Managing business performance and detecting outliers in financial services

Transcription

1 Anayzing data. Empowering the future. Managing business performance and detecting outiers in financia services WHITE PAPER

2 Tabe of contents Looking for Red Fags KPI: the cornerstone of exception management 2 3 ActiveMonitor Managing exception in compute-intensive financia environments End-to-end KPI management Step 1 Definition of meaningfu KPIs KPI attributes Creating a new KPI Step 2 KPI monitoring and rea-time notification No useess noise Advanced exception monitoring Step 3 Root-cause anaysisanaytics beyond traditiona BI / OLAP systems Mutidimensiona root-cause anaysis As-of anaysis Step 4 - taking corrective action Temporary Goa Extension Auditabiity ActiveMonitor Key Benefits 12

3 Executive Summary For financia organizations, the practice of exception management is as od as time itsef. But with increased reguation, miions of daiy transactions, and mutitudes of sioed information systems, managing revenue, risk, and compiance has become increasingy difficut. To meet the need for timey and consistent risk anaysis, managers, traders and anaysts must be abe to instanty examine risk across a activities and casses, detect outiers and trends, and freey perform anaysis without being constrained by pre-buit queries. This paper examines ActiveMonitor, which provides a framework for exception management in compute-intensive financia environments. Operating over Big Data, ActiveMonitor defines, monitors and acts upon key performance indicators to enhance business performance and enabe exceptiona exception management. 1

4 In today s fast-changing and unpredictabe business environment, managers are facing an increased expectation for agiity and responsiveness. They must demonstrate their abiity to identify and rapidy respond to changing market dynamics, unusua patterns, disruptive events or significant deviations in their key business metrics. They are expected to immediatey detect the situations that require their immediate action or further investigation, in order to steer the business in the right direction and remain in contro at a times. In this context, management by exception is a vauabe practice by which ony the information that indicates a significant deviation of actua resuts from panned or expected resuts is brought to the management s notice. If they are equipped with the proper toos to manage situations by exception, managers are abe to focus their attention on the reay important tactica and strategic tasks, without being distracted by things that are performing normay. Looking for Red Fags Management by exception hods a number of benefits. The first and perhaps most obvious benefit is agiity. Because managers are notified of the most important things to ook at, the risk of missing or overooking an important event is significanty reduced. They are in a better position to quicky respond to a sudden change in business patterns, to grab a new opportunity, to sove an unexpected issue or to dea with an unusua event. This resuts in enhanced operationa efficiency. The other benefit of managing situations by exception is enhanced contro. Managers can identify probem areas before they are out of their contro, ook for causes and take corrective action before it is too ate. As a resut, they have a better grip on the business. In fact, management by exception is a usefu practice to adopt, in order to decrease operationa risk. Managing by exception aso acceerates decisionmaking in situations that require the invovement of severa hierarchica eves and different teams. A decision that cannot be made at one eve of management is passed on to the eve above. The timey and accurate anaysis of the weath of information that is now avaiabe with Big Data faciitates the process of managing situations by exception. If managers have the abiity to measure more things in a more sensibe and accurate manner, they are abe to focus on the reay important tactica and strategic tasks that wi make a difference. This, however, requires upfront carity about what to measure and how performance shoud be evauated. Since You cannot manage what you cannot measure, it is critica to define and monitor the right performance indicators. 2

