160513 Study Sourcing in risk and compliance functions

Sourcing of Risk & Compliance functions Results and insights of an international Financial

institutions Benchmark study

May 2016

160513 Study Sourcing in risk and compliance functions.pptx 1

Draft—for discussion only

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Executive Summary

• Sourcing emerges towards a key strategic lever in order to improve effectiveness and efficiency in Compliance

and Risk functions. It helps banks to stronger focus on elements of the value chain that drive differentiation,

enables to reduce cost of up to 30 %, helps driving consistency and quality of the overall framework and

enables the organization to quicker respond towards and implement regulatory requirements

• Key prerequisites for sourcing Risk & Compliance functions are an adequate financial attractiveness of the

business case, transparency on the structure of the current Risk & Compliance functions and that proposed

sourcing measures are in line with legal and regulatory requirements

• We observed that most banks tend to implement in most cases a nearshoring model for their Risk &

Compliance functions. Many banks have already undertaken sourcing measures for Risk & Compliance

functions and some are planning to take further measures in the upcoming months

• There are strong regional patterns – given the significant differences in average margins by global regions, we

observe a distinct tendency for sourcing Risk & Compliance functions in European and North American banks.

In other global regions the trend is not or not yet distinct

• The sourceability by functions strongly differs. Examples of functions with high degree of sourceability are: risk

models development, maintenance and testing, and transaction decisions for standardized products in retail

(mortgages), private banking (lombard) and corporate business (loans), Compliance monitoring, Compliance

tools and infrastructure

• Success factors for implementing Risk & Compliance sourcing measures are: detailed functional analysis and

feasibility, focus on effectiveness improvements without triggering uncalculated risks and development of a

forward-looking transition plan

Source: BCG



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Key contacts

DR. MARC D. GRÜTER

PARTNER AND MANAGING DIRECTOR

Phone: +41 44 388 8768

Mobile: +41 79 373 8768

Email: Grü[email protected]

ANDREAS BÜRKLI

PRINCIPAL

Phone: +41 44 388 8849

Mobile: +41 79 373 8849

Email: [email protected]

LAURIN FROMMANN

PRINCIPAL

Phone: +41 44 388 8925

Mobile: +41 79 373 8925

Email: [email protected]



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Agenda

1. Sourcing as a strategic lever in Risk & Compliance functions 4

2. Status quo in international banks 11

2.1 Current and planned sourcing activities in large banks

2.2 General source ability of Risk & Compliance functions

2.3 Sample case

3. Success factors for sourcing of Risk & Compliance functions 20



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Agenda





2.3 Sample case




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Sourcing in R&C functions is an attractive strategic lever Strategic drivers for sourcing of Risk & Compliance functions

Drivers for increased importance of

sourcing of Compliance & Risk functions Impact

Stra-

tegic

• Reduced time to adapt to new markets

• Increase of management capacities to focus on higher

value areas

1 Net cost reduction estimate

10–30%

Risk,

Quality

and Cost

• Improve risk effectiveness

• Quality improvement due to stronger centralisation

• Factor cost advantage and improved cost

transparency

2

(depends on level of existing

sourcing degree, the footprint

and the business portfolio

complexity)

Regu-

latory

• Reduced time to implement new regulations

• Complexity reaction in the context of TBTF regulations 3

Functions with the most signi-

ficant cost reduction potential

• Operational Risk Control,

Compliance

• Risk Reporting

• Credit Risk Control and

Portfolio Mgt.



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Nearshoring: Ideal sourcing strategy for know how processes Definitions: Onshore, Nearshore, Offshore

Sourcing Strategy

Key characteristics:

• Exclusivity

• Legal structure (captive entity)

• Low cost location

• Business proximity

• Language and cultural proximity

• Time zone difference

Onshore

YES

YES

NO

HIGH

YES

NONE

Nearshore

YES

YES

YES

MEDIUM

YES

2–3 HOURS

Offshore

YES or NO

YES or NO

YES

LOW

NO

>3 HOURS

1

2

3

4

5

6



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Several prerequisites for sustainable R&C sourcing strategy Selected key Prerequisites for sourcing of Risk & Compliance functions

Key prerequisites

for sourcing of Risk

& Compliance

functions

• Potential additional risks are in line with risk

opposite

• Target footprint is in line with local/legal entity

reg. requirements

Limitation of

Sourcing risks in

line with regulatory

requirements

3

• Significant re-ocurring efficiency improvements

that compensate for on/off investments and

transaction cost, risks and tax effects

Financial

attractiveness

of business case

1

• Transparency on FTE's, footprint and cost from

a functional perspective

Transparent

functional view on

risk an Compliance

management

2



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Trend towards functional risk org. enables stronger sourcing Risk type driven versus functional risk organization

Risk organization by risk types

Corporate Center

Cre

dit R

isk

Ma

rket R

isk

Op

. R

isk

Liq

. R

isk

...

Risk organization by functions

Strategic risk management

and business enablement

Risk steering and reporting

Risk operations

Banks are moving towards more functional risk organization

90%

60%

40%

10%

Risk organisation

by risk types

Today

Risk organisation

by functions

In 5 years



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Significant risks related to sourcing need to be addressed Major risks related to sourcing of Risk & Compliance functions

People

• Cultural impact – loss of engagement

• Survivor guilt and morale impairment

• Impaired ability to cross train staff – less attractive career tracks

• Less experienced staff at provider – high turnover, low industry knowledge

Flexibility and

control

• Inability to redirect resources to emerging priorities

• Erosion of in-house capability – become beholden to suppliers

• Higher charges for exceptions / ad hoc demand

• Contractual obligations (minimum spend / utilization etc)

Vendor issues

• Vendor failure / relationship failure

• High degree of supervisory burden and cost

• Misaligned incentives (cost versus quality / revenue)

• Bait and switch "suppliers trap"

Trends in Nearh-shoring.pptx 10


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Number of banks that successfully sourced R&C functions Real examples from large international banks

Institution Scope of GRC near shore activities

Near shore

vs. Off shore

• Off and near shoring of the compliance function with major hubs in China, India and Sri Lanka (~1600

FTEs)

• Off- and near shoring of credit risk function with major hubs in Malaysia, Indonesia, Hong Kong and

India (~1800 FTEs )

• Off- and near shoring of market risk function with major hubs in India and Hong Kong (~80 FTEs)

• Off shoring of Fraud Operations (~700 FTEs)

Global Universal

Bank

Combined GRC off and on shore model

Global Universal

Bank

• Credit risk modeling team off shored to India, which is about 40% of overall credit risk management

(~25 FTEs)

• Development of stress testing scenarios off shored to India which is about 50% strategic scenario

analysis, (~40 FTEs)

GRC off shore model

European

Universal Bank

• Modeling and validation near shored to Slovakia, Romania, and Czech Republic (~60 FTEs)

• Compliance functions near shored to Slovakia

• Risk and regulatory reporting near shored to Slovakia

GRC near shore model

Large US

Investment Bank

• Large near shoring center in Salt Lake City including compliance, transaction decision and risk

analysis (~1800 FTEs)

• Off shoring center in India for risk methodology, risk control, risk analysis, and transaction

decision related to hedge funds and institutional clients

Combined GRC near and off shore model

European

Universal

Bank

• Near shoring center for more complex activities within the country where the head quarter is located.

This includes credit risk, market risk and operational risk (~550 FTEs)

• Offshoring center in India for less complex activities of the second line of defense in credit risk and

operational risk (~300 FTEs)

Combined GRC near and off shore model

Source: BCG



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Agenda





2.3 Sample case




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Share of banks that are sourcing Risk & Compliance

functions

Did you successfully

implement any sourcing

measures for your 2nd line

of defense Risk &

Compliance functions?

Nearshoring

Offshoring

Do you plan for any

additional sourcing

measures for your

2nd line of defense risk &

compliance functions

(upcoming 3 years)?

