Cognizant Point of View

Swiss Private Banking and the Rationale for Global Services Delivery
To reduce unrelenting operating cost pressures, Swiss private banks should rethink longstanding third-party sourcing assumptions and update their knowledge of what partners can provide, especially when it comes to handling elements of their back- and middle-ofce IT and business portfolios.
Executive Summary
Switzerlands hallmark data privacy laws, which once made Swiss banks attractive to wealthy customers worldwide, are increasingly making it difcult for banks to efciently conduct business. This trend, combined with the pre-crisis level of activity and a general client preference for safer investments, is causing a steep drop in prot margins across the private banking sector. Unfortunately, operating costs have also continued to climb. The result: an expected industry shakeout, with the remaining players focusing intensively on cost reduction. Recent settlements with foreign governments on alleged tax evasion claims will hasten this shakeout. A recent Boston Consulting Group global study noted that the cost base of global private banks has increased from 61 cents to 73 cents to the U.S. dollar1 during the past ve years. To reduce costs, private banks are expected to turn to third-party partners for certain operations. In fact, UBS and Credit Suisse already work with partners on large portions of their IT and business services portfolios. More recently, Deutsche Bank hired Avaloq Group to handle a majority of its wealth management back-ofce operations in Switzerland, where 80 employees were rebadged to the vendor.2 In general, Swiss private banks are not as mature as their American counterparts or their retail and investment banking peers when it comes to global sourcing. This is primarily due to the following three drivers:

Process maturity. Service standardization. The increasingly competitive landscape.

This point of view paper examines the feasibility of global sourcing for Swiss private banks, which are seeking a return to their historic healthy margins. Bottom-line pressure and the growing clamor for relaxing Swiss secrecy laws will increase receptivity to global sourcing opportunities.

The Business Context: Data Privacy

Data security, a strong characteristic of the Swiss private banking industry, has often deterred global sourcing opportunities. Despite the rejection of a bill introduced in the Swiss Parliament seeking to temporarily allow Swiss banks to share informa-

cognizant point of view | march 2014

tion with U.S. tax authorities, it is clear that the Swiss banking model is on the verge of a change. As a result, it is only a matter of time before more middle- and back-ofce functions will be sourced from third parties after incorporating appropriate safeguards. The Swiss Federal Banking Act of 1934 and its subsequent amendments, which apply to all banks in Switzerland, prohibit the transmission or disclosure of any customer-related data to a third party, unless:

data masking tools ensure that banks adhere to data privacy laws. Third parties are increasingly adept at providing clean room facilities with a level of data protection that is considered even more secure than the banks own operations. And as these vendors expand globally, many offer a mix of near-shore and offshore facilities to deliver various permutations of a global services delivery matrix.

Global Sourcing Decision Factors

Global sourcing is no longer an exception but a competitive necessity. Decisions to hire a global services provider typically pivot around the following:

Banks

have complied with provisions in the Financial Market Supervisory Authority (FINMA) outsourcing guidelines and the Data Protection Act (DPA).

The data that allows the customer to be identied is encrypted, or the unencrypted data transfer is expressly approved by the customer. Banks can legally exercise due control over the
supplier functions. As the global services industry has matured, it has become increasingly feasible to conduct control checks and leverage IT appropriately to overcome these challenges. Advanced data encryption and

What to source: Banks must decide what their

core functions are and consider third-party partners to access expertise in noncore functions. Doing so frees up resources that can be applied to core strategic initiatives, such as offering even more customized client solutions or driving a transformation project. Typically, the middle- and back-ofce tasks are suitable candidates for turning over to a third-party expert. Figure 1 illustrates the potential global services landscape for a private bank.

