Re-engineering banking with object-oriented models: Towards customer information systems

International Journal of Information Management, Vol. 17, No. 3, pp. 179-197, 1997 © 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0268-4012/97 $t 7.00 + 0.00

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Re-engineering Banking with Object-Oriented Models: Towards Customer Information Systems G N MENTZAS

The banking sector is demanding re-engineering due to changes in economic setting, consumer needs and market competition and requires a redesign of current accounts-oriented information technology systems to customer-oriented systems. The paper argues that object-orientetion provides the needed transparency and consistency between the models of business systems and the models of IT systems and adopts the use of objoct-oriented methods as a basis for redesigning banking business processes and information systems. The paper reports the findings of a research project that dealt with the development of the Banking Reengineering with Object-Oriented Modelling (BROOM) method for the coupled redesign of business and information systems and gives the results of an application of the method to a bank. © 1997 Elsevier Science Ltd

Gregory Mentzas is currently an Assistant Professor at the Department of Electrical and Computer Engineering at the National Technical University of Athens.

Introduction

The banking sector is undergoing significant changes in economic needs and market competition. Although it is hard to forecast the details of such an evolution, it is clear that it will demand an emphasis on increased 1BoUenbacher, G. M., Reengineering fi- flexibility in marketing of different product mixes, greater branch autonnancial processes. The Bankers Magazine, omy and shortening of 'time-to-market' new products; see e.g. BoUenba1992, 154, 42-46. 2Metzger, R. O., and Rau, S. E., Strategic cher. 1 Information technology (IT), on the other hand, plays a crucial planning for future bank growth. Bankers part in the provision of banking products and services; see e.g. Metzger Magazine, 1982, 6, 57~5. and Rau 2 and Cressey. 3 I T investments are one of the well-recognized 3Cressey,P., The developmentof information technology in UK banking. In Infor- keys o f competition in the banking sector, while I T cost reaches high mation Technology for Organisational scores in relation to operating expenses. In addition, quality, security Systems, eds. H.-J. Bullinger, E. N. Proto- and risk assessment are vital characteristics of the sector and of its infornotarios, D. Bouwhuis and F. Reim. Elsemation systems; see e.g. Ramani and Pavri 4 and D u t t a and Doz. 5 vier Science, Barking, 1073-1078, 1988, 4Ramani, K. V. and Pavri, F., IY supExisting banking systems, practically always home-grown, remain ports business strategy growth at the huge and cumbersome, requiring intensive maintenance and lacking in Development Bank of Singapore. Journal of Strategic Information Systems, 1994, 3, flexibility. On the other hand, the investments already made in existing systems cannot be discarded and constitute a typical 'legacy' drag. A 327-337. 5Dutta, S. and Doz, Y., Linking informa- significant issue is the need to manage 'customer-oriented' rather than tion technology to business strategy at Banco Comercial Portugues. Journal of 'accounts-oriented' systems. Contrary to the emerging business needs Strategic Information Systems, 1995, 4, for client-orientation, the majority of current banking I T systems adopt 89-110. an account-oriented approach, thus limiting the flexibility of banks "Watkins, J, Business process redesign in the UK retail financial services sector. either to create strong links with existing customers, or to attract new Business Change and Re-engineering, ones with increased marketing efforts. These considerations demonstrate 1994, 1, 38-48 the practical need for a re-engineering of both the banking business 7Maull, R. and Childe, S., Businessprocess re-engineering: an examplefrom the bank- processes and the associated information systems; see Watkins 6 and Maull and Childe. 7 continued on page 180

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Considering the development of business models for banking information systems design, some general conceptual models of data and processes have been developed and constitute 'kernels' of applications ('designware'). These models are usually built using traditional methodologies and antedate modern approaches to the design of information systems and especially the object-oriented approach. Although, however, the IT profession is constantly improving its understanding of how object-oriented development can support the business process re-engineering ventures for business transformation, few financial institutions are, today, ready to tread this path. This is in contrast to other domains; see e.g. Murthy and Wiggins8 and Wang. 9 This is due to the specific business requirements of the banking business as well as the need to explicitly provide mechanisms for the encapsulation of legacy data. However, we argue that object-orientation provides the needed transparency and consistency between the models of business systems and the models of IT systems. Object-oriented approaches seem to have the potential to encapsulate legacy data and processes that are already described in existing information systems applications, and treat them as a primitive variety of objects that can be associated to new objects and progressively replaced. Such an approach can apparently offer an opportunity to break the 'legacy deadlock' with its associated maintenance burden. The present paper adopts the use of object-oriented methods as a basis for redesigning banking business processes and information systems. Specifically, the paper reports the findings of a research project that dealt with the development of the Banking Re-engineering with ObjectOriented Modelling (BROOM) method for the coupled redesign of business and information systems and gives the results of an application of the method to the banking sector. The paper is structured in the following manner. The next section outlines the major trends and the need to redesign the banking systems, as well as the need to re-engineer the information systems of banks with a customer-oriented emphasis. The BROOM method, that enhances the expressive power of the object-oriented approach and further extends its business modelling abilities by representing the inherent business logic is outlined followed by a case-study application of method and redesign of a specific banking process. The final section gives some concluding remarks and directions for further research.

