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MBA698 Beyond Budgeting at UBS Report

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MBA698 Beyond Budgeting at UBS Report Business Policy, MBA 698 Wednesday, 16 May 2007 Professor Benain Beyond Budgeting at UBS, a Strategic Choice By Dekin O’Sullivan Table of contents Table of contents ....................................................................................................................... Executive summary................................................................................................................... Introduction ............................................................................................................................... I. Positioning......................................................................................................................... a) The UBS-SBC merger................................................................................................... b) The industry................................................................................................................... c) The “Beyond Budgeting” book..................................................................................... II. Options ........................................................................................................................... a) How to theoretically drop budgets ............................................................................. b) How dropping budgets works in practice for a bank: the Svenska Handelsbanken case.. ................................................................................................................................... c) Strategic objectives .................................................................................................... III. Implementation........................................................................................................... a) Managing change ....................................................................................................... b) Organization and resources ........................................................................................ c) Performance ............................................................................................................... d) A perfect system?....................................................................................................... IV. Evaluating the strategy and its execution................................................................... a. The bank as a whole................................................................................................... b. The International wealth management and Swiss retail and corporate businesses division............................................................................................................................... c. Non-financial indicators............................................................................................. Conclusion.............................................................................................................................. References .............................................................................................................................. Exhibits................................................................................................................................... Executive summary In 2004 – as part of a program to foster a more entrepreneurial culture – UBS decided to do away with the annual budgeting process in its International Wealth Management and Swiss Retail and Corporate Businesses division. In this paper our aim shall be twofold: first to assess the execution of the strategy, second to come up with a recommendation on the basis of what conclusions can be drawn from the assessment. There are mainly three reasons why the division chose to do away with budgets: first, the increase in market volatility due to the recent surge of derivatives; second, the shortening life cycle of financial products (new products are coming out every day, increasing trend towards customization); third, the publishing of a book in 2003, “Beyond Budgeting”, which gave UBS’s executives the idea of abandoning budgeting as a ways of gaining a competitive edge in these new conditions. The strategic issues are clear: need for a more flexible, agile and adaptive organization which can take on more risk and adapt quickly to the market whilst being able to take on difficult economic times without collapsing. This leads to the formulation of strategic objectives by UBS which it is pursuing with this strategy: growth, cost reduction and the implementation of a new entrepreneurial spirit within the organization. The assessment of the execution of the strategy is clear: it is a success both on the financial measures side (growth and cost reduction) and the non-financial ones (culture change). In view of this success, we think that the organization as a hole can benefit from this strategy. We therefore strongly recommend that UBS extend the “Beyond Budgeting” strategy beyond the single Wealth Management and Swiss Retail and Corporate Businesses to its other divisions (Asset Management, Investment Banking, etc.). Introduction UBS AG is a diversified global financial services company, headquartered in Basel and Zürich, Switzerland. It is the world's largest manager of Private Wealth assets, and is also the second largest bank in Europe, by both market capitalisation and profitability. UBS has a major presence in the U.S., with its American headquarters located in Manhattan (Investment Banking); Weehawken, New Jersey (Private Wealth); and Stamford, Connecticut (Capital Markets). UBS's retail offices are located throughout the United States, and in over fifty other countries. UBS's global business groups are Private Banking, Investment Banking, and Asset Management. Additionally, UBS is one of the leading providers of retail banking and commercial banking services in Switzerland. It currently employees some 78,140 people. In 2004 – as part of a program to foster a more entrepreneurial culture – UBS decided to do away with the annual budgeting process in its international wealth management and Swiss retail and corporate businesses division. In this paper our aim shall be twofold: first to assess the execution of the strategy, second to come up with a recommendation on the basis of what conclusions can be drawn from the assessment. In order to assess the strategy, we first need to understand what objectives UBS was aiming for when it decided to implement its strategy. To do this we therefore start with a positioning analysis where we will try to show that the causes which motivated the decision to “drop budgets” were mainly the enhanced risks of today’s financial markets and the shortening life cycles of financial products. It is important to note that the point we are here trying to make is not that there was a problem with UBS’s budgeting system as such (it was just as good as any other’s) but that it is certain key issues relating to changes in the financial industry which led UBS to consider dropping budgets as a means to overcome these issues. Once the strategic issues discovered, we then, in a second part, try to show how the option to drop budgets can be considered as, in the present state of things, the only option allowing UBS to achieve a competitive advantage. This second part will end with the statement of the strategic objectives UBS was pursuing, which is to say cost reduction, growth and an enterprise culture change to foster a more entrepreneurial spirit within the organization. We then, in a third part, go on to analyze the actual way UBS implemented and executed the chosen strategy. We finally, in a fourth part, attempt to assess the strategy execution by analyzing its impact on financial and non-financial measures. In the conclusion, we shall finish with the second aim of this paper, to come up with a recommendation for the future. The reader should always keep in mind that it is not all of UBS’s departments which dropped budgeting budgeting but only one of them, the International Wealth Management and Swiss Retail and Corporate Businesses Division. This is the bank’s largest division (it accounts for roughly half of its profits) and most successful (world leader in wealth management). One could wonder why then is it that we don’t only focus our analysis on this branch but, for example, analyze trends which affect the banking sector as a whole. It is that, the aim of our recommendation will be to either suggest that UBS stop the strategy, continue as is, or extend it to other sectors of its operations or even to the bank as a whole. What is at stake here is therefore not only one branch of UBS but the company’s future as a whole. I. Positioning a) The UBS-SBC merger Positioning is an analysis which usually contains an external and internal analysis. Such tools as PESTEL, Porter analysis and SWOT are used. However, we feel that these tools are best suited for acquiring general knowledge about an industry, an economy, and how a given company fits into its environment. This type of knowledge is useful when one either doesn’t have a strategy yet and needs the necessary information to come up with one or when one wants to see whether a given strategy idea could be viable given the conditions. Our case is quite different however. Indeed, we are dealing with a strategy which has already been put into place. Our aim is to understand not the general but the specific issues and reasons which led to its implementation so as to be able to assess the implementation and results
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