Exploring the Global Financial Information Superhighway

Vol. 6: Dawn Period of Offshoring and Outsourcing in the Investment Banking Industry (part four)

Consulting Fellow, RIETI

Starting 1993, policy messages on finance and information technology (IT) from the Clinton administration were disseminated not only across the United States but the whole world. Responding to the globalization of this new business model, investment banks began actively investing in the development of cross-border information networks, resulting in the rapid transformation of intermodal information exchange methods, from more traditional technologies like fax and telex to newer technologies utilizing computer networks. Methods for managing information systems have also started to change as a means of dealing with global business needs.

Hybrid managers

Hybrid managers, which were discussed in the previous report (Note 1), have been defined by Dr. Michael J. Earl of Oxford University as "a person with strong technical skills and adequate business knowledge, or vise versa." Dr. David J. Skyrme, who carried out joint research with Dr. Earl (Note 2) on hybrid managers, describes the following characteristics of hybrid managers:

(1) Business knowledge
Hybrid managers are expected to have extensive work experience in a particular industry, as well as related industries, possess fundamental knowledge of the industry, and on the basis of this knowledge be able to detect and predict future change.

(2) IT knowledge
Hybrid managers do not need to possess specific computer programming skills. However, they must understand the future possibilities for information systems. As such, they are expected to initiate both internal and external value creation schemes with the use of information systems.

(3) General management skills
Hybrid managers must possess the basic general management skills to engage in value creation with the use of information systems. They should be able to both convey to their internal organizations an overall vision using information systems and solve immediate issues by consolidating the opinions of those who agree with that vision.

(4) Knowledge of decision-making dynamics
Every organization has its own decision-making dynamics. To successfully engage in value creation using information systems, hybrid managers must be well versed with the specific decision-making system within their organization and possess a network of human resources to enable successful decision-making.

(5) Personality traits
Hybrid managers must be energetic and enthusiastic about their work; they should be resolute and need to possess a driving attitude.

According to Dr. Skyrme, there are two approaches to cultivate hybrid managers. One is to help computer programmers involved with information systems to develop general management capabilities and comprehensive business knowledge. The other is to take human resources who have extensive business knowledge and understand the practice of end-user computing (EUC) and further their management skills and knowledge about information systems. Many investment banks choose the latter approach because it has not always been easy to educate information systems professionals to become hybrid managers.

The overall internal flow of information systems processing consists primarily of input, processing, and output. Input is the stage when data is entered into a system; processing is when regular arithmetical operations are performed on the basis of data input; and output is when the user receives information after the necessary data has been sorted and extracted from the data that has been converted.

According to Dr. Daniel Cougar (Note 3), information systems professionals tend to develop a strong interest in the arithmetical computer processing, meaning that they may pay significantly more attention to the processing that is part of the three steps above. Information systems users, on the other hand, tend to show more interest in input and output, in which data is handled directly, than in the processing step, in which arithmetical processing is carried out.

Thus the areas of interest of information systems professionals are different from those of information systems users. Users often feel that the professionals have failed if errors take place during the input or output stages, even if the professionals have created a superior program during the processing stage. This gap between the interests of information systems professionals and users often causes conflict.

Business managers who specialize in EUC have comprehensive knowledge of all three stages because they have had practice bringing their business knowledge to the computer environment. It has become an important issue in information systems management to get business managers to further their knowledge of general management methods and information systems, in order to have in place people who can play a role in bridging the gap between information systems professionals and users.

Organizational structure of the information systems division

Research has been conducted on hybrid managers, as well as chief information officers (CIOs), project sponsors, and project champions, from the perspective of information systems human resource development and utilization. Information systems division structural reform has also been researched with the aim of finding out how to use human resources effectively to establish a global information system.

During the late-1980s, when the terms IT and IS were not yet widely used, Dr. Earl defined the three concepts of information systems (IS), information technology (IT), and information management (IM). Information systems involve the understanding and selection of appropriate business applications. Information technology involves selecting technological platforms and understanding how to provide the applications. Information management involves knowing what personnel possess what duties, authority, and responsibilities and making organizational policy decisions. Of the three concepts, Dr. Earl stressed how important it is for senior management to establish clear information management to effectively execute global businesses. Joint research (Note 4) carried out by Drs. Brian Edwards and David Feeny, categorized the organizational structure of the IS division into the following five types:

(1) Corporate service type
This type of IS division is an independent organization that reports directly to company management. Although IS themselves may be decentralized, their operation is controlled by a centralized IS division. If a business division needs to introduce a specific system, it must follow standardized internal procedures and have the relevant department secure a budget for the system and submit its requirements to the IS division.

(2) Internal bureau type
This type of division is an independent organization similar to the corporate service type. It operates in the same manner as other corporate divisions, submitting reports to company management in the same manner. Each business division decides whether to entrust its operations to an internal bureau-type IS division or to an external system vendor.

(3) Business venture type
This type of division seeks to generate earnings in the same manner as other business divisions. It develops a management accounting system to compute charges for internal corporate services, and it keeps an eye on how to generate earnings from services to other companies.

(4) Decentralized type
This system literally decentralizes IS functions. Each business division has functions that control IS, and there is no centralized information system division, so company management keeps track of budgets associated with IS investments using ordinary budget control regulations.

(5) Federal type
This type decentralizes IS functions in a similar manner to the decentralized type, with each business division having some control over IS. A separate organization governs the overall operations, unifying and standardizing the IS policy and architecture shared by all business divisions.

Development of the federal-type IS division

The results of case studies conducted by Dr. Michael J. Earl and other researchers showed that from 1983-1993 the greatest number of organizations chose the federal-type IS division. Dr. Earl believes that this type of division has a framework that can more readily respond to change, including changes within a company in addition to change in business models, information technologies, and IS strategies, and he concluded that this type of division is most suitable for more complex business operations.

A growing number of investment banks have begun setting up federal-type IS divisions to respond to global business models that have expanded front office functions. They have established separate IS applications development divisions for front, middle and back offices and assigned hybrid managers to these divisions. They have then set up independent organizations for the global control of the IS infrastructure, including computers, servers, and networks, and moved to standardize international IS specifications by employing cross-border reporting lines.

In the next volume, I will conclude this discussion of the dawn period of offshoring and outsourcing in the investment banking industry from 1990-1994, by reporting on the subsequent decision-making and personnel changes.

February 18, 2008
  1. Matsumoto, Hideyuki. (2007) "Dawn Period of Offshoring and Outsourcing in the Investment Banking Industry (part three)," Overseas Report Series: Exploring the Global Financial Information Superhighway, vol. 5, January 16, 2008.
  2. Skyrme, D. J. (1996), "The Hybrid Manager," in Information Management: The Organizational Dimension, M. J. Earl, ed., Oxford. University Press, 1996, pp. 436-455.
  3. Couger, J. D. (1996), "The Changing Environment for IS Professionals: Human Resource Implications," in Information Management: The Organizational Dimension, M. J. Earl, ed., Oxford. University Press, 1996, pp. 426-435.
  4. Earl, M. J., B. Edwards and D. F. Feeny (1996), "Configuring the IS Function in Complex Organizations," in Information Management: The Organizational Dimension, M. J. Earl, ed., Oxford. University Press, 1996, pp. 201-230.

February 18, 2008

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