Defining Business Direction after the E-Hype

Transcription

1 Defining Business Direction after the E-Hype The Australian s CEO/CIO Summit Conference Sydney, 19 June 2001 Chief Executive Officer 1

2 Thank you for the opportunity to address this important conference. Like all revolutions, the e-revolution certainly has had its highs and lows so far. Highs of hope and innovation. Lows of speculative frenzy and even greed. And, as we know from past technology revolutions, the e-revolution drama isn t over yet. As the Federal Treasury recently reminded us in Budget Statement no. 4, if we look at the e-revo lution and the development of broader information and communications technology in its historical context, we can see that it is one of only about a dozen general purpose technologies that have developed over the course of human history. Some of the others that economic historians have recognised are; the domestication of crops and animals, bronze and iron, the water wheel and the windmill, the printing press, the steam engine, the internal combustion engine and electricity. The extreme swings that we have seen in the e-revolution over the last two years accompanied the roll out of some of these preceding technological revolutions and, the early entrepreneurs were not always the most successful. Throughout history the statement points out, the rewards of major new technologies have repeatedly gone to productive users of new technologies, not to the early producers of them. And, of course, the point grasped by the productive users was a simple but fundamental business truth: it doesn t matter how great the new technology is, what matters is using the new capabilities in a commercially prudent fashion to provide better products and services to customers. Today it s timely to review developments in this latest revolution, and to consider what it means for business directions and from my perspective the future of banking. Old vs new economies 15 months or so ago, most of the talk was about the emerging demarcation line between the so-called old economy and new economy companies. Even some reputable broking firms were predicting doom for many of the well established, but old economy businesses. Driving this view was the promise of new scale economies. For the first time in history, a truly global, scalable, low cost, easy-to-use, open standards-based communication system was emerging. The standardisation of the browser and Internet protocols was beginning to make it possible for staff, suppliers, customers and business partners to work together in previously unimaginable ways. At least on the surface, this was seen to pose significant threats for traditional incumbent businesses. Businesses that had operated as vertically integrated monoliths, owning and producing across the value chain, were considered particularly vulnerable to the threat of competition from specialisation. 2

3 New entrants were seen to possess a significantly lower cost infrastructure through potential access to very large-scale economies on both the supply and demand sides. It was on this apparently rational base that much of the e-hype was created. This expectation was enthusiastically factored into what could only be described as widely speculative stock prices, totally unrelated to any established earnings track record, or other fundamentals of stock valuation. About fifteen months ago, in a keynote address in the midst of this hype, I challenged the proposition that established banks would become dinosaurs, languishing in the frozen world of the old economy. And I argued that those banks that firmly embraced the e- business opportunity represented some of the best e-plays around. I shared the view that was being put forward by Kellogg Business School Professor, Mohanbir Sawhney in early He said: The pure play on-line company is being exposed as a myth. What we see are successful Internet businesses such as Amazon and successful bricks and mortar companies such as Walmart both converging on a hybrid clicks and mortar model. Banks, of course, were well positioned to capitalise on the clicks and mortar opportunity. And I am happy to say Australian banks, in large part, have managed these early phases of the market transition about as well as anyone globally. But perhaps the most important take out for business and investors is that the so called new economy companies do not operate under some fundamentally new set of economics or a different valuation paradigm. Without a sound business strategy and a clear path to profitability, new technologies of themselves cannot lead to a successful business outcome. Market fundamentals and established valuation methodologies, despite the earlier hype, have not been redefined. But there is no doubt that the e-technology revolution is real. It is having, and will continue to have, a fundamental impact on businesses. And the benefits are materially benefiting end consumers. In the end, even the Internet itself and the new e-technologies are tools albeit incredibly powerful ones. It s about strategy and execution Let me reflect briefly on how we at Westpac have analysed and approached the challenges posed by the e-revolution. We took the view early on that the difference between success and failure would be more about strategy and quality of execution than simply about adopting the new technologies. We saw it as all about successfully adapting our business model to create a hybrid old and new economy business. 3

