Outsourcing Monitor                                                                            December  2002

Swiss Banks and Outsourcing

Switzerland is often comfortably thought of, as a land of chocolate and cheese surrounded by beautiful mountains like the Matterhorn. Swiss banks also suffer from a terribly over-stereotyped image, reducing them to a world of secret numbered accounts and vaults full of gold.

Reality is obviously very different, there is no typical "Swiss Bank". In fact, there are several distinctive types of banking institutions in Switzerland. 

It is interesting to analyze how outsourcing trends are hitting each group differently:

Cantonal or regional banks

These are retail banks, some are quite small, some are very large, they mainly depend on a local client base. The State (Cantons) are major shareholders in most cantonal banks and therefore client accounts enjoy the privilege of a State guarantee. There is very little competition between cantonal banks, each one operating in their own canton, a situation that even e-banking has not changed. 

Regional banks are small local institutions. In some parts of Switzerland they have almost disappeared, weakened by bad debt in the early 90's, they were swallowed up by local cantonal banks. In other parts they are still active, however their market share remains very small.

In 1976, three cantonal banks opted for external IT co-sourcing (a jointly owned service company). Since there are three major co-sourcing companies: AGI, RTC and UNICIBLE. These firms act as IT Infrastructure and ASP outsourcers.

Over the last 8 years, cantonal banks have increased their credit market share. More recently, provision for bad debt and the falling stock exchange have put them under cost pressure. Plans to drop costs by pooling back-office operations have been revived. The three existing outsourcing firms are ideally placed to take on these operations for their clients, however they could be undersized to take on all types of operations and may loose some business to larger Bank's in-sourcing ventures.

Global Banks

There used to be the three large banks: Crédit Suisse (CS), Swiss banking Corporation (Bank Verein) and Union Bank of Switzerland (UBS). 

In 1998, SBC and UBS merged under the name UBS. CS and UBS are global players, they outsource IT Infrastructure (Desktop, helpdesk, .). As many global banks, through shared services, they are now moving into in-sourcing specific business processes (see UBS Warburg below).

These banks provide all necessary banking facilities to their clients, private, retail, trading etc. They have volume and are under heavy competition from other large global players: they are on the move ...

Private Banks

Traditionally, a private bank is built upon the wealth of one or several families. Their personal wealth is a guarantee for investors and there is no limit to their liability. Therefore they are cautious, most of the wealthiest people in the world are their clients. They are located in the big cities in Switzerland, mainly in Geneva.

With a few exceptions (see article on Banque Edouard Constant), by habit, Private Banks do not outsource. However, seeing that they are very active in asset management, the high cost of straight through processing systems is making it more and more expensive for them to stay on their own (see article on UBS Warburg). At last, there is interest in BPO from Private Banks, however, caution remains a maxim.

Foreign Banks

In order to offer to their private clients the advantages of Swiss banking, many large European or US banks have set up subsidiaries in Switzerland. These are not branches, but Swiss banks bearing the name of their mother company. They operate in a very similar way to locally owned private banks and are not inclined to outsource. Cost pressure will bring BPO into this group of banks as it does for private banks. 

In addition, when the mother bank backhome signs a global outsourcing deal, it's subsidiary in Switzerland may have to comply. 

Trends

In the past, there was little collaboration within the Swiss banking landscape. Cost pressure, increased globalization, expensive technology and a major decrease in income, will all help to break down barriers and position "best of breed" players as service providers to other Banks. Traditional co-sourcing companies may merge or be acquired as critical mass becomes more and more important.

Outsourcing foreign exchange transactions : 

The UBS Warburg success story

In 1998, two of the three major Swiss banks, Union Bank of Switzerland (UBS) and Swiss Bank Corporation (SBC) decided to merge under the name UBS. At the time, most onlookers were skeptical. Many analysts were worried that culture clashes would weigh down the merger process and counterbalance it's positive effects.

Fours years later, UBS has published excellent results, especially when compared to other global banks. If Business Process Outsourcing is to be one of the keys to the future of banking then UBS must have experienced it.

We found out that they have done so and the results are quite impressive.

The road to Business Process Outsourcing (BPO)

In 1992, SBC ran 18 foreign exchange (FX) trading centers in Switzerland alone. Electronic trading infrastructure became widespread and new opportunities appeared. Two years later, SBC had managed to drop the number of trading centers from 18 to 1, doubling profitability by optimizing the organization and processes.

