Changing the game: Making the transition to open systems

CIO 2003 Conference – 12 February

David Boyles

Chief Operations Officer Australia and New Zealand Banking Group Limited

Agenda

ANZ’s strategic direction ANZ’s technology program and directions ANZ’s progress in migrating to open systems - case studies

• ERP/Common standardised administration systems • Item processing • Next generation switching project • International payments clearing

Conclusion

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ANZ’s strategic direction

Organic out-performance

• Extend specialisation • Grow customer numbers • Increase share of wallet • Drive productivity

Portfolio reshaping

• Invest in high growth areas • Build specialist capabilities • Exit weak positions • Risk reduction

Transformational moves

• Step changes in positioning • Creating new growth options • Proactively shaping industry

Our targets

• Revenue growth materially higher than expense growth • Take business units to sustainable leadership positions • Build a range of strategic options Page 3

Delivering performance

$M 2500 2000 1500 1000 500 0 % 67 62 57 52 47 42 NPAT 1997 1998 1999 2000 2001 2002 Cost Income Ratio

46%

1997 1998 1999 2000 2001 2002 Note: 2002 figures exclude significant transactions Page 4

%

24 22 20 18 16 14 12 ROE

21.6%

1997 1998 1999 2000 2001 2002 Cents 140 120 100 80 60 40 20 0 EPS & Dividends 1997 1998 1999 2000 2001 2002 EPS DPS

ANZ’s technology focus

Putting technology to work to: • Provide our customers with a personalised, consistent experience • Empower our customers and our people with real time information access and online applications via web-based technology, anywhere and anytime • Ensure our technology is robust, flexible and cost effective • Aggressively reduce costs, improving productivity, benchmarking, increasing ‘straight-through’ processing, simplifying and automating administrative functions • Provide low-risk, high-efficiency and state-of-the-art payment capabilities Page 5

Initial technology strategy (1998) provided focus to move to next level

Customers (BU) People Process Infrastructure 1998: Inward focused, low satisfaction, weak process, complex infrastructure

• Little BU focus • Poor understanding of business drivers • Service levels poorly understood • Leadership weaknesses • High staff turnover: 18% • Many cultures • Poor disaster recovery • Inconsistent architectures • Poor project management and methodology • Billing of services incomplete and inaccurate • Inflexible, high cost technology • 15 data networks • 6 core systems • Many different platforms

2003: Customer focused, positive culture, improving process, simpler infrastructure

• Explicit business partnership • High customer satisfaction 7.7 (Sep 02) • Service level agreements • Customer survey/ feedback process • $75m in benefits from our continuous improvement program • Improved staff satisfaction to 83% • IT staff turnover below 3% • Training on-line • Leadership development program • Performance culture • Full DRP in all critical processes • 900+ staff through Project mgt program • New processes - PiaB, One Team, CMM, Niku, RAD, Phased funding, Outcome management • Technology costs defined and regularly reported • Technology governance, standards and policies • Detailed billing • Tandem, Unix & AS400 rationalisation • 2 core systems • Single IP Network • Standard Win2000 desktop across Australia • Intranet to all but 800 Int’l staff • Established strategy for standardisation and re-use Page 6

People - skilled and committed

Breakout cultural transformation workshop Management tertiary qualifications policy pcs@home: heavily subsidised packages for staff to acquire PC’s eVouchers provided free to staff to choose reading materials Online training courses Half yearly staff survey with action teams to address issues raised Page 7

Customers - commitment to focus technology on business unit objectives

Average SLA for major systems

Service level agreements in place for each Business Unit Average - 1999 Average - 2000 Average - 2001 Clear alignment between Technology and Business Units Detailed billing to Business Units for IT services Customer survey/ feedback process on 6 monthly basis. Linked to individuals’ performance measures.