Re-engineering banking: trends and needs In order to analyse the current trends in the banking environment one should take into account the following issues: continued from page 179

ing sector. International Journal of Service Industry Management, 1994,5(3), 26-34. SMurthy, U. and Wiggins,C. Jr. Objectoriented approaches for designing accounting information systems. Journal lnformation Systems, 1993,7, 97-109. ang, S. Object-oriented modeling of business processes: object-oriented systems analysis. Information Systems Management, 1994, ll, 36-43.

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• business trends, i.e. the trends concerning banking products, clients, etc.; • operations trends, i.e. the trends already developed from within the main operations of banking institutions; • technology trends, i.e. mainly the information technology trends that may affect the banking business; • infrastructural barriers that may constrain the evolution of the banking business.

Banking and customer information systems: G N Mentzas Concerning the main business trends, one notices: a globalization of markets; a shift from product to client focus; an increased need for product innovation; pressures for the development of mature banking products; client sophistication, techno-literacy and diversity; and sharp pressures for capital efficiency. The main operation trends are as follows: increasingly sophisticated operating arrangements; better control of risk management issues, in order to meet credit and currency risks; continued complexity of the regulatory environment; increased demand for timely and consistent management information; and an increased need for standards and their integration both across Europe and on a world-wide basis. On the other hand, the more important information technology trends that may affect the banking business are: an increase in the platform capabilities and a smooth parallel decrease in the unit costs of IT; increased diffusion and commercial maturity of client server and network computing products, but also reluctance to adopt open systems approaches; use of development tools and languages (mainly with the gradual--yet slow--adoption of case tools and object-oriented languages); little interest in client server applications, apart from complex trading, negotiations phases, or downsized deposit applications; availability of high power analytic tools and visualization aids; and availability and commercial maturity of imaging and multimedia tools. These developments are expected to have significant impact on the way the banking business is carried out. Nevertheless, significant rigidities have been already developed within the banking institutions. These are due to the following infrastructural barriers: • high costs and inflexibility of support due to the duplication of operations functions and applications across locations and products; • insufficient data quality and timeliness of information due to the complexity of data flows and the lack of focus on data management; • severe information gaps due to the inability of current systems to provide important management information; • ageing legacy systems, with pressures for re-engineering practices. The impacts of the above mentioned issues can be briefly summarized in the following implications for the banking business: • there is a need to leverage existing capabilities and functionality to improve the cost efficiency of transaction processing and more effectively deploy human resources; • an increased need is observed to share information, especially risk management and client information, across businesses and locations; • existing and newly developed systems should ensure operational flexibility so new products can be delivered more quickly; • a pressure towards the diversification of banking products is observed, such a diversification should exploit new powerful platforms, the networks of branches and commercial links with economic partners. These trends and requirements demonstrate the practical need for a reengineering of the banking business processes. The redesign effort should take into account a multitude of factors: • structure (i.e. the trend towards decentralized profit centres and valueadding hierarchical levels);

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• systems (i.e. the need for integrated management tools and management information); • staff (i.e. the empowerment of staff and the creation of competitive employer advantages); • culture (i.e. the need to develop enhanced business cultures and support the creation of learning institutions). The business redesign efforts should focus on: the strategic redirection of banking business; the design of core process/operations; the management of change; the redesign of organizational structures (e.g. issues of centralization/regionalization); and the redesign of the branch network; see also Bollenbacher. ~° An overview of the challenges to be faced for banking redesign is given in Table 1. Table 2 gives an overview of the historical evolution of information technology support for customer-related information. The need of banks to focus on micro-segments of customer types has significant impacts on the development of customer information systems and the required IT support (see Mentzas 11). The development of a Customer Information System (CIS) is a strategic imperative for all banks. Having a clear knowledge and understanding of the customer is now recognized as being vital for continued Success.

The systems that the banks are currently running are leftovers from the 1980s when the consumer finance boom began. These systems were originally designed to support the design of services at head office, the function of the branch was to service the individual customers. This situation no longer exists. A CIS allows a bank to examine its customers in detail, particularly the cross-holding of products and to accurately assess their profitability. The banks will have to move to a position of giving 'best advice' on all their products and services. This is likely to become the norm when 'segment-of one' marketing becomes common practice. The profitability of an individual customer will depend on the amount of individual servicing (s)he requires. Customers who are currently unprofitable will have to be quickly identified and their transactions analysed to provide lower cost servicing and support,

Table 1 Challengesfor redesigning the banking business New key requirements

Problems within existing retail bank structure

Focus on specific customer needs

Lack of segment driven marketing

Develop targeted product bundles Pricing as a key component of value

Lack of understanding of costs and profitability of individual products/segments

Develop capacity to adapt fast to changing market needs

Large, hierarchical slowly moving organizations

l°Bollenbacher,Op.cit., Ref. 1. 11Mentzas, G. N., Information systems strategy for electronic banking. Interna- Attract talented people tional Journal of Information Management, 1994, 14, 159-175

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Competition with other companies that use high technology

Banking and customer information systems: G N Mentzas Table 2

Evolution of IT support for customer information

Issues

Before 1980s

1980s

1990s and beyond

Product and Checking/ payments services services Credit cards Savings Basic consumer loans Corporate lending