5 KPI: the cornerstone of exception management Key Performance Indicators form the basis of management by exception and to business performance management in genera. Key Performance Indicators, aso known as KPIs, hep an organization define and measure its progress toward a set of predefined goas. KPIs provide a point of reference against which performance is measured on an ongoing basis. The high eve requirements to manage situations by exception using KPIs are highighted above. The abiity to meet these functiona requirements depends on the usage of a monitoring and anaytica environment that supports an enforceabe workfow for end-to-end KPI management. Key Performance Indicator KPIs are usuay defined as the combination of a measure and a goa. In the word of finance, management by exception reates to a arge extent to the management of imit breaches. A typica KPI exampe is the cacuated Vaue at Risk of a book (i.e. the measure) and the maximum VaR imit per book (i.e. the goa). However, a KPI can aso be used to define specific goas, such as the appetite for risk or a PnL goa. Using KPIs faciitates the identification of any deviation between the effective vaue of the measure and its associated goa (or in other words, exceptions ). Exceptions materiaize when the measure in the KPI goes above or beyond the goa that has been defined as the point of reference. A breach in a KPI can be the sign of an outier, an error, a disruptive or abnorma event, an unusua pattern, or a change in trend. The high eve requirements to manage situations by exception using KPIs are highighted beow. The abiity to meet these functiona requirements depends on the usage of a monitoring and anaytica environment that supports an enforceabe workfow for end-to-end KPI management. Measure Goa KPI 3Functiona Requirements KPI DEFINITION What do we want to measure? Which metric? How do we capture a change in the KPI vaue? What is the goa that the metric shoud be measured against? Who shoud be aerted in case of a KPI breach? How many KPIs do we need? For how ong is a KPI vaid? KPI MONITORING AND REAL-TIME NOTIFICATIONS ROOT CAUSE ANALYSIS How do we expain the KPI breach? ACTION What is the escaation path in case of KPI breach? What is the context of the KPI breach? How do we report actions in an auditabe way? How do we quaify a meaningfu aert? How to perform further anaysis within this context? Who is entited to create/approve a new KPI? 4 3 How do we share KPI data among a stakehoders? 2 1

6 ActiveMonitor Managing exception in compute-intensive financia environments ActiveMonitor, ActiveViam s business operations management soution, forms the backbone of effective management by exception in the Big Data era. ActiveMonitor provides a framework to create, monitor, anayze, and act on Key Performance Indicators, within a coaborative and controed environment that enhances business performance management by exception. ActiveMonitor buids on and extends the ActivePivot high performance anaytics backbone to deiver an integrated soution that: Enhances operationa inteigence of compex, dataintensive business processes Acceerates decision-making in time-sensitive environments Streamines coaboration and faciitates organizationa aignment ActiveMonitor s unique abiity to deiver end-to-end KPI management yieds significant vaue in the foowing two contexts: The use of KPIs in the context of compex, compute-intensive metrics spanning arge voumes of heterogeneous data. For exampe, the proactive detection and the subsequent anaysis of outiers hidden in hundreds of compex aggregated indicators (such as the VaR), commony used to manage risk exposure and certify PnLs on an intraday basis. The use of KPIs in the context of time-sensitive metrics that span arge voumes of highy voatie fast-changing data. For exampe, the rea-time monitoring of breaches on thousands of risks imits assigned to a trading desk and the abiity to take corrective actions immediatey. End-to-end KPI management ActiveMonitor faciitates management by exception by enforcing a process consisting of four steps. Step 1 Definition of meaningfu KPIs Exampe of a KPI : Here is an exampe of a KPI that measures the ma-ximum oss aocated for PnL per Product per Desk. When the actua amount of PnL reaches 80% of the authorized threshod, ActiveMonitor changes the traffic ight associated with the KPI to red. That is to inform business users of a significant change in the KPI status and a potentia risk of KPI breach. The first step is to define which KPIs shoud be used. This is a muti-step process that requires the invovement of severa stakehoders with different roes and privieges. Typicay, KPIs differ per organization, per business unit, per use case. KPIs are abeed differenty depending on what needs to be measured and who is using them. Labes incude Key Performance Indicator/KPI, Key Risk Indicator/ KRI, Key Quaity Indicator (KQI) to name but a few. However, despite the variety of different names, they act as a singe point of reference for desired success. It is therefore important that a stakehoders have a chance to discuss KPIs with their peers and their managers before KPIs are approved. This requires an environment where roes and responsibiities are ceary defined. With ActiveMonitor, managers and business users aike can manage the definition and the approva of KPIs by using a coaborative environment that mirrors the organiza-tiona structure. 4

