How to Improve Traditional Financial and Management Habits

Dr. Shuhe Chestnut, Director of Finance, SAP China:

In the age of the Internet, China's four modernizations (agriculture, industry, national defense, and scientific and technological modernization) cannot be separated from informatization. Similarly, the modernization of the service industry cannot be separated from informatization. The modernization of the financial services industry is even more inseparable from informatization because it is the largest data (and risk) intensive industry. The financial industry's information is highly dense and asymmetric, so risk management and management modernization is highly dependent on information technology!

The financial industry is the largest data- and risk-intensive industry, and is the most important service industry opened to the outside world after China's accession to the WTO. In order to be in line with international standards in terms of technology, business and management, many financial enterprises in China (including banks, insurance and securities, etc.) are considering or have already carried out the selection and implementation of international standard application software. Although their respective situations are different, most financial enterprises in the application software selection or implementation of the following seven **** the same problem: First. First on the system, or first business process reengineering (BPR)? Second. When local habits are inconsistent with international practices, who is leaning on whom? Third. Choose one enterprise-level suite or use a combination of multiple departmental software? Fourth. What to put on first and what to put on second? Fifth. Is it development-oriented, or configuration-oriented? Sixth. Who will lead the project, the business or IT department? Seventh, how much money and time will it take? What kind of rewards and risks are there? In addition to the second question, these are also the main problems that many financial companies around the world have encountered in the past one or two decades and now. The first three questions are mainly related to software selection, including first consulting or first selection, using domestic software or international software, choosing enterprise-level software or departmental software. The fourth to sixth issues are mainly related to software implementation or project management issues, including the management of time (schedule), content (tasks) and resources (personnel). The last question is a return on investment or project evaluation question, i.e., whether to go on and how big a project to go on.

First. First on the system, or first business process reengineering (BPR)? A great deal of experience at home and abroad has proved that the most effective practice is parallel, that is, according to the current situation of the enterprise, the needs and functions of the software to design practical business processes and implementation. In other words, in the software implementation process to complete the BPR.

In the past, many enterprises out of thin air first to do a separate BPR, the results of the BPR report of the business process blueprint sketched out too far, too beautiful, like the moon in the sky, unattainable and unattainable! This problem is even more serious in China now, because there is a big gap between China and the world's management practices. Although we now have the most open mind in the history of mankind, but the content of management change in the enterprise level involves (enterprise) management thinking, management processes and management systems and other changes in three aspects, in the employee level involves (personal) awareness, habits and interests of the change. These changes can only be gradual, not sudden. Regarding the enterprise management ideas and personal awareness habits, part of them can be solidified in the computer system, another part can be clear in the business regulations and processes. Much of the rest is invisible and plays a critical role (e.g., the intentional or unintentional loss of data, either alone or in collusion, can have serious consequences), but cannot be forced to change overnight. Awareness change is limited by the learning and changing of the "conscious mind", while habit change is limited by the learning and changing of the "unconscious emotions". The former can be realized through ordinary learning and training (relying on classrooms and books), while the latter needs to be realized through repetitive training in practical activities; both are subject to interests. Interestingly, both "ideas" and "software" are "indefinite durables" that do not wear out and depreciate, and therefore should be adopted as early as possible to reduce TCO and increase ROI. At the same time, it is necessary to constantly update and upgrade the ideas and software. Internationally leading standard application software unites advanced management thinking and best business practices, and through its implementation, training and application, management change and process improvement can be realized. The most effective approach is to carry out unified planning and step-by-step implementation around the overall solutions provided by the most mature international standard application software (industry-level or enterprise-level). Consulting planning out of thin air can only be empty to empty!

Second. When local habits are not consistent with international practices, who is leaning on whom? In most cases, if it is possible to move closer to international best practices, it should be done gradually.

