reshape your it spend, increase agility, & defend against operational risk

Reshape Your IT Spend, Increase Agility, & Defend Against Operational Risk

Financial Services Group

Wilson Perumal & Company, Inc.

Executive Summary• Financial Services institutions have grown much more complex—including product,

process, system, channel, organizational, & regulatory complexity

• This is driving significant costs into the organization—especially IT/IS costs—while also impeding the organization’s agility and increasing operational risk

• Traditional approaches are not well suited to address this issue:– Tendency to add resources & processes to manage the issue simply adds to the complexity

– Bottom-up, boil-the-ocean approaches are overly cumbersome and typically don’t address the broader interactions, where the larger opportunities usually lie

– Technology-driven solutions rarely achieve desired results, as they focus on the tool and not the issue

– Traditional process improvement efforts focus on individual processes in isolation, not on the interaction between processes, which is where complexity resides

• We offer an alternative—a systematic but streamlined, top-down, and multi-dimensional approach to unlock transformational opportunities others would miss

• Wilson Perumal & Company is the leader on complexity—we literally wrote the book!

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Why our focus on IT? Systemic issues around cost, agility, & risk are wrapped around IT/IS

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Issue Complication Implication

IT Spend: Costs (especially IT) are growing geometrically with the level of complexity in the business

IT costs are the outcome of complexity across business

Technology-driven solutions will not root out this complexity and often add more cost

Organizations are finding it difficult to execute their strategy given the complexity in their business

IT complexity limits agility across the organization (IT is a major driver of this issue)

Increased risk is another complexity outcome that most firms look to address through the IT lever

Operational risks are growing geometrically with the level of complexity in the business

IT is only part of the issue/solution; focusing mostly on IT can be expensive yet insufficient to managing risk

IT complexity must be addressed by also attacking process & organizational complexity in the business

IT Spend

Agility

Risk

4Wilson Perumal & Company, Inc.

Key Takeaways

• Technology will continue to change the way we do business in unanticipated ways—but when you don’t know what the future holds, how can you fill the gaps?

• Companies want to use technology to reduce operating costs, minimize risk, and gain market share—but we see that both IT spend and risks are growing!

• Many IT teams are locked in an unending cycle of firefighting and backlog because new projects increase product, process, and organizational complexity elsewhere in the system

• Unchecked, the unseen additional complexity costs multiply exponentially

• Adding resources, processes, and systems to attack the issue often just adds to the complexity and the problem, in a vicious cycle

• Companies are at the point of asking themselves: Is this really working? Is there a better way?


Agenda

• The top-down vs. boil the ocean approach

• Trends facing IT

• Key elements of our approach


Typical approaches to address IT quickly become “boil the ocean” efforts with lesser benefit• IT has permeated the organization, and is now a critical piece of anybody doing anything

– Starting with Sarbanes-Oxley, IT became the financial backbone, and has since grown in magnitudes of importance and dependency throughout the rest of the organization

– The spread of IT dependency has typically been incremental, with no holistic strategy to govern the layers upon layers of development

– Year-over-year advances in software, computing power, data mgmt, and device interaction make predicting needs (i.e., your “future state”) very difficult

• The organization is so dependent on IT, that it can be daunting to unwind the complexity– Traditional approaches aim at identifying all the gaps (exhaustive and lengthy)…

– Then developing a plan to close all the gaps (more exhaustive and lengthy)…

– Consuming significant time and resources, and adding risk, before impact is possible…

– And aim more at static solutions, than developing the capabilities to continue to grow benefits

• To tackle the dual issues of complexity and dependency you need a plan of action that delivers results quickly AND provides flexibility for future change

– Our top-down multidimensional approach takes a broader perspective, but with more focused actions to achieve impact more quickly

– Is built to evolve, to capture ongoing and greater levels of benefit6


Our approach takes a broader perspective, but lighter investment, for faster, more transformational results

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Traditional Approach• Tech-driven (even if business initiated)• Focus on system solutions

(narrower view)• Aims at identifying all gaps; then

developing a plan to close all gaps (broad actions)

• Leads w/ precision (exhaustive)

• Business-led• Focus across products/services, processes,

& organization (broader understanding)• Aims at identifying the limited set of actions

that will make most impact quickly (targeted actions)

• Leads w/ clarity (effective)“What focused set of actions will get me

the most improvement quickly?”“What universe of actions will close all my

gaps at some point?”

“Given the complexity facing organizations today, it is impossible to anticipate and design for every potential failure. Mastery cannot be designed from the start, but it can be discovered bit by bit.”

