UBS Newsletter for Banks and Financial Institutions I / 2005

News for Banks

2 Research 6 Focus Business 9 Focus Business 10 Round Table 14 In Brief
The transformation of The Reference Bank Clear, informed Multi-dimensional SWIFTNet: a critical
the banking landscape Model decision-making decision-making assessment

Point of view

What makes a bank

Marten Sybren Hoekstra
Member of the Group Managing Board
Head Market Strategy & Development
UBS Wealth Management & Business Banking
a “bank” ?
UBS got to the bottom of this question ners are speaking the same language by
while analyzing an important client bank. clearly defining every term. The model
What came out of the study is the Ref- cannot, of course, judge whether it
erence Bank Model described on page 6. makes sense to sell a specific business
This model provides a general overview area, or whether doing so will be a huge
of the functions, products and services success. The four participants in the
that a bank must have and offer to clients round table (page 10) addressed this
in order to be perceived as competent question in their final thesis for their Ex-
and to be legally classified as a bank. ecutive Master of Business Engineering
programme. They developed a model
The Reference Bank Model might also that highlights the critical points and
help any bank gain a clearer picture renders the decision-making processes
of its business model and strategy. As involved in a potential outsourcing proj-
Henner Schierenbeck, Professor for Bank ect more transparent.
Management & Controlling at the Uni-
versity of Basel points out in his article From a shareholder value point of view,
on page 2, banks worldwide sometimes a bank has two critical long-term assets
feel pressure to consolidate. To succeed, which drive profits: client relationships
banks have to concentrate on strengths and a brand which can help generate
and core competencies and keep costs new client relationships. These two as-
under strict control. Consequently, they sets cannot be outsourced. Depending
have to consider which areas of their on a bank’s strategy, most other func-
operations they need and want to cover tions can be partially or completely out-
and which areas they can outsource or sourced.
sell. The model serves to help banks
structure and document their functions The Reference Bank Model to outsourc-
and processes as well. ing is usually not one of strategy or
function. It is usually internal debate. We
Lastly, the Reference Bank Model demon- believe that the Reference Bank Model
strates where and how activities can is an outstanding tool to help any bank’s

Ab be outsourced. It also ensures that both management team tackle these issues.
a bank, and potential outsourcing part- We hope you, too, find it valuable.
Research
The transformation of the banking
landscape
A wave of consolidations For some years now, the banking sector
worldwide has been undergoing con-
is sweeping across the solidation on a major scale, leading to
banking industry, massive structural change. Consolidation
is generally understood to mean a pro-
leaving a verydifferent cess of increasing market concentration
landscape in its wake. as a result of mergers and takeovers,
whereby the historical fragmentation in
Cross-border mergers many sectors of the banking market is
are a likely prospect in reduced or eliminated altogether. As a
result of this process, the number of
Europe. In asset and banks in the six leading industrialized
nations – the USA, Japan, Germany, the
wealth management and UK, France and Italy – nearly halved,
in retail banking, too, on average, between 1990 and 2002.
And in terms of their total assets the 50
the pressure looks set biggest banks worldwide also saw their
to continue. share increase from 45% in 1995 to 55%
in 2002 (see Figure 1).
Likewise, the group of small and
medium-sized banks in Europe has also
undergone consolidation. This segment
is dominated by public-sector (savings)
banks and co-operative banking organi-
zations. Given the nature of the public-
sector and co-operative structures in
question, takeovers or mergers between
this segment and the private sector are
a virtual impossibility. As such, cross-
sector mergers can only take place if
both legislators and the associations
concerned are ready to abandon these
Figure 1: The global concentration process
Top 1000 banks’ assets in USD billion
45
45%
40
35
30 55%
25
25%
20
15
21% Top 10
12%
10
Next 10
5 10% 18% Next 30
14%
0 Remaining 950
1995 2002 Source: The Banker
The top 50 banks have increased their total market share by ten percent over the past seven
years through mergers.
2 UBS News for Banks I / 2005
legal structures. How far advanced this
process is, differs from one part of
Europe to another. Where things have
yet to open up, mergers have taken
place within sectors. As such, the num-
ber of independent financial institutions
fell significantly between 1998 and June
2004 and the process is still ongoing
(see Figure 2).
Given the limited num-
ber of potential merger
candidates and active
players in Europe, the
first movers with the
best strategy will be at
a distinct advantage.
The driving forces behind
consolidation
When searching for the causes of con-
solidation, one factor that stands out is
the growing trend towards industriali-
zation in the banking industry. There are
various reasons for this: the impact of
modern information technology, with-
out which many activities would simply
not be possible, the growing pressure
on margins in almost every segment of
the banking business, the deluge of
banking regulations with their negative
implications, the relentless pressure for
innovation and the ever-higher levels of
expertise required to stay competitive
in today’s banking industry, to name but
a few.
Then there is the sharper focus by mod-
ern bank managements on value and
the capital markets, which is undoubt-
edly one of the key elements driving the
consolidation process. As a result of this,
a bank’s rating becomes a more impor-
tant measure of success as reflected in
its funding costs as well as market stand-
ing and customer business in general.
Another reason is the increasing pres-
sure for banks to live up to investor
expectations. In particular, this means
that market capitalization and the struc-
tural return on shareholders’ equity
 Research