7 KPI attributes A KPI is a rich object that has severa properties, among which are the foowing: Goa What is the point of reference, the desired outcome? This can be a imit, a utiization rate, a risk goa, a PnL goa Cacuated measure What is the vaue of the KPI at a given time? This is a cacuation formua. It can be dispayed in different ways: a numeric vaue, a percentage of achievement Time vaidity How ong is the KPI vaid for? The vaidity of a KPI can be defined for a specific apse of time. A month, one day, one minute or even an interva of two minutes within a day. Status What is the status of the measure when compared to the goa? Is the measure within the predefined boundaries, above or beow? In either case, is it a positive sign or a negative sign? The status heps put the metric into context. Trend How has the KPI evoved since it was ast updated? Creating a new KPI The coaborative process in ActiveMonitor around the definition and the approva of new KPIs enhances contro and transparency. This process ensures that reevant KPIs are used at a times. It mirrors what the organization wants to measure, depending on how their strategy is evoving. Many banks are facing a deuge of imits sometimes thousands of them - that have been created in an ad-hoc manner, outside of any controed environment. It is a coossa task to maintain and monitor so many imits over time, to ensure that they are reevant and that they are used by the right peope. In the end, many banks use ony a sma fraction of a avaiabe imits. By bringing a controed framework, ActiveMonitor avoids the proiferation of KPIs that are irreevant to the organization or obsoete. Here is a typica workfow associated with the definition of a new KPI. 1. Creation To create a new KPI with ActiveMonitor, the user makes a seection from the ist of avaiabe KPI tempates. Because KPIs attributes vary depending on users requirements, ActiveMonitor provides the fexibiity to configure mutipe tempates per KPI depending on the attributes that a user finds reevant to his KPI. Once he has seected the appropriate tempate, the user quaifies his KPI by fiing in the requested KPI attributes fieds. 2. Vaidation Once submitted, the new KPI goes through an approva workfow. Approva paths and invoved stakehoders can be easiy defined in ActiveMonitor. KPI approva is an iterative process with intermediary back-and-forth exchanges that are repeated unti a invoved parties are fuy aigned. The definition and the subsequent approva of a KPI is mapped with the priviege eves and the roes of the stakehoders, in order to mirror the organizationa structure. 3. Activation Once they have been approved, KPIs are pubished in a common view. They become visibe to a invoved stakehoders, based on their roe and their privieges. At this point, KPIs aso become fuy auditabe. STEP 1 User Manager User + Manager STEP 2 KPI Definition KPI Monitoring Creation Vaidation Activation 5

8 Step 2 KPI monitoring and rea-time notification Continuous KPI monitoring is a prerequisite for situation awareness. Once a goa has been defined, actua measures must be monitored on a continuous basis so that exceptions can be detected. With business processes growing in compexity, managers are faced with an increasing amount of metrics that they must simutaneousy foow. However, they do not have the time to keep an eye on hundreds of metrics, trying to detect meaningfu changes that are worth investigating. Furthermore, hiring hundreds of anaysts to monitor a host of metrics woud be difficut to justify. Therefore managers and operationa users want to be instanty and automaticay aerted whenever measures breach a imit, meet a combination of specific conditions, or evove in an unusua way. In other words, managers prefer to have meaningfu events pushed at them so that they can focus on situations that require their immediate attention. This is much better than having to pu events. ActiveMonitor continuousy monitors KPIs and underying metrics to deiver instant visibiity into the operations. No useess noise Any change in the underying operationa systems is immediatey propagated to the status of the KPI. Furthermore, ActiveMonitor proactivey notifies users of any change in the KPI via rue-based aerts. Users have the fexibiity to define the combination of conditions that shoud be met before an aert is triggered. For exampe, a head of desk is abe to determine that an aert shoud be triggered whenever the measure associated with the VaR imit reaches 80% of its target vaue indicating that the desk is about to breach the maximum risk exposure imit, or conversey when the VaR imit is beow 20% - indicating that the desk doesn t have enough appetite for risk. This way, business users have the confidence that the aerts they receive are meaningfu and we quaified. In the event of an aert, ActiveMonitor simutaneousy notifies and updates mutipe entities. For exampe, when a VaR imit is breached, ActiveMonitor can send an emai to the head of desk, whie feeding data to a third party appication such as a transactiona patform ike Murex, Caypso or any other web porta or reporting soution. When a KPI breach is reported, users can see it dispayed in ActiveUI (ActivePivot s web front-end interface to ActivePivot), in the KPI dashboard as we as in Exce. ActiveMonitor s continuous event processing and rea-time notification form a soid basis for management by exception. By pointing to the areas on which they shoud focus their attention, ActiveMonitor ensures that managers stay in contro at a times and don t miss any disruption, outier or abnorma trend. Exampe: The status of the PnL imit has turned to red because a trader has created a new trade without executing a strategy to hedge the risk of this new transaction. It is immediatey refected as a red status. An aert is then sent to the trader s manager, to report the anomay and prompt for further investigation. 6