Why? This is because Western economic and financial markets have more than a century of continuous accumulation of mature management experience, while our market economy is being established, "market finance" is just beginning. No market, there is no market management; no mature market, there is no mature market management, including management experience, ideas, models and algorithms. This determines the upper limit of the management level included in the current domestic software. On the other hand, due to factors such as the Internet, WTO and Basel II, there is an increasing convergence of business and regulatory norms in the global banking industry. Therefore, in order to participate and become a qualified competitor in the international financial market, we have to comply with international rules of the game and absorb international best practices. Due to the principle of gradual change analyzed in the first question, convergence should take place gradually. Compared with Europe and the United States, our financial products, prices and channels are very homogeneous and simple. What we have now, foreign countries have had for a long time, while many foreign countries have that we do not have now (e.g. derivatives and asset securitization). Therefore, there is no need to worry that international standard applications will not meet existing domestic business needs. At the same time, our financial processes, regulations and institutions are very crude and imperfect; we need to borrow boldly, gradually improve and ultimately perfect. This is a problem that domestic software cannot solve in the short term. On the other hand, not all international software can be successfully adopted in China due to specific local language, regulatory, custom and support requirements. The most important thing is to choose "software that is both highly internationalized and fully localized". A high degree of internationalization requires the inclusion of a variety of practices in Europe, North America and Asia-Pacific, while full localization requires local language, local regulations, local business practices and local service support in place in all four areas. SAP's HR system, for example, supports the personnel systems and payroll accounting systems of more than 40 countries in Europe, America and Asia-Pacific, and has a simplified Chinese version in China, which complies with national and local labor laws and regulations, and meets China's payroll and welfare accounting and political and economic aspects of the personnel management system. In addition, SAP has dozens of local support and HR localization development and implementation teams in Shanghai and Beijing, SAP HR has been successfully adopted by more than 40 Chinese users.

Third. Choose one enterprise-level suite or use a combination of multiple departmental software? The international trend is to choose one or a handful of enterprise suite vendors where possible, the fewer the better. Whether you choose one or many, there should be unified planning and step-by-step implementation.

Why? Because in the current computer industry, applications are far less standardized than hardware, databases, and operating systems, and applications from different vendors usually require a large number of data interfaces between them, and more importantly, they contain different industry business processes, rules, and terminology. Therefore, as the number of vendors increases and the number of historical systems increases, the difficulty of data interfacing, project management and system maintenance increases geometrically. Eventually, a large number of old systems have to be replaced, retrofitted and integrated at great expense, just as in the demolition of an old house. Just like housing or urban construction, unified planning and phased implementation are essential for the construction of management systems (regardless of how many vendors you choose). Because the various parts of the information system is highly complementary, and centralized management trend, so the need for unified planning. Because of the limited resources and learning capacity of the enterprise staff, staff awareness and habits of the time required to change, redistribution of benefits will encounter resistance, so it should be realized in phases, including in the scope of the function and geographic scope of the step-by-step progress. The general practice is to select a consulting service company after identifying a software vendor, and have that consulting company implement and train at the head office (head office) and one branch (branch), and then have the consulting company and the users*** work together to roll it out throughout the bank (company). There is a concern that the selection of only one application software vendor may create a monopoly problem. In fact, this problem is not as serious as it seems. For example, aren't we all using Microsoft Windows and Office suite (including Word, Excel, Power Point and Access)? Why don't we worry about Microsoft monopoly? Because there are existing or potential competitors to Microsoft. If Microsoft's prices or services are too unreasonable, it will lose a large number of existing customers and will have a hard time attracting new customers and will eventually be replaced by existing or potential competitors. Importantly, as long as there are potential competitors, a true monopoly will not exist. In fact, Gates often reminds himself and his employees that Microsoft may be only 18 months away from collapse. If you do ever need to switch vendors, it's much easier to replace one old system than multiple ones. There are now three types of enterprise application systems on the market: departmental (division-level), enterprise (enterprise-level), and industry-level (industry-level or cross-enterprise-level entraprise-level) applications. For example, Siebel only provides CRM, a management software for customer service departments, which is sector-level software; PeopleSoft and Oracle provide ERP and CRM, but do not provide banking core business systems, which is enterprise-level software; SAP provides ERP, CRM, and core business systems for banking and insurance at the same time, and supports Basel II, which is industry-level software. SAP provides both ERP, CRM and core business systems for banking and insurance and supports Basel II, which is industry-level software. Industry-level solutions in the Internet era not only provide business processing within a single enterprise, but also provide cross-enterprise business transaction realization. This is collaborative e-commerce; it is achieved by establishing standardized industry business processes (rules and terminology) and e-commerce transaction platforms. Transactions include intra-industry such as inter-bank (peer-to-peer) transactions and bank-to-business (cross-industry) transactions. A bank A's core business systems need to be connected simultaneously with the bank's internal financial and other systems, with other banks B's core business and other systems (indirectly) connected to the enterprise C (C for A's customers) financial and other systems. If A and B use SAP core banking and other systems, and C uses SAP financial and other systems, then full real-time integration can be achieved between A, B, and C to achieve straight-through-process (STP). This is a huge advantage of industry-grade standard software.