Differentiation of services Money market accounts Cash management ATMs and EFT/POS

Needs-based services Cross-selling focus Global cash management Phone banking and home banking Electronic purse

Information technology

Heavy 'batch' processing systems Increasing automation of customer interface

On-line transaction processing Integrated information systems Bank-wide customer information

Heavy 'batch' processing and accounting systems

bringing them into profit. Some banks believe that this will not be possible, others are making moves to put the systems in place. In the end it will be the individual bank's view of its target customers that will influence its strategies for product design and servicing. However, it will be the development and refinement of the CIS that puts the banks into a position in which they will be able to make decisions quickly and accurately with the known facts at the fingertips of all staff. 1. Key elements of the existing situation

The main elements of the existing situation concerning the information systems of banks can be summarized as follows: • Banks have moved from customer records and information being held on paper within individual branches to the central maintenance of customer records. • Systems and structures have been designed around products and not individual customers. The desire to be able to handle records by individuals has led to the modification of existing systems and, in some cases, the introduction of totally new systems. • The desire to recognize and fully understand the individual customer has become increasingly important to the banks. The understanding of the bank's relationship with the customer is seen as the vital component of the profitable management and development of the individual customer. • The cost of recruitment of new customers has made the retention and long-term development of existing customers a priority for the banks. The customer is increasingly being viewed as representing a longterm investment: the management of the individual's needs and the maintenance of a long-term relationship are being refined by the introduction of effective CIS tools. • Quality of data is a widely acknowledged problem because of the history of transaction-based systems.

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Banking and customer information systems: G N Mentzas 2. M a i n f a c t o r s towards C I S

In order to tackle the issues mentioned previously, the following list of elements and factors have been identified as critical when planning the evolution towards CIS in the banking sector: • the CIS should be accessible in the branches of the organization; it should be available at or close to, all possible customer interfaces. • the systems should be able to support segment of one and household marketing; a CIS should become the tool for relationship management with the ability to build an individual customer's profile supported by event and contact management details. • the CIS should recognize the customers' changes in life stages and the buying triggers that these changes represent. • the CIS should be seen as a long-term investment for the organization, not a short-term solution to the current reputation problems of the industry. • the CIS should be seen as a tool what will help initially to regain the customer's confidence and trust and then to maintain and re-inform the customer's belief in the ability of the organization to serve their needs. • the CIS should be used as a way of measuring the individual customer's profitability and that customer's relationship with the organization. • the CIS should be used to aid the design of the new products and services for the organization. • the CIS should be designed with the idea that it can feed the broader management information requirements of the bank. The development of a CIS allows the banks to clearly identify the different types of customers and their propensity to use certain services. This information will allow the closer tailoring of products and services to meet customer's needs. This strategy, in turn, is allowing one bank to plan its products to make the majority of their customers profitable no matter the level of usage of the products and services. 3. The need to redesign retail banking I T systems

120p.cit., Ref. 6. 13Downs, E. P. Clare and Coe, I., Structured Systems Analysis and Design Method. Application and Context.

Prentice-Hall International, London, 1988. n4Tardieu, H., Rochfeld, A. and Colleti, R., La Methode MERISE.. Principes et Outils. Les Editions d'Organisation, Paris,

1988.

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The information technology and information systems (IT/IS) related issues of the redesign effort should include the following: the organizations of IT/IS; examination of the outsourcing possibilities; the functional and technical architecture of IT/IS (e.g. the need to distribute more IT capabilities to branches); the efficiency of systems development; the consolidation of data centres; the organization of individual systems development projects; the IT/IS implication of branch network redesign; see also Watkins.12 Considering the development of business models for banking CIS design, some general conceptual models of data and processes have been developed and constitute 'kernels' of applications ('designware'). These models are usually built using traditional methodologies, e.g. SSADM (see Downs et al. 13) and Merise (see Tardieu et al.14), and antedate current approaches (e.g. the object-oriented approach) to the design of information systems. From the above observations an emerging need is deduced towards the consistent definition of conceptual business models that would cover the needs of modern banking needs, and in the same time capitalize on the

Banking and customer information systems: G N Mentzas

applications already developed and assist banks in business redesign efforts. As a basis for modelling the business processes towards the development of CIS, the present paper proposes the BROOM method, which builds upon the object-oriented approach. The method is described in the following section, and its application to the process redesign of a banking system is given in the penultimate section.

