With increasing pressure for accurate, real-time operational information and an expansion of regulations calling for greater visibility and transparency, executives are looking for ways to transform their back-office operations to lower costs, reduce errors, and improve cycle time. Back-office operations can be categorized into three fundamental types of processes:
• Core processes: capturing, processing, recording, accounting, and reporting transactions originated at the front office.
• Management processes: includes balancing and reconciliation, monitoring and measurement to ensure integrity and performance.
• Governance processes: internal and external audit as well as regulatory compliance, to test, validate, and certify the integrity of the core and management processes.
Inefficiencies in these processes stem from multiple sources including information silos across product lines, mergers and acquisitions, and the prevalence of manual steps. By driving process optimization, banks and other financial institutions seek to lower expenses and gain efficiency that in turn helps them to be more responsive to market dynamics.
Conceptual Model for Back-Office Operations
In financial services companies, one of the key purposes of the back office is to process, record, and report upon transactions originating in the front office. Back-office operations are comprised of core processes, management processes and governance processes.
Conceptually, the core operations can be divided into three layers: the transaction capture layer, transaction processing layer, and the output layer. The capture layer receives information from front office systems. Transactions are then processed across teams, platforms, and applications in the processing layer. The output layer then accounts for the transactions across the general ledger, data warehouses, and predictive models, and prepares information for external consumers.
The main processes which drive back-office operations management include transaction validation, core process monitoring, and performance measurement. In financial services companies, transactional volumes and variety are significantly high; therefore, ensuring that transaction information is appropriately matched and sources are verified is crucial to prevent errors. Process monitoring serves a similar function by keeping oversight on the outputs of all back-office processes as well as monitoring all steps of the processes. Performance measurement allows managers to understand process, people, and system performance over time through various reports and metrics.
Key governance processes in the back-office include risk assessment, audit, and certification. Governance of the back-office involves auditing processes to ensure integrity of back-office operations. This process is becoming increasingly complex with expanding number of regulations such as Dodd-Frank and Basel II, requiring a greater level of oversight from major financial institutions and banks.
Overall, inefficiencies of back-office operations across all process types arise primarily through the use of manual processes and information silos. More importantly, these issues at the core process level result in additional inefficiencies at the process management level and eventually at the governance level.
As organizations realize gains through the elimination of inefficiencies in the core processes, they are looking to further extend their gains by moving beyond the core processes. A number of organizations have initiated or are in the process of initiating, ways to optimize their back-office operations management processes. While the gains may be lower when compared to improving core operations, making the management layer more efficient often results in quicker and reasonably substantial cost savings in an absolute sense. In addition to the cost savings, the availability of real-time process visibility and measurements enable organizations to make better decisions and respond to the market needs faster.
Emerging Trends in Back-Office Solutions
In order to manage core back-office processes, executives are using a system of controls, measurement, and monitoring that ensures information accuracy, allows timely execution of processes, and enables performance measurement and reporting for effective decision making.
While systems enable automation, organizations are also taking advantage of standardization, centralization, and innovation of processes as a means to optimize their back-office operations management processes. Streamlining operations management using this approach creates a framework to reduce back-office inefficiencies while ensuring that the process management layer is flexible and adaptable to the changing needs of the core business operations layer as well as the governance layer.
Automation, standardization, and centralization are enabling organizations to gain significant efficiencies thereby positioning them appropriately to usher in the next level of product and process innovation that would otherwise be a stretch for organizations that are mired in inefficient back-office management processes.
To reduce the inefficiencies caused by manual processes and to improve the timeliness of information, many organizations are automating processes across business operations management. Typically, organizations have automated operational management processes in three areas: operational control, operational insight, and performance measurement.
Operational control is a system of checks, balances, and reconciliation that when automated, reduces manual processing thereby reducing time and errors associated with the process, and greatly improving its performance. Automation of controls enables data to be captured from multiple sources, validated through reconciliation, and tracked through exception management. For example, a leading financial institution was able to repurpose 45 FTEs by automating its account reconciliation processes. In addition, they were able to significantly improve their match rates.
