Better, Faster, Cheaper. Pick Three. Expanding Operational Capacity in Financial Services While Reducing Cost and Risk

Transcription

1 > Better, Faster, Cheaper. Pick Three. Expanding Operational Capacity in Financial Services While Reducing Cost and Risk

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3 1 Table of Contents 1 Executive Summary 2 The Efficiency Advantage 2 Keeping Pace with the Rate of Change 3 Can Operations be More Efficient? 5 Operational Intelligence 6 What is the Return on Investment? 8 Summary Executive Summary Across large segments of the middle and back office functions in Custodian Banks and Investment Managers, it s business as usual, circa While new applications have been introduced and legacy apps modified, off-line solutions still abound. Business demands and regulatory requirements change faster than the core applications used by Operations can be updated. To keep pace, Operations creates manual workarounds. Additionally, because certain Operational requirements cannot be satisfied with the core applications, some workarounds become a permanent part of the landscape. In such environments, management s effective oversight and span of control is compromised. Managers simply do not have all the data for proper analysis and must add additional staff to keep pace with increased volumes, new business, and regulatory changes. We cannot solve our problems with the same thinking we used when we created them. - Albert Einstein An Operational Intelligence framework solves these problems by introducing process automation and providing managers with the objective data needed to optimize their business processes. Using a Business Process Management (BPM) suite, off-line processes and core applications are integrated and event data is created at each step in a process. Event metrics are created from all processes, including core systems and manual procedures. Event data is made available with customizable management dashboards. These tools provide managers the ability to analyze historical and real-time event data. When business processes are consolidated in this manner, Operations managers acquire a transparent, integrated view of all activities, including the means to monitor intraday progress relative to Service Level Agreements (SLAs) or Key Performance Indicators (KPIs). An Operational Intelligence framework can be implemented on a small-scale, non-disruptive basis for quick wins. Additional processes can be linked and leveraged as quickly as resources allow. Benefits of using an Operational Intelligence framework to optimize business processes: Continuously analyze operational performance Create capacity while enhancing service levels Comply with the data integrity, accountability, and governance requirements of Basel II and Sarbanes-Oxley

4 2 Efficient operations produce the highest quality products and services while minimizing risk and expense The Efficiency Advantage Operations groups at Investment Managers and Custodian Banks have much in common with product manufacturing: Raw or semi-finished materials are consumed and submitted to rigorous quality controls Raw materials are transformed into products, then tested and reviewed to minimize defects Processes and procedures are integral to meeting production quotas, maintaining quality, and satisfying Service Level Agreements Nearly every department inside an Investment Manager or Custodian Bank is both a consumer and a producer. Inputs, in the form of database updates or reports, are consumed, produced with value added, and distributed. For example, Operations consumes inputs such as Trades, Positions, Prices, Custodian Bank records, and other data. In turn, Operations produces Risk Reports, Performance Statistics, Cash Availability, Trade Settlements, Pricing, Client Reports, and other records. Because of the importance of quality output for customers, limiting production defects is a key success goal and KPI criterion. Defects create operational risk, firm risk, and reputational risk. Because so many internal consumers rely on Operations, the ripple effect of Operational errors can create a tsunami of work across the firm. The firm s overall health and ultimate success depends on high quality output, cost-efficiency, and loss prevention Management time and attention is quickly sidetracked in efforts to research the cause of errors and to minimize the firm s exposure. A flurry of s and meetings ensues until the root cause has been identified. Additional IT rework (as needed), and post mortem analysis consumes resources at a rate completely disproportionate to the effort of simply preventing the error at its source. Viewed at a firm-wide perspective, even small production defects are very expensive to unravel and repair. Keeping Pace with the Rate of Change Evolving business requirements create stress in every department within an Investment Manager or Custodian Bank. Demand is growing for new products and services. Firms must also accommodate additional regulatory requirements. Operations managers are challenged to keep pace with this constantly shifting landscape and still satisfy expectations.

