The Birth of Financial Management

In an industry that produces little more than bits and bytes (albeit in gargantuan quantities), the crown jewels of the financial services industry remain the data and documents that are either kept locked up in the data center or unreachable on someone's desktop. Frequently, little is done to share these individual digital assets or tie them together into something that creates greater value for the organization and its customers.

While the best practices surrounding business and quality management have been making their mark on operational excellence for more than 50 years, not all financial institutions have participated equally in taking advantage of these techniques.

The Fathers of Financial Management

From an historical point of view, one could argue that this all began with the renowned—but frequently overlooked—Frederick Taylor, back in the early 1900s. Dr. Taylor was the father of scientific management. While his name may not come to mind when introducing the subject and principles of knowledge management, Taylor's principle of extracting common elements from processes made him one of the earliest proponents of replicable and reproducible best practices (although that term was not used frequently in the early 20th century).

Somewhat later, others such as W. Edwards Deming and Peter Drucker took applications of quality and the concept of a knowledge society to new dimensions. Deming applied theories of total quality management that literally helped forge Japan into an economic superpower. And Drucker, a stock brokerage trainee when he was a young man in Frankfurt before he came to America, continually challenged how American corporations and their managers built commercial empires with knowledge workers.

In rediscovering these patron saints of business management, we can pose a myriad of questions as to their cause and effect on the captains of industry and the premier financial institutions of the day:

• Did Taylor really have any effect on J.P. Morgan while they were both still alive?
• What relevance was Deming to the Merrill Lynch organization?
• What influence did Drucker have on the young financial minds of the time while he taught at NYU for 20 years? Did he shape in any way the style of Donaldson, Lufkin and Jenrette, the former famous NY investment bank now part of CSFB, with whom he was a consultant?

Since all three of these innovative geniuses of management theories are deceased, the answers will probably remain obscured. But some of the questions can be answered through what has transpired in the financial industry over the past two decades.

Most importantly, there clearly has been a movement in the financial services industry over the past 10-15 years to compare one's company with world-class operations, to develop methodologies to cross-pollinate and connect business units, and ultimately to capture and bottle up and package best practices.

Information and Quality Awards

Over the past 20 years, the industry woke up to the intense competition that was sprouting up everywhere around the globe. One of the programs that took root in the US was the national Malcolm Baldrige Award, which still awards companies for best practices around quality, Six Sigma and customer satisfaction. Named after the former secretary of commerce under President Reagan, the program gave its best shot at being impartial to all applicants, while simultaneously running each one through a gauntlet of questions and audits on how it achieved its stated goal of best-in-class customer satisfaction and world-class business methods.

As part of that program, a team of seven examiners reviewed an applicant company for one week and then prepared a report for a panel of judges to review and determine who would be the eventual winner. The criteria for best-in-class quality covered seven different categories, matching up to the number of examiners on a team. Coincidentally, Section 4 of the award is titled, Measurement, Analysis and Knowledge Management. That's right—knowledge management is named directly in one of the Baldrige sections. Section 6 is dubbed Process Management. It seems they constructed a program with the right ingredients, right from the start.

Two financial services companies that won the quality award included AT&T Universal Card (the credit card company that AT&T started, now part of CitiGroup) and Merrill Lynch. All three of these companies reflect brands that are associated with the highest standards of customer service and quality.

Let's look at Merrill Lynch and their Credit Corporation (MLCC), which won the award in 1997. With only a small fraction of the total employment at Merrill, the MLCC focused on home-equity credit lines. True, it's not the sexy equity-trading environment where Merrill still makes the majority of its money, but the MLCC services a portfolio of over $10 billion and thousands of clients.

To guarantee that their market research remained current, MLCC continuously updates information on their prospective clients and what they are looking for in equity services and products. The MLCC modeled more than 18 of its business processes and created a systematic business planning process program to capture what it does, how it does it and what that means to the bottom line. And, as in most companies, not all of the Merrill Lynch companies equivalently indoctrinated themselves into this data management methodology and process improvement cycle.

Driven by Technology

During this same period of time, financial institutions and banks such as CIBC and Chase were actively pursuing knowledge around world-class practices as applied to their technology deployment. They were mapping their processes, at least internally, and then comparing them to other companies in non-financial industries. Using a variety of technologies, these techniques are used to reduce costs and improve service to their customers; they were beginning to employ techniques known as "benchmarking." Much of this actually sprang from the ability to use technology to drive new financial products for their customers, while capturing vast amounts of information and knowledge about these same customers.

Thus, technology itself has been a tremendous enabler to improve process and information quality and data accessibility. Innovations in storage technology and computers have allowed us to retain and manage vast amounts of data. This is particularly important to an industry such as financial services where data is growing nearly 100% year over year, and where near real-time access to that data is frequently critical. Improvements in search-engine technology have enabled intelligent capturing of important aspects of information that can be reused for a multitude of business purposes. Further, today's software programs allow businesses to simultaneously map their workflow while tracking the information that is being created at every step along the process journey. And lastly, through the auspices of business-intelligence engines, this compendium of information can ultimately be used for better decision making, whether to improve the underwriting results and returns of loans or the underwriting of insurance risks.

Improved Processes

In another area of financial services over the past decade, we've seen an emphasis on mapping and improving the back office processes in capital markets, and subsequently today's insurance and banking market. The term that was coined for this is "straight-through-processing (STP)." STP arose from the international industry demands for the entire end-to-end trade placement and execution process to be completed entirely electronically, from order through reconciliation, all within 24 hours. While this was not a conscious effort to look at internal process improvement for the sake of quality or knowledge management, what we've been