Hans-Peter Güllich, Ph.D., CEO, Riskmanagement Concepts Systems, Zurich, Switzerland
➔ Public scandals have brought increased scrutiny to the financial services industry, and it must incorporate systems and methodologies that provide more efficiency and transparency.
➔ Projects must link outcome with an organization's mission
➔ Operational, market and credit risks are not new, but managing such hazards is a nascent enterprise.
➔ Beyond becoming compliant with regulations imposed from the outside financial services firms must consider how to operate more transparently within their own four walls.
BY KEN SILVERSTEIN // PHOTOS BY ARSÈNE SAHEURS
HOLISTIC PROJECT MANAGEMENT PROCESSES CAN STEADY AN EVOLVING AND BELEAGUERED FINANCIAL SERVICES INDUSTRY.
FINANCIAL INSTITUTIONS HAVE BEEN GIVEN NUMEROUS WARNINGS THAT THEY MUST CHANGE HOW THEY OPERATE.
A total of $1.5 billion has been collected from investment banks worldwide for their complicity in the Enron affair ($429 million has been returned to investors). Since 2002, when it was discovered that a Merrill Lynch analyst had advanced stocks publicly that he disparaged privately, investment banks such as Bear Stearns, Goldman Sachs, Lehman Brothers, J.P. Morgan, CitiGroup and Morgan Stanley, have settled with the U.S. Securities and Exchange Commission (SEC).
➔ Coupled with pressure from investors, such scrutiny from regulators has added a whole new level of risk to the already risk-averse financial services industry. Some firms responded by making managerial changes and initiating projects to establish oversight committees and strengthen internal review processes. Others are working to mitigate their operational risks, a true task, given that many companies let their risk management practices slip during the economic heyday of the 1990s.
With such heavy prices being paid for shoddy oversight, financial institutions are becoming more aware of what they must do: Projects must be integrated into the corporatewide risk map to maintain investment grade credit ratings from Standard & Poor's. In other words, projects always must be tied to other corporate initiatives.
Because resource management is critical, financial firms must abolish the traditional command-and-control approach and adopt a more process-and project-oriented management focus that looks at operational risk management and considers both hard and soft factors. This is part of what many sources deem the “industrialization of banking,” a cultural transformation toward high-performance teams and process management.
The financial sector's traditional way of working seems to address all issues through the organization's hierarchy. That, however, is proving inadequate in the face of such widespread pressure. “The typical bureaucratic approach of doing things at the same detail is unmanageable,” says Wilhelm Kross, a director at Value & Risk, a Frankfurt, Germany-based consultancy specializing in risk and process management for banks. “The sum of the complexities in resulting mega-project constructs is more than the sum of the complexities in individual projects. So, the traditional project manager's limited focus on time and budget concerns has become inefficient.
“I NEED TO ANALYZE INTERNAL RISKS AND TAKE APPROPRIATE ACTION BEFORE THEY MIGHT MATERIALIZE INTO A LOSS.”
Hard facts on the table help reduce the emotional factors behind a decision.
Head of Credit Management Unit, DZ BANK Frankfurt, Germany
➔ Now, projects should be managed holistically, not piece-by-piece without coordination among the various units. In practice, Mr. Kross says this requires a moderated negotiation process in which the various business units are tied into one common vision and the decomposition of large projects into smaller parts. Entire processes can be mapped through a set of information technology functions, although it is critical to get all employees on board and prepared for the changed processes. From a conceptual point of view, a project doesn't start when the budget is approved and end when the responsibility is handed over to those in the trenches, as is the case from a cost accounting point of view.
Conversely, project portfolio managers must consider many additional aspects, such as the types of skills and resources needed as well as the utilization of scarce resources across an organization. Too many mega-projects fail because they are layered with bureaucracy and people, Mr. Kross says, adding that little thought has been put into intelligent ways of segregating projects into smaller, manageable components. He believes the focus at this level should be about coordinating and prioritizing functions so projects are executed more transparently.
Most importantly, a cultural environment must be established that enables multidisciplinary teams to be organized and managed with flexibility over extended periods of time. Teams should not feel threatened by the changes that lie ahead; instead, they must focus energy on making projects more visible in the complex management network, Mr. Kross says. In practice, this is one of the most neglected aspects of project management because project success in banks often is measured in accounting terms. Project managers must strive to link the outcome with the organization's mission, and this is inhibited when individuals are stuck within territorial disciplines. In banks, for example, an overarching focus on customer service may be needed in all projects to ensure better services.
Mitigating Rising Risks
➔ In a PricewaterhouseCoopers survey of more than 130 senior executives at financial institutions around the world, 82 percent agreed that risk awareness is more palpable than two years ago. Most said that risk management is used to meet regulatory obligations, however, and not to protect and enhance the value of the enterprise.
