Impact of GIS on a Global Bank
INTRODUCTION
Expectations and Impacts of a
Global Information System:
The Case of a Global Bank from
Hong Kong
Firms have been forced in the 1990s, as
never before, to view markets and
competition globally. The rapid expansion
of international trade, reduced trade
barriers, and political developments in
Eastern Europe and China have resulted in
strategic opportunities and threats for many
firms.
In
industry after
industry,
multinational firms are under pressure to
seek global economies of scale, to build
world products, and to tailor products to
customers in diverse markets (Ives &
Jarvenpaa, 1992).
Authors :
Ken Peffers
Rutgers University, New Jersey
Virpi Kristiina Tuunainen
Helsinki School of Economics, Finland
ABSTRACT
The banking industry plays a major role in
supporting increased global trade and
investment activity (Holland, Lockett,
Richard & Blackman, 1994). Globally
distributed manufacturing and marketing
requires that firms finance these activities
across national boundaries. In addition, they
must manage the flow of cash among
operating units in different continents with
different currencies. Consequently, firms in
the banking industry might be able to reap
benefits from business globalization.
Indeed, the globalization of competition
together with deregulation of financial
markets, the availability of relatively cheap
IT, and the shift towards a global outlook by
large industrial organizations have led to
dramatic changes in the strategy and
structure of the banking industry (Holland
& Lockett, 1995).
Information system (IS) research suggests
that the use of innovative information
technology (IT), deployed globally with the
right mix of organizational assets, may help
firm performance by increasing scale and
scope
economies,
customer
value,
operational efficiency and organizational
effectiveness,
and
by
providing
opportunities for competitive advantage.
This interpretive case study investigates the
business value created by a combination of
firm and IT strategy, global assets, and the
use of an innovative IS to deliver products
in the international trade finance and cash
management
business.
Hexagon,
a
proprietary on-line banking application that
supports the international management of
financial assets, was developed by HSBC
Holdings, plc. HSBC has used Hexagon to
leverage a presence in 79 countries to
create value for the customers and
marketing advantage for itself. Quantitative
and qualitative analysis reveal Hexagon's
impacts on HSBC in terms of performance
impacts anticipated in the IS literature and
in terms of firm level business objectives.
To take advantage of the new scale and
scope of international trade finance and
international banking may require firms to
build extensive networks of assets and
alliances (Engardio, 1993), as well as welldesigned global IT infrastructures (Cusack,
1990). This combination of assets may be
impossible for all but a handful of the
17
Impact of GIS on a Global Bank
industry’s members to assemble. Here we
investigate the use of a global IS to produce
a unique IT-based product, made possible
by the use of a combination of firm strategy,
IT strategy, global assets, and the use of an
information system with a global scope.
How is a firm rewarded for developing a
unique product based on a global IS?
section, we discuss the meaning of the
results, the limitations of the study, and the
implications for managers.
EXPECTED IMPACTS OF GLOBAL IS
IN THE FINANCIAL SERVICES
INDUSTRY
Performance Objectives of a Global
Information System
To answer this question we study the case
of HSBC’s Hexagon. HSBC Holdings, plc,
the world’s 10th largest bank holding
company, has seized an opportunity to
create business value, using global
corporate assets and an innovative
telecommunications technology application
to support firms engaged in international
trade. For more than ten years HSBC has
been developing Hexagon, a proprietary
system that allows individual and corporate
subscribers around the world to conduct
international banking transactions online
through links between HSBC and the
subscribers’ personal computers. Over the
same period HSBC has been putting
together a global system of alliances and
subsidiaries. As a result, it is able to
leverage Hexagon to create value for the
customers as well as a marketing advantage
for itself, relative to competitors.
Empirical evidence is mixed, but it suggests
that firms that make innovative IT
investments have been rewarded with
economic returns (Dos Santos, Peffers, &
Mauer, 1993), while other IT investors have
not. Furthermore, most of the benefits
appear to have gone to firms that invested
early, before acceptance of an innovation
was assured (Dos Santos & Peffers, 1995).
What happens when a firm puts together the
right mix of an innovative IT, an effective
global organization, and an appropriate
strategy to produce value? IS researchers
suggest that, depending on the purpose of
the system, the firm may be able to benefit
from increased scale and scope economies,
improved
product
value,
increased
efficiency,
improved
organizational
effectiveness, and competitive advantage.
In the next section, we develop expectations
from IS literature for how such an IT-based
product might affect the firm. In the
following section, we describe our research
objectives and methodology. In the next
following section, we develop a rich casebased story about HSBC, the development
of Hexagon, its features, and its anticipated
future. In the next section, we analyze the
effects of Hexagon in terms of customer
acceptance, performance impacts, in terms
of our expectations from the literature
review and at the firm level, and the overall
success of HSBC. Finally, in the last
Scope and Scale Economies.
Economies of product scope arise when
unit costs are lowered by producing two or
more products using overlapping operations.
If a bank offers new products that are
similar to existing ones, the new products
can be produced with few new resources
because resources required for the new
products are similar to resources already
available. Economies of scope can be
increased
when
IS,
particularly
interorganizational information systems
(IOS), are introduced to allow the firm to
18
Impact of GIS on a Global Bank
perform an extended range of tasks at low
marginal costs (Gurbaxani & Whang, 1991).
created purposefully for that purpose.
Efficiency.
IOS and information sharing are often
targeted at increasing operational efficiency
by reducing ordering costs, inventory costs,
and supply lead times (Seidmann &
Sundararajan, 1997). For instance, using an
EDI system, Chrysler has achieved
substantial cost savings from improved
information exchanges between it and its
suppliers (Mukhopadhyay, Kekre, &
Kalathur, 1995).
