Information Technology and Management Information SYSTEM (ITMIS)

Assignment: IT system failure in RBS on June, 2012

Submitted by: Rosy Oli

ID number: C0086RHRH1113

NOVEMBER 2013

MFP/MBA

LONDON SCHOOL OF COMMERCE (LSC)

Abstract

Chapter 1: Introduction

1.1 background to the study1.2 aims and objectives of the project1.3 aims and objectives of the report1.4 report scope and structure

Chapter 2: Case Study

2.1 knowledge about project2.2 project life cycle2.3 problems statement

2.3.1 Failure to invest properly in its IT system2.3.2 Inexperienced operative2.3.3 Poor practice and management

2.4 report structure

Chapter 3: Analysis and Findings

3.1 SWOT Analysis3.2 PEST Analysis3.3 Michael Porters Five Force 3.4 Information technology

3.4.1 ERP and accounting systems 3.4.2 Supply chain management 3.4.3 Customer relationship management 3.4.4 Database Management

Chapter 4: solution

4.1 Testing4.2 Upgrade at the weekend 4.3 Beware outsourcing 4.4 Adequate resourcing 4.5 Contingency planning 4.6 Good customer communication 4.7 Risk management and adequate training

Bibliography

References

ABSTRACTThis report is based on the Information technology system failure of RBS bank on June 2012 affecting more than million customers. Although they are one of the old established bank in UK, they have gone through few major problems and changes like merger with NatWest bank, financial crises and IT system failure on 2012.

In the chapter, the background, knowledge of the RBS bank and their aims and objectives has been discussed along with the use of information system in RBS. The second chapter gives the information on life cycle of the project, the problem related with project and reason for RBS system failure.

This report provides an analysis and evaluation on RBS and how the information system helps to increase customer relation and supply chain management. The proposed solution to the possible problem which causes RBS system failure and to avoid any such errors, issues and failure in future.

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1. INTRODUCTIONThe Royal Bank Of Scotland (RBS) is one of the retail banking subsidiaries of the The Royal Bank of Scotland Group plc which provides banking facilities throughout the UK and Ireland together with NatWest Bank and Ulster Bank. There are around 700 branches of The Royal Bank of Scotland which are mostly in Scotland, and they have many branches in larger cities and town throughout England and Wales. The Royal Bank of Scotland was founded on 31 May, 1727 in Edinburgh, by royal charter. In 1783 first branch of RBS was opened and was able to developed a larger number of offices all over Scotland in 19th century and its main branch is situated in Glasgow. It was able to open its extension in London in 1874, and from 1920s it developed by procuring a major presence in England. In 1994, Direct Banking was started by RBS which became UK 24 hour fastest growing telephone banking operation and in 1997, UK's first online banking service was announced.

The main objectives of RBS is to help and support the business grow by providing services, they look to provide a simply accessible, straight forward and knowledgeable banking service that will help to survive and benefit in the most competitive markets. Their aim is to

Customer satisfaction to achieve at higher level

All Shareholders sustainable value to be rebuild

To restore undoubted standalone strength in the bank

Its function includes Services of business, Human Resources, Finance and Group Strategy, communication, support telephony , borrowing and lending money transmission services, reporting of global purchasing, budgeting, forecasting and technology infrastructures.

In this report, it will discuss the causes, reasons and symptom of 2012 computer system failure in RBS which started from 19 June 2012, and the impact and real cost of IT system failure on its business, on the customer and relationship with them. It will discuss the clear strategy to manage IT system in future, analyse & evaluate the issues involved in the development and deployment of management information systems. We will evaluate and interpret the managerial decision making and the practical application of information systems to enhance the organisation. In the chapter below, we will enclose more about the project, its life cycle, problems related with the project, the cause of 2012 IT system failure in RBS and its impact on its business and customers.

2. CASE STUDY

RBS had undergone several mergers and acquisitions. In March 2000, a deal worth £21 billion to acquire the National Westminster Bank (NatWest) by RBS and RBS purchased a big share of capital from Virgin One business and Euro Sales finance in 2001. After the merger of RBS and NatWest businesses the enormous task of integrating their IT systems began as both systems were combined together and with merged back room the bank could create and market financial products which could then be sold under the banner of the different brands in the group. So a NatWest customer would remain with the bank, but everything would be run on Royal Bank system. This posed an enormous challenge for John White, head of IT.

