Capital investment

Capital One is a bank in a hurry. Established in 1995, the fledgling financial services firm rapidly became a Fortune 500 company inside 10 years, and with the acquisition of North Fork in November is well on track to become one of the top-10 banks in America over the course of the next few years. To get the low-down on the technology strategies behind the bank’s recent success, FST spoke to CIO and Executive Vice President Gregor Bailar about keeping the business agile, the challenges of large-scale acquisitions and how people are the most important part of any business.

FST. Capital One has built a hugely successful international business from scratch in a decade. How important has technology been in your success to date?

GB. It is at the very core of the company’s success. Our operations are based on our information-based strategy (IBS), and that strategy is in turn built on two things. First, we have an incredible and tenacious credit policy that helps us understand the financials of our business. And second, we empower that credit and financial strategy with fact-based, automated information. Our entire model is built on being able to organize this data to give our decision-makers both automated and assisted decisions.

FST. Presumably other banks had access to the same technology as you – what has made your implementation so successful?

GB. Well, it’s not clear that other banks do have access in the same way. There are a couple of things that make Capital One unique in its approach. One is that IBS was built on a ‘consulting’ methodology, a scientific approach called ‘test and learn’. And we built the company around this, thinking about how we would create tests for smaller, and then larger, populations to learn consumer response. This allows you to then target products that were profitable and responsive to customer needs in small segments. Other companies (and I was at some of these companies so I know this) did the reverse – they looked at offerings that could address large groups of people in one product, and they built their companies around that. So to respond to Capital One they would have to rethink their credit policies, their structure and all sorts of things – not just their technology.

We’re going to go after multiple market segments. Capital One wasn’t interested in just three products; rather, we were interested in the one thousand segments that represented the sub-groups. That actually is a pretty fundamental difference.

It was a fairly unique approach when we launched, though many people have tried to replicate it. But again, our culture helps us. Every person who came into Capital One, basically since the beginning, has been passed through a number of tests. One of them was what we call a case test – similar to a Harvard Business School case – where you were give a business situation and asked to come up with a solution. We look for people to be innovative in their design of a solution. So we’ve tested for people who would come into the company and would be thinking in a similar ‘test and learn’ mode, and that just isn’t that common out there in the rest of the industry – it’s hardwired into our business.

FST. You’ve mentioned a thousand different segments. Offering a thousand different products must be a challenge, how do you go about meeting it?

GB. Well, it would be nice if it were just a thousand – we traditionally have done between 16,000 and 25,000 tests a year. In some ways it’s difficult, but it’s actually not overall, because it’s the way we’re built. We’re built to run multiple different product lines, and optimize performance within a particular line. We have lots of reporting, risk management and security designed specifically for this.

At the same time we’re always pushing the envelope, so our business needs a greater degree of technology savvy than many of our competitors. And that’s great, because it pulls the business and technology teams together, and it aligns them. I call it knowing the building materials of your trade – we really expect our business people to know the building materials of their trade, because they want to use it. If they want to be building in pre-formed laser etched steel rather than cheaper stuff then they better know how to do that, what’s involved – and that’s a great environment for my technology people to work in.

FST. And is that a case of you recruiting business people with this tech savvy, or training people on the job?

GB. A little of both, Capital One invests a lot in developing people – we’re probably one of the first US companies to issue iPods as part of our education program and say ‘here, load this thing up with the courses we’re giving you’, or ‘go online and get books on us as part of your personal development’. We’ve got budgets for people to spend at least a week on training outside of the company, in addition to the training we offer in-house. There’s an awful lot of development that goes on. But Capital One naturally attracts business people with an affinity for this model. If you’re not interested in using information to drive business solutions, then you’re probably going to go somewhere else first. If you are interested in that you’re going to be excited by Capital One. We’ve got a lot of tools and mindset at the top of the house that supports that – I’ve been in meetings with our Chair Richard Fairbank, and he’s dug all the way down into the mathematical details of our credit models – so it’s there for you. We hire for it, we develop to it, and we also have a great partnership with IT. So if you’re not really savvy in these areas, IT is going to help get you there, with innovation sessions or exposing you to the kind of decisions you’re going to need to make.

