Ah Luxembourg! It has a very healthy financial place (FP), which represents a significant percentage of the country's economy. The job market is good and salaries are high. So what's the problem? So long as Luxembourg as a location still maintains its particular charm (i.e. favourable fiscal efficiencies), there appears to be little threat to the activities that are positioned here. Correct?

According to the 2005 Codeplafi (Committee for the Development of the Financial Place) "Study on the Impact of the Financial Industry on the Luxembourg Economy", comparing 2005 with 2004, direct and indirect income generated by financial activity realised an increase of 17% in 2005, to reach nearly 20 billion euros. With more than 11 billion euros and a progression of 20% in 2005, financial activities, by their nature, strongly contribute to the national added value. The indirect sector and its effects account for 38% of GDP. At 4%, the progression of employment was weaker but, with nearly 58,000 employees working directly or indirectly for the financial industry, (defined as banks, reinsurance and insurance companies, PSFs, asset management companies and including OPC activities); it represents (in 2005) 19% of total employment in Luxembourg and more than 31% of state tax revenue.

The fact is however, that the FP is weighted much more as back office than as front office. What happens in the future, in a country that relies so heavily on one sector, especially one whose advantages, at the very least at the basic level, are being eroded? Do we have all of our FP eggs in one back office basket?

According to the CSSF, the most recent figures for Luxembourg (September 2006) show banks employing 24,350 and PSFs employing 8,450 persons. However, statistics detailing the breakdown of front/back office are hard to come by. And what exactly constitutes "back office"?

Fernand Grulms is a member of the Executive Committee of the Luxembourg Bankers' Association. "Back offices appear everywhere in the world of finance and include: payments, securities, trading, investment funds, private banking, etc." he says. "But then there is the question of how to categorise support functions like accounting, tax, legal, compliance, audit... are these back office also? By definition, we are talking about people having no direct link with customers. When including support functions, you can easily raise the figures to two thirds of staff or more being involved in back office. If you look at support functions for investment funds, that must be already quite a lot of jobs. My point is, the back office of the finance industry goes far beyond the numbers published for the financial sector itself."

So, is there a risk for Luxembourg, so heavily dependant on the FP and a large part of that back office? "It appears that back office can be outsourced (i.e. delegated to another provider in Luxembourg) or off-shored (i.e. delegated to someone in another jurisdiction)," he comments. "Outsourcing in Luxembourg can be towards a PSF or another intermediary (accounting firm, payroll admin, IT, Internet provider...)."

The world is flat

"One needs to be aware that certain back office work can be considered by some as not very dynamic. But aspects of it can also be very complicated and extremely challenging. In some banks the back office requires brilliant scientists and engineers to work out the concepts and run the whole thing afterwards. One thing seems to be clear to me: the "basic" part of back office work might not stay in Luxembourg in the medium run. We need to concentrate on high added value jobs. The only problem is that everybody wants to do that."

In this ever "flattening world", efficient back office management is increasingly essential to the success of any financial institution. The drive for innovation and changing regulations is placing huge demands on back office managers to come up with cost-effective business solutions. Automation eats away at the labour force, and companies look to in/outsourcing and near/off-shoring as ways to reduce costs but also to increase efficiency, and sometimes even to seek out higher skills.

The recent global trend in off-shoring business processes (BPO) is driven by the need for cost savings, but, because of the potential for both the quantity and quality of work that may be done elsewhere, has larger implications for service economies in developed countries like Luxembourg.

Julien Presber, Managing Director, State Street Bank Luxembourg, says that some reconciliations will be "insourced" to State Street operations in India. "This is not really outsourcing," he explains, "as it stays inside the bank. It is part of State Street's move towards a global "operating model". We have identified areas of business that can be moved to low cost centres, but in the case of State Street Luxembourg this is quite small, and is more than offset by the influx of experienced staff we have recruited lately in Luxembourg."

"There is a trend towards higher added value functions but I think this is being driven by increasing demand. This demand is in turn being driven by regulations and increasing complexity and will continue to grow, positioning Luxembourg as a centre of expertise. Luxembourg has huge potential for increasing the number of highly skilled jobs. The demand is already growing. But to become a centre of excellence, we need to satisfy capacity. Cost is a worry, but I think a more important challenge is to cope with growth. We need to secure the means to satisfy the demands of tomorrow."

"In general, we have to facilitate a migration from doers to thinkers, and I think that a lot of people are already making that migration. We need to retrain people to facilitate the natural progression from doers to thinkers."

The UniCredit Romania Case

Giovanni Giallombardo, Managing Director and President of the Management Committee, UniCredit International Bank (Luxembourg) has a story to tell about back office that should make people pay attention.

