Exclusive! UBS Procurement outsource / spin-off: Will it raise governance questions?

UBS, the global financial services giant, announced on Friday that they are outsourcing a large part of their procurement activities, currently sitting in the Supply and Demand Management (SDM) unit, to an organisation called Chain IQ.  (UBS have been describing this as a “spin-off”, but that suggests they will retain some equity, which as we will see is not the case here).

This intrigued us of course, not least because as industry analysts and experts, we’d never heard of Chain IQ. That is not surprising, because it is a new firm, “privately funded and owned by a group of independent investors”, as UBS said. It is, in effect, an operational spin off from UBS (even if it is not from an ownership point of view), and will start delivering services in the second half of 2014. It will then look for additional clients. And the press release suggests that early discussions look promising with “letters of intent” already received from various third parties.

The majority of the 210 employees of SDM in Switzerland, Singapore, New York and London will transfer to Chain IQ, which will handle, “the sourcing areas of IT hardware and software, logistics, travel, workplace, facility management, marketing, insurance cover, professional services and real estate”.

So this initiative is an outcome of the UBS “Industrialization” strategy, announced a while back, which is looking apply best practices from different industries to their back-office processes.  And a Swiss entrepreneur, Claudio Cisullo, has been chairing a UBS Industrialization Advisory Board, supporting this initiative.  But – and this is where eyebrows may be raised - the chairman and lead investor in Chain IQ is the very same Claudio Cisullo.

There is another connection here.  Eros Fregonas, the Programme Director of the Industrialization Programme, was previously an executive and latterly CEO of one Cisullo’s IT businesses, Swisscom IT Services.  Now none of this matters too much in terms of whether the procurement outsource will be a success or not. But there are some obvious questions of corporate governance and potential conflict of interest, so we put some questions to UBS, which they responded to very promptly (thanks!)

They confirmed that this is a start-up, with UBS as the first client of Chain IQ. We asked about the two aspects of the transaction that might be perceived as surprising – the decision to go with a start-up, when there are mature outsourcing firms in the market, and the role of Cisullo.

This is how the UBS spokesman described the decision process to us.

Four options were considered.  Keeping the operation in-house was rejected – UBS want to simplify their business, focus on core activities, so the usual arguments in favour of outsourcing apply.

The second option was to go to the existing outsourcing market. This was rejected because of potential conflicts of interest, and there would be little chance of UBS leveraging their own volume to get additional returns (as in the case of the chosen option).

Setting up a new business with UBS retaining a share was rejected as option three, because other financial services firms would probably not participate as clients with UBS as a shareholder.  So the fourth option – a private equity start up, without a UBS equity stake, was preferred.

And the value of the UBS contract to Chain IQ is reflected in the savings that UBS expect to make from the agreement - “up to 40 Mio SF, and in a few years with other clients joining the services of this new firm, we expect the cost savings to go up to 120 Mio Swiss Francs and even more”, we were told.

That appears to be a combination of operational and purchase price savings, but the UBS spokesman wasn’t clear whether those savings are guaranteed by Chain IQ.

In terms of Cisullo’s role, neither he nor the Advisory Board “has any discretionary power” and the Group Executive Board signed off the decision. And other options were considered in terms of private equity involvement, according to UBS.  So all in all, “during its evaluation by both the legal and compliance departments, UBS found no potential conflicts of interest associated with any of the investors”.

Whilst we might disagree with the UBS analysis of the four options, and we’ll come back to that in a future article when we look at the chances of Chain IQ succeeding, there is a certain logic in the UBS thought process.  However, the question for UBS shareholders really is whether they are satisfied that UBS looked at all the options for the start up, including sources of investment other than from Cisullo. It is an potentially attractive investment, with a strong guaranteed income stream, although that depends on the precise terms of the contract with Chain IQ, which is confidential (to us at least). If the non-executives have not already done so, perhaps they need to scrutinise the agreement to make sure that it is the best that UBS could have negotiated, given Cisullo’s closeness to the business.

One final point. Our first impression was that Chain IQ would develop their own P2P platform ready for operation by the middle of 2014. That seemed ambitious, but UBS have now clarified that SDM does already have a platform, so they aren’t starting from scratch – that might have been one challenge too many!   And on that note, we’ll be back with our thoughts on the challenges facing the start-up, and what UBS (or other potential clients of Chain IQ) should look out for over the coming months.

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