The BROOM method 1. Object-oriented modelling o f business processes

One of the main steps when re-engineering business processes is the creation and transformation of a business model. Real business models, i.e. the ones that are in the heads of the managers and employees of a company, are complex and fuzzy. Everybody has a different idea about what the business is and how it should perform and develop. One of the main ideas behind BPR is the creation of a common business process model, i.e. such that it partially matches most of the different individual ideas about the business; see e.g. Hammer and Champy 15 and Davenport. 16 This is a difficult task, because everybody has a different viewpoint: one will get very different answers from a CEO and from a production engineer working in the very same business. It seems important for an organization to consolidate these differences, so that it can move in the 'right' direction and ultimately be successful. Corporate strategy and policy, all the short and long-term planning, marketing, etc. are directed towads this common, but elusive, business model; see Huckvale and Ould. 17 Although many process modelling technologies are currently mature enough to provide the basis for effective process definition and to facilitate process improvement efforts, no standard approach exists for process definition, simulation or enactment; compared for example to the Software Engineering Institute process assessment procedure, which has become the closest to being a fully developed technology and an accepted industry standard for software processes; see e.g. Clough, TM Curtis et al. 19 A business model should cover the following requirements:

15Hammer, M. and Champy, J., Reengineering the Corporation: A Manifesto for Business Revolution. Harper Business New York, 1993. ~6Davenport, T. H., Process Innovation: Reengineering Work through Information Technology. Harvard Business School

Press, Boston, MA, 1993. 17Huckvale, T. and Ould, M., Process modelling: why, what and how. In Software Assistance for Business Re-Engineering. ed. Kathy Spurr et al. John Wiley,

• description of the process steps and their results (i.e. functions/activities that need to be performed, conditions necessary, sequencing of activities, rules for feedback or iteration, constraints on the process, etc.); • description of the state of objects produced by or used in performing the process; • description of organizational roles (i.e. who implements which activities, mapping of individual process steps to tools or humans, decision-making roles, etc.); • possibility of identifying bottlenecks, inconsistencies or anomalies in the process; • analysis of process management issues, e.g. process scheduling, concurrent/sequential implementation of activities, idle times, resource conflicts, etc.

New York, 1993,pp. 81-97. 18Clough, A., Choosing an appropriate process modelling technology. In Crosstalk, a publication of the Software Technology Support Center Utah, USA, 1992. 19Curtis, B., Kellner, M. and Over, J., Process modeling. Communications of the Modelling the corporate processes and functions has been the subject of ACM, 1992, 35, pp. 75-90. numerous methods and techniques in the information systems analysis

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2°Lockeman, P. C., Object-orientedinformation management. Decision Support StYKistems,1989, 5, 79-102. m, W. and Lochovsky,F. H., ObjectOriented Concepts, Databases and Applications. ACM Press, Addison Wesley,

New York. 22Taylor, D., Business Engineering With Object Technology. John Wiley, New York, 1995. 23jacobson, I., Ericsson, M. and Jacobsen, A., (1994), The Object Advantage: BPR with Object Technology, AddisonWesley. 24yu, E., Models for supporting the redesign of organizational work. In Proceedings, Conference on Organizational Computing Systems, COOCS '95, 13-16

August, Milpitas, USA, ACM Press, New York, 1995, 225-236. 2SKueng, P., Kawalek, P. and Bichler,P., How to compose an object-orientedbusiness process model. Paper presented at the Conference 'Method Engineering '96: Principles For Method Construction And Tool Support', International Federation for Information Processing(IFIP), Working Group 8.1 and 8.2, 25-28 August 1996, Atlanta, GA. 26Rumbaugh, J., Blaha, M., Premelani, W. and Lorensen, W., Object-Oriented Modeling and Design. Prentice-Hall, London, 1991. 27Fayad, M., Tsai, W.-T. and Fulghum, M., Transition to object-orientedsoftware development. Communications of the ACM, 1996, 39, 108-121.

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and design field. Methods range from static data modelling (e.g. DFDs, SADT, Entity-Relationship Diagrams, IDEF-0, etc.) to dynamic behavioural modelling (e.g. State Transition Diagrams, Petri nets, Role Interaction Nets, etc.). The application of object-oriented techniques in business process modelling is considered to be one of the steps to break a number of limitations that exist in modelling business processes and to move towards a more comprehensive modelling approach. Object-oriented developments in the software world are recognized as being a credible way to the production of better and more easily maintainable software. Relevant analysis and development methodologies are maturing, as well as tools supporting them; see Lockeman 2° and Kim and Lochovsky. 2~ However, most applications built till now using an object-oriented approach are of the reporting or departmental size; there are hardly any 'core' or 'strategic' applications, and the reasons are mainly due to lack of familiarity and to the weight of the existing legacy data. Various approaches have been applied to the object-oriented modelling o f business processes; see e.g. Taylor, 22 Jacobson et al., 23 Yu, 24 Kueng et al. 25 The present paper adopts the O M T method; see Rumbaugh et al. 26 This choice is justified by the fact that O M T is one of the methods that covers the whole life cycle system and has proved to support adequately the transition to large-scale object-oriented software development; see e.g. Fayad et al. 27 The O M T methodology supports the entire software life cycle, from problem formulation through requirements analysis, design, and implementation. The methodology consists of three phases: analysis (i.e. understanding and modelling the application and the domain within which it operates); system design (i.e. determining the overall system architecture) and object design (i.e. the elaboration, refinement and optimization of models). According to the O M T method a system is modelled from three related but different viewpoints, each capturing important aspects of the system, but all required for a complete description. The object model, which represents the static, structural, 'data' aspects of a system; this model describes the structure of objects in a system-their identity, their relationships to other objects, their attributes and their operations. The dynamic model describes these aspects of a system concerned with time and the sequencing of operations----events that mark changes, sequences of events and states; the dynamic model captures control, that aspect of a system that describes the sequences of operations that occur, without regard for what the operations do, what they operate on, or how they are implemented, The functional model represents the transformational, 'function' aspects of a system; the functional model describes those aspects of a system concerned with transformation of values--functions, mappings, constraints and functional dependencies. A typical software procedure incorporates all three aspects: It uses data structures (object model), it sequences operations in time (dynamic model), and it transforms values (functional model). Each model contains references to entities in other models. The three kinds of models separate a system into orthogonal views that can be represented and manipulated with a uniform notation. The different models are not completely independent, a system is more than a collection of indepen-

