Journal of Information Technology Teaching Cases (2015) 5, 8–19

© 2015 JITTC Palgrave Macmillan All rights reserved 2043-8869/15

palgrave-journals.com/jittc/

Research article

Banco Sabadell acquires Banco CAM: leveraging a cloud computing strategy Javier Busquets1, Conchita Álvarez2 1

Management of Information Systems, ESADE, Universidad Ramon Llull; Banco Sabadell

2

Correspondence: J Busquets, Management of Information Systems, ESADE, Universidad Ramon Llull. E-mail: [email protected] This case study may not be distributed, transmitted, copied, or used without the express written permission of the authors.

Abstract In a deep financial crisis in Spain, Banco Sabadell won a competitive bid to acquire Banco CAM for the price of €1. The President of Banco Sabadell Josep Oliu announced at a press conference on the 8 December 2012 that BCAM, a similar size to its acquirer, must be integrated in less than 1 year. Banco Sabadell management expected €331 million in synergies from 2012 to 2014. The case focuses on Miquel Montes, the new CEO in Banco CAM, and his team; Federico Rodriguez, new Chief Operations Officer; and Carles Abarca, new Chief Information Officer. Banco Sabadell had developed a cloud computing architecture never tested before in mergers and acquisitions (M&A). Despite Sabadell management’s strong and proven experience of M&As, there were risks associated with the benefits. Students need to understand both in order to understand how to plan in such situations. Journal of Information Technology Teaching Cases (2015) 5, 8–19. doi:10.1057/jittc.2015.3; published online 9 June 2015 Keywords: Strategic management of information system; banking platforms; M&A; cloud computing

Introduction licante, 2 January 2012 Miquel Montes, Federico Rodriguez, and Carles Abarca landed in Alicante on January 2nd, 2012, after the acquisition of BCAM (Banco Caja de Ahorros del Mediterráneo) by Banco Sabadell (BS) for the symbolic price of one euro. Montes was appointed the new CEO of the acquired bank. His previous post was as chief of operations and technology, a position to which his right hand, Federico Rodriguez, was now appointed as chief technology and operations officer (CTO). Carles Abarca was appointed as chief information officer (CIO) of the group. They were responsible for the integration of the new bank. One month earlier, during the press conference held on 8 December 2011 to announce the award of BCAM to Banco Sabadell after a competitive bidding process, Josep Oliu, Chairman of Banco Sabadell, stressed the strategic importance of this acquisition. He went on to state his bank’s intention to put an end to BCAM’s recent period of instability and uncertainty following its nationalization by the Banco de España (the Spanish regulator) a few months earlier as a consequence of the financial crisis in Spain (see Figure 1). Oliu had stressed that the merger would generate €331 million in synergies from 2012 to 2014.

A

In fact, Banco Sabadell had grown through the mergers and acquisitions (M&A) of seven banks in Spain and four in the United States from 2003 to 2011, leveraging its core banking platform (PROTEO) and IT-based competencies, replacing all IT infrastructures and systems of acquired banks with PROTEO. As a result of this operation, Banco Sabadell would account for €166.5 billion in assets, becoming one of the elite ‘systemic’ banks in Spain, essential to Spain’s economic infrastructure. For that reason, Oliu had announced that BCAM must be integrated before the end of 2012. Some analysts attending that press conference were sceptical about this acquisition.1 In the first place, Banco Sabadell and BCAM were very similar in size (some 2.5 million customers). Second, BCAM had a brand new core system whose replacement was going to be very complex in only 1 year. Third, analysts considered that Banco Sabadell had underestimated the risks involved in such a large acquisition, especially considering that BCAM’s risk portfolio was estimated at €24 billion (ibid). There was also an internal debate as to whether Sabadell had to integrate BCAM before the end of 2012, since at that moment two technology teams under the

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supervision of Rodriguez were deployed in the M&A of two other banks in Spain: Banco Urquijo and Banco Guipuzcuano. Montes, Rodriguez, and Abarca entered the BCAM auditorium in Alicante at 10:00 a.m., where some 500 people watched them in silence, waiting and listening for the initial plan to integrate BCAM. Unions displayed banners against layoffs and Banco de España reform policies. The press had leaked at the end of 2011 that the initial plans of Banco Sabadell considered a reduction of some 3000 people out of BCAM’s 8000 employees. Montes, Abarca, and Rodriguez looked at each other, and Montes switched the microphone on to begin his speech. The banking industry and Banco Sabadell group in 2012 Banco Sabadell (BS) was founded on 31 December 1881 by a group of 127 businessmen and traders from Sabadell (in the province of Barcelona). At the end of the 1960s, the bank began to expand territorially, opening its first branches in various Spanish provinces and metropolitan areas. From 1996 to 2011, Banco Sabadell purchased, with a total investment of €2 billion NatWest España, Banco Asturias, Banco Herrero, the Internet bank ActivoBank, and Banco Atlántico. In 2011, it also acquired Banco Urquijo and Banco Guipuzcoano. Banco Sabadell’s clientele were, on average, upper-middle-class individuals, small- and medium-sized companies (SMEs), and private banking users. The bank had gone public in 2001 and joined the IBEX-35 index, which includes the top 35 firms by market capitalization in the Spanish stock exchange. After adopting the common currency (euro, €) and tackling the Y2K (Year 2000) effect, there was an expansive wave of