The next step was to streamline FX operations and build up a global competency center. UBS Warburg was positionned to provide FX coverage to other business groups of UBS AG. UBS Warburg supplied internal divisions with FX liquidity on an account-to-account basis and taking on the position risk for them.

 This paved the way to UBS Warburg becoming a major FX Business Process Outsourcing (BPO) supplier.

 However, as we have seen with the recent Procter and Gamble attempt, it takes several other factors to trigger off a successful Business Process Outsourcing move.

When size really counts .

As a Bank director once said to us when discussing outsourced back office operations:

"Why should I outsource or pool an activity that is mainly based on unit costs ?".

In other words, if doubling volume then doubles the cost, where are the savings ? Good point, however, in the case of Foreign Exchange, there is more to it than unit costs:  

 Ø      Size really matters.

To gain access to the FX market and remain competitive, one must be a major player. 50 % of the FX market is split up between less than 10 Banks. The other half is fragmented between thousands of players. In less than 2 years, UBS Warburg has leaped from a 5 to a 11 % FX market share.

FX is now a commodity like energy, only price counts and in order to be able to lower costs, increasing volume is important. In the current downturn, as cost pressure increases in the banking sector, concentration will continue, and soon there will only be 4 or 5 global FX players left.  

Ø      Straight through processing (STP)

In order to decrease operational risk, various projects or systems have been, or are being, introduced. They all aim at speeding up and securing settlement. Fixed costs of introducing STP are high and are dividing the banking world into two groups:

o      large players who have introduced STP alone and may try to sell their service to others

o      smaller or niche players who will buy an STP service

The UBS Warburg FX BPO Offer

UBS Warburg offers a broad range of products and services. It acts as a production and processing factory to UBS AG internal business groups and external clients. In the Foreign Exchange area UBS Warburg delivers to Banks, Institutions and corporations:

• Decision Support:         

High quality research, technical and quantititive analysis to support currency views, market insights from the dealing floor.

• Execution:                    

UBS Warburg allow their clients have immediate access to transparent live prices and deal execution 24 hours / 5 days per week with minimal effort.

• STP solutions:

The possibility for Banks to integrate processes and reduce the operational risk and to outsource the market risk to UBS Warburg.

Traditional Banks are still producing a product over the whole value chain, like industrial companies at the beginning of the 20th century. New technologies in the e-commerce environment allow now to break up the value chain. UBS Warburg clients have started to analyse the costs and service levels along the chain and to consider to outsource components, which they can get from wholesalers at lower costs or better service levels.

External clients access the UBS Warburg infrastructure either via web technology or through fully integrated processes.

Private banking: a very recent change in mind set

Until the recent downturn, Banks used stock exchange gains to "subsidize" operational costs. In September 2001, the world of private banking showed little interest in BPO solutions such as UBS Warburg FX services.

This Spring, when it became obvious that the second half of the year would not mark the end of the downturn, many private bankers started looking seriously into BPO solutions.

Currently, there is a lot of interest in the UBS Warburg solution. UBS Warburg have already a substantial two digit figure of external clients, among them are St Gallen Kantonbank and Maerki Baumann & Co.AG, a Zürich based private Bank.  Jack Hertach, a Maerki Baumann board member, states that by using the UBS Warburg FX solution his Bank has reduced FX operations costs by a factor of 50 %.

As the magazine Schweizer Bank stated recently:

"What used to be a futuristic vision is now reality: The value chain in banking has started to break up".

Over the next ten years, the world of banking could very well go through a transformation similar to that of the Pharmaceutical industry in the 90's. If so, at each critical link of  the value chain, only a few global actors will be present and what is already the case for FX will then emerge for all of the other links.

The Banque Edouard Constant - EDS deal

If caution has always been valued by Bankers, Swiss bankers have made it their trademark. Inside the world of Swiss banking, there is a group or even more secret and cautious establishments: Private Banks. Build upon, and guaranteed by the wealth of a particular family, Private Banks are however very Technology-wise and they tend to "in source" a lot of their IT.  

In many cases, as far as IT is concerned, what a Private Bank has not bought, is what it does not want ...

Therefore when a Swiss Private Bank opts for a full IT outsourcing with a US company, it's well worth taking a closer look.  

The Banque Edouard Constant (BEC) is a Swiss Private Bank, based in Geneva and named in memory of the founder of the Sandoz pharmaceutical group presently called Novartis.

