These areas of expertise may be in any area but are most likely to develop in the

critical, central areas of the company where the most value is added to its products.

For example, for software company key skills may be in the overall simplicity and

utility of the program for users or alternatively in the high quality of software code

writing they have achieved. Also, it can be a unique and robust business requirement

analysis process and transformation process of business requirements into functional

requirements so that functionally reached IT systems can be developed or capability to

attract highly talented and skilful individuals by creating challenging working

environment and market leading compensation.

Core Competencies are not seen as being fixed. Core Competencies should change in

response to changes in the organization’s environment. They are flexible and evolved

over time. As a business evolves and adapts to new circumstances and opportunities,

so its Core Competencies will have to adapt and change.


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To identify Core Competencies, Prahalad and Hamel suggest three factors, which are

described below.

Core Competencies are the factors that enable the organization to create

innovative products and processes. In IT organization, the presence of strong

R&D wing can be a core competence.

Core competencies are the skills that enable an organization to deliver a

fundamental customer benefit. In IT organization, a fundamental customer

benefit can be achieved by keeping production system up and running 99% of

time, providing system with required functionality, and delivering the reliable

system always within the time with reasonable cost tolerance.

A core competence should be "competitively unique": In many industries,

most skills can be considered a prerequisite for participation and do not provide

any significant competitor differentiation. To qualify as "core", a competence

should be something that other competitors wish they had within their own

organization. Presence of people with strong knowledge both in business

engineering and IT can create real differentiation in an IT organization.

Source: http://tutor2u.net/business/strategy/core_competencies.htm,

http://www.mindtools.com/pages/article/newTMC_94.htm


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http://www.mindtools.com/pages/article/newTMC_94.htm

http://tutor2u.net/business/strategy/core_competencies.htm

1.12 Creating value to customer:

To gain the competitive advantage, creating the value to customer is very much

essential. If the customer does not understand the value of the solution, it will be

practically impossible to gain the confidence and satisfaction of the customer. IMD,

Switzerland has carried-out research on this topic, which is explained below.

Figure 1.5

Source: Presentation by Dr. Stefan Michel of IMD, Switzerland

There are six main areas, which can add value to customer resulting in superior

competitive advantage.

Provide solutions: When we think about providing a solution to the customer, we

think about providing product with various functionalities or attributes. We rarely

think about whether these functionalities will be benefited to customer or not. Recent

research from IMD, Switzerland clearly shows that by providing desired solution to the

customer, we can add value to customer rather than various attributes.


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Partnership with customer: To understand the desired customer solution, we need to

create close partnerships with customer. This will help us to identify various benefits

customers are looking from our solution. In IT, regular meeting with business,

involving business with IT planning and solution design, prioritising the work slate

together with business are few good examples of developing healthy partnership with

customer.

Understand customer benefits: Understanding of what really benefit to the customer

is one of the most important tasks. Clear understanding of customer benefit will help to

build the most desirable solution for the customer.

Create value with customer: It is a very new concept. To add a customer value,

realization of the value from customer prospective is very important. This can be

achieved when value analysis will be done together with customer.

Value constellation: Key values will be categorized from various aspects once value

analysis is performed along with customer. Each category will have values grouped

together. Customer solution should address each value category.

Consistency and reliability: Delivering a solution to customer with consistency and

reliability is most important factor. It is a great value to the customer because without

it the best solutions will have little meaning to the customer.

1.13 IT Governance:

Effective IT governance becomes part of the firm's DNA and is a source of

competitive advantage rather than perceived as a burden and bureaucracy. It can put


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the maximum value to the business and can be directly linked to financial results.

Overlay IT governance onto "what-ever makes the company great" is a vital factor. IT

governance should be carried-on from senior management level to program level and

to project level. The IT governance body of a project or program should consist of at

least IT program or Project Manager, Business Manager, Major Sponsor, Architect,

Business Senior Management etc. Following figure shows roles of the effective IT

governance model.

Figure 1.6

Source: My own derived model from “Maturing Your IT Governance – An Update” by Dr. Peter Weill

of MIT Sloan Centre for Information Systems Research Forum, http://cisr.mit.edu/members/index.php

Define business and IT strategy: In the meeting of an IT governance body, business

strategy should be discussed explicitly along with how business and IT can work

together in a partnership to improve the business process, innovate the business, and


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http://cisr.mit.edu/members/index.php

make business and IT strategy aligned. There should be clear visibility of business

strategy in IT strategy. The body should evaluate the go vs. no go decisions, tactical

vs. strategic decision.