loans to individuals and public administrative bodies (representing 11.1% of GDP in 2009) from 2005 to 2008, the majority of which were used to finance infrastructure and property operations. The European common currency led to a fall in interest rates, as well as an increase in loans to property from 21% of total credits to the business community in 2002 to 41.8% in 2007 – a percentage well above the banking industry average thus escalating the percentage of high-risk loans. In just one year, from 2007 to 2008, these loans increased by 326% among savings banks, compared with 265% for other types of banks (ibid) (see Figure 1). Upon acquiring BCAM, Banco Sabadell became Spain’s fifth largest banking group. From 2002 to 2012, the bank went from managing €27.2 billion in assets to €161.5 billion; from 908 branches to 1898; from 7755 employees to 15,596; and was now servicing 5.5 million customers (see Figure 2). Banco Sabadell’s new position was remarkable in the Spanish financial sector, considering that the latter was facing one of the worst financial crises in history and, consequently, a substantial restructuring: over 35 banks and saving banks had disappeared from 2008 to 2011, and 15% of branches were closed in less than 4 years, affecting nearly 14,000 banking employees. Banks also faced tremendous competition and a strong reduction in intermediation margins of around 57% over the previous 5 years. At the same time, banks had to adapt to regulatory changes which required minimum capital levels (Basel III) that incentivized the creation of larger banks. The year 2012 was going to see a new financial reform that, according to Spanish Prime Minister Mariano Rajoy, would ‘ensure that financial institutions are cleaned up, transparency [be] increased, and encourage further consolidation.’2

380

360

340

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

320

Operating loss GrossMargin (income)

53.684

65.119

• Operating profit after provision

36%

39%

66.382

67.552

63.249

57.106

45.280

3% 3%

4%

53%

49%

73%

122%

24%

• Provisions nonperforming loans

17%

18%

• Expenses and amortizations

47%

43%

45%

44%

47%

50%

45%

2006

2007

2008

2009

2010

2011

3Q12

19.126

26.337

17.276

9.756

7.856

-2.943

-21.623

Operating profitafte profit after r provision impairmentt provisionimpairmen

31%

Figure 1 Spanish financial system evolution number of banks; Margin and profit evolution of the Spanish financial system (million euros percentage).

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10

2003 (M ) • Total assets (M€)

2004

30,511.60 45,709.20

2005 52,320.4

2006

2007

2008

2009

2010

2011 201111

2012 201222

72,779.80 76,776.00 80,379.07 82,822.89 97,099.21 100,437.38 100,437.38 161,547.09

– Deposits (M )

17,186

23,568

23,023

30,091

33,350

39,199

39,131

55,093

58,444

82,464

– Credits (M )

23,757

32,308

41,643

55,633

63,219

63,006

63,233

73,981

74,922

117,283

1.008

1.103

1.456

1.835

2.162

2.227

2.505

2.331

2.507

2.958

292

468

641

793

814

1,059

1,115

1,325

1,290

1,231

234.9

373.2

453.1

908.4

782.3

673.8

522.5

380.0

231.9

81.9

0.60

0.49

0.45

0.39

0.47

2.35

3.73

5.01

5.95

9.335

475%

324%

383%

466%

394%

107%

69%

57%

48%

45%

• Branches6 (#)

866

1,085

1,097

1,187

1,225

1,225

1,190

1,428

1,339

1,853

• Employees (#)

7,545

9,628

9,443

10,066

10,234

9,929

9,466

10,777

10,675

15,596

(M ) • Gross Income (M€) • Operating Margin3 (M ) • Group net profit (M ) 4 • NPL ratio (%)

• Coverage ratio (%)

1) Includes Banco Guipuzcoano (Spain) and Sabadell United Bank (USA) 2) Includes Caja de Ahorros del Mediterráneo (CAM) from 1 June 2012 3) Gross income – operating costs (personnel + administrative cast) 4) Non-performing loan ratio 5) NPL ratio of assets no included in Asset Protection Scheme (APS) 6) Domestic branches

Figure 2 Banco Sabadell’s growth (key figures). Source: Banco Sabadell (http://www.bancosabadell.com).

The overall aim was to increase scale and solvency and help economic recovery (ibid). Information technology at Banco Sabadell: platforms and people Like most Spanish banks, computers were introduced in Banco Sabadell in the 1970s in order to automate administrative accounting, billing, payroll tasks, and the like. According to Montes: Systems are not just business facilitators: we shape strategy with information systems to create business value since every penny passes through a computer. Every banking product is a software application with a series of related transactions that define this product in the mainframe. So, the design of these applications, their interconnection and related transactions define the bank’s business model. In the 1980s, Banco Sabadell and BCAM used a Bull mainframe, developed internally, to run their primary applications. In 1998, Bull announced that it was discontinuing its mainframe technology, putting the very existence of Banco Sabadell and BCAM at risk. Deciding to implement technological change, Banco Sabadell launched a project to build a new platform, PROTEO, from scratch. In 2000 Oliu hired Montes to lead this transformation; he in turn hired Rodriguez to manage the software development effort, which involved 1,359,000 h in software development by a team of 900 people (including IBM and Accenture analysts) and took 5 years (2000–2005). PROTEO was a modular system architecture which shaped Banco Sabadell’s business model, according to Montes, enabling the bank to divide product logic, services, and delivery channels into a manageable number of discrete components (see Figure 3). The modular nature of component business modeling provided the flexibility and responsiveness required