Banking and customer information systems: G N Mentzas OBJECT MODEL

(classes and relationships) FUNCTIONAL MODEL

(actors and flows)

Figure 1

DYNAMIC MODEL

(states and transitions, events)

Model interconnections in OMT

dent parts, but each model can be examined and understood by itself to a large extent. The interconnections between the different models are limited and explicit; see also Figure 1. Each model describes one aspect of the system but contains references to the other models. The object model describes data structure that the dynamic and functional models operate on. The operations in the object model correspond to events in the dynamic model and functions in the functional model. The dynamic model describes the control structure of objects. It shows decisions which depend on object values and which cause actions that change object values and invoke functions. The functional model describes functions invoked by operations in the object model and actions in the dynamic model. Functions operate on data values specified by the object model. The functional model also shows constraints on object values. 2. Overview o f the B R O O M method

In order to deeply represent a domain, the object-oriented model is not enough. It can be used as the basis, but it must be extended in, generally speaking, two directions: • to provide more fundamental expressive power, i.e. to add more framework relations (temporal relations for example) and • to cover the specificities of the business domain, i.e. to add the possibility for: capturing the business logic; representing business metrics; enabling what-if analysis; supporting time and resource management, etc. In order to cover these requirements the BROOM method has developed and applied a consistent linkage between the object-oriented method OMT and the Action Workflow Analysis (AWA) method; see Winograd and Flores 28 and Medina-Mora et al. 29 The AWA model is based upon a network of speech acts, in which an interplay of requests and commisives are directed towards explicit cooperative action. The BROOM method includes the following steps (see also Figure 2):

28Winograd, T. and Flores, R., Understanding Computers and Cognition. Ablex Publishing, New Jersey. 29Medina-Mora, R., Winograd, T. and Flores, P., Action workflowas the enterprise integration technology. Bulletin of the Technical Committee on Data Engineering, IEEE Computer Society, 1993,

16(2), 4~53.

(a) Conceptual modelling of current processes, which refers to the development of the object-oriented models for each of the processes in the 'as-is' situation. (b) Process mapping, which refers to the development of the business workflow models for the 'as-is' situation. (c) Definition of metrics to be subsequently used as benchmarking guidelines for a quantitative simulation of the selected processes. (d) Process Measurement and Benchmarking, which refers to the derivation of the values of metrics for the 'as-is' version of processes and related comparisons.

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Banking and customer information systems: G N Mentzas

"As-is" Process

Redesign

"To-be" Process

Process Mapping

li 0-0 Process Model I [ Definition of Process ObjectModelDiagram I I Metrics & Indices Event Trace Diagrams I EventFlow Diagram I OMT Data Flow Diagram I OMT State Diagram(s) I

I

ProcessMapping Customer/Performer --Phases

Customer/Performer Phases

I • Time

/ ° Cost

Satisfaction 1.° Staff Satisfaction / ° Customer

. ~ IStatistical U_P_rocess U Procedures ]TMeasure.mentl- lfor Samplin! I i Problem~Areas i I Surveys

0-0 Process Model -

-

Object Model Diagram Event Trace Diagrams Event Flow Diagram OMT Data Flow Diagram OMT State Diagram(s)

I Desired Process Behavior I

Figure

2

The B R O O M redesign steps

(e) Process Redesign by developing the 'to-be' workflow model or even alternative scenarios (i.e. desired process behaviours) of 'to-be' processes. (f) Process Simulation and Evaluation, which refers to re-evaluating the associated metric values for alternative 'to-be' models and selecting the appropriate ones. (g) Information Process Development which refers to the development of object-oriented models for the selected 'to-be' processes. The latter provides the basis for the development of the associated CIS. Initially, the object-oriented and workflow mapping of each 'as-is' process is performed. Values of metrics are assigned on certain low-level components (i.e. steps) of each process. The process mapping, accompanied by the associated metric values, reveals certain problem areas. The reasons for the appearance of these areas may be identified by means of an elaborate investigation of the particular mechanisms, procedures, practices, etc. involved in activities within the particular (sub)processes. The identification of these reasons lead to some well defined causes of problematic issues, which in turn prove to be dependent either on internal or external factors. It should be noted at this point that redesign efforts may not exclusively focus on significant problematic areas, but also on non-problematic ones, which however show some improvement margins. In certain cases, new ideas may be expressed on how certain subprocesses might be simplified or facilitated, although there is no direct connection with a problematic area at the first place. Starting from the present conditions, regulations, infrastructure, etc. long-term redesign guidelines can be produced, as a response to a requirement for improved (desired) process behaviours. The final result is a realistic representation of long-term redesign goals within the process mapping diagrams of 'to-be' processes. This result can be expressed both quantitatively, i.e. in terms of values of the specified metrics, as well as non-quantitatively, with reference to non-measurable considerations (such as staff and customer satisfaction).

