Two pioneering companies, Halifax and Amtrak, have shown how to avoid the risks of transitioning business to the internet while still maximising the opportunities, writes Julia Vowler.
The Halifax had a clear idea of the business opportunities afforded by the internet when it launched Intelligent Finance, its internet bank.
Julie McClelland, IF director of business design and IT, says the aim was to provide the then very new service of current account mortgages, where the amount borrowed is constantly offset by the amount a customer saves.
The risks, apart from anything else, included the challenge of setting up the IT infrastructure that would provide the service within a tight timeframe. The new bank's aim was to launch five different products in a year, says McClelland. That meant a lot of supporting IT had to be put in place, fast.
McClelland believes Intelligent Finance ended up getting it right for the following reasons.
Top level support: the IT implications of launching a new bank were recognised by top management from the outset, in October 1999. They knew that the high-level IT architecture, plus all the systems providers and partners would need to be in place by December l999 if the business goal had a chance of being met.
Greenfield development: Starting from scratch meant a lot of work, but avoided the problem of integration with legacy systems.
"We could keep the timescale short because we were greenfield," says McClelland. "We did 500 man years of development in nine months. The first two tiers - channel interface and customer details - were completely new.
"It was definitely technically easier than launching it out of the Halifax."
Leveraging existing systems: although a greenfield build, IF did not waste time in replacing work done at the Halifax.
"We took a copy of the Halifax's current account system and amended it, we used a credit card system from EDS, and the Links loan, mortgage and saving system for the back-end, third-tier production systems," says McClelland.
External programme management: IF used a dedicated consultancy, Vision Consulting, to programme manage the IT perspective and, crucially, manage the 10 or so major IT suppliers involved in the project.
Fast and focused supplier selection: there was no time for lengthy, formal invitations to tender, says McClelland. "For each bid we evaluated two preferred suppliers.
"We had a rapid evaluation process according to their fit in terms of the functionality of the system and the responsiveness of the supplier, and their ability and willingness to work to our timescales.
"What was important was to build the right partnership and the right risk and reward relationship - that was not formal, it was cultural. We selected suppliers that had a good cultural fit, and those with which we had had prior relationships."
Although the technology might be new - current account mortgages were a new idea then - the argument was that at least the people should be familiar.
Leveraging the Halifax's own IT capability: IF's IT department is for application development, not operations, says McClelland.
"The Halifax Group Technology Function provides our infrastructure and operations platform, but we are responsible for the applications. We are using their hardware - we got in extra capacity - and they run our systems for us," says McClelland. "We use the Halifax as a service supplier and have service level agreements with them."
Putting readiness above deadline: IF was prepared to put back the opening of the bank in order to ensure the systems were robust.
"Getting through the testing period was a challenge. The market is hard on internet banks when they run into difficulties, and we could not afford that to be an issue. IF was praised for being responsible enough not to take people's money [before it was operationally robust], and our chief executive understood the importance [of us getting the IT right].
"The IF brand was launched in February 2000, and we were due to go live in July. The scale of development meant we were delayed, so we took step back to be comfortable," says McClelland. "The telephone banking system went live in September, and the internet system in November 2000."
Two years on, IF has more than 10% of the UK's mortgage market, and offset banking has taken off as a new way of paying for houses.
Amtrak has same-day delivery wrapped
UK parcels delivery company, Amtrak, could see that the fastest growing segment of its marketplace was in same-day delivery. But to exploit that lucrative new market most profitably the company needed to get in fast - and at least cost.
It also had to take up as little of his management time as possible, says chief operating officer, Peter Walters.
Moving into that market would require dedicated booking, tracking and billing software - delivery is point-to-point rather than depot based - but the company was loathe to invest the large sums of money that owning, implementing and maintaining such software would need. Moreover, because Amtrak's couriers are franchised, accessing the system from their own computers had to be low-cost and simple to use.
Walters opted for a web-based software package, Net Despatch, that could be run by an application service provider. It needed only minimal tweaking for Amtrak's specific usage, which Walters says cost not more than "a couple of grand".
Because it is web-based both couriers and customers can access it via a browser, and couriers also have WAP access. Customers can also book via telephone - Walters uses a hosted call centre, again to minimise start-up cost and time to market - which goes straight into Net Despatch.
Best of all from Walters' point of view, having hosted software means that charging is transaction based, so that it scales according to volume of business, thus minimising start-up costs.
"Transaction-based charging is very appealing," says Walters.
Although the same-day courier business of Amtrak is critically dependent on the software, Walters is minimising risk by putting escrow agreements in place, and is confident that, if necessary, "it wouldn't be a problem to take it in-house".
For Amtrak, entry to a new market was enabled by opting for hosted, web-based, transaction-charged, one-stop software, which kept start-up costs low for the company and its franchises, and kept on-going costs low too.
"Such a system just a few years ago would have cost millions to implement," says Walters.
This was first published in February 2003