As its name implies, Raiffeisen International is the non-domestic arm of Austria's Raiffeisen Zentralbank Osterriech (RZB), which owns over two thirds of the business. In this context, the term 'international' essentially means Central and Eastern Europe, as subsidiary operations exist in 17 countries across the region (including Russia and Ukraine). Raiffeisen International has aggressively entered emerging markets in an effort to gain early mover advantage and stimulate rapid growth, a strategy that, in Datamonitor's opinion, appears to have worked successfully. Through both organic and inorganic (i.e. acquisitive) means, Raiffeisen International has become one of the largest financial institutions in the Central and Eastern European region, second only to Italy's giant UniCredit Group.
Up to now, Raiffeisen International's financial performance has been respectable almost to the point of over-achievement. At the end of the third quarter of 2008, the balance sheet total had increased by 20% to E87.2 billion (compared to the previous year), and the company reported a E1.6 billion year-to-date profit from operating activities.
However, Q3's glowing results were immediately dimmed by Raiffeisen International's announcement that it would be cutting 2008 guidance and placing its mid-term goals under review. True to its word, the bank subsequently slashed its full-year net profits forecast by 5% to E950 million and refused to publish new goals for the coming 12 months (and beyond) until the end of March 2009. If anything, the situation is even gloomier at RZB. Like many of its peers throughout Europe, RZB is currently seeking a E2 billion injection of government capital in order to shore-up its balance sheet. Datamonitor believes this is significant, as RZB provides much of Raiffeisen International's wholesale funding. If RZB fails to secure state aid, the impact on its non-domestic offspring is potentially disastrous.
All of which makes Raiffeisen International's decision to outsource all future development of the core system to the well-established Misys/HCL partnership an announcement worthy of comment. According to the company, Raiffeisen International will continue to expand, and Misys/HCL will assist both with getting new products to market faster and maintaining existing ones more efficiently, thereby ensuring the bank does not overstretch its resources too thinly. A dedicated team of developers from Misys (based in Europe) and HCL (based in India) will be permanently assigned, with a central control function based in the bank's Vienna headquarters.
In Datamonitor's opinion, the announcement makes perfect sense. The bank is a long-standing customer of both companies, having first used Misys Midas, and subsequently Midas Plus, as the core banking solution across most of its IT infrastructure. However there are exceptions: Datamonitor is aware of at least one local operation, Raiffeisen Bank Polska, using a Temenos core system. This seemingly innocuous event actually tells its own story, as individual countries have on occasion opted to 'go their own way' when it comes to implementing banking technology. Curtailing this somewhat maverick practice and aligning operations to the Midas Plus platform in all 17 countries should be a priority for Raiffeisen International, investment budgets notwithstanding, as it minimizes operational risk and ensures both process and behavioral consistency across the group.
Banks are, of course, under intense pressure to drive down IT expenditure wherever possible. The announcement makes no mention of cost reduction, but it would be foolish to assume that there are not any tangible financial benefits associated with outsourcing core systems development to Misys/HCL. At this stage, it is unclear as to what the impact will be on Raiffeisen International's internal IT teams in both the corporate headquarters and individual countries, but Datamonitor envisages that a decrease in headcount could very well be one outcome.
It is impossible to know if this announcement is a knee-jerk reaction to the dismal trading conditions that Raiffeisen International now finds itself operating in, or it is in fact the culmination of strategic discussions that have been taking place over a prolonged period of time. However, Datamonitor suspects the answer lies somewhere in between, with the deterioration of the retail banking market in recent weeks acting as an accelerator and resulting in the outsourcing agreement rising to the top of the agenda faster than originally anticipated.
Raiffeisen International is not the first financial institution to hand core systems development to a third party, and it certainly will not be the last. Those banks - or, more specifically, those IT executives - who remain resistant to outsourcing this type of IT activity will find themselves in an increasingly precarious position. It remains to be the seen if this decision will deliver the benefits expected of it, but Raiffeisen International cannot be accused of failing to take bold actions in order to weather the storm.