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Banking and customer information systems: G N Mentzas

Redesigning banking business processes 1. The case-study bank: Alpha Credit Bank

Alpha Credit Bank (ACB) is the largest private commercial bank in Greece with a long and successful history. It belongs to the Alpha Group of companies which includes fourteen other affiliated and subsidiary companies (among them are: financial services companies, investment companies, real estate companies, electronic data processing and insurance companies). The bank entered the Athens Stock Exchange in 1924. Alpha Credit Bank holds the top position among banks (in the stock market) as far as the tradability of its share and the value of its transactions are concerned. At the end of 1994 the bank's network numbered 162 branches and 3730 employees. The basic goals of the bank are: to remain the first private bank in Greece; to offer high quality services; and to offer pioneer products. The qualities needed, as expressed from the bank itself, to achieve the above-mentioned goals are: quality at work; quality in communication; meritocracy; ethos and creativity. The bank has decided to proceed with a significant re-engineering effort, towards the reorganization of branches and the development of consistent Customer Information Systems (CIS). Within this context, a pilot study was initiated, that concerned the high-level modelling of banking processes, the categorization and prioritization of processes with respect to their need for re-engineering, and a study of the merits and pitfalls of object-oriented techniques in analysing and designing the future information systems to support re-engineered processes. 2. The Bank's business processes

In order to analyse the business processes of Alpha Credit Bank, a threelevel hierarchical approach was followed. The first level consists of four high-level business processes which cover all the operations and activities of the bank: i.e. manage the business; manage people and work; serve the customer; support the business. These four high-level processes are then further analysed into the second level of the hierarchy. This disaggregation is depicted in Table 3. Since emphasis is put on the development of CIS for service provision, we only present here (Table 4) the decomposition of the high-level business process "Serve the Customer" into the second and third level of hierarchy. 3. Business process prioritization and selection

Given the resource and time constraints of the pilot project, only a limited number of business processes could be selected from the plethora of processes mentioned above. The selected processes would be the subject of detailed re-engineering. In order to proceed with the selection of the customer-oriented business processes to be modelled, a number of criteria were defined. The criteria were grouped into the following categories (see Table 5): Business strategy criteria. The criteria of this category represent the strategic role of the examined processes (e.g. need for a higher market share). Process importance. The criteria of this category represent the importance of the current state of examined processes, regarding issues such

189

Banking and customer information systems: G N Mentzas Table 3

The first and second hierarchical levels of business processes

1. Manage the business

1.1 Direct the business 1.2 Plan the business

2. Manage people and work

2.1 Manage personnel 2.2 Manage and control process operation

3. Serve the customer

3.1 Market products and services 3.2 Provide customer services

4. Support the business

4.1 Manage information systems 4.2 Manage finance 4.3 Manage administrative services

Table 4 Business processes of "serve the customer" Market products and services Market research New product development Product promotion and advertising Product pricing Public relation Interest rates management Internal marketing Provide customer services

Deposit management processes Loan and letter of guarantee management Funds transfer Foreign trade management Private banking Mutual funds management Bonds purchase and selling Standing orders Credit and debit cards management Underwriting Derivatives management Other services management

as the profit earned from the processes, the satisfaction of customers, etc. Operational criteria. The criteria of this category represent the impact of the processes being examined on the operations of the bank. Problem-related criteria. The criteria of this category try to pinpoint processes that already have, or may generate problems. After assigning numeric weights (on a scale from 1 to 5) to the criteria and marking the relevance of each criterion to each process, the processes were ranked. The following four processes were selected as the most appropriate for detailed modelling and redesign: • Accounts Special Terms Management, i.e. the approval (and possible modification) of 'special terms' of deposit accounts (the first of the Deposit Management Processes); • Loan & L/G Granting, i.e. the granting process of various types of loans (the first of the Loan and Letter of Guarantee Management Processes); • Cheques management, i.e. the clearing process of cheques issued by other banks (the second of the Deposit Management Processes);

190

Banking and customer information systems: G N Mentzas Table 5

Process selection criteria

Group

Criterion

Business strategy criteria Need for new flexible product definition Need for higher market share Internationalization Process importance criteria

Existing high number of customers High profitability Large current market share Customer satisfaction Managerial issues

Operational criteria

Possibilities of diversification Heavy workload Delays to provide service Lack of IS support Relationships with subsidiaries and affiliates Need to decrease cost High IS maintenance cost Age of existing application

Problem-related criteria

Complexity Redundancy of steps of work Regulatory and legal constraints

• Stamps Management, i.e. the management of selling social security stamps to customers (the first from the Other Processes). 4. Definition o f metrics

Taking into account the priorities of Alpha Credit Bank regarding the optimization of core processes and their applicability to our model structure two major groups of metrics have been identified and analysed as follows: Time as a generic metric of vital importance for both parties (bank and customer) and • Cost as a derivative metric of major importance for the bank. Cost is defined as a function of other variables such as time, wage, fees, volume and is formed as a linear combination which captures each process individuality. •

