Business Case Executive Recommendation

MANAGING TRANSFORMATION AT NATIONAL COMPUTER OPERATIONS

Gar Finnvold knew his organization needed to change, to transform itself over the next two years. His 1,000 employees had enjoyed what amounted to monopoly status. They had been the exclusive provider of computer support services to the global enterprises of the U.K.‐based National Banking Group. All that was about to change. National Bank’s newly appointed chairman had announced that, starting in two years, all bank operations would be free to purchase their computer services from any vendor who could supply excellent value. Finnvold’s operation would be competing against the best in Europe. At the same time, Finnvold would be free to market his computer operations on the outside, to build a customer base external to the bank.

Finnvold’s excitement at the challenge of transforming his National Computer Operations (NCO) into a truly world‐class competitor was matched by his anxiety (see Exhibit 3‐6 for a partial organization chart). As the longtime manager of computer operations, he understood only too well that NCO was unprepared to compete. Internal bank customers had complained for years of the high‐cost/low‐responsiveness culture of the NCO.

EXHIBIT 3-6 Partial Organization Chart—National Computer Operations.

G. Finnvold

Managing Director

N. Krasna

Manager Operations

H. Ramos

Manager Support Services

M. Gold

Chief Financial Officer

P. Petit P. Chereau L. Rubio

Manager Manager Manager Branch Distributive Service Services System Delivery

Shielded by their monopoly status, NCO’s computer technicians didn’t worry much about whether the customer perceived them as providing value. They believed they better understood both what that customer needed and how much they should be willing to pay for it. In two years, Finnvold knew that equation would be reversed. Given a free-market choice to seek the best provider of computer services, would they continue to use NCO? Not likely, he thought.

At least inside the bank, NCO enjoyed a substantial cost advantage over potential external competitors. National tax laws exempted bank operations from having to pay a 20 percent tax on internally provided services. That tax advantage disappeared when NCO left the safety of the bank to hunt external customers. What’s more, no one at any level in NCO possessed real general management experience. Certainly not managing costs, customers, and operations within a fiercely competitive environment. Was two years even close to enough time to undergo the radical transformation required to make such a venture successful?

NCO Operations

Listen to how Peter Kapok, a longtime NCO manager, described what his organization was like in the 1990s: “We weren’t client oriented. We told our clients what they could and couldn’t have. We came to work for ourselves and did pretty much what we wanted. We simply didn’t consider ourselves working for a client.” The notion that customers might define the ultimate value of their services was alien to NCO.

It’s little wonder that for most of NCO’s managers, effectiveness was not measured by organizational performance or client satisfaction. Their focus turned inward instead. How can build up my functional area? Enhance my personal career? “We were an organization of empire builders,” Kapok observed. “The more people you had working for you, the more likely you were to get promoted. There were few performance measures, and almost no coordination of our efforts.” The functional silos of the organization were so powerful, said Kapok, that NCO’s own staff “didn’t quite consider ourselves working for the same operation. If someone from one unit went to someone from another to ask for help, they were considered a nuisance. We certainly never considered the impact of any of this on our costs.”

Because of what was occurring within NCO, the bank’s new chairman hired a consulting firm to evaluate internal computer operations. The findings were as disturbing as they were predictable. “They confirmed our worst fears,” recalled an NCO manager. “We were not performing at the level we should have been performing at.”

Until the consulting report provided irrefutable evidence to the contrary, NCO managers felt they did an excellent job of providing these services to the bank. “If you had asked us how we were doing,” admitted Gar Finnvold, “we would have said, ‘We meet our customer service levels most of the time. We are improving our unit costs year‐on‐year. And of course we’re adding value.’ ” It was only later that Finnvold came to recognize that customers held a view of NCO’s effectiveness that stood in direct opposition to the opinion of NCO’s managers. “Our customers were saying, ‘You’re too expensive. Your system is always breaking down. And you provide no added value?’ ”

At the time of the consulting report, NCO was billing approximately $240 million USD annually (within an overall annual information technology expenditure of $1.5 billion USD), almost entirely to internal bank customers. Although NCO offered a wide range of services, including processing, project management, and technical support and consultancy, they pointed with pride to one distinct competency – disaster recovery. “NCO provides planning and backup facilities for unforeseen crises or disasters such as fire and flood. Planning and backup facilities can be provided either separately or together and can be offered in either a ‘hot start’ or ‘cold start’ environment.”

