Is outsourcing the cause of RBS debacle?


Robert Peston on RBS delays

Royal Bank of Scotland says it has fixed what it calls the "technical failure" that has disrupted banking services for millions of NatWest, RBS and Ulster Bank customers on a scale and for longer than has ever happened at any British bank since they went computerised.

But given that it is still impossible for many of its depositors to see up-to-date balances and that the bank warns there may be further "bumps in the road", it may not look like much of a remedy.

Here is the point: short of a bank running out of money, or what happened to Royal Bank of Scotland and HBOS in the autumn of 2008, this debacle at RBS is about as serious as it gets for any bank. In respect of a bank's core responsibilities, executing transactions for customers and letting them see what funds they have available are fundamental.

And, of course, an operational problem of this sort can become what is known as a prudential problem: if dealt with poorly, there can be an impact on a bank's viability.

Customers of Northern Rock queue outside the Kingston branch in order to take their money out of their accounts on 15 September 2007

You only have to think back to the run on Northern Rock from 14 September 2007 to see the interplay of technological failure and the confidence of customers: one of the primary contributors to the anxiety of the Rock's customers was that they could not access their online accounts on the evening of 13 September after I disclosed the bank had gone cap in hand to the Bank of England for emergency funding; the Rock had inadequate server capacity to cope with a surge in demand for information about what was going on.

Since then, the Financial Services Authority has insisted all banks increase their server capacity, so that they are able to handle online traffic equivalent to 300% of normal peak demand.

I am told - and there is no surprise here - that the FSA will now want a full and comprehensive explanation from Royal Bank of Scotland of precisely why a computer malfunction that happened last Tuesday evening is still having repercussions.

In one respect, RBS's response latterly has been textbook and sensible. In order to reassure customers, it has opened branches on Sunday, it is keeping them open again late tonight, and it has made a blanket on-the-record promise that no customer will be "out of pocket" - which implies it will meet all legitimate claims for compensation.

Robert Peston: RBS group will have to produce a very detailed investigation into what went wrong

But that disguises the very basic sense in which RBS's response has been lamentably poor. Here is the thing: the software update that went so badly wrong last Tuesday night was fairly quickly identified and patched by Royal Bank; it is the absence of a contingency plan to deal with the knock-ons from the initial computer failure that many will see as deeply troubling.

One RBS banker put it like this: "it was the management of the after-effects of the software failure that caused us the real difficulties, rather than the software failure itself".

As I understand it, one reason why RBS has not given much detailed information about why its services have been so badly disrupted is that so much of the operational responsibility for IT is outsourced - so there is a sensitive issue of where to attribute blame.

In my conversations with RBS bankers, there is an implication that outsourcing contributed to the problems - though they won't say whether this is an issue of basic competence or of the complexities of co-ordinating a rescue when a variety of parties are involved.

Certainly the FSA will want to know the answer to that question. And there is a strong argument that RBS will need to give a much more comprehensive explanation of what happened to its customers - or risk some of them taking their business elsewhere.

For what it is worth, RBS does not believe that the issue raised by many - that all the banks have creaking ancient and complex computer systems, on to which they are constantly grafting updates - is the core weakness.

That said, it is striking that in the boom years before the crash of 2007-8, none of the big banks replaced their so-called legacy systems with new modern ones - which some would see as another example of how they did too little sensible long-term investment when the sun was shining, and are now struggling to mend their roofs in less clement weather.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 572.

    I don't know if if Hestor thinks he is kidding anyone but his stance that it was the software is nonsense & he knows it. Only a fool runs software on a live system without first testing it for flaws on the development system. A typical ignorant high risk approach with no management and no thought process. RBS IT Director should be looking for a new job completely divorced from IT or finance.

  • rate this

    Comment number 571.

    I used to work in RBS IT on core mainframe systems. I was laid off in 2010; RBS was/is running down the IT skillbase in UK and Irl and outsourcing to 'reduce costs'. The systems are too complex and critical for this model.

    Now happily working somewhere else where IT resources are valued.

    The drive to reduce IT costs has let down regular RBS group staff and their customers.

  • rate this

    Comment number 570.

    Hopefully this will act as a wake up call to directors who see IT as an overhead, a chance to justify huge bonuses cutting costs - replacing experienced developers with cheap coders based in India.

    Sadly it wont.The UK was a world leaders in IT, that legacy has been squandered by greedy directors, and Labour/Tories have done nothing to stop it.

    We should offshore the directors instead.

  • rate this

    Comment number 569.

    #568. Dave

    There is a lot more to programming than a load of COBOL.

    I look upon web aps, banking included as simply gaming.
    Drongos sat transfixed in front of screens.
    3D even. Big deal.

    No, the real interesting programming is interfacing with real life stuff.
    Stuff that moves. Can be nano grams or mega tonnes in mass.
    Stuff that changes state. Has fields surrounding it. Not just green fields..

  • rate this

    Comment number 568.

    KIDS, don't waste your school life learning programming. Unless something drastic changes re. IT in this country, there will not be any jobs for you.


Comments 5 of 572



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