KB Bank’s Internal Conflict
IBM Korea’s offered prices for a mainframe operating system to Kookmin Bank CEO Lee Kun-ho are a reportedly temporary offer applicable until June 30, which is nearly impossible to review. Mainframe prices are the main reason for discord within KB Financial Group surrounding the replacement of its computer system. The backlash against the issue is expected, because Kookmin Bank (KB) is going to hold a board meeting on June 23 to discuss whether or not to report IBM Korea to the Korea Fair Trade Commission (FTC).
According to sources in the financial industry on June 22, IBM Korea head Shirley Yu-Tsui reportedly sent an e-mail to KB CEO in April, specifying that her company will offer special prices before June 30.
Sources in the IT sector say that IBM Korea suggested more than 200 billion won (US$196 million) last year while discussing a contract extension with KB for a mainframe operating system. At that time, the nation's largest lender decided to change its system to Unix. However, IBM Korea proposed a mainframe deal worth 150 billion won (US$147 million) via e-mail to CEO Lee in mid-April. Since Mr. Lee and Audit Committee member Jung Byung-ki are calling for review, they are at odds with the board of directors over the issue.
The problem is that IBM Korea’s special price offer is only valid until June 30. Industry experts are saying that the server vendor made an improbable proposal in the first place. An official in an IT service company remarked, “A big project like this usually takes one to two months to select a business operator after a request for proposal (RFP) is written. So, it is virtually impossible to review the project in two and a half months.” In fact, it took one month for the bank to solicit a business proposal for the switch from their existing one to Unix servers and to announce another bidding process between April 30 and May 29.
Another industry source said, “It will probably take six months to review and implement the processing applications project, because the project first needs to be discussed by the related departments. It is also necessary to review prices and conduct benchmarking tests. In addition, the issue should be discussed by the management and the board of directors. Finally, the bank ought to issue a RFP and choose a business operator.” The source added, “But the whole process might take just two and a half months if KB already chose IBM and intended to sign a contract extension with the company.”
Experts point out that the e-mail that was sent by IBM Korea head to the KB CEO and an auditor’s report should be revealed to clarify suspicions.
The IT industry believes that IBM Korea will suggest higher prices when renegotiating with the lender after June 30. KB has temporarily suspended the project, waiting for the decision of the Financial Supervisory Service (FSS) scheduled on June 26. If the bank cannot renew the contract within four days after June 26, it has to sign a contract extension with the server vendor with IBM’s suggested prices.
Some in the industry think that IBM Korea has been deliberately stalling for time. Last April, IT service companies asked IBM, HP, and Oracle to give estimated prices for Unix servers to participate in the project. But IBM failed to submit its estimate and demanded more time. Hence, suspicions have arisen over whether or not IBM’s slow response caused the IT service companies’ delayed price assessments, and ultimately a project delay, for approximately two weeks. April is the month when the e-mail was sent from the head of IBM Korea to her KB counterpart.
In the end, a special board meeting related to the replacement of KB’s computer systems is scheduled to be held on June 23 at the request of non-executive directors. They are said to have proposed a measure to report IBM Korea to the country’s anti-trust regulator, citing interference with the bank’s attempt to switch from their existing computing system to a Unix system by abusing its dominant position in the market. Nonetheless, the success or failure of the measure is unclear, since the management of the bank is more likely to oppose the plan.
However, if the board of directors decides to report IBM Korea to the FTC, a backlash against the decision is expected. Then, Mr. Lee and Jung will be inevitably blamed for the fact that they were dragged into IBM’s strategy. A source in the financial industry pointed out, “If it was difficult to review IBM’s offer due to limited time, the management should’ve dismissed the unrealistic offer or requested an extension of time by more than six months.”
If the FTC reaches the conclusion that IBM’s move is problematic, the FSS will be in an awkward situation. Likewise, in the event that FSS sanctions against related people imposed by its Deliberation Commission on June 26 are different from FTC’s decision, it may also ignite controversy.