become vital criteria for success, that Figure 3: Consolidation pressure on two fronts
banks must earn the cost of their capital
and that they must consistently apply Growing pressure
the principles of return-based capital on margins
allocation when deciding which busi- Growing pressure
nesses to operate in. These two trends to rationalize Industrialization
Deluge of banking of the banking
are the primary forces determining the industry...
regulations
direction and momentum of the restruc- High investment
turing process in the banking sector requirement
(see Figure 3). Ever-greater exper-
tise required/pres-
sure for innovation and ... as the driving
An overview of the European
force for
banking landscape consolidation
Decline in state Increasing
In order to ascertain the strength of the guarantees and importance of
pressure to consolidate within a given subsidies bank ratings
banking system, we can study both Bank strategies
geared to value
market structure data and profitability and capital
Banks’ increasing Banks increasingly
indicators based on data for the period dependence on focused on inves- markets ...
1992 to 2001. In this instance, the capital markets tor expectations
structural data include bank concentra-
tion figures, the G5 coefficient (i.e. the Industrialization, together with the banks’ sharper strategic focus on value and capital
aggregate market share of the five markets, is driving consolidation.
biggest institutions), the bank density
ratio per million inhabitants, the density
of the branch network (number of ing industry is Germany. Here, the five ket, with 103 banks per million inhabi-
branches for every 10,000 inhabitants) biggest banks have a combined market tants. At the other end of the spectrum
and the average number of branches per share (in terms of total assets) of just is the UK (8), which has managed to
bank. It is important to note that – for 20%. Top of the table are the Scandina- slash the number of banks drastically.
systemic reasons – the G5 coefficient will vian countries, with G5 values in excess
be higher for smaller countries although of 77%. The main reason for this high
the absolute figures for the banks in level of consolidation is the serious Industrialization and the
question will tend to be lower. There banking crisis of the early 1990s. sharper focus by modern
will also be country-specific anomalies.
The bank density ratio also varies from bank managements on
At the bottom of the league table when
it comes to concentration in the bank-
country to country. Front-runner here is
the clearly “overbanked” Austrian mar-
value and the capital
markets are the primary
Figure 2: Consolidation among small and medium-sized banks
forces determining the
direction and momen-
Number
2,256
● Credit co-operative in Germany
◆ Savings banks in Germany tum of the restructuring
2,500 ● 2,035
n Regional banks and savings banks in Switzerland process in the banking
1,792
industry.
2,100 ●
● 1,619
1,700 1,489
● 1,393 1,378
●
1,300 ● ●
594
As far as the density of the branch
–39%
578 network is concerned, the mid-range
600 ◆ 562
◆ ◆ 537
520 values are much closer together. Ex-
550 ◆ ◆ 491 486 tremes are shown with the UK, Sweden
500 ◆ ◆ and Finland with between 2.1 and 2.4
450 –18%
108 106
branches per 10,000 inhabitants and
103 Spain with 9.5. These major disparities
110 n n n 94
100 88 can be attributed to strategic differences
n 83
90 n n –36%
in the distribution systems of the various
80 69
70 n countries, but – in this case – have no
60 real impact on efficiency.
1998 1999 200 2001 2002 2003 June 2004
Source: zeb/rolfes.schierenbeck.associates
Finally, the average number of branches
Due to current legal strictures, mergers among small and medium-sized banks have tended to per bank is a further key structural in-
occur within the same sector. dicator. Here, Finland (3) and Austria (5)

UBS News for Banks I / 2005 3

Research

have extremely low values indeed. This
is due to the prevalence of savings banks
and co-operative banks in particular. At
the other end of the spectrum is Spain,
with almost ten times more branches per
bank than Germany (15), for instance.
If one compares the country-specific
structural data, certain clusters emerge.
With the exception of certain ambigui-
ties, we can identify three distinct groups.
In the first group we find Switzerland,
Denmark and Sweden. The second
group is made up of the UK, Belgium
and the Netherlands, Finland and
France. The third and final group com-
prises Spain, Italy, Germany and Austria.
Successful banking
systems tend to exhibit
a relatively low bank
density, a high number
of branches per bank
and a relatively high
degree of concentration
(G5). And vice versa.
In addition to structural data, banks’ per- itable bancassurance companies. Spain,
formance indicators are also analyzed
on a country-by-country basis. The crite- relatively high market concentration and
ria used for comparison purposes are
profitability, measured by return on
Figure 4: Regional differences in consolidation pressure
assets and the cost/income ratio, and
market capitalization, as expressed by
the price-to-book ratio. As in the case
of the structural data, distinct clusters
can be identified, which can again be
divided into three groups. In group 1
we find Switzerland, Spain and the UK.
Group 2 is made up of Denmark,
Sweden, Belgium, the Netherlands,
Germany and Italy. Group 3 comprises
France, Finland and Austria.
On this basis, we can state that success-
ful banking systems are characterized by
above-average profitability, as measured
in terms of return on assets, a high
cost/income ratio and high market capi-
talization in terms of price-to-book ratio.
When it comes to attempting to link the
performance indicators with the market
structure data, it is important to be
aware that there can be no simple,
monocausal explanations. There is sim-
ply too much divergence in the strate-
gies pursued by the various European
banks in their respective business seg-
ments and the “perceived psychological
stress” in the event of poor perfor-
mance. There are examples of extremely
successful specialist and full-service
banks in Europe, as well as highly prof-
in particular, is convincing proof that a
intense competition need not be mutu-
ally incompatible. Here, oligopolistic
low
structures actually encourage competi-
tion and, at the same time, have a posi-
tive impact on banks’ performance.
With this proviso, the following rule
applies: successful banking systems tend
to exhibit a relatively low bank density, a
high number of branches per bank and
a relatively high degree of concentration
(G5). And vice versa.
On the other hand, the density of the
branch network per se is apparently
only of minor importance. In other
words, it gives more of an indication of
how well the population is provided
with financial services than the degree
of consolidation of the banking market
(see Figure 4).
Cross-border mergers
Outside of the “bulge bracket” seg-
ment, too, the consolidation of the big
banks looks set to continue apace. In
other words, in the European big bank
sector – now that the opportunities for
consolidation at the national level have
been exhausted in many places – we are
likely to see a growing trend towards
cross-border mergers and thus the
emergence of pan-European banks.
Such a development looks probable for
a number of reasons. Firstly, this is the
only way to achieve any kind of a coun-
terbalance to the might of the big
American banks such as Citigroup in
particular. The EU – with its regulatory
framework geared to integration, partic-
ularly in relation to the financial services
market, its common currency in the form

ES CH of the euro and its standardized banking

CH DK
Group 1

Group 1

UK SE
regulations (Basel II Accord) – looks set
to dismantle the barriers to cross-border
mergers. Running counter to this is the
strong desire in certain European coun-
Performance Structural
Consolidation pressure

indicators: indicators: tries – such as Germany or France – to

DK UK build up or preserve their own “national
• Ø Return on SE BE/NL • G5 coefficient champions” in the banking sector, but
Group 2

Group 2

assets BE/NL FI • Bank density

• Ø Cost / income • No. of branches
this can be neutralized through Euro-
DE FR
ratio IT per institution pean holding structures. Last but not
• Ø Price-to-book • Density of the least, there is no doubt that the Euro-
ratio branch network pean banking industry still lags a long
way behind other sectors in terms of the
FR ES
FI DE degree of market concentration.
Group 3

Group 3

AT IT
AT Given the limited number of potential
high

takeover/merger candidates and active

players in Europe – no more than about
Linking the performance indicators for banks in individual countries with the corresponding 30 institutions in total – the first movers
structural indicators reveals which regions will be exposed to the greatest cost pressure. will be at a distinct strategic advantage.

