Yet another three-letter acronym has found its way into business vocabulary. BPM – Business Process Management – is gradually becoming the new ‘hot topic’ in operational and IT circles. In the USA, according to some pundits, BPM has become the ‘holy grail’ for some of that country’s largest companies. But what is it, and why could it be so important to the future of the UK financial services industry?

Tony Barker, Director of Marketing, UK Financial Services, Computer Sciences Corporation (CSC) explains.

At the start of this decade the drastic downturn in the global economy forced an intense interest in streamlining and taking costs out of business operations, the like of which had not really been seen since the recession of the early nineties. Companies once again had to look for ways to improve stakeholder returns in the face of stagnant – or, as for many financial services companies, greatly impaired – financial performance.

This prompted the dramatic and ongoing growth of a range of cost cutting and efficiency initiatives: outsourcing in all its forms, the spread of Six Sigma from manufacturing to services companies, and the partial re-emergence of business process re-engineering (BPR) in the emperor’s new clothes of ‘Business Transformation’, to name just a few.

The need for process alignment

These initiatives place a heavy reliance upon IT to bring about the necessary business transformation (small ‘b’, small ‘t’). For the more successful ones this has been IT with the benefit of hindsight – exploiting technologies that reduce the need for long, ‘big bang’, inflexible implementations wherever possible, so attempting to avoid many of the pitfalls of the past whilst providing a visible return on investment.

There is no doubt that this focus on internal operational efficiency has helped the industry start to transition to a phase of sustainable recovery. But as senior managers begin to lift their heads above the parapets and look outwards again to their markets for business growth they are seeing a different and highly dynamic landscape. A landscape in which the abilities to adapt almost immediately to environmental circumstances, and work collaboratively with an ever-changing portfolio of business partners have become key competitive differentiators as well as key success criteria.

As a result, it is becoming clear that there needs to be a fundamentally different approach to how business operations and the IT that underpins them interact. One that ensures business processes continue to align precisely to evolving business strategies.

Step forward Business Process Management (BPM).

It’s not what you do, it’s the way that you do it

In order to appreciate why BPM could have such an enormous impact on business performance over the next few years it is necessary to first adopt a little lateral thinking. Instead of considering products (physical or service) as discrete entities, they need to be viewed as the summation of the processes used to create, maintain and distribute them. For anyone involved in the financial services industry, based as it is on the provision of largely intangible products, this should be a relatively easy concept to grasp.

Consider two financial services products: a savings account and car insurance. Both these ‘products’ can be broken down and described in a variety of ways using the potential high-level processes that underpin them (NB There could be more than those shown, plus any number of sub-processes dependent upon the nature and features of the 'product'):

Savings Account

• Product Design
  
• Marketing
  
• Application
  
• Acceptance
  
• Account set-up
  
• Deposit facilities
  
• Investment
  
• Interest payment
  
• Withdrawal facilities
  
• Account information production and access
  
• Account detail changes
  
• Account closure
  
• Accounting
  
• Regulatory reporting
  
• Etc.

Car Insurance

• Product Design
  
• Pricing
  
• Marketing
  
• Quotation
  
• Application
  
• Underwriting
  
• Acceptance
  
• Policy Issue
  
• Premium collection
  
• Accounting
  
• Cover changes
  
• Policyholder detail changes
  
• Claims handling
  
• Renewal
  
• Regulatory reporting
  
• Etc.

Accepting this premise, it is logical to propose that what differentiates one company from another, especially where service-based products are concerned, can be defined by the business processes they employ. In the above savings account example, the main differentiator for one company may be their investment process, which could manifest itself competitively as a higher interest rate for the customer. For a motor insurer, an ability to change pricing quicker than competitors, so maintaining a balanced risk portfolio, may be the key strategic differentiator.

Other players could home in on different areas, and the strategic importance of particular processes will vary subtly from company to company operating in any given market. But if a company’s key strategic processes are – in terms of impact on cost, efficiency, responsiveness, product attractiveness, etc. – better suited to the markets they operate in than their competitors they will achieve a natural competitive advantage. The tricks are to design, implement, execute and operate these better than the competition, and then be able to identify and carry out improvements that keep them so. This is a significant challenge for any business and one where, as stated previously, IT is frequently called upon to provide solutions.

