Local hero

HSBC CIO Ken Harvey talks to CXO about investment, innovation and the environment at one of the biggest banks in the world.

With over 10,000 offices in 83 countries, HSBC is one of the largest financial institutions in the world. On a purely technological level, keeping all the company’s myriad systems running smoothly and maintaining its reputation as the ‘world’s local bank’ is a monumental task. This task falls to CIO Ken Harvey, who approaches it with commendable enthusiasm.

Having recently overseen a huge investment in IT across the entire company, Harvey is keen to tell us about exactly what all this expenditure has meant to the company. “The benefit has surprisingly been 85 percent on the revenue generation side, with only 15 percent on the cost reduction side,” he says. “The reason I say that's surprising is going into it, we certainly would have viewed a ratio that would have had equal, if not more, benefit out of reduced operating costs. But the truth is, most of it has been showing up in incremental volume and incremental revenue. That's true whether we're playing in new global trading platforms, or much more business in emerging marketing equities than we had before, because we put in a better global platform.” 

But despite the significant successes already witnessed, Harvey and the HSBC management are confident that there is much more to come. “To use one of (group CEO) Mike Geoghegan’s favourite phrases, he’d say we’re probably in the foothills of the benefit here,” Harvey explains. “We started monetizing the benefit and, about a year ago, we started going public with some of the numbers that we're achieving. But that was after two and a half years of heavy lifting, where the benefits actually weren't immediately apparent.” He goes on to predict that 2008 and will be a much bigger year than 2007: “It’s just going to amplify, so we’ll get much more yield out of it going forward.”

But how does Harvey maximise benefits and efficiency across such a widely dispersed group? The answer: by manufacturing most of their software in centralized locations and then deploying it globally, cutting out the need for external developers. “Being HSBC, we have a huge advantage inasmuch as we're a very well-recognized employer in places like India and China,” he says. “So unlike some of our less global competitors, if they were to try to burst into a market like that and hire 3000 or 4000 people in India, or 2000 in China, they might have a tough time. If we hang the HSBC logo on the street, I have a good queue of engineers who want to come work for the world's local bank, because it's such a well-recognized brand.”

Internal development
In fact 42 percent of the group’s global programming is done in India, China and Brazil. Something of a high water mark in the industry, particularly for a major G7 bank such as HSBC. The result of such an approach is that it enables the company to bring software in anywhere in the world at a very attractive price point. Harvey explains the concept, which he refers to as ‘leverage squared’: “If you're a small country and you had, let's say, 200,000 credit cards, we're going to bill you for the use of the credit card software by credit card,” he says. “If you're a large country that has 80 million like the United States, then they get billed 80 million units. So everybody gets a better unit rate because they're all participating in sharing the cost of something that's developed at a good price point to begin with, because we're leveraging the offshore.”

But while an extremely large portion of HSBC’s software is developed in house they do occasionally turn to outside developers. “We have a principle that says that if the software you're building will create a competitive advantage, it is built in house. If it's a parity issue, we tend to buy it.” Harvey continues. “So we bought the general ledger system, because no customer really cares what the internal ledger system of the bank is. The internet facing systems, the staff facing systems, the systems that actually do trade, our systems that create derivatives, those are built ourselves.” Asked to estimate just what proportion of software is built within HSBC’s walls, Harvey comes up with the impressively high figure of 70 percent.

What’s new?
In its recent interim report, HSBC announced two major advances, which Harvey has been instrumental in developing. First of these is a new group-wide business and internet platform. Already implemented in 25 countries, primarily across North America and Asia, it is now rolling out across Europe and promises to make major improvements on the 50 or so regionally developed systems currently in place. Giving customers the power to customize their own environment and access cross-country and cross-border portfolios, Harvey is understandably proud of it. “It's absolutely the cutting edge in the industry. That particular system was over $200 million to build.”

Once again, it is HSBC’s huge international reach that allows it to make such an investment. “There's no way a single bank, even a bank our size in the UK, could easily afford a $200 million build,” explains Harvey. “But if you spread the cost of that $200 million build across 80, 85 countries, it actually becomes more reasonably priced than the lower grade system that would have been built regionally.”

This globally integrated development structure has also been instrumental in HSBCs other major announcement. The company is launching the card system that already serves 86 million accounts in 16 countries worldwide. The bulk of the card base has already been converted and the remainder is expected to follow soon. “Now the reason we're able to do new launches is because, as I mentioned before, we can go into new countries at a very affordable price point, because we're not building a brand new platform.” says Harvey. “We're not buying hardware. We're not licensing new software.  It's just another incremental account on an already large plant. So we can expand cards in new markets without having to say, ‘Well, unless we can get out the doors with 400,000 accounts, it's not viable.’ It's viable at a much lower threshold, because you're only paying incremental growth.”

