Case study Report: First Fidelity Bancorporation (C)

Executive Summary:
First Fidelity Bancorporation (FFB) is a US holding bank corporation with 8 subsidiary banks
under its umbrella. FFB decided to rationalize its operation and system department to
improve its efficiency and to meet stringent regulations. Therefore, FFB decided to outsource
its system consolidation project to EDS. Both EDS and FFB signed a 10-year contract for the
system integration project. Taylor from EDS faced with financial overrun of $8 million within
a year into the project. Taylor had three choices to choose to manage the overrun and
maintain a healthy relationship with FFB. Since the contract was quite ambiguous and both
the parties failed to foresee such issues, it is highly recommended to split the financial overrun
equally between two companies.
Introduction:
First Fidelity Bancorporation (FFB) is a US bank holding corporation with 8 subsidiary banks
functioning autonomously. Due to economic crisis and stringent government regulatory
bodies, FFB decided to rationalize and standardize products across all its banks to have
competitive edge among banking institutions. FFB wanted to have a centralized organization
structure and at the same time, built a common application platform for all its bank. To realize
its objective, FFB had tight time frame of 18 months. FFB did not have enough internal
resources to carry out this rationalization, therefore FFB decided to outsource the system
consolidation project and data centre processing to an external vendor.
Electronic Data Systems (EDS) is an industry leader in private-label outsourcing activities. EDS
brought along with it vast experience and comprehensive knowledge of financial industry
software and leading-edge technologies. It was also known for its flexibility and commitment
in supporting its clients plans. This made FFB to choose EDS as its outsourcing vendor and
awarded a 10-year contract for system integration and long-term systems related activities.
Tom Taylor was appointed as account manager by EDS to carry out this project.
Within a year into the project, Taylor was facing a budget overrun of $8 million. He was under
immerse pressure to address this financial burden which resulted due to incompatible
software platform, culture conflicts, relationship management issues, acquisition of 4 new
banks by FFB, and absence of detailed contract terms with clear picture of each other’s
responsibilities. Taylor had to act fast to resolve this issue so that he can complete the project
on time and continue to maintain a positive relationship with FFB. To resolve the issue, it was
important for Taylor to investigate the problems that resulted in $8 million overrun. He
identified 4 keys issues that attributed to the addition cost.
The key challenge EDS faced during its project was incompatible software platform. The
internal organization conflicts within FFB hampered the application selection process as each
bank wanted its existing products to be added to the new platform. The original platform
approved by FFB at the time of contractual agreement could not accommodate the
requirements of all its bank and thus EDS had to modify the design which added to its existing
cost. Both the parties failed to foresee such issues and did not define appropriate clause in
their contract to resolve this key issue. Also, EDS cannot completely accuse FFB for his mishap
as it could severely damage their cooperative relationship.
Next, the old FFB employee groups that were brought together clearly showed animosity and
frustration towards this cultural change. EDS found that FFB’s system development team is
not motivated and lacked confidence in on-time completion. Therefore, EDS had to bring in
large number of extra personnel to complete the project within the timeframe. The lack of
confidence and internal politics hampered EDS’s ability to meet the deadline.
FFB failed to fully communicate about the relationship understanding it shared with EDS to
the management of the subsidiary banks. The part of problem resulted from ambiguous terms
of the relationship. The subsidiary banks were resistant to changes and Taylor had few
supporters outside the FFB top’s executives. The organizational restructuring attributed to
lack of involvement from subsidiary banks and created a great deal of frustration for both
sides. To complete the integration on time, Taylor wanted support from all banks under FFB
holding company.
Lastly, the need to integrate four newly added bank into common system platform added
complexity to already challenging conversion project. It was likely to increase the cost of
overall project and re-sequence the existing time schedule.
Taylor was running out of time and he had to address these issues immediately to further
avoid any deviation from stipulated project timeframe. He had three options to choose from:
assume all costs in his budget, split the costs with FFB or pass the cost on to FFB. It was
necessary for Taylor to be aware of pros and cons of each options and understand the
implication each had on the relationship of both firms.
Option 1: EDS assumes all costs
Pros:

 EDS decision to assume all cost could be viewed as act of trust, cooperation, flexibility
and conducive for healthy medium and long term relationship between both parties.
 Prevent the further delay in the project timeline and could get pricing metrics in place
so that contract revenue would reflect bank’s growth and rapid changes.
 Avoid compounding of $8 million overrun and any negative press publicity.
Cons:

 FFB could take EDS for granted in future conflicts if they appear to be very
accommodating by assuming all costs.
 No room for any discussion on how to find alternative to relationship arrangement if
similar crisis occur in the future and to re-define the terms of each other’s
responsibility in the contract.
Option 2: EDS splits cost with FFB
Pros:

 Alleviate the financial burden of EDS partly.

 Provide an opportunity to both EDS and FFB to identify the areas which they
overlooked during the initial contract agreement.
Cons:

 Difficult to persuade Parcells to accept the equal split as he thinks the overrun is part
of project conversion and primary responsibility of EDS.
 Result in conflict given the ambiguity of contract terms and in turn affect the medium
& long-term relationship of both firms.
Option 3: FFB assumes all costs
Pros:

 Ideal option for EDS as this will alleviate Taylor’s budget problem and he could prove
himself to be efficient manager who avoided millions of dollars overrun for EDS.
 FFB will assume all the responsibility for the software platform incompatibility and
internal organization conflicts which distracted the conversion teams from exploring
issues.
Cons:

 Blaming FFB solely for the overrun could reinforce a confrontational atmosphere and
can seriously affect the long-term relationship of EDS with FFB.
 Parcell could be viewed as an ineffective leader who failed to act in the favour of
financial interests of FFB.
 Hinder the project schedule as it could take time for EDS to convince FFB to assume
all the cost.
Recommendation:
As per the contract, EDS has agreed to complete the system integration at a fixed cost.
However, the contract was ambiguous and did not provide clear instruction on who should
take up the responsibility when there is any change during the project. It is evident from the
analysis that FFB should also take responsibility for incompatible platform selection and lack
of proper communication to its subsidiary banks. Therefore, it is necessary for FFB and EDS to
split the overrun cost equally to maintain long-term relationship positively and achieve their
goal of system integration within 18 months.
Given the circumstances, both EDS and FFB had equally failed to clearly define each other’s
responsibilities in the contract. They totally neglected the possible overrun cost in their
project budget and did not allocate any extra budget to handle such situation. Since both the
companies signed a contract for partnership relationship, it is necessary for both the
companies to support each-other in resolving any challenges. It is important for both the
companies to re-define the contracts terms and better define their responsibilities to avoid
any such situation during their contract period.