BPM provides insight into financial services processes

No single financial services firm has yet developed a silver bullet for the competitive challenges looming in the crosshairs of this highly competitive industry.

Product differentiation remains relatively minimal. Innovation exists, of course, but no offering has delivered an overwhelming edge in some time.

The primary way that firms outgun their competitors is by devising sustainable methods to serve more customers with existing capabilities. Whether a firm wins customers away from competitors or attracts customers who were previously too expensive to acquire, success is currently defined by efficiency.

In the existing competitive environment, organisations succeed not by product differentiation, but through process differentiation and process innovation.

That exigency explains the growth of business process management (BPM) over the past four years and, more intensely and with greater sophistication, in the past 12 months to 18 months. At its core, business process management enables companies to transform business strategy into business processes by fully integrating the work people do with the information systems employed to optimise business performance. A common characteristic of most approaches to BPM is that it helps companies to leverage existing IT investments.

Hold up an important business process within the financial services industry, and there`s a good chance that it has recently become more efficient thanks to an introductory dose of BPM. At the same time, there remains considerable room for improvement.

When fund managers direct their broker to make a trade, for example, many firms can now see each major processing step. The problem is that few firms can see into the black hole of what occurs - the system-to-system connections and manual handoffs - between processing steps.

A broker may initiate the customer`s order in a trading system in Japan. The data then zips electronically to North America where the order is validated, run through a pricing computation, subjected to a compliance check, entered into the accounting system and then stored in a date warehouse.

This vital business process, one that may be reaped thousands of times a day, raises several important questions: Did the trade take place? Was the trade completed in time? Did the trade`s terms, as they were executed, match the terms that the broker had communicated to the customer? If something went wrong, where and when did it go wrong, is it being addressed and who is responsible for rectifying the error?

Currently, few companies possess the line of sight into the business process`s execution to answer those questions before uncomfortable results crop up. The process may falter or, worse, grind to a halt because the system or person responsible for a crucial step in the process was unavailable. Of course, the most expensive time to discover that a trade did not execute as promised is after the fact. Customer dissatisfaction is a painful cost to stomach at a time when firms need to differentiate themselves on the quality of their service and support.

Financial services companies have sought to make many of their processes - particularly those with a potentially material effect on financial reporting - more transparent. In the post-Sarbanes-Oxley era, visibility into key processes represents both a major risk and a potential reward. US public companies that cannot see the dark spaces between systems and manual hand-offs within processes that influence financial reporting run the risk of unsavoury opinions from external auditors, or even a call from regulators.

Companies that enhance their insight into those shadowy areas can limit the scope and cost of their external risk.

Providing that capability is a major challenge due to the financial services industry`s heavy reliance on highly distributed and complex information technology systems. Those complex webs need to be untangled if companies are to reduce costs, broaden their market spectrum, and improve the effectiveness and efficiency of their compliance processes.

BPM efforts typically begin with a thorough analysis: What, exactly, takes place between the point when a customer requests a trade and the point when the completed trade enters into our accounting system?

Documenting the entire process equips process, usually with the aid of a powerful graphic tool, equips process owners, senior managers, IT departments and others with sharper eyesight. They can prune redundant steps, reduce errors and speed execution of the process, at least in theory, once they can see how a process works and compare it to how it should ideally work. Business process analysis uncovers obvious problems and enables organisations to design better processes.

Business process analysis, including simulation, represents a necessary and beneficial step - 20% gains in process improvements are routinely achieved simply through a better understanding of current processes - but this level of improvement is no longer sufficient.

BPM puts the model into practice and continually monitors and manages its execution: Did the trade take place? Yes. Was the trade completed in time? Almost. Why not? This particular system was down and slowed the trade`s execution, and this particular person was alerted and took care of the problem so that it will not occur again.

Those insights are typically delivered through dashboard and scorecard interfaces. Metrics and really important metrics - those with parameters assigned to them so that they become key performance indicators (KPIs) - are continuously monitored so that they can be managed if any warning signs emerge before problems arise.

If, for example, the time it takes to execute a trade is X, whenever a trade is executed in X plus two minutes, a dashboard may contain a yellow-coloured warning next to the "processing time" KPI. If the time stretches to X plus five minutes, the warning turns red. Individuals responsible for manual intervention may be alerted automatically whenever the KPI changes from green to yellow, or from yellow to red.