FST. Could you tell us a little bit about Capital One’s Future of Work program – is this an example of IT trying to grow this culture in which staff can make better decisions?

GB. It’s a great example because it operates in a couple of different ways. The Future of Work program was a response by the real-estate group and the technology group to the requirements and needs of our knowledge worker community. Our company has a large percentage of knowledge workers, who want to work in collaborative ways, who are entrepreneurial in the way they do things, who’s home life is typified by being in their living room watching TiVo with a laptop, having a Starbucks and messaging their friends and families. We saw that and said ‘gosh, desks and offices and cubicles don’t exemplify that same working model’. So yes, we absolutely went after Future of Work to bring the kind of tools, approaches and collaboration spaces that we think knowledge workers today are using.

We didn’t set out to be groundbreaking, we wanted to ‘test and learn’ using established technology. It turns out though that it was dramatically groundbreaking. Productivity among the groups that moved to this in the early stages was markedly better – sometimes two times better. The satisfaction of the individuals in those groups was 20 or 30 points higher than other groups. And the notion of collaboration and the fluidity in the way these people worked just became so natural that other people hungered for it, it was a fire – unfortunately in some ways, as we had to move so quickly. But it aligned our business needs and our technology capability, it aligned the people in these teams, and it came out with something else that in the end has become our latest innovation tool – the use of ‘lean and agile’.

FST. And why is ‘lean and agile’ important, and how do you achieve it in your business?

GB. What came out of the Future of Work program is that now that we had this ‘Starbucks-esque’ workspace that mimicked the way people wanted to work, people found themselves seeking out ways to collaborate as teams in new ways. So we looked for a development methodology that would engage them in both a disciplined and entrepreneurial way. At our root we’ve got a group of self-starters who want to change the world, and they’re not exactly process-driven. So we needed to get the process and business work that we need to grow and be consistent with a large corporation, married with the entrepreneurial spirit that is so deeply ingrained in each of these staff. ‘Agile’ really provided us with that tool.

We went about it in a pretty disciplined way; we trained agile coaches and got these folks involved in projects; we custom-built the rooms we had for agile development and processes; and we worked through the disconnect with our older processes and agile in a very rigorous way. And once we sorted out all that, the net result was a thirty percent reduction in time-to-market last year through using agile processes. In the customer satisfaction area our users just see this as natural for them. They see this as a way to directly talk to and interact with the business, so it aligns their interest with the outcome.

What we do is reduce the scope – so we reduce the ‘nice things to have’ that people were asking for but weren’t value-added, and we focus on the things that are truly valued-added and get those to market fast.

FST. You mention a disconnect with older processes – have you stripped out those kind of processes completely now?

GB. Well, first you obviously try to tweak them and see if you can do things ad-hoc. But in most cases what we’ve had to do is create a set of processes that are conducive to an agile track. So we now have a few different tracks for enabling new solutions at Capital One. The first is a traditional, sequential, phased track. The second is a bespoke software or third-party application track. And the third one is agile. We’ve designed our methodology and processes around the fact that we’re going to have all three things going on. All three of them consider offshore work, third-party work with consultants, and our standards and security and all of those things. But they deal with them differently.

FST. So at the outset of a project you’d decide which track was most suitable and push different buttons within the business accordingly?

GB. Yes, and something might start as an agile or phased project, but it might have third-party software in it, so some of these things are mix and match – lots of the methodologies cross over. Our largest projects, the hundred million dollar ones that are at the top of the house, have to be driven fundamentally as phased projects. You might want to organize the oversight of the project as traditional, but then have hundreds of sub-projects, many of which might be agile. We’ve done that very effectively over the last year, so we know the two can mix very well.

FST. Talking of large projects, you’re in the process of acquiring two branch-based bank networks; Hibernia in the South, and North Fork in the New York region. What are your strategic priorities for this acquisition?