In fact IT has been able to do a great job of assisting in the design to operate phases of the process lifecycle. According to some estimates, up to 70% of an organisation’s business processes can now be packaged highly effectively within IT systems. However, it is the remaining 30% slice that tends to embody those processes that have the highest strategic value. This slice normally includes those that provide visible differentiation from competitors – the ‘identity’ processes that have the greatest impact customer perception and stakeholder value – and those that are the most complex and dynamic.

The latter are the processes, involving a multifaceted interaction of company departments, suppliers and customers that are truly core now to most businesses and where underlying integrity therefore needs to be preserved. Also, more than any others, it is these compound processes that require continual optimisation in response to market changes to ensure alignment with business strategy.

The danger of dumbing-down

From an IT standpoint, this type of process is the most difficult to encapsulate within any single system or package. Of course, this hasn’t stopped software vendors seeking to expand the attractiveness of their offerings by trying to do just that. To date, though, when they have attempted to broaden the functionality of a system to accommodate such a process they have often had to standardise at least some of it – forcing all system users to follow a limited number of process paths.

Standardisation is not necessarily a bad thing. It can allow those companies with poor existing performance to compete more effectively, and create clarity, both of which could ultimately benefit the customer. Because of this, however, it may automatically reduce a company’s ability to use a process as a competitive weapon. This is especially the case if, in order to shoe-horn a complex process into a system, it involves it being ‘dumbed-down’ to such an extent that its strategic value is marginalized.

This issue is, of course, exacerbated in financial services by a regulatory framework that seeks to impose a plethora of ‘standards’ on the companies operating in the market – albeit ‘standards’ that mainly determine what the process inputs and outputs should be (e.g. a disclosure notice), or that only effect certain processes or components of a process.

And if compound processes can’t be readily implemented within a single system whilst preserving strategic integrity, it follows that the cohesive management of them also becomes a problem. Not only will different systems be used for the various component parts of the process, they will frequently involve a number of parties, internal and external, for their execution. Invariably, the systems used will have been sourced without any regard for the totality of the process, be based on inconsistent data, disparate hard-coded functionality, and be unable to communicate directly without additional technical ‘glue’. Add to this any intermediate manual techniques used to fill the gaps, and even creating a single, comprehensive, description of how a process works can be tough.

Without the ability to either describe the end-to-end detail of a process or control it directly, it becomes nigh on impossible to identify and apply co-ordinated change and improvement. Even where this could be achieved, the inflexibility of the underlying systems may mean that the time and effort required to get it right using conventional means may far outweigh any realisable benefits.

Unless processes can be improved in a timely manner, their alignment to business strategy can’t be maintained. Couple this with the need to adhere to minimum regulatory and legislative standards, and when faced with such a scenario it may seem easier to compromise and modify strategy, rather than deal with process limitations. This is the ultimate in dumbing-down, and a route that usually ends in some form crisis management further down the line.

Putting process control back where it belongs

In order to address these issues BPM has to be put at the centre of operations, with process demands determining how the various underlying systems operate and interact, rather than the other way around. This requires the ability:

• To put full control of process development and change firmly in the hands of those having process responsibility – usually the business operations people.
  
• To see, manage and adapt processes in an integrated manner that straddle the boundaries between a company and its suppliers, business partners and even customers.
  
• To design and implement processes flexible enough to adapt, almost automatically, to changing business conditions whilst still reflecting statutory and legislative requirements.
  
• To introduce or change business processes in real time if required, and at least at a speed governed by a company’s own business cycle.
  
• To cater for the phased restructuring and repurposing of legacy applications, so maximising return on investment, whilst at the same time facilitating the rapid introduction of any new application components necessary to support immediate business needs.

Whilst traditional methods, IT and tools have so far failed to deliver solutions that can adequately fulfil all of these business process management criteria, the possibility of achieving a new level of process control is now within grasp.

Exploiting recent technological innovations, a so-called ‘third wave’ of BPM (see footnote at end) is now emerging. By combining developments in technical architecture, middleware, integration and connectivity with a new breed of dedicated BPM software (BPMS) the potential now exists for true strategy-driven process design, execution and maintenance.

A leading example of BPM architecture, already in use commercially, is CSC's e4^SM (see Figure 1 below). Here the BPMS is the core of a framework involving: a ‘Service’ layer, where the various enterprise applications plug-in; a ‘Co-ordination’ layer, one function of which is to allow connectivity and collaboration beyond the boundaries of the organisation; and a ‘Distribution’ layer, controlling multi-channel access by employees or customers to the service or product defined by the processes.

