Enterprise Performance Management: Harmonizing Risk and Financial Performance
The 2008 financial crisis exposed flaws in maintaining a siloed approach to risk and financial performance management. This resulted in increased pressure from regulators and stakeholders on financial institutions of all sizes to take an enterprise-wide view of risk, finance, accounting, compliance and performance management when managing their business.
In February, Fiserv released Intelligent Workplace℠, a single point-of-entry, online portal that enables clients to access a menu of integrated risk and financial performance tools. The Point spoke to Danny Baker, Vice President, Product Management at Fiserv, to get a better understanding of enterprise performance management, and how new tools like Intelligent Workplace can help harmonize risk and financial performance processes towards a common enterprise performance management strategy.
Q: What is Enterprise Performance Management?
Enterprise performance management (EPM) finally addresses a struggle that financial institutions of all sizes face - how do you balance the risk-return tradeoff? That is, how do you minimize uncertainty to protect value while maximizing profitable growth to create value - and provide a system to help control performance to achieve the desired results.
Protecting your assets equates to managing your risk - very simply, how do I not lose money? Most people think that the risk for financial institutions is in lending money and investing money, and that certainly is true. But they face other risks such as interest rate risk, credit risk, liquidity risk and pricing volatility, for instance.
It takes a certain amount of risk to sustain and grow a business. For financial institutions it may be selecting the right products at the right price. A better understanding of the risk-return tradeoff allows institutions to exploit new market opportunities and create competitive advantage. In good times, lack of attention to these tradeoffs can lead to excessive growth. In bad times, it can result in higher volatility or significant losses. Managers need to be able to look at extraordinary returns and ask "how exactly did we make this kind of money?" They should also determine "what risks are we getting paid for?" The goal is one of creating the ability to make more informed choices.
Enterprise performance management helps a bank balance this. It helps them manage the appropriate risk while at the same time helping to meet their growth desires and overall financial performance goals.
Q: Aren't financial institutions already doing this?
Yes, but all too often they make these decisions in a siloed environment, in a disconnected way. There is so much pressure on financial institutions to add to their capital and to manage that capital properly, but for various reasons, the two sides haven't communicated well. And there is a tangible mandate for financial institutions to employ this "new" approach. Emerging regulatory requirements will likely force many institutions to seriously re-evaluate their portfolios: exiting more capital-intensive, less-profitable lines of business and geographies, and shifting out of more complex, less-liquid instruments into simpler, more-liquid products with less risk and, of course, less return. This can only be accomplished effectively by marrying risk and financial performance management.
Part of this problem is that historically these two areas - risk management and finance - were separated. But now, they are meshing together into one area, one department, one focus. So now, all the solution, capabilities and management tools - as well as the measurement tools - are working in a much more integrated environment.
Q: Why has it been difficult to integrate these two areas?
Operational activities are driven by strategy but because of the historical separation, there has been no way of monitoring actual performance against strategic goals. Compounding the situation, there was no way to modify the strategy based on what was actually happening in the market in real-time.
EPM allows the financial institution to execute its business strategy as well as monitor and manage it in real-time. It allows financial institutions to make fast-action changes to react in this ever-changing financial environment. With EPM everything is linked so all parts are working together toward one goal: the financial institution's overall heath and success.
Q: Why haven't traditional software tools helped solve these challenges?
Most approaches are really about reporting, but that's only one part of the equation. Financial institutions need predictive tools that link to their strategy. For example, when customers pay off their loans early, those assets are off the books and cash flow stops. We can use prepayment modeling to predict the impact to the institution based on consumer behavior, market conditions, rate conditions and other factors. Because we can model future performance, the institution can make changes to its strategy based on what is happening today to its assets and customers. So in that example, the financial institution could look for next products in the lifecycle to offer customers who are likely to prepay early, or adjust origination strategy to add more new loans.
Q: What's different about Intelligent Workplace?
We have invested quite a lot in architecting our solutions to support a virtualized, hosted ASP environment that allows the CFO, risk managers and other business users to access these solutions in single place – an enterprise performance management desktop if you will. This ASP model reduces the financial and logistical burdens associated with implementing and maintaining the software, and puts everyone on the same page in terms of where risk and financial performance live within the organization.
The solutions available in Intelligent Workplace will continue to grow, making it a very compelling tool for financial institutions of all sizes who are looking to align to an enterprise performance management culture. The Fiserv approach is to look at the financial environment and all of its core elements and help the financial institution achieve a greater level of insight so it can constantly monitor, improve, optimize and execute. It allows for these insights to be turned into decisions and these decisions to be actioned at a much faster pace to achieve profitable growth.