GB. The Capital One strategy is to take the idea of business that we started with and use it to reinvigorate the financial service offerings for consumers across the board. We see ourselves as a kind of ‘maverick’ in the financial services world, offering a different consumer promise and a different level of transparency – a different level of consumer advocacy, almost. That’s why we’re going into this diverse set of products. We’re diversifying the business into banking, different kind of lending products, mortgages and so on. But at the same time we’re diversifying the breadth of individuals to whom we’re able to offer products to – so new immigrants to the US who have no credit history, all the way through to platinum cardholders and high-end billionaires.

The end-game as we see it is national scale products, with local scale banking. In order to offer products with a national impact, you have to compete both in terms of conditions as well as price. So whether you’re offering CDs, mortgages or car-loans, the rates are set at a national level and you have to have scale in order to compete, and to lower your costs in order to be able to offer the right rates. On the other side, the fact that customers walk into branches because of familiarity, locality, ease-of-use and our moniker of being the ‘no-hassle’ player is something we believe we can capitalize on. We want to be able to have good coverage, perhaps not as ubiquitous as some other banks, but be known for being hassle-free, for being a transparent service – you know we’ll not only show you our products, but probably how we compete with others – and build on that service notion, combined with the fact that we can deliver national products.

FST. So will you be looking to keep the two brands with separate operating systems, or are you looking to integrate them into a new common operating system?

GB. We’ll be doing the latter – taking the best of both, and creating a Capital One infrastructure, a ‘Capital One bank’. In April we went live with the new brand for Hibernia, so Hibernia no longer exists; it’s now Capital One Bank. It went very successfully, partially because people saw Capital One’s commitment to Hibernia throughout Katrina. We saw it as a galvanizing point in the relationship and we really thought it was important to be there. And our strategy is to continue that and move the Capital One brand into the North East with New York as the primary market for North Fork.

On the other hand, we have a little bit of protectionism over the Capital One brand, so we will often hold onto the native brand when we buy something until we’ve had a chance to bring in our culture and technologies, and then when it makes sense we change that brand. So with North Fork we would expect to convert the brand in early 2008 – you’ve really got to give yourself a year to integrate something so large, so I would imagine we’ll be concentrating on the technology throughout 2007, and then change the brand after that. We usually do a quiet brand change too – so we’ll change it, and then run it for a month or so and make sure it works and the customers are happy, and then we’ll advertise it.

FST. And what about the technological and operational challenges of integrating two separate banks?

GB. Well, we close on North Fork in November, and it’s three times the size of Hibernia, and yes that brings some challenges because now we have two different banks with two different infrastructures. But we see that as an opportunity to get better; the integration will offer us the chance to choose best-of-breed systems from both of the two banks, forcing our business players to argue and resolve differences in approach and come up with new and better solutions for our customers – extending that national vision we’ve talked about, and basing it in those local markets. We’re very confident that this process is going well.

Hibernia is now almost entirely integrated already – a few weeks back we finalized the deposits and infrastructure migration and that went very well. We haven’t begun on North Fork because we haven’t closed yet, but we have a detailed playbook and a very exhaustive approach to this (because we’ve done it a number of times now) and I’m pretty confident that it will go fine.

FST. It sounds like an enormous challenge. How do you ensure that this doesn’t sap all the energy from your business and retain your agility?

GB. Well we do it in sequence, so we’ve pretty much finished on Hibernia. We did the brand conversion in April – with 12,000 brand touch-points to change. In fact, it was one of the most innovative brand changes that I’ve seen, because we changed the brands across many branches well in advance of the conversion date, but then we shrouded those changes – like the neon signs outside – in a cover that said Hibernia. So come the night of the brand changeover, all the branch managers had to do was get a couple of maintenance guys to remove the shroud, and pull out the new racks inside the store and so on. We really have a good set of plans around this. Even during Katrina we were opening new branches during the weeks following the hurricane. So that’s one thing – really planning and thinking through how we’ll do it en masse.

Another important point is that we use our technology as the enabler of our diversification strategy. IT is a significant component of our company strategy. We implement technologies that allow us to realize efficiencies and work smarter, and that really helps manage these types of projects.