Banque Edouard Constant's major activity is wealth management for private and institutional clients. BEC also offers all of their services to external asset managers. The "Sandoz Family Foundation", is the sole shareholder of Banque Edouard Constant.

In 1997, BEC was running a 20 year old, relatively inconsistent legacy system based on MVS. Operational costs were relatively high and short term challenges such as the Euro and Year 2000 had to be met. As Yves Cornu, current CIO at BEC states "At the time, the risks were too high to continue on our own, we needed to spread them using outside manpower and know-how"

Therefore main driver behind the decision to outsource was decreasing operational risk by partnering with a solid player : EDS was selected in 1998.

All IT related activities and the traditional organization function were transferred to EDS. Personnel were transferred to EDS with a guaranteed employment.

The contract was signed for a period of 7 years. Minimum technical documentation was produced by EDS during the Due Diligence phase of negotiations. At the time, the BEC-EDS deal also aimed at creating a banking competency center in Geneva. Given the high market potential on the banking world, this was obviously an attractive idea for EDS.

Internal governance was initially run by one BEC employee in charge of collecting bills and other administrative functions. This must have changed, so I challenged Mr Cornu with this strangely low figure, he commented "Internal governance has grown especially as far as the traditional organization  function, we now have 3 or 4 employees inside the bank managing the relationship" In the year 2000, BEC actually created an internal IT department to improve the required coordination and control.

Before the year 2000 most effort was put on making the legacy system Y2K compliant. In February 2000 a new project involving the implementation of a package was launched with a very ambitious timeframe. BEC considered that a package was a valid option given the fact that most of their procedures were standard. The Globus banking package edited by Temenos was chosen, EDS are naturally managing the implementation work.

After 4 years, Mr Cornu sketched an objective and fair picture.  

•  Costs: 

"We did not decrease operational costs, but" added Yves Cornu "you must be careful, our IT in 2002 has many extra features and cannot be compared to our 1997 system". 

• Service level:

Service is good. Statements of Work have been drawn up, but no formal SLA's have been signed. "They are doing well and we have no major operational grievances"

• Year 200 and Euro:

"All went well, it was our main objective when outsourcing and we reached it in a sound way"

 

• New developments:

"Yes we are running late, mistakes were made" admits Mr Cornu.

• The banking competency center:

"It just never happened ." added Mr Cornu.

I challenged Mr Cornu with ideas about BPO or further outsourcing ventures. "BPO" he answered "requires a well defined separation between back and front office, in our business it's not really the case". Quite clearly, BEC has no plans to move towards BPO.

A lot has been said about the BEC-EDS deal. Our impression is that it may be the demonstration that outsourcing does not remove all IT related decisions or problems. The less IT that is run internally, the better one must be at managing it.

In our view, the build up of an internal IT department inside BEC is not a swing back against outsourcing, quite the contrary. Documentation issues are now a hot topics and are clearly being managed.

The step towards outsourcing was a wise one considering short term challenges. It could even be a better one if BEC can continue to use it as an opportunity to improve internal IT governance.

Procter and Gamble split up the mega-deal

The troubled times that outsourcers are going through seem to have put rest to the mega BPO bid issued by P&G this Summer.

 Reality check

 IBM have announced good figures and, after having bought PWC, they have now swallowed up Rational Software. 

However, IBM Global services remains an expectation, most outsourcers are not immune to the downturn, quite to the contrary. Getronics and EDS have made the headline news, but others are not doing well. Conventional wisdom says that outsourcing revenues are guaranteed and recurrent, but discretionary spending accounts for 10 to 25 % of outsourcing expenses.

 Spread risks

 P&G has now decided to divide the bid into multiple parts that will be given to several suppliers. Just how BPO can be compatible with multiple suppliers is anyone's guess. We reckon that there are two ways left to slice it up:

Our opinion

Outsourcing implies transfer of responsibility. There is no gray area, either the supplier is in charge of operations or he/she is not.

Currently the risk of transferring all back-office operations to an outsourcer is higher than it was a year ago. Even when using a consortium setup, the size of the P&G BPO project cuts down the list of bidders to a handful. Hence, in our opinion, the risk will not drop substantially. 

As we saw in the UBS Warburg case, size can really matter and, in some cases, not outsourcing can also be a high risk. Quite clearly, if P&G pursue their BPO move, then it must mean that risks incurred by not moving are very high. 

