Business Process Management:

a pragmatic approach to reducing costs and mitigating risk

Controlling processes is a key tool to reduce cost and mitigate risk in the investment management industry, with both cost reduction and risk mitigation having been common themes since the recent financial crisis starting in 2008. Business Process Management (BPM) tools and methodologies provide one good alternative to control investment management processes.

by Anders Kirkeby, Domain Manager at SimCorp

Investment management organisations are complex businesses. Mounting demands from ever more complex regulatory regimes help create an increasingly transparent and level playing field for all parties involved. However, these initiatives add little clarity for the organisation itself, as the regulatory requirements mostly cover the external view and not the internal intellectual property, which is frequently the raison d’être and differentiator for a particular organisation.

In a recent report on 2011 trends, research and analyst agency Ovum cites BPM as one of the key priorities for this year. Over the last several years many companies have embarked on enterprise BPM (EBPM) projects, attempting in this way to tie up all processes with a single standard solution. These are valiant and useful efforts, but large enterprise-wide solutions may have inherent issues when applied to investment management operations. This is especially the case in the level of complexity they can control, project ownership and change agility, not to mention project cost and risk, which may not be acceptable in the current economic climate.

AUTOMATION FOR EFFICIENCY AND CONSISTENCY

Arguably the most important driving force behind IT investments over the past decades has been automation – the wish to reduce cost or free up resources through automation of specific processes. Lessons from other industries, such as the highly process-driven and automated Japanese car industry in the 1970s, show how large market shares were quickly captured, not just with lower prices but also with higher quality, both of which can largely be ascribed to clear processes and ever increasing levels of automation. Automation was literally turned into a competitive advantage. The value of these earlier lessons today is evident in business-process improvement methodologies such as Six Sigma.¹

Automation relies on well-defined processes describing workflows to control who or what does what or when and under which circumstances. There are several useful definitions of BPM, but here we will define it as the continuous process (see Figure 1) of analysing and optimising the processes required, then to model and design the actual workflows, subsequently to actually develop and deploy the workflows, and lastly to manage the workflows and interact to carry out the workflow tasks. Data gathered automatically during that last step is then used to facilitate the next cycle of process analysis and optimisation.

Gathering operational data during process execution, often called Business Activity Monitoring (BAM), is critical. The data is used to continuously optimise the processes, but also to report on metrics relevant to the specific processes. The ability to report is as important as the automation itself. The data may be used for internal and external Service Level Agreements (SLAs) to make involved parties more accountable. SLAs are widely viewed as an effective tool for improving efficiency in medium to large enterprises where departmental separations may otherwise cause substantial overhead.²

Taking another lesson from manufacturing, the investment management industry is increasingly divesting parts of its vertical integration stacks. Outsourcing aspects of IT operations is very common and may be very close to the individual organisation’s business services and at arm’s length in other cases. But more recently we see a trend towards Business Process Outsourcing (BPO) of back-office functions, reference data management and traditional middle-office reporting needs. The outsourced functions, which are deemed not to be core competencies, are still business-critical. Hence there is a need for clear reporting on how well stakeholders are living up to expected service levels.

 
Fig. 1. Business Process Management: a continuous process. Source: Microsoft. 

LET PRAGMATISM RULE BPM PROGRAMMES

Many organisations have considered or even begun enterprise-wide BPM programmes to tie all business processes together using a single methodology and software tool support. While this certainly has merit, it is costly and risky, and does not provide immediate results. This makes it a hard sell in the current economic climate. It may not always be feasible from the tool aspect due to a combination of time, risk, cost and technical constraints.

The fully unified approach typically requires that all software components across the entire enterprise architecture adhere to one of a small set of defined generic interfaces, typically in the form of Service-Oriented Architecture (SOA). Despite substantial interest in this type of architecture, we are still far from having generally accepted SOA-interfacing standards at anything but perhaps the technical protocol levels.

As a result, it would require a substantial amount of standard and custom middleware components to establish a single orchestration interface to all components. The unified approach is a useful long-term enterprise architecture strategy, but many require a more progressive approach to deliver value from a BPM initiative sooner than the unified all-or-nothing approach would allow.
Thus the winning approach is to proceed with the analysis work across all business processes to identify the ones with the most potential for cost and risk reduction and procure or evolve the enterprise software environment accordingly to ensure that each of these individual processes can be orchestrated in a single tool.