Define business and IT objectives: Obvious business objective should be drawn in-

conjunction with IT objectives to accomplish the strategic goal once strategy

alignment is complete. These objectives should support overall business and IT

strategy. Again visibility and tractability between business objectives and IT

objectives is a very important factor.

Establish accountability: Clear accountability from business and technology side to

execute a program or project is very much important. The governance body will ensure

that accountability has been established and agreed.

Create IT framework & architecture: IT program or project managers along with IT

architects will draw the plan about how existing IT framework can be utilized, what

are new initiatives should be considered in the current architectural frame-work, and

how overall architecture will be changed to achieve a specific objective. The

governance body should ensure that best practices are followed, integration (leveraging

on another internal IT platform), standardization, and innovation are considered in the

IT framework and architecture model.

Decide investment & priority: IT Governance body should decide how the investment

should be made to achieve a specific business objective, how prioritizations will be

done among various business objectives, how IT cost can be transparent to business

value. Effective investment strategy linked to business goals and objectives can bring

an organization on the edge of competitive advantage.


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Establish communication: The objective of IT governance body and decisions should

be communicated to project team level, so that common goal and objectives can be

established across the team. The body should encourage working closely with the

business as a team, to work towards shared vision, interest, and knowledge, and to

carry-out lesson learnt exercise at the end of the project. Effective communication of

an IT governance body is a vital factor to change the culture of the IT organization and

integrate the IT organization with business.

Define reward system: The governance body is responsible for creating effective

reward system to provide reward to an individual or a team by financial means or other

means like team dinner, letter of accomplishment, recognition in company magazine or

news letter etc. This reward system will increase individuals’ or teams’ motivational

level and encourage other team or people to work similar way and finally improve the

efficiency of overall IT organization.

1.14 IT Innovation :

Innovation is very much essential to get the success and competitive advantage. In an

organization, IT innovation can add massive value to the business. However,

innovation does not just happen. It needs dedicated effort, leadership and most

importantly funding. The IT organization of a firm can have a small R & D

department who will work at various innovations in IT, which can add direct values

to the business. Few examples of IT innovation are creation and measurement of value

of re-usable components across the organization, creation of a common repository of

commonly used functions or components, exploration of usage of cloud computing in

an enterprise environment, and many more. A success of an innovation project

depends on certain factors, which are shown in the following figure.


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Figure 1.7

Source: “Building an Effective IT Innovation Capability” by George Westerman of MIT Sloan Centre

for Information Systems Research Forum, http://cisr.mit.edu/members/index.php

The description of the above figure is given below.

Separate: The innovation team should be separate with full time people. The leader of

the team can build the right culture, skill, common objectives, and complete focus on

innovation. The team should interact very closely with IT architects in the

organization.

Systematic: Clear but flexible criteria and methods to gather and filter ideas, plan and

conduct experiments should be in place. This improves the team productivity and

measurement; improves credibility to rest of the business.

Small: The team size should not exceed eight including a strong leader. This will help

on co-ordination, idea generation, and increased focus.

Sponsored: Strong investment support from business senior management is required to

protect the team so that the fund can-not be the obstacle in the research work.


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Shared: The team should work across all functional areas of the business and

technology to gather the shared ideas, and identify the common problem.

Seen: The team should be visible to other teams and business in the organization. The

team should regularly publish their innovation journals, show prototypes, provide

brown bag talk etc to technology and business teams.

1.15 IT Savvy:

Source: “Rethinking IT Investments as a Portfolio & IT Savvy” by Dr. Peter Weill of MIT Sloan

Centre for Information Systems Research Forum, http://cisr.mit.edu/members/index.php

An IT Savvy company generates maximum value of IT at its business success. IT

Savvy is reflected in a firm's ability to use IT to consistently elevate firm performance.

An IT Savvy company considers IT as a strategic asset rather than liability. Following

test will reveal how IT Savvy your firm is.

