Linking Transformational Initiatives to Desired Business Outcomes: Leveraging a Business-Metrics Driven Framework

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1 Business Process Services White Paper Linking Transformational Initiatives to Desired Business Outcomes: Leveraging a Business-Metrics Driven Framework

2 About the Author Venkatesh Kuppuswamy Venkatesh Kuppuswamy heads the Transformation Center of Excellence within the Business Process Services (BPS) unit at Tata Consultancy Services (TCS). He focuses on the banking, nancial services, and insurance (BFSI) domain. In this role, he is TM responsible for deploying TCS' FORE transformation and benchmarking methodology across the BFSI BPS group. Venkat has over 20 years of experience related to business and IT transformation. He is an engineer from BITS, Pilani with a post-graduate degree in Management.

3 Abstract In today's digital business environment, banks are increasingly adopting business transformation to stay competitive. The effectiveness of operational transformation initiatives is no longer measured in terms of cost reduction only. Rather, it is tied to the realization of strategic business outcomes. Implementing a business-metrics driven framework enables banks to measure the effectiveness of their operational transformation initiatives against the backdrop of their business objectives. This paper discusses the need for a metrics-based approach to measure success of operational transformation initiatives and outlines a method to identify desired business outcomes expected from the initiatives. It also describes how banks can build a suitable business-metrics framework based on the CAMEL rating model. The proposed approach ties the process of measuring the impact of transformation initiatives to a bank's strategic goals, resulting in enhanced effectiveness and relevance.

4 Contents Measuring the Impact of Transformation Initiatives 5 Developing a Business-Metrics Based Framework 5 Advantages of Implementing a Business-Metrics Driven Framework 9 Gauging the Impact of the Transformational Journey 9

5 Measuring the Impact of Transformation Initiatives Banks are progressively embracing the digital revolution to drive business transformation and growth. A major challenge for banks in this scenario is effectively evaluating the success of the transformation initiatives. Current methods offer little or no alignment between transformation initiatives and business outcomes, an element critical to holistic evaluation and results. It is therefore essential to develop a business-metrics based framework that measures the impact and business value of transformational initiatives. Such a framework would enable practitioners and transformation program managers to define strategic business objectives, and align transformational interventions to relevant business results. In effect, it acts as a key tool in the overall transformation journey. Developing a Business-Metrics Based Framework There are three steps to developing a Business-Metrics Based framework. The first step is to leverage a standardized and proven approach to determine business performance and outcomes. Traditionally, a bank's performance has been judged based on its profitability. However, the financial crisis highlighted the inadequacy of utilizing profitability as the sole measure to determine the performance of a bank. A more holistic approach is required to arrive at the true picture of a bank's success or failure. While there are several approaches to assessing a bank's performance, the most widely used and 1 recognized rating system for performance measurement is the 'CAMEL' rating system. This system comprises five elements capital adequacy, asset quality, management quality, earning ability, and 2 liquidity that make up the acronym CAMEL. Originally developed in the US, CAMEL is a supervisory rating system used to identify and measure a bank's overall condition. Under this system, a combination of ratio analysis and the results of an on-site examination by a designated supervisory regulator is used to assign ratings. The various components of a bank's condition that are typically assessed under the CAMEL system and the key measures associated with them are depicted in Table 1. 1 Federal Deposit Insurance Corporation, 'Uniform Financial Institutions Rating System', published April 2014, accessed September 2015, 2 The rating model changed from CAMEL to CAMELS after The last element, 'sensitivity to market risk' is not considered in this paper, since this parameter involves the creation of hypothetical scenarios and models. 5

6 CAMEL Parameters Key Business Outcomes to Determine a Bank's Performance Capital Adequacy Assets Capital adequacy ratio, net advances to total assets, leverage ratio, return on equity Gross NPA to net advances, net NPA to net advances, NPA to total assets, total investments to total assets Management Capability Total advances to total deposits, business per employee, pro t per employee, expenses per employee Earnings Operating pro t to average working fund, net pro t to average assets, interest income to total income Liquidity (also called asset liability management) Liquid asset to total assets, liquid assets to total deposits Table 1: CAMEL parameters and representative business outcomes associated with them The second step to developing the framework is to determine the right metrics with associated accountability. The business-metrics driven framework can help banks identify the right metrics at various levels and layers - starting from strategy to linking metrics with business outcomes (as shown in Table 1) and identifying ownership for execution. This provides greater clarity on overall governance and supports the achievement of business outcomes. As illustrated in Figure 1, strategy deployment follows a top-down approach. However, the various layers of metrics follow a bottom-up approach as they consolidate results of operational processes and track their impact up to business outcomes. It is also important to identify components of the business strategy that can be achieved through the implementation of the right operational measures. METRICS ROLL-UP BUSINESS OUTCOMES STRATEGY DEPLOYMENT UNIT OUTCOMES OPERATIONAL AREA MEASURE CAPABILITY MEASURE VALUE STREAM MEASURES PROCESS MEASURES PERFORMANCE MEASURES Figure 1: The business metrics framework 6