Figure 3 PROTEO architecture. Source: Banco Sabadell.

for Banco Sabadell to become an on-demand bank while still managing the complexity. Montes added: Within the bank, each component is a unique provider of the particular service it performs. Banking services may be provided to or received from other components that are inside or outside the organization. In the component perspective, an enterprise is simply a set of business components, networked together. PROTEO as a name, noted Montes, was taken from a mythological figure – Proteus – who represented the idea of ‘renewal and change.’ In that vein, Rodriguez added: The PROTEO architecture was based on three IT subsystems: products and transactions (back office), multichannel customer relationships (front office) and information analytics.

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11 300

297

250

●

200 173

150

● 128

100

50 1999

2000

2001

Branchop’s

2002 FTE's

2003

2004

2005

2006

Numberofbranches

Figure 4 Branch operations vs branch employees (1999–2006).

First, the back office handled the bank’s core products such as mortgages and loans. Second, the multichannel or delivery subsystem was designed to distribute and keep track of commercial activity in all the channels: the branch network, Internet, automatic teller machines (ATMs), and telephone. In fact, in 2011, Banco Sabadell Group managed more than 80% of its client firms via online banking contracts, and carried out more than 60% of banking operations through alternative channels (telephone, Internet, mobile, and ATMs). The third area was the business analytics, which included the integrated management control system (SCGI in Spanish) whose value resided in uniting all the management data generated by the bank’s back office and front office into a single structure. According to Rodriguez: Once this data was compiled and categorized according to the business that created the data, it was translated into economic data in terms of risk, value, expenses, or profits as key indicators. PROTEO allowed Banco Sabadell to radically alter its technological positioning by having infrastructure and applications (both front and back office) that matched those offered by other Spanish banks. For example, the bank gained the capacity to manage much more information about its customers, adding high levels of efficiency in branch operations between 1999, before PROTEO began, and 2006, when it was fully operational (see Figure 4). Productivity among sales representatives in branches tripled. In fact, the results of this reinvention were spectacular in terms of efficiency (see Figure 5). Cloud computing at Banco Sabadell Cloud computing is the name the industry has given to software applications and other IT infrastructures in the form of services and pay-as-you-go technology that can be accessed from anywhere and with any device. Originally, there were basically two deployment models for cloud computing services: (1) public, with flash drives and unrestricted access for all potential users (designed to be used on the market and not only by a single enterprise); and (2) private, that is, restricted to users belonging to a single enterprise (designed to be an internally shared resource and not a commercial offering). The cloud computing offering included three service levels that could be contracted together or separately: ●

Software as a service – Offering applications to users over a network without the need to install and run the application

on their own computers. Applications can be accessed via a web browser. Infrastructure as a service – Offering storage, processing, and network capacities that are paid for on a consumption basis and with access to a virtualized, highly scalable pool of IT resources. Platform as a service – Offering a development environment and associated tools and services to customers for them to develop and market their own applications and online services.

By the end of 2006, Montes had hired Carles Abarca, from BCAM, as CTO, tasked with focusing on the definition of the new governance model. According to Abarca: The basic idea was to manage IT infrastructures from investments into services for better managing the IT budget; and focusing on providing a faster delivery of new applications. The main value for the bank is flexibility, since pricing is based on the real use of technology or ‘pay as you go’; secondly, a reduction in customer barriers to technology; thirdly, faster time to market for technology implementation; and fourthly, better control over expenditures such as web services, technical staff, and data centre space.

Mainframe on-demand services In July 2005, Banco Sabadell signed a major, 10-year outsourcing contract with IBM worth more than a €100 million. Using this approach, Banco Sabadell would receive IT services as if this new business unit were an external provider of services; that is, by means of contracts and service level agreements. According to Abarca: The model defines prices for the services rendered within the technological infrastructure. Services would be billed in € per MIPS or € per Gb. With this management model, the aim was for the bank to maintain strategic management and control over the service, while the technological partner would be responsible for operating and managing the service. IBM would provide the necessary resources to handle demands arising from infrastructure management, maintenance, and program development (see Figure 6). The bank had to address the issue of updating the PC environment, office automation servers, and Windows. This operation would affect approximately 400 platforms (more than 1000 physical servers) on which, according to Abarca, ‘critical applications for the business are sometimes run.’ The new project, called Orion, was launched in 2010. Its objective was to reduce costs associated with managing the bank’s technological infrastructures by 45% in 4 years, including the purchase of new equipment. Abarca added: The objective is to have a platform which is cheaper and which will allow us to deploy servers in a matter of minutes not days, avoiding the delays implied in classic procurement methods, and quickly responding to business needs.3