The multi-platform approach is a pragmatic choice, but may also be required to control software licence and configuration costs. Organisations employing pure best-of-breed enterprise architecture strategies accept the cost of integrating and configuring at fairly low levels. Other organisations seek to minimise software costs by employing larger component sets from fewer vendors, which entails them using the workflow tools supplied by the vendor to leverage default configurations as the workflows might be very granular and quite software-specific.
The gist of this can be summarised as follows: be pragmatic and apply the enterprise BPM strategy to discrete processes to deliver immediate value. The most likely conclusion is that investment management systems would ideally be fully integrated on a single BPM platform, but that it is more cost-effective to take a pragmatic incremental approach to avoid costly and risky BPM projects which are not particularly welcome in the current economic climate.

AVOID STALE PROCESS DIAGRAMS

Where BPM tooling is applied, it is paramount to seek platforms where workflow model and execution platform are one and the same. Workflow modelling should not be done in one tool, only to be implemented in another. This creates an all-too-common disparity between process documentation and process execution, which inevitably leads to issues around keeping both synchronised.

Many software implementation projects begin with workflow analysis, and lovely diagrams are drawn up in, for instance, Visio and later implemented in the actual operational software. After that point, the diagrams turn stale when subsequent workflow changes are applied to the operational platform but not to the documentation.

BPM is not a one-off activity, but rather a continuous programme of process optimisation – both to improve efficiency but also to adapt to changes in the business environment. The process models should be maintained and optimised continuously. The best way to ensure workflow models are maintained is to have them form part of the system as opposed to simply documentation. The workflow should not be a series of diagrams and protocols maintained as separate documents but rather be data residing within the very tools they are supposed to control.

WHO OWNS BPM?

Customer Relationship Management (CRM) systems share many characteristics with BPM. One is that successful projects to introduce seek to make the most of existing tacit process knowledge in end-users. An effective approach is to put the configuration and modelling tools in the hands of end-users. A good example of the value of empowering end-users rather than relying on technologists to introduce new CRM systems is salesforce.com. When it launched the market’s first powerful easy-to-use hosted CRM solution sales departments the world over jumped at the opportunity to deploy a CRM solution quickly on their own without involving their IT departments. The fast-growing market share of salesforce.com demonstrates the value of end-user empowerment.

The lesson here is not to bypass ‘IT’ but that some enterprise-component change projects may gain agility and reduce friction through end-user empowerment. In BPM terms, business analysts and power users should therefore be the owners of the process modelling and execution. Technologists should support this by providing the necessary integration on demand. Especially the incremental approach advocated here would not benefit from being owned by technologists.

REDUCE COSTS WITH BPM

An investment in BPM can contribute to achieving cost-reduction aims. Modelling the processes incurs a cost but may be done as part of the implementation of software to support the business processes. However, the tooling and maintenance will carry additional costs. Nevertheless, the process models supported by BAM data will support analysis with a view to optimising the processes further.

The ability to leverage BPM to continuously optimise business operations is important. Sufficiently rich models, which are always in synch with actual operations and a steady trickle of operational data, should provide the tools to continually look for ways to optimise processes. The models provide overview, the data provides statistics on actual usage. Both may change, but in combination they provide insights into the actual processes that are taking place.

Processes governing human workflows may be used to improve operational efficiencies to ensure appropriate responses within expected timeframes along with the tracking tools to generate quality of service (QoS) metrics for performance evaluation of both individuals and teams, possibly through SLAs between teams.

RISK AND AGILITY

BPM may also be used to help reduce operational risk. Well-defined process models will immediately bring more clarity and an increased ability to communicate the processes and workflows to others who might be able to spot weaknesses.

Institutionalising the defined processes should help reduce the occurrence of errors by reducing the set of possible outcomes in any given situation. Transparency in processes will allow more workflow participants to better understand the processes they contribute to and how these fit into the larger picture.
Greater process transparency also provides greater agility to react faster to opportunities and changes in the business environment. Business process models, which are actively used by supporting software tools running daily operations, should empower business units to do their own ‘what-if’ analyses and deploy changes without necessarily requiring cross-functional change projects.

