Business Process Management in the Capital Markets
Financial services organizations that have already discovered the advantages of digitised content are now seeking to digitise entire processes, streamlining their operations much like the assembly line forever changed the factory floor. Nowhere is this need more urgent than for those institutions serving the global capital markets. Specifically, top capital markets institutions are responding to margin pressures by refining their operations and driving additional cost savings. One method being used to reduce costs and improve controls is improved business process management (BPM).
Supporting a process using BPM has several important implications:
BPM initiatives, properly designed and deployed, can reduce process time and related expenses dramatically while supporting compliance with the myriad of laws and regulations that govern the capital markets. In some cases, companies report they have cut day-to-day operating costs by 30 per cent to 50 per cent. BPM can also help deliver additional services to clients, thus enhancing and augmenting revenue streams.
Many software applications have been developed over the past 20 years to make financial services transaction processes better, faster and more cost effective. Such applications perform critical functions, such as analytics, processing, communications and reporting. As the need grew for more and more of these functions, business process re-engineering occurred to link systems that were each built to apply to specific products. Indeed, custom application program interfaces were often developed to link the numerous applications required to complete a transaction.
As each new application was added, extra interfaces were needed to link the new application with the existing ones. By the mid-1990s, routing and messaging “middleware” arose as a means to link applications and move transactions from application to application. With the lack of committed architecture and the cost and complication of building and maintaining interfaces, manual and semi-manual processes frequently remain to link systems and complete processes.
Today, new market and regulatory demands are forcing capital markets firms to converge data in a way never previously imagined; the increasingly complex web of manual and automated interfaces is not adequate to address these issues. This means creating a new level of service-oriented architecture on top of the information exchange – a backbone that routes and controls the workflow. That backbone is BPM.
Due to the unique challenges that capital markets firms face, they have begun embracing automated workflow initiatives such as BPM. To bolster profit margins and keep pace with mushrooming regulations that cover larger and larger transactions, capital markets firms have an even stronger incentive to re-evaluate their legacy architectures and determine new BPM strategies. Three ongoing challenges, in particular, impact these efforts:
A key imperative is the need to comply with a fast growing number of complex regulations. Each institution must deal with multiple regulatory regimes driven by, among other things, the geographies of their clients and employees and the products and services provided. The purpose of the regulations varies from protecting customers from securities fraud to preventing terrorists and other criminals from using the financial system. Such a regulatory environment poses a challenge for every BPM design and implementation. Business and technology management must ensure that each automated workflow conforms to the applicable regulatory requirements. In addition, such designs must be ready to support periodic changes in regulations.
Customers in the primary and secondary markets have already taken advantage of the digital revolution by trading via electronic communication networks (ECNs). Now capital markets firms face a new strategic imperative – in order to survive, they must maintain profit margins by delivering more comprehensive products and higher value services. As they may have limited ability to spend more money on people to deliver those products and services, organizations must take advantage of automated workflow.
Healthy profit margins on new products tend to be short-lived as competitors catch up and free market forces take over. Each capital market player undergoes a process of selecting which products and services serve as its core business and which will be dropped from its portfolio. For core products and services, each firm must seek methods of driving efficiencies and reducing costs to stay competitive. BPM provides a vehicle for eliminating or automating tasks that are still being executed manually.
An organisation with siloed architecture is like a house of cards. One more work-around or tweak to a legacy process can bring the house down. Instead of just integrating systems, capital markets firms need to analyse accurately, plan meticulously and implement functions carefully. Firms must first examine a process to determine whether it needs to be fixed, replaced or monitored. These data-driven strategies support the business case for change and determine the scope, phasing and expected returns to be paid by any investment
Organisational silos may resemble warring medieval fiefdoms. Often one fiefdom does not talk with or trust the other fiefdoms. They do not share data, they do not share processes and they do not share profits. To unite the fiefdoms, an outside arbitrator is almost mandatory to help create a BPM implementation that crosses boundaries and empowers the functional managers who own all of the bits of the process to work together. Only then can they achieve their total potential.
Workflow defines the interconnections between different pieces of software, the exchanges of the data and the rules associated with the routing. But one of the most important steps before implementation is to define the roles of the people who will be involved in the new, more automated process. It requires objectivity, and often an outside viewpoint, to define those roles. The assignments have to be correct because the roles will be “institutionalised” within the process template.
BPM implementation requires a tremendous amount of organisation-wide connectivity. Workflow must be coupled intelligently with middleware, applications, databases and e-mail. Although it may be enough to provide integration from edge-to-edge of applications, a better approach would be true convergence that combines data, process and technology at the application core.
BPM architecture usually requires both a data model and a process model. Semantics must be consistent so successful implementation can be duplicated system-wide. “Architect” big, but implement small. If your models are robust enough for global implementation, they can also withstand the local tweaks required and approved so they may be instituted in each region.
A recent review of many top global capital markets firms showed that operations and technology spending ranges from $4bn to $6bn annually. Many of their current initiatives seek to address complex record keeping and reporting requirements imposed by government regulations. BPM and automation represent the next technology frontier for these organisations. Automation of business processes in capital markets firms may be compared with the promise of factory automation a century ago, but with far greater complexity, risks and rewards. We are just now beginning to codify our office “manufacturing” processes, selectively applying automation tools that will trigger rapid change, much as the assembly line did on the factory floor.