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J Busquets and C Álvarez

12 700

IT Costs Bank Assets Gross margin Branches Employees

B. Sabadell 2002 = 100

600 500 400 300 200 100 0 IT Costs Bank Assets Gross margin Branches Employees

2002

2003

2004

2005

2006

2007

2008

2009

2010

100 100 100 100 100

100 112 109 100 99

117 168 144 125 126

99 192 160 126 124

118 267 182 137 132

93 282 214 141 134

85 295 221 141 130

89 304 249 137 124

92 357 231 165 141

2 2011 201

92 369 249 154 140

112

CAGR 1,10% 1,10%

593

19,5% 19,5%

293

11,4% 11,4%

213

7,9% 7,9%

204

7,4% 7,4%

Cost per transaction ( ) 0.25 0,22

0.2

0,182 0,15

0.15

0.1

0,075

0,07

0,065

0,064

0,057

0,05

0.05

0,04

0 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Figure 5 Efficiency increase (2002–2011). Source: Accenture IT cost benchmark, 2012

Data centers In 2010, Abarca launched the first phase of the cloud computing project consolidating IT infrastructures at two facilities (San Fruitós and Sant Cugat) enabling Banco Sabadell to apply a 12 to 1 ratio, thus saving 50 m2 in space. In addition, its contingency plans were improved, enabling ‘close to 100%’ availability of services (preventing programmed maintenance interventions from disrupting services). In line with its corporate social responsibility policy, Banco Sabadell also reduced the energy consumption of its IT equipment (between 80 and 85%) and reduced CO2 emissions. This process was referred to as ‘virtualization’; as Abarca stated: Virtualization enabled us to explore new and more interesting business models in which technology in some cases had limited our growth. The perception for users was that they have all the computer power they need at their fingertips, but with the advantage that this power is managed on demand. It also succeeded in eliminating practically all the problems related to equipment use because it was then possible to procure new applications almost immediately. The office operations of Banco Sabadell were handled via the virtualized platform, served centrally from two Data Processing Centers (CPD in Spanish): a proprietary one located in Sant Fruitós and a second provided by British Telecom. Each of the centers was capable of supporting 100% of the production, and the two acted as backup centers, capable of supporting 100% of the production and

allowing the changing of hardware while live, that is to say, without the need to shut down any equipment. Mid-range server consolidation In 2007, Banco Sabadell signed an agreement with HewlettPackard (HP) for a private cloud of its mid-range platforms (complementary servers to mainframe which support applications in Unix or Windows). In 2010, it expanded the contract to include cloud-based services giving it a superior technological platform of higher performance. The key services included in the contract were: ●

●

●

Renovation of technological infrastructures, improving services, and increasing availability, while providing better response to contingencies. Providing the branch network with “thin client” workstations that would improve response time, reduce energy cost and allow for a centralized control of branch applications. In essence, it would offer a virtual desktop (applications would be presented in the terminal, but be executed in a centralized data center). This would also allow for total mobility, due to the fact that the virtual desktop could be ubiquitously invoked from tablets and laptops connected through mobile VPNs. Technological support (Help Desk) and field service support to branches and corporate centers.

The difference between the IBM and HP contracts was the need to manage different technological standards between the hardware components, due to differing update speeds and

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13 Banc Sabadell Users

Functions kept

IBM IT services: 2,500 MIPS and 20 TB

Business organisation and planning

Single point of contact

Oriented towards production

Oriented towards business functions

Technological updates

• •

New projects Service control

Functions outsourced

Scope Mainframe

Help desk

Storage

Pricing criteria per computer power (MIPS)

• • •

Operation and exploitation Maintenance & development Help desk

Service level agreements (SLA) 1. Availability (i.e., 99.99%) 2. Flexible capacity (MIPS) delivery depending on bank’s demand 3. Recovery times (in minutes) 4. Time to increase or decrease capacity 5. Backup remote data centre 6. Maintenance and upgrades

Availability (for example 24/7)

per capacity (Tbyte) Number of backups per day and week; storage time

7. Time to resolve requests (in hours or minutes) 8. Information integrity and availability 9. Backup schedules

Figure 6 Banco Sabadell’s IBM infrastructure model.

technological cycles and the management of peaks in demand, the development of backup processes, and the incorporation of redundancies to ensure runtime, security, and continuity, as well as the need to differentiate IT infrastructures between manufacturing and software development. Abarca pointed out the difference between; [t]he back office which relies on a mainframe scaling up vertically (product logic, transaction based, and real time) versus the front-office applications that require horizontal scaling (or ‘scale-out’) due to different information management needs (contextual information and quasi-real time). Mobile cloud and thin client deployment The bank considered it important to have more flexible business models in its sales network. Abarca noted: Our ultimate aim is to have a central unit from which we can service all our online positions, from the branch office employee to the ATM application, and including mobile sales points at any given device. The bank started to provide the bank branches with thin client workstations to replace PCs. Abarca explained that with the transition to: [c]loud computing, we underwent a disruptive phase in which a large part of the infrastructure and applications that required our attention were transferred to a service cloud. Secondly, mobile phone bandwidth continues to grow, and is expected to reach 1Gbps in 2015. Thin clients enable total mobility (see Figure 7) as a virtual desktop can be ubiquitously invoked from tablets and laptops connected through mobile virtual private networks, thus