In 2004, DZ BANK implemented a business process management solution to enhance the work flow transparency for corporate loans. The resulting process management called for the automation of strategic functions, such as processing loan applications, evaluating credit risk ratings and supporting investment decisions, leaving less critical functions to be incorporated later. The approach reduced the processing time for syndicated loans by 70 percent and simplified the overall process.
“By being able to provide additional information Like status reports about the credit application, the satisfaction of cooperative banks as clients of DZ BANK increased remarkably,” says Manfred Salber, head of DZ BANK’s credit management unit. “By detecting inefficiencies and generating data in a much shorter time, DZ BANK’s ability to make the right business and organizational decisions increased remarkably. The quaLity of decisions also improved.
“Additional data generated by the workflow tool will help define future project goals and set them closer inline with implementation details,” Mr. Salber says. “Transparency now puts pressure on customers or internal users to optimize existing workflows, and as a consequence, the time of setting up a project probably will be much shorter and cycles will improve. Having transparency has convinced users of the advantages of this workflow solution—hard facts on the table help reduce the emotional factors behind a decision, and the work environment moves much faster.”
Regulations, such as the United States’ 2002 Sarbanes-Oxley and the Basel II Accords (expected in 2006 and 2007), already have had a significant effect. Sarbanes-Oxley has required companies to install work flow tools that span multiple units, and the Basel II Accords will require banks to detail their risks and available capital. But the biggest concern stemming from these new regulations is that disparate information systems across an organization will fail to pick up inappropriate behavior.
Financial institutions will need to reconstruct their data and then warehouse it to evaluate both risks and capital, considering everything from natural disasters to political upheaval to illicit insider dealings. A fully integrated software solution likely will provide early warning signals of trouble. Such a risk-based method might lower the cost of capital and make banks more competitive.
Data should be used once and then subsequently applied across corporate units.
Senior Vice President and Managing Director, BearingPoint, New York, N.Y., USA
Additionally, data should not be used multiple times in a way that could allow it to become misconstrued. Rather, data should be used once and then subsequently applied across corporate units, as risk and financial information within annual reports often are pulled from unrelated places and thus are not reconciled, says Christopher Hamilton, senior vice president and managing director with BearingPoint's New York, N.Y., USA-based global risk and finance practice. “Leaders must break down these silos,” he says.
➔ In his view, corporate governance is about addressing risk and financial transparency. Spending has become reactionary and ineffective, and it's not linking with improved customer relationship management or the enhanced technical requirements necessary to jibe with new security and corporate governance laws and regulations. New forms of risk are surfacing routinely.
Beyond being focused on compliance, organizations also must be concerned with credit and operational issues. The Basel II Framework attempts to accomplish this by being more reflective of the underlying risks in banking and providing stronger incentives for improved risk management. It builds on the 1988 Accord's basic structure for setting capital requirements and improves the capital framework's sensitivity to the risks that banks actually face. By introducing a new capital charge for risk exposure caused by operational failures, capital requirements will be aligned more closely to the risk of credit loss.
Global Economic Change: Are We Ready?
The industry has learned some difficult lessons. Hans-Peter Güllich, Ph.D., CEO of Zurich, Switzerland-based Riskmanagement Concepts Systems (RCS), points to Sumitomo Corp., which lost more than $2.6 billion from copper trading in 1996 as an example of such hard falls.
Looking at the examples outside your four walls easily should lead to process improvement. Executives must have their finger on the pulse of the enterprise and its key projects. A clear methodology is needed to measure performance. Executives and project managers must communicate effectively to see how factors have changed and how best to overcome challenges as they arise.
“I need to analyze internal risks and take appropriate action before they might materialize into a loss,” Mr. Güllich says. “Banks must install a risk management framework that contains a definition of organizational structures and responsibilities for individual risks and business areas. They also must implement surveillance and monitoring systems that provide early warning of upcoming risks, and this framework must be supported by a respective software solution to manage the complexity.”
“Change comes from those who must implement it,” says Paul Nichols, consultant with Recruit Associates Worldwide Ltd., London, U.K. “Senior management has to be sensitive not just to legal and regulatory obligations but also to competitive pressures; otherwise organizations stand still and carry huge operational risks because they don't adapt.”
The financial institutions that take a holistic approach to risk and appropriate resources accordingly will have an edge over those that manage the individual pieces separately. Executives and project managers alike are realizing that successful project management techniques invariably will create value for the companies that they serve. PM
Ken Silverstein, MBA, is an award-winning journalist who has contributed to UtiliPoint's Issue Alert and Treasury & Risk Management.
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PM NETWORK | MARCH 2005 | WWW.PMI.ORG