Can you:

respond to new customer demands in a timely manner ?

reproduce business success in new a location within a reasonable timeframe ?

integrate the new acquisitions quickly ?

ensure that managers and decision makers simultaneously do what is best for

your company and customer?

present a single face to global customers?

An IT Savvy company is more often able to answer yes to these questions. Their

systems support strategic business priorities. In contrast, non IT Savvy firms often


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have some good systems but those systems were built to support isolated business

needs. They do not work together to meet business needs.

To become IT Savvy first, it requires clear vision, strategic development of digitized

platform, and a significant change management effort. To achieve this, it needs strong

leadership in business and IT across the organization and more investment in IT

integration, aggregation, product innovation, and architecture should be made.

IT Savvy is a journey, it can-not be done in one day. Firms should learn how to

implement their vision and strategy in IT arena to get the measurable value.

1.16 IT Growth pyramid:

Following figure has been derived from the concept of McKinsey’s growth pyramid.

Source: http://tutor2u.net/business/strategy/mckinsey_pyramid.htm

Figure 1.8


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It shows that how competitive advantage can be achieved through IT & Business

strategy alignment, IT governance model and IT cross-functional team. It also shows

that increasing investment is required in IT to achieve the competitive advantage.

1.17 Emerging view of IT management :

Source: “What Makes IT Leaders (and Their Units) Effective: IT OVERSIGHT” by Dr. Peter Weill of

MIT Sloan Centre for Information Systems Research Forum, http://cisr.mit.edu/members/index.php

Through-out the last two decades of 20th century and beginning of 21st centuries, IT

has been evolved dramatically and become an integral part of any organization’s

success. Managing IT in the organization also has been passed through various

challenges over the year and has been matured. Role of IT management has been

changed dramatically on current years. Delivering system using traditional SDLC

(Software Development Life Cycle), maintaining and supporting IT systems, carry-out

business as usual enhancement work, people management, project management &

execution, testing, quality & risk control, disaster recovery test, off-shoring to India

and China are become more regular tasks of IT management, which need to be carried-

out anyway. Current IT management role is more focused on adding value to business

by integration, innovation, simplification, aggregation and effective communication.

Few emerging IT management roles in the IT organization are given below.

-- Work more with non-IT colleagues (like business, customer).

-- Re-engineering of a business process before implementing the system.

-- Innovative IT solution in synchronization with business process re-engineering.

-- High focus on transformation of business strategy into IT strategy.

-- Cross-functional (horizontal) integration across the organization.


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-- Product integration and innovation.

-- Free up internal IT department to work on projects and applications that will create

and sustain competitive advantage for the company and outsource business as usual

work, infrastructure management to a third party in cost advantage locations.

-- More emphasis on IT governance at a program & project level.

-- Rational IT investment fulfilling overall business strategic objectives.

-- Facilitate open discussion about certain issue or matter.

-- Communicate explicitly to employees about business goals, objectives and

importance of customer satisfaction.

-- Timeliness of delivery with reasonable cost and quality.

-- Encouragement of more usage of agile methodology of system development and

diverting from traditional SDLC.

-- Strong accountability on project delivery and process implementation.

-- Reduction of bureaucracy, internal politics and egoism inside the organization.

-- Allow business goal and objective transparent in all levels of the IT organization.

-- Assist on creation of a team with common goals and objectives.

-- Focus on “lessons learned” mechanism after post project review.

-- Keep best people in the organization by adjusting compensation or using other

motivational factors of each individual.

-- Attract best people from the market to the organization by providing challenging

working environment.


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1.18 SWOT analysis:

SWOT analysis is an important tool for auditing the overall strategic position of an

organization and its environment. SWOT stands for Strengths, Weaknesses,

Opportunities and Threats. This tool is widely used in the industry and provides a very

quick measure of positive and negative aspects of a particular scenario. Following

figure shows the SWOT matrix.


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1.19 Scenario planning:

Scenario planning [or scenario thinking or scenario analysis] is a strategic planning

method that some organizations use to make flexible long-term plans. Scenario

planning is not about predicting the future. It is about exploring the future. If you are

aware of what could happen, you are better able to prepare for what will happen.