Economies also apply to geographic scope,
the extent to which a firm competes in
various geographic markets. When they
allow efforts to be replicated in new
geographic areas at low marginal costs and
reduce the cost of communication over time
and space, IOS may allow firms to increase
geographic economies of scope (Palvia,
1996).
Scale economies allow a firm to reduce its
costs compared to firms with smaller scale
production. Firms can use IS to realize scale
economies by replicating systems to deliver
products to many customers. IS applications
often have very high economies of scale
because the processing, communications,
development, and maintenance costs are
largely fixed and independent of the number
of customers (Bakos, 1991).
Organizational Effectiveness.
The development of global IS can give
multinational firms a basis for increased
coordination and control or direct
competitive advantage in global markets
(Palvia & Lee, 1996). For example, for
Rosenbluth Travel IT has developed
mechanisms for managing the complex
interactions between travel agents and
customers (Clemons & Row, 1991).
Product Value.
Systems that integrate internal processing
for the firm with that of its customers create
value for the customer by increasing
operating efficiencies (Jelassi & Figon,
1994) or convenience and flexibility
(Peffers & Dos Santos, 1996). Advances in
networking, processing, and decision
analysis have allowed firms to lower their
customers' costs. For example, electronic
payments reduce clerical errors, increase
billing speed, and lower transaction costs.
Competitive Advantage.
Network externalities arise when the
benefits to users are a function of "network
size." They affect the value of an IOS when
its usefulness is dependent upon whether it
has sufficient scope to satisfy customer
needs (Bakos, 1991). Network externalities
can work to provide competitive advantage
by creating barriers against competition in
markets from new entrants (Palvia, 1996). A
global information infrastructure, requiring
a huge investment, may be difficult to
imitate. Consequently, its owner may be
able to retain “exclusive access," for some
time, to customers who want the set of
features provided by the system.
Suppliers that can combine globally
integrated databases and communication
systems with globally integrated customer
service strategies can reduce coordination
costs for their customers (Jarvenpaa, Ives &
Pearlson, 1996), provided that the systems
are used with specialized marketing,
operations, and support infrastructures
19
Impact of GIS on a Global Bank
Performance Impacts of IT Investments
in the Financial Services Industry
RESEARCH OBJECTIVES AND
METHODOLOGY
Banks have expanded internationally,
facilitated by falling trade barriers, to
market to increasingly global customers.
Global customers expect consistent product
and service offerings, expertise, worldwide
service standards, and local multilingual and
multicurrency support (Jarvenpaa et al.,
1996). IT and communications technology
are critical tools to enable the effective
satisfaction of these expectations, along
with other resources, such as branch
locations and corporate image (Martinsons,
1992). Accordingly, bank spending for IT
has increased dramatically and the high rate
of investment is continuing (Takac, 1994).
In this study we investigated the
development and implementation of a global
IS to support an innovative product, the
system’s relationship to the strategy and
resources of the firm, and its impact on firm
performance. We wished to understand how
the subject of our study uses a global IS to
provide a unique product for its customers.
We hoped to understand more about the
relationship between the use of this system
and the performance of the firm, both in
terms of expectations derived from our
literature review and in terms of firm-level
performance.
This is an interpretive case study involving
one firm, HSBC, and a particular product,
Hexagon. We studied HSBC’s strategy, its
use of technology, and its performance,
using qualitative and quantitative data. The
data gathering involved reviews of
documents and publications, annual reports
and data from commercial information
services. It included many hours of
interviews with HSBC executives, including
HongkongBank chairman, John Strickland.
We interviewed technical and product
managers about such issues as the reasons
for approving the development of Hexagon,
Hexagon operations in Hong Kong and
elsewhere, and the firm’s plans for
Hexagon’s future. We also interviewed
managers and reviewed documents and data
from a number of HSBC’s competitors.
Such spending raises many questions about
whether the investments pay off for the
firm, in terms of improved performance
(Peffers & Saarinen, 1998; Hallikainen,
Heikkila, Peffers, Saarinen, & Wijnhoven,
1998). Empirical studies in the industry
have focused on how firms have sought
competitive advantage from IS that reduce
costs, enhance management information, or
improve responsiveness to customers, e.g.,
(Clemons & Weber, 1992). All industry
competitors in the have access to similar
technology, so firms must focus on how
information is used and on building a
supportive strategic infrastructure (Fletcher
and Wright, 1996). Taken as a whole these
studies suggest the potential for financial
services firms to impact performance
through investments in innovative global IS.
Such impacts depend upon the use of IT, the
strategy of the firm and the resources that
the firm can deploy for the benefit of its
customers.
We chose to study HSBC and Hexagon for
three reasons. First, HSBC is one of the
largest and most successful bank holding
companies in the world and it has an
explicit strategy to focus on the use of
innovative IT to create new products for
customers. Secondly, while studying the use
20
Impact of GIS on a Global Bank
of technology to support trade finance and
cash management services among banks in
Hong Kong, the authors learned about the
Hexagon system and became excited about
the Hexagon story. Thirdly, HSBC agreed to
participate in the study. This last reason was
very important because, in general, firms in
Hong Kong were very cautious about
revealing anything about operations to
researchers. The other firms mentioned in
the analysis were chosen because they are
major firms in trade finance and cash
management, they do business in Hong
Kong, where our initial investigative efforts
were focused, and they agreed to participate
in the study.
Strickland, as CEO of HongkongBank,
HSBC is thought, among the business and
academic communities in Hong Kong, to be
the largest corporation, outside the
computer industry, with a computer
programmer as such a senior executive.
