Online Extra: ABN Amro's Smart Moves

The European banking giant took its time developing an outsourcing plan, and that deliberation is paying off

For years, ABN Amro has remained in the shadows of European peers like UBS (UBS ) or Deutsche Bank (DB ). But the goal of The Netherlands' largest bank is to make it into the ranks of Europe's Top Five -- up from No. 11 in terms of equity capital and reserves.

To jumpstart this effort, the ABN Amro (ABN ) board in 2004 approved a plan to restructure and align the bank's 60 operations worldwide under one technology umbrella. By consolidating its back office, the bank figured it could save $300 million annually, starting in 2007. It also wanted to free up resources to develop innovative new products that would boost the bank's revenues, which were $23 billion in 2004.

"We wanted better service quality than what we had, and more agility to respond quickly to changes in the market," says Lars Gustavsson, ABN's London-based group chief information officer. To achieve its goals, ABN Amro decided to look offshore.


  ABN Amro was no stranger to outsourcing: It had earlier signed a $1.2 billion five-year outsourcing contract with EDS (EDS ) for infrastructure and software maintenance, as well as software development. From that experience, says Gustavsson, ABN learned that outsourcing isn't really effective piecemeal, but should be part of a larger strategy. The bank also figured out that effective outsourcing isn't only about saving costs but also about improving service and products. ABN Amro decided to apply these lessons as it launched its major corporate restructuring and back-office shakeup.

Here's how the bank did it. First, it put out the word that it was in the market for a back-office overhaul, and the development of a seamless system where the retail, private, and investment-banking parts of the banks' businesses worldwide would be integrated on the same technology platform. For that, the bank wanted to outsource the monitoring of data centers worldwide, as well as the maintenance, support, and development of IT applications.

The prospect of a large, multiyear project was alluring. ABN Amro received an unusually large response from a dozen service providers. But the bank didn't rush into a decision. Instead, management took a year to evaluate the responses and allowed its strategy to evolve in the meantime. Finally, in September, 2005, the bank announced that its $2.1 billion, five-year deal would be spread largely among three players. IBM (IBM ) Global Services would take on the data-center work and some software development, while India's Tata Consultancy Services and Infosys Technologies (INFY ) would handle the rest.


  In November, 2005, ABN Amro began implementing its tech restructuring -- and the bank already professes to be pleased with early results. Thanks to the outsourcing project, the bank has greatly improved its technology and can respond better to market demands, Gustavsson says. The bank is accelerating plans to launch a new credit card and more private banking services in the U.S. and Brazil -- a step toward other new product launches. And the bank's stock is up 18% in the past year.

Analysts and outsourcing companies say ABN Amro made some smart moves in developing its outsourcing strategy. First, the management carefully evaluated the benefits of restructuring and understood the shakeup would entail a change in the entire organization. It made a plan and took a year to evaluate it before deciding to implement it. The decision to outsource was strategic, not just a play on cost-savings.

Second, the bank divided its contract among more than one player. The Indian companies that bid for the ABN Amro contract weren't any cheaper than the Western players, but their presence helped the bank negotiate better with Western outsourcing companies such as IBM. The combination of the Indian offshore companies and the Western players was a good fit. The Western partners had the knowledge of the bank's business while the Indian companies were technology-development experts.


  Third, ABN Amro opened up about its plans to employees. The bank set up a full-time communications department to explain the outsourcing move, conducted town-hall meetings with employees, and management worked with the labor unions. "We didn't ask them, 'Should we outsource?,' because the business case was clear. Rather, we asked them to help us execute it in a dignified way," says Gustavsson. "It was transparent, honest, open communication."

ABN Amro also created a huge exhibit, called a "solutions walkthrough" that illustrates the banks goals and future plans. The installation, a labyrinth spread through eight rooms, offers multimedia interviews with board members and managers and is translated into several languages.

Of course, the bank couldn't avoid a certain amount of upheaval, particularly because of job cuts. Altogether, some 1,500 tech jobs were lost. But others were saved -- some 200 employees were transferred to TCS's operations in Luxembourg, Switzerland, and Brazil, while 1,800 engineers went to IBM. ABN Amro convinced those employees that as engineers, they had a better future at an engineering company, than at a bank. For those that lost their jobs, ABN Amro sent many of the staffers to retraining programs or gave them generous severance packages.

Although the restructuring is only a few months old, Gustavsson says ABN Amro is already starting to benefit in cost savings. The next step will be taking advantage of the bank's new tech platform and developing sophisticated new products. "Outsourcing isn't just strategic and tactical. Once you make a move, the invisible hand gets to work," explains Gustavsson. ABN Amro is hoping for real benefits from outsourcing for years to come.

Kripalani is BusinessWeek's Bombay bureau manager


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