Oddly, organizations play out the ‘bad’ situation only after that situation has happened

and once a ‘normal’ condition is back, organization throws their scenario planning tool


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out. Though it is impossible to identify all the future events that can impact the

business, but ‘how’ it may impact is an important component that can be easily

integrated into scenario planning. Preparing responses to imagined changes in

conditions, allows organizations to educate themselves about the probable risks. As an

example, in an IT organization, disaster recovery testing and business continuity

testing are part of scenario planning. More scenario planning can be done in the

organization during business and IT strategic alignment (like how fast IT can provide a

solution if the business wants to provide a new product to customer or how IT budget

will be impacted if the business makes a loss in the future or how IT can work on

reduced budget in a difficult market condition by providing maximum value to

business or how IT can work seamlessly irrespective of favorable or difficult market

conditions. )

Source: http://en.wikipedia.org/wiki/Scenario_planning, http://itstrategyblog.com/

2. Current strategic methodology & approach:

2.1 Current methodology & approach:


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http://itstrategyblog.com/

http://en.wikipedia.org/wiki/Scenario_planning

Business strategy has been taken into consideration along with IT strategy to identify

areas of investment in the IB IT trading department. Following strategic methodology

and approach have been used to evaluate the strategic investment direction.

Business strategy and value of IT analysis: In this section detailed business strategies

of a trading department and its sub-department have been considered and how IT can

add value to it has been identified. Please follow Appendix A for the sample analysis.

Application characteristic analysis: Based on above business strategy, detailed

strategic analysis has been done in the IB IT trading department. Characteristics of

various applications in the department and its sub-department have been identified.

Please follow Appendix B for the sample analysis.

Application source analysis: In this section source of major applications (In-house or

Vendor) have been identified in the IB IT trading department. Please follow

Appendix C for the sample analysis.

Analysis of project and current investment trend: In this step, objective/benefit

analysis, current and near future budget allocation of all major ongoing projects of the

IB IT trading department have been considered. Please follow Appendix D for the

sample analysis.

Current situation analysis (Fitness check): In this section, “Fit for future vs. Fit for

purpose” matrix has been created to identify which applications in the trading


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department need more and immediate investment. This analysis has made it clear that

which applications need immediate investment consideration to fit for the future.

Figure 2.0

Current situation analysis (Competitive positioning): In this section critical analysis

has been done to evaluate the competitive positioning of various applications or

application groups in the trading department. Three measures (Base, Differentiating

and Competitive) have been considered for the competitive analysis. The standard is

applications should be at least competitive, anything below competitive need

investment. Please follow the Appendix E for the sample analysis.


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Current situation analysis (Life cycle analysis): Application life cycle analysis is one

of the main tools to identify which applications are in an initiation state, operating

state, matured state and retired state. Applications which are in an initiation (test) state

need more investment than applications, which are already in operating state or

retirement state. Also, it identifies when a particular application will be in a retirement

state and how long the operating state will continue. Please follow the Appendix F for

the sample analysis.

Current situation analysis (Challenges & Actions): In this section major current

challenges of a trading department have been listed and proposed high level action

plans have been drawn to meet those challenges. Please follow the Appendix G for the

sample analysis.

Proposed initiatives and investment: In this final section, proposed future initiatives

along with benefits/objectives and investment plan have been drawn based on current

situation analysis. Please follow Appendix H for the sample analysis. Finally various

programs have been created in the IB IT trading department to address proposed

initiatives.

2.2 Current strategic challenges:


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The current strategic methodology and approach meet the overall objectives on some

extend, but it has some challenges, which need to be looked at to gain the competitive

advantage. Following section details some strategic challenges, which should be

considered.

1) Establish the clear link between a global business goals, regional business goal

and technological goal and how investment should be made to achieve each of

these goals.

2) Map business objectives directly with technological objectives. There should be

clear, visible and traceable mappings between business and technology objectives

not only at higher level but also at the operational level.

3) Creation of a cross-functional group to implement strategic analysis & changes.

Investment needed for cross-functional strategic analysis in business and

technology together regionally and globally.

4) In investment banking IT organization, separate sub-department should be formed

to carry-out strategic management covering strategy analysis and planning,

strategy execution, controlling & monitoring and strategy implementation.

5) Absence of a strategic plan to identify duplicated systems (functionally) across

various regions nationally and internationally. No investment decision has been

made to carry-out the exercise.


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6) Similar asset classes are traded in different systems. No strategic direction has

been followed to identify those systems.