4 UBS News for Banks I / 2005

 Research

At the same time, those first movers will will be greatest in the two key strategic
increase the consolidation pressure on areas of retail & commercial banking and
other banks (see Figure 5). wealth & asset management (private
banking). Of late, there has been a
If a retail bank is to growing consensus of opinion that retail
banking is in a position to generate re-
to increase a company’s market share
and the number of potential customers
in its particular businesses, they can also
optimize the earning potential of these
businesses.

succeed, it must have an spectable, stable margins provided that In asset management – which is often
the business is run properly and with a an integral part of wealth management
outstanding sales cul- sizeable customer base. Combining pri- – many banks and insurance companies
ture, a strong distribu- vate clients and (medium-sized) corpo- massively increased their capacity during
rate clients in an integrated business the boom period in order to benefit from
tion model, rigorous cost model can also be an additional contrib- the expected growth in the industry. In
control and highly so- utor to success. But above all, if a retail
bank is to succeed, it must have an out-
the meantime, they have had to lower
their expectations considerably. Accord-
phisticated risk manage- standing sales culture, a strong distribu- ing to a study by Oliver, Wyman & Co.
ment procedures. tion model, rigorous cost control – with
intense exploitation of economies of
the volume of assets under manage-
ment in Europe will only grow by 7.4%
scale in processing and transaction- per annum up to 2006 compared with
Strong pressure to consolidate based operations, in particular – and 20% in the 1990s. At the same time,
There may be immense pressure to con- highly sophisticated risk management annual earnings growth is set to halve
solidate, but not all banks or business procedures. Moreover, the greater its to just 7%.
areas will be affected in the same way. market clout and the larger its customer
Looking at the various banks and the re- base, the better placed a bank is to Much like traditional on-balance-sheet
spective core businesses individually, one boost its earning potential still further. business, the asset management and
can say that the pressure to consolidate Thus, to the extent that mergers serve private banking markets are highly frag-
mented. With more than a thousand ri-
val players in the field, the five biggest
Figure 5: Prospective merger candidates asset managers in the European bank-
ing scene have a total market share of
Market capitalization in EUR billion, as of July 31, 2004 just 16.5%. In private banking, the top
five global players account for a mere
Commerzbank 8.490 6.5% of the assets of high net worth
Hypo-Vereinsbank 9.842 individuals. As such, we can also expect
Svenska Handelsbank 10.059 to see a massive process of consolidation
Banco Popular Español 10.173 in both these businesses in the future.
Abbey National 12.632
Danske Bank 12.681 Henner Schierenbeck
San Paolo IMI 13.764 Professor at the Department of Bank Management
KBC Group 14.575 & Controlling, Institute of Economics,
Dexia 15.768 University of Basel
Standard Chartered 15.888 henner.schierenbeck@unibas.ch
Nordea 16.491
Gruppo Intesa 18.220
Fortis 23.264
Bibliography
Unicredito Italiano 25.053
ABN Amro 28.638 KPMG: “Hungry for more? Acquisition appetite
and strategy in the global private banking and
Crédit Agricole 28.881 wealth management industry”, Zurich, 2004.
Société Générale 30.257 Krabichler, T. / Krauss, I.: Konsolidierung im
Deutsche Bank 31.282 europäischen Bankenmarkt, Regensburg, 2003.
Credit Suisse 31.864 Lahusen, R.: “Bankenerfolg in Europa:
Lloyds TSB 34.842 Grosse Fortschritte durch Konsolidierung – mit
Ausnahme Deutschlands”, in: EU-Monitor,
BBVA 37.503
Frankfurt am Main, 2004.
Grupo Santander 37.670
Oliver, Wyman & Co./ UBS: “The Future of Asset
HBOS 41.839 Management in Europe”, September 2002.
BNP Paribas 42.802 The 2004 Global 500 annual ranking of the
Barclays 44.751 world’s largest corporations, in: Fortune, Vol.
UBS 65.785 150, pp. F16 – F22.
Royal Bank of Scotland 73.261 Paul, S.: “Zwingt das Internet-Zeitalter Banken
zu internationalen Fusionen?”, in:
HSBC 135.107
Internationalisierungsstrategien von Kredit-
Source: Datastream
instituten, Stuttgart, 2002.
There are 28 banks which are candidates for a pan-European merger.