Fourth. What comes first, what comes after? The international mainstream is: the use of advanced standard application software to first update and transform the management (analysis) system, and then gradually replace the core business (operation) system. The process of application system standardization is generally divided into three stages: standardization of business support systems, standardization of analysis systems and standardization of processing systems. First, it usually starts with the standardization of business support systems, i.e., ERP, and establishes or updates standardized business support systems including the management of people, finance and materials, i.e., human resource management, financial management and fixed asset (and procurement) management. Most of them start with the establishment of standardized financial systems (including financial accounting and management accounting). Second, on the basis of ERP, the establishment of standardized financial analysis systems, including profitability analysis (e.g., funds transfer pricing FTP), risk analysis (e.g., asset-liability management ALM), performance (value) analysis (e.g., economic value added EVA). Most of these start with profitability analysis. Third, business processing systems such as centralized standardized customer information and relationship management systems, standardized deposit systems and loan systems, and standardized funds transaction and payment systems are established or updated. Since the human resource management systems are relatively independent of the business lines, they can be put on earlier or later.

The reason behind this is what I call the "four lines" and "three standards" of modern financial management. The four lines are the customer line, the product line, the employee line and the financial line. Management is concerned about: how much money each customer, each product and each employee earns (spends), that is, the contribution of the first three lines to the fourth line. The three targets are (accounting) profit, (consolidated) performance and (economic) value. Shareholders are interested in the objectives: the company's current profitability, its future potential and its value in the market. The company's current profit is the accounting profit realized in the present from the company's past performance. The future potential of the company depends on the status of the four lines: e.g. customer satisfaction and market share, product innovation and business processing capabilities, employee training and organizational development, cash flow and return on investment and risk. How do you translate future strategic goals into practical actions in the present? Use the Balanced Scorecard to create incentives and align the four lines for integrated performance evaluation and risk management. The value of a company in the marketplace is equal to the total net present value of the present value of the company's current profits and the present value of its expected future profits (risk-adjusted profits). Risk-adjusted return on capital is RAROC. furthermore, from the point of view of shareholders' return on investment, economic profit should be considered, i.e., accounting profit minus opportunity cost (e.g., money invested in running a bank can also be invested in securities or real estate). On the other hand, there are traditional accounting expense items that may actually be investment items, e.g., the training of bank employees should be considered an investment in human capital. In fact, the most important asset of a bank or other financial enterprise is human capital (not land and machinery), so human capital investment (e.g., training) is crucial, and ignoring or distorting such items can seriously affect long-term development. With these (risks, opportunity costs, and investment-based expenses) and other adjustments, accounting profits are transformed into economic value added, or EVA.How do you translate shareholder value objectives into concrete actions for management and employees? The Balanced Scorecard, which uses EVA indicators, enables value management. Corresponding to the four lines of customers, products, employees and finances, there are departmental management systems such as CRM, core business, HR and finance as well as a (whole) corporate strategic management system. The enterprise strategy management system is a cross-departmental (enterprise-level) management system that realizes unified management for the four lines. How can profit management, performance management and value management be realized through these systems? The following discussion takes the construction of a modern commercial bank management system as an example.

A. Profitability analysis and basic financial budget control are realized through the implementation of financial accounting, cost accounting and fund transfer pricing systems to achieve the goal of profit management. Financial accounting, cost accounting and funds transfer pricing (FTP) constitute the bank's management accounting system. Financial accounting is used to record, summarize and report income and expenses, assets and liabilities, and cash flows; cost accounting is used to apportion (non-funded) expenses; and FTP is used for internal funding pricing, i.e., "funding cost sharing". Subject to the functional limitations of the existing core banking system and the specific requirements of internal and external reporting, the general ledger system in financial accounting could gradually become independent from the core business system and become the hub for unifying and linking the business and cost systems. Subject to data, regulatory and interest constraints, cost accounting can gradually move from the traditional "departmental cost approach" to the "job cost approach". Similarly, subject to data and other constraints, FTP can begin with a single-pool approach, move to multiple-pool and single-transaction approaches, and progressively realize profitability analyses by customer, product, business unit, and channel with varying degrees of disaggregation.