5. Sampling survey and data collection

It has been noticed that there is a variation in the time framework in which certain processes and subprocesses are taking place. This reveals a non-uniform approach among several branches of ACB and underlines the lack of standard procedures. This notification addresses the need of a standard statistical survey which aims to analyse and model this observed variation among ACB branches and give valuable estimates for the generic variable time. The sub-processes in workflows for which time is a meaningful metric, have been included in a questionnaire that has been sent to 30 branches of ACB, a number that represents 20% of all ACB branches in Greece. In each branch an expert has been asked to estimate the time variable

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Banking and customer information systems: G N Mentzas for those sub-processes. ACB branches have been divided into groups according to their location (Athens or region) and their type. The branch type refers to the role of a branch in a specific process and depends upon the level o f authority and/or several quantitative measures. For the loan granting and the special terms processes, branch types are three: A, B and C corresponding to different levels of turnover and branch limits. As for the stamp process, branches are divided into two types, central and local. A stratified random sampling was designed and executed across a 2 × 3 array (location x branch type) for the loan granting and the special terms processes, while for the stamp process the array (location × type) was 2 x 2. This sampling scheme was selected over a simple random sampling, since there were indications of differences on the distribution o f time in different branch type and location. • For the loan granting process a set of 25 questions having numerical responses concerning time was asked in the questionnaire. • For the special terms process a set of seven questions of the same nature was included in the next questionnaire. • For the stamp process besides a set of questions concerning time some questions regarding the number of booklets per month/per branch and the total monthly sales were included in the questionnaire. • For the cheque purchase and clearing process there was no sampling, since all subprocesses were well defined in terms of time and there was no deviation of the standard times that ACB provides. These standard times have been used in our workflow analysis for this process. A distribution of the ACB branches that participated in the survey categorized by location and type is given Tables 6 and 7.

6. Processing of metrics Data collected from the sampling technique described above have a specific nature. Instead of measurements or observations we have a set of estimates which reflect expert opinion from k independent sources where k is the number of branches (or experts) which palcipated in the survey; see Cochran. 3° The basic assumption here is that there is no communication among experts regarding the subject of the questionnaire and therefore the answers (estimates) are identical and independently distributed. The relevant theory of combining information from expert opinions allows the use of a standard statistical analysis applying to estimates instead of observations; see Petrakos. 31 An alternative more complex scenario would be the Delphi method which extracts and evaluates expert opinion from k dependent sources following a repetitive process; see Pill. 32 This method would require a second run of the sampling scenario conditioned on the knowledge of the results o f the first one. 3°Cochran, W. G., Sampling Techniques. J. Wiley,New York, 1977. Table 6 Sampling scheme for the loan granting and special terms 31Petrakos, G., Combining information: processes (entries in number of branches) statistical theory and applications. Ph.D. dissertation, Deptartment of Statistics, Location/type Type A Type B Type C University of Wyoming, USA. 32Pi11,I., The Delphi method: substance, Central (Athens) branches 5 5 5 context, a critique and an annotated bibliography. Socio-Economic Planning Regional/local branches 5 5 5 Sciences, 1971,5, 27-71.

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Sampling scheme for the stamp management process (entries in number of branches)

Table 7

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2 13

10 5

The preliminary data analysis carried out, which consisted mainly of several graphical representations of the collected data, revealed a large variability and a serious deviation from a concrete, bell-shaped distribution, mainly because of a number of outliers for every variable, concerning time. The large variability in certain variables reveals the lack of a formal way of 'doing the job' in the corresponding sub-processes and it is a subject for further study. The preliminary results suggested the use of robust methods for the analysis phase. Outliers sustain in the data body as valuable pieces of information, since they may reveal some functional problems within an individual branch, but their influence in the analysis will be minimized by the selection of robust methods, since we are dealing with an overall bank model. The following statistical indices have been applied: • The median, which is the middle point of the ordered data, has been used as a measure of location, instead of the arithmetic mean and • the interquartile distance, which is the interval that contains 50% of the data, as a measure of dispersion instead of the standard deviation. This is an appropriate choice since the mean and the standard deviation in the presence of outliers give invalid measures of location and spread. For example, an unusually large observation can drive the mean much higher and certainly far away from the main group of observation and therefore makes it (the mean) a bad representative of the data under study. The Mood test for medians has been used as a non-parametric analysis of variance to detect possible differences in time (response variable) for different values of branch type and location, A series of data calculations among groups of different branch types and locations results to a single standardized number, ranged between 0 and 1 and called p-value; see Conover. 33 A p-value of less than 0.1 indicates such a statistically significant difference in the medians among groups. 7. An example o f process redesign

The following paragraphs give an overview of the analysis, modelling, evaluation and redesign of an example process, using the BROOM method described in the previous section. The process refers to the approval of special terms in deposit accounts; for the redesign of a similar process see Foster. 34 Description of "as-is' process. The need for special terms arises when the

33Conover, W. J., Practical Nonparametric Statistics. Wiley,New York, 1980. 34Foster, R. A., Technologyupdate ... Reengineering the lending process. The Journal of Commercial Bank Lending,

1991, 74(1), 48-53.

customer brings cheques issued by other banks. Therefore, the above mentioned terms have no meaning for cash or cheques issued by Alpha Credit Bank. The process concerns the approval of special terms in deposit accounts as well as the alteration or abolition of the existing special terms. The applicant therefore in this process is already a bank's customer. There are only a few exceptions where the applicant is a completely new customer.

