A series of significant management failings were to blame for spiralling IT costs which contributed to the Co-operative Bank’s £1.5 billion capital shortfall, according to a damning report from Sir Christopher Kelly.
The 152-page report highlights the problems encountered as the bank attempted to replace its core banking systems with Infosys’ Finacle platform, a project which was cancelled in 2013 with a bill of almost £300 million added to its balance sheet.
“The weight of evidence supports a conclusion that the [core banking replacement] programme was not set up to succeed,” said Kelly. “It was beset by destabilising changes to leadership, a lack of appropriate capability, poor co-ordination, over-complexity, underdeveloped plans in continual flux and poor budgeting.”
The bank agreed a deal with Infosys in 2007 to overhaul its ageing IT systems, which had applications built on top of each other since the 1970s. However, the project encountered significant problems and was put on hold in 2011, before eventually being cancelled last year, with IT write-down costs of £148 million.
According to Kelly’s report, the failure of the project was due to poor decision-making as the already ambitious project ran into further challenges such as the Britannia merger in 2009, and proposals to purchase bank branches from Lloyds Banking Group in 2011.
‘Litany of deficiencies’
One of the major factors highlighted was a frequent change in leadership for the project, with three different executives leading change between 2007 and 2012.
The departure of CIO Gerry Pennell to join the London Organising Committee of the Olympic and Paralympic Games in 2008 was considered to be a particular factor in the derailing of the project. He had been “the driving force behind the decision to replatform,” Kelly said, and, with his departure, the organisation “lost some of the capability and drive to make the project a success”.
For example, Pennell had overseen plans to outsource management of aspects of the IT programme which were originally intended to be handed to IBM, under the guises of Project Magellan and Project Olympus.
Kelly stated that partnering with IBM would have would have resulted in shared responsibility for project management, meaning that the bank would not be solely liable for unexpected costs relating to the project. IBM would also have been given powers to negotiate and sign contracts with the core banking system vendor, which could have also helped to reduce the overall cost of the project.
However, following Pennell’s departure, plans to outsource certain business process responsibilities to IBM were significantly reduced, with Infosys handling the majority of systems integration delivery.
Furthermore, his replacement, who had previously overseen the merger of Bristol & West Building Society and Britannia systems, did not have experience of a change project of the scale the Co-op Bank was attempting, Kelly said.
The report also calls into question the initial decision in 2007 to embark on a complete replacement of its core systems, rather than continuing with its existing platform and beginning remediation efforts.
When the project began, the Co-op Bank was the first major UK bank to attempt such a “risky” transformation – with Nationwide not completing its move onto a SAP core banking platform until November 2013. The report states said that the Co-op Bank had failed to sufficiently consider the possibly of alternatives to a complete overhaul of core systems, and “overestimated” its capability to deliver such a complex programme of change.
Undertaking such a major transformation is “a brave decision” for any bank, said Kelly, due to the technical difficulties involved, but the Co-op Bank’s small size meant that a failure would have a “disproportionate effect” on its capital compared to larger lenders.
“The Bank...recognised that the replatforming project was risky. But it was attracted by the idea of leapfrogging the competition and gaining an advantage, or better protecting its position, through improved customer relationship management and quicker delivery of new products.”
He added: “It is important to be realistic about the scale of projects undertaken, and the burden this places on the organisation.”
The decision to overhaul its platform was further complicated as the bank announced its acquisition of Britannia building society in 2009.
Typically a merger will involve moving one bank onto another’s existing platform, but the Co-op Bank management decided to attempt to transfer both onto a newly created system at the same time.
“Even if the dual migration risk is ignored, continuing the replatforming programme while simultaneously attempting to integrate the two entities was itself very risky. Both would require a significant amount of senior management attention. It was almost inevitable that one, if not both, projects would be compromised.”
Kelly also claims that senior management teams were not sufficiently engaged with the project to ensure its success.
“The importance of the replatforming programme to the Bank’s future strategy, its high risks and the size and unpredictability of its likely costs in relation to the Bank’s profitability and capital might all have been expected to cause the Bank’s Executive and Board to pay it particular attention,” he said.
“It is difficult to avoid the conclusion that both Board and Executive failed to interrogate the programme sufficiently closely and paid inadequate attention to its obvious difficulties until it was too late.”
Kelly also described the communication between the three teams overseeing the various IT projects at the bank as “weak”, with reports of "personal animosity" between those in charge of the main IT staff, the Finacle implementation team, and those involved in additional technology programmes.
Another problem was an inefficient organisational structure, with approximately 800 staff contracted to the project by 2011, which became over-managed.
Too little was done to reduce complexity, Kelly adds, with the business demanding 18,000 amendment requirements - an "excessive demand" for what was supposed to be an 'out of the box' system. Even the collection and documentation of requirements created a substantial workload, Kelly said, with the complexity likely to have added to the project costs.
"The Bank's management seems to have underestimated the amount of work reconfiguration would entail both for Infosys and for its own staff. The project would also require significant effort to migrate data from the legacy systems, to build interfaces with other bank applications, to train staff to use the new systems, and so on."
Since the cancellation of most of the Finacle project – which has been rolled out to the SME lending part of the business – the bank has announced plans in its full year financial results to invest £500 million as part of ongoing IT transformation plans.
The bank stated: “The primary focus for 2014 and 2015 will be remediation of the existing system issues to ensure the bank can meet its ongoing commitments to regulators and customers, and the creation of an IT platform which allows the bank to provide new digital channel applications to enable appropriate online products, specifically web-based and mobile banking and functionality for its customers.”
The bank, which recently saw CIO Peter Coleman depart, announced in October that it had appointed former HP Enterprise Services vice president Bill Thomas as a non-executive board member to help lead its IT transformation.