Exploring the Global Financial Information Superhighway

Vol. 9: Construction Period of Offshoring and Outsourcing in the Investment Banking Industry (part two)

Consulting Fellow, RIETI

The paradigm shift in international finance gathered momentum around 1995. In this period, the back offices of multinational investment banks "built" the mechanism of operational processes outsourcing to other companies in the same countries, the business models for intra-group offshoring in which other overseas offices are expanded and transformed into centers for developing information systems for large-scale business processes, and schemes for offshore outsourcing of information systems development to other companies in different countries. In this volume, we explore key points in intra-group offshoring by analyzing a case involving the global information systems strategies of a multinational investment bank.

Business partnership across the Atlantic

An investment bank affiliated with a multinational financial group began building an intra-group offshoring center in Singapore around 1995 (Note 1). This group was a forward-thinking multinational financial conglomerate formed through a business partnership across the Atlantic between a traditional commercial bank in Switzerland and a traditional investment bank in the United States. It is a trailblazer in globalization and multinationalization. The group's three offices in Zurich, New York, and London have been working in concert to make global management decisions since 1990.

This Swiss-American financial group can trace its history back to a commercial bank established in Switzerland in 1856, which steadily expanded its network of branches within the country during the period from its establishment to World War I. After the war, the bank opened new branches and established new subsidiaries by absorbing other financial institutions, and continued to expand its market share. The bank continued to enlarge its network of branches following the Great Depression in 1929. However, in the period from World War II to the 1960s, its profits failed to grow as expected, and it found itself playing second fiddle to two other major Swiss banks. To turn the tables, the bank began to look to increase profits by acquiring market share through the development of an international business network outside Switzerland in the early-1970s.

In 1978, this Swiss financial group formed a business partnership with a progressive U.S. investment bank. This venerable bank was part of the bulge bracket in the U.S. in the 1940s but was suffering from anemic profits in the late-1970s. It returned to profitability in the mid-1980s by handling a broad range of financial products, and regained its position as a market leader on Wall Street. The bank also expanded into Asia, and opened a representative office in the Tokyo market in 1972. It upgraded the Tokyo representative office to a branch in 1985, and became a member of the Tokyo Stock Exchange in 1988.

New global business models and global booking systems

The U.S. investment bank reported losses on a number of stock and bond transactions in the period around Black Monday from 1986 to 1988. Its cash position deteriorated as a result. In response, the Swiss group decided to invest aggressively in its U.S. partner. The financial group established a Swiss-American financial holding company in 1989, and placed the commercial bank and the investment bank under the control of the holding company.

The integrated bank introduced two global business models in 1992. The first model employed derivatives trading conceived at its London office. The second was a model for global bond trading that was brought to its New York office by another U.S. investment bank. These two separate models, formed at offices in London and New York, differed in traded financial products and transaction methods. However, they had extremely similar information systems requirements. Both models required systems that enable the global booking mechanism necessary to operate across the three regions of North America, Europe, and Asia-Pacific.

Trading volume for the two new global businesses originated in London and New York rose sharply in 1993. To deal with the dramatic business change, the Swiss-American investment bank began to force through global organizational structure reforms in 1994. Until then, the bank's offices in such locations as New York, London, Tokyo, Hong Kong, Singapore, and Sydney had operated independently in a localized management structure. The bank changed this structure into a regional management structure in which it established three regions of North America, Europe, and Asia-Pacific, and managed operations within each of these regions using a cross-sectional and integrated approach. Following these changes in the organizational structure, the senior management of the group made the decision to establish an intra-group offshoring center in Singapore for the Asia-Pacific region, based on cost per ticket derived from simulation matrix analysis.

Intra-group offshoring to Singapore

The financial group's back offices in the Asia-Pacific region embarked on structural reforms in 1994. As a first step, senior managers of the financial group's information systems, securities management, and accounting divisions moved from the Tokyo, Hong Kong, and Sydney offices to the Singapore office to build an intra-group offshoring center. In the following year, 1995, the financial group launched a new internal system development project in Asia-Pacific, looking to reduce manual processes, consolidate information systems used at different offices, and cut costs. To carry this project through, the group relocated a number of hybrid managers from its Tokyo, Hong Kong, and Sydney offices to the Singapore office.