193

Banking and customer information systems: G N Mentzas The special terms approval process begins with the customer's request for special terms in his deposit account. It includes the assembling of the application's dossier, the review of the application and supporting documents; and the final evaluation and acceptance or rejection of the application. Several decision-making bodies of the Bank review the application dossier in order to approve his request. Their decision is based primarily on the evaluation of previous collaboration with the customer. The special terms of a deposit account refer to the following: • The interest-bearing date (valeur) which relates to the calculation of the interest and the date it starts. The date the interest starts is different when: (i) the cheques are issued in districts other than the one it will be paid or/and (ii) the cheques are issued from another bank in districts where there is not a branch of Alpha Credit Bank. • The withdrawals from non disposable sum of money (plafond which relates to withdrawals from the unclear account balance after the clear balance has been used up). • The duration of the approved special terms as the updated special terms remain valid only for a specific period of time.

Figure 3 gives the Event Trace Diagram of the OMT dynamic model, while Figure 4 shows the Flow Diagram. Measurement of the process. As mentioned above, a preliminary analysis indicated that medians should be used in the workflow analysis model as a time estimate, while the interquartile distance should be used as a measure of spread. The statistical results showed no significant statistical differences in the medians for different branch location and type. For all variables the Mood test for the medians result a p-value of > 0.1. No need for a separated workflow analysis for different branch location and types has been identified. Redesign directions and 'to-be' process model. The examination of the workflow analysis model indicated that after the request for special terms has been reviewed at the proper level of hierarchy, the subsequent participation of the Organzation and IS Divisions causes a significant delay in the completion of the process. A very important issue is also derived from the observation that the process is currently initiated from the customer's request for new special terms. After approval has been granted, the new special terms are entered into the Bank's information system, along with their date of expiration. However, there is no process dealing with the direct handling of the existing special terms after they expire. The following directions for redesign were identified: Expiration of special terms (development of new batch process): Customer satisfaction can be raised mainly by automating the revision of the existing special terms after their day of expiration. The customer therefore need only be informed about the currently valid terms, without having to make any enquiries or applications unless special reasons necessitate the re-adjustment of the existing terms prior to their date of expiration. In particular, an every-day batch process is required in order to inform the Branch owning the account, as well as the customer, for

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the special terms expiration date, suggesting the necessary actions to be taken. Special terms update through branch transaction: A simplified version of the process should be sought, where final control and update could be performed with the least possible participation of different organizational units. In particular, the Organization and IS Division interaction might be replaced by a single notification to the Deposit Supervisor, who in turn is responsible for the special terms update through a proper transaction route. The transaction to be developed should also provide a display facility of the existing special terms. Evaluation of process changes. The removal of the Organization and IS Division from the process--along with the series of the corresponding information exchange--resulted into remarkable time and cost savings for the Bank. The process redesign resulted in the following modification of time and cost metrics: • The average time required for the final entry of the new special terms decreased from 11 to 8 working days (approximately 30% time reduction). This modification is quite important as the validity of new special terms may be of utmost short-term importance to the customer. • The cost of the whole process for the bank has also decreased by 30% of the initial cost. • The proposed automation of the special terms' update after their expiration would also eliminate the cost to the bank caused by the continuation of providing favourable special terms to a particular

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Banking and customer information systems: G N Mentzas

customer who is no more in a position to satisfy the Bank's interests accordingly.

Conclusions As it can be deduced from the abundance of case studies and the real needs of businesses, business process re-engineering is here to stay and will become increasingly important as a way for corporations to remain competitive. Process orientation, combined with contributions from IT, can yield tremendous performance improvements within companies. The focus of business process re-engineering on the "process" concept puts forth the need for consistent methods and techniques for the capture, representation and performance assessment of business processes. Such considerations are especially critical for the banking business, since banks also need to manage the transition of their costly legacy systems to modern Customer Information Systems (CIS). Therefore, what is needed is a simple, yet powerful, way to model both the information systems and the business part of a process in a unique manner. To implement such a view, the paper discussed the use of object-orientation for modelling the agents of a business process in terms of objects and representing the dynamic behaviour of objects through the message passing and concurrent execution of these objects within a process. However, the object-oriented modelling approach needs to be extended in order to add framework relations and cover the specificities of the business domain. The BROOM method was presented to satisfy this need. The use of the method added to the dimensions of the objectoriented model a suite of business-oriented issues, such as metrics, customer-orientation, etc. The method was applied to a re-engineering effort of a medium-scale bank and lead to significant results in terms of decrease of duration of processes; elimination of non-value adding steps; and reduction of manual tasks. The process changes within the re-engineering effort proved that the approach developed here generates advantages in a 2-fold manner; first a tight integration of dynamic information modelling aspects with business redesign issues (such as client-orientation and customer satisfaction, workflow co-ordination, productivity enhancement, etc.) is guaranteed; and second, quality improvement in modelling the business processes is enabled by supporting better control of modelling issues and enhancing the understandability of processes by process workers.

197