allowing the deployment of mobile banking solutions and apps in smartphones and tablets. Some analysts such as Gartner produced reports regarding thin client deployments (see Figure 8) from which Abarca was aware that cost criteria were important, as were the requirements for the number and specificity of applications running in each PC. In branch offices, the average was 10–15 applications per user, while in HQ some people managed some 1000 different applications. According to Rodriguez: Thin clients improve response times, reduce energy costs, and enable a centralized control of branch applications. In essence, it is a virtual desktop (applications are presented in the terminal, but executed in a centralized manner). In addition, the key is integrating mobile devices such as smartphones and tablets.

BCAM history and the cold merger (2010–2012) BCAM had 939 offices and 3 million clients, €71.3 billion (some of 75% Banco Sabadell’s assets), and employed 8000 people offering an efficiency ratio of 88%. BCAM was founded in 1875 and by 2010 had become one of the largest savings banks in Spain, with heavy investments in property and tourism assets along the Spanish Mediterranean coast and in other countries, particularly the Mexican Caribbean. As part of its plan to restructure Spanish savings banks, in 2010 the Bank of Spain approved the merger of BCAM (which would own 40% of the new entity), Cajastur (40%), Caja de Extremadura (11%), and Caja Cantabria (9%) by means of a process known as ‘cold fusion’; that is, a merger in which the various banks make joint decisions together. Although strategic and political decisions were to be made by Caja Cantabria, during the negotiations BCAM succeeded in positioning its corporate information systems as the means to

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Figure 7 Mobile services. Source: Banco Sabadell.

facilitate operational integration within the new bank. Yet after an entire year of negotiations with few advances made in line with the Bank of Spain’s requirements, on 30 March 2011, the general assemblies of Cajastur, Caja de Extremadura, and Caja Cantabria voted against the merger. CAM then presented its recapitalization plan to the Bank of Spain, requesting a maximum of €2.8 billion from the Restructuring Fund for Banks (Fondo de Reestructuración Ordenada Bancaria, FROB) to meet the targets established by the Bank of Spain. However, the latter ordered an audit which subsequently detected irregularities in BCAM management and hidden losses possibly reaching €4.6 billion (the largest losses of any bank in Spain). On 28 September 2011, the Bank of Spain fired CAM’s CEO, preventing her from receiving any indemnity or the €370,000 lifelong annual salary she had awarded herself. Within CAM, analysts detected risks totaling €24 billion, principally for mortgages and real estate financing to developers. The provisions already granted totalled €4 billion. Expected losses at the time of the acquisition rose to €5.5 billion, and after deducting provisions, these losses totalled €1.5 billion.

The Sabadell’s bid for Banco Caja de Ahorros del Mediterráneo (BCAM) When Banco Sabadell submitted its bid, some managers at Banco Sabadell thought it was going to be very difficult to win, since both banks were of a similar size. Rodriguez commented that ‘It was a very competitive bid with all global Spanish banks presenting their offers.’ However, the bid was awarded to Banco Sabadell in December 2011 and according to Josep Oliu, Chairman of Banco Sabadell, the merger had to take place before the end of 2012. The expected synergies were € 331 million from 2012 to 2014. Specifically, Banco Sabadell management expected to reduce the cost base by €247 million and the increase income base by €84 million. The organization of the M&A was based on a Project office reporting to the board. Initially, as shown in Figure 9, the business of the acquired BCAM was ‘coordinated’ with Sabadell’s business (dotted lines) while technology had a hierarchical dependency to Sabadell’s technology team. ‘The objective is to retain key people that know and run the systems, data bases and other critical components required to run the bank,’ explained Montes.

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Figure 8 IT infrastructures at Sabadell and BCAM. Source: Banco Sabadell.

Figure 9 The organization of the M&A.

The asset protection scheme (APS) The contract signed between Banco Sabadell and the Bank of Spain established an APS which covered up to 80% of the losses of a ring-fenced portfolio of €24.6 billion in assets as of June 2011.4 Banco Sabadell would assume 20% of the potential losses, while the remaining 80% would be assumed by the Spanish Deposit Guarantee Fund (Fondo de Garantía de Depósitos – FGD) with a 10-year liquidation period. In addition, the Deposit Guarantee Fund would inject €5.2 billion (€2.8 billion already promised in 2011 and €2.4 billion upon closing the transaction). The differences in the customer base BCAM’s activities were primarily focused on retail banking for individuals and SMEs. BCAM had a very loyal customer base, with more than 60% penetration in some towns near Alicante. One of the successful strategies developed by BCAM was acquiring customers when they were children. According to Rodriguez: Being part of the customer base at BCAM was a tradition between parents and children. Parents opened savings accounts or ‘libretas de ahorro’ for their kids with small

cash gifts and so being part of BCAM was part of the inheritance between generations. For example, a Delfín account could be opened by parents for children aged under 14 in any office of the BCAM by simply presenting a state-issued ‘family book,’ or a copy of a birth certificate (providing they were resident in Spain). Another difference between the two banks was the BCAM ‘virtual card’ which guarded privacy for the customer in e-commerce buys, whereas Sabadell had only a debit card intended to do so. In fact, customer behavior in the two institutions was very different (see Table 1). Montes stated: Sabadell had a wealth-oriented commercial background while BCAM had a lot of experience in retail banking. In fact some branch offices had 60% of market penetration, something that Sabadell did not have for any of their branches. We needed to carefully study both models before going operational. In any case, BCAM had promoted mortgages linked to the dizzying urban development along the southern coast of Spain