UBS News for Banks I / 2005 5

Focus Business

The Reference Bank Model

As an aid in the optimi- solutions are absorbing more and more also helps to facilitate understanding
zation process, UBS between a bank considering out-
resources, competition and falling mar-
sourcing and its prospective solution
gins demand efficiency and cost control.
has developed a generic providers. A corresponding glossary
model that replicates Rather than succumbing to the pressure ensures that both parties to any out-
to consolidate and going down the sourcing arrangement are speaking the
the value chains of a merger route, many banks are opting to same language when it comes to the
outsource parts of their value chain to functions and processes concerned. The
range of different banks. professional, experienced partner organi- Reference Bank Model is the result of a
The Reference Bank zations – the rationale behind this being collaborative venture with a Swiss
that another bank can carry out the private bank that contacted UBS to dis-
Model is a useful tool processes in question more cost-effec- cuss the possibility of outsourcing ele-
for the managements of tively than would be possible in-house. ments of its value chain.
But before deciding which activities and
partner banks when processes to entrust to a partner organi- Focusing on the client
faced with decisions zation, a bank must first identify its own For a private bank, the ever more so-
core competencies. phisticated nature of financial products,
on the outsourcing of for example, raises the issue of whether
sub-processes. Speaking the same language
With that in mind, the UBS Reference
it can – or indeed should – continue to
develop and put together the full range
Bank Model can be a very useful tool in- of products in-house, or whether it
The intense competitive and consolida- deed. The model replicates every single might not, perhaps, be better to buy in
tion pressure in the banking industry is value creation, management and sup- the requisite know-how from an exter-
forcing non-global banks in particular to port process. The accompanying ques- nal source, given the increasingly com-
consider their future strategy. The main tionnaire is designed to help the man- plex regulatory and fiscal environment.
question facing management is whether agement team identify the applicable By teaming up with a professional part-
the bank can continue to cover all areas core competencies and determine the ner organization that will develop the
of the business to optimum effect and bank’s future strategic orientation. Only financial products and deal with all the
how best to utilize the available re- then can the issue of outsourcing non- legal issues, a bank can concentrate its
sources. Whilst the ever-changing regu- strategic sub-processes be addressed. efforts on front-line activities such as the
latory environment and the increasing By depicting all the different areas of acquisition of new clients and the care
complexity of customer products and the business, the generic bank model of existing clients, or devising tailor-

Industry trends in private banking

Major industry trends Business implications

• Changing client needs • Advice required on all financial needs: assets,

liabilities, insurance, tax, pensions, real estate
• A more demanding regulatory environment
• Risk systems need to be enhanced
• Continued in-market and cross-border (or outsourced)
consolidation
• Size increasingly important as a means to
• Ongoing cost control paramount as margins extract cost (synergies) and remain competitive
are continually squeezed
• Weak performers will come under further
• Outsourcing of back-office functions as a pressure and will have to either rationalize or
means to address the cost issue exit

• Intense competition for outsourcing

mandates could help to further reduce cost

The private banking industry has undergone fundamental changes over the last few years. Both strategic and structural changes have been
accelerated by the recent bear market.

6 UBS News for Banks I / 2005

 Focus Business

made investment solutions. In this way,
the bank will be able to devote far more
time to its clients and dramatically im-
prove the quality of the contact it has
with them.
The Reference Bank
Model replicates every
single value creating,
management and
support process.
Identifying risks and defining the
interfaces
The potential risks of outsourcing
particular activities can be identified at
an early stage with the aid of the Refer-
ence Bank Model. Thus it is possible to
ascertain early on whether selling third-
party products or using external trading Last but not least, by clearly illustrating
platforms, for instance, would involve the processes involved, the generic bank
any risk to a bank’s reputation and, if model allows the costs of carrying out
so, how that risk can be limited. specific sub-processes within the bank
to be identified. Only when these pre-
Once the areas to be outsourced have cise costs are known is it possible to
been decided, the next step is to clearly make any meaningful comparison with
define the interfaces with the partner what a prospective outsourcer is offer-
organization. Here, the challenge lies in ing. In some cases, the outsourcer will
the detail. Take the decision to out- not only be more cost-effective, but also
source the processing of securities trans- more flexible and more responsive.
actions, for example. It might sound
straightforward. But in practice the
entire process – from submission of the Markus Bühler
order through to confirmation of execu- UBS Investment Bank,
tion – has to be broken down into its Regional Distribution Channel Management
constituent parts so that the relevant markus.buehler@ubs.com
activities can be outsourced without
causing disruptions in the process as a
whole (see diagram on page 8). As a
rule, this will also involve seamlessly
integrating different IT platforms at the
various interfaces.

The Reference Bank Model for a private bank

Corporate Functions Products and Services Client Advisory

Business Strategy Financial Financial Planning

Planning Estate Planning
Tax Planning
Foundations and Trusts
ALM & Finance
Insurance
Investment Fund Advisory
Solutions Portfolio Advisory
Risk & Compliance Portfolio Management
Alternative Investments
Fund Administration
Banking Accounts
Legal Products Cards
Payments
Client
Mortgages
Communication Other Loans
Trade and Export Finance
Transaction Equities
Products FX
HR & Education
FI
Proprietary Funds
Third-Party Funds
IT Research Macro-Economic
Investment Strategy
Asset Allocation
Investment Capital Structure Advisory
Central Logistics
Banking Restructuring/Privatization/IPO
M&A and Divestitures
Corporate Finance Advisory
+

Outsourcing to be ruled out Outsourcing to be considered

The Reference Bank Model shows all the products, functions and processes of a bank at the generic level. With the aid of this model, a bank
can identify its core competencies and business strategy. At the same time, the model also illustrates which activities a bank could theoretically
outsource.

UBS News for Banks I / 2005 7

Focus Business

Breaking down processes to the last detail

BVC Flow Diagram: Offer Basic

Equity trade is requested Product Service

Equity Trade Order (requested)

Enter Equity
Order

Equity Trade Order (captured)

Enrich Equity
Trade

Equity Trade Order (validated)

Execute Equity
Trade

Equity Trade Order (captured)

Market

Equity Trade (filled)

Execute Equity
Trade

Equity Trade (executed)

Allocate
Execution to
Equity Order

Equity Trade Order (executed)

Allocate Equity
Order Execution
to Client

Equity Trade Order (executed)

Generate Equity
Order Trade
Confirmation

Equity Trade Order (confirmed) Equity Trade Order (confirmed)

Equity Trade Order (executed)

Client Process Security Archive
Delivery Documents

Equity Trader Order (executed)

Custodian
Network

Sub-process / activity Outsourcing to be ruled out

External agent / party Outsourcing possible
Infrastructure Outsourcing potential identified

The Reference Bank Model can be used to break down a process into its component parts. The flowchart for a sub-process of securities trading
shows which aspects are suitable for outsourcing and which should definitely remain in-house. It shows all supporting elements, as there are
systems, human skills and tools required for each individual activity. In addition the model enables the calculation of production /service
creation costs. The entire model can also be seen as a glossary explaining and defining terminology being used in the financial industry. It there-
fore makes communication across different companies much easier.