Strickland originally joined HSBC in 1966
as
Chief
Programmer
to
install
HongkongBank’s first computer. Hexagon
is a key component of HSBC’s IT strategy,
as indicated by the use of the Hexagon
symbol, a six-sided figure, made up of six
red and white triangles, as HSBC’s
corporate logo.
THE HEXAGON SYSTEM
The Hexagon idea originated in 1982 in the
Technical Services Department, then headed
by Strickland. Citicorp and Chase
Manhattan were already providing corporate
customers with mainframe computer
terminals, through which they could access
within-country transactions and balance
data about their accounts. This was a
strategic threat to the HongkongBank
because these products focused on business
customers engaged in intercontinental trade
and, potentially, high-end retail customers
who used global banks to manage their
personal global finances. Such customers
might favor a bank that could deliver a
system to manage cash worldwide. If
competitors developed such a global system
first, HSBC could find itself sidelined in the
competition for the world’s most important
banking customers.
The Development of Hexagon
HSBC Holdings, plc.
HSBC Holdings, plc is one of the world's
largest financial services organizations. Its
founding member, The Hongkong and
Shanghai Banking Corporation Limited
(known as Hongkong Bank) was established
in 1865 to finance trade between China,
Europe and North America. Formally
organized as HSBC Holdings, plc in 1991, it
has grown dramatically, acquiring Marine
Midland in the US in 1987 and Midland
Bank in 1992, as well as a score of other
firms. Currently HSBC's international
network comprises more than 5,500 offices
in 79 countries and territories, operating in
the Asia-Pacific region, Europe, the
Americas, the Middle East and Africa. It has
120,000 employees in 79 countries, a global
girth only Citibank can match (Chowdhury,
1998).
To meet this threat HSBC would need to
leapfrog the concept of a simple global
inquiry system, otherwise it might find itself
trying to compete with a product that was
always functionally one step behind that of
the competitors. To turn the threat into a
positive
strategic
thrust,
concluded
The use of innovative IT is an explicit part
of HSBC’s strategy (HSBC, 1997a). Its IT
staff of 6000 worldwide are heavily
involved in product development. With John
21
Impact of GIS on a Global Bank
Strickland’s group, HSBC had to develop
the most ambitious concept possible. The
Hexagon vision was to deliver the resources
of a worldwide banking system right to the
desktop of the manager. “At the time their
systems were just dumb terminals,” not
capable of two-way communication. “We
envisioned intelligence on the desktop,”
Strickland told us. While competitors
systems
were
offering only cash
management, Hexagon was to be a complete
banking system. The global scope of the
system was a major component of the idea.
be able to manage those assets by shifting
them to where they are needed; they need
effective delivery of trade financing
services; and they need real time
information on foreign exchange and
securities prices. The concept also focused
on upscale retail customers who traveled
extensively for business or professional
reasons. Such an upscale customer might
have, for example, a home and family in
Vancouver, a home office in London, and
work extensively in Hong Kong, Japan and
China.
In the simplest sense, the system would be a
new channel to deliver information that the
bank already offered to the customer. The
primary beneficiary was expected to be the
customer, who would have access to better
information, rather than more paper.
Eventually the customer might also benefit
from automated handling of data from the
bank. The objective for the bank was to use
this added value to capture market share by
meeting and surpassing the capability of the
systems offered by competitors.
Retail bankers in the firm were cool to the
idea, so after studying its feasibility, the
bank decided in 1983 to go ahead with the
project focused toward multinational
business customers. “It was the most
exciting business decision of [our] lives,”
said Strickland. Although spending on IT
had been steadily increasing in the bank for
a number of years, this was the firm’s first
major competitive thrust using innovative
IT in more than 15 years.
Technically, there seemed to be no serious
barriers to the system. Packet switching was
new, but had been proved elsewhere to be
reliable. Personal computers, an important
component of the new system, were very
new, not much used in business, and not
considered to be very reliable. "This was a
problem the system could live with." If a PC
went down “it was only one customer and
anyway it was his PC, so that wasn’t
considered to be much of a problem.”
Transactions security, however, was a major
concern and it was expected to require a fair
amount of the project’s effort.
At the same time the bank expected to
benefit from automating information
delivery by reducing data handling costs.
According to David McMyn, one of the
original project team members and now
Senior Executive, Group IT, HSBC, the
value created by the system was originally
expected to be 80% from increased
customer value and 20% from cost
reductions for the bank.
The Hexagon concept focused on providing
infrastructure support for firms engaged in
multicontinental trade, especially in Europe,
North America and the fast growing
Western Pacific. Such firms need real time
information on cash, receivables, and
securities balances worldwide; they need to
Six new technical people recruited from
outside the bank, two experienced bankers,
and some additional programmers made up
the design team that put together the
22
Impact of GIS on a Global Bank
original design over the next 18 months.
Figure 1 shows the development of the
system over time, in terms of features and
geographic scope. By 1985 the first
operational version, offering basic account
information
and
allowing
payment
instructions, was launched to five Hong
Kong corporate customers. In 1986 it was
launched to five additional customers in
each of the US, UK, Singapore, and Japan.
This version offered customers access to
transaction
account
statements
and
balances, multicurrency payments (within
the HongkongBank system), interaccount
transfers, and electronic mail between the
customer and his/her own bank branch.
Hexagon’s infrastructure was enhanced in
1987 to provide greater cross-border
functionality and in 1989 a more
functionally-rich version was released
across 30 countries. Since 1989 HSBC has
continuously worked to develop Hexagon’s
functionality and geographic scope.