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16 Table 1 Banco Sabadell and BCAM Customer Base (2012)

Proportion of MediumHigh wealth customers Proportion of retail banking vs. private banking Maximum penetration of local retail banking in some branches

Table 2 Total Cost of Ownership (TCO) 4 Years between Thin Client and PC (based on Gartner reports)

Banco Sabadell (%)

Banco CAM (%)

76

22

45 vs. 55

88 vs. 12

33

68

and in cities such as Benidorm and Marbella, along with other investments led by the Valencia regional government such as the Terra Mítica theme park. The adoption of the euro led to a fall in interest rates: from 2007 to 2008, these loans increased by 326% among savings banks, compared to 265% for other types of banks. Many of these investments would become major losses for BCAM. BCAM’s IT systems in 2011: the ‘Mare Nostrum Project’ At the turn of this century, BCAM had launched one major IT innovation project to revamp the company. The Mare Nostrum Project was expected to deliver one core platform and focus on profitable customers through improved crossselling and business retention. BCAM had activated its new core banking application in 2010 with balance sheet value of more than €240 million. BCAM’s data processing centers were in the locales of Alicante (Oscar Esplá) and Aguamarga (see Figure 8). The office operations of BCAM, on the other hand, were based in PC workstations connected to servers in each of the offices. ‘And the offices were connected to the central processors, which offered the full range of production services,’ commented Abarca, who added: The history of systems development at Banco Sabadell and BCAM ran in parallel. Both banks changed their Bull systems to IBM and completely renovated their IT systems. We never imagined that we would end up buying BCAM; even though when BCAM started its renewal project after we had finished SIBIS, there were various meetings to discuss collaboration between both banks. Nevertheless, we never imagined that the moment would come when we would have to decide to replace all of BCAM’s systems with our own systems. On the basis of their experience of rolling out PROTEO in different M&As, Montes thought that PROTEO could be implemented in BCAM by December 2012. Montes added: We needed to technically validate the project before it was launched. Over the following months, the operating gap was covered, a plan to migrate to Sabadell systems was drawn up, quality programmes were established to test the information, a new back-office unit was set up in Alicante, and a branch network implementation plan was prepared. Finally, at the IT infrastructure level, the bank needed to double its capacity from managing 2.5 million clients to 5 million (see Figure 8). The question was how to leverage existing infrastructures and cloud services in less than 1 year.

Cost Dimensions, in US Dollara Hardware Hardware maintenance Software and software maintenance Data center allocation/Storage Electricity CAPEX: hardware, software and facilities Security and desktop operations Administration OPEX: IT operations Administration and management User training IT training Storage allocation OPEX: administration Training Fixing Downtime End user costs Direct costs Indirect costs (end users) Total cost of ownership (4 years)b

Desktop PC

Thin Client

239 38 700 1 24 1002

79 25 850 8 34 996

49 150 199 100 27 15 0 142 284 760 24 1068 1343 1068 2411

48 47 95 94 37 6 26 163 378 513 82 973 1254 973 2227

a This table presents a general TCO analysis to guide in decision making. In this table, Gartner assumes salary levels in mature markets for OPEX. For desktops, the PC price is US$972, and the PC life cycle of 4 years. The price of a thin client is $350, and the expected life cycle is 6 years. In PC-managed scenarios, we account for servers and the labor required to operate management tools. In thin client scenario, Gartner assumes the use of 15-blade, dual-CPU quad-core servers with 96GB of memory (priced at $13,350 each) and two chassis (priced at $2700 each). b These costs can vary substantially from one circumstance to another, and should be estimated carefully to obtain a complete picture of the cost implications of moving to thin client.

Planning the M&A With the adjudication, BCAM’s 939 offices would be added to Banco Sabadell’s 1340 offices, with a total of 17,042 employees. Montes and his team considered that the BCAM operation should be leveraged by applying Banco Sabadell’s tried and tested M&A to generate the required €331m in synergies. Sabadell’s chairman, Oliu, decided to appoint a new CEO for BCAM, Miquel Montes, who added: A technology project is always long-term. But we need to complete the M&A in less than one year. Normally a change in the core system may need over three years, and in technology speeding things up – given the considerable complexity of the projects involved – may lead you to jeopardize the bank’s business continuity since IT infrastructure underpins the bank’s business operations. The problem was that in Span no investor was willing to wait years for financial results. Rodriguez and the M&A team were busy finalizing the merger with Banco Guipuzcoano and were concerned about the

