Making operations pay

UBS News for Banks, Autumn 2009

When you visit Ulrich Hoffmann in Zurich, you step off the train into an industrial suburb, then walk up to a tall glass-and-steel building with a loading bay in its basement. If momentarily you took the offices at Max- Högger-Strasse 80 for a factory, your affable host, who heads up UBS’s global payments and cross-product services function, would not object.

Modern times: operations need to be industrialized with a view to improving services and reaping scale efficiencies, says Ulrich Hoffmann, UBS’s Global Head of Payments and Cross-Product Services

On the contrary, he might welcome the comparison. After all, “industrialization” is the word that Hoffmann likes to use when outlining his strategy for UBS’s operations. Banking transactions are commoditized, he points out. And, logically, one should respond to their rising volumes and shrinking margins by cutting costs and streamlining processes. In Hoffmann’s view and that of quite a few consultants (see next article), you would do that by pulling operations facilities into central hubs, by re-engineering workflows, by sharing infrastructures, and by standardizing products.

You would set up global utilities for payments, cash management, financial messaging, reconciliations and output processing. These would ride atop a consolidated data repository, harnessing the massive processing capability of your latest-generation bank IT infrastructure. And why stop there? You could extend the utility approach to securities, derivatives, trade and credit operations.

That was the gist of a talk entitled “The Industrial Revolution in Banking” that Hoffmann recently gave to a SWIFT conference. But wait a moment, one might object. Although manufacturers went down the road of standardization and centralization decades ago, banks have been slow to follow. And there are good reasons for that, including inconsistent regulation, idiosyncratic payment and settlement cultures in different centres, single markets that aren’t, and, last but not least, the hodgepodge of legacy systems within many banks.

Smartsizing

Cost transparency also helps UBS to “smartsize” its operations capacity, says Hoffmann. If volumes are small and transactions complex, for instance, straightthrough processing may not always be worth the spending necessary to achieve it. It could be better to stick with manual processes. A similar trade-off applies to application development: sometimes individual solutions for specific locations can be more cost-effective than a global standard. By contrast, UBS has opted for a single messaging infrastructure worldwide.

Cutting costs through product standardization

Product standardization is another way that makers of commoditized wares can cut costs. Ulrich Hoffmann is no exception: “We need to reduce service complexity for both cost and risk considerations,” he explains. Clients might see things differently, demanding services that fit their requirements. UBS squares this circle by building value-added solutions on top of highly standardized infrastructure.

How does this work in practice? The starting point is classical client segmentation – private clients, corporates, financial institutions – with service offerings tailored to each retail and wholesale category. As Hoffmann comments, “The more you differentiate between client segments, the more precisely you can target your offering.” Specialist advisory teams work with UBS’s relationship managers to ensure that private and institutional users get the service they need.

Successful template

When the service offering is differentiated, remuneration for risk and resource commitment must match. The traditional system of transaction charges has therefore given way to a more flexible framework that considers both the volume and value of transactions, introduces risk-weighted pricing and evaluates fixed fee schedules. In many respects, Hoffmann comments, pricing now follows the pattern established by mobile phone companies, offering all-in tariffs, surcharges for optional features, and so on.

UBS’s global cash and messaging utilities can now act as a successful template for the creation of further industrialized services to be shared across the bank. Exponents of industrialization aim to produce a greater variety of goods at more competitive prices. In that sense, the UBS offices at Max-Högger-Strasse 80 really do represent the factory of the future.

Martin Hood
News for Banks