UniCredit Group, one of the top European banking groups, consider themselves, the "first truly European bank", as they are the main western banking group active in central and eastern Europe with over 7,000 branches, over 140,000 people and a presence in 20 different countries. UniCredit is already present in Romania.

UniCredit Produzioni Accentrate (UPA) was established in 1999 to provide operational, accounting and administrative services to the companies that belong to UniCredit. Starting from December 2004 UniCredit decided to develop its local activity; recently it established a local branch of UPA in Bucharest. In February 2005 it was announced that their new Romania UPA branch would generate 500 jobs within a programme conducted between 2005 and 2007. The local UPA branch will become fully operational in the near future and will provide a wide range of operational services sustaining all the banks in the group.

"The UPA is still raw," says Giallombardo, "but if it works, it gets tested in Romania, and why not? Luxembourg has a problem with its core work. It makes sense to 'in-source' to Romania the 'general back office' because it saves money and increases efficiency."

The programme is quite extensive. "Graduates are recruited directly from the University of Bucharest and/or trained with our own courses," he adds. Eighty-five professors have been engaged, 148 courses are offered, with 25,904 hours of language courses, over 31,000 of technical hours and 17,672 hours of on-the-job training.

Their argument for increased back office activity in eastern Europe is a compelling one.

"Luxembourg is not cost-efficient for many of these services. Also, the quality of life in Luxembourg threatens to kill the 'hunger' of the younger generation to work, to learn, to take risks, to move to another country, etc." Giallombardo points to the fact that they have been able to engage 250 managers, which means that the managers are willing to be mobile (to move to another country). "Concentrating the basic back office in Romania (payments, corporate), which is culturally and geographically closer than say India, helps to develop the country, by offering a transfer of financial competence, while it benefits the bank at the same time, thus there is a global benefit.

It is a move that is secure, the work will be quality, the workers will be trained to be competent, and it respects EU regulations (which is absolutely key). It makes sense!"

"The European banking system is changing due to different mergers and acquisitions. The result is the creation of large groups. In order to ensure efficiency, effectiveness and same level of services all over the group, the banks are now working on 'business lines' models, where also operational activities and all support services in general are considered as specific business. This is what UniCredit, the leader of new European markets, is doing."

Giallombardo feels that Luxembourg should become the centre of excellence in the financial specific areas and should push for implementing a dedicated school here for private banking and asset management specialists, so that Luxembourg could concentrate on the parts of the business that are the best quality. "We should push the Luxembourg University. We should push for the development of well-balanced business (between the front end and back office activities), being aware that not all operational activities can be outsourced abroad (regulatory aspects)."

Luxembourg for a long time has been a FP back office. "If you look at the cornerstones of the financial industry (i.e. items such as asset management) for some time the business management, and/or the financial strategies, have been outside of the Grand-Duchy."

The Shift to Skills

Giovanni Giallombardo feels that, for the time being, less than 10% of the market strategical decisions are taken inside Luxembourg - operational issues represent the rest of the activities. "For me, the FP's future should develop in two directions: one specific in 'building' new business opportunities (new specific products) and the other in the connected administrative support. Therefore, the FP should develop these two aims in order to continue to grow. Also, innovation is important. In my opinion, the FP here should develop more specific financial strategies inside the country, be the 'head' of the business - more in the manner of the Swiss, which is a well consolidated model in private banking and asset management activities where in the same place we can find the brain (strategies) and the heart (operations) of the business."

There is plenty of proof of a demand for higher skills, as evidenced in the talent gap in Luxembourg (see paperJam, January 2007, p. 152). This is not necessarily a bad direction for the Luxembourg FP to be heading in, so long as people in the industry are willing to keep their skills relevant and "train up".

Rachel Treece and Paul Klienbart are both Directors for Fast training. Fast is a specialised recruitment and training consultancy operating within the financial services industry that has recently decided to put more emphasis on training with a modified course structure The new courses are designed on three levels - fundamental, in depth and customer customised - and included in the 300-level are a series of value-added services, such as consulting, individual training and coaching. "Fast training has seen a 36% increase in business in 2006 with the nature of the demands becoming even more complex reflecting the changing nature of the financial services market here in Luxembourg," says Treece.

"Luxembourg is by definition a back office market, with the possible exception of private banking. In the fund industry, which is the largest part of Luxembourg's financial services sector, the separation between front and back office does not have much meaning," says Kleinbart. "It is true, however, that financial services are becoming increasingly complex, implying a greater need for training. For example, we have seen a large increase in the demand for courses on derivatives and alternative funds, topics that traditionally were not very popular in Luxembourg. This demand is coming prima-rily from the areas of fund accounting and custody."

The point is not that it is time to panic, but simply that the smart thing to do is to look at recent developments, both local and global, and start to consider a Plan B for the future of Luxembourg's FP, and the huge number of people employed in that sector.