Ulrich Schröder is a banker used to success. Since he took the reins of the KfW state development bank six years ago, it has grown to become Germany’s third largest financial institution.
With assets of more than €460 billion ($615.6 billion) and booking almost €1.3 billion in profits, the public financier earned more in 2013 than Deutsche Bank and Commerzbank combined.
But now Mr. Schröders’ balance sheet is in turmoil as his most important project – the complete restructuring of the out-of-date information technology (IT) infrastructure – is fast becoming a fiasco as costs for the upgrades double.
The bank planned four major IT projects at a projected cost of €400 million, but underestimated the length of time required, the complexity of the project and total cost of the overhaul. The KfW now estimates the cost of introducing new standard software for the financial and administrative accounting functions alone will run from at least €90 million to as much as €180 million, Handelsblatt has learned from sources within the bank.
The ballooning cost of the project has alarmed the co-chairs of the state bank, Sigmar Gabriel, minister for economics, and Wolfgang Schäuble, minister of finance. Mr. Schröder presented a full report about the problems of implementing the new technology and to explain they can be addressed to the board of examiners.
However, the IT problems are no trifling matter for the development bank.
The KfW is now subject to Germany’s Credit Services Act (KWG) and must slowly begin to forward standardized data to Bafin, the country’s federal financial supervisory authority, yet that can only be accomplished with the new software and IT architecture.
“The modernization of the IT, and especially the KWG requirements, are highly complex and time challenging. We have drafted a transparent reporting procedure vis-a-vis the board of directors, regarding project details, time plan, and cost development,” a KfW spokesperson said.
But there are no details about how the bank will respond.
In the face of the IT delays, it also will take longer for the KfW to implement its second major project, which is to transmit reports to the supervisory authority at the push of a button. The KfW and Bafin have reached an agreement giving the bank until 2017 to make the reporting software operational, which is two years later than originally planned.
Complicating the first phase of the IT restructuring is the incompatibility of the KfW’s current software. Each division of the bank – development aid, export financing and domestic economic subsidies among them – utilizes its own applications. To successfully transmit everything required by Bafin means creating a central data pool, which has not been possible up to now.
Adding to the pressure on Mr. Schröder is a project running parallel to the IT reboot. The KfW is introducing a new SAP standard software for financial accounting that is based on the data pool, a mammoth undertaking that suggests the bank has overstretched by trying to do too much in too short a time.
“The KfW is reaching the limits of its capacity,” a board member told Handelsblatt, adding that error messages recorded during data pool load tests stalled the project.
The bank has discarded plans for preparing the 2015 opening balance with the new SAP standard software because it cannot be done without a reliable pool of data. Despite the problems, the bank seeks to continue working with IBM Corp., which has been hired to integrate the systems, even though the schedule for implementation has been reset and while more difficult data load tests are planned. Two external IT experts who report directly to the board have been monitoring the project’s progress.
Ongoing problems with the project are bad news not only for Mr. Schröder, the leader of the bank that touts its sense of responsibility in its corporate slogan, but also for Edeltraud Leibrock, an executive board member responsible for IT and organization, who is under intense pressure to make the projects work.
In April, she said professional management of the project was necessary and should be directed centrally, but she added, “I would, however, advise against placing too much micromanagement in the project.” She urged employees to invest their energies in the project and not in “arbitrating regulations.”
The KfW has reached a size and complexity that makes professional supervision necessary
Now on a short leash, Ms. Leibrock must verbally relay the project’s progress every week to the board, while submitting a written report every month. The KfW also has strengthened the steering committee for central project management by adding a department head and an external expert. The timing couldn’t be worse for Ms. Leibrock, whose contract expires next year. As is customary at the KfW, she will learn in December if it will be renewed.
So far, there has been no search for the parties responsible for the bank’s problems in Berlin, where the consensus is that KfW will eventually get a handle on the problems, but the grumbling has begun. “The assessment of the cost explosion in the IT projects is a management issue,” a government source said.
The IT projects are not the only costly issues the bank confronts. Linking up with the Credit Services Act also means more expenses, which the KfW estimates at €100 million to €120 million. The bank says the additional costs are tied to hiring additional employees and regulatory requirements from financial supervision.
The KfW’s growth, which was controlled solely by the Ministry of Finance, became too large for the politicians to handle. In May 2013, the German parliament acted to change the KfW regulation, so that in the future Bafin would monitor the development institute as it does with private business banks, savings and loans and credit unions.
“The KfW has now reached a size and complexity that makes professional supervision necessary,” the government said at the time.
Immediately following the summer recess, the German government will want to know whether the KfW can get a handle on the costs of the IT projects. Mr. Schröder is supposed to submit a new report to the steering committee in September. A positive update on the bank’s woes would be good for him and the bank.