We do large projects a lot here and we have a very large portfolio of big projects. The way we make sure they’re successful is that we make sure that they’re business projects. The business is deeply involved in every aspect of them, and they are managing the risk they’re worried about, and we’re working with them to eliminate those risks. So what we will do several times for North Fork before the final brand cutover is dress rehearsals and all sorts of tests. That gives choices to the business about what could be done differently. And that involvement of the business means that we know what line we’re drawing on the risk management and when it makes sense to go live. That’s key, it’s giving ownership back to the business.

FST. Finally, you’ve personally experienced some fairly extreme business situations – at Capital One through Hurricane Katrina, and prior to that you were CIO at Nasdaq on 9/11 and took the decision to close the market that day. What have these experiences taught you, and what has your biggest success been?

GB. The experience of 9/11 really taught me not to underestimate people’s passion and commitment, even in times of stress. I remember one time in particular when we had a bomb-scare in the main data center the night before the market was set to go live for the first time, nine days after 9/11. This was different to a bomb-scare at any other time; at that point you really didn’t know whether it was going to be real or not – after all, we had national guards in the parking lot. We had to put the question to our people: will you stay? We need you to stay, we don’t have a policy on this, and we know there’s a risk, but will you stay? And they did. That’s just one example, but there were dozens of examples of people going the extra mile.

In Katrina we had folks who literally stayed in the operations center while the hurricane was going on, after it had left, and then while the looting was going on. We had to helicopter them out. And then they came back to work two days later, having moved their families, to make sure everything got back up. It’s maybe a situation when you might see yourself saying, ‘Wow, I’m getting out of here and going to Montana’, but people don’t do that. One of the lessons I’ve learnt has been how people truly make it happen at the times when you think they might not. I’ve been blessed to work with great people who have always stood up to those challenges. I wouldn’t choose to go through another event like this, but if I have to, I’d want to be with those people.

If I look back on my career, I am most happy about the fact that people were developed, people got different roles, people were able to rise to challenges that they probably didn’t imagine would be in their future. And I feel great satisfaction in being a part of that.

I can remember setting up the Nasdaq command center in the Marriot Marquee [on 9/11], and I can remember every face that was in that room as they walked in covered in dust or whatever. These are the things that you remember. It’s not what was in that problem set on the all-nighter – you remember Andrew who did the problem set with you, or the box of Oreo cookies you shared, rather than the problem you solved or the miracles you achieved. You remember the people, and that’s why people are so important to an organization. And that’s the biggest lesson I’ve taken from my career to date.

The future of work

In its short history, Capital One has always based its approach to business on aggressively pushing the functionality of its technology. It is no surprise then that it has taken recent innovations in wireless technology, and rolled it out to many of its staff.

The ‘Future of Work’ program is the name for its roll-out of wireless technology to around 2500 of its knowledge workers – around one sixth of its workforce. The program equipped staff – or associates as Capital One call them – with wireless enabled laptops, VoIP software phones and portable printers to enable them to do work from anywhere within the company’s 24 buildings in the US and UK.

Each of the buildings has been set up with wireless access points, allowing associates to access the company’s work-flow applications through a web-portals. The programs ia about more than just technology though – the real-estate side of the business were also deeply involved in driving the program.

This involved re-configuring buildings to do away with traditional cubicles and desks, and instead build spaces that would not only support mobile workers, but also encourage a more collaborative approach to work.

Capital One’s buildings now look very different to a traditional office. Large red signs indicate mobile workspaces – available on a first-come, first-served basis. Green signs indicate rooms with videoconferencing facilities. Conference rooms contain couches and rocking chairs while ‘quiet’ rooms are set aside for work requiring intense concentration.

As Bailar explains in the adjacent interview, the idea behind the program was to align Capital One’s technology with the needs of the business, and encourage the fluid entrepreneurial working style that it wanted from its staff. Its been a great success at this, with productivity doubled in some cases, and associate job satisfaction showing significant increases.