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resources needed. Montes made his first choices: first, Sabadell needed to understand rapidly the future scenario for the M&A in December 2012. This would affect the resulting model of the bank; the best moment for finishing the M&A would be 8 December 2012, exactly 1 year after the announcement of the acquisition. And, Sabadell would not stop or delay Banco Guipuzcoano’s acquisition: they needed to run in parallel. Managing people, expectations, and change Banco Sabadell planned to close 300 BCAM branches in 2012, without detailing the impact on jobs. In cases when both banks had branch offices in the same area, Banco Sabadell would decide which was more established: ‘It will depend on where they’re located and their market shares when they coincide,’ according to Montes. The bank offered redundant employees a special retirement program that was agreed with the unions. Banco Sabadell’s team found that many staff in acquired banks wanted to continue working with them. BCAM had been up for sale for some time, so following the acquisition by Sabadell, staff motivation to get on board was high. At the same time, the bank learned how to work with labor unions to maintain jobs, wages, and certain privileges – although this would be somewhat different at BCAM, since it had to abide by a European Union resolution regarding the restructuring program. As Montes stated: Our critical ability was to coach personnel from the acquired banks and keep their spirits up so that they would continue working. Given the enormous impact implied by the integration and the consequent technological change, a key skill was the ability to train and help new personnel learn the new systems. In this acquisition, Banco Sabadell’s management knew that the major issue was going to be keeping employees from the purchased bank motivated. Jaime Guardiola, Banco Sabadell’s CEO, highlighted that Banco Sabadell’s purchase of BCAM implied ‘the least impact of all the options’ available for BCAM and enabled retaining the largest number of employees due to the fact that the territorial presence of both banks was complementary. Banco Sabadell also offered redundancy payments ‘to reduce the social impact’ of layoffs. Rodriguez added: It is absolutely necessary to keep people motivated. My most important role in acquisitions has been to explain to people that they are important for the merger and the future of the bank. M&A methods: dossiers and red flags During the acquisition, Banco Sabadell’s systems team created a project office responsible for acquisitions (see Figure 9). Integration projects were based on the ‘dossier’ method developed by Banco Sabadell. It consists of three phases: (1) dossier definition and preparation (normally 128 dossiers which define functional dimensions); (2) development; and (3) trials. According to Rodriguez, ‘each dossier allows us to identify gaps between Sabadell’s functionalities and requirements found in the acquired bank.’ Each dossier has two managers, one from Sabadell and the other from the acquired bank; both managers need to prepare for the

merger’s impact in (1) commercial activities, (2) bank’s operations, and (3) technology. During the first phase, the integration team worked on approximately 200 dossiers with a direct impact on information systems. ‘To this end, dossiers are organized by subject, for example, commercial catalogue, IT platforms, user applications, and legal matters,’ explained Rodriguez. The Quality Assurance method requires that every dossier contain a script with questions to ask BCAM employees. These scripts lead to precise descriptions of every operational process, and detailed action plans to cover the migration. Afterwards, a quantifiable objective and the corresponding deliverables were defined in order to proceed with the integration as quickly as possible. The development phase normally aimed to discontinue the acquired bank’s information systems, substituting them with Banco Sabadell’s. Important points in this phase included process, procedures, and data migration from the old to the new systems. Rodriguez added: We adopted a big-bang strategy for the migration and so avoided a transitional period when both systems coexist. We defined December 8th, 2012 as the cut-over date since we had a three-day bank holiday. The third phase would end with the final date for download and upload into the Sabadell systems. ‘The best practice is to finalize the acquisition as soon as possible,’ according to Rodriguez. As Montes pointed out, ‘the process is managed with very strict time limits. When these are exceeded, we put up a red flag. Every Friday afternoon, we have a meeting with the top managers involved. No one should have a dossier or project with a red flag.’ The methodology developed was based on the praxis and acquired experience of the project office team and published on the bank’s intranet. Time-to-roll out When Carles Abarca reviewed the installed base of BCAM, he learned that the vast majority of PCs and ATMs were obsolete. BCAM had invested in a new system, but branch office infrastructures were outdated. Abarca thought of implementing an integration project between the data processing centers of Banco Sabadell and BCAM that would permit the creation of a ‘Private Cloud.’ Its advantage would be the potential to repurpose information resources dedicated to the network of offices (normally open from 8:00 a.m. to 3:00 p.m. in Spain) for other productive uses outside of normal working hours. Abarca added: The creation of a Private Cloud would potentially be complemented with additional capacity contracted to a third party under the pay-for-use modality (Public Cloud). The combination of a Banco Sabadell Private Cloud and a Public Cloud will create a Banco Sabadell Hybrid Cloud and will offer additional flexibility that will permit us to tackle an increase in business activity, be it for seasonal or one-time reasons (e.g. promotional campaigns), without the need to install permanent additional capacity (and, for that matter, without additional investment).