8 UBS News for Banks I / 2005


Clear, informed decision-making
With the help of the
outsourcing decision-
making model, manage-
ment can make more
informed decisions
about outsourcing based
on a clear understanding
of the inherent risks
and benefits.
The Reference Bank Model can help
banks to define their processes and
functions and identify those areas where 4. Staff
it might make sense to outsource prod-
ucts or services to a third-party provider.
But what the model does not indicate is
where problems might arise in the event 5. Outsourcing partner
of outsourcing or what prospective out-
sourcing partners need to consider
when evaluating a particular solution or
discussing plans with potential partner
organizations.
With this in mind, four members of the
Executive Master of Business Engineering 6. Legal aspects
program at the University of St. Gallen’s
Institute of Information Management
have developed an extensively generic,
non-industry specific procedure for eval-
uating different outsourcing projects
and making the corresponding decisions
clear, comprehensible and transparent.
For, as their thesis on the Outsourcing
Decision-Making Model points out, out-
sourcing decisions are often based on a
limited number of factors – mostly cost-
related – and, as such, tend to be emo-
tional rather than objective.
Although the Outsourcing Decision-
Making Model is universally applicable,
it nevertheless takes account of the
specific circumstances of a given out-
sourcing project.
Drawing on the relevant specialist litera-
ture, the architects came up with eight
dimensions that they believe have a ma-
jor impact on outsourcing decisions and
the evaluation of outsourcing options.
A detailed questionnaire has been drawn
up for each of the eight dimensions,
and touches on the following topics:
Focus Business
1. Business strategy 7. Risks
Questionnaire: corporate strategy,
core competencies, management’s
Questionnaire: dependencies, ar-
rangements for dealing with tempo-
outsourcing capabilities, possibility of rary quality-related problems, prepa-
partnerships and cultural change ration of management for changes
on the personnel front
2. Complexity of the process,
function or subject 8. Management of the outsourcing
Questionnaire: documentation, inter- Questionnaire: experience with out-
faces, proximity to core business and sourcing decisions, project culture,
type of activities to be outsourced control mechanisms
3. Costs In a second phase, the answers to the
Questionnaire: economies of scale, questions on each of the eight dimen-
reduction of fixed costs as a result of sions are weighted again by the respon-
outsourcing dent. Finally, the computed and weighted
values are displayed visually in a net-
work diagram (see below). This shows
Questionnaire: communication with at a glance whether outsourcing is an
staff, future employer, staff training option in a particular case and pinpoints
possible trouble spots. As such, any
potential problems in connection with
Questionnaire: core competencies, outsourcing can be addressed at an
track record and experience, financial early stage.
strength; as well as “soft” factors
such as negotiating language, vision, The Outsourcing Decision-Making
etc. of the prospective outsourcing Model is the subject of the round table
service provider discussion that follows. Further informa-
tion is also available from the architects
of the model.
Questionnaire: length of negotiations,
transparency, termination options, Monika Baumgartner
liability for damages UBS Wealth Management & Business Banking
monika.baumgartner@ubs.com
The eight dimensions of the Outsourcing Decision-Making Model
Business strategy
10
9
Management
8
of the Complexity
outsourcing
7
6
5
4
3
2
1
Risks 0 Costs
Legal Personnel
aspects
Outsourcing Strike Point OSP
Results of the evaluation
Outsourcing partner
The network diagram shows the subjectively weighted values from the eight questionnaires.
The result indicates that, due to the complexity of the system, outsourcing could present
difficulties. Being aware of these problems can be tackled at an early stage.
UBS News for Banks I / 2005 9
Round Table
Multi-dimensional decision-making
Andreas Urwyler
Participants
Claudius Sutter
Chief Operating Officer,
UBS Investment Bank,
Opfikon (Switzerland)
claudius.sutter@ubs.com
Marcel Müller
Chief Risk Officer,
Member of the Executive Board,
Baloise Bank SoBa,
Solothurn (Switzerland)
marcel.mueller@baloise.ch
Herbert Portmann
Head of Controlling,
UBS Card Center AG,
Glattbrugg (Switzerland)
herbert.portmann@cardcenter.ch
Andreas Urwyler
Head of Consulting,
Partner, Stepwise AG,
Jegenstorf (Switzerland)
andreas.urwyler@stepwise.ch
10 UBS News for Banks I / 2005
Outsourcing a process,
system or function is
often exclusively a matter
of costs. In the opinion
of the participants in
this discussion such an
approach is too short-
sighted. They have de-
veloped a model in which
decisions on outsourcing
can be taken more con-
sciously and with greater
transparency.
When does a bank make the decision to
outsource ?
Claudius Sutter: When you realize that
the bank has no core competence in a
particular area and does not want to
build up such a capability; when you re-
alize that the services to be provided re-
quire critical mass and there is no possi-
bility of achieving economies of scale. In
reality, companies often try to improve a
problem situation by outsourcing. I have
also observed that management often
does not have enough time to effectively
deal with the sector that is a potential
candidate for outsourcing.
Marcel Müller: It’s certainly a balancing
act. If you are not talking about a core
competency, then a company wants to
benefit from the capability of a partner
in this sector so as not to have to deal
with this problem.
The coordination and
control of costs as well as
other aspects are often
underestimated in out-
sourcing.
Herbert Portmann
Herbert Portmann: In my experience
costs usually dictate the outsourcing
decision. The idea is to try and achieve
economies of scale by outsourcing,
which in fact is often the case. What is
often underestimated are the coordina-
tion and control costs of outsourcing as
well as all other aspects.
Andreas Urwyler: For the small and
medium-sized enterprises for which I act
as an advisor the point of outsourcing is
not to save money. These companies are
looking to boost their quality, for exam-
ple in the Human Resources area. Com-
panies notice that their systems and
processes are no longer up to the latest
standards. Their core competence is not
in this area, so not much time and effort
is invested. Nevertheless, the companies
want to benefit from the most efficient
technologies and methods.