4 We began the process some three years ago, when we set ourselves the challenge of creating a truly e-enabled, customer centric, and multi-channel platform. One that was conveniently accessible to customers, employees and business partners, through which we could deliver individualised financial solutions. We had to be willing to abandon our old model of seeking to compete fully across every element of the value chain. We had to come to grips with where we had a sustainable competitive advantage and where - in the e-enabled world - we didn t. We ve looked at the best ways to achieve world s best practice scale economies and capabilities. And as a result, we ve out-sourced our information technology operations, cheque processing, and several other support functions. If we include our mortgage processing and on-line broking back-office functions, which are currently undergoing evaluation for outsourcing, we will have outsourced around 20 % of our underlying cost base. Also by e-enabling our processes, we have been able to reduce unit costs, cycle times and re-work. A simple example of the power of e-enablement is the on-line instantaneous access we provide today to 12 months statement history. Not so long ago, this involved a paper-intensive process taking days to get statements to customers. At the same time we have been extending the scope of our enterprise and re-configuring our networks to capture new business opportunities. By way of example, we have extended our distribution reach through collaboration with content providers such as f2 (the Fairfax Internet site), and by providing secure on-line payments through our e-market service. The deployment of new e-technologies has also enhanced our global wholesale distribution through joining portals such as FXAll and Yieldbroker. Plus, we have leveraged our large scale for the benefit of our small business customers by extending our reach outside of traditional payments functions into areas such as e-procurement through our B2Buy services. Recognising that the technology means nothing without the right strategic and executional capabilities, we have put a lot of effort into creating a business culture which values strategic and analytical capability, speed and adaptability. This kind of cultural transition is fundamental in successfully e-enabling established organisations. Although it s still early days in this major cultural transition, our efforts are beginning to deliver results. Don t mistake me here, we know we have a long way to go, but we have definitely started down the path to success. Our objective is that our entire corporation will become ebusiness savvy, from the sales desk to the CEO and Board. Just eighteen months ago ebusiness was very much still a cottage industry. Today it s in adolescence and its ongoing reach and influence on our businesses will be pervasive. I believe the e will simply become superfluous as the transformation reaches maturity. 4

5 The main focus of all this technical, strategic and cultural change must be the customer. Future successful organisations will be those that come to grips with crystallising the opportunities inherent in their existing customer interactions. Like all businesses, at Westpac we need to see the world through our customer s eyes. Today, our business model is firmly based on the principle that customers drive the outcomes. As an established company, one of the important advantages we had over the Internet startups was that we had an existing large customer base. But while banks are typically data rich, we have generally been information poor. Some 18 months ago we recognised that we were in a race against time to fully use our customer information intelligently to strengthen and extend customer relationships. This was the reason we began investing heavily in customer relationship management technologies. We continue to see major opportunity to be more proactive in helping our customers with their financial needs. So we ve been progressively rolling out message-enabled and workflow capable solutions such as Seibel Technologies Customer Relationship Management and Lotus Notes. It s still early days, but we are seeing some successes in improved customer targeting, retention and sales. And this success is not just about the technology and infrastructure roll-out. The large cultural changes, involving people and processes, are just as critical. Integrating the new Channels A major challenge for all businesses in any period of revolution is to predict customer behaviour. Will customers adopt the new technologies and on-line channels? At what rate? What will be their preferred method of doing business? There have been, and will continue to be, many false starts technical promises that look like winners but have not taken off so far. Smart cards, WAP applications and many B2B marketplaces are examples. That s why we have spent a lot of time listening to our customers. The vast majority continually tell us they want to deal with us through multiple channels. Both the old and the new ways remain important to them. For us the challenge is to provide the right distribution mix, and to provide a consistent customer experience whichever way they choose to deal with us. And we need to do this in such a way as to reduce our total cost of delivery, with customers expecting to share in the technology benefits. 5