There has been few issues of IT system breakdown since the merger, but the major problem began on 19 June 2012. Not only RBS computer system were affected, but NatWest and Ulster bank were facing the same problem.

On 19 June 2012 a software update was applied to RBS's CA-7 Software which checks payment system and Customers' wages, transactions and payment were disrupted. Customers were unable to withdraw cash from ATMs or to see their account details. Some customer had to pay fines for late payment of bills as the system was not able to process direct debits. New home purchases were delayed because of the complication with the system and lot of people were stranded abroad. RBS admitted that transactions were affected by the issue in 27 June. Even the customers of Ulster Bank had problem to access cash on 2 July. This can be the result of merger of three banks and their computer system.

The main reason and cause for IT system failure in RBS can be

1) Failure to invest properly in its IT system- RBS were investing heavily in building computer system for the customer so they were unable to invest on its computer system. Due to increase in capital which means bank has less money to invest, and when they do have cash the back-office was low down the list of priorities. RBS banks continue to layer new systems on top of old trying to save money on computer system so they continue to breakdowns, and resulted on massive system failure. RBS have very outdated computer systems and upgrading them is both very expensive and has to be done without outages occurring at any moment and banks can’t ask their customers not to use their accounts for a week while improvements take place, so this is also a major problem of RBS.

2) Inexperienced operative-   IT meltdown which crippled the RBS banks was caused by inexperienced operative. There were inexperienced staff who were performing backing out upgrade routine task of CA-7 tool and major and serious problem occurred. It is nothing new that a upgrading software can cause a problem, where IT staff are expected to back out but in during the process of backing out, a blunder error was committed and this made the job of restoring services go so long creating a large backlog. All the erased information had to be re-inserted to the system and processed again, so inexperienced workers made the problem more complicated to fix. The problem arised on Tuesday night. RBS engineering teams start off to work on to the problem on Wednesday morning, but till the weekend the issue was not cracked. So the makers of the CA-7 software had to help RBS to fix the tragedy which affected 16.9 million people bank account.

3) Poor practice and management - Environment management such as creating the versions of the system for testing as well as development, management release such as providing production the new versions of code, are very important and need to be carried out by people who have the sufficient knowledge and understand the systems that they are working on but in RBS, without satisfactory analysis and testing stress beforehand CA-7 upgrade took place, and corruption of files caused by the upgrade became the huge negative impact. Test team of RBS was not allowed to raise bugs directly with the vendor because of the reason that they did not have adequate understanding about the normal system operation to differentiate between a exciting bug as they had never seen them before. RBS had very dull documentation which can be one of the major source of

failure. In some RBS teams, there was no proof that the code which was released was the code that had been already tested. Another serious issue in RBS was poor source control, no one knew what sort of code was running currently in the production system.

3. ANALYSIS AND FINDINGS

SWOT Analysis

Strengths-RBS has very strong and established brand identity, RBS services have been serving customers for several years. They have been in business for so long; they have a good networking which helps them to know their customer well. They have wider branch network and various mobile van branches so that customers can find a branch Customer Adviser with no effort and experienced servicing staff, which provide a good customer service.

Weaknesses- Due to financial crisis in RBS, Royalties gold sales was refused. Their weakness point is MI data inside branch and telephony; it’s very difficult to find exactly where the product was bought among two channels. Due to the financial crisis, marketing budget overall has been reduced which indirectly means that there in reduction of budgeting for IT system development and any new installation of new computer system. Inexperienced staffing in some areas especially on IT sector. The level of service is inconsistent; across their branch and internet network they have millions of Customer Advisers.

Opportunities- Customer loyalty is very high, and RBS is seen as one of the trusted brand in Scotland. Despite the crises, RBS' reputation is better in Scotland. From the competitors point of view , RBS aren’t facing any disadvantages as all their competitors are almost facing the same issue that is financial crisis. Mr. Stephan Hester’s who is the Group Chief Executive of RBS has a close relation and involvement with the government which allows him a some amount of lobbying power. As RBS is a subsidiaries of large international company RBS plc, there is great opportunity and finance to buy some of their suppliers, which saves on cost in the long run.

