Journal of Operational Risk

Risk.net

Strategic and technology risks: the case of Co-operative Bank

Patrick McConnell

  • The failure of the venerable Co-operative Bank was not caused by the Global Financial Crisis
  • Rather, buoyed by its success in navigating the GFC, the Co-Op embarked on an ambitious "growth by acquisition" strategy, eventually acquiring /merging with the much larger Britannia Building Society
  • The strategy was a disaster, not least because the acquisition required the replacement of the bank's elderly and complex Core Systems and a number of IT projects to try to replace those systems failed
  • This paper considers the problem of Core Systems Replacement (CSR) and the Strategic Technology Risks that must be managed by financial institutions

Growth by acquisition strategies is risky, first, because often the acquiring firm is uncertain about exactly what is being acquired, and second, because justifying the costs of acquisition is dependent on how well the firms can be integrated to achieve the necessary savings and/or increased market opportunities. In addition to integrating staff and processes, a key integration that must also take place is that of information technology systems. In knowledge intensive industries, such as banking, successful integration of technology platforms, especially software, hardware and networks, is critical to the long-term success of any acquisition strategy. This paper studies the growth by acquisition strategy embarked upon by a mid-sized UK bank, the Co-operative Bank; this strategy was a disaster, leaving a heretofore successful bank in dire trouble and on the block for buyers at a substantial discount to its original value. The case is an example of a board failing to manage its strategic risks and, in particular, its strategic technology risks. In 2008, the board of the Co-operative Bank, backed by its parent the large and profitable Co-operative Group, took the decision to acquire a larger competitor to increase its market penetration. However, despite being well capitalized, the execution of the strategy was botched, not least as regarded the replacement of the bank’s “core banking systems” to accommodate the larger, merged bank. This paper first provides some background on the bank as it embarked upon its growth strategy, before discussing the topics of strategic risk and strategic technology risks, in particular the risks in so-called core systems replacement programs. The events that caused the Co-operative Bank to fail so disastrously are then described, and finally the lessons that can be drawn are discussed.

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