Claudius Sutter
Sutter: For small and medium-sized
companies outsourcing means primarily
IT outsourcing. In this respect they are
not that different from large banks. If
the infrastructure is not state-of-the-art,
then you have to go outside the firm to
get it. But the picture is different for
business processes. I would draw a line
between client-facing and back-office
processes. Basically, a bank should out-
source those processes that do not give
it differentiation in the market. There
are of course services that a bank must
provide due to regulatory requirements.
The model brings a cer-
tain level of objectivity
into the assessment of
outsourcing projects.
Claudius Sutter
Müller: Small and medium-sized busi-
nesses, compared with banks, have
clearly defined core competencies. Thus
for these companies it often makes
sense to outsource their non-core areas.
The core competencies for banks are
less clearly defined. Regional banks are
not best in class in any area. They may
be able to stand out in the market by
advertising that they provide more per-
sonal service; but as long as the global
players put pressure on prices, this ad-
vantage does not bring much. Clients
want more than personal service; they
want low prices above all.
Herbert Portmann
You developed an Outsourcing Decision- smoothly. It should help in recognizing
Making Model for your final thesis
at the University of St. Gallen. Why ?
Sutter: In the period following the
merger, we at UBS were confronted
with the topic of outsourcing for certain means making a contractual commit-
sectors. I noticed that the discussions
with management concentrated on
those aspects that were at that time
perceived as costs. But there was not
enough clarity about how new costs
could arise during the outsourcing. At
the same time I was also scouring the
relevant literature for a model that dealt
with the various aspects of outsourcing.
There was no model out there, however.
So I took the initiative and found some
capable and competent colleagues to
help me develop it.
Portmann: I had a similar experience in
my job as controller. Attention is com-
pletely focused on costs. There was no
pragmatic model that one could use to
find out whether the outsourcing of an
activity was even practicable. The thesis
gave me the opportunity to work to-
gether on developing such a model. The
model not only takes into account the
many aspects of outsourcing, it also
shows where potential trouble spots and
opportunities could arise if the decision
to outsource is made.
Urwyler: The model makes it possible
to find out where you stand. But it can
also show a company what it can and
must do to ensure the outsourcing goes
Round Table
and managing the potential risks; thus
the model can also be used as a control-
ling instrument. It is also a good tool
for an outsourcing service provider to
assess potential clients. Outsourcing
ment over a long period. The model can
help the outsourcing service providers
estimate whether they are dealing with
a short-term opportunity or a long-term
relationship and thus manage risks
accordingly.
It is crucial that everyone
involved agrees to the
decision-making process
itself, before the results
of that process are on the
table.
Andreas Urwyler
The model covers eight dimensions. The
purpose is to make the outsourcing de-
cision-making process more transparent.
How important is that ?
Müller: A big problem in making deci-
sions – and not only with outsourcing –
is the one-dimensional focus on num-
bers. It’s as though the numbers prima-
rily serve later as the (only) justification
for the decision taken. Marketability,
implications for processes and the envi-
ronment – in other words soft factors –
UBS News for Banks I / 2005 11
Round Table

Marcel Müller

are sometimes also considered, but of- The model could help me determine, for It is relevant both for the outsourcer and
ten not analyzed and documented in a example, that the resources that I could for the provider to know how many em-
structured way. save with outsourcing cannot even be ployees and which employees will be
reduced, whether due to regulatory fac- taken over. This is not only a question of
Sutter: In the evaluation phase the po- tors or possible damage to the com- people’s lives and livelihood, but also
tential success of outsourcing an activity pany’s reputation. This would be a po- one of ensuring know-how and quality
is measured using net present value. At tential cost factor. The management is in the company after the outsourcing
this point in time it does not matter open to these types of arguments, as it takes place.
whether the project will be successful or understands that there are risk factors
not. Often there is one lead person that only later start to impact the num- Have you been able to use the model ?
promoting outsourcing for specific and bers.
sometimes very personal reasons. Thus Sutter: We have used it several times.
the model can help bring some objectiv- Urwyler: It is crucial that everyone in- We have learned that the model helps
ity to the assessment of outsourcing volved agrees to the decision-making you to focus on details that you may not
process itself, before the results of that
projects, despite all the subjectivity that have paid much attention to otherwise.
the model also allows for. The model process are on the table. This means With the model you can also demand
can help management make a con- that the persons responsible for the pro- proof, as sometime in the marketing
scious decision about how subjective cess that leads to the decision must ap- effort solutions are proffered that look
the final decision should be. prove the process, regardless of the re- rosier on paper than they are in reality.
sulting final decision. Otherwise, the re- We have not entered into certain part-
Costs are just one of eight dimensions in sult could be questioned by stating that nerships because either we have discov-
your model. Is it not expecting a bit too the process leading up to it was deficient. ered details that we were not happy
much for something other than costs to about or because after applying the
come up in discussions with the man- model we discovered that the risks asso-
agement ? A frequent problem ciated with the outsourcing were greater
than the benefits.
Portmann: The model makes it possible in the decision-making
to weigh individual aspects subjectively. process is the one- Portmann: I have used the model to
If management sees costs as the most look into the sale of a business unit.
important element, the model can give dimensional focus I had to leave out certain aspects such
a stronger weighting to costs over other on numbers. as the outsourcing partner or substitute
aspects. The weighting of the factors some aspects such as the size of the
makes the model dynamic and takes Marcel Müller buyer. Using the model helped me to
into consideration the various points of include all the key points in the decision-
departure a company may find itself in. making process and not focus merely on
Müller: There is no doubt that costs costs.
Sutter: It is possible to argue versus drive outsourcing. But when discussing
management that all dimensions are ex- outsourcing with company management Interview
pressed in terms of costs sooner or later. personnel issues are also a key element. Monika Baumgartner