Outsourcing (mainly IT-

related functions)

30%

70%

Yes No

28%

72%

35%

65%

18%

82%

65%

35% 34%

66%



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Trend towards sourcing of Risk & Compliance functions

mainly in North America and Europe

• Many large international banks have successfully implemented sourcing measures in Risk & Compliance

functions

• Banks who successfully sourced selected functions in the past tend to further increase the sourcing degree in

the upcoming 3 years

• Know-how driven Risk & Compliance functions are pre-dominantly nearshored – where more standardized

operations and IT-related functions are offshored or even outsourced

• The current and future sourcing degree is strongly driven by regional patterns. We observe that sourcing in

Risk & Compliance functions is mainly relevant for North American and European Banks

Key insights on current sourcing activities



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Agenda





2.3 Sample case




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Most functions in risk mgmt with significant sourcing potential Range of sourcing degree: Risk function

Risk functions Range of sourcing degree Comments

0% 100%

Risk Strategy and Oversight Strategic relevance, limited

sourceability

Risk Policy Management Strategic relevance, limited

sourceability

Risk Analytics High sourceability

Risk Data Management and IT High sourceability, mainly near-

shoring due to data confidentiality

Risk Reporting High potential for nearshoring,

offshoring

Transaction Decision Contribution Limitations due to data confidentiality

30% 60%

20% 50%

30% 70%

10% 50%



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Compliance functions with approx. 40 – 50% sourcing potential Range of sourcing degree: Compliance function

Risk functions Range of sourcing degree Comments

0% 100%

Regulatory development and

coordination

Sourceability of regulatory

intelligence activities (tracking) and

partially impact analysis

Subject Matter Compliance Advise

to business, education and

training

High centralization of advise in

selected globally aligned subject

matter areas

Compliance Policy determination

and standards -

Monitoring, Surveillance and

testing

Significant sourceability of

Surveillance functions, limitations in

areas of more qualitative monitoring

Compliance Reporting

High degree of source ability for

report generation (if global standards

are established), limitations for report

analysis and interpretation and

alignment

Compliance Tools and

Infrastructure

High degree of sourceability

(offshoring) to operate compliance

infrastructure

40% 50%

50% 70%

40% 30%

10% 30%

20% 40%



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Agenda





2.3 Sample case




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Case study

Baselining and definition of

strategic targets for sourcing

Development of sourcing

strategy and business case

Alignment and approval of

business case / development

of transition plan

• Functional assessment of current

Risk & Compliance organizational

units (incl. footprint)

• Definition of guardrails for the Risk

& Compliance sourcing model

• Defining overall targets to be

achieved and scope of functions in

scope

• Defining set of potential Near and

Offshore locations, pre-evaluation

of locations

• Detailed Sourceability analysis for

every function in scope based on

defined set of criteria (e.g.

proximity to business activities)

• Detailed and function specific

evaluation of location set

• Business case (incl. cost benefit

analysis and ideal footprint)

• Alignment of key elements of

business case with key

stakeholders

• Finalization of business case and

facilitation of Steering Committee

discussion and decision

• Development of transition and

retention plan

Activities &

results

BCG Tools

Case study: Sourcing Strategy for Risk & Compliance of a large international bank

Functional assessment of Risk & Compliance functions (BCG functional model)

Functional scope of

sourcing strategy

Targets of sourcing

strategy (qualitative,

quantitative)

Location assessment

Sourceability analysis

Business case

Stakeholder alignment

Retention plan

Transition plan

Support

activities(exempl.)

Governance &

ControlStrategy/ Policy Decision support

Execution /

Transactional

Regulatory reporting &

group accounting

Tax & insurance

Legal

Compliance

Internal audit, revision

Risk management

Monitoring & reporting

Accounts payable

Accounts receivable

Fixed assets accounting

Cost accounting

HR administration &

payroll processing

Strategic procure. &

order mgmt.

Real estate

Health & safety

Infrastructure & general

services

Corp. strategy,

organization &

development

HR strategic planning &

measurement

Compensation & benefits

Purchase strategy &

support

Planning/ budgeting

M&A

Corporate financing &

investing

First level

support/general HR

Recruiting, retiring &

redeploying

Training & people

development

External communication

Investor relations

Internal communication

Corporate responsibility

& sustainability

"Core""Expansion"

622,9 14,816,8

55,5

28,0

192,2

55,9

93,1

23,749,7

93,1

0

100

200

300

400

500

600

Ges

amt

xx xx xx xx xx xxx xx xx xx xx

Anzahl FTE

Mexico

3,000 FTE

Scottsdale

San José

Moncton, Saint John

500 FTE

Salford Quays,Manchester300 FTE

Newcastle

Prague

800 FTE

Szekesfehervar

225 FTE

Prague

500 FTE

Dalian

1,100 FTE

Manila

India

Bangkok

Bangalore130 FTE

Hyderabad,Delhi, Bangaloreand Gurgaon23,000 FTE

Budapest300 FTE

Curitiba SP

São Paulo

Budapest

400 FTE

Kuala Lumpur

Budapest280 FTE

Atlanta

634 FTE

Budapest250 FTE

Budapest

100 FTE

Krakow

100 FTE

Brno

100 FTE

Krakow

700 FTEBudapest

Local account.

Bundled

2.6

14.6 14.6

4.9

19.5

2.2

1.511.0 2.8

8.2(1)

3.1(3)

11.385%(2)

-15%-10%

-25%

Status

quo

Pulled

out

SSC

target

Best-practice

efficiency

Scale

effect

Factor

costs

G&A cost

accounting

(€M)

Efficiency gain ~45%

Efficiency

€8.2M p.a.

2.0

25.0

5.8

Audit etc.

High flight-risk, no

critical talent /

information holder

High flight-risk

individuals, key

information holder

Low flight-risk, no

critical talent /

information holder

Low flight-risk

individuals key

information holder

Flight

risk

High flight-risk

individuals critical to

business

Low flight-risk


business

Impact of departure

Low High

Lo

wH

igh

Non-essentialKey Information

HoldersCritical Talent

Rest of Population Key Groups



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Agenda





2.3 Sample case




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The success of the sourcing strategy is strongly driven by

the quality of the feasibility and the transition plan

1

• Detailed and criteria based judgment of sourcing potential for each

function in scope

• Consider key limitation (especially legal, IT, data)

• Active involvement of functional owners

2

• Drive sourcing under the clear aim of improving the effectiveness of

the overall function

• Be sensitive of additional risks related to sourcing – ensure

measures are in line with overall risk appetite

3

• Develop a forward-looking transition plan, that actively addresses

potential downsides

• Ensure that productivity gaps in the new set up are limited

Focus on effectiveness

improvement –

transparency on potential

additional risk

Run detailed functional

feasibility in close

collaboration

with functional owners

Forward-looking transition

plan

Appendix



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141020 GRC TOM Proposal BCG projexp.pptx 10

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A Shared Services concept needs to be validated via

business case

Business case elements

Specific optimization levers, e.g.

• Cross-location harmonization (e.g., of reporting

formats, ...)

• Process optimization (e.g., through implementing

best practice processes)

• Factor cost reduction (e.g., through relocation)

Quantified operational savings in target state

("run rate")

• Effect of process optimization (e.g., FTE savings)

• Scale effects through bundling in SSC

• Effect of factor cost reduction

Required investments, e.g.

• Personnel costs (e.g., severance payments,

double salaries through required "work

shadowing")

• IT costs

• Other (e.g., relocation costs)

Breakeven-analysis

• Timing of implementation

• DCF-analysis

Quantified levers Total savings

Required investments /

Ramp-up costs

Breakeven-analysis

Local account.

Bundled

2.6

14.6 14.6

4.9

19.5

2.2

1.511.0 2.8

8.2(1)

3.1(3)

11.385%(2)

-15%-10%

-25%

Status

quo

Pulled

out

SSC

target

Best-practice

efficiency

Scale

effect

Factor

costs

G&A cost

accounting

(€M)


Efficiency

€8.2M p.a.

2.0

25.0

5.8

Audit etc.