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Abarca thought this M&A was the right moment to leverage cloud computing capabilities through the process of deploying new terminals. Although Banco Sabadell had only tested this approach in a pilot scheme, Abarca thought that the time requirements in this M&A provided a unique opportunity to leverage this capability. According to Abarca: Banco Sabadell would reduce the weeks it normally took to procure servers and new applications to a matter of hours. In addition, using the cloud meant reduced maintenance costs, increased satisfaction among end users, and a faster launch of new Banco Sabadell applications. This interest in virtualization also applied to the bank’s network of ATM machines since they were very important at BCAM. As Abarca explained, ‘we’re examining with our ATM development teams what changes are needed to run pilot ATMs. We want this project to coincide with a ‘renovation’ style plan for these types of terminals.’ He also added: Mobility gives users access from anywhere and at any time. This helps increase productivity, reduce costs, and shorten project times. Throughout these processes and technological evolution, IT efficiency at Banco Sabadell would be transferred into the new bank. The thin client pilot test In 2012, Abarca had launched a pilot program, replacing approximately 1000 PCs out of the 8000 in the branch network. The aim was to provide central service computing in all the branch offices during 2012. According to Abarca: Virtualizing the work station implies greater security, because data management and safety measures are centralized. The new terminals do not store any local information, so no protection is needed. Moreover, they have small footprints, start quickly, and are immediately replaceable if they break. In addition, there were savings in the supplier contracts, in line with the new terminal life cycles, that represented approximately 50% (see Table 2). When Banco Sabadell acquired BCAM, Abarca saw a great opportunity to deploy thin client network. Although cost criteria seemed to favor thin client development, according to the Pilot test, not all management agreed on its deployment without testing migration costs, such as application testing and application redevelopment, and other application-specific issues, such as reconfiguration, network management and continuity, business continuity, and regulatory compliance management. At the same time, the solution for mobile devices became independent, and this laid the groundwork for the deployment of tablets and compatibility policies for these types of solutions. Decisions Montes, Rodriguez, and Abarca were at BCAM auditorium in Alicante 2 January 2012, where some 500 people were waiting and listening for the initial plan to integrate BCAM. For Montes and his team, the priority was to carefully communicate the

reasons and advantages of the defined strategy that prompted the migration. More than ever, IT strategy was a critical factor. Before starting, Montes reviewed his thoughts. First, how to keep people motivated and retain key personnel. Second, regarding the technology strategy, BCAM had a brand new system, Mare Nostrum, focused on retail banking. Should Banco Sabadell staff integrate BCAM’s current IT assets, including its brand new and renovated (not yet depreciated) core banking application? Or apply its well proven strategy of substitution? Third, how could Banco Sabadell leverage its cloud computing strategy into BCAM. Montes was very aware that getting every application to run in a thin client environment was not a trivial exercise. The adoption of thin client could evoke cultural and political problems among users who might feel deprived of their PCs. Finally, how should training for BCAM employees be managed if Banco Sabadell deployed a new system? How could Banco Sabadell employees collaborate in this effort? Acknowledgement Figures reproduced from Banco Sabadell documents with permission.

Notes 1 http://www.elconfidencial.com/economia/2011/12/18/comoabsorber-la-cam-sin-morir-en-el-intento-el-secreto-mejorguardado-del-sabadell-89460/, March 2012. 2 ‘Banco Sabadell: A transitional quarter,’ Merrill Lynch Bank of America Report, 27April 2012. 3 http://www.idg.es/computerworld/articulo.asp?id=182090, March 2012. 4 According to stress tests performed for international analysts, and after provisions attached to the APS, the losses expected in the operation may be no more than €2.1 billion within 10 years. Given that BCAM was a nationalized bank and that the operation required financial support, the restructuring plan proposed by Banco Sabadell needed the approval of the European Union. On 1 June, after receiving all the necessary approvals, the purchase was closed and Banco Sabadell acquired BCAM for the symbolic price of €1.

About the authors Javier Busquets holds a Ph.D. in Management (CBS). He is an Associate Professor at ESADE (URL) where he teaches Strategy in Innovation & Technology and Strategy in Information Systems. He is author of several international papers published in Harvard Deusto Business Review, Communications of ACM, Journal of Information Technology, European Journal of Information Systems, Innovations (MIT Press), and Decision Support Systems among others. He serves as Director the Executive Master in Digital Business (2011–) and the CIO Advanced Program (2011–). He served as Chair of the Department of Management Information Systems (2003– 2011) He has an extensive professional and executive experience in the Information Technology (IT) and telecommunication industry where he served for 17 years. In 2007 and 2011 he received an IBM Faculty Award dedicated to a research in Service Science and Innovation in Banking.

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Conchita Alvarez Hernández is the Director of Corporate Projects at Banco Sabadell, including M&A’s, strategic plans and transformational projects. Prior to joining B. Sabadell, she served in McKinsey, contributing actively to the development of the European Banking Practice, in particular, creating the Affluent Banking Service Line and participating in the European banks restructuring' knowledge effort. She has been a part-time professor in Business at different universities in

Spain (Universidad Pompeu Fabra, Escuela Organización Industrial and ESADE). She holds a Bachelor Degree in International Business from Universidad Pontificia de Comillas – ICADE (Madrid, Spain) and from Northeastern University (Boston, USA), where she graduated with Honors. In addition, she has a Master in Business Administration from Columbia University (New York, USA), where she was London European Scholar.