The pace and level of competition in banking in Asia have intensified, making it critical for financial institutions to understand the cost of each activity and to minimize the expense involved in delivering financial products and services. In order to turn scale and lower cost production into a competitive advantage, DBS needs to accomplish several things:
•   Understand with precision the cost and profitability of the bank’s activities
•   Optimize the cost per activity through scale (regionally if possible) - in-sourcing, co-sourcing or outsourcing, centralization of processes, and automation
•   Translate the lower cost into pricing and profitability advantages
To better track and monitor the bank’s activities, DBS fully rolled out its Cost and Profitability Management System (CPMS) in Singapore in 2002. This activitybased costing system involved a major investment in time and resources. CPMS provides critical, accurate and timely information on the cost and profitability per product and per customer which facilitates pricing and resource allocation decisions. With a clearer understanding of costs and profitability, DBS can prioritize and focus on activities, products and businesses that need to be emphasized, improved or de-emphasized.
During the year, DBS reduced its core operating expenses (minus the impact of the Dao Heng Bank and DBS Vickers acquisitions in 2001 and 2002), by 7%. Some of these savings can be attributable to the better understanding of our costs and profitability through CPMS, with other savings being directly linked to the reduction of about 11% of Group employees, including 12% of our managing directors.
Building Scale - Integrating Dao Heng Bank
DBS has pursued scale to address price competition.
In 2002, the focus was on consolidating the Dao Heng operations with the rest of DBS. The operational integration efforts have focused on:
•   Aligning Dao Heng accounting, risk management, credit, human resources and product control policies to group standards
•   Harmonizing DBS Kwong On Bank and Dao Heng Bank front office and back office operations
•   Centralizing selected operational functions in location
Centralization involves several stages.
Initially, all operations within a country are consolidated. In Singapore for example, DBS used to have decentralized processing operations at each branch. Over the last three years, DBS has consolidated its processing operations in Singapore into a central Processing & Servicing unit. It has also completed the centralization of its Hong Kong processing operations as its call centers, data centers, and processing operations have been consolidated.
Subsequently, DBS further reduces unit costs by consolidating its processes across the region. For example, Treasury and Markets?operational functions are now centralized in Singapore using a common technology and operations platform. Trade finance processing, on the other hand, will be centralized in Hong Kong, while credit card processing will be centralized in Singapore. This initiative will further strengthen DBS?cost competitive advantage as volumes increase.
At a later evolution, DBS may move more regional processing operations to a lower cost country or to an outsourcer. In 2002, DBS signed a ten-year outsourcing contract with IBM worth S$1.2 billion, in which DBS outsourced its network and mainframe technology functions. This outsourcing initiative covers technology operations in Singapore, Hong Kong and Thailand. Outsourcing can potentially bring down the annual operating costs of these functions by as much as 20%.
The alliance with IBM will consolidate and enhance DBS?data centers, provide a 24 hour customer helpdesk, manage many of DBS?current applications and provide systems management disciplines across the bank. DBS?IT group will continue to be responsible for IT services such as IT strategy and architecture, IT security and strategic projects. The alliance involves the transfer of 500 staff from DBS to IBM. Both parties have agreed to transfer all staff’s roles and compensation, and will provide opportunities in a proven technology leader with a record of managing skills development, and career opportunities for IT professionals.
Improving unit costs through Six Sigma
The second key component to improving unit cost is through improving processing quality and reducing error rates. DBS adopts the Six Sigma framework in benchmarking its processing and servicing functions. Six Sigma is a methodology that seeks to continuously enhance processes by reducing defects, improving productivity and increasing customer satisfaction. Operations that are functioning at a Six Sigma standard would see less than 3.4 defects for every one million transactions.
Although not yet at the Six Sigma standard, DBS has made good progress in improving its processing and servicing standards. DBS now ranks highly among Asian Banks in achieving these standards. Several of our colleagues have achieved "black belts" in the Six Sigma methodology and we have many more undergoing training to attain that standard. Furthermore, a value engineering team is focused on streamlining and improving operational process across the Group. Apart from the cost synergies realized from the Dao Heng integration, the team has to-date initiated 40 projects with identified cost savings opportunities.
Through Six Sigma DBS has increased the "straight through" rate of its processes. Now, once a front-line officer turns over a transaction to the processing team, more than 85% of the processing is "straight through" and does not require human intervention by DBS staff.
Though there may be different usages of the term "straight-through processing", DBS defines it as the percentage of transactions that do not require manual assistance once a transaction is turned over to the Processing & Servicing unit. For example, if a customer steps into a branch and applies for a mortgage loan, the "straight-through processing" rate measures what percentage of the application processing requires manual assistance. In an ideal case the loan application is first scanned into or data are entered electronically by the customer directly into our computer system. Following which, the loan application is reviewed by our internally defined risk score parameters. Clear acceptances or clear rejections are automatically notified through electronic mail. These cases would be considered "straight through". Cases that require us to go back to the customer for more information would not be considered "straight through".
Six Sigma for DBS
Six Sigma for DBS: Though the term "Six Sigma" is a bit of an obscure statistical reference, it has tremendous practical application and has put some of the world’s most celebrated companies where they are today. Originally designed as an analytical method aimed at achieving near-perfect results on a production line, Six Sigma’s impressive results in improving the performance of service companies is being harnessed by DBS and put to work at the heart of the value engineering team’s program to streamline processes throughout the Group.
Differentiating with Wealth Management, Investment Banking, and Treasury and Markets     Differentiating with Wealth Management, Investment Banking, and Treasury and Markets
Scaling a Pan-Asian Network     Scaling a Pan-Asian Network
Building Scale - Integrating Dao Heng Bank
Improving unit costs through Six Sigma
DBS > DBS Annual Report 2002 > Consolidating to Become a Lower Cost Producer