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How best to model profitability for financial institutions? (Part-2)

Guest post by
Vandana Vasudev Nayak, Consultant, Infosys


In continuation of our view on profitability measurement being one of the critical activities for Financial Institution to survive in today's volatile environment, let's focus on technology to enable better profitability management. 

Profitability modeling requirements of institutions for typical usage is delivered by out of box products like Oracle, SunGard etc. Within Oracle suite itself there are two solutions namely Oracle Financial Services Profitability Management (OFSPM) and Hyperion Profitability Cost Management (HPCM) providing solution on profitability modeling but in different context.  For non-financial institution, HPCM is only option but for financial institution both of them have a play in overall client architecture. With due consideration, investment in technology is a strategic move and is driven by multiple factors and cannot be an isolated decision.

In this part, two of the available profitability applications, Oracle Hyperion Profitability and Cost Management (HPCM) with Oracle Financial Services Profitability Management (OFSPM) have been evaluated for needs of the financial institutions considering the business criteria.


Hyperion Profitability Cost Management

Oracle Financial Services Profitability Management

Basis for analysis

HPCM is the suggested solution where the business need is to allocate costs based on consumption and activity based analysis. .

OFSPM is the best suited application for Risk Based profitability analysis with emphasis on net interest margin analysis sharing common data model which allows leveraging on the funds transfer pricing results for allocations.

Approach for profitability modelling

When the approach is based on Cost Development (Standard Profitability model) and Cost and Revenue (Detailed Profitability Model) supported by scenario analysis, HPCM is the recommended solution.

When the profitability calculations are based on Risk-Adjusted Performance Management (RAPM) approach, OFSPM is the right solution. It supports both Management (Ledger Level) and Financial Accounting (Customer Account Level) models.

Granularity of data

When the granularity of data is more inclined to segment level, HPCM is suitable as profitability modelling is supported using multi-level allocations.

OFSPM is advocated solution on data processing front as it provides the flexibility to model and allocate data at both financial (instrument level processing) catering to external regulatory requirements and management (ledger) data which focus on customer, risk adjusted basis of profitability analysis across various dimensions.

Profit Drivers

When the business requirement is to look for specific driver measures like volume and rates with associated formulae, HPCM provides the right framework to build the required measures applicable to both cost and revenue values, and reusable with many values.

When the focus of the financial institutions is on key performance measures including Return on Total Assets, Return on Capital Employed, RAROC and Capital Analysis, OFSPM is the best suited solution. It supports of out of the box profit drivers for financial and management level profit analysis with in-built calculations.

In part three, the comparative analysis will concentrate more on the technical aspects of the two products which will support better profitability management process.

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