Source: BCG case experience; BCG analysis

In € Mio. (G&A)

Business case SSC accounting Madrid

2006 2007 2008 2009 2010

Savings

One time costs

Aggr. disc. CF after tax

Savings

One time costs


2011 2012

Break-even

-4.1

-14.5

-3.0

3.9

9.3 9.7 10.0 10.4 10.8

-3.0

-9.2

-5.8

-0.9

3.8

8.5

12.9

B


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622,9 14,816,8

55,5

28,0

192,2

55,9

93,1

23,749,7

93,1

0

100

200

300

400

500

600

Ges

amt


Anzahl FTE

BCG with proven approaches along all dimensionsExample: Vision & strategy

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations

Mandate & governance

1

2

3 4 5 6

Baselining of current

activities & resources

Low High

High

Low

Payback potential

Implemen-

tation effort

Approach

opportunisticallyQuick Win

Little use pursuing Long running project

12

6

7

9

1112

1413

15

16

17

1 23

4

5

7

9

1112

1314

15

1617

88

10

= number of FTE

1 Expatriate support

2 Processing standard labor/social law questions

3 Environmental analyses of personnel/social policy

4 Performance of health management/company sport

5 Conception of health management

7 Performance of PE/Q. (not mgrs.)

6 Supervision of intragroup labor market

8

9

Human resources administration

10

Answering employee enquiries

11

Payroll accounting

12

Reporting2

14

Performance of labor/environmental protection13

Personnel recruiting

15

Discharge of personnel1

16

Support with salary/bonus determination

17

Coordination of training activities

Travel expense accounting

Potential Shared Services ProcessesCase example

Assessment of shared

service potential

• Collect, analyze, and present

employee data

• Forward data to agencies, board

etc.

• Responsible for most of processes

concerning salary and taxes

• Manage pensions

• Support external assessments

Reporting

Expatriates

Adminis-

tration

Outplace-

ment

Develop-

ment

Support

Payroll

• Employee f irst level support

• Coordination of support within

dif ferent level of expertise

• Organize and conduct trainings

• Specialize on dif ferent target

groups and skills (Executives, IT-

Trainings, languages)

• Handle all administrative tasks of

outplacing employees (account

compensations, write references,

placement support

• Collect and cultivate employee

data (standardization)

• ESS (Employee-Self -Service)

• Support of foreign assignment

(application for visa, work

permission, insurances)

• Support of return


employee data


etc.



• Manage pensions












placement support





Example HR

External best-practice

comparisons

Support

activities(exempl.)

Governance &


Execution /

Transactional


group accounting

Tax & insurance

Legal

Compliance


Risk management


Accounts payable

Accounts receivable


Cost accounting

HR administration &

payroll processing


order mgmt.

Real estate

Health & safety


services

Corp. strategy,

organization &

development


measurement


Purchase strategy &

support

Planning/ budgeting

M&A


investing

First level

support/general HR


redeploying

Training & people

development


Investor relations



& sustainability

"Core""Expansion"

Definition of final

functional scope

B

P-UBS Proposal location assessment-BCG-DRAFT 16-10-23h20.pptx 13

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Presentation-SAS Geno Tag-30Mar12-KOM-HAM-v09.pptx 40

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Source: BCG analysis

Risk/Finance

categories

IT layers

Scenarios

and analysis

Models and

calculations

Data

availability

(persistence)

Data

availability

(sources)

Reporting

Archiving and

versioningVI

I

II

III

IV

V

Operational Risk Liquidity RiskMarket RiskCredit Risk Other RisksFinance

Risk

Archiving and Versioning

FO System 1 (Derivatives)

FO System 2-...

Loss DB

Scenario Calculations

Risk Aggregation

CR Analysis MR Analysis OR Analysis LR Analysis IFRSOther Analysis

Local GAAP

RBC/ICAAP

Data Storage

Management Cockpit/Reporting Tool

Analytical Cockpit/Ad Hoc Reporting

Information Map/Business Metadata

ETL

Unique Function LibraryCF PV

Unique Parameter Library

PD LGD

MVaRCVaR ...AMA

...

... ...

PV01 VaR-MCMC VaR-ANA ...

Concentration Risk ... ...

Result data of layer II & III

Market Data/Reference/Master Data/Transaction Data/Collateral Data

Solutions for a well-structured risk IT need to focus on

horizontal integration across Risk/Finance categories

Move to more transversal Risk IT to better fit functional

organization and also new regulation requirements

Move from complex vertical architecture...

...towards horizontal integration

along IT layers

Case study

Wilfred Nagel deck-BF-V3.pptx 26Draft—for discussion only

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1. Investment BankingSource: BCG project experience

Risk/Finance

categories

IT layers

Scenarios

and analysis

Models and

calculations

Data

availability

(persistence)

Data

availability

(sources)

Reporting

Archiving and

versioningVI

I

II

III

IV

V


Risk

Front-to-back

solutions in silos

Fragmented IT

landscape with

over 120 data

sources and

applications

No horizontal integration between risk categories

Reporting

inconsistencies

due to missing

result

integration layer

Data

inconsistencies

due to missing

meta-data layer

Today's risk IT architectures often characterized by high

complexity and vertical front-to-back integrated solutions

Realistic landscape defines compromise between vertical

and horizontal structure

IT layer architectureC


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Detailed Risk TOM defined across sub functions and regionsOverview on organizational and governance dimensions that were defined

Risk strategy

Market risk

Wholesale /

retail credit risk

Operational risk

Risk operations

Wholesale risk

management

Retail risk

management

AM risk

management

Insurance risk

management

Ris

k t

yp

es a

nd

op

era

tio

ns

Group

Bu

sin

ess r

isk

ma

na

ge

me

nt

Region Country

Client example

Head of credit

approvals

corporate

Head of credit

approvals FI

...

Head of traded

credit

Head of

wholesale credit

risk

...

• Org structure for head of function and

one level below

• Character of reporting lines (solid /

dotted), accountabilities

• Tasks, responsibilities and

accountabilities per function

• Committee structure

• Processes per function

• Location, accountability, automation

• Interfaces between risk and other

function (e.g., operations, finance)

• Interfaces within risk

Org structure and location Interfaces

Responsibilities Processes

Organizational entity

Global risk function setupC


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Selection of examples of centralization of processes

observed in the market – not all players successful yet

Models and

Analytics

Global universal bank centralised analytics and reporting in

two hubs in India and Eastern Europe

Leading investment bank has ~1,000 employees in Utah,

including risk analysis

Major US universal bank has certain risk analysis activities

in Florida and simpler tasks in Mumbai and Bangalore

Major credit card company moved risk modeling to

Singapore, after talent issues in lower cost locations

Cost pressure has led many banks

to offshore also risk activities

Experience shows, that not all

players have been successful and

some even relocated their risk staff

Bottom line seems to be that

banks successfully offshore risk

activities if...

– ... the task is simple enough

that it can be written down, in

its entirety, unambiguously; or

– ... or: a clear understanding of

individual activities exists and

interfaces are minimized (tasks

made separable)

– ... or: enough scale in offshore

operations – e.g. BNY has

~10,000 employees in India,

20% of the total populationOther activities

Global UK bank established center for high-value risk

activities in Singapore

Major financial analysis corporation offshored some risk

activities but then reshored from India

Reporting

Large French bank built up 'Reporting-Factory' in Vietnam

– shared for Risk and Finance

Large Asian bank moved operational risk reporting to India

Credit risk

management

Major European retail bank outsourced capturing and

tabulation of balance sheet data, verification of salary

statements and contracts to a captive provider

Global automotive captive centralised contract administration

Large Austrian bank discussed centralisation / set-up of rating-

hubs – not yet implemented

Large Asian bank moved credit analysis for multiple lending

businesses to India

1

2

3

Source: BCG Project Experience

B


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Four main themes typically support rationale for a new

sourcing strategy...