12 UBS News for Banks I / 2005

 In Brief

Due diligence made easier…

Take 2
The avid reader of News for Banks will clients, and would also be notified of any
recall the publication, in the January 2004 relevant information updates regarding Growing UBS
issue, of an article entitled “Due diligence those clients. The estimated economic UBS has grown significantly in all three divisions
made easier” which described in some benefits of such a system are expected Investment Bank, Wealth Management and
detail the concept of an international to be significant. Global Asset Management over the past few
months. The first in a series of acquisitions,
registry for financial institutions, emanat- mergers and joint ventures was the purchase of
ing initially from the Wolfsberg Anti- The Wolfsberg Group had already iden- the Capital Markets division of Charles Schwab
Money Laundering Principles for Corre- tified the information that its members in New York. The transaction was completed at
the end of October 2004. Already a top-three
spondent Banking of November 2002. wished to see in the registry, which would firm in the trading of NYSE-listed securities, the
also ensure a standardization of due dili- integration of SCM results in a significant expan-
The yet more assiduous reader may even gence information globally, in itself pro- sion of UBS’s US capabilities. By increasing its
recall that the purpose of such a registry viding a potential cost-saving in that less equity sales and trading offering, including the
addition of a state-of-the-art technology plat-
was to centralize useful and necessary time would be spent collating required form and NASDAQ trading system, UBS also
information which would assist financial information from a diverse set of sources. becomes one of the top volume traders in
institutions in carrying out appropriate NASDAQ securities in the US.
due diligence investigations on their cor- The Group began collaborating with
In Wealth Management UBS is supplementing
respondent banking clients, while gen- Banker’s Almanac in early summer, and its organic growth with a series of acquisitions in
erating cost-savings, though not dis- we are delighted to inform you that the Europe and the Americas. In Germany, UBS and
charging financial institutions from their Due Diligence Model, which the Wolfs- Sauerborn Trust will merge their advisory ser-
responsibility to conduct their own risk berg Group has contributed to develop- vices for ultra-high net worth clients. Managing
more than 6 billion euros in client assets for
assessments based on the information ing, is now available for “inspection” on some 100 families and family-owned compa-
held in the registry. the internet. nies, Sauerborn Trust is Germany’s biggest
provider in this market. In Italy, UBS is to acquire
Etra SIM S.p.A. of Milan which manages 500
It was argued that, in the context of While we are still assisting Banker’s million euros in assets for wealthy private and
ever increasing regulatory requirements, Almanac in the finalization of various institutional clients. UBS will acquire the private
the registry as recommended by the elements of the module, the coming banking activities of American Express Bank in
Wolfsberg Group, and fully supported months will clearly be spent encourag- Luxembourg with assets of around 385 million
US dollars, and also take over the wealth man-
by UBS, provided an indispensable tool ing our correspondents to populate the agement business of Dresdner Bank Latein-
for banks to ease the financial burden registry, so that it is as useful, complete amerika. DBLA, with a head office in Hamburg,
of conducting proper due diligence on and cost-effective as possible for every- is active in all Latin American markets, managing
assets for affluent and high net worth clients of
their correspondent banking clients. Re- one. We therefore wholeheartedly rec- around 4.8 billion euros. In Canada and the US
cent enforcement actions by US Regula- ommend that you visit the site, inspect UBS will acquire the North American wealth
tors prove that insufficient due diligence the module and suggested requirements management operations of Julius Baer with a
on these clients will not in any way pass and submit your documents as soon as main location in New York and offices in
Los Angeles, Palm Beach and Montreal. They
muster on inspection. Indeed, the fines possible, so that the benefits of a fully manage more than 4 billion US dollars in client
recently levied for failings in due dili- functioning registry can be achieved assets. The new acquisitions are all subject to
gence exercises in respect of correspon- sooner rather than later. In the current receiving the necessary regulatory approvals.
dent clients have been on the high side, regulatory environment, such a facility
In January 2005, UBS Global Asset Management
and the historical tendency for fines to can only be seen as a boon to the ap- announced the formation of a joint venture
increase rather than decrease should propriate and risk-based conduct of cor- fund management company in partnership with
give us some pause for thought. respondent banking business, if not a the Chinese State Development Investment
panacea for all ills. Corporation (SDIC). The joint venture will come
about through UBS’s purchase of a 49% stake
The basic premise of the registry remains in the Shenzhen-based China Dragon Fund
simple: rather than requesting the rele- Management Co Ltd (China Dragon). This joint
vant information from each individual Contact / further information venture will be one of the first to allow the new
maximum 49% foreign partner holding in a Chi-
institution, and, similarly, rather than tracy.paradise@ubs.com
nese fund management company, and continues
provide this information to each corre- www.bankersalmanac.com the growing interest UBS has in the Chinese
spondent, the necessary due diligence financial services industry. In the same month,
information would be centralized in a Global Asset Management signed an agreement
with Siemens in which UBS will acquire a majority
global registry. Financial institutions stake (51%) in the real estate funds business of
would be responsible for providing and Siemens Kapitalanlagegesellschaft mbH (SKAG),
maintaining accurate, complete and up- currently a 100% subsidiary of Siemens AG
and part of the Siemens Financial Services Group.
to-date information in the registry; they Both transactions are subject to regulatory
would be able to retrieve information approvals.
about their correspondent banking