BPM AND THE INVESTMENT MANAGEMENT INDUSTRY

Using BPM to ensure consistency in client interaction is a classic use of BPM in other industries, which applies equally well in investment management. With increasing regulatory requirements for client reporting for investment performance purposes, it makes sense to wrap not only the actual client interaction in defined workflows, but also to model and control the processes leading up to client interaction.

One instance of this is found in the regularly scheduled report production tasks where some parts are completely automated, other parts require manual task such as a fund manager’s commentary, and where at several stages there will be different persons signing off parts of the finished report before it reaches clients.

Everything must be seen to be audited and executed in a timely fashion, and that is precisely what BPM can provide by tasking users to take a specific action within a defined timeframe.

Many back-office functions are already quite efficient through investment in straight-through-processing (STP) systems. Many organisations have well-defined key performance indicators (KPIs) and metrics to track STP rates – the rate of transactions processed without human intervention. The cost of transaction processing varies greatly with the nature of the instruments and the involved parties, so even a high overall STP rate does not preclude scope for further optimisation.

BPM IN THE FRONT OFFICE TOO?

Traditionally BPM has not played much of a role in the front office characterised by more room for individual preferences and proprietary processes. But again, increasing regulation and cost pressures make it highly relevant to look at front-office areas where BPM may add value.
Smart Order Routing has gained popularity over the last several years. Some aspects are relevant for BPM, such as rule-driven aggregation of orders and differentiated handling of orders based on specific order characteristics. Workflow models may define the full flow of orders between functional roles in the organisation, e.g. between portfolio manager, compliance officer, dealer, and supervisors.

The workflow model may then be enriched with business rules to directly enforce compliance or supervisory approval thresholds, which may trigger different workflow paths. Overall workload can then be reduced by allowing portfolio managers to release orders without supervisory approval if the order value is lower than a certain amount and the risk is deemed sufficiently low. Similarly, some orders may need to trigger validation workflow paths to ensure appropriate roles get their say when necessary (see Figure 2).

Without easily configurable workflows, such rules would have to be enforced in a more static and general manner, resulting in unnecessary validation tasks. This carries increased operational risk because a user who routinely has to ignore some elements is likely to occasionally ignore more than intended.

 
Fig. 2. Example of possible order handling rules based on order characteristics.

BPM TAKEAWAYS

Like any other technology under review, it is important to stress that BPM is not a panacea. It is a tool, which is implemented at a certain cost and, if handled well, can be used to achieve demonstrable benefits. Applying BPM strategically in discrete areas will help to deliver value in the short to medium term rather than long term only.
Automation is the driver behind BPM to reduce cost and mitigate risk through fewer possible outcomes in any given business process and process step.

BPM can be applied more widely across the business functions in investment management, including areas that may not have had much BPM attention in the past, of which only a few are mentioned in this article.

BPM should be viewed as a continuous cycle of process optimisation, which requires process model and deployment to be one and the same to preserve a single version of the true picture. Such a single version provides agility to make changes to follow shifting business needs fast and safely.

 

Anders Kirkeby is Domain Manager for System Architecture in the Strategic Research department at SimCorp. He leads a team charged with setting and executing strategically focused changes in the SimCorp Dimension investment management software product. His specific focus areas include scalability, enterprise-wide cross-functional consistency and overall user experience. Prior to joining SimCorp, he served in software architecture and consultant roles focused on the Microsoft technology stack as well as a three-year IT start-up engagement as technologist and product owner for a SaaS product. He earned his degree in Computer Science and Human-Computer Interaction from the University of Aarhus, Denmark.

¹See the chapter ‘Lean Six Sigma’ in asset management: a way to cut costs? by Klaus Arfelt in ‘Operational Management and Control: processes and costs’ (2010), published by SimCorp StrategyLab.

² SLAs have been used since the late 1980s by fixed-line telecom operators as part of their contracts with their corporate customers. This practice has spread and it is now common for a customer to engage a service provider by including a service-level agreement in a wide range of service contracts in practically all industries and markets.