7) Clear strategic investment plan to be drawn to incorporate IB trading platform into

Private Banking department to boost the investment of private banking customers.

More robust strategic investment plan for the trading IT department needs to be

created to bring investment and private banking together.


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3. Proposed strategic direction:

3.1 Proposed strategy:

This section is aimed to provide probable strategic direction along with existing

strategic methodology. This can be followed to meet the challenges identified in the

previous section.

Goal integration and alignment: Knowing and understanding of organizations’ vision

is a very important factor to identify goals of each business unit. Each business unit

must identify their goals globally, which will relate to the organization’s overall vision.

These business specific goals will be further analysed regionally and each region will

have its own goals, which are linked with global business goals along with its own

regional goals. As the IB IT trading department of a region supports various business

areas of investment banking, they have to align with regional business goals. At the

same time, they have to align vertically with global IB IT trading goals. It will

increase the focus on horizontal goal integration across different regions. The overall

goal alignment is not an easy task, it needs massive amount of co-ordination, co-

operation, and communication across different business and technology groups. Strong

support and investment are needed to carry-out this exercise. Following figure shows

the example of a vertical and horizontal goal integration and alignment process.


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Figure 2.1

Objective Synchronization: In Investment Banking IB IT department, each business

objective should be mapped clearly with a technological objective. It should detail

what each business objective means and how IT can help to achieve those objectives.

IT people should understand business values and benefits of IT solution to business.

Following figure shows how IT should work to understand business values and

benefits. Once understanding of business values and benefits are clear, it will be much

easier to map business objectives and technology objectives.


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Figure 2.2

Detailed analysis also required on a level of innovation needed in IT to achieve the

target solution, the time limit to provide the target solution to business, and how


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similar objectives are handled globally and across different regions (through horizontal

alignment). Again investment is needed to carry-out this exercise.

Formation of Cross-functional group: Cross-functional development teams have

proven to be a highly effective mechanism for integrating the different functional

capabilities required to develop a solution and for developing co-operation and

communication across different business segments and regions. This team can work

across different business segments regionally and globally. The primary objective of

this team is to integrate common goals and objectives in trading IT, provide strategic

IT solution suggestions, carry-out gap analysis between similar systems across

geographical regions, analyse on internal resources & capabilities, establish core

competences to full-fill the overall business objective, facilitate the communication

between different groups, come-up with a strategic implementation plan, communicate

the message across different line organizations and reduce the cultural indifferences

between different groups. Following figure shows how a cross-functional group in an

IT organization can enable the strategic direction.


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Figure 2.3

Source: Course material of ‘The Strategic Leader by Dr. David Pendleton’ module of PGDOL,

Said Business School, University of Oxford.

From the above figure, it is very much clear that the cross-functional group will be

very much active to

enable a strategic direction across the organization along with enabling

leadership and team work.

inspire and reinforcement of creating alignment and building sustainable

relationships.

provide a strong focus on the strategic planning, organization, implementation and delivering results.


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The out-come of strategic planning is number of programs and projects, which will be

finally implemented. During the whole process, the group will continuously learn and

improve the path-way of strategic implementation.

The work of the cross-functional team is not only limited to setting-up strategic

direction & planning but also carry-out strategic gap analysis of similar function

systems, identification of inefficient systems, provide strategic solutions to overcome

inefficiency of systems and create the marriage (shared values, systems, structure,

skills, strategy, style and staff) between the IB and PB IT trading department by

deploying IB IT trading environment in PB area.

Currently there is no existence of a cross-functional group in the IB IT trading

department who can carry-out the above exercise. Investment needed to form this

group for the purpose of long-term sustainable success of the organization and deep

roots in solid ground.

Outsourcing of non-core processes: The trend of a business process outsourcing to

cost effective locations has been increased rapidly over last 10 years. IB IT trading

department has to identify core and non-core processes. Non-core, matured, and

business as usual processes can be outsourced to offshore on a fixed price contract

basis. This can reduce the overall IT operating cost dramatically. This cost saving on

non-core processes can be utilized on core processes for the purpose of innovation.


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3.2 Benefits of the proposed strategy:

Benefit highlights of the proposed strategic direction are given below.

Overall organization’s vision and goal can be drilled down to the IB IT

operational level.