Cost benefits

• Makes cost and consumption transparent and addressable

• Factor cost advantages through lower labor costs, share systems

• Scale effects of external provider – leverage outside volumes

Provider leverage

• Potential to achieve change measures and efficiency gains in a shorter time frame,

due to reduced resistance to change

• Access to scale, best in class systems, thinking and experience

Quality benefits• Quality improvement due to professional specialization and expertise

• Access to best in class processes and service levels – effectively benchmarked

Strategic• Potential for reduced time to adapt to new market / industry regulations

• Frees management capacity to focus on higher value areas

Source: BCG project experience

Theme Example

B

BCG project experience and insights structured along 5

dimensions

Project

references

Broad relevant strategic project experience in

defining risk target operating models and

sourcing in the financial services industry

A

Key trends in

sourcing along

client examples

Sample client examples illustrating the key

trends in sourcing and transformation of

global risk functions

Source: BCG

D

Industry insights

and lessons lear-

ned on sourcing

Valuable insights and lessons learned from

other companies in the financial sector

C


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BCG has more than 300 relevant credentials in financial

industries in the context that UBS requested

Source: BCG

A

Selection of relevant project experience in financial services industry

Client

Global Universal bank

European Universal bank

Large Nordic bank

International US Bank

Indian Bank

International US Bank

German financial institution

Major Australian bank

French Universal bank

Top 5 US bank

US Investment bank

International UK Bank

Major bank in APAC

US bank

UK bank

Topic

Transformation and sourcing of group risk functions

Excellence initiative in support functions

Outsourcing of support functions

Transformation/Sourcing of group risk management (off

and near shoring)


Sourcing strategy and model for finance & risk

Location strategy for support functions

Outsourcing of support functions

Outsourcing of all major support functions

Location strategy for group risk management

Location/sourcing strategy for support functions

Sourcing strategy and transformation support for group

risk management

Sourcing strategy development (Risk, Finance)

Location assessments for support functions

Location assessments for finance, risk and compliance

Location

assessment

Sourcing

strategy

Transforma-tion

business case

Transformation

Management

✓ ✓ ✓

✓ ✓ ✓✓ ✓

✓ ✓

✓ ✓ ✓

✓ ✓

✓

✓

✓✓

✓

✓

✓

✓

✓

✓ ✓✓ ✓ ✓✓ ✓ ✓✓✓ ✓

✓ ✓

✓ ✓✓✓


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Industry analysis indicates mix of offshoring and near-

shoring activity, but challenges still exist

Deutsche Bank offshored

corporate credit analysis

employees to India, but

partially reshored

1. Other examples of financial services companies to recently reshore from India include HSBC, Lehman Brothers.Note: Reshoring is the act of taking a job that has been offshored and bringing returning them to a higher-cost location. Nova Scotia has seen significant investments in middle and back office jobs (~1000 FTE) from 2008 – 2010, unclear what functions are being performed. Sources: BCG Research and Analysis, Nova Scotia Business Inc.

Standard Chartered

established center for

high-value risk activities in

Singapore

Next wave expected to be more successful given experience

and cost imperatives

Amex moved risk

modeling to Singapore,

after talent issues in lower

cost locations

JP Morgan1 has risk

analysis in Mumbai and

Bangalore

Ireland, Czech Republic,

Poland among choices for

European banks

Goldman has ~1,000

employees in Utah,


ANZ moved credit analysis for

multiple lending businesses and

operations risk reporting to India

JP Morgan has certain

risk analysis activities

done in Florida

Moody's offshored some risk

activities but then reshored

from India

TD Insurance has mid/back office

ops in Nova Scotia; significantly

increased footprint since 2008

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Risk functions bundled in European center

• Outside of financial centers to achieve lower labor costs

– client proximity less relevant

• Separate legal entity to avoid existing cost structure and

collective labor contracts

More extensive functions bundled

Cost reduction of near shoring is substantial1

• Near-shoring potential: ~20-30% of total FTE in CRO-

function

• ~<60-70% cost saving on near-shored FTE

=> 15% to 20% overall CRO-FTE cost reduction

Global bank achieved significant costs savings through

bundling and near-shoring of risk tasks

Client situation

Client is a leading multi-region, multi-division bank

Client had already an established off-shoring program

to Asia for risk tasks in place

• In place for several years

• Relevant tasks focused on daily market risk

controlling and components of credit approval, i.e.,

rating, documentation, IT

• Off-shoring to Asian low cost countries

• Low labor costs partly offset by high travel expenses

• Extremely high attrition rate in off-shored functions

caused loss of efficiency and knowledge – continuous

training of new staff required

• Significant number of risk FTE remaining in high-cost

locations, i.e., global financial centers

• Total FTE ~68K thereof 5-7% in CRO-function:

~3.500 – 5.000 FTE

• Near-shoring potential: ~1.000–1.500 FTE

or €100-150 mn2

Levers and Impact

Client example

New legal

entity

Credit approval (except largest customers)

Daily operations risk controlling

Compliance

Legal

IT partly remains in low cost location

Near-shoring of risk tasks

1. Outside-in estimation 2. All-in cost per FTE ~€150K in-house vs. 50K near-shore

Potential cost savings for CRO function1

C


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Shared Services is a performance journey with global market

leaders pushing towards "Full Service Solution Provider"

Transactional

Service Factory

High Performance

Service Engine

Full Service

Solution Provider

Value

• Functional Excellence

• Bundle & Standardize

• Optimize & Automate

• Relocate & Outsource

• Multi-functional excellence

• Optimize & Improve/Innovate

• Expand & Integrate

• Develop & Scale-up

• Transactional business services

• Analytics to drive insight /

decision support

• Consult & Market

• Support & Take-over

• Decide & Take responsibility

Scope Four corporate functions

(Finance Ops, HR&A Ops, IT,

Procurement & RE)

Add'l corporate functions

(Legal Ops, Compliance

Ops, etc)

Some business functions

Partnership Transactional with individual

functions

Transactional across

functions

True value-add partner

with BUs

Performance Cost efficiency Operating effectiveness Decision support

Standardization Basic support processes Extend across BUs, geos Extend to fit-for-purpose

processes

Capability Business transformation

(vendor mgmt, engineering)

Lean processes (E2E)

across functions

Data and analytics, BU-

value added services

Maturity

dimension Time

Source: BCG

D


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Full Service Solution Providers of global market leaders

exhibit common key features

Ambitious

functional scope

End-to-end

process ownership

"Service hubs"

model

Strong customer

focus

Continuous

improvement

Business-like

steering

1

2

3

Long-term

continuous effort

1

2

3

4

5

6

7

Source: BCG

D

Innovation and

Excellence in

Shared Services

E

The journey towards Excellence in Support

Functions (ESF) – best-practice Shared

Services


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The journey to excellence: shared services drive efficiency &

effectiveness in support functions

Valu

e / E

ffecti

ven

ess

Cost / Efficiency

"Excessive" "Truly excellent"

"Bureaucratic" "Minimalistic"

Source: BCG

The opportunity: Break the paradigm of

value VS. cost

• Excellence is about both

• Shared services can deliver both, one

reinforcing the other

The approach: De-average delivery

• Differentiated delivery

• More specialization, yet strong overall

orchestration and capability building

The value: cost and value impact

• Cost out: 1-3 ppt improved cost ratio

• Value: Enable your organization, be able

and credible to best steer and service your

business, drive growth and profitability

D

BCG framework

for shared serv.

operating model

B Our proven BCG framework for the target

operating model of shared services

addresses all key elements


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Vision,

& strategy

Vision

& strategy

People &

behaviors

Vendors

& sourcing

Systems

& tools

Proces-

ses

Org

design


Effectiveness

(Value)

Efficiency

(Cost)