Important milestones include the launch of
an MS Windows version in 1991 and
features implemented in 1994 that allowed
routine transactions to be automatically
initiated through Hexagon software on the
customer’s PC and carried out in the back
offices of HSBC member banks worldwide.
between the bank and its customers
worldwide. Communication with other
banks is handled largely through SWIFT, a
messaging network of about 4000 banks in
over 110 countries, and the Automated
Clearing House (ACH), which provides
clearance for checks and electronic
transactions within the US. Other links use
telex, global clearing systems and cellular
phones. About 500 banks, other than those
in the HSBC group, currently use Hexagon
to support their own cash management
needs as well as to provide these services to
their clients. For example, according to
Kurtis Giehl, a JPMorgan associate,
JPMorgan uses Hexagon to provide cash
management services for its private banking
customers, using its own “private label”
interface. Some of the sites have online
links with Hexagon, while others process
transactions through an electronic banking
center. HSBC is working toward having
online links with all sites.
Figure 2 shows the conceptual architecture
for Hexagon, which can be thought of as a
three-layered electronic banking platform.
At the center Hexagon acts as the core of
the global banking systems; everything else
is “bolted” onto it. The second layer
includes HSBC banking systems in each
location, where all accounts and balances
are kept and all transactions are performed,
as well as links to other banks and banking
networks. The third layer includes the
client’s Hexagon software, based on his or
her PC, and the client’s transaction partners.
As much of Hexagon as possible is
contained in PC-based software so that
information processing can be performed on
the client’s machine and a minimum amount
of data is transmitted through the Hexagon
communication systems.
The Current System
Today Hexagon is a global electronic
banking service that gives customers direct
access to a range of banking services,
worldwide 24 hours a day, 365 days a year
from their offices through their own PC’s.
Hexagon runs on all platforms and in all
languages supported by MS Windows.
Hexagon's defining features are its global
geographic scope and functional generality.
Hexagon is first an internal network, a
delivery mechanism for communication
23
Impact of GIS on a Global Bank
Hexagon
Hexagon proposal
1982
Decision to go ahead with the project
1983
Group Chairman endorses strategic
plan and vision for electronic banking
1984
"Hexagon" becomes brand name; launch in
HK with five customers.
1985
PC, DOS based version. Account information
and payment instructions.
Roll out of pilot to Hong Kong, US, UK,
Japan, and Singapore. Five customers in each
site.
1986
Online payment transfers.
Global online transactions involving time
deposits, securities purchases
1987
Remote authorization, 3rd party SWIFT, some
ACH. Stock market information.
1988
Hexagon version 1.2 launch to 30 countries.
1989
Cash management, trade finance, securities
market information.
Marine Midland (US) launches Hexagon.
1990
Electronic statements, securities information
1991
Windows version launched. EDI added.
1992
Midland Bank (UK) launches Hexagon
1993
Online monitoring of trade loans
Automated link to back-end systems
1994
15,000 subscribers in 50 countries.
1995
Integration with corporate back-office systems.
Version 4.0
1996
Enables banks to use Hexagon for their
customers.
1997
Links to all ACHs where HSBC has presence.
30,000 customers in 80 countries, e.g.,
Azerbaijan. Year 2000 compliant.
1998
Smartcard alternative to password security.
Internet-based retail version?
1999
Figure 1: Development Timeline for Hexagon.
24
Impact of GIS on a Global Bank
Figure 2. Conceptual model for Hexagon architecture
25
Impact of GIS on a Global Bank
Some routine transactions require no
intervention by either the client or by bank
employees. These operations can be
initiated by a time trigger in Hexagon
software on the PC and automatically
executed through Hexagon. Some of the
services of Hexagon can be run also off-line
or can first be processed off-line, then
transmitted online to Hexagon. Examples
include direct deposits of employee salaries,
bonus, insurance premiums, fee collections,
loan installments, regular payments to
suppliers, and other automatic payments.
These features are continuously expanding.
flexibility of the system. The main service
groups offered by Hexagon are cash
management services, trade services, EDI
services, Electronic Trade-Related Services
(ETRS), securities services and information
services.
Cash Management was Hexagon’s original
feature. It has two components: information
and funds transfers. Customers can access
balance and activities information about all
their accounts, in over 40 currencies,
regardless of the country, for any banks
within the HSBC group. Funds can be
transferred online among any accounts and
any currencies with members of the HSBC
group worldwide. Payments can be made to
trading partners with accounts within the
group or to any payee through any
beneficiary or intermediary bank. These
processes have been automated as much as
possible. Finally, Hexagon can format paper
checks for use to draw funds against any
bank account at any bank in any of more
than 100 countries.
Data security in Hexagon is a very high
priority. Data is encrypted and access is
governed by a two level password control.
The first level requires a user ID and
password and the second level requires a
session password that is given to the user by
the system at the end of the previous
session.
Hexagon
also
supports
authorization and delegation control; that is,
it is possible to control who is allowed to
use which services. Since 1998, a smartcard
alternative for security is also available in
addition to password control. An on-line
audit trail shows transactions over the past
30 days.
These are powerful features. For example,
an electronics manufacturer purchases
components in China, assembles them in
Hong Kong and, through contractors, in the
Mauritius Islands and the Philippines, and
sells them in retail stores in the US. Sunday
night, from her offices in London, the
comptroller uses Hexagon to transfer
surplus US dollars from the firm’s accounts
at Marine Midland Bank in New York to
pay the Chinese manufacturer through its
account at the Shanghai Branch of the
HongkongBank. She also transfers funds
through SWIFT to the contractor’s account
at the Philippine National Bank in Lapu
City, Philippines. She uses Hexagon PCbased software to format a paper check in
the local currency for the Mauritius Islands
and to prepare direct transfers of employee
Many customers, increasingly including
medium sized companies, wish to integrate
their financial applications with their own
back office systems so that information does
not have to be re-keyed, according to Y.B.