The bank’s new chairman quickly recognized that NCO customers and managers held completely different views of value. Using the consulting report as a driver, he first designated NCO as a profit center. He made clear that NCO would be expected to pare costs severely. Within a year, NCO dramatically downsized its workforce from 1,500 to 1,000. The chair- man then called on Gar Finnvold to oversee more sweeping change. NCO, in other words, would have to become fully competitive in order to survive.

MANAGING TRANSFORMATION

AT

NATIONAL

COMPUTER OPERATIONS

Gar Finnvold knew his organization needed to change, to transform

itself

over

the

next

two

years.

His

1,000

employees

had

enjoyed

what

amounted to monopoly status. They had been the

exclusive provider of com

puter support services to the

global enterprises of the U.K.

based

National Ban

king Group. All that was about to change. National Bank’s newly appointed

chairman had

announced

that, starting in two years, all bank operations would be free to

purchase their computer services from any vendor who

could

supply excellent value. Finnvold’s

o

peration would be competing against the best

in

Europe.

At

the

same

time,

Finnvold

would

be

free

to

market

his

computer operations on the outside, to build a customer base external to the

bank.

Finnvold’s excitement

at

the

challenge

of

transforming

his National

Computer Operations

(NCO) into a truly world

class competitor was matched by his anxiety (see Exhibit 3

6 for a

partial organization chart). As the longtime manager of computer operations, he understood

only too well that NCO was unprepared to

compete

.

Internal

bank customers

had

complained

for

years

of

the

high

cost/low

responsiveness

culture

of the NCO.

EXHIBIT 3

6

Partial Organization Chart

National Computer Operations.

Shielded

by their monopoly status, NCO’s computer technicians didn’t worry much about

whether the customer perceived them as providing value.

They believed they

better

underst

oo

d

both what that customer need

ed

and how much they should be willi

ng to pay for it.

In two years,

Finnvold knew that equation would be reversed. Given a free

market choice to seek the best

provider of computer services, would they

continue to use

NCO? Not likely, he thought.

At least inside the bank, NCO enjoyed a substantial cost advantage over potential external

competitors

. National tax laws exempted bank operations

from

having to pay a

20 percent tax

on internally provided services. That tax advantage

disappeared

whe

n NCO left the safety of the

MANAGING TRANSFORMATION AT NATIONAL

COMPUTER OPERATIONS

Gar Finnvold knew his organization needed to change, to transform itself over the next two

years. His 1,000 employees had enjoyed what amounted to monopoly status. They had been the

exclusive provider of computer support services to the global enterprises of the U.K.-based

National Banking Group. All that was about to change. National Bank’s newly appointed

chairman had announced that, starting in two years, all bank operations would be free to

purchase their computer services from any vendor who could supply excellent value. Finnvold’s

operation would be competing against the best in Europe. At the same time, Finnvold would be

free to market his computer operations on the outside, to build a customer base external to the

bank.

Finnvold’s excitement at the challenge of transforming his National Computer Operations

(NCO) into a truly world-class competitor was matched by his anxiety (see Exhibit 3-6 for a

partial organization chart). As the longtime manager of computer operations, he understood

only too well that NCO was unprepared to compete. Internal bank customers had complained

for years of the high-cost/low-responsiveness culture of the NCO.

EXHIBIT 3-6 Partial Organization Chart—National Computer Operations.

Shielded by their monopoly status, NCO’s computer technicians didn’t worry much about

whether the customer perceived them as providing value. They believed they better understood

both what that customer needed and how much they should be willing to pay for it. In two years,

Finnvold knew that equation would be reversed. Given a free-market choice to seek the best

provider of computer services, would they continue to use NCO? Not likely, he thought.

At least inside the bank, NCO enjoyed a substantial cost advantage over potential external

competitors. National tax laws exempted bank operations from having to pay a 20 percent tax

on internally provided services. That tax advantage disappeared when NCO left the safety of the