Source: ESF

Our Framework for the Target Operating Model of shared

services addresses all key elements

Input

Dimensions

Output

Dimensions

Excelle

nce

Sharp vision & clear value

creation ambition through

priority setting in corporate

strategy

Right mix of

functional &

soft skills,

combined with

right mindset

& high

motivation

Flat hierarchies,

right centrali-

zation, clear roles

Vision/Strategy-consistent

mandates, minimal regulation &

"good enough" mindset

Lean processes,

minimizing waste

& rework

Effective use of

external providers &

leverage of external

workforce

Effective tools,

methods, dash-

boards & IT

Value added in high priority issues,

high quality service interactionsHigh speed at reasonable cost ,

no low-value service activities

B



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BCG has more than 300 relevant credentials on sourcing in

financial institutions

A

✓ ✓ ✓

✓ ✓ ✓

✓ ✓ ✓

✓ ✓

✓

✓

✓ ✓ ✓

✓ ✓ ✓ ✓

✓ ✓ ✓

✓ ✓ ✓

✓ ✓

✓

✓

✓

✓ ✓

✓

✓

✓

✓ ✓

✓

✓

✓

✓ ✓ ✓

✓ ✓

✓ ✓ ✓

✓ ✓ ✓

✓

✓ ✓

✓

✓ ✓

Client

Global universal bank

International US bank

International UK-based bank

French banking group

International US bank

International bank

Regional German bank

Global German-based bank

European bank

Portuguese bank

European universal bank

German financial institution

International UK bank

Major bank in APAC

French universal bank

Topic

Transformation and sourcing of group risk functions

Transformation/Sourcing of group risk management (off- and

nearshoring)

Re-engineering of global risk function

Definition of target organization and governance for the risk function

Sourcing strategy and model for finance & risk

Transformation of risk organizational design

Comprehensive transformation program for the CRO function

Target Operating Model blueprint for operational excellence program

Operational excellence strategy for corporate functions

Redefinition of Operating Model for support functions to optimize cost

structure


Location strategy for support functions

Sourcing strategy and transformation support for group risk

management

Sourcing strategy development (Risk, Finance)

Outsourcing of all major support functions

Location

assessment

Sourcing

strategy

Transformation

business case

Transformation

management

Risk Target

Operating Model

Selection of relevant project experience in the financial services industry

Source: BCG



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Vision,

& strategy

Vision

& strategy

People &

behaviors

Vendors

& sourcing

Systems

& tools

Proces-

ses

Org

design


Effectiveness

(Value)

Efficiency

(Cost)

Source: ESF

Our Framework for the Target Operating Model of shared

services addresses all key elements

Input

Dimensions

Output

Dimensions

E

xc

elle

nc

e

Sharp vision & clear value

creation ambition through

priority setting in corporate

strategy

Right mix of

functional &

soft skills,

combined with

right mindset

& high

motivation

Flat hierarchies,

right centrali-

zation, clear roles

Vision/Strategy-consistent

mandates, minimal regulation &

"good enough" mindset

Lean processes,

minimizing waste

& rework

Effective use of

external providers &

leverage of external

workforce

Effective tools,

methods, dash-

boards & IT

Value added in high priority issues,

high quality service interactions High speed at reasonable cost ,

no low-value service activities

B



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622,9 14,816,8

55,5

28,0

192,2

55,9

93,1

23,749,7

93,1

0

100

200

300

400

500

600

Ges

amt


Anzahl FTE

BCG with proven approaches along all dimensions Example: Vision & strategy

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Baselining of current

activities & resources

Low High

High

Low

Payback potential

Implemen-

tation effort

Approach

opportunisticallyQuick Win

Little use pursuing Long running project

12

6

7

9

1112

1413

15

16

17

1 23

4

5

7

9

1112

1314

15

1617

88

10

= number of FTE

1 Expatriate support

2 Processing standard labor/social law questions

3 Environmental analyses of personnel/social policy

4 Performance of health management/company sport

5 Conception of health management

7 Performance of PE/Q. (not mgrs.)

6 Supervision of intragroup labor market

8

9

Human resources administration

10

Answering employee enquiries

11

Payroll accounting

12

Reporting2

14

Performance of labor/environmental protection13

Personnel recruiting

15

Discharge of personnel1

16

Support with salary/bonus determination

17

Coordination of training activities

Travel expense accounting

Potential Shared Services ProcessesCase example

Assessment of shared

service potential


employee data


etc.



• Manage pensions


Reporting

Expatriates

Adminis-

tration

Outplace-

ment

Develop-

ment

Support

Payroll











placement support

• Collect and cultivate employee

data (standardization)

• ESS (Employee-Self -Service)






employee data


etc.



• Manage pensions












placement support





Example HR

External best-practice

comparisons

Support

activities(exempl.)

Governance &


Execution /

Transactional


group accounting

Tax & insurance

Legal

Compliance


Risk management


Accounts payable

Accounts receivable


Cost accounting

HR administration &

payroll processing


order mgmt.

Real estate

Health & safety


services

Corp. strategy,

organization &

development


measurement


Purchase strategy &

support

Planning/ budgeting

M&A


investing

First level

support/general HR


redeploying

Training & people

development


Investor relations



& sustainability

"Core""Expansion"

Definition of final

functional scope

B



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BCG with proven approaches along all dimensions Example: Mandate & governance

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Steering logic –

cost vs. profit center

Obligation to

Contract

Free Decision

R

• Essential weakening of

demand side

• Internally subsidized

growth

• Problematic

prioritization of

customers

G

• Enabling of highest

efficiency and

effectiveness (ready for

market)

• Loss of bundling effects

• More complex company-

wide steering

G

• Compensation of

possible inefficiencies

through price mechanisms

• Minimization of the danger

of an unwanted

company-wide increase

of supply

Y

• Strengthening of market

powers

• Price vs. cost problems

if bundling is not possible

• Wrong incentives on the

demand side

G

• More Focus on cost

reduction while demand

remains stable

• Increase of efficiency

due to higher pressure

for justification by

internal demand side

Y

• Uncertainty for planning

due to uncertain

demand

• Problems with offering

adequate offers

• Yet, possibility to

reallocate earnings and

losses internally

With Obligation to

Contract possible center

type

With Obligation to

Contract possible center

type

With Free Decision possible

center typeEvaluation

Contracting

model

Steering logic

Cost centerControlled

profit centerProfit center

Service KPIs

Purchase-to-

Pay

• % of items processes within 4 calendar days

• ø query resolution time

• % of customer service availability

• % of customer service first time resolution

Service

Invoice-to-

Cash

• DSO on target

• % cash allocation

• % of calls answered

Account-to-

report

• % of on time submissions to system

• % of unprocessed orders

Tax• % of VAT return delivered on time

• % of Intrastat submissions delivered on time

KPIs

Customer interaction

model

Corporate center

SSC

Customers

Contracting model – obligation

to buy vs. free choice

Option 1:

Obligation to Contract

Option 2:

Free Decision

Services that can be bundled on a company-wide level, HAVE to be

contracted via SSC

Subgroup/

BUSSC

External

Provider Optional special rights for

service unit possible:

"Last call"-Rule

Right to be informed about

bid-invitation to external

providers

Right to takeover a contract

for same condition

Subgroups/BUs can freely choose to contract a provider

Subgroup/

BU

SSC

External

Provider

"Last-Call"-

Rule

B



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BCG with proven approaches along all dimensions Example: Organization design & locations

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Overall Shared Services

organization

Decentralized setup

Corp. Center

BU

SS

BU BUBU

SS SS

Functional setup

SS

BU BU BU

Corp. Center

SS SS SS

Multi-service setup

BU SS BU

Corp. Center

HR

F&

A

P

Interface to

business units

Business

unit 1

Business

unit 2

Business

unit 3

Business Partners

& HR Supports

BU Business PartnersTransversal Processes

Payroll / Administration

Areas of Expertise

Employee

Relations

Impats/

Expats

Comp./ Benefits

and Projects

Platforms

Management Shared HR

Career

Management

Recruiting

Training &

Development

Define Define

Define /

supportAdvise

Provide/

Adapt

Define

needs

Individual service setup

HR Management SSC

Payroll

accounting

Health

Management

HR

Management

Retirement

Provision

Assistant

Location choice

Mexico

3,000 FTE

Scottsdale

San José

Moncton, Saint John

500 FTE

Salford Quays,Manchester300 FTE

Newcastle

Prague

800 FTE

Szekesfehervar

225 FTE

Prague

500 FTE

Dalian

1,100 FTE

Manila

India

Bangkok

Bangalore130 FTE

Hyderabad,Delhi, Bangaloreand Gurgaon23,000 FTE

Budapest300 FTE

Curitiba SP

São Paulo

Budapest

400 FTE

Kuala Lumpur

Budapest280 FTE

Atlanta

634 FTE

Budapest250 FTE

Budapest

100 FTE

Krakow

100 FTE

Brno

100 FTE

Krakow

700 FTEBudapest

B



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BCG with proven approaches along all dimensions Example: Processes & systems