Threats- Decline in brand reputation, negative impact on customer trust due to the financial

crisis. Among all the regions, financial crises has hit the RBS branch of England and Wales the most so loyalty of customer is low in this region, not only customer loyalty has reduced but also there is high level of competition and ,competitors are offering similar services to the customer which lower their customer satisfaction.

PEST Analysis

Political and legal - RBS chief executive have good link and relationship with governing

party, so that has benefit in many ways to RBS, they are aware of changes in rules and policies and they amend their strategic planning. Regulatory are essential in protecting operational activities (Mullineux, 2009), and RBS operates well developed and stabile regulatory. Financial regulation is also the major area of concerned, UK banking is highly regulated by financial services authority (FSA). During the time of the global financial crisis 2007-2008, there was huge interference of UK government into the banking industry and bank like RBS were offered bail-out facilities by financial services authority (FSA).

Economical- RBS was hit by the Global financial crisis in 2007-2008. Reduced in Gross Net

Profit, low revenue, declined in demand for credit services and consumer confidence were few areas of economic that effect RBS during the crises. However, RBS can capitalize and affect the credit crunch as there is low capital costs and demand for credit may increases. Since 2008 the RBS was in loss making an average loss of £2bn around for the period 2009-2011 (annual report 2011), and in February 2009 the Bank announced its detailed strategic plan which was aiming for recovery of the bank from the crisis, was announced by bank on February 2009, and also the plan includes bank of becoming more efficient and make more profit on a long-term basis.

Social- The attitude of society have influence on the strategic position of an any firms,

especially financial organization like RBS, whose perfomance are affected by public behavior. Uk has system of fractional reserve banking where all the banks are retained as reserved only a fraction of their liabilities, and remaining funds are given as loans to outsider. Due to financial crises resulting loss of people confidence in bank, people who deposit wants to withdraw their money which causes liquidity problem to RBS. The reputation of RBS was in a line because of

various issues like labor (London interbank offered rate) fixing scandal, several articles have been published with time which damaged the RBS reputation regardless the fact or evidence were found. There was an articles written on about RBS being UK’s Enron which was allegations by Turner who is a former Minister of Scotland (Telegraph, The Week, and The Guardian 3/2009). RBS showed their concerned towards the society by raising their Social Responsibility profile. They funded various public and small medium enterprises, enhanced transparency and corporate governance

Technological- RBS financial information systems and software system facilitate data

(Elving, 2009). These tools strengthen the assessment and analysis of expenses, revenue and

liabilities. RBS have been implementing green IT system in order to reduce their water and

electricity. Technology in RBS helps them to manage counterparty, credit, and operational risk.

There was a huge IT system failure in RBS along with NatWest and Ulster bank in June 2012.

RBS's former CEO Fred Goodwin has been blamed by Different analytics, writers and in articles

blamed the former CEO of RBS Mr. Fred Goodwin for not investing sufficient in technology and

also after the takeover of NatWest in 2000, robust enough systems wasn’t build properly. Due to

continuous development in technology sector it is very essential for increasingly business

transaction and processing online to have knowledge about the importance of the effective IT

Governance and business continuity planning.

Michael Porter’s five forces framework

“Porter's five forces” is a framework for the business strategy development and business

analysis.

(Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter 1980)

Rivalry- Rivalries are the greatest threats facing RBS. RBS belongs to RBS groups which are 5th largest bank on world; it faces fierce competition from Barclays, HSBC. RBS are good and efficient on developing strategic plans so that they can always be better option of their customers in banking industries and finance industries.

Threats of substitutes- A threat of substitutes is affected when a demand of a product is hampered by the change in price of a substitute product. Switching cost also affect Threat of substitution, there is a costs in for retooling, redesigning and retraining the product or service when customer switches to substitution or different service and product. RBS is always concerned about their competitors and aware of the services they will provide with any new products and services in the future. It is good in a way that it allows the company to work harder to be in its position, and sometime it can result in its profitability.

