German banks face IT integration challenge

Commerzbank aims to make £4.1bn savings by 2011 following the announcement of its plans to buy Dresdner Bank for £8bn.

Commerzbank aims to make £4.1bn savings by 2011 following the announcement of its plans to buy Dresdner Bank for £8bn.

The merged bank will make savings by reducing headcount and selling parts of its business in the short term, but integrating IT systems in the merged banks is a longer term opportunity.

Commerzbank is Germany's second largest bank behind Deutsche Bank, operating in commercial and retail banking and mortgages. It has a presence in London, Luxembourg, Poland, Spain and Switzerland.

Dresdner Bank, which has been owned by insurance giant Allianz since 2002 has a strong presence in the UK, through the investment bank Dresdner Kleinwort, which employs about 2,500 people.

The banks, which have a total headcount of 67,000, have already announced 9000 redundancies of which 70% are the back office, control and production units and investment banking.

Although each bank's operations are similar, a merged bank will have two separate core IT infrastructures made up of systems that are very different.

"There are so many systems and so many interdependencies I do not think they will save money through IT in the next few years," says Bob McDowall, analyst at Towergroup.

German banks use more proprietary systems than UK banks because of the complexities of German banking regulation. Dresdner and Commerzbank have hundreds of IT systems which have grown up and been modified over time. Although many are small-scale they are critical to each business, says Robert Morgan, director at consultancy Hamilton Bailey.

"Trimming costs by integrating [systems] is in many cases not possible," he says. "There is very little that can be done because the systems use proprietary software, notoriously have little documentation and few people know and can run them."

One example is Dresdner's fund accounting system called Paladign, which it uses to balance the books at the close of business. It is old and has been modified so often that few IT people can work with it. Dresdner's trading platform called Imagine, which covers parts of the bank's investment business, is another.

The merged bank must also renegotiate its outsourcing contracts if it is to meet the targeted cost savings. Commerzbank has IT outsourcing agreements costing over £108m and Dresdner Bank has contracts costing more £113mm.

Tony Rawlinson, managing director of financial services at sourcing consultancy Equaterra, estimates that it will take between one and three years for the banks to fully rationalise their outsourcing contracts. He says, "It depends on the flexibility of existing contracts to take on higher volumes, absorb change and address new requirements together with the associated exit provisions."

But a merged bank could make quick gains in areas where IT is less core to the business. "Cost savings can be made in consolidating and standardising the desktop, networks and mid- and back-office applications," says Morgan. But contracts for business critical services may have to run alongside each other for a period.

To meet its short-term targets for savings the bank is likely to cut its headcount and divest businesses, with its London Investment business expected to see major job cuts. But the complexity of each bank's internal systems will make IT rationalisation a longer-term goal.

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