Westpac spends $500 million to take back IT

Attempts to mend dysfunctional outsourcing relationships.

Westpac Group technology executive Bob McKinnon has revealed that the banking giant has spent some $500 million in four years putting out technology fires created during a “dysfunctional” relationship with outsourced supplier, IBM.

In a frank presentation to a CEDA conference on Friday, McKinnon spoke at length about his efforts to rescue the relationship between Westpac and IBM, highlighting several wins Westpac has enjoyed since bringing IT architecture strategy and service integration back in-house.

Surveying the damage

McKinnon told the conference that when Westpac CEO Gail Kelly took up her post in 2008, she was horrified at the state of the bank’s IT infrastructure.

“She looked under the technology hood and didn't like what she saw,” he said. “Westpac’s technology and management of that technology was not even close to where it needed to be after years of chronic underinvestment.”

McKinnon said Westpac’s systems lacked reliability. The bank was recording about 30 severe IT incidents (outages) per month in 2008, running at almost one a day, he said.

McKinnon claimed there was no IT strategy to speak of. The IT department was a “dysfunctional poor cousin” to the rest of the business.

“We were in Alice in Wonderland territory,” he noted. “As the Cheshire Cat told Alice, if you don't know you're going, [any road will lead you there].”

Kelly, he said, “understood that technology was central to Westpac’s future”, and armed McKinnon with a budget and a timeline to fix the damage.

The central problem, however, was that relationships with “key suppliers” – the largest being with IBM – were in “disarray”.

Mending the fence

At the time of his appointment, IBM was contracted to provide Westpac with IT services for a further two years.

But instead of planning to leave the toxic relationship, McKinnon oddly chose to attempt to repair it, for reasons that have never been disclosed.

He told the CEDA conference that he set about “rebuilding” the relationship with IBM over a period of two years as the new contract was negotiated.

McKinnon believed that Westpac “could not muster all the capabilities necessary” to recover quickly and had to “make the best of relationships with suppliers” such as IBM, Microsoft and Oracle.

“We needed traction quickly,” he said.

The relationship with IBM was saddled with both contractual and cultural problems and “sadly the most dysfunctional” of all, he noted.

“Much of the challenge with our original IBM was that the agreement was less than clear and transparent, and in many cases ambiguous,” he said.

“People on both sides had different interpretations of what the contract meant. Good people found themselves in conflict over their responsibilities."

From a cultural perspective, McKinnon said Westpac had effectively created “a huge shadow organisation to watch what IBM was doing” rather than being an active participant in the process.

The fix

During the first twelve months of his tenure, McKinnon spent $80 million on fixing known issues in Westpac’s IT infrastructure to improve service reliability - $30 million of which was spent on online platforms.

But more would be spent on designing and rolling out infrastructure that would prove more capable, and refining a new agreement with IBM that would make more parties more accountable.

McKinnon revealed that Westpac has spent $500 million on fixing IT infrastructure and improving service management processes over a four-year period.

Getting supplier relationships right, McKinnon said, came down to improving transparency, introducing governance and creating clear roles for all parties involved.

McKinnon noted that Westpac needed to accept its share of the blame for the IBM relationship, adding that the bank has built “internal management capabilities to be a better customer”.

Under a new $1.3 billion deal signed with IBM last year, Westpac became the “design authority and service integrator”.

“We still decide how it looks and we oversee the way our staff and our service providers work as one team,” McKinnon said.

McKinnon hired a new team of technology executives – several from his former employer the Commonwealth Bank - to lead this transformation.

Sarv Girn was named Westpac’s chief technology officer, former EDS CIO Randy Fennel was named general manager of technology engineering, former Lloyds Bank executive Clive Whincup was named general manager of technology service delivery, and Bernadette Inglis was named general manager of Westpac’s five-year Strategic Investment Priorities program.

The bank also set up a separate technology sub-committee for the Westpac board for increased governance of IT issues.

As the design authority and service integrator, Westpac’s new technology leaders could negotiate to use less IBM hardware and software, and take a best-of-breed approach.

This has led to agreements to replace IBM storage with $65 million worth of EMC storage and services, the use of Cisco Unified Computing servers instead of IBM servers, the replacing of Lotus Notes with a Microsoft SaaS solution hosted by Fujitsu, and the replacing of Frontrange’s HEAT and IBM’s InfoMan with BMC’s Remedy solution.

IBM services staff have been contracted to do much of this work.

Priorities

McKinnon conceded that not all of the technology platforms used by the group’s banks could be upgraded straight away.

As announced late last year, his team has prioritised the renewal of Westpac’s front-end customer experience and the core banking systems of St.George over other pressing projects.

The upgrades have been implemented so that the same platforms used to improve Westpac’s front-end customer facing systems will be used for St.George in the future, while St.George’s Hogan core banking system will be used for Westpac – a project that won’t commence until 2014.

McKinnon said that work on St George’s core banking system has had to take a back seat of late to focus on building systems for the group’s new bank, the Bank of Melbourne, which will also run on the same system.

“We still have a lot to deliver, but we are on track,” he said.

Is McKinnon's strategy working? Read on to find out...