Bargaining Power of Buyers- The occupation of the value established by an organization is affected by the buyer power. The most important determinants of buyer power include the size as well as the customer concentration and the other factors are differentiation of the competitors. RBS has been able to manage their customers effectively which allows the company to gain customer loyalty and satisfaction. The strategy used by RBS group enables them to become the world 5th largest in banking and financial sector. They have bargaining power collectively but not individually as customer deposit account for 414 billion pound as a financial report 2011.

Supplier Power- The determinants of Supplier power are supplier concentration, differentiation and impact of inputs and their substitute, threat of forward integration and importance of volume to supplier. RBS has the power and ability to change the different price of target markets various prices in according to the price formulated for each of the buyers. Customers, investors and UK government with over 80% share are the blood of RBS.

Threat of Entry/barriers to entry- Profits becomes nominal if there exist both free entry and free exit in the market. There are many sources of barriers to entry such as branding, economies of scale, distribution channels, government regulatory, and technology. RBS has been facing several threats like, Tesco being the UK largest super-market, they are in partners with RBS plc since 1997, but now they are making plans to enter into banking industry as a solo operating with 6.5 million customers. RBS has strong branding image which works as an advantage and is an entry barriers for any new organization emerging in the market.

Information system

We can make businesses like RBS productive and more profitable by using IT in a very effective way. Business integrating their processes, developing their marketing skills with a customer database, improving supply chain management or better managing receivables, right technology can develop and improve how to run business. We can make improvement in the performance of business by examining the internal processes normally which are not manage together and joining them together into a solo management system. Payroll, accounting, production control, inventory and customer relationships are the internal processes which can be mixed and client and employee communication can be mixed as well.  This case study will give an overall view of the ways banking business like RBS can benefit from using technologies for the best serve to their customers along with betterment to meet their business goals.

ERP and accounting systems Enterprise resource planning (ERP) allows business to crack their traditional rules, and replace with integrated structures which encloses human resource, internal processes, organization

strategy and technology strategy. ERP system covers the RBS activities like accounting, marketing management, sales management and management of shareholders, purchasing and production management, control of inventory, HRM and costing.

Supply chain management The supply chain includes the steps which involve in reaching a service and product to the customer. Software of Supply chain helps the business to process and track information on their orders and deliveries automatically. This helps business like RBS bank to forecast any supply and demand more accurately. It is great help in reducing any errors by performing automatic transactions, it also speed up services in regards to customers, helps in improvement of inventory control and reduces in cost of administration by using automated systems.

Customer relationship management  CRM use a technology which improve the business insights into customers behavior and their needs . It helps in managing relationships between and with clients. It is mostly used to build personalized and specific call centre where technology identifies incoming numbers of the customer phone and get all the information of costumer automatically for the representative who is taking the call. Based on customer historic trends, it helps to improve and develop customer needs and also based on targeted marketing which get to specific audiences and help in developing business through healthy and efficient customer relationships. Even with less budgets we can use CRM as it gives benefit by dealing with customers using a various means such as faxes, emails, letters, phone calls. Using all of the information together can help business like RBM improve their customer service.

Database ManagementDatabase allows information manages customer mailing lists in logical and restrained way. They can link different aspects of the business electronically, like linking a specific service with customer which they use on regular basis so that the business can better keep track of customer behavior which helps them to reach the targeted market. This type of tool helps the business to process information such as analyze data, customer sales pattern.

In the report below, it’s been discussed the possible solution to the IT failure in RBS, how can business avoid such kind of system failure in future.

4. PROPOSED SOLUTION TO THE PROBLEM

IT system failure in 19 June, 2012 in RBS bank has affected million of customers, leaving the business reputation in line causing a huge sum of money in the form of compensating, staffing. There has been no exact proof or solid evidence provided by RBS on system failure, But this report has proposed possible solution to the problem stated in chapter 2 of this report for system failure in RBS and avoid such failure in future in any business.

Testing – The problem was a suspicion of inadequate testing. RBS need to undertake the correct system and also understand the user testing before rolling out live in a development environment.

Upgrade at the weekend – RBS did their upgrading of system on a Tuesday and then they try to catch up on the following days of same week. They should do any sort of upgrade including IT or system upgrades on a quiet times, weekend and holidays are the best time. RBS need to careful about the timing of upgrading in future.

