HVB Americas Implements Straight-through Processing

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Business Relationship Manager - Product Lifecycle Management, Chevron Corporation

Eastern and Central Europe are in the midst of dynamic economic changes. Last year, 10 countries joined the European Economic Union and others, including Bulgaria and Romania, are slated to join in the coming years. With the largest banking network in the region, the HVB Group is right in the middle of the action. Headquartered in Munich, HVB is the second largest bank in Europe, with $644.

5 billion in assets and 60,000 employees in southern Germany, Austria, and Eastern Europe. HVB also supports international operations around the world, including Asia and North America. In 1997, the bank made a strategic decision to expand its operations in New York, HVB Americas. Until then, the company supported a traditional branch banking infrastructure designed primarily to support its German customers and to provide dollar funding for the bank. The decision was made to develop a more sophisticated capital markets operation. “Given that the epicenter of the more sophisticated capital markets is in the U.S., New York became the laboratory for the bank to develop this expertise,” said Christopher Wrenn, managing director and chief operations officer. Expanding the New York operation presented several challenges in terms of information infrastructure, application implementation and business processes. First, HVB needed to increase its head count and build an IT infrastructure that could adequately support more employees. Second, while robust, the application infrastructure in place was relatively basic and straightforward. Many of the applications were in operation because they had been mandated for use by the headquarters operation in Munich. “We had to make an assessment of the types of applications that we would need to bring into the U.S. that were not currently there,” Wrenn said. “And we had to tailor applications that were being used in Munich for the U.S. operation. “Resolving the business process challenge, however, was the piece that perhaps had the greatest impact on the business. It led to cultural changes within the organization itself. “We saw a culture change in operations from one that was there to process transactions to one of exception processing,” said Wrenn. By automating flows, you turn your people from paper pushers to process managers; added David Dart, managing director and chief information officer.

Getting Started

The first step on the road to change was to develop an IT strategy for the New York operation. “Until that point,” Dart said, “the technology strategy was driven out of Munich. We needed to develop a strategy that was specific to New York and mapped to the New York business mission. And then we needed to deploy it.”  The question was how to align the IT strategy with the business strategy. To answer that question, the enterprise convened a small management committee that included the head of corporate business, the head of markets business, the head of credit, and Wrenn, who was responsible for IT and back-office operations. The committee met weekly to set strategy and determine priorities for the business and then to execute the strategy. “Because our resources were limited,” Wrenn said, “we had to be very careful where we spent our IT dollars. And those IT dollars had to be spent in a way that would maximize the return for the business.” Having a corporate governance structure that included technology as an integral part of the business strategy, Wrenn observed, enabled the management committee to focus IT in those areas that allowed the company to make progress towards its corporate goals. Weekly, the management committee would review spending on IT and the major IT projects underway. “We aligned IT strategy with business strategy,” Wrenn said. “We don’t do IT for the sake of IT. “There is nothing that I do that doesn’t have a business reason or purpose behind it,” said Dart.


