OPERA^® Invest — Operations Improvement and Risk Reduction Case Study

The Check-up (two months)
The firm's Executive Management Committee asked BPG to broaden the scope of its assistance into a second stage, diagnostic assignment. The broadened assignment was to work with a team of internal system and operations personnel to identify specific areas of heightened processing risk and to identify actions that would mitigate the immediate and longer term impact of these risks.

Approach
In tackling the operational diagnostic assignment, BPG started by revisiting the goals of the original assessment project as defined by the Executive Management Committee. Specifically, executives wanted to know that:

• The firm was operating to the highest operational standards;
• The organization was operating with the least possible risk to client funds; and
• The information used in the investment management process and reported to clients was accurate.

BPG cautioned the team and the firm's executives that based upon past experience, the commonly accepted measures of operational quality and risk were unlikely to be a significant help in reaching these goals.

BPG recommended a structured approach to assess the presence of potential errors in the ongoing processing stream in a way that;

1. Proved the integrity of internal event posting processes;
2. Proved the integrity of the data provided for each event; and
3. Verified the quality of event processing.

BPG based its guidance and approach on the fact that the firm had passed all internal and external audit reviews with high marks. Further, experience with accounting controls and actuarial loss measurements show they are measurement frameworks well suited for financial reporting and insurance risk purposes but unlikely to benefit operations management in control of real-time or near real-time investment operations processes.

With this perspective in mind, the team started with a base of data obtained from the recordkeeping, trading and reconciliation process for the prior month's activity. To identify how the organization of people, process and systems might give rise to the type of unexpected losses the firm was experiencing, BPG led the team in an analysis that assumed a significant error existed that needed to be found quickly using only the data already available inside the firm.

This approach added a discipline and urgency to the team's analytic efforts and thought process. The approach forced a focus on the logic used to discover, assess, triage and correct errors that could potentially exist in the many components of the firm's processing infrastructure. Further the approach involved the team in establishing the methods to verify the firm's operational process quality and risk.

Through a series of straight forward analytic steps, directed by BPG staff, team personnel were able to verify expected outcomes, quickly recognizing and isolating potential loss events using data from daily recordkeeping and reconciliation records.

Grouping these events into different process, functional and investment categories the team was able create a multi-dimensional view of the impact these events might have on the firm.

During the analysis process, the project team also identified the frequency and value of the potential impact on eight key operational functions. Comparing these metrics, (error frequency and value at risk) enabled the team to categorize, compare and recommend organizational, system and process modifications or actions to improve processing quality and efficiency while reducing process variability and overall risk.

Impact
BPG and the team were able to quantify the specific quality and risk of each function's operational processes, determine the root cause of operational errors, and assess whether the errors represented a clustering of similar errors or a truly isolated event.

The OPERA^® measurement framework allowed the team to better understand their operations and derive additional quality information from data they had been using in their day-to-day activities. By structuring this information differently, the team was able to gain insights and knowledge about processing glitches as well as processing improvement opportunities.

Next: Continuous Measurement

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