Beware outsourcing – lots of rumors has been going on about the failure that outsourcing might have caused RBS system failure. Therefore great care should be taken when outsourcing analytical systems like RBS and processes, making sure that the resources offshore are of a better capacity which are carefully handled and have clear and focus mission of what is needed and required.

Adequate resourcing – Since the financial crisis 2007, more than 30,000 jobs were taken off of which RBS has implemented and this could affect infrastructure. This goes along with the off shoring, and the organizations need to plunge properly in good staff and better systems when the organization like RBS depends mostly on modern and advanced systems for the successful of its business. It is noted that the problems were caused by old-fashioned mainframe batch processing not by new technology.

Contingency planning – RBS system issue took quite long to sort out its problem, it took several days to just identify the problem and work on the problem from the first system glitch on Tuesday 19 June. Requirements to handle potential problems or more challenging situations that occurred were never considered. Therefore organization like RBS need a have a good contingency plan so that they could deal with the backlash of system failure and a proper and full IT disaster reformation plan in hand.

Good customer communication – There was very limited communication initially, but later Stephen Hester was bound to take the lead in communication program with customer by operating branches till late hours, even during the weekend and expanding the staffs in the call

centre. The network of people and organizations affected were vast. Share price of the RBS bank was fallen substantially since the problem occurred. It is very essential to build up good customer communication from beginning to avoid any rush or disappointment in future and provide good services to customers

Risk management and adequate training - Risk management to be carried out frequently or timely to cover any risks, problems and issues. Monitoring performance on a regular basis, and tracking the project based on small increments rather than a larger one. Adequate training and development program should be provided to staffs who work on the volatile environment.

Bibliography

Williamson, D and Jenkins, W and Cooke, P and Moreton, K (19 December 2003) Strategic Management and Business Analysis

Blais, S (16 december 2011) Business Analysis John Wiley & Sons Inc

Greasley, A and Chaffey, D and Bocij, P and Hickie, S (5 august 2002) Business information system Pearson Higher Education

Wilson, H (3 december 2913 3:30PM GMT) RBS IT 'glitch' leaves bank facing £1bn bill The Telegraph available from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10491846/RBS-IT-glitch-leaves-bank-facing-1bn-bill.html

References

Monaghan, A (Wednesday 4 December 2013 01.03 GMT) RBS boss says sorry for decades of penny-pinching on IT The guardian available from http://www.theguardian.com/business/2013/dec/04/rbs-it-failure-computer-systems

Slater, S and Jain, A (Tuesday 3 December 2013 2:12 GMT) RBS admits decades of IT neglect after systems crash Reuters available from http://uk.mobile.reuters.com/article/idUKBRE9B10YB20131203?irpc=932

Treanor, J (Thursday 2 August 2012 14.19 BST) RBS computer failure to cost bank £100m The guardian available from http://www.theguardian.com/business/2012/aug/02/rbs-computer-failure-compensation

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Gizmodo (25 June 2012 12:45) Failed Automated Software Caused RBS/Natwest Banking System Crash gizmodo [online] available from http://m.gizmodo.co.uk/2012/06/failed-automated-software-caused-rbsnatwest-banking-system-crash/

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Duell, M and Poulter, S and Marsden, R (4 December 2013 01:40) RBS and NatWest blame DECADES of scrimping on IT for Cyber Monday fiasco that EMPTIED customers' bank accounts and left millions unable to access their money Mail Online News available from http://www.dailymail.co.uk/news/article-2517858/RBS-NatWest-blame-DECADES-scrimping-IT-Cyber-Monday-fiasco.html

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Brewster, T (21 June 2012)  NatWest And RBS Fail Kills Banking Services W Tech Week Europe [online] available from http://www.techweekeurope.co.uk/news/natwest-rbs-banking-systems-fail-83561

Waterson, J (2  December 2013 6:17pm) One Reason Why NatWest And RBS’ Computer Systems Keep Failing BuzzFeed available from

http://www.buzzfeed.comjimwaterson/one-reason-why-natwest-and-rbs-computer-systems-keep-failing