Citigroup Cost Cutting Puts A Bull's-Eye On IT

Talk about life on the edge. As part of Citigroup's campaign to cut $10.4 billion in spending over the next three years, the banking giant's tech operations have been slapped with a bull's-eye, the target of big consolidation and offshoring projects in the coming months. Citigroup plans to close half of its 42 data centers, move thousands of jobs to lower-cost locations in the United States and abroad, and possibly replace some big-ticket data storage systems with commodity gear, according to regulatory filings and executives who spoke on a conference call last week.

	Prince: Be nimble--at a much lower cost Photo by Yuriko Nakao/Reuters

If the plan works, Citigroup will become "more nimble," chairman and CEO Chuck Prince said. Prince and other executives didn't offer many IT details, but they made clear Citigroup's tech operations will play a central role in the restructuring--both as part of the cost cutting and as a platform Citigroup can use to roll out new offerings more quickly and cost effectively. "The simple fact is, we have to make our middle and back office help us serve our clients better, help us generate revenue better and faster," Prince said. He's under heavy pressure to improve results, after revenue rose just 7% last year to $89.6 billion while operating costs rose 15%. Citigroup plans to cut 17,000 jobs--roughly 5% of its total workforce--and move 9,500 more positions to "lower cost" locations. More than half the cost cuts are expected to come out of tech and back-office operations. This undertaking rolls in a previously announced IT streamlining that had already begun. "We are now looking at this as one project, as would be expected," chief operating officer Bob Druskin said. "You could not do a structural expense review without technology." The company didn't specify jobs to be cut, but it's likely many will be in IT given Citigroup's desire for a leaner tech operation. Citigroup already has 19,000 employees in India taking customer service calls, crunching numbers to support investment research, and performing other back-office tasks, mostly from Citigroup Global Services operations in Mumbai and Chennai. How much work is too much for banks to push offshore? Deloitte--itself a provider of offshore services--says banks have barely begun, predicting that 30% of the industry's IT spending will move to low-cost locales in three years. Today, it's 6%. In addition to its own operations in India, Citigroup has outsourced tech functions to Infosys, Satyam Computer Services, and Tata Consultancy Services. TCS Americas president Surya Kant says banks in general are more aggressively outsourcing routine tech and office work. "Banks have been spending more on running the business than changing the business," he says. "They want to reverse that." Outsourcers downplay the risks--cost overruns, lower quality and productivity, management problems, lost industry knowledge--that offshoring can bring. But Citi, which recently spun off its India-based banking software company iFlex, knows what it's getting into. "They're probably further along than most banks on this," says Bart Narter of banking consulting firm Celent. "They're as good as anyone at offshoring." Despite the multibillion-dollar stakes, outsourcing strategies aren't set in stone. Former Bank One CIO Austin Adams terminated a $5 billion outsourcing deal between JPMorgan Chase and IBM after Bank One and JPMorgan Chase merged in 2004 and Adams became CIO of the combined companies. The rationale: Tech was one of the company's competitive advantages. The problem with this sort of about-face is companies end up trying to rehire tech talent they previously laid off or off-loaded.

BEYOND OFFSHORE Citigroup's overhaul also calls for more efficient use of existing IT assets. COO Druskin said the company will close half of its 42 data centers and increase server utilization rates. The company declined to give more details. The bank also will make greater use of shared services operations--departments that perform centralized back-office functions on behalf of units across the company, Druskin said. About 65% of Citigroup's procurement spending is routed through shared services arms, and Druskin wants that to be 100% by 2009. Citigroup also wants to slash the number of software-based systems used to create and manage its product offerings. For instance, it's reducing its U.S. credit card platforms from 12 to two and U.S. mortgage-origination platforms from five to one, Druskin said. The company also plans to integrate the systems used to run its Citibank and Smith Barney operations "so our clients can do business with both of those entities," he said. On this front, Citigroup is behind U.S. competitors such as Bank of America and Wells Fargo that were more disciplined about integrating the systems of companies they acquired, Celent's Narter says. Consolidating such systems, which is "painful and expensive," will require a short-term IT spending spike, he says. Citigroup plans to take a first-quarter charge against earnings of $1.4 billion to cover severance and other expenses related to the restructuring. Meantime, Citigroup will take a closer look at whether it's buying higher-end storage than it needs, Druskin said. Major banks typically spend millions of dollars annually on storage to comply with record-retention regulations. But banks may have overspent on storage as a knee-jerk reaction to those regulations and high-profile court decisions and Securities and Exchange Commission rulings that punished regulated companies that didn't do a good enough job archiving and retrieving records. Now those institutions are taking a second look at commodity systems for e-mail archiving, database reporting, and development. Storage market leader EMC sees global customers sticking with high-end systems for information that needs to be available round the clock, says David Donelan, senior director for industry marketing. "But we do see a trend toward some of the lower-cost products" for branch offices and secondary operations, he says. To further cut IT costs, Citigroup plans to modernize its global voice and data networks; standardize how it develops, deploys, and manages software; and reduce the number of vendors it buys from. Citi didn't offer details, but the moves sound like the kind of IT housekeeping pledges that make sense but aren't likely to lower costs much. Citigroup projects it will reduce IT and back-office operation costs by $775 million this year, $1.6 billion in 2008, and $2.5 billion in 2009, the company says in an SEC filing. That's about half the more than $10 billion in savings the company expects over those three years. Despite the squeeze on IT, Druskin insists Citigroup views internal technology prowess as key in the cutthroat financial services industry. He noted the company will expend 1 million more staff hours on application development this year than it did in 2006. "That is an important point," said Druskin. The question for Citigroup, and its customers, investors, and employees, is whether the bank can keep operations on track amid all the renovations.