Fertile ground for ROI in BPM: Three unlikely areas

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At the moment in financial services organizations, not spending today on an IT project is often a more compelling option than even a significant return on the investment tomorrow. This means that the business expects the IT department to be innovative or accept cost reduction as the only viable strategy. Unfortunately, investments in software infrastructure -- even for hot topics such as SOA and BPM -- seem to offer primarily medium-term returns. This makes justifying new investments and even sustaining current investments in this area challenging. What this means is technology innovation must be carefully focused on "sweet spots" where it can pass these more exacting investment criteria. In the case of BPM, the sweet spots emerging are those where BPM has the ability to automate complex manual processes, remove human error and handle process change.

To somebody coming fresh to BPM, this idea of looking for very specific problems to fix may be surprising, as BPM is often positioned as a strategic project driven from the top down with widespread benefits. While it can be argued that the returns of a strategic approach may be substantial, the overall costs will be high and the payback not immediate. Therefore, such an investment is out of sync with the realities facing most financial services organizations today.

Unfortunately, this perception of BPM as "big concept" may make some organizations slow to try BPM in a different and more pragmatic mode. To make matters worse, BPM can be quite confusing, as it is really a combination of concepts from process re-engineering and an approach to describing and formalizing ad hoc business processes as well as a set of technologies.

To complicate matters further, BPM technology is actually applied to two types of problems (and sometimes a combination of the two): the integration of applications with multi-step business processes, and the automation of human workflows. This final distinction has mostly to do with the origins of the vendors selling solutions, who typically come from one or the other camp.

To identify where BPM sweet spots lie, it is useful to boil down what BPM does: BPM automates well-defined processes. It is true that a BPM project often includes the creation of the formal process definitions from the informal, and implicit processes that already exist. However, while much is sometimes made of the ability of BPM software tools to support the capturing of business rules, many business processes still require a lot of work to formalize. This formalization itself forces changes in the way the business operates. And it may be expensive and hard to justify change for changes sake. Therefore, it is clearly much easier to start in areas where the processes are already formalized.

Moving onto the second part of the definition: automation clearly can only occur where there is no discretionary judgment (the decision is defined by the rules). And automation is worthwhile where you remove cost or reduce risk of error. While cost savings are always worthwhile, reduction of error equals reduction of risk, which for high-value or high risk processes is of potentially greater value.

Finally, BPM solutions also provide software engines which execute the process definitions. A benefit of the BPM architecture is that it's much easier to make process changes and deploy those changes, than would be the case with code-based or even manual alternatives. Combining these dimensions means that BPM sweet spots are going to be where processes are complex and change rapidly.

On that basis, three areas are emerging as fertile ground for BPM projects:

Keeping up with regulation: Even before the current credit crunch, financial services organizations were busy with the "scheduled" regulatory changes from SEPA to Basel II. Today, new regulation is on the way, which will put extra strain on IT departments to keep up. Furthermore, unlike the post-Enron wave of regulation which arrived after the crisis, the new regulatory changes seem likely to appear during this extended credit crunch. This means that compliance solutions must be built with change in mind. For all the vendor talk, this is unusual in the enterprise space -- for most applications, the reality of change never quite lives up to the expectation. Regulation is and will remain the exception. How does this make BPM a good fit? Regulation is, of course, by definition well-defined, and hence any BPM-based initiative has a headstart. Furthermore, a feature of BPM systems (over custom coded solutions for instance) is that they are configurable through the use of rules. This makes BPM-based solutions inherently more capable of dealing with change. Therefore, BPM is both well-suited to regulation-related projects, and addresses the major challenges associated with these systems.

Derivative trade-life cycle: Another area of potential application is derivative trading. The financial instruments traded in this highly profitable area continue to grow more complex, and continue to change rapidly as firms jockey for competitive advantage. Unfortunately, this increased level of customization and complexity also increases the difficulty associated with managing the trade lifecycle. In the extreme case, the risk associated with deception becomes harder to control, as the Irish bank AIB discovered back in 2002, when its rogue trader hid almost $700 million in loses behind fictitious trades. Even in less extreme cases, pricing or settling derivatives are complex and often semi-manual processes (often supported by spreadsheets with all the contingent risk of out-of-date information and errors). As with regulation, the combination of inherent complexity and error makes this an interesting application of BPM technology. In this case, BPM brings a necessary rigor to the process, and hence can reduce accidental error.

Automation of back-office and support desk function: This may seem a strange place to look for the final example of BPM sweet spot, as it's precisely where off-shoring should already have extracted benefits by driving down the cost base. However, the downside of off-shoring has been the loss of expertise during the initial transition and due to high turnover of staff in the off-shoring centres. This loss of expertise increases the risk of error unless the knowledge and business rules can be captured and preferably automated. Consider the typical off-shoring activities such as IT help desks, or routine operational activities such as account opening processes. While routine, the cost of error in any of these functions can be high both in terms of client satisfaction and operational efficiency. Furthermore, even what appear to be straight forward processes are complicated not only by internal operational complexities, but also by the ever-changing regulatory environment associated with money laundering. All of this makes a good potential sweet spot for BPM: complex sets of rules to be followed and automated, and high cost associated with human error. BPM can take leverage the existing processes and rules and deploy them in a flexible manner capable of evolving.

These three examples represent only some of the scenarios where BPM can be effectively used in today's banking environment. When considering BPM, it is important to balance the big picture version of BPM with the pragmatic approach. For better or worse, in many cases the pragmatic approach is often more attractive today and it does not necessarily exclude a more comprehensive BPM strategy in the future when budgets return and perspectives become less short term.

About the Author

Financial services expert Ronan Bradley is ebizQ's Community Manager for Banking and Capital Markets.

As Community Manager, Bradley will blog and podcast on the latest news and breakthroughs relevant to the financial services industry. He will also publish press releases, cover briefings, write feature articles and source content from other analysts, industry associations and vendors for publication on ebizQ. Each week, Bradley will compile the most important news and views in an e-mail newsletter for ebizQ's ever-growing financial services community. Bradley has spent over 17 years in the software industry and has held senior management positions in a number of international software vendors with strong emphasis on the financial services sector. As Vice President for Product Management at IONA Technologies, he was responsible for products generating over $100 million of revenue. Bradley also founded PolarLake, which has grown into a leading Enterprise Service Bus (ESB) vendor.

Currently, Bradley is a co-founder and analyst with Lustratus Research, a market analyst and consultancy firm focused on software infrastructure. He is also principal of The IT Perspective, a specialist IT advisory firm working to help clients align their IT and business agendas. As a recognized expert on business integration software and its uses in financial services, Bradley has spoken at many events worldwide and has been quoted in publications such as The Financial Times, Banking Technology, and Computer Business Review. He also lectures at The Dublin Institute of Technology.

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About Lustratus Research

Delivering independent and unbiased analysis of global software technology trends for senior IT and business unit management, shedding light on the latest developments and best practices and interpreting them into business value and impact. Illuminatus analysts include some of the top thought leaders in market segments such as service-oriented architecture (SOA) and business integration.