Foreign Exchange

Charged with the mission of aligning IT with the business goals, IT personnel began to spend time with business people to help them articulate their short-term and long-term plans. “We then went through an exercise to prioritize. What did we have to do first?” Dart said. The company decided to focus on its foreign exchange operation first for several reasons. The manager of the foreign exchange operations was eager to improve the process. Foreign exchange represented a significant part of the business. And foreign exchange transactions are relatively straightforward. At the same time, it was clear that a more sophisticated IT infrastructure could have a dramatic impact on the operation. “There was no automation whatsoever. All you saw were manual processes,” said Dart. The process in place required that a single transaction be entered manually into seven different systems. The laborious nature of each transaction was extremely problematic. First, it led to errors and there could be steep costs associated with each error. Second, the sheer volume of paperwork meant that the foreign exchange staff often had to put in significant amounts of overtime. Third, even though the foreign exchange transaction volume at HVB was not particularly high at the time, there was a natural limit to how many transactions could actually be completed. The goal was to develop what the bank called a straight-through processing (STP) system, in which a transaction would be entered once and then flow through from execution to accounting, payment and funds transfer, generally without further human intervention. After a series of brainstorming sessions, the team involved concluded that the key to implementing STP was middleware. Dart put together a highlevel request for proposals and ultimately selected middleware from SeeBeyond, based in Monrovia, CA. Dart was attracted to its object-oriented program and he knew there was a community of people knowledgeable about the platform to whom he could turn for expertise. Also, he noted, it was a cost-effective solution. Working with the SeeBeyond professional services team, within four months HVB had put together a straight through processing system for the foreign exchange operation. It also developed an internal application called Smurf, which allowed the operational staff to monitor the lifecycle of a transaction as it was transformed at each step in the process. “We would constantly validate the transaction,” Dart said. When a transaction did not flow through the system as anticipated, the reason why could be determined. In some cases, the transaction didn’t reach the end because of an error somewhere along the line. In other cases, the system was designed to halt the transaction because manual intervention was appropriate. The impact of the system was dramatic. The number of mistakes dropped precipitously, reducing the costs associated with them. And the staff no longer had to work overtime. Savings in those areas alone recouped the external costs of the system within several months.

Next Steps

After completing the foreign exchange applications, HVB moved to other processes, first the money market operation and then lending. It was in the lending operation that the inter-relationship between process improvement and the technological infrastructure became apparent. When they began, HVB officials thought it would take about nine months to implement an STP system for lending. It took almost two years. The reason was simple. The process then in place simply was insufficient.  “We weren’t capturing all the information that we needed to achieve straight through processing,” said Wrenn. Indeed, when all the participants involved in loan processing gathered together to work on the requirements for the new system, it quickly became apparent that the system did not address everybody’s needs. “Their requirements had never been considered before,” Wrenn said. The entire process had to be reengineered. Data about the existing loan portfolio had to be re-input into the system, or, at times, input for the first time. “That was the difficult part,” Wrenn said. “We underestimated how poor the process surrounding the loan portfolio was.” Though difficult, re-engineering the lending process was perhaps the high point of the entire effort. It brought together a large cross-section of people and allowed them to work together. The team was able to put structure around the lifecycle of a loan. Changes unrelated to IT were made to the process that allowed people to work more efficiently. “It showed us how we could work together and deliver a product that provides benefits to all,” Wrenn said. 

Changing Development Paradigm

HVB’s experience in developing its straight-through processing systems has led to several shifts in the way it develops and deploys IT solutions in general. The business side of the house took the lead in determining what was needed. “In the past, IT was leading the charge,” Wrenn said. “Now, the business was leading the charge and IT was in more of a supporting role.” In fact, when a process is to be reengineered, people from every facet of the company are involved, including representatives from the businesses themselves, operations, accounting and IT. “All these processes are interrelated,” Wrenn said. Moreover, working with the SeeBeyond platform, the speed at which applications can be developed and deployed has accelerated. In the past, the business personnel would develop the functional requirements for an application and development would not begin until those functional requirements were completed and approved. Development now is based on a proof-of-concept approach. Business personnel and IT personnel discuss the business users’ needs. “We then rapidly develop something and ask if it is what they need,” Dart said. “If the answer is yes, we make it grander. If the answer is no, we throw it out and start again.” Of course, more work needs to be done. HVB plans to upgrade older applications. Moreover, it hopes to integrate its operations with the operations of its customers. Finally, Dart noted, “When you start to automate your processes, your underlying data becomes cleaner.” The improved quality of the data has allowed HVB to create a sophisticated data warehouse that cuts across product lines.Clean data is essential to meet new compliance and reporting obligations. 

Keys to Success

The business process engineering effort at HVB has succeeded for several reasons. The management structure ensured that IT met business users’ needs. Second, the company laid out a clear vision for technology. Third, the company engineered a cultural shift with the technological changes. “Technology is becoming a commodity,” said Dart. “The process has to be business-led.” Moreover, added Wrenn, “You have to develop your own strategy and stick to it.”

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