Electronic timesheet capture for IT project tracking, reporting and billing Page 8

Process - commitment to improve execution capability

Project in a Box

• ‘Best of breed’ project management tools • Central repository for all project reporting • Open access to all users

Capability Maturity Model

• Significant productivity and quality improvements • CMM level 2 certification – 1 st Australian Bank • Bangalore, India - level 5 certification

Project management training

• Generic training courses tailored with ANZ specific content and latest Project in a Box tools

Continuous improvement programme

• Driving real cultural change • Series of workshops for all staff • Resulted in $75m benefits to date Page 9

Reengineering in a Box

• Standard tools, templates and process for re-design of business processes

Infrastructure - commitment to rationalisation and standardisation

Core systems

1998: 6 major systems

2001 Hogan CBS IP network 1998

Multiple data networks

2000

- Simpler systems and platforms reduce cycle times - Single IP network provides universal connectivity

Servers and desktops 1998 2003 Platforms 1998

8+ major platforms

2003

Platform focus Eg,W2K, UNIX, MVS - Provide all staff with best tools possible - Low cost of ownership through standard solution Page 10 - Greater ability to leverage new technologies - Lower hardware, software licence fees and support costs

Technology Transformation strategy 2003-05

Simplify platforms

Continued drive to simplify the platforms

Improve project delivery

Capability upgrade of project process, business/ IT alignment

Robust operating model Take out costs

Next level agility and adaptability, quick ability to up or downscale Next level tools and methods

Leverage Group assets

Leverage existing technology through re-use and componentisation • Open systems environment (eg, Wintel) • Scale out model • Ongoing enhancement to security capabilities Movement to open systems – key factors • High availability of skills • Good breadth of vendor support • High agility • Vast breadth of tools and technology • Standard commoditised technologies • Efficient development environment • Support re-use and components • High levels of integration ‘plug and play’ • Customer access through web enablement Page 11

ANZ’s move to open systems

From

• Traditional core applications based on proprietary systems – Single vendor with limited scale to innovate • Proprietary systems have limited interoperability/ integration • Relatively expensive to run - often long lead times to upgrade system capacity

To

• Standards-based modular building blocks • Benefits: • Cost - efficiency and skills availability • Flexibility - speed, scalable, modern infrastructure • Connectedness - ‘plug and play’, ‘ease to innovate’ Page 12

ANZ’s progress in migrating to open systems - case studies

• ERP/Common standardised administration systems • Item processing • Next generation switching project • International payments clearing Page 13

ERP/Common administration system - background

• Our ERP systems were fragmented and outdated • General ledger was no longer supported • Payroll system was old, heavily customised and costly to support • Very limited HR MIS Page 14

ERP/Common administration system challenges

• Need for a common, standardised administration system – PeopleSoft met our mandatory selection criteria – HR functionality was tailored to Australian regulatory environment – General ledger structure is a good fit to our operations – Technology fits well with our architectural standards • ANZ’s PeopleSoft implementation is the largest on MS Windows 2000 and MS SQL 2000 in the world • Implementation approach critical to success, trade off between package customisation and our current processes Page 15

ERP/Common administration system solution/approach

• We adopted a ‘vanilla’ implementation, thus our processes were changed to fit the software • Focused on people impact – change management and training • Staged approach to deploy major modules: - Procurement and Accounts Payable - Human Resources - Fixed Assets - Finance (General Ledger) - Payroll • Pushing the time/cost boundaries Page 16

ERP/Common administration system solution/approach

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ERP/Common administration system outcomes

Cost

– Reduction in finance administration and procurement expenditure and greater control of fixed assets – Reduction in HR expenditure in progress following recent payroll implementation – Faster, easier and more cost effective way of working

Flexible

– Straight-through automation – Easier capture and use of business information – Consistent business platform across ANZ

Connected

– Delivery of web-based information anytime, anywhere, any place – Transformation of culture – Reduction in operational risk Page 18

Item processing - background

• ANZ used the same equipment to process cheques for almost 18 years at five state-based Transaction Processing Centres • Large logistics exercise to achieve same-day value processing of all cheques/deposits across 900 Australian branches • This process had a number of disadvantages • Aged Proof of Deposit platform and 5 major voucher processing sites • Costly and inefficient physical storage, access and retrieval of cheques from paper archive warehouses for 7 years • Geographic dependency on paper • Day-2 functions (eg exceptions, returns) all required paper handling and records management actions • In NZ we had an equally old system on different equipment in three centres using different software and interfaces Page 19

Item processing - challenge

To develop a best practice document processing environment to enable efficient and timely capture of customer and internal paper based financial transactions.