6 Not surprisingly, customers are increasingly voting with their feet and opting for the more convenient on-line channels. But the outcomes are not uniform across products. For example, nearly 50% of BPAY bill payment transactions now occur on-line. We also originate some 14% of our total credit card sales today via the Internet. However, when it comes to more complex transactions like home lending, few sales occur in a total on-line environment. With home mortgages, the integration across on and off-line channels continues to prove to be the most effective. That s why we have recognised the power of providing on-line services to our mortgage broker partners to create efficiencies, even where the customer interaction is not direct. My feeling is that our experience is similar to that across much of the business world. At least some of the more successful ones are doing what we have been doing watching their customers closely, making a series of relatively small bets, and seeking to ensure the online offerings are based on viable economics. Many of those trying to second-guess customer behaviours have come in for rude surprises. A focus on listening to customers and delivering a simple, easy to use, consistent customer experience is the path to higher satisfaction and higher utilisation rates. Progress has been rapid We began our transition to a clicks and mortar company just three years ago. And we have accelerated it over the past 18 months. The numbers indicate we are making solid progress. In just over 2 years, our Australian on-line banking service has grown to over 800,000 customers, which represents over 30% of those using us as their main bank. We are the equal largest on-line banking site in Australia and we consistently rate as a Top 10 Australian site in terms of visitors. This is remarkable growth. But business shouldn t just take comfort from registering customers or getting page visits. At least for us, success is about high service levels, transactions and purchases. Customer satisfaction with our on-line services is around 95%, well above our other service channels. And currently we are hitting above our weight with more than 36% of Australian on-line banking transactions and about a 25% share of the log-ons to on-line banking services in Australia. Take another example. We were a late entrant to the on-line broking market. But it took us only 10 weeks from a standing start to reach the number three position in the market, eclipsing the majority of niche players. We did this by effectively leveraging our existing on-line customer relationships. And one more illustration. You will probably have heard of PayPal the US start-up dot.com person to person payment company. In a press release in May 2001 they were quoted as having done, cumulatively, some US$2 billion in on-line payments since launch more than a year ago, and claimed some 8 million customers. 6

7 In comparison, in the single month of February, we put through over $1 billion in on-line payments via our on-line banking (funds transfers, bill payments, and third-party payments) with just 630,000 customers at that point. Business to Business (B2B) opportunity In the area of B2B ecommerce, we, like everyone else, are still finding our way. There s certainly been a wild swing of the pendulum from extreme optimism to extreme pessimism over prospects for B2B during the last year. As is common in these matters, we believe reality is somewhere in between. We still see B2B as presenting very real opportunities for buyers, suppliers and banks alike, but like past revolutions, the real winners are not yet clear. Our pivotal role in the payments system has always been at the core of the traditional banking model. Since the days of the Medici, banks have been central in facilitating business to business trading and we intend to continue this role in the future. We have gained some invaluable lessons for future B2B developments from our own efforts to introduce ebusiness processes, such as eprocurement, to Westpac. Our latest initiative, our B2Buy marketplace, is now operating in a successful pilot environment, as we explore how we can best assist our small business customers to participate in ecommerce. We are well positioned through our Metiom Australasia venture, which is helping us learn how we can best integrate financial services delivery in a B2B trading environment. We believe the main question is not when, but how quickly buying and trading activities will migrate. Conclusion I believe the companies that have successfully avoided the worst excesses of the e-hype have done so by focusing on the fundamentals of their business - defining a clear strategy and then executing it. But no company should fall into the trap of believing all of the things associated with the dot.com phenomenon have passed. The fundamental shift of power to the end-consumer is a reality that we all need to confront and embrace. The balloon has well and truly burst for many of the pure plays built on unsustainable business models. But for many real world companies, such as banks, the long promised productivity benefits are starting to flow through and the hybrid business model appears increasingly sustainable. In our case, aggressively taking on the challenge, playing to our strengths and never losing sight of the fact that in the e-world economic fundamentals equally apply, has left us well positioned. 7

8 Certainly, nothing that has eventuated in the past 18 months has deterred me from my view that banks represent one of the best e-plays available. And the exciting thing is that, we and other businesses are just beginning to tap the real potential of the hybrid e-world. We are certainly in for an exciting, if not still bumpy, ride as businesses worldwide continue to adapt to an increasingly on-line world. As Forrester Research, one of the leading emerging technology analysts, has predicted, by 2004, B2B e-commerce will hit $2.7 trillion, and 40% of total computing and electronics trade will move on-line. Companies that best understand these trends and flexibly adapt their business models accordingly will be those that thrive and stay ahead of the competition. Thank you. 8