7 In Figure 1, the process ownership of the four measures unit, operational area, capability area, and value stream resides with senior and middle management. These four measures are interdependent and strongly aligned with the desired business outcomes. The metrics defined at these levels have a strong domain orientation. On the other hand, operational metrics related to processes and performance measure are domainagnostic variables like timeliness, efficiency, quality, scalability, and accuracy. These may also include metrics related to inter-process dependency, enabling improvement in the quality of hand-off between processes. The third step is the implementation of the business metrics framework. For a bank that conducts most of the operations in-house, the business metrics framework should be easy to implement. But problems may arise when third parties are involved in operations. Typically, external vendors are responsible for fulfilling capability-level measures and some vendors may find it challenging to identify and meet these measures based on the nature and scope of the engagement, and limited visibility into the end-to-end process. This results in disconnects between what the service provider executes and reports on and how the retained customer organization expects to perform. This, in turn, leads to unachieved or underachieved business outcomes. Such a scenario can lead the bank to question whether it should continue to work with a partner. However, there is a simple solution to this problem. To achieve the desired business outcomes, the client and external service provider should collaborate to design a business metrics framework for the engagement. This framework should be built after considering the scope of processes that have been delegated to the service provider. Table 2 depicts a metrics-driven framework for evaluating initiatives in the retail banking account origination process using the CAMEL model. 7

8 Ownership Metrics Roll-up Detail Banking Entity-example Metrics-Example CEO Business Strategy/Outcomes Entire Bank XXX Bank Pro tability, capital adequacy, NPA to total advances, business per employee, etc. Senior Management Unit Strategy/Outcomes Operational Area Personal Banking Division Retail Banking Growth in customer base, no. of new products launched/year, NPS, cross-sell %, etc. Account conversion rate, deposit account attrition rate, revenue/retail customer, etc. Capability Area A/c Origination No. of account opening/year, cycle time for new a/c process, avg. applications handled/back-office associate Middle Management Value Stream Request to Entitlement Process No. of accounts opened through online channels, e2e TAT for a/c origination, % query on opened accounts, transaction error rate, no. of forms required to open an account Operational Process Performance KYC/AMI Process Document Scrutiny % reuse of KYC documents veri ed case, TAT for KYC, KYC process accuracy % missing documents/information, internal misses identi ed by checker/qc Table 2: The business metrics framework for a retail banking account origination process While defining metrics at each level, it is essential to choose commonly used and industry-defined metrics to avoid ambiguity. For instance, the 'number of accounts opened in a year' can be interpreted as either the number of applications received or the total number of applications successfully processed. The former would yield a lower account conversion percentage, while the latter would yield a higher percentage. The business also needs to establish links between process metrics; these links can be one-to-one or many-to-one. For example, several process and performance criteria can exist for a capability level, as multiple process steps create a value stream. While typically, only one capability area is associated with any given value stream, it is possible for multiple value streams to exist for a capability area. For example, for account servicing, both customer requests and complaints are value streams for evaluating capability. 8

9 While the above outlined construct illustrates how relevant business metrics can be aligned to business outcomes for account origination, the same approach can also be expanded to other areas of retail banking such as payments and disputes. Similarly, it can be extended to cards, consumer lending, and other products that are part of the personal banking division. The framework can be also extended to other units within the bank, such as Commercial Banking and Insurance. Advantages of Implementing a Business-Metrics Driven Framework The business-metrics based framework discussed in this paper helps banking organizations use a formal approach to identify business measures that impact business outcomes. Leveraging this framework allows banks and external service providers to establish mutually-beneficial partnerships. The advantages of this framework are that it: Makes the transformation journey independent of the initiator, whether it is the external provider or the in-house team Facilitates benchmarking of business metrics and helps banks and external service providers identify and remedy gaps between process and governance ownership, resulting in increased success of transformation initiatives Gauging the Impact of the Transformational Journey The ability to tie transformational initiatives to business outcomes such as reduced costs or increased revenues is critical to obtaining stakeholder approval prior to implementation, as well as effectively assessing their impact post-implementation. Organizations that deploy a metrics-driven framework to benchmark their transformational initiatives can accurately assess and improve the impact of their programs to realize greater value. Moreover, the ability to measure intermediate results with the help of the framework enables them to proactively identify inconsistencies and make course corrections, thus better supporting the transformation journey. 9

10 About TCS Business Process Services Unit Enterprises seek to drive business growth and agility through innovation in an increasingly regulated, competitive, and global market. TCS helps clients achieve these goals by managing and executing their business operations effectively and efficiently. TCS' Business Process Services (BPS) include core industry-specific processes, analytics and insights, and enterprise services such as finance and accounting, HR, and supply chain management. TCS TM creates value through its FORE simplification and transformation methodology, backed by its deep TM domain expertise, extensive technology experience, and TRAPEZE suite of solution accelerators and governance enablers. TCS complements its experience and expertise with innovative delivery models such as using robotic automation and providing Business Processes as a Service (BPaaS). TCS BPS unit has been positioned in the leaders quadrant for various service lines by many leading analyst firms. With over four decades of global experience and a delivery footprint spanning six continents, TCS is one of the largest BPS providers today. Contact For more information about TCS Business Process Services Unit, visit: ( bps.connect@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and TM assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2015 Tata Consultancy Services Limited TCS BPS Design Services I 10 I 15