The strategy comprised five parts:

1. Implement an Image POD System to further increase productivity and reduce the cost/item of processing in a standard system across both Australia and NZ 2. Utilize the more efficient/flexible Image POD System to integrate with the aging Retail Lock-box System 3. Create an Image Archive over 7 years to replace paper storage and provide rapid access across the enterprise 4. Image enable back office processes and centralize those functions which would result in major FTE savings 5. Interface into the Bank’s Internet System to provide ‘self-service’ archive access to ANZ customers Page 20

Item processing - solution

Two Pass Capture, Balance and Encode PASS ONE PASS TWO

Conventional Solution

2 Pass Proof of Deposit Receive WORK PREP HIGH SPEED CHECK CAPTURE PASS CAR/ ICR PAPER REJECT RE-ENTRY MICR REPAIR IMAGE BALANCE IMAGE DATA ENTRY PAPER BALANCE HIGH SPEED CHECK ENCODE PASS & SORT RE HANDLE PASSES CASH LETTERS CAPTURE IN CLEARINGS POST DDA LAST EXCHANGE SPECIALISED FUNCTIONS One Pass Capture, Key, Balance, Encode, Image Capture and Sort System

ANZ Solution

One Pass Image Proof of Deposit Systems Receive Work by Courier from Branches BATCH PREP AMOUNT KEY MICR/OCR READ MICR REPAIR AUDIT PRINT ENDORSE MICR ENCODE IMAGE CAPTURE SORT ONE-PASS TRANSPORTS 1 OPERATOR PER MACHINE

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CASH LETTERS LAST EXCHANGE IMAGE CAPTURE IN - CLEARINGS POST DDA ONE-PASS TRANSPORTS 1 OPERATOR PER 3 MACHINES

Item processing - outcomes

Cost Flexible

– Streamlined processes in both Australia/NZ – Lowest unit costs from ‘one pass’ data and image capture – Efficient and timely capture of customer and internal paper based financial transactions – Improved customer service through faster retrieval or self service – A platform that can grow or contract with our imaging requirements – Increased scalability and ease of integration

Connected

– In-sourcing opportunities - such as credit card services or white labelling – Sales potential to off-shore banks Page 22

Next generation switching project

• Replacement of existing ATM and EFTPOS switching functionality (approx 1,500 ATMs and 50,000 plus POS terminals) • Current environment based on proprietary hardware/platform and software

Solution:

• Migrate to Windows 2000 and OpeN/2 (from S2)

Outcomes

Cost  After full implementation, expected to be 50% of previous environment Flexible Connected   Equivalent functionality can be developed much faster Lower development costs, can upscale quickly     Allows integration with existing web channels and CRM Eliminates requirement for proprietary architecture Lowers overall diversity of platforms Reuse with telling platform Page 23

International payments clearing

• Inherent risks due to complex and disparate payment systems/processes • High complexity within a proprietary environment

Solution:

• Single platform that processes international and domestic high-value electronic payments

Outcomes

Cost   Reduced resources in both Aust/NZ Reduced hardware maintenance/support costs Flexible   Increased STP rate for MT100/103/200 message types from 30% to 60+%. At same time business volumes have increased.

High availability and standardised platform in Aust/NZ Connected    Increased revenue streams and enhanced product devp Improved operating risk management and tools Real time counterparty risk management Page 24

Conclusion

• Historically, financial institutions have built a myriad of fragmented proprietary point solutions that are difficult to integrate • ANZ is focussed on moving to open systems to simplify its environment, enabling: – componentisation and re-use of solutions – lower costs – improved cycle times and business functionality • But, this is not easy - it requires clear vision, unrelenting drive and constant innovation Page 25

Copy of presentation available on

www.anz.com

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The material in this presentation is general background information about the Bank’s activities current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is appropriate.

For further information visit

www.anz.com

or contact Philip Gentry Head of Investor Relations ph: (613) 9273 4185 fax: (613) 9273 4091 e-mail: [email protected] Page 27