Events in 2003

January

• BCS COMPUTER SHOW 2003, January12-18 2003, BCFCC Center, Dhaka, Bangladesh

• 2nd Annual Risks, Rewards & Trade-Offs of Offshore Outsourcing, January 16 - 17, 2003 - Westin St. Francis Hotel (Union Square) - San Francisco, CA

• Outsourcing von FM-Dienstleistungen,  21 Januar 2003, Holiday Inn
  München (in German)

• OutsourceWorld New York 2003, 21-22 January 2003, The Show Piers, New York

• Outsourcing Employee Benefits & HR Functions, January 21 - 23, 2003·   Las Vegas, NV

• Contact Centre Outsourcing 2003 One Day Conference
  January 27, 2003, Dubai, UAE

• Outsourcing Solutions for Business Processes in the Financial Sector, January 27-28, 2003, Mayfair Conference Centre, London

• Outsourcing Finance & Accounting Functions and Processes, January 28 - 29, 2003  New Orleans, LA

February

• Strategic Outsourcing, leveraging External Services To Focus On Core Competencies
  two day course, February 11 - 12, 2003, Toronto, Canada

• The HR Outsourcing Summit, Crowne Plaza Manhattan, New York, Feb 13, 2003 - Feb 14, 2003

• The IT Outsourcing and Subcon Exhibition, February 13 to 15, 2003 at the World Trade Center Metro Manila.

• Developing, negotiating and managing outsourcing contracts, 14 February and 7 October 2003, Harrington Hall, London 

• The 2003 Outsourcing World Summit, February 24-26, Desert Springs Marriott, Palm Desert, California

• Offshoring Business Processes: Shared Services BPO in Low Cost Locations, February 25 - 26, 2003·   The Café Royal, London

• Softworld HR & Payroll 2003, 26-27 Febraury 2003, London
  

March

• 8th Annual Best Practices in Retail Financial Services Symposium.Hyatt Regency Coconut Point Resort & Spa, Bonita Springs, FL, March 2-4, 2003

• CFO Financial Outsourcing Conference & Expo, Palmer House Hilton in Chicago, Illinois, March 4-6 2003

• Outsourcing in Telecoms, 24th - 26th March 2003, Venue: Brussels Marriott Belgium

• Business Process Outsourcing Focusing on Your Core Business by Outsourcing Mission Critical Activities March 19 - 20, 2003·   Sydney, NSW, Australia

• The 2nd Annual Healthcare Outsourcing Congress, March 31 - April 1, 2003 Las Vegas, Nevada
  

April

• IT Services for the 21st Century - Winning strategies in Business Process Outsourcing, April 2 2003, RSA, London

• Outsourcing for Financial Services III,9th to 10th April 2003, The Hatton, London

• The 2003 China-America Outsourcing Business Development Summit, April 11-13, 2003
  China World Hotel, Beijing, China

• Nearshore and Offshore Outsourcing Conference, Chicago, April 2003

• EuropeServicing 2003, Spring 2003. London, email for more details

May

• CIO Forum on board The Adonia from May 4-7, 2003, New York City Harbour

• Gateway2Outsourcing, May 12, 2003 - May 13, 2003, Stampede Park, Calgary, CA

• ACORD Annual Conference 2003, Walt Disney World Dolphin, Orlando, Florida 
  May 18-20, 2002 (Insurance and Financial services)

June

• The 2003 European Outsourcing Summit, June 2-3, 2003, The Sheraton Brussels Hotel & Towers, Brussels, Belgium

• Outsourcing für Privat Banken, 24 June 2003, Hotel Widder Zürich

• IT Outsourcing Conference
  Wednesday, June 18, 2003 - Thursday, June 19, 2003, Boston, MA

• Gartner Outsourcing Summit, 23-25 June 2003, Century Plaza Hotel & Spa
  Los Angeles, CA

• Software Outsurcing Summit, Shuvalov palace, 25-29 June 2003, St Petersburg, Russia

• Outsourcing: When Is It Time? Wednesday, June 26, at PC Expo, New York

September

• Nearshore and Offshore Outsourcing Conference, New York, September 200

October

• The retail Forum, cruise on board the ORIANA, Southhampton, 8-11 october 2003

• Catalyst Europe 2003, Hotel Rey Juan Carlos, Barcelona, Spain,October 7-9, 2003
  

November

• Nearshore and Offshore Outsourcing Conference,  San Francisco, November 2003
  

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