The group undertook another round of global structural reforms again in 1996. Through these reforms, the group was divided into four business units: a retail banking unit for Switzerland, a commercial banking unit to utilize global networks, an investment banking unit to handle global financial transactions, and a trust banking unit to perform asset management. These reforms in the organizational structure clarified the global reporting lines within the group.

In 1998, the internal system development project concluded successfully, and integrated information systems began to operate in the back offices of the financial group's offices across the Asia-Pacific region. With the experience of two major international projects to address the European Economic and Monetary Union (EMU) in January 1999 and Y2K-related problems in January 2000, the information systems used by the financial group's back offices in Asia-Pacific, centering on the Singapore office, grew into an extremely high-quality system, capable of providing sufficient support to global businesses performed by the group's front offices. In 2004, the group began offshoring information systems division operations at its London and New York offices to the Singapore office.

Key points in intra-group offshoring discovered from this case study

As a conclusion to this report, the key points that emerged through the intra-group offshoring experience of the Swiss-American investment bank can be summarized as follows:

1) Capital alliances across national borders and the emergence of forward-thinking multinational financial groups
Capital alliances across national borders have gathered considerable momentum in the financial sector since Black Monday in 1987. Besides the example of the Swiss commercial bank and the U.S. investment bank analyzed in this volume, a German financial group took over another U.S. investment bank through a trans-Atlantic business alliance formed around the same time. These cases seem to suggest that the sense of discomfort at alliances formed by financial institutions of different nationalities has declined since the late-1980s.

2) Globalization of business models for investment banks
The idea of introducing advanced financial transactions into Asia-Pacific and other regions, which had been performed in the London and New York markets, has been actively discussed and put into practice since the early-1990s. With the growth in these sophisticated financial transactions, developing a global information system that connects the three regions of North America, Europe, and Asia-Pacific has become urgent for back offices.

3) Organizational structure: from a local to a regional, and then to a global structure
To meet the requests of front offices to use global booking to facilitate their businesses, back offices - including securities management, information systems, accounting, personnel affairs, and general affairs divisions - are changing their organizational structure from local to regional to global. These offices are showing early signs of matrix management, featuring reporting lines to the global head of the business functional level in the headquarters, in addition to lines to the branch head of the regional level.

4) Decision-making by the senior management of multinational financial groups
As Lacity, et al. (1996) found in their analysis of outsourcing decisions made by information systems divisions in Britain (Note 2), it is the senior management of financial groups, rather than the senior managers of their information systems divisions, that make the intra-group offshoring decisions at investment banks.

5) Cross-border movement of human resources and the national strategies of receiving countries
Senior managers and hybrid managers are relocating across national borders from back offices, including the information systems division, securities management division, and accounting division, for building intra-group offshoring center. The receiving country, Singapore, is adopting a national economic strategy focusing on finance and IT. Its national interests are consistent with its corporate interests.

6) Transfer and accumulation of knowledge
Knowledge moves together with labor. Knowledge accumulated in the Singapore office of the Swiss-American investment bank through the success of an internal system development project for Asia-Pacific and the experience of executing the two major projects to address the EMU and the Y2K. In the several years since, the Singapore office has grown to the point of meeting the system development requests of the London and New York offices.

In the next volume, we analyze the national strategies of Singapore, the country chosen by this Swiss-American investment bank as a destination of its intra-group offshoring center.

May 8, 2008
  1. Matsumoto H. (2005), "Global Business Process/IS Outsourcing to Singapore in the Multinational Investment Banking Industry", Journal of Information Technology Cases and Applications Research (JITCAR), Volume 7, Number 3, Research Article One, pp. 4-24, Ivy League Publishing, Won best paper award at 4th Annual International Outsourcing Conference, Washington, D.C., September 2005.
  2. Lacity, M. C., L. P. Willcocks, and D. F. Feeny (1996), "Sourcing Information Technology Capability: A Framework for Decision-Making," in Information Management: The Organizational Dimension, M. J. Earl, ed., Oxford. University Press, pp. 399-425.

May 8, 2008

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