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Service processes

Service level

agreements

Employee

services

Business

services

Stakeholders involved Services delivered

Service

Level

Agreement

GBUs

MDO

Corporate

functions

GBS

Input Owner

Transfer pricing

schemes

"Direct cause-

and-effect"

"Indirect cause-

and-effect"

IllustrationPrinciple

BU 1

BU 2

BU3

BU4

BU n

BU 1

BU 2

BU 3

BU 4

BU n

1. Rechnungserfassung und -archivierung

2. Rechnungen prüfen

3. Kosten-/Aufwands-buchungen durchführen

4. Rechnungen begleichen

TK 1 SSCRechnungs-

prüfung

Andere Abteilung

Operative Einheiten,

Einkauf

Rechnung

SSC

Rechnung sachlich, vertraglich und rechnerisch

prüfen

SSC

• Rg. buchen, ggf. korrigieren/ Anschreiben erstellen

• Gesperrte Rechnung klären

SSC

• Maschinelle Zahlung

anstoßen/

Überwachen

Zahlung

= Schnittstelle

Einkauf

Ggf. Preisprüfung

Wareneingang

Ggf. Warenein-gangsbuchung

Lagerort

Ggf. Anerkennung Menge und WE-Buchung

Anforderer

Ggf. Anerkennung Menge und ggf. WE-Buchung

Finanzpartner

• Prüfung/ Kontierung• Ggf. Umbuchung über

Kontrolllisten

Scannen

Validierung

Rechnung (Work-Item)

Empfang

SSC und Vorberei-

tung

Scannen

Systems and enabling

technologies

IT-systems

BU 2

BU 4

BU1

BU ...

Units

B



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BCG with proven approaches along all dimensions Example: People & behaviors

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Retention management

High flight-risk, no

critical talent /

information holder

High flight-risk

individuals, key

information holder

Low flight-risk, no

critical talent /

information holder

Low flight-risk

individuals key

information holder

Flight

risk

High flight-risk


business

Low flight-risk


business

Impact of departure

Low High

Lo

wH

igh

Non-essentialKey Information

HoldersCritical Talent

Rest of Population Key Groups

Transfer of capabilities

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

201220112010

24

79

112

143

184 184 184 184

55

33

31

41

24

89

139

167

203

206

192184

24

184

Career paths in-/outside

Shared Services

SSC(desirable and soon mandatory for all HR careers)

CoE 1 CoE 2

HRBP(experience in SSC and 2 CoEs mandatory)

HR leadership(experience in all three departments desirable)

Bu

sin

ess

exp

eri

en

ce

High-potential attraction

MeasureStrategy-based HR planning and value proposition

OpenNew pools of talents or resources

MarketNew channels and credibility

SupportAppropriate tools and organizations

Current

talent portfolio

Future

optimal target

SSC mgmt.

Key positions

Key position

potentials

Potentials

x10

x3

x3

Challenge: Fueling growth of Shared Services

How to adjust Shared Services

for growth

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BCG with proven approaches along all dimensions Example: People & behaviors

Vision

& strategy

People &

behaviors

Vendors &

contractors

Process

& systems

Org

design &

locations


1

2

3 4 5 6

Sourcing strategy

BU Intern. serviceprovider

ExternalInternal

Lo

ca

l

Re

gio

na

l/

glo

ba

lO

ffsh

ore

C

3A B

2a 4

1a 5

67

1c

1b2b2c

Vendor selection &

transition

III IV V

Sizing the opportunity

I II

Vendor scoping, RfI/RfP & due

diligence

Design ofretained org. &

contractingTransition Transformation

Vendor management

Operational

board

Strategic

board

Quality manager

Project manager(s) OtC/PtP/general ledger

Operational manager

Head(s) of OtC/PtP/general ledger

Process deliverymanager

Contract owner,e.g., CFO

Key Accounter

A

B

CHelp Desk

Business

units

OtC team

PtP team

General ledger team

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A Shared Services concept needs to be validated via

business case

Business case elements

Specific optimization levers, e.g.

• Cross-location harmonization (e.g., of reporting

formats, ...)

• Process optimization (e.g., through implementing

best practice processes)

• Factor cost reduction (e.g., through relocation)

Quantified operational savings in target state

("run rate")

• Effect of process optimization (e.g., FTE savings)

• Scale effects through bundling in SSC

• Effect of factor cost reduction

Required investments, e.g.

• Personnel costs (e.g., severance payments,

double salaries through required "work

shadowing")

• IT costs

• Other (e.g., relocation costs)

Breakeven-analysis

• Timing of implementation

• DCF-analysis

Quantified levers Total savings

Required investments /

Ramp-up costs

Breakeven-analysis

Local account.

Bundled

2.6

14.6 14.6

4.9

19.5

2.2

1.511.0 2.8

8.2(1)

3.1(3)

11.385%(2)

-15%-10%

-25%

Status

quo

Pulled

out

SSC

target

Best-practice

efficiency

Scale

effect

Factor

costs

G&A cost

accounting

(€M)


Efficiency

€8.2M p.a.

2.0

25.0

5.8

Audit etc.

Source: BCG case experience; BCG analysis

In € Mio. (G&A)

Business case SSC accounting Madrid

2006 2007 2008 2009 2010

Savings

One time costs


Savings

One time costs


2011 2012

Break-even

-4.1

-14.5

-3.0

3.9

9.3 9.7 10.0 10.4 10.8

-3.0

-9.2

-5.8

-0.9

3.8

8.5

12.9

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Business case based on clear guidelines and assumptions

including optimization levers and ramp-up costs

Not relevant • Currently, only limited use of external vendors

• Therefore, no potential assumed

Procurement

optimization

5% • Conservative assumption: processes at business unit A already largely optimized

• By rolling out business unit A process, learning effects largely realized

• Yet, limited future learning effects through use of employee interaction center for employee requests

Learning curve

effects

Costs for payroll

system migration

• Implementation costs of € X Mio. for migration of current payroll processes and data to systems of

business unit A

• Further implementation costs of € Y Mio. to set up employee interaction center

• Recurring yearly IT costs of € Z Mio. in steady state

IT costs

1,2 x personnel

costs • Overarching assumption for severance pay, based on BCG know-how, client experience and

existing labor agreements Severance pay

Op

tim

iza

tio

n le

ve

rs

Ra

mp

-up

co

sts

100% of activities • Bundling of entire function HR payroll

• Activity scope includes: payroll, HR administration, employee requests, payroll reporting

Functional

scope

Bundling in two

clusters

• Currently, very decentralized set-up, differing degrees of efficiency

• Yet, due to high complexity of underlying tariff structures, complete bundling not feasible

• Bundling in two clusters, business units A, B, C and D in cluster 1, business unit E to form cluster 2

Degree of

bundling

Increase to internal

best practice

• Increase of productivity to current internal best practice (business unit A)

• Furthermore, use of scale effects through bundling and migration to two payroll systems

(assumed scale curve: 10%)

Productivity

increase

€ 5.550 • Overarching assumption based on benchmarks, BCG know-how and client experience Relocation

costs

Source: BCG case experience

Case example

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Four main themes typically support rationale for a new

sourcing strategy...