Clear picture, the road-map, and the impact of IB IT on business visible to

everyone. The cross-functional team will be accountable for establishing the

visibility.

Due to top down business strategy alignment with IT strategy, better

meaningful investment strategy can be formulated and more customer

satisfaction can be achieved.

The result of IT investment will be clearly visible to customers (IB business).

Communication and alignment between different functional areas regionally

and globally will improve, which can trigger internal resource movement

regionally and globally.

Integration of IT systems regionally and globally can bring competitive

advantage and can lead to further innovation of more intelligent IT solution.

Decommissioning of redundant systems will increase the operating efficiency

and reduce the maintenance cost and support cost.

Cultural indifferences across regions will be reduced and more diversified work

force and team will be created with common goal and vision.


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More end customer satisfaction will be achieved and overall organization will

get the competitive advantage due to a high level of alignment and integration

between business & IT.

3.3 Conclusion:

Strategic management process is a dynamic process which enables the

transformation of organization’s vision, mission, and objectives into reality. It is an

ongoing process that evaluates and controls the organization’s growth, stability, and

integrity. The result of strategic management is implementation of a number of programs

and projects, which will meet organization’s overall strategy. In this work, it has been

seen that, strong alignment is required between business and IT to get best benefits of IT

in the Investment Banking organization. Investment prioritizations based on business

strategy and objectives can improve organization’s accountability on IT. Presence of a

cross-functional group can help IT organization to integrate vertically and horizontally

across geographical regions, which can eventually boost the business performance and

bring the competitive advantage for the overall organizations. On 21st centuries, business

processes are defined based on functionality of IT system. Investment is required in R & D

to innovate IT platform, which can help to draw the most optimal business process and

enable business to take correct decisions in the competitive market place. Today,

innovation in IT is happening at a higher speed than earlier days and effective use of IT

will do open-up new business opportunities, which were not seen before in a full scale.

In this project work, various challenges related to business & IT alignment, integration of

IB with PB, harmonization of various IT systems with similar functionality across

geographical regions, and life cycle issues have been addressed. Various strategic


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methodologies like creation of a cross-functional group, formulation of program and

project level governing bodies, an existence of a strategic team inside trading IT

organization, goal & objective synchronization, IT investment prioritizations on line with

business objectives, and benefit analysis are considered to meet above challenges. This

is the main achievement of this project.

Finally, it can be concluded that strong and robust partnership and alignment between

business & IT will be the key to success for an Investment Bank on coming future.


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Appendix A:


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Appendix B:


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Appendix C:


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Appendix D:


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Appendix E:


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Appendix F:


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Appendix G:


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Appendix H:


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References:

1… Grant, Robert M., Contemporary Strategy Analysis, Sixth edition

2… Michel, Stefan., Presentation on Service Strategy, IMD,Switzerland

3… Pendleton, David., Course material of ‘The Strategic Leader’ module of PGDOL, Said Business School, University of Oxford.

4… Weill, Peter., W.Ross, Jane., C.Robertson, David., Enterprise Architecture As Strategy, Harvard Business School Press

5… Weill, Peter., What Makes IT Leaders (and Their Units) Effective: IT OVERSIGHT, MIT Sloan Centre for Information Systems Research Forum

6… Weill, Peter., Maturing Your IT Governance – An Update, MIT Sloan Centre for Information Systems Research Forum

7… Weill, Peter., Rethinking IT Investments as a Portfolio & IT Savvy, MIT Sloan Centre for Information Systems Research Forum

8… Westerman, George., Building an Effective IT Innovation Capability, MIT Sloan Centre for Information Systems Research Forum

9… http://agilemethodology.org/

10… http://cisr.mit.edu/members/index.php

11… http://en.wikipedia.org/wiki/Rapid_application_development

12… http://en.wikipedia.org/wiki/Scenario_planning

13… http://en.wikipedia.org/wiki/Strategy

14… http://itstrategyblog.com/

15… http://tutor2u.net/business/strategy/competitive_advantage.htm

16… http://tutor2u.net/business/strategy/core_competencies.htm

17… http://www.mindtools.com/pages/article/newTMC_94.htm

18… http://www.mariosalexandrou.com/methodologies/rational-unified-process.asp

19… http://www.nyse.com/


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strategic investment prioritisation in investment banking it division

Education