Similarly, automated monitoring allows for real-time information to be consistently monitored, ensuring quality of information in motion through operational insight. Visibility into core back-office processes enables organizations to monitor from end to end. This is a message that appears to resonate with both business and IT leaders due to their increased focus on risk. In the context of an end-to-end business operations management solution, this capability has the potential for creating significant value. An automated command center will update with real-time processing information and daily balancing all viewable on daily system generated dashboards. The process of exception management and problem resolution also becomes simplified through automated operational insight with systematic root cause analysis and drilldown capabilities at the job level. A large credit card processor was able to automate the monitoring of its file transfer process, thereby enabling them to repurpose nine FTEs and saving them $1 million per year in SLA violation fees.
Operational management is also heavily reliant upon measurement. Automated measurement enables regular checks and assessments as well as generation of real time reports that help operational managers to keep track of the process performance. Through automation, a variety of metrics can be used to generate not only management reports but also compliance and audit reporting, ensuring accuracy of the information that reaches the governance process. As an example, a large financial institution was able to combine its risk reports with its operational reports, thereby significantly improving its resource allocation and risk profile.
In addition to the prevalence of manual processes in the process management layer, product line specific information silos make business operations management inefficient. Running separate operations and management for each product line requires duplication of processes that in turn results in higher costs and lower organizational efficiency. These inefficiencies in turn impact the overall responsiveness and competitiveness of the organization.
Standardizing operations across product lines makes all three layers of the back-office processes more efficient by creating reusability that in turn lowers costs and implementation time for operational changes. Consolidation of operations and system flows streamlines back-office operations.
Analysis by Management Consulting Firm, McKinsey & Company, shows that only 10% to 15% of back-office processes must be dedicated to specific product areas. The rest of the processes and resources used by certain operations can be shared and centralized. For example, processes such as payment processing, trade reconciliation, and account maintenance that run through similar operations cycles can be fully consolidated. Centralizing these resources in relation to operations will reduce IT dependence as well by reducing pressures to leverage existing IT tools which often are not end-to-end process management tools.
Centralization of operations management while standardizing core back-office processes functionally streamlines and restructures operations, in turn positioning them appropriately to take advantage of shared services and other centralized efficiency drivers such as centers of excellence.
While continuous improvement of processes is a large driver of efficiency, innovation is the engine that generates efficiency leaps. Organizations that are stuck with manual and inefficient processes do not have the opportunity to create enough organizational slack for their analytical and creative resources to channel their energies towards innovation. Such inability prevents companies from achieving the efficiency leaps that would help them to achieve process excellence and a leadership position among their competitors
Achieving process efficiency through automation, standardization, and centralization would in turn help organizations to generate the slack required for them to get on a path to becoming an innovative organization.
Traditionally, companies have attempted to gain efficiencies from the back-office at the core process level. Re-engineering core processes is a large undertaking that requires a significant capital and time commitment; the benefits of re-engineering are typically large and wide reaching. Nevertheless, in addition to these initiatives, there is a significant opportunity to improve the operational management process layer. Through our work with leading financial institutions and banks, we have seen the benefits of achieving operational excellence in back-office operations management.
The emerging trends of automation, standardization, centralization and innovation of operations management processes such as balancing and reconciliation, monitoring, and measurement have created a path for organizations to gain efficiencies in the back-office. This path is becoming more of an industry standard in this current economic environment that demands financial institutions to quickly adjust to market fluctuations. The initial savings from streamlining operational management can be used as a bootstrapped investment to reorganize back-office operations leading to a strategic transformation of the back-office.
Prasad Sista is a Product Manager, Infogix Assure Controls Platform. Contact Prasad at email@example.com.
This is an article reprint from the Governance Issues™ Newsletter, Volume 2012, Number 1, published on March 28, 2012. To automatically receive the newsletter, go to firstname.lastname@example.org and we will register on your behalf.
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