Cost benefits

• Makes cost and consumption transparent and addressable

• Factor cost advantages through lower labor costs, share systems

• Scale effects of external provider – leverage outside volumes

Provider leverage

• Potential to achieve change measures and efficiency gains in a shorter time frame,

due to reduced resistance to change

• Access to scale, best in class systems, thinking and experience

Quality benefits • Quality improvement due to professional specialization and expertise

• Access to best in class processes and service levels – effectively benchmarked

Strategic • Potential for reduced time to adapt to new market / industry regulations

• Frees management capacity to focus on higher value areas


Theme Example

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...but common risk drivers should be considered as well

People

• Cultural impact – loss of engagement

• Survivor guilt and morale impairment

• Impaired ability to cross train staff – less attractive career tracks

• Less experienced staff at provider – high turnover, low industry knowledge

Flexibility and

control

• Inability to redirect resources to emerging priorities

• Erosion of in-house capability – become beholden to suppliers

• Higher charges for exceptions / ad hoc demand

• Contractual obligations (minimum spend / utilization etc)

Vendor issues

• Vendor failure / relationship failure

• High degree of supervisory burden and cost

• Misaligned incentives (cost versus quality / revenue)

• Bait and switch "suppliers trap"


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Selection of examples of centralization of processes

observed in the market – not all players successful yet

Models and

Analytics

Global universal bank centralised analytics and reporting in

two hubs in India and Eastern Europe

Leading investment bank has ~1,000 employees in Utah,


Major US universal bank has certain risk analysis activities

in Florida and simpler tasks in Mumbai and Bangalore

Major credit card company moved risk modeling to

Singapore, after talent issues in lower cost locations

Cost pressure has led many banks

to offshore also risk activities

Experience shows, that not all

players have been successful and

some even relocated their risk staff

Bottom line seems to be that

banks successfully offshore risk

activities if...

– ... the task is simple enough

that it can be written down, in

its entirety, unambiguously;

– ... or: a clear understanding of

individual activities exists and

interfaces are minimized (tasks

made separable);

– ... or: enough scale in offshore

operations – e.g. BNY has

~10,000 employees in India,

20% of the total population Other activities

Global UK bank established center for high-value risk

activities in Singapore

Major financial analysis corporation offshored some risk

activities but then reshored from India

Reporting

Large French bank built up 'Reporting-Factory' in Vietnam

– shared for Risk and Finance

Large Asian bank moved operational risk reporting to India

Credit risk

management

Major European retail bank outsourced capturing and

tabulation of balance sheet data, verification of salary

statements and contracts to a captive provider

Global automotive captive centralised contract administration

Large Austrian bank discussed centralisation / set-up of rating-

hubs – not yet implemented

Large Asian bank moved credit analysis for multiple lending

businesses to India

1

2

3

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Industry analysis indicates mix of offshoring and near-

shoring activity, but challenges still exist

Deutsche Bank offshored

corporate credit analysis

employees to India, but

partially reshored

1. Other examples of financial services companies to recently reshore from India include HSBC Note: Reshoring is the act of taking a job that has been offshored back to a higher-cost location. Nova Scotia has seen significant investments in middle and back office jobs (~1000 FTE) from 2008 – 2010, unclear what functions are being performed. Sources: BCG Research and Analysis, Nova Scotia Business Inc.

Standard Chartered

established center for

high-value risk activities in

Singapore

Next wave expected to be more successful given experience

and cost imperatives

Amex moved risk

modeling to Singapore,

after talent issues in lower

cost locations

JP Morgan1 has risk

analysis in Mumbai and

Bangalore

Ireland, Czech Republic,

Poland among choices for

European banks

Goldman has ~1,000

employees in Utah,


ANZ moved credit analysis for

multiple lending businesses and

operations risk reporting to India

JP Morgan has certain

risk analysis activities

done in Florida

Moody's offshored some risk

activities but then reshored

from India

TD Insurance has mid/back office

ops in Nova Scotia; significantly

increased footprint since 2008

Backup C



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High level checklist can provide initial indication on how to

mitigate the risks

• Off-/nearshore standard, non-core, non client facing activities.

• Complex, bespoke activities will remain in the trading hubs

• Do not offshore broken processes

• A variety of factors need to be considered (Government subsidies,

availability of talents, country risk )

• A detailed global blueprint needs to be developed to ensure consistency

and avoid duplications

• Requirement of single point of contact (e.g. front office)

• Continuous effort required to co-ordinate day-to-day interactions with the

regional operations teams to drive economies of scale and process

efficiency

• Level of outsourcing depends on internal ability and acceptance

What to off-/

nearshore?

Where to off-/

nearshore?

How to

manage?

When out-

source ?

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Key trends in risk function organization

Global risk function

setup

International leading bank improved efficiency and effectiveness of global risk function by

• Ensuring global consistency of risk strategy, policies, roles, processes, data and IT

• De-layering by removing management layers (12 to 8) and committees (>100 removed)

• Increased use of shared service centers for operational efficiency

• Less and more standardized reporting

Bundling of risk

tasks

Global bank achieved significant costs savings through bundling of risk tasks in non financial hubs

• Achieved lower labor costs for risk tasks where client proximity is less relevant (e.g. daily controlling

operations, legal, credit approval, compliance)

• Separate legal entity to avoid existing cost structure and collective labor contracts

IT layer architecture

Transversal Risk IT set up to better fit functional organization and new regulatory requirements

• Single point of truth for market, master/reference and position data

• Consolidation of models and calculations across Risk, Finance and Front Office

• Dynamic portfolio simulation environment allowing ad hoc and integrated marco-economic scenarios

• Integrated reporting of risk and finance without disconnect between reg. reporting and bank steering

Integrated workflow

management

Large universal bank improved effectiveness with integrated workflow support for credit process

• Capturing and real-time editing of all relevant data while avoiding data inconsistencies

• Value-added analyses based on workflow tool (e.g. definition of warning signals, automated analysis of

existing portfolio, basis for scenario analysis, resource allocation analysis)

D

Client example Description




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Key levers defined to enhance organizational efficiency and

effectiveness

• Spanning across headquarter, regions, countries

• Make Risk function own all its key operations Build a truly global Risk function

• Globally consistent definition of risk strategy, governance,

organization, roles, task splits, policies, processes, data, IT, etc.

Implement globally consistent Risk

Operating Model along a common

Blueprint

• Clear accountability defined between global headquarters,

regions, countries

• Clear interfaces with businesses functions

Align responsibilities and interfaces

globally

• Dual reporting lines on layer 5+ only if required by local

regulation

Define global reporting lines and

remove multiple ones where possible

• Removal of >100 committees/meeting formats

• Clear responsibilities, no duplicate sign-offs

Streamline risk-related

committees/meeting formats

• Reduce from previously 12 management layers to max. 8 layers

• Increase spans of control from below 5 to an average of 8

(between 6-25)

Reduce management layers and

increase spans of control

• Less and more focused/standardized and automated reports

• Re-engineer end-to-end risk processes to apply global standards

• Review of all risk activities – elimination low-value activity

Thoroughly review the way the Risk

function operates

• Merge selected offshore shared risk service centers

• Take advantage of labor cost arbitrage

Increased use of further

offshoring/shared services

Processes

Physical

location

Organization

Configuration

Governance

Global risk function setup

Client example

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Detailed Risk TOM defined across sub functions and regions Overview on organizational and governance dimensions that were defined

Risk strategy

Market risk

Wholesale /

retail credit risk

Operational risk

Risk operations

Wholesale risk

management

Retail risk

management

AM risk

management

Insurance risk

management

Ris

k t

yp

es

an

d o

pe

rati

on

s

Group

Bu

sin

es

s r

isk

ma

nag

em

en

t

Region Country

Head of credit

approvals

corporate

Head of credit

approvals FI

...

Head of traded

credit

Head of

wholesale credit

risk

...