9 Exampe: Consider the breach to be quaified when the aggregated vaue of the PnL stays beow -100 for more than 60 seconds. Assuming that the hedge strategy is executed during this time window, ActiveMonitor wi not generate any aert. Athough a breach was observed, it did not ast ong enough for the conditions of an aert to be met. This is an advanced exampe of management by exception, taking into account the time constraint. Advanced exception monitoring Managers are aso abe to introduce a time window in the quaification of KPI breach and the subsequent aert mechanism. In this way, aerts are triggered ony when the breach condition is observed across a predefined period of time. The introduction of a tempora factor in the monitoring of a KPI is particuary usefu in the financia market environment, where a given trading strategy coud consist of mutipe transactions executed at different times but eventuay cance each other out. The impact of a new trade that may resut in a imit breach coud be offset by the processing of hedge trade a few minutes ater, resuting in the KPI going back to a norma status. imit measure breach The systematic generation of an aert whenever there is a imit breach woud in that case resut in too many notifications, overoading managers with information that does not require immediate action. Instead, ActiveMonitor triggers aerts ony when the breach is observed for more than a few seconds or a few minutes. The duration of the breach is a meaningfu event itsef, because it may indicate that the hedging strategy shoud be revisited. ActiveMonitor s continuous event processing and rea-time notification form a soid basis for management by exception. By pointing to the areas on which they shoud focus their attention, ActiveMonitor ensures that managers stay in contro at a times and don t miss any disruption, outier or abnorma trend. end of breach :00 PM :10 :20 :30 :40 :50 04:01 PM :10 :20 :30 :40 time window before aert 7

10 Step 3 Root-cause anaysis Whist the notification of a breach is an invitation to investigate further, it is ony a means to an end. In fact, the abiity to expain why a KPI has changed status and to identify its root cause is a fundamenta eement of effective management by exception. To that end, users need to be abe to anayze a breach across many dimensions, such as products, country, ega entity, counterparty etc. Furthermore, they need to put a given breach into its proper historica context in order to understand which succession of events, or which combination of factors, resuted in the breach. Aong with rea-time notifications, ActiveMonitor deivers the contextua and historica information that aows business users to perform effective root cause anaysis. Anaysis can be conducted immediatey or at any future point in time. Mutidimensiona root-cause anaysis The combination of ActiveMonitor and ActivePivot s in-memory processing provides business users with a mutidimensiona anaytics environment that aows them to expore a KPI aong any axis that is reevant to them, to fiter data or to group it with a view to foowing up or verifying any thoughts or theories they may have regarding the data. Resuts are dispayed in a spit second. Consequenty, users can perform accurate root cause anaysis, without being forced to use pre-canned reports or pre-aggregated KPIs that ack the required depth of data. Mutidimensiona anaytics deivers the underying context that eventuay turns a notification into vauabe information. Through the provision of meaningfu insight, users can make corrective decisions, based on a wider range of data. 8

11 Exampe: Users have the abiity to anayze the context of the breach at each time point. Each time point can be compared to a snapshot of the data. This freedom of anaysis aows business users and managers to prioritize the aerts they are deaing with, addressing the most time-sensitive first, and eaving ess urgent ones unti ater. To summarize, ActiveMonitor aows users to perform detaied anaysis on exceptions at a time that is both convenient and appropriate for them As-of anaysis ActiveMonitor deivers fu visibiity of the reasons why the status of the KPI has changed, at the exact moment the aert was triggered. Acting as a time machine, ActiveMonitor aows business users to go back in time to perform as-of root cause anaysis. In fact, ActiveMonitor recreates the exact conditions of the breach and deivers the contextua data at the precise moment in the past when the breach occurred. The abiity to anayze the context of an aert ex-post is particuary vauabe in highy voatie environments with operationa data streaming in at a high frequency, as is the case in financia markets: By the time managers are abe to ook at an aert, it is ikey that the context in which the aert happened has changed competey. In other words, managers face the risk of osing the vauabe contextua data that surrounds the aert, shoud they not immediatey deve into it. With ActiveMonitor, business users can ook for the root cause of an aert that took pace in the past and be confident that the underying contextua data wi aways be in sync with the aert itsef. Aso when they conduct their anaysis on those past events, they can even navigate the then-current data foowing their train of thought, transparenty adding or removing any dimension as they wish :00 PM :10 :20 :30 :40 :50 04:01 PM :10 :20 :30 :40 epoch 1 epoch 2 epoch 3 epoch 4 epoch 5 evoution of the cacuated measure over time evoution of the KPI imit epoch 1 epoch 2 epoch 3 epoch 4 epoch 5 evoution of the cacuated measure over time evoution of the KPI imit 9