Yeung, Assistant General Manager, Head of
IT, HongkongBank. Today’s Windows
version allows data to be exported and
imported easily between Hexagon and other
applications in the firm.
Hexagon Services
Continual
expansion
of
Hexagon's
functionality is intended to ensure the
26
Impact of GIS on a Global Bank
salaries to employees' individual accounts in
Hong Kong. All of the electronic
transactions are completed by the end of
business on Monday.
electronically to HSBC via their Hexagon
software. The usual costs involved in setting
up EDI links are avoided and there is no
need to join a value added network (HSBC,
1997b).
Trade services involves financing the
international sale of goods. With Hexagon
the whole trade cycle is automated. In the
Asia and Pacific region letters of credit
(LC) are heavily used to finance trade. The
first step, an LC application, is traditionally
a laborious task. With Hexagon the client
uses a software template to transmit the LC
to HSBC electronically, where it is printed
and processed. The information on the
template can be reused for the next LC
application, making appropriate changes.
The LC is then transmitted electronically,
through the SWIFT network, to the trading
partner’s bank, which can advance the funds
to the trading partner. Insurance services are
also provided through the system.
Through information services customers
can access stock market and foreign
exchange information. For example, dealers
and analysts in trading centers around the
world provide advice through the system on
which currencies to buy. Precious metal
prices include the closing gold prices for the
New York and London exchanges, and
prices of different localized gold products.
Stock prices and index values are received
through a direct link to the stock index
system that provides information updated
about every half-hour.
In the securities services module a
customer can access his/her global
investment portfolio and buy or sell
securities online in more than 15 countries.
The customer can also move idle funds to
interest-bearing accounts, time deposits or
overnight money markets.
HSBC was one of the first banks to make
electronic banking EDI capable. EDI and
ETRS services facilitate the exchange of
electronic
documents
in
standard
international EDI formats between trading
partners. Hexagon ETRS has the capability
to interface with the company’s existing
computer applications, enabling the
electronic exchange of business documents.
Hexagon supports UN/EDIFACT purchase
orders, allowing both outward and inward
EDI messages to be sent and received with
trading partners. Some third-party EDI
software packages can link to Hexagon. For
example, users of Spex, an export
documentation package, can submit their
HSBC documentary collections to HSBC
Trade Services electronically. Direct send
exporters are able to produce their
collections documents (the ‘paperwork’
necessary to collect funds from the
importer) in Spex and send them
Each of the HSBC member banks prices
Hexagon services for its own customers.
Currently most corporate customers are
charged a flat monthly fee for all services.
For retail customers Hexagon is priced
differently, that is, cheaper. Later services
may be “unbundled” to separate services
and fees; there may be different prices for
on-line and off-line use and a la carte
pricing for service modules. Moving more
and more of the functionality of Hexagon to
the PC further pushes the cost of the
services down.
Hexagon’s Future
With few exceptions, PC-based banking has
27
Impact of GIS on a Global Bank
not been very successful yet with retail
customers (Heikkinen, 1997). Hexagon is
now available to individual retail customers,
however HSBC is still waiting for a “change
in mood” in this sector. Of course, Hexagon
is not an ordinary “PC home banking”
product. Only the relatively small number of
retail customers who perform a substantial
number of international transactions may be
interested in its sophisticated features.
HEXAGON PERFORMANCE
IMPACTS
To understand Hexagon’s impact on HSBC
we first look at its acceptance among HSBC
customers. Secondly, we look at the way the
Hexagon has affected performance at
HSBC, both in terms of expected functional
impacts of a global information system,
revealed by our review of the literature, and
in terms of resulting firm level performance
impacts. Finally, we examine HSBC’s
overall firm-level performance.
For retail customers most HSBC
subsidiaries use the same Hexagon PC
banking software that is provided to
corporate customers, but other approaches
are also being tried. First Direct, a UK unit
of HSBC, is to launch a banking service
using generic Internet browser software,
such as Microsoft Explorer or Netscape
Navigator, instead of the proprietary PC
software. Customers, however, will have to
dial a special number to gain access to the
banking service, rather than connecting
through the Internet (Graham, 1997). HSBC
does not currently offer banking services
over the Internet because of security
concerns, although it has created a site on
the World Wide Web for display at
http://www.hsbcgroup.com.
Customer Acceptance
Figure 3 shows how the number of
corporate Hexagon accounts has grown over
time since its 1985 introduction; most of the
growth has occurred since 1990. In 1997
HSBC executives estimated that 50% of all
electronic international corporate banking
transactions worldwide are done through the
Hexagon system which was by then being
used by 80,000 individual corporate and
retail customers in more than 79 countries
(Graham, 1997). By comparison, an
estimated approximately 50,000 individuals
used the New Citibanking system as of
1998, according to John Conte, Citicorp,
Head of Group Information Network. These
figures may not be directly comparable,
however, because some of the features of
Citibanking and Hexagon are also provided
by other Citicorp systems.
HSBC and Microsoft Corp. have signed an
agreement to link Hexagon to MS Money
software (Reguly, 1997). Retail customers
would use this for financial management as
well as electronic banking. Customers
would be able to execute electronic banking
transactions, obtain account statements,
reconcile accounts, prepare budgets and
investment objectives, plan loan facilities
and analyze cash flow, 24 hours a day
(HSBC, 1996). HSBC is also looking into
possibilities of interactive television.
Impacts in terms of Hexagon’s purpose
Scale and Scope Economies.