• Org structure for head of function and

one level below

• Character of reporting lines (solid /

dotted), accountabilities

• Tasks, responsibilities and

accountabilities per function

• Committee structure

• Processes per function

• Location, accountability, automation

• Interfaces between risk and other

function (e.g., operations, finance)

• Interfaces within risk

Org structure and location Interfaces

Responsibilities Processes

Organizational entity

Global risk function setup

Client example

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Risk functions bundled in European center

• Outside of financial centers to achieve lower labor costs

– client proximity less relevant

• Separate legal entity to avoid existing cost structure and

collective labor contracts

More extensive functions bundled

Cost reduction of near shoring is substantial1

• Near-shoring potential: ~20-30% of total FTE in CRO-

function

• ~<60-70% cost saving on near-shored FTE

=> 15% to 20% overall CRO-FTE cost reduction

Global bank achieved significant costs savings through

bundling and near-shoring of risk tasks

Client situation

Client is a leading multi-region, multi-division bank

Client had already an established off-shoring program

to Asia for risk tasks in place

• In place for several years

• Relevant tasks focused on daily market risk

controlling and components of credit approval, i.e.,

rating, documentation, IT

• Off-shoring to Asian low cost countries

• Low labor costs partly offset by high travel expenses

• Extremely high attrition rate in off-shored functions

caused loss of efficiency and knowledge – continuous

training of new staff required

• Significant number of risk FTE remaining in high-cost

locations, i.e., global financial centers

• Total FTE ~68K thereof 5-7% in CRO-function:

~3.500 – 5.000 FTE

• Near-shoring potential: ~1.000–1.500 FTE

or €100-150 mn2

Levers and Impact

New legal

entity

Credit approval (except largest customers)

Daily operations risk controlling

Compliance

Legal

IT partly remains in low cost location

Near-shoring of risk tasks

1. Outside-in estimation 2. All-in cost per FTE ~€150K in-house vs. 50K near-shore

Potential cost savings for CRO function1

Client example

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IT layer model supports identification of major pain points

along IT layers and across risk/finance categories

Typical pain points of Risk IT landscape

No integrated reporting with risk and finance numbers, disconnection between regulatory reporting

and bank steering and inconsistencies across reports

Ad-hoc reporting not sufficiently supported (e.g., EBA stress testing)

Multiple manual workarounds and long time-to-report

No integrated macroeconomic scenario calculation, no ability to develop and run simulations on

demand

Multiple valuation engines (E.g. front office, Risk, Finance)

Long computation time for risk numbers

No single point of truth for market, master/reference and position data

Limited data accessibility and transparency; data inconsistencies

Scenarios

and analysis

Models and

calculations

Data

availability

Reporting

IT layer


Case study

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Presentation-SAS Geno Tag-30Mar12-KOM-HAM-v09.pptx 40

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ights

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Source: BCG analysis

Risk/Finance

categories

IT layers

Scenarios

and analysis

Models and

calculations

Data

availability

(persistence)

Data

availability

(sources)

Reporting

Archiving and

versioningVI

I

II

III

IV

V


Risk

Archiving and Versioning

FO System 1 (Derivatives)

FO System 2-...

Loss DB

Scenario Calculations

Risk Aggregation

CR Analysis MR Analysis OR Analysis LR Analysis IFRSOther Analysis

Local GAAP

RBC/ICAAP

Data Storage

Management Cockpit/Reporting Tool

Analytical Cockpit/Ad Hoc Reporting

Information Map/Business Metadata

ETL

Unique Function LibraryCF PV

Unique Parameter Library

PD LGD

MVaRCVaR ...AMA

...

... ...

PV01 VaR-MCMC VaR-ANA ...

Concentration Risk ... ...

Result data of layer II & III

Market Data/Reference/Master Data/Transaction Data/Collateral Data

Solutions for a well-structured risk IT need to focus on

horizontal integration across Risk/Finance categories

Move to more transversal Risk IT to better fit functional

organization and also new regulation requirements

Move from complex vertical architecture...

...towards horizontal integration

along IT layers

Wilfred Nagel deck-BF-V3.pptx 26Draft—for discussion only

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reserv

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1. Investment BankingSource: BCG project experience

Risk/Finance

categories

IT layers

Scenarios

and analysis

Models and

calculations

Data

availability

(persistence)

Data

availability

(sources)

Reporting

Archiving and

versioningVI

I

II

III

IV

V


Risk

Front-to-back

solutions in silos

Fragmented IT

landscape with

over 120 data

sources and

applications

No horizontal integration between risk categories

Reporting

inconsistencies

due to missing

result

integration layer

Data

inconsistencies

due to missing

meta-data layer

Today's risk IT architectures often characterized by high

complexity and vertical front-to-back integrated solutions

Realistic landscape defines compromise between vertical

and horizontal structure


Case study

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Implementation of integrated work flow tool

• End-to-end support for credit process

• Capturing of all relevant data, e.g., client, collateral,

transaction, in one system

• Avoidance of data inconsistencies

• Standardization of processes

• Real time editing of data

Enabling of analyses based on workflow tool

• Automated analyses on existing portfolio

• Definition of warning signals (e.g., behavioral data) to

trigger manual interventions

• Basis for scenario analyses

• Refocus of resources to value-adding tasks (80%)

Large universal bank achieved effectiveness gains by

implementing integrated workflow support for credit process

Client situation

Client is a large universal bank with significant retail

and SME portfolio

Traditional focus on risk costs but operating costs

higher for selected segments, e.g.,

• Retail, in particular mortgages

• SME

• Mid Cap

Due to missing integrated workflow tool resources

not employed effectively

• Focus on manual reconciliation tasks (80%)

• Less focus on value adding analyses (20%)

Levers and Impact

Integrated workflow management

Client example

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The journey to excellence: shared services drive efficiency &

effectiveness in support functions V

alu

e / E

ffecti

ven

ess

Cost / Efficiency

"Excessive"

"Truly excellent"

"Bureaucratic"

"Minimalistic"

Source: BCG

The opportunity: Break the paradigm of

value VS. cost

• Excellence is about both

• Shared Services can deliver both, one

reinforcing the other

The approach: De-average delivery

• Differentiated delivery

• More specialization, yet strong overall

orchestration and capability building

The value: cost and value impact

• Cost out: 1-3 ppt improved cost ratio

• Value: Enable your organization, be able

and credible to best steer and service your

business, drive growth and profitability

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Shared Services is a performance journey with global market

leaders pushing towards "Full Service Solution Provider"

Transactional

Service Factory

High Performance

Service Engine

Full Service

Solution Provider

Value

• Functional Excellence

• Bundle & Standardize

• Optimize & Automate

• Relocate & Outsource

• Multi-functional excellence

• Optimize & Improve/Innovate

• Expand & Integrate

• Develop & Scale-up

• Transactional business services

• Analytics to drive insight /

decision support

• Consult & Market

• Support & Take-over

• Decide & Take responsibility

Scope Four corporate functions

(Finance Ops, HR&A Ops, IT,

Procurement & RE)

Add'l corporate functions

(Legal Ops, Compliance

Ops, etc)

Some business functions

Partnership Transactional with individual

functions

Transactional across

functions

True value-add partner

with BUs

Performance Cost efficiency Operating effectiveness Decision support

Standardization Basic support processes Extend across BUs, geos Extend to fit-for-purpose

processes

Capability Business transformation

(vendor mgmt, engineering)

Lean processes (E2E)

across functions

Data and analytics, BU-

value added services

Maturity

dimension Time

Source: BCG

E

http://www.kraftfoodscompany.com/home/index.aspx

http://www.shell.de/

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Full Service Solution Providers of global market leaders

exhibit common key features

Ambitious

functional scope

End-to-end

process ownership

"Service hubs"

model

Strong customer

focus

Continuous

improvement

Business-like

steering

1

2

3

Long-term

continuous effort

1

2

3

4

5

6

7

Source: BCG

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assumptions used in these analyses. Changes in the underlying data or operating assumptions will clearly impact the analyses and

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160513 Study Sourcing in risk and compliance functions

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