WP&C “Top-Down” Approach

• Requires significant investment now for much later results

• Monolithic approach to risk• Static solution

• Systematic approach to risk (4 sources)• Builds capabilities to learn & evolve

• Requires lesser investment for earlier results; continues to grow over time

$$$$$$$$$$

$$$$$$$$$$$$$


Agenda

• A top-down vs. boil the ocean approach




Complexity is the defining issue for many firms today

“Individual productivity”

Volume

Cost

Pre-Industrial Age

• Energy limited by muscle power (man or beast)

• Little scale efficiencies• Efficiency driven by strength

and/or speed of individual working unit (narrow range)

“Economies of Scale”

Volume

Industrial Age

• Revolution in energy and machinery (steam, electricity, oil) create significant scale economy

• Efficiency driven by volume—”larger is better” (nearly unlimited range)

“Complexity Costs”

Complexity

Post-Industrial Age

• Significant growth in variety drives geometric growth in “complexity costs”

• Efficiency driven by balance between volume and complexity (complexity is the opposite of scale)

Complexity has grown to the point that it is now often the largest driver of a company’s cost competitiveness, ability to execute, and level of risk

Wilson Perumal & Company, Inc. 10

FS IT teams face unprecedented demands

Proliferation of mobile and online financial products

Rapidly changing regulatory requirements

Increasing demand for real-time analytics

Software as a Service and Cloud computing

Disruptive innovation

FS IT trends Implications

• IT must build and continuously refine front office systems that directly impact customer satisfaction

• Exponential customer data growth escalates costs

• Systems must be constantly updated to comply with new and unpredictable regulations

• Ongoing regulatory change is the new normal

• Real time information on the company operations and risks is more important than ever

• Complexity and legacy systems hinder efforts

• IT is increasingly relying on providers over which it has little control, multiplying risks

• Financial startups and tech firms are developing new business models and leveraging the latest technology to disrupt incumbents bound by complexity and legacy tech

Bring your own device • BYOD and decentralized purchasing means IT must support an ever increasing, constantly changing set of devices


FS IT systems are plagued by increasing complexity

Example of sources of complexity• Proliferation of systems supporting new and

old products and services

• Legacy systems and scarce legacy skills

• Poor integration between systems

• Redundant platforms

• Exponential increases in data collection

• Differing IT priorities

• Suppliers outside of IT’s direct control, and cloud hosted data

• Regulatory differences across entities

• BYOD policies and decentralized purchasing

Adding complexity to IT systems has many unintended consequences:

Complexity has increased exponentially as FS IT systems have grown over time, involved more parties, and support new data intensive products and services

• Decreased innovation and slower new product development

• Endless firefighting, backlogs

• Hidden catastrophic risks• Demoralized employees

• Spiraling IT costs• Poor internal and external

customer satisfaction

Legacy Systems

New Systems

Duplicate Platforms

Data GrowthRegulatory

Change

Software Vendors

Cloud Data Hosting


Complexity is leading to greater operational and business risk for financial services firms• Complexity multiplies weak points and

increases risks, particularly of system outages and security breaches, and hides catastrophic risks, such as fraud and rogue trading

• Current approaches take a static, compliance-focused and technology-based approach to risk that cannot combat the constantly changing nature of risk

• Proactively detecting and eliminating risk requires a systematic approach to building operational excellence and implementing operational discipline to transform behaviors and processes in the organization

“Hackers hold bank to ransom over stolen data”

“TD Bank’s Mobile Site, ATMs Running Again After Hour-Long Outage”

“Regions Bank website outage caused by cyber attack”

“Credit Suisse fined over algo failures”

“UBS Fined $47.5 Million in Rogue Trading Scandal”

“Banks Must Boost Risk Oversight After Trading Scandal, FSB Says”

“Crackdown on insurance fraud exposes $1.7B of bogus claims”

“Nasdaq CFO Says Complexity Is Obstacle to Smooth Markets”


CEO’s are beginning to recognize the issue, but are less sure about how to attack it

“Complexity dramatically increases cost and risk of failure. It is like a cancer that eats away

at efficiency and profitability.– Andy Beal

Chairman & CEO, Beal Bank

Complexity affects your:

And has implication

on your:

In a recent survey, CEO’s identified complexity as the primary challenge they face. Nearly 80% said they expect high levels of complexity over the next five years. Yet far fewer felt prepared.