HSBC enjoys substantial economies of
geographic scope through Hexagon. When
offering services to customers in new
locations, there is no need for the bank to
develop new software or to reinvent
Hexagon’s overall architecture. Hexagon
28
Impact of GIS on a Global Bank
Number of corporate customers
30,000
25,000
20,000
15,000
10,000
5,000
0
1984
1986
1988
1990
1992
1994
1996
1998
Year
Figure 3: Number of corporate Hexagon customers since its introduction
also increases economies of scale because
Hexagon transactions have only trivial
marginal costs; the system’s operating costs
are nearly all fixed and the total costs for
the system are very tiny, relative to other
HSBC operating costs.
decreased costs relative to size and scope.
To the extent that Hexagon increases
economies of scale and scope for HSBC, the
firm should realize low operating expenses
compared with similar firms. Table 1 shows
scale and geographic scope characteristics
of HSBC and selected competitors. These
banks were selected for comparison because
they compete directly with HSBC for trade
finance business, particularly in the fast
growing Asia-Pacific region. Two measures
of geographic scope are the number of
offices and number of countries in which
the bank operates. Among these six banks,
HSBC operates in more countries with more
offices than any of its competitors, except
Citicorp. Another indicator of geographic
scope is the percentage of loans made by the
firm outside of its own continent. In this
respect, Citibank is the only comparable
competitor. Total assets is a measure of
economic scale. By this measure, HSBC is
Hexagon’s potential use by retail customers
represents a performance benefit in terms of
economies of “product scope.” The retail
version of Hexagon, in whatever form it is
finally rolled out, will be the same
application, repositioned by changing the
interface and pricing, for different
customers. Because the product has already
been developed for one target group of
customers, it can be repositioned at a
minimal cost. The development investments
have already been made and the operating
costs are already being covered.
Economies of scale and scope result in
29
Impact of GIS on a Global Bank
Geographic Focus (1997)
Home
Assets
Number of
Country (US$ Millions) Countries
Number of
Offices
Percentage of Loans
in Home Continent
Bank of America
US
260,159
38
1944
82.9*
Citibank
US
310,897
98
3400+
41.6*
HSBC
UK
452,498
79
5688
45.2
National Bank of
Canada
Canada
48,616
12
724
93.5**
Royal Bank of
Canada
Canada
179,664
36
1558
80.7*
HK
74,546
48
600+
71.0
Standard Chartered
* Percentage of loans in home country.
** Percentage of assets in home continent.
Table 1: Geographic Scope of HSBC and Selected Competitors
larger than any of the competitors shown;
Citicorp and Bank of America are smaller
and similar in size to each other.
banks in terms of total assets, a measure of
scale. Consequently, HSBC's low operating
expenses, relative to size, are also consistent
with high economies of scale.
Geographic scope is not obtained for free.
Firms pay an expense penalty to have more
offices and to operate in more countries.
Consequently, we would expect firms with
the highest geographic scope to have higher
operating expenses, relative to size. Higher
economies of scope and scale might change
that, however. Among the firms, Bank of
America and Citicorp have the highest
operating expenses, relative to assets, of the
selected banks. This is consistent with their
high levels of geographic scope. HSBC has
the lowest operating expenses, as a
percentage of assets. By this measure, the
other banks in this group appear to pay a
substantial penalty for higher levels of
geographic scope, but HSBC does not.
HSBC is the largest of the six selected
Product Value.
Hexagon offers customers opportunities to
reduce costs by saving transactions
processing steps. For example, when using
letters of credit (LC), a customer can submit
an application from his/her office and save
the effort and cost of physically submitting
the application. Furthermore, the first LC
application can be used as an online
template for future applications, minimizing
the staff time required for this activity.
Finally, the entire LC process can be
monitored through Hexagon, saving phone
calls and follow-ups.
Many of the Hexagon features allow
customers to treat Hexagon as extensions of
30
Impact of GIS on a Global Bank
their own corporate finance departments.
For example, by submitting a payroll file
and transferring funds through Hexagon, the
firm can allow surplus funds in one country
to be used to make payroll payments
overnight in another country. This saves
firms in terms of their cost of funds and
management attention.
Because Hexagon costs are mostly fixed,
however, rapid transactions growth should
soon lead to such a situation.
Hexagon's impact on efficiency within
HSBC should be reflected in operating
expenses. We compared operating expenses
as a percentage of revenue for HSBC and
competitors. HSBC’s expenses are lower
than all but one other of the selected firms.
To take full advantage of Hexagon’s value,
customers are encouraged to use HSBC
group banks for more of their banking
functions. If a firm uses Hexagon to perform
international banking transactions, why not
use an HSBC affiliated bank for domestic
banking in the firm’s next new market?
If Hexagon is successfully used by HSBC to
reduce operating expenses, we might expect
staff expenses to be affected as corporate
customers used the automated features of
Hexagon to perform activities that normally
required human intervention. We might also
expect premises expenses, i.e., rent, heat
and light, to be effected if more corporate
staff stayed in their offices or at home to
conduct transactions, reducing the need for
branch office space.
If Hexagon provides value by improving
customer efficiency, effectiveness, and scale
and scope economies, then this value should
be reflected in what customers are willing to
pay, i.e., it should affect HSBC's market
share and revenue. We compared net
interest income plus other revenue
(hereafter referred to as ‘revenue’) for
HSBC and its competitors for 1990-1997.
HSBC has experienced exceptional revenue
growth, compared to its competitors, after
1991, during the same time that use of
Hexagon has shown dramatic growth.
In terms of staff expenses as a percentage of
operating income, HSBC appears to be in
the middle among the selected banks. This
is consistent with HSBC executives’
conclusion that Hexagon has not reduced
average transaction expenses. When we
examine premises and equipment expenses
as a percentage of revenue, HSBC’s
expenses are the lowest among the selected
banks. This suggests that Hexagon is
successfully substituted for physical bank
branch space, resulting in a cost reductions
that wouldn’t show up when measuring
Hexagon’s transaction costs. The values of
these firm performance measures are
consistent with a conclusion that Hexagon
reduces operating expenses even though
average Hexagon transaction costs are not
less than the average for other media.