B. Risk management objectives are achieved through the implementation of systems such as the Asset-Liability Management System (ALM) and Credit Risk Management, which enable risk analysis and budgetary control of base funds. According to the Basel II framework, risk management includes the management of market risk, credit risk and operational risk. Among them, there are mature models and systems for market risk management, such as the asset-liability management system ALM (mainly used for the management of interest rate risk in on-balance sheet operations.) ALM has three main tools: on-balance sheet duration matching, off-balance sheet hedging (using linear contracts such as futures and hedges, or non-linear contracts such as options and limits) and asset securitization (changing the balance sheet). Credit risk management is a central focus of the new Basel Accord. Credit risk management systems should support the three credit risk measurement approaches (i.e., the Standardized Approach, the Underlying Internal Approach and the Advanced Internal Approach) and credit risk mitigation principles (e.g., collateralization, hedging and diversification) required by the new Accord. Operational risk management is a newly introduced concept. The operational risk management system should be integrated with the loan management system for optimization of loan processes and approvals. It is worth noting that although the final requirement to align with Basel II is beyond 2005, data preparation needs to start now due to the data requirements (more than three years of data) for risk assessment and calculation methods (e.g. historical simulation). The combination of a profitability analysis system and a risk management system can constitute a basic business pricing system. Business pricing includes product pricing and service pricing. Take, for example, loan product pricing. The loan rate should reflect the three components of loan cost, risk and profit, i.e.

Loan Rate = Loan (Marginal) Cost + Loan (Marginal) Value-at-Risk + Loan Profit Margin

Where cost includes both direct and indirect costs. The direct cost is the funding rate determined by the FTP system and the indirect cost is the non-funding cost apportioned by the management accounting system. Risk pricing should reflect the credit risk of the lender and the risk of the loan program (depending on factors such as the term of the loan and the collateral), as determined by the credit risk management system (including the collateral management system). Finally, a loan's profit margin is also determined by taking into account factors such as average profit margins in the market, competitors' rates and the future value of the lender to the bank.

C. The primary objective of performance management is achieved through the implementation of a human resources and corporate strategic management system, which initially enables integrated performance assessment and strategic development planning. Based on the bank's corporate strategic development objectives, business plans, financial budgets, key performance indicators KPIs and their related persons in charge are determined for each department and they are evaluated and incentivized using the Balanced Scorecard. It is important to note that performance management systems can be incomplete (e.g., not considering risk factors), untimely (e.g., non-real-time data), and semi-manual if they are not integrated with a profitability analysis system and a risk management system.The combination of systems A, B, and C can constitute a comprehensive, timely, and straight-through (STP) value management system for comprehensive planning and budgeting, comprehensive cost and risk control, integrated business pricing and integrated performance management to realize the high-level goal of value management.

Fifth. Is it development-oriented or configuration-oriented? Where possible, mature standard applications should be selected to (parameterize) configuration and minimize (program) development.

This question relates to the difference between "development software" and "standard software". Development software is the result of the development of a specific customer's current specific needs, on the matter; it generally can not meet the needs of other customers or emerging needs in the future, the lack of versatility and foresight. Whenever there is a new product launch, a new regulatory requirement or a change in organizational structure, enterprises need to re-develop the system, which not only has a long cycle (months or years) and high cost, but also has a large number of interfaces, resulting in slow system operation and complex maintenance. The emergence of standard application software is to solve these problems. The basis for its success is the standardization of business processes and program technology. Although the business and management of each enterprise in each country in the world is not the same, but the basic elements of its business processes and business objectives are the same, namely, people, money, materials and production, supply, sales (or deposits, loans, intermediary business) and profit maximization. Although the feasible business processes or element combinations can have an infinite variety, but the optimal business processes or element combinations are usually only one or a few. The standardization of the application software program technology itself is based on object-oriented programming language, modular structure, parameter configuration design and workflow technology; the result is "standardization of software system components", which can be reused like building blocks and flexibly docked, assembled and replaced. Mature standard software should be able to meet the needs of most customers more than 90%, to support the general new product launch cycle shortened to a few weeks or even a few days, to reduce the cost of traditional IT by 30% or even more than 50%. Therefore, standard software should be used, which is based on parameter configuration, supplemented by programming and development. Selection of mature standard software is relatively easy, as if purchasing commercial airplanes or fitness equipment; as long as you choose the best supplier, there is no need to add to the detailed functions of the software in too many visits. However, after determining the software supplier, you need to choose a consulting services company, demand research, system configuration and user training. A good consulting company will enable users to get significant results and complete knowledge transfer. The limited precious time should not be wasted on software selection, but should be concentrated on implementation, i.e. process design, system configuration and data interface and change management.