COMPLEXITYCost

StructureExecution& Growth

Business & Operational Risk

Business Process Redesign

Supply Chain Strategy & Mgmt

Process PerformanceProduct

Portfolio Mgmt

Organizational Effectiveness

Operating Model Design

IT Strategy

Management Systems

Network Optimization

AssetUtilization

Risk Mgmt

(Examples) Data Protection & Mgmt

Transaction Speed

Channel Strategy

Margin Improvement

Customer Experience


Agenda

• A top-down vs. boil the ocean approach




Addressing IT strategy requires three key elements

1. Address the fundamental Complexity of the issue– Taking a multi-dimensional approach by managing

product, process, and organizational interactions

– Understanding what you offer, how you offer it, and how to structure and operate to maximize performance

2. Applying lean to IT (“lean IT”)– Implementing lean principles and tools

into IT and IT-supported processes

3. Creating a High-Reliability Organization (HRO)– Implementing a systematic approach to

managing the four sources of risk

– Leveraging human performance as a barrier to risk (establishing a culture of high-reliability)

Key elements of our approach


Organizational, process, & product complexity interact to constrain performance

Organization

Value add

Non-value add

The Complexity

Cube:

• Complexity exists along the dimensions of the cube

‒ Can be good or bad‒ Too much is bad‒ Companies almost always

have too much

• Complexity costs exists on the faces of the cube

‒ Results from interactions between the dimensions of complexity

Complexity is the number of things:

Too much complexity is certainly bad:

ProductProcessOrganization

Number of products and services you offer

Number of systems, entities, vendors, etc.

Number of processes, steps, handoffs, etc.

• Poor service• Customer confusion• Unwanted products

• Duplication• Rework• Work-arounds

• Redundant systems• Poor performance• Functional silos 0

0

Total complexity

costs

Complexity

The cost of complexity grows geometrically


Symptoms: Organization

Where complexity

arises

Organization

Where complexity

hides

Organization

Where complexity takes root

• Frustrated customers

• Long lead times/queues

• Many unprofitable products

• High inventory levels

• Product shortages

• Product surpluses / markdowns

• Frequent changeovers / eroded capacity

• Service / quality levels below par

• Poor customer service levels

• Complex bloated organization (no complete picture)

• Lots of activity but not much outcome

• Difficulty seeing or managing trade-offs across functional boundaries

• Complex use of systems impede processes & decision making

• Slow decision-making and information flow

• Poor product availability

• Marketing and sales efforts diffused over products / geographies

• Tangled web of IT symptoms Sprawling physical footprint with poor asset utilization

• Operations struggles to keep up with the ‘cats and dogs’ of the product line

• Fragmented supply base

• 3rd-party distributors resist efforts to focus the product line

• Efforts to consolidate network stymied by current needs

Organization / Product Process / OrganizationProduct / Process

Financial services companies are most challenged on the Process-Organization face of the cube


Lean ITHow can we do IT better?

Using Lean IT methods can help you implement an efficient, agile IT model

• Only 30% of IT projects succeed*

• Lean principles and tools revolutionize IT operations in the same way that they have for manufacturing

• We help FS IT departments build a culture of Continuous Improvement using Lean tools such as Visual Management, Work Flow Organization and Objective Definition

• Lean tools streamline and accelerate system maintenance, new product development, and improvement deployment

* Standish Group CHAOS Report

The Lean IT Pyramid for Complex Environments

Systems Thinking

Voice of the Customer

Flow/Pull


Complexity Value Stream Mapping identifies opportunities to reduce waste, risk & enhance service

• It is critical to focus IT attention on the entire processes of delivering customer value

• Complexity Value Stream Maps lay out the end-to-end capability to provide a services/products and identify unnecessary costs and service gaps

Value added steps

Key: •Line colors: products, combinations•Box colors: different systems•Red lines: NVA handoffs/steps

Complexity Value Stream Map Example Applying Complexity Value Stream Maps can help identify:

– Duplication and overlapping capabilities– System and process bottlenecks– Hidden or unnecessary costs– Underutilized resources– Opportunities to increase

customer value– Opportunities to up/cross-selling

customers– Security weak points

Lean can help FS IT manage the system application portfolio to greatly improve speed and efficiency of core business processes


High-reliability rests on having multiple robust layers of defense…“Defense in Depth” is the US Nuclear Navy’s multi-layered approach to safety and operational performance:

Well designed, maintained, and tested, equipment—but it is impossible to design equipment that will never fail…

Robust Equipment

Rigorous Procedures

Well-Trained Operators

…and equally impossible to devise procedures that will cover all contingencies...