5 3 Until production tools are able to catch up, Operations managers create alternative methods to satisfy new requirements At some point, production tools are updated to accommodate most new business requirements. However, Transaction Processing, Accounting, Compliance, and other core applications are not designed for frequent modification. Changes to core systems include requirement specification, development, and parallel testing before a new production release. The possibility of introducing a bug is too serious to merit any other approach. Additionally, during the build phase for new updates and modifications, cost and time-to-market considerations often force the elimination of some changes. In the interest of the big picture, features and desired functionalities for Operations are eliminated. While the largest issues are usually addressed, Operations is left with the problem of creating solutions for everything else that is dropped on the cutting room floor. Yet, day-to-day production expectations must be satisfied. Operations managers generally don t say, We can t handle it. They get the job done! Manual workarounds are employed to bridge the gap until core systems can be updated (if possible). Tactical solutions haven t changed in decades: e.g., manual processes, secondary reviews, sign-offs, spreadsheets, and Access databases Until core systems are updated, Operations relies on a patchwork of manual, off-line solutions. The typical Operations group uses scores of manual workarounds. Operations creates one-off processes and manual procedures in response to significant errors or other failures to execute properly. Post mortem recommendations often include new manual procedures to prevent that error from occurring again. While the IT department does its best to whittle down Operations wish list, resources are often diverted fighting fires or are focused on strategic initiatives. Given the larger list of firm-wide needs, few would argue with this approach. As a result, Operations is dependent on the precise, timely orchestration and management of manual procedures and processes. Without a transparent means to determine if and when manual processes have taken place, managers are relying on people to remember and run procedures. and direct communication with the staff are typically the only tools Operations managers have to determine their current status. If Operations managers are to keep pace with the rate of change while maintaining quality and minimizing costs, this paradigm must change. Can Operations be More Efficient? Volume growth, new products, new security types, new reports, and new client or regulatory requirements usually result in new requests for additional headcount in Operations. However, throwing arms and legs at Operational problems is inefficient, creates unwarranted risk, and is ultimately short sighted.

6 4 While manual solutions have minimal impact individually, the accumulation of manual workarounds creates an inefficient, complicated, unwieldy environment Labor-intensive manual procedures and limitations of core systems make it difficult for Operations to accommodate additional volumes. Temporary manual workarounds take root and become part of the daily workflow. Operations managers often make the trade-off of getting the job done against the loss of some managerial oversight and control. When managers create manual controls to mitigate risks, the potential for errors is reduced but not eliminated. A general lack of automation and oversight creates a difficult control environment. Examples of this include: No transparency into manual processes Inconsistent execution of manual processes Little transparency into real-time performance of Business Process Outsourcing partners Inefficient communication of issues Lack of accountability Limited adaptability to new demands Inability to manage effectively from the desktop In complicated environments, output quality can sometimes suffer, impacting consumers. When an error occurs, it is usually resolved with a manual procedure and becomes another entry on Operations wish list for IT. Current workflow status is difficult to determine because gathering the required process metrics ranges from difficult to impossible Status is generally communicated by broadcasts to a wide audience, adding to noise. While this process is generally effective, managing by is inefficient. is typically exception-based rather than a proactive view of the current status. Further, historical content is not easily analyzed. Built as one-offs, individual tactical patches generate little or no event data regarding progress and performance. This data must be captured if managers are to perform effectively. On a real-time basis, all process events as well as information from other databases should be combined and maintained historically. An Operational Intelligence approach allows managers to react more quickly to developing situations. Equipped with dashboards indicating real-time business analytics, workflow status, exception queue updates, and staff utilization, managers are more effective and can deploy resources more efficiently. In a manual environment, simple questions such as, How are we doing today? or Will we meet our SLAs? are not easily answered. Operational Intelligence provides managers with the ability to determine status, forecast potential threats, and analyze historical trends against current performance. Creating capacity using Operational Intelligence results in significant headcount savings, increased span of control, reduced risk, and the ability to adapt more quickly.