Sixth. Who will lead the project, the business department or the IT department? The unified planning of the project can be coordinated and led by the IT department. If mature standard applications are used, the main players in project implementation and maintenance are the relevant business departments. If the use of enterprise-level or industry-level standard application software, the leadership should be personally involved in the project implementation process (i.e., grasp a handful of projects).

Currently, most banks and other financial enterprises in China have a low status of the IT department, and do not have sufficient authority to carry out cross-sectoral unified planning. Since the financial industry is a highly data-intensive industry, the status of the IT department and CTO/CIO should be important. On the other hand, most of the current business departments and management of the application software selection, implementation and maintenance of awareness and participation is quite insufficient. Many business and management personnel believe that application software selection, implementation and maintenance is entirely or mainly the work of the IT department. This is a misconception that needs to be changed urgently. In fact, mature enterprise application software is mainly used and maintained by business and management personnel (as in the case of Microsoft's "personal management software" Office). The use of immature standard applications usually requires a relatively large number of IT staff to implement, develop and maintain. If you choose to develop application software, there will be a lot of secondary development, IT may become a bottleneck or even an obstacle to business development. The use of mature standard application software, IT will support, promote and guide the development of the business, while the role of the IT department will be changed from passive to active, from auxiliary to lead, its status will be improved.

Seventh, how much money and time will it take? What kind of rewards and risks? On a set of applications to spend three money: hardware costs, software costs and implementation costs. Usually the international ratio of the three is about: 1: 2: 3, that is, every dollar of hardware costs, corresponding to two dollars of software costs and three dollars of implementation costs. Mature application software itself usually requires hundreds of thousands to millions of dollars to purchase; the specific cost depends on the system modules used, the number of users and business volume and other factors, ranging from a small hundred thousand to tens of millions of dollars. Implementation costs and time depend on factors such as the scope of the implementation (both functional and geographic), the number of legacy systems, the requirements of the new system, data interfaces, and the number and experience of consultants. Implementation times typically range from a few months to several years, as short as one or two months and as long as three to five years. The payoff from implementing a management system is both value added and cost reduction. Value added is reflected in improved data (increased completeness, accuracy and timeliness), improved processes and improved decision-making; these aspects are of great value but are mostly less easy to quantify, with the exception of the cycle of data and report generation. For example, with the adoption of the SAP management system, the cycle time for the generation of management reports at Bank One in the United States has dropped from one month in the past to less than one week. Cost reductions are reflected in both direct IT cost reductions and indirect cost reductions such as labor, the former of which is easier to measure. For example, the implementation of SAP core banking and management system, Germany DZ Bank's IT costs fell by more than 70%. Since finance is a data-intensive industry, and labor costs and IT costs are two of the most significant costs, the ROI for financial companies implementing standard application systems can be relatively high, and the total cost of ownership TCO can be quite low. What kind of risk is there in implementing an application system project? There are five main risks: the project can not be completed on time and on budget, the system can not be used, the system is not good, the system is not good, the system does not use (good).

In the case of a given implementation scope, the project budget, project time and project risk three have alternative relationships. The smaller the project budget, or the shorter the project time, the greater the project risk. In fact, too small a project budget is often the biggest waste. Why? Because, first, a software budget that is too small will not buy a mature standard application, or even if the chosen vendor quickly withdraws or goes out of business. Second, too small implementation budget can not get enough or good enough consultants, implementation time and quality control is difficult to guarantee. Third, too small a project budget does not attract enough attention, involvement and support from business and management (especially leadership), and the necessary change management and support measures may be difficult to initiate and execute.

These are the seven habits of efficient financial information technology! Eliminate all the inefficient habits and all that remains is to lead!