Efficiency.
Tens of thousands of HSBC’s best
customers use Hexagon to perform banking
transactions themselves, through software
on their desktop PCs, rather than through
HSBC employees. As a result, customers
enter transactions data that would otherwise
have been entered by bank staff, reducing
operational staff tasks. Transactions
volumes have not reached levels that result
in lower overall average costs for Hexagonbased
transactions,
compared
with
transactions done through other media.
Organizational Effectiveness.
Hexagon integrates many of the back office
31
Impact of GIS on a Global Bank
operations of the bank, such as payments
and securities trading. The effort to make
sure that these operations can work
effectively together has resulted in
processing improvements. The system also
provides a standard interface for many
different operations in many countries. That
these operations take place in separate
systems in a variety of countries is
transparent to the user as he or she
experiences a smooth transition while
initiating transactions that are performed in
Hong Kong, Manila, or Toronto. This
standard interface increases flexibility for
HSBC because it provides opportunities for
low cost product extensions and it increases
flexibility for the customer as it allows the
customer to extend its reach to new
locations or new products at little
incremental cost.
These network externalities create a “barrier
to entry” for all but the very largest
financial services firms. Only a global
system could compete with Hexagon. An
alliance, such as the one between Open
Financial Exchange (OFX) and Integrion,
could pose a threat, however. OFX is a
partnership between CheckFree, Intuit, and
Microsoft and Integrion is a partnership
among 20 banks and IBM. Among them
they wish to develop a common standard for
branded electronic banking products.
For customers who want to do international
banking online, there aren’t many
alternatives to Hexagon. Many large banks
have sophisticated online systems, which
are restricted to domestic banking. Hexagon
is the only application that provides the mix
of cash management, trade finance,
insurance, and securities features with
global scope. Consequently, HSBC benefits
from an “exclusive access to customers”
who want to use all of its features within a
single, integrated global system.
Competitive Advantage.
Hexagon’s full value depends on its
geographic scope, a form of “network
externality.” The system is more valuable to
a firm if it reaches every country in which
the firm may wish to do business and
Hexagon reaches more than 100 countries.
A system built on a smaller scale, which
covered a smaller number of locations,
would be much less valuable. Consider the
electronic goods manufacturer that we
mentioned earlier. Suppose the comptroller
was unable to use Hexagon to process its
Hong Kong payroll or to transfer funds to
its contractor in the Philippines because
HSBC had no presence in those localities.
The consequence would be that she would
have to find other ways to accomplish these
tasks. This would substantially reduce the
effectiveness of Hexagon as a global cash
management system.
Does Hexagon provide HSBC with
competitive advantage by providing
exclusive access to customers and favorable
network externalities, backed up by a barrier
to entry? If so, it should allow HSBC to
obtain high business margins. Figure 4
shows pretax profit as a percentage of
revenue, a reasonable proxy for margins.
Since 1993 HSBC has earned higher
margins than any of the selected
competitors. This suggests that HSBC
enjoys a competitive advantage as a result
of Hexagon.
32
Impact of GIS on a Global Bank
50%
HSBC
40%
Nat. B. of
Can.
30%
Citibank
20%
BofA
10%
R.B. of
Can.
0%
1990
1991
1992
1993
1994
1995
1996
1997
Standard
Chartered
-10%
Figure 4: Pretax profit as a percentage of revenue
(net interest income plus other revenue)
Success of HSBC
Bray, Friedland & Kamm, 1998).
HSBC’s explicit strategy includes a focus
on the development of cutting-edge IT to
support its global business. The centerpiece
of this strategy is Hexagon. If the strategy is
successful, one might expect this success to
affect profits. Is HSBC profitable?
DISCUSSION, LIMITATIONS, AND
IMPLICATIONS FOR MANAGERS
Discussion
The results strongly suggest that Hexagon
affects HSBC’s performance by increasing
economies of scale and scope, providing
additional value to customers, increasing
efficiency within HSBC, and improving
organizational effectiveness. In addition,
network externalities in the product provide
disproportionately more value to the
customer when every location at which the
customer wants to do business is covered by
the system. Hexagon provides HSBC with
HSBC easily outperformed each of its
competitors in profits and in profit growth
over the period from 1990 through 1997.
For 1997 its pretax profits were nearly USD
$8 billion. Indeed, of the 100 largest
financial services firms, as of the end of
1997, HSBC was 10th largest in assets, but it
was 1st in pretax profits for each of the three
years from 1995 through 1997 (Steinmetz,
33
Impact of GIS on a Global Bank
exclusive access to customers who want the
all of Hexagon’s features in a global system.
Finally, the scale and scope of the system
provide substantial barriers to entry,
potentially allowing HSBC to earn
exceptional returns. When we looked at
HSBC’s firm level performance, in terms of
measures related to HSBC’s apparent
performance impacts, we found that it is
consistent with these conclusions.
targeted measures. Nonetheless, since the
results of analyses that we are able to
present are very strong, we believe that they
are quite persuasive.
In any case, our intent here is to understand
how one firm used an innovative global IS,
along with its business and IT strategies and
a global network of business assets, to
achieve its business strategy and obtain
superior performance, rather than to provide
empirical proof that the impacts were
actually realized. We think that the analysis
contributes much to our understanding of
Hexagon’s impacts, as well as providing us
with insights about the use of global IS to
create value for the firm and its customers.
The results suggest that HSBC’s worldwide
corporate assets, including its staff, its
offices, and its domestic IT infrastructure,
are complementary to Hexagon and create
together more value for customers than
would be created by each separately.
