Posted in Operations & IT Articles, Total Reads: 2962
, Published on 16 June 2013
Operations management has always, inherently, been an integral part in the smooth functioning of every organization. However, the emphasis on operations management as a separate discipline of study is comparatively recent but nevertheless, of high importance. It encompasses the functions of controlling, maintaining, overseeing, designing and redesigning of business organizations and production houses at both the micro and the macro level. The reason of increased focus on operational management directly corresponds to the exponentially increasing trends of competition in the market with players vying for the most economic and profitable strategies.
The BFSI domain- globalization and recent trends
With the beginning of the IT revolution, the facet of banking sector, as other industrial sectors, changed massively. The image of banks functioning as mere institutes of lending and depositing changed drastically to tech-savvy organizations focused on customer-oriented services. Globalization allowing cross-border functioning opened up arenas for expansion and the banking sector came up with a plethora of services like core banking, ATM & credit card facilities, E-Pay, E-Rail, and other online banking facilities. Customer satisfaction with the services being provided by the bank became an important parameter to be stressed upon and strategies, services and products were developed.
Integration of operations management in the BFSI domain- need of the hour
External drivers have brought banks to the threshold where they have to leverage development on IT and perfect operational activities with simultaneous innovations. Regulatory change and consolidation, competitive forces, changing consumer preferences, technological developments etc are some of the areas that the banking sector has to focus upon. Vulnerability of banks to performance shocks due to operational inadequacies has increased manifold with increase in operational risks in the volatile financial market. Operational risks mainly arise due to non-compliance with policies, laws and regulations, breakdown in the availability or integrity of services, systems or information, payment or settlement risks to name a few. The Subprime crisis of 2008 was an exemplary phenomenon of cascading operational risk and mismanagement that culminated into a near standstill credit market. Hence, incorporation of best business practices, straight through processing, automation, process centralization, single window service and control through effective and timely MIS are the present trends being implemented in the domain.
Sources of operational risks
Operational risks, as the name suggests, arise out of operational error. In a broad classification, these risks are usually classified under the heads of transactional risk (arising out of product complexity, booking error, commodity delivery risk, documentation or contract risk, settlement risk and execution risk), control risk ( arising out of fraud, money laundering, rogue trading, security risk, key personnel risk, processing risk etc) and systems risk( due to programming error, model or methodology error, management information, IT systems failure, telecommunication failure, contingency planning etc).
Waste of time and resource not only reduces the operational efficiency of banking institutions, but also proves to be a major detrimental force. While over-processing adds value to a product or service more than what the customer values it, unnecessary movement of materials, product or even information leads to transportation waste. Overproduction, over-stocking of inventory, defects and delay between two consecutive processes are the key factors that degrade operational efficiency, usually resulting in loss of customer base.
The Subprime crisis spanning over the period from 2006 to 2008 was a clear example how an accumulation of operational failure, especially in the domain of securitization could cripple the economy. Underwriting, lax regulatory measures, property appraisal, document evaluation were the primary operational risks involved. Lending and participating agencies selling mortgages failed to adhere to guidelines of minimum regulatory capital requirements, proper evaluation of documents and other necessary operations. Adding to this, neither could the monitoring agencies make such institutions follow the principles and guidelines. These operational risks culminated into wide spread operational failures that ultimately required huge monetary funds to re-stabilize.
Operations Management in BFSI– implementation and benefits
As a simple example, the fruitful use of operations management by SBI may be elucidated. Over the past years, SBI has made a successful attempt to upgrade itself in a manner that makes it technically superior( implementation of SAP and ERP), have strong front end partnerships, resilient institutional infrastructure, and looks towards country-wide financial inclusion. They attuned their business model in a way that was customer oriented, planned a proper centralized control and decision making mechanism and followed a closely monitored system that involved clear cut roles at each operational level. Their highly appreciated ‘Outreach Model’, a plan to encompass the financially excluded villages in their service domain, depicts operations management as an implicit need. Their aim to have a customer service point (CSP) in every village requires proper management of resource, both in terms of capital and human resource and strict adherence to time frames to set up the infrastructure. The project focuses on technology with low capital and operating experience, but with high reliability.
Business process management (BPM) and banking performance
BPM, in simple terms, encompasses the managing, automating and optimizing of banking operations with the aim of improving productivity and profitability. The concept is to measure, improve and benchmark the performance with strong emphasis on customer satisfaction and retention. BPM is primarily an evolution of the concepts of total quality management(TQM) and business process re-engineering(BPR). BPM can be applied to various banking processes and business lines - from account opening to risk management. With increasing banking options, customers have become increasingly focused on speed and quality of service. The driving factors behind the employment of BPM are:
a) Customer agility: With fast changing scenarios, banks must be able to modify processes at a fast rate in order to retain customers.
b) Productivity: financial institutions always look for increased productivity but with proper cost control mechanisms. Cost cuts are not always feasible and hence system or process modifications to increase overall productivity are needed.
c) Regulatory compliance: compliance and responsible behavior of banks demand certain standardized and centralized terms to respond to changes.
d) Multichannel integration: The rules, workflow and integrative ability of BPM can facilitate the evolution of a bank towards the persistence and consistency that is required for an integrated multichannel experience.
e) Optimization and continuous improvement: The need for automation for optimality and continuous improvement. As a simple example, the introduction of ATMs for cash transactions was well received by the customers. Adequate availability of ATMs and acceptable services of a particular bank induced the customers to have an inclination towards that bank leading to higher customer retention.
f) Revenue building: By increasing business volume and customer base
g) Collaborations: Banks having collaborative partnerships usually employ suitable BPM to offer wider range of products and services at lower prices.
h) Cross-selling and up-selling: BPM helps develop the technological support that the advanced customer relation management needs to alert employees about opportunities.
Incorporation of BPM in the banking sector may be wide and varied spanning over numerous business lines like account opening and account changing that would route details to the correct areas of the bank, automation and rules processing(based on past history of customer and customer segmentation) in case of overdrafts, setting credit approval strategies like limiting further credit allowances to a customer who has surpassed his credit limits and other similar cases.
Expected future trends
Given the advantages of BPM, it is expected to be implemented in more complex areas such as:
Straight-through processing: often present internally but not in links outside the organization. This basically optimizes the speed of transaction processes and involves feeding data electronically and transferring it across involved parties rather than manually handling data at each and every step.
Migration: facilitating the migration of back office operations to the front office.
Integrated risk management: Using BPM to help in the shift away from non-integrated credit risks, operation risk and market risk. BPM helps gain insight about the process design and identify potential risks. This would make the system more robust and flexible and less susceptible to external influences
Compliance: Compliance to regulatory measures may be integrated into BPM. Those financial services organizations that get past BPM implementation hurdles find that standardizing and streamlining processes does more than improve operational efficiencies and reduce operational costs. It can support regulatory compliance efforts to make them more efficient and less costly as well
Thus BPM in banking will empower financial institutions to seamlessly adjust to critical changes in process. Application of BPM has huge potential in emerging market trends to achieve increased productivity and profitability.
The article has been authored by Surbhi Bhardwaj, LBSIM, New Delhi