7 5 Operations can be more efficient; the key is abstracting complexity with Operational Intelligence Operational Intelligence Operations relies on multiple stand-alone applications: Accounting Systems, Trade Settlements, Pricing Systems, Matching Engines in Reconciliation, Company/Security Master Maintenance, Performance, Corporate Actions, and others. Operations may also interface with other systems such as a Trading application or a Risk Management platform. As noted, Operations is also dependent on a variety of manual processes and procedures. Unfortunately, managers lack a consolidated view of these disparate applications, processes, and procedures. Operational Intelligence provides comprehensive oversight and effective workflow management. To facilitate Operational Intelligence, a Business Process Management (BPM) suite is incorporated into the business. A BPM suite ties disparate functions together, automates part or all of some manual procedures, and creates the process event data underlying Operational Intelligence. Integrating automatic and manual processes in a common workflow creates valuable event data. Using dashboards and analytical tools, managers can analyze this event data. By proactively managing the workload, problems can be identified and resolved before creating resource drains or worse, hard dollar losses. An Operational Intelligence approach is even more important where functions have been outsourced to Business Process Outsourcing (BPO) providers. While each outsourcing agent may provide status updates and/or web-based reports, this information is difficult to integrate between providers as well as with internal functions and data. Merging status updates from one or more BPO providers with internal event metrics provides the transparency needed for tighter management of BPO providers and an integrated, end-to-end Operations view. Operational Intelligence provides managers with the capacity to analyze their performance using objective, detailed event data Operational Intelligence provides more control to measure and manage the firm s risk exposure. Managers can easily create criteria watch lists and be sent alerts when rules are violated, such as, Daily trade volume 220% above daily average, or Vendor update files delayed 2.5 hours. Managers can then take action, redeploying staff to handle the volume spike, or alerting downstream consumers about output delays. Within the BPM suite, business analysts can create processes using a rules based approach, e.g., alerts, routing, escalation, prioritization, and enrichment. Process models can run on an exception basis or, if desired, confirm for managers that the specified process was run with zero exceptions.

8 6 Operational Intelligence creates scalability, leverage, and accountability A Business Process Management solution for Operations should include: Real-time, web-based dashboards Drill-down capability within dashboards Customizable dashboards (graphics, colors, layout, etc.) Allowing business users to create and modify triggers Sending or text messages when trigger points are exceeded Measuring progress towards SLAs and/or projected completion targets Allowing manual processes to be modeled and run within the application Workflow screens for staff to process exceptions Generating event data for all manual processes Automatically populating a historical event database (date, time, and person ID) for all events, including manual processes Security access controlled by role- or person-based security Operational Intelligence frees managers to focus their attention on valued activities and process optimization With Operational Intelligence, managers have the capacity to analyze processes and identify areas for improvement. With customized dashboards, including the ability to drill down for more detailed information, managers have the objective data needed to optimize production, reduce risk, maximize resource utilization, and monitor productivity. Dashboard views are available irrespective of geography. As events occur, managers have access to that information, whether the work is performed thirty feet away, or in another building, or in another state, or by a BPO provider. Managers can visualize current output relative to historical norms. System status, violations of SLAs, and/or progress towards KPIs can be systematically brought to the attention of the responsible managers or staff. Operational Intelligence is an event-centric approach providing managers with the ability to optimize processes and procedures using objective, historical data. What is the Return on Investment? The benefits of introducing Operational Intelligence are found in three areas: capacity, risk, and optimization. Capacity As each group within an Operations department is transitioned, existing manual processes and procedures will be partially or fully automated. The automation of formerly manual functions creates excess capacity.