The premise behind a BPMS is, like many IT innovations, relatively straightforward. Instead of having pieces of functionality (process components) hard coded into underlying applications, they are instead extracted to a business process engine. To manipulate these components a user accesses a secure interface that allows them to be combined diagrammatically, in any way they like, by means of a sophisticated flowcharting tool.

BPM and ROI – Two acronyms, same meaning

Once the flowchart has been completed, it can be used to run simulations and tests of the process, and changes made as appropriate before making them live. When the user is happy with the design, the flowchart is converted by the BPMS into an executable programme. This programme takes over control of the various systems and interfaces necessary to undertake the process and instructs them what to do. In this way the business process engine collapses the design, implementation and execution phases of a process life cycle into a single stage. In addition, once a ‘best practice’ process component has been established it can be stored for future retrieval and cloning at will, significantly cutting development time.

Process improvement also becomes as easy as adding, deleting or moving boxes on the flowchart, and changing the links between them. Processes become inherently flexible, giving managers more control over strategy. For example, if a household insurance claims process had to be changed to replace a third party white-goods supplier by another this could be done quickly by the management responsible, using the BPMS to automatically invoke the necessary alterations to data flows and systems to support the new relationship.

Of course, if it were as simple in practice as it is in theory, then BPM would already be in widespread use. However the nature of the entrenched applications in many sectors, including financial services, and the ways in which trading partners interact, currently dictate that a BPMS be integrated within a supporting technical architecture. This architecture is crucial in providing the interface points between the BPMS, process designers, internal enterprise applications and external participants, and has to be robust, scalable, adaptive - and right first time. Both a strong commitment and some up front investment are therefore required, but the payback in terms of ROI and strategic flexibility can be enormous.

The future of BPM in Financial Services

A prime requirement for any BPM architecture is that any enterprise system involved is capable of communicating with the BPMS and other systems in the right way. CSC is currently well down the path of converting its own portfolio of financial services applications so that they readily integrate within both CSC's e4^SM and other BPM architectures, but there is still a great deal of work that needs to be done across the industry. Eventually, the mathematical concepts underlying BPM will become an inherent part of software packages, making them more dynamic and easier to combine, but this is probably many years away.

Within industries as diverse as motor manufacture, toy production and aerospace BPM is now starting to create significant benefits for its early adopters. But despite the promise BPM offers, there are as yet few examples of its widespread implementation within the UK, or indeed global, financial services market. Herein lies the opportunity.

It’s worth remembering that much of the bad press suffered by UK financial services institutions over the past few years has centred upon their inability to adequately control processes or change them quickly enough respond to market dynamics. Personal pension mis-selling, rogue trading, and the current the endowment policy crisis are all examples of this.

BPM does not offer a panacea for all the ills of the financial services market but could by its nature help prevent similar occurrences. Moreover those organisations willing to embrace a new way of thinking about the products and services they offer and the IT used to deliver them would not only perhaps be able to create new ways of differentiation in the current market, they would be positioning themselves far better for whatever the future holds.

ENDS

The ‘Third Wave’ of BPM

In their best selling book ‘Business Process Management: The Third Wave’ (Meghan-Kiffer Press, 2003), Howard Smith, Chief Technology Officer (Europe) at Computer Sciences Corporation, and Peter Fingar, Executive Partner at The Greystone Group, suggest that a ‘third wave’ of BPM is emerging.

The concept of business process management is not new, and can be traced back to the introduction of time and motion studies in the 1920’s. The period from then through to the Total Quality Management initiatives of the 1980’s, coinciding as it did with exponential growth of computing power and availability, constituted the ‘first wave’ of BPM.

The ‘second wave’ kicked of in the early 1990’s with the introduction of business process reengineering (BPR) alongside the emergence of distributed computing, enterprise resource planning systems, CRM and other IT-enabled process automation tools.

Exploiting recent technological innovations, some based on an obscure branch of mathematics called Pi-calculus, the ‘third wave’ of BPM is founded upon the development of new IT architectures centred around core business process management engines or systems (BPMS). The architecture enables the modelling, design, maintenance and control of business processes independently of underlying packages.