January 16, 2009

Update: Citigroup split up will send IT in ‘reverse’

Ten year move to standardised IT may be part undone, analysts predict

By Leo King, Computerworld UK

---

Troubled banking group Citigroup said it is splitting its business in two in a move that analysts warned would put its IT strategy in a backspin.

The bank, one of the world’s largest, today confirmed numerous reports that it is splitting off its less profitable divisions in a dramatic restructure, as it sent shudders through the market with a fourth quarter loss of $8.29 billion (£5.6 billion).

Citigroup has been attempting in the last year to remove a massive £1.5 billion from annual IT costs. It is thought a large number of IT staff could be affected by the 52,000 job cuts across its business already announced in November.

Years of IT integration work, conducted by Citigroup following the merger of Citicorp and Travelers Group in 1998, could be undone as the bank splits in two, financial IT analysts have warned.

“It’s taken [Citigroup] 10 years to get to a point where they’re moderately efficient in IT. It will be very hard to undo [the changes],” Ralph Silva, senior analyst at Tower Group told Computerworld UK. Different parts of the business may now have to move away from standard solutions they had adopted and use some of their original systems, he said, even though many departments “had to make a compromise [by moving onto] standard solutions”.

Citigroup, “easily one of the top 10 banks for standardised IT” with “probably three-quarters of its technology off-the-shelf”, would face the “near impossible” task of splitting the business while trying to keep IT costs low, Silva predicted.

The IT changes the bank makes, he said, are “bound to be on the cheap".

"There hasn’t been one speck of innovation for five years. They will have to buy back previously owned technology," he warned.

Under the new arrangement, Citigroup would split into two units: Citicorp and Citi Holdings. Citicorp would house the company's private and investment bank as well as its credit card and consumer banking business, with about $1.1 trillion in assets.

The smaller Citi Holdings would incorporate its so-called non-core businesses, including its Smith Barney brokerage and a pool of troubled assets that have plagued the firm for more than a year.

Silva predicts that the bank would act quickly to standardise IT in its principal core business, Citicorp, and would look to cut costs in areas such as customer relationship management (CRM), messaging, middleware, networking and communications.

Citigroup did not provide detail on its IT plans. But a spokesperson told Computerworld UK that Citicorp and Citi Holdings would each still attempt to use their scale to make IT efficient. "Both entities will continue to benefit from Citi's scale and share technology and administrative resources," she said.

In a statement to investors, chief executive Vikram Pandit said: “Given the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses. This will help in our ongoing efforts to reduce our balance sheet and simplify our organisation, which will enable us to better serve our clients and customers in both businesses without disruption.”

On Wednesday, Citigroup announced it was merging its brokerage with that of Morgan Stanley, a move that would lead to $1.1 billion cost savings, including $350 million from IT and operations. Jost Hoppermann, principal analyst at Forrester, warned that in similar cross-mergers conducted by other banks in the past, "only a few were successful" in terms of IT benefits.

"I do not know of any bank that has an application landscape with this kind of change planned," he said.

Newsletters

Your daily injection of CW news and expert analysis: we’ll bring the news to you.