9 7 As companies try to find cost optimization opportunities during the economic downturn, business process management (BPM) investments can provide a cost savings of as much as 20 percent within the first year of implementation. Analysts have said enterprises can achieve the payback from their BPM implementation within a year. - The Gartner Group 1 As additional processes are converted, the ROI is recognized more quickly because initial setup and data connections expenses have already been incurred. In larger Operations, a 20% cost reduction is a conservative estimate. For example, for a large custodian, if the logical rules for reconciling basic position exceptions are embedded in a BPM model, many of the reconciliation exceptions will be systematically reconciled and resolved by the process model. A much smaller number of more complex exceptions would be routed for manual reconcilement. Operations would have the capacity to absorb more business, maintain SLAs, add no incremental risk, and do so without adding headcount. While arguments about headcount not hired sometimes fall on deaf ears, when Operations headcount trend flattens as accounts and/or volumes trend up, this measure of productivity and leverage cannot be ignored. Risk Complying with Basel II, Sarbanes-Oxley, MiFID and other regulatory requirements requires financial service companies to demonstrate substantial internal controls for execution, delivery, and process management. In the current environment, this is a costly, difficult exercise. In many cases, the data is not there for many manual processes, e.g., who, when, what, outcome, etc. Without complete, easily accessible data, satisfying regulations will be an onerous task and a resource drain. In a process-centric environment, event data is automatically generated for every process and every step within the process. The resulting data set provides Operations the transparency and flexibility to feed the Risk system and comply with current and future regulatory requirements. A measurable and transparent operation is similar to paying careful attention to the rules of the road and avoiding accidents. With Operational Intelligence it is possible to mitigate risks, measure how risks were reduced, and demonstrate a tight, carefully controlled environment to prospects and clients. The platform can be extended to Risk Management, providing a current view of firm-wide events and the ability to measure risk in real time on custom dashboards. Optimization The introduction of event-based workflow provides robust metrics on everything from accuracy and timeliness to computed ratios such as resource utilization, individual productivity, and unit cost. 1 Gartner Press Release, March 16, 2009, The Gartner Group, Stamford, CT

10 8 Historical metrics allow analysis identifying areas for improvement, and optimizing processes for maximum efficiency Managers are better able to identify process improvements and staff performance using granular event data. By tracking activity through business processes, procedural roadblocks are easily identified. When a roadblock (and its owner) is visible throughout Operations, there is significant incentive to address problems quickly. The availability of process event data enables optimization techniques such as Six Sigma and Lean to be embedded in the daily management of Operations. These tools can be continuously applied to identify optimization opportunities on a daily basis. Summary An Operational Intelligence approach provides managers with the means to analyze and optimize their processes while maintaining service levels and containing costs. Better Creates capacity for managers to focus on value-added services, not only daily operational issues Provides an integrated view of the entire operation regardless of geography or number of locations Delivers automated workflow and management oversight for all manual processes Includes a common interface for managing all process exceptions Defines clear roles, responsibilities, and accountability for all processes Faster Distributes process alerts on a real-time basis Streamlines communications with real-time status updates Exposes process deficiencies with objective measures Reduces design, development, testing, and deployment time for workflow changes Empowers managers to redeploy resources from their desktops for quick response to operational issues Operational Intelligence permits firms to demonstrate robust data oversight and control measures Cheaper Embeds the concepts of Six Sigma and Lean into the daily workflow and analytical framework Reduces development costs for process improvements Reduces IT workload supporting Operations Measures resource productivity and utilization at the group and individual level

11 9 Operations now has the means to create an environment providing maximum flexibility to accommodate new business requirements efficiently and effectively. Operational Intelligence allows managers to monitor and optimize their workflows, creating a positive feedback loop of continuous process improvement. This approach empowers Operations managers to maintain service levels while reducing risks and minimizing costs. Better, Faster, Cheaper it is no longer necessary to pick only two. Operational Intelligence provides the ability to scale more efficiently while minimizing risks and improving service levels. About Nexperient Based in Boston, MA, Nexperient is focused on financial services solutions, primarily in the Operations arena. We help clients introduce and implement strategic Operational Intelligence solutions, leveraging their current staff and existing infrastructure investments. About Vitria Vitria Technology, Inc. is the industry s leading privately-held BPM and integration technology company. The company has a rich heritage as a pioneer of BPM that spans more than a decade. Vitria s award winning process integration solutions provide the backbone for many Global 2000 companies mission-critical business processes. Vitria has customers in North America, South America, Europe, Asia, and Australia.

12 Nexperient, LLC 396 Washington St. #149 Wellesley, MA Authors: Paul Bradley and Jack H. Singleton, December Property of Nexperient, LLC Use or redistribution of this content is prohibited. 945 Stewart Drive, Sunnyvale, CA Tel: +1 (877) Vitria Technology, Inc. All rights reserved. Vitria, M3O, StreamXQuery, and Exception Manager are registered trademarks of Vitria Technology, Inc. All other names may be trademarks of the companies with which they are associated. Expanding Operational Capacity in Financial Services 12/