Hexagon's extensive portfolio of services,
together
with
HSBC’s
worldwide
operations, creates value that is not
available to customers of other banks. At
the same time Hexagon creates strong
incentives for corporate customers to
become customers of other HSBC banks in
order to take full advantage of Hexagon’s
international features.
Implications for Managers
For firms in the global financial services
industry, this is further evidence of the
extreme importance of IT infrastructure to
their business. Customers will continue to
demand faster transaction speeds, more
transparent interfaces, lower transaction
costs, and geographic scope. Only highly
integrated global systems, which are,
themselves, well integrated with back office
processes, can hope to compete on this
level. There are thousands of financial
services firms in the world, but not many
firms can compete in this manner.
Limitations
None of the analysis that we have presented,
qualitative and quantitative, nor all of it
together, proves that Hexagon positively
affected HSBC’s performance. Firm level
performance is affected by many factors,
while our analysis focused on one broad
product line, albeit the centerpiece of
HSBC’s global IT strategy. Quantitative
firm level performance data that more
precisely measures the performance impacts
of Hexagon’s features was not available to
us. Consequently, the connection between
the qualitative functional impacts on withinfirm performance, observed by HSBC
managers, and firm level effects is not
directly observable in terms of precisely
Of course, not every customer needs global
systems. Contrast Hexagon’s complex
infrastructure with that of another bank that
operates from a single location in Hong
Kong and focuses on financing bilateral
trade with other provinces in China. Its
services are delivered entirely at one
physical location and without substantial IT
support. Its expenses are low, its business is
very focused, and it competes on the basis
of price. Its customers' service level
34
Impact of GIS on a Global Bank
Chowdhury, N. (1998). Why HSBC is Sailing
Through the Storm. Fortune, March 2, 1998, 16-17.
expectations are in line with the services
provided and it is very profitable.
Clemons, E.K. & Row, M.C. (1991). Information
Technology at Rosenbluth Travel: Competitive
Advantage in a Rapidly Growing Global Service
Company. Journal of Management Information
Systems, 8(2), 53-79.
For now the financial services industry
seems likely to move in the direction of two
or more distinct levels of service: integrated,
global
services
with
intense
IT
infrastructures and niche products, which
provide lower costs or custom services to
customers who don’t require products with
global scope. Many of these niche products
can be very profitable, but they might not be
stable. The firm with the global IT-based
structure and consequent low economies of
product and geographic scope may
eventually be able to incorporate the niche.
Clemons, E.K. & Weber, B.W. (1992). National
Westminster’s Strategic IT Infrastructure: Redefining
Branch Banking with £500 Million, Making the
Investment Decision, Managing the Risk. Proceedings
of the 25th Hawaii International Conference on System
Sciences, Vol. IV, 697-705.
Cusack, S. (1990). Bankers Trust Architects a Global
Plan. ComputerWorld Premier 100, 31-34.
Dos Santos, B.L. & Peffers, K. (1995). Rewards to
Investors in Innovative Information Technology
Applications: First Movers and Early Followers in
ATMs. Organization Science, 6(3), 241-259.
For multi-national firms in other industries
there may also be an analogical lesson. This
case provides a revealing example of an ITbased product that was intended to create
value for the customer, but also reduced
costs for the firm, created economies of
scale and scope, and created difficult-toimitate competitive advantages.
Dos Santos, B.L., Peffers, K. & Mauer, D.C. (1993).
The Impact of Information Technology Investment
Announcements on the Market Value of the Firm.
Information Systems Research, 4(1), 1-23.
Engardio, P. (1993). Global Banker. Business Week,
May 24, 50-52.
ACKNOWLEDGMENTS:
Fletcher, K. & Wright, G. (1996). The Strategic
Context for Information Systems Use: An Empirical
Study of the Financial Services Industry. International
Journal of Information Management, 16(2), 119-131.
We are very grateful for the excellent
recommendations of the three reviewers and
the editor in chief, which contributed so
much to the quality of this article. This
research was supported in part by grants
from the Christian R. & Mary F. Lindback
Foundation, the Research Foundation of the
Helsinki School of Economics, and The
University of Hong Kong.
Graham, G. (1997). First Direct spurns HSBC home
banking software. Financial Times, April 30.
Gurbaxani, V. & Whang, S. (1991). The Impact of
Information systems on Organizations and Markets.
Communications of the ACM, 34(1), 59-73.
Hallikainen, P. Heikkila, J. Peffers, K., Saarinen, T.
and Wijnhoven, F. (1998). Evaluating Information
Technology Projects: Procedures, Follow-through,
Decision-making and Perceived Evaluation Quality.
Forthcoming in Journal of Global Information
Management.
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Assistant Professor of MIS at Rutgers
University. His research articles on the
business impacts of IT investments and
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published in such journals as Information
Systems Research, IEEE Transactions on
Engineering
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and
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include the value of investments in
electronic commerce applications and the
development of new methods for IS planning
and evaluation. Dr. Peffers is also the
publisher of a new student-edited and
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of Information Technology Theory and
Application(JITTA).
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36
Impact of GIS on a Global Bank
See http://crab.rutgers.edu/~peffers/
http://www.jitta.org.
and
Virpi
Kristiina Tuunainen is a
researcher at the Electronic Commerce
Institute of Helsinki School of Economics
(HSE). She received her M.Sc.(Econ.) and
Lic.Sc.(Econ.) degrees from the HSE, and is
currently finishing her doctoral dissertation
on electronic commerce. Her research
focuses on interorganizational information
systems,
electronic
commerce
and
economics of IS. She has published articles
in Journal of Management Information
Systems, International Journal of Electronic
Commerce and in a number of international
conferences.
37