Private Banking Outsourcing Landscape

Sales
Acquisition Asset allocation determination Continuous client relationship management Risk profile assessment/ regulatory documentation Account and securities deposit Contract management

Front-Office
Client relationship management support Research/data analysis Investment strategy and process Risk management and controlling (client rating) Product management (product rating) Salesforce management Order entry Allocation/rebalancing Investment controlling/ monitoring Complaint and claims management

Middle-Office
Client and management reporting Payments Financial statements and custody services System maintenance IT processes and administration Order validation and routing Settlement notes Corporate actions Service provider and partner management Portfolio maintenance and rebalancing Risk management and analytics

Back-Office
Trade enrichment and completion Transaction management and control Clearing and settlement Custody/administration Reconciliation Fee calculation and booking Portfolio accounting Regulatory & management reporting Tax services Data and document management

Data-sensitive processes requiring full access to client data. Offshorability rating: 20%-30%

Processes requiring minimal access to client data. Offshorability rating: 60%-70%

Processes requiring no client data access. Offshorability rating: 80%-90%

Source: Based on the domain knowledge and experience of Cognizants Private Banking Operations group. Figure 1

cognizant point of view

 Sourcing

model: The main decision here is whether to follow the captive route (where banks create and manage their own offshore delivery centers) or hire a third party that is primarily responsible for running the operations to meet service level agreements (SLAs). Other options can be considered along the spectrum between these two extremes, such as working with a third party in an afliate model. An example of this is when a generic IT infrastructure setup is provided by a thirdparty provider, but the IT security and IT networks belong to the bank. The bank may retain supervisory functions in such an afliated setup. Figure 2 reveals how and why a third-party sourcing decision is typically superior to the captive alternative when the following parameters are considered:

>> Transformational:

Can the bank leverage IT and engage in transformational exercises with its captive setup or with a third-party integrated IT and business services provider?

Sourcing location: The selection of the sourc-

ing location is primarily decided upon on the basis of cost-effectiveness, availability of talent, overall business environment, culture, languages spoken and laws. If its feasible, banks should consider a follow the sun approach, which provides them with up to 18-24 hours of productivity if the third-party services are delivered from another time zone. When all of these parameters are considered, India often appears on the top of the list for favored sourcing destinations.

>> Cost effectiveness: Which option tends to

have lower operational and setup costs? to source core/critical activity?

Looking Ahead
As Swiss private banks continue to experience margin pressure, they will need to review their global services footprint in order to remain competitive. This is especially true as pressure rises from both public and governmental entities for increased transparency of Swiss banks. Banks that have chosen to set up captive centers for data privacy reasons are likely to review their decisions, particularly as third-party vendors continue to demonstrate increased process maturity, in addition to a level of industry knowledge and data sensitivity that allows for an equal level of condentiality. The upside benets of revisiting such decisions can be substantial. But for banks that do not reconsider their stance on global third-party services partners, the missed opportunities can be enormous.

>> Core activity: Where would the bank prefer >> Competency: What are the general talent
competencies in a captive or third-party option? and exible?

>> Scalability: Which option is more scalable >> Talent retention: What is the attrition and
longevity of staff within the organization?

>> Control: Can sourced work be better controlled via a captive or third-party provider?

>> Management

oversight: Which option requires less corporate management bandwidth?

Scoring the Sourcing Choices

Third-party sourcing often outscores a captive arrangement when key parameters are considered.
Transformational Talent Retention Cost-effective Required Management Oversight Core Activity Competency

Scalability

Control

Captive Thirdparty partner

Figure 2

cognizant point of view

Total
3 5

Footnotes
1

Daniel Schafer, Only the Strongest Will Survive Shakeout, Financial Times, Nov. 28, 2013, http://im.ft-static.com/content/images/8c66f238-5647-11e3-96f5-00144feabdc0.pdf. Avaloq Group to Take Over Wealth Management Operations Back-Ofce of Deutsche Bank, PR Newswire, June 30, 2013, http://nance.yahoo.com/news/avaloq-group-over-wealth-management-032400474.html.

About the Author

Sharad Sharma is a Director within Cognizants Banking and Financial Services Business Unit. He has over 14 years of experience in nancial services, spanning asset management servicing, hedge funds reporting, auditing, budgeting, planning, nancial control, etc. Prior to joining Cognizant in 2007, he worked with Cap Gemini and Hewlett Packard Co. Previously, he handled fund accounting and administration for a leading asset manager. Sharad has an M.B.A. from the Indian School of Business, Hyderabad, and is a qualied Chartered Accountant. He can be reached at Sharad.Sharma@cognizant.com.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 171,400 employees as of December 31, 2013, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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