…so the last layer of defense is having well-trained operators with a thorough understanding of the plant and its capabilities

“Teaching” conveys knowledge, but “Training” drives behaviorMost organizations are most challenged on this last layer of defense (culture)

The US Nuclear Navy stands out for its superb safety and operational record despite the complexity of its operation and environment; its lessons have been successfully

applied to other organizations to dramatically increase organizational reliability


Why is Operational Discipline Important?…which is driven through a systematic approach to managing risk and a culture of operational discipline

Management System

Operational Discipline

High-Reliability

• A systematic approach to managing the four sources of risk

• The individual behaviors & collective practices of the organization (i.e., culture)

• Manages the precursors of low frequency, catastrophic events the same as the events themselves

• Rests on proven pillars that define and govern individual and collective behavior

Most organizations fail for one or more of the following reasons:

1. Not having an effective risk-based management system2. Not directing the mgmt system at the precursors for low freq., catastrophic events3. Not establishing a culture of OD centered around the right fundamentals

22Wilson Perumal & Company, Inc.*Operational Excellence Management System

The Mgmt System is a framework for systematically eliminating the sources of poor execution

Key Value Drivers

Four Sources of

Risk

Common Causes of

Failure

Specific Key Controls

OEMS* Elements

OE is defined by measurable business performance across specific value drivers

There are only four sources of risk for failure to perform against the

value drivers

The four sources of risk tend to fail for the same

reasons regardless of the type of operation

Specific key controls exist to prevent these causes

of failures

Key controls are organized into

Elements to facilitate implementation and

management

Examples

Vision/Procedures

Training/Certification

Performance Mgmt

Planning/Scheduling

Management of Change Process

Culture

Organization Structure

Process Control Plan

FMEA

Examples

Expectations don’t exist

Lack of knowledge

Wrong incentives

Technology not capable

Resources not allocated

Process not capable

Inadequate management of

change

Leadership

Employee Commitment

Risk ID

Risk Control

Training & Communication

Configuration Control

Continuous Improvement

Cost

Data Quality

Speed

Productivity

Security

Compliance

People

Processes

Technology

Change


A culture of reliability: Stop catastrophic loss and minimize other operational threats

Are you 100% certain your company is immune to catastrophic loss—do you know what could cause this kind of loss in your company?

• Today’s complex company makes it impossible for management to monitor all aspects of operational risk, but catastrophic risk must be controlled

– Identify what is most important to the well being of your company– Focus on what could go wrong to cause outsized loss– Implement an effective system to indentify and stop activities that could lead to

catastrophic loss

• Operational loss prevention requires an organizational strategy not an IT strategy* – Integrity – employees are reliable– Level of Knowledge – not just what but why– Questioning attitude – always ask questions; what might go wrong?– Formality – a seriousness, a privileged trust; rigor in communications– Procedural Compliance – Conduct work as prescribed– Forceful team backup – reinforce, act as each other’s keeper

* Drawn from the US Nuclear Navy’s Pillars of the Program


In an HRO the pillars work together in an integrated fashion to create a culture of reliability

Integrity Level of Knowledge

Questioning Attitude

FormalityProceduralCompliance

Watch Team Backup

Knowledge beyond your own area expands your ability to

back up your co-workers

Knowledge provides the base to question,

and to spot out-of-the-ordinary

Questioning attitude helps you find better ways

Formality means following the process to improve the procedure when you find a better way

Integrity means you can be relied upon

A questioning attitude enhances acquisition of

knowledge

Questioning Attitude helps you spot what

others may have missed Formality ensures a questioning attitude is

productive


Few consulting firms have the combination of expertise to help clients get this critical issue right

Right Combination of Expertise

Unique Experience

Talented Resources

• Complexity• Lean / process• Strategy & Operations• Financial Services

Track Record of Success

• Beal Bank (most profitable bank in the US)• George Group (leader in developing lean in the US and Europe)• US Naval Nuclear Propulsion Program• Track record of applying Navy pillars to other companies

• Top performing strategy consultants from Bain, BCG, and McKinsey (Best of Bain, George Group Engagement Leader of the Year)

• Experienced operations professionals from leading companies• Former CFO and Director of Strategy & Risk Mgmt from Beal Bank

• “This is a landmark project…you guys were exactly what we needed.” – Lead strategist, top-five financial services firm

• “WPC’s approach to complexity is the most direct route to an efficient, profitable enterprise” – CEO Diversey

Strategy OperationsComplexityHow can we help you?

Strategy

Sample of Our Services:

• Corporate Strategy

• BU Strategy

• IT Strategy

• M&A Due Diligence

• Revenue Optimization

• Operating Model Design

• New Market Entry

• Complexity Mgmt

• Complexity Agenda

• Process & Organizational simplification

• Product Profitability

• Customer Profitability

• Portfolio Optimization

• Operational Excellence

• Process Transformation

• Plant Transformation

• Lean IT

• Supply Chain Mgmt

• Conduct of Operations

• Customer Retention

• Risk Management

Complexity Operations

www.wilsonperumal.com

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