So, is more major investment in the pipeline or has expenditure reached a plateau? “The core infrastructure build and therefore the bulk of the spending on a global basis is behind us,” answers Harvey. “It's done. Now we're actually adding feature, function and product that differentiates us. You'll see more of that later this year on the business side, in the CMB space, in the PFS space, in the capital markets space. And next year will be even stronger than this year.”

Inside out
With overall responsibility for HSBC’s technology, does Harvey have any difficulty managing both internal and external facing systems? At first glance it doesn’t seem so. “The way we’re structured, the internal IT is all within my control so that’s actually quite easy,” he says “As for the customer facing propositions such as our new credit card system, that’s actually quite easy as well because you just go out the region and say ‘You get this new function for this price’. That’s actually going very, very well right now.”  If all this sounds incredibly simple for the manager of a multi-billion IT infrastructure, it is perhaps reassuring to know that there is the occasional stumbling block.

“The most difficult part is balancing internal spends on improvements like transfer pricing systems or enhancements in the human resource systems, because they don't have a real short-term benefit to revenue,” he says. “They don't have a significant cost reduction hooked up to them the year you put them in.”  It’s a concern that we hear quite often when speaking to CIOs from every type of industry: the challenge in persuading management about the value of long-term, internal investment.

“I think those types of systems are the most difficult ones to discuss and to have the senior management team agree upon,” agrees Harvey. “Most of the senior management team would say, ‘Well, put the money up front where it makes the difference with the customer.’ But you have to take care of your SAP structures, your Oracle structures.  That is the most difficult thing to get justified, and it’s the spend that comes under the most scrutiny.”

The green CIO
The group has recently taken the bold step of announcing its intention to become the world’s first carbon-neutral bank. That’s a major undertaking for any bank, let alone one of HSBC’s size. It’s a challenge that Harvey has both a professional and personal interest in. “I’m somewhere between being very green and a tree-hugger,” he confesses. “So it fits in a big way.”

One of the main ways that the group is reducing its carbon footprint is through the use of technology to reduce unnecessary travel. “We absolutely are at the front edge of these virtual telepresence rooms, for instance, to cut down on air travel,” Harvey explains. “And we’re pushing out on the front edge of things like work at home.” He goes on to give the example of a call centre worker who can dial in remotely. “I can put a screen in your house, just as easily as I could if I made you get in a car and drive down to a centre and consume all those resources. We've had very good luck with our pilot technologies.”

And the benefits of this approach are not limited purely to the environmental. “It actually cures many things at once,” Harvey explains. “It's very green. You end up reducing office space, which is helpful from a corporate expense standpoint. And actually, human lifestyle is improved.” That last point is something that anyone who faces a long commute each will have no problem agreeing with.

To be able to affect such a change in culture, you need innovation to back it up. “You have to create the technology so that the company is comfortable that you are productive, useful and connected at home,” Harvey agrees. “If there's an important conference call, you can't not do it because someone is out of the office. In our case, I can light up your desktop, and we’re looking right at you in a high definition monitor. The new monitors we're putting out as desktop screens for PCs are also high definition IP based videoconference terminals.”

But enabling people to work in a less environmentally damaging way is only part of the task. With ever-growing reserves of information that need to be stored, the power demands of data centres and other forms of technology have to be taken into account. It’s an area which Harvey is giving plenty of attention. “We've done a huge amount towards things – technologies like server virtualization,” he says. “We plug quite a bit of the new Sun Server technology, which puts out far more throughput with lower levels of both heat displacement and power consumption. And we are looking at ways of constructing data centres in such a way that the cool ambient air is put in the right place, as opposed to trying to chill the whole data centre like a refrigerator.” New data centres built to these exacting specifications are currently being constructed in Mexico, Hong Kong and the US with another about to be started in the UK.

Good relationships
As our interview moves towards its end, we ask Harvey about HSBC’s relationship with the vendor companies who are instrumental parts of the group’s massive infrastructure. Are there any ways in which these relationships could be improved? “We are huge customers of IBM, Sun, Cisco and HP.” He explains. “I'll tell you the one thing that I think they don't understand, or that they haven't fully embraced. They're kind of in a manufacturing and sales environment. So they're always looking for incremental sales volume, which is right and proper for someone in that business. But what they have to recognize in our industry is that our margin on almost every product we have goes down every year.”

Harvey tells us that he needs to figure out a way to put more volume through at a much lower price point: “I need to drop my unit cost of operation 10 to 15 percent every year for everything I sell. Otherwise, my margin would disappear, and I would cease to exist.”

While this seems very basic in a macroeconomic sense, Harvey paints a picture of vendors whose main focus is on increasing profits without a necessary attention to improving value for money. 

“You can't just sell me 15 percent more money's worth of stuff if the margins on my products are going down.” he says. “You have to figure out some way to help me drive the total cost of my operation down. My promise to HSBC is that we will drive down our unit costs, by 10 percent per year every year. I need suppliers and vendors who understand that and are engineering to that point, not just people who are trying to sell me X more units.”