12 Step 4 - taking corrective action Managing situations by exception eventuay requires corrective actions to be taken, foowing an escaation path that is aigned with the organizationa structure. There are severa possibe actions that can be embedded in the KPI workfow based on ActiveMonitor. Exampes of actions incude Approve, Disapprove, Adjust the goa of the KPI, Comment, Escaate, or Cance. Actions are configured in ActiveMonitor to mirror the organizationa hierarchy. Escaation is a muti-step process invoving mutipe participants with different roes. Specific conditions can be associated with each step of the escaation process, incuding the invovement of a reevant contributors based on their roe and the maximum period of time aocated for each intermediary action. As a resut, a stakehoders can bring their individua contribution to the decisionmaking process, knowing exacty what they have to do. Since they share the same information in a common environment at a times, the process is executed in a reiabe and smooth manner. Above is a graphica, ogica representation of a workfow designed in ActiveMonitor to support aert management. STEP 4 Action Notify Owner Temporary Goa Extension One of the possibe courses of action is to manuay adjust the goa of the KPI for a imited period of time ony. Consider a KPI that defines the maximum oss imit of desk A at At 1:00pm, ActiveMonitor registers a KPI breach of -220, after a trader on desk A has added a new transaction to the portfoio. An option that the head of the desk might consider is to temporary change the vaue of the imit from -100 to -240 for one minute. This aows the hedge dea to be processed at a ater stage. ActiveMonitor provides a visua representation of the entire ifecyce of the KPI. At 2:12, ActiveMonitor registers a breach as the processing of a new transaction brings the PnL to beow -220 whereas the imit has been set to Assess Breach Keep Incident Audit Ignore At 2:14, the head of desk decides to change the imit (the goa) to -240 ony for one minute. At 2:15, the eve of the KPI imit is restored to its origina eve of As second breach has been generated because the hedge dea is not yet processed. At 2:21, the KPI breach is back to norma as the hedge dea is processed in the systems. With ActiveMonitor, managers are confident that their KPIs refect the tactics that they want to impement depending on the evoution of their business objectives. As a resut, they can use KPIs to steer their business in a very sophisticated way, not ony to monitor ong-term, strategic goas, but aso to support their ad-hoc, tactica actions and other short-term tasks. Audit Incident evoution of the aggregated PnL vaue evoution of the goa (the imit) :11 02:13 02:15 02:17 02:19 02:21 02:23 10

13 Auditabiity ActiveMonitor keeps track of every incident. It aso records a corrective actions that have been taken in order to provide a reiabe audit trai. Managers can use this for reporting purposes. By keeping a detaied history of events that paved the ifecyce of a KPI, ActiveMonitor improves corporate governance. It aso heps managers improve the overa efficiency of their core business processes. Summary Exception management, at its most basic eve, is about focusing eary on the most critica issues that require attention. ActiveMonitor provides this capabiity to its fuest for mutipe stakehoders. Regardess of data voume, data voatiity, data storage, or computationa ogic needed, Sentine provides rea-time metrics and aerts that improve risk management, acceerate response and enhance overa business performance. 11

14 Key Benefits Measurement of business performance based on meaningfu KPIs An enforceabe workfow that supports the definition and end-to-end management of the indicators required to measure operationa performance. The KPI governance framework enhances transparency and consistency in the way performance is measured across the organization. Rea-time operationa awareness Managers get instant visibiity into the operations. Events that impact the vaue and the status of KPIs are monitored in reatime. By keeping track of what is happening in the underying operationa systems and making issues, outiers or opportunities visibe quicky, the ActivePivot suite supports rea-time situation awareness. Focus on meaningfu events Managers are notified whenever KPIs breach a imit or evove in an unusua way. This aows them to focus on those KPIs that require immediate attention. In depth on the spot and as of root cause anayses resut in a cearer understanding of which combination of factors has impacted the KPI. This heps business users choose the most appropriate course of action. Organizationa aignment The ActivePivot suite faciitates the aignment of various stakehoders behind common goas by providing a goden repository of KPIs that are both visibe and aways up to date. Business users with different roes and responsibiities are abe to coaborate and contribute to the decision-making process in the most efficient way. Need more detais or want to ask us a question? Contact us on activeviam.com 12

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