UBS News for Banks I / 2005 13

In Brief

SWIFTNet: a critical assessment

Approximately five years ago, SWIFT an- more generally, the financial industry. The browse service is based on the
nounced the concept of a new messag- Hence, when considering the migration “https” internet standard protocol.
ing platform, based on the well-known of the underpinning technology, the It is designed to complement SWIFTNet
and established Internet Protocol (IP) question for UBS and all other financial FileAct and SWIFTNet InterAct.
technology. It was intended to replace institutions working with SWIFT was not
the outdated and somewhat inflexible whether to adopt, but rather when. New services pose challenges
X.25-based messaging environment 1. In the past,financial messaging infrastruc- Banks which have made the technical
The official deadline communicated for ture technology was perceived merely as migration to SWIFTNet have the option
this migration was 31 December 2004. an enabler, not as a potential product in of using the new services described.
its own right. Thus, the driver for this Although these services are available for
Today the financial messaging world has change was more than simply to utilize all financial institutions, there is a price
almost achieved this ambitious migra- increasingly modern technology. The key to be paid if banks want to fully utilize
tion goal. Based on current statistics point was that the financial industry was them for high-volume processing,
(December 2004), approximately 99% demanding more services from SWIFT automation or even straight-through
of all financial institutions, accounting than “just” the old FIN service. SWIFT processing (STP). This price involves
for some 96% of the entire SWIFT-based was compliant and introduced addi- factors such as investments in infrastruc-
traffic, have migrated to the new tech- tional new SWIFTNet services which are ture components or more complex and
nology. As it stands today, the migration only available and possible with the therefore more costly processes. Not all
will be globally complete by the time of much more flexible IP technology. banks are willing to invest this much
publication. SWIFT expects that it can without seeing a clear business opportu-
begin dismantling the old X.25 infra- The new services offered by SWIFT
structure commencing the second quar- include:
ter of 2005.
❑ SWIFTNet FIN
New services:
Within the financial world, the SWIFT- SWIFTNet FIN essentially remains the where does UBS stand today?
Net migration is the second largest same. The difference between X.25 and
UBS was the first financial institution amongst
initiative since Y2K. Due to the signifi- IP-based FIN is in the technology, not the top 10 SWIFT users to complete the entire
cance of both its size and success, this the service as such. SWIFTNet FIN is still SWIFTNet migration. After successfully finalizing
migration is a milestone for the entire the most common and frequently-used this, UBS went on to use FIN over IP as its first
SWIFTNet service by the third quarter of 2003
financial industry. of all SWIFT services. In 2004 (Jan – Sept)
(FIN is the traditional and broadly used Store &
for example, FIN carried roughly 1.7 bil- Forward Service of SWIFT).
Goals of SWIFTNet lion messages. Peak days will currently Technically, UBS has been SWIFTNet compliant
It is not always enough to replace (even see above 10 million messages. since the third quarter of 2003. This, however,
outdated) technology with newer tech- does not mean that the firm wishes to immedi-
ately take the final steps towards a full-scale roll-
nology, just for the sake of updating it. ❑ SWIFTNet InterAct out of the new non-FIN services including the
This raises the question of what strate- SWIFTNet InterAct is an interactive mes- MA-CUG concept without considering the op-
gic or particular objectives the SWIFT saging service supporting the pre-agreed tions available. Instead, UBS is looking for a clear
community had on its agenda when the exchange of messages between two business opportunity, to justify investments in
this area.
SWIFTNet initiative was agreed upon parties. With InterAct, banks can ex-
This opportunity might come from the market
and eventually launched. change interactive messages. Contrary but it is also highly probable that product devel-
to the FIN Store & Forward service, Inter- opments will make it necessary to bundle prod-
It is important to note that the technical Act can be used for mission- and time- ucts with one or another of the new SWIFTNet
services.
SWIFTNet migration was a mandatory critical applications such as Continuous
SWIFTNet is very important to UBS. The bank
undertaking for all SWIFT participants Linked Settlement (CLS) or real-time clearly sees the benefits of using the new
because SWIFT is a co-operative owned gross settlement systems (RTGS). services if it can justify capital expenditures and
by banks. Consequently, whatever operating costs. And since SWIFTNet is – to a
SWIFT does must be agreed upon and ❑ SWIFTNet FileAct certain extent – a fixed-cost-driven infrastructure,
it makes sense to go for the highest transaction
approved by the member banks or, SWIFTNet FileAct allows the secure trans- volume possible in order to reduce unit costs.
fer of files and can be used to exchange For instance, using the new SWIFTNet services
batches of structured or unstructured fi- such as InterAct and FileAct could enable UBS
to remove volumes from other proprietary mes-
1 X.25 still is a popular international standard for nancial messages. With FileAct it is now saging infrastructures and consolidate these
packet-switching networks. It provides a connec- possible to send files as large as 250 transactions in SWIFTNet.
tion-oriented technology for transmission through megabytes. FileAct is closely linked with With the bulk of migrations having been
highly error-prone facilities, which were more InterAct. achieved, the financial industry is now entering
common at the time it was first introduced. Error- a fresh phase of opportunity where the next few
years promise to be challenging yet rewarding
checking is performed at each node, which can ❑ SWIFTNet Browse for UBS as well as the entire SWIFTNet commu-
slow overall throughput and renders X.25 inca- SWIFTNet Browse allows users to oper- nity.
pable of handling real-time voice and video. ate in a secure and reliable environment.

14 UBS News for Banks I / 2005

 In Brief

nity, including a business case with a

reasonable ROI. Subscription form

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Somehow, the Gordian knot will have
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Personal details
In addition to the market situation and
the question of who should take the q Mr q Ms
lead to drive this further, there is an Name
issue involving standards. Whilst the FIN First name(s)
service is very strict on standards, the Financial institution
new services, in principle, allow for sig- Department
nificant flexibility. Hence, in an extreme Address
case, two partners could negotiate indi-
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Additional SWIFTNet features

There is a further issue which requires q Please send an additional copy of this newsletter to
addressing. Based on SWIFT’s 2006
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to significantly increase its customer base.
The only way this could be achieved was
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However, it was decided to prohibit di- q Please send me more information on “The Bank for Banks”.
rect access for corporates as members,
and instead allow them access as partic- q Comments
ipants or via a so-called Member Admin-
istered Closed User Group (MA-CUG).

Every point mentioned in connection

with the new services must also be ap-
plied to corporate users. In an extreme
situation, this can lead to an environ-
ment where banks have to monitor UBS AG Production: UBS AG, Marketing & Sales Development / Publications;
Financial Institutions CC Publishing
bilateral standards agreements not just P.O. Box
with other financial institutions, but CH-8098 Zurich Photos: Andy Müller, ESA
with corporates as well. +41-1-239 80 08
newsforbanks@ubs.com Date of publication: February 2005
www.ubs.com/newsforbanks

Contact Disclaimer:
ralf.kappler@ubs.com While the facts in this publication have been carefully researched,
UBS cannot be held responsible for their accuracy. The opinions
expressed may differ from official UBS views.

UBS News for Banks I / 2005 15

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