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December 24, 2013

Ad hoc Judgment to Comprehensive Fact Based Decision - OFSAA Profitability Management (Part 2)

Guest Post by
Imran Aziz, Senior Associate Consultant, Infosys

Having discussed the importance of profitability management for a financial institution and role of OFSAA Profitability Management (PM) in delivering the same in part 1. Now let us dwell little deeper into some of the vital features of OFSAA Profitability Management in this Part 2 of the two part blog series.

Let's begin to explore it by adopting a challenge. Assume a financial institution is looking forward to extract a value from aggregated source and perform arithmetic calculation and factor operations on it to distribute the balance to number of targets at one go.

Such operation or various types of operation can be performed in OFSAA PM with great flexibility using allocation rules. An allocation rule allows you to choose data from source and perform calculation on it using a driver to achieve the desired output. We will discuss about allocation rules in detail in the coming paragraph before that lets discuss on certain requisites. Looking data from various dimensions i.e. customer, product, channel, geography etc. gives a broader picture and a different insight. This need of the institution is fulfilled through OFSAA PM's seeded key processing dimensions like financial element, organization unit, GL etc. and its ability to accept user defined standard dimension. The combination of seeded and custom defined dimensions gives the user wider scope to define and analyze data from different angle. Design of custom defined Management Ledger is another important aspect that expands the room to play around with data. To appreciate its importance let us not forget that Financial Element that forms one of the important element in classifying data is not typically found in any General Ledger but in OFSAA PMs management ledger.

As mentioned earlier a feature that distinguishes OFSAA PM from its peer EPM application is its allocation rules. Most Allocation rules either distribute or aggregate balances using driver data. There are various types of allocations based on driver input like constant, leaf, static and dynamic. Given the scope of discussion in this forum we will try to explore few like dynamic and static allocation. A major difference between dynamic driver and static driver allocation is that the dynamic driver distributes data to the output by calculating driver on the run that gives real time picture whereas in static the driver data is fixed; each has its own usage in business world and preferred to be used based on client requirement. An example would be distributing ATM transaction cost amongst various centers based on number of ATM transactions (driver) that is carried out. The Dynamic allocation also has an advanced function known as distribution type against all other allocation types. Distribution type expands the scope of distribution in which the cost is to be bifurcated like for e.g. you would want to distribute an ATM transaction expenses to center A,B and C that has number of transaction as 100,400, 500. So using percent distribution method you could allocate 10%, 40% and 50% to each center or you would go with uniform distribution method if you want to distribute equal share of cost i.e. 33.33% across 3 centers.

Apart from some of the standard features discussed herein, OFSAA PM also has the ability to sync with some of the non-family member like Hyperion Essbase and produce advance multi-dimensional reporting using Profitability Business Intelligence (PFT BI). To recapitulate, custom defined dimensions, flexibility to play around with different types of allocation and its ability to harmonize with other applications makes OFSAA PM a comprehensive solution for decision making.

Ad hoc Judgment to Comprehensive Fact Based Decision - OFSAA Profitability Management (Part 1)

Guest Post by
Imran Aziz, Senior Associate Consultant, Infosys

With growing competition, globalization and increased product variants around the globe, innovation has become imperative. Time after time Financial Institutions have to bring in new products or services to sustain and grow. Most common questions that run across any Chief Executive's mind are - How much should the bank charge for the product/ service? Which segment shall we target? What % of cost shall we pass on to customers and eventually; is this going to contribute to the organization's profitability!!! The bottom line as we all understand looks very simple i.e. Profit = Revenue - Cost.

In most cases the job of deriving the right price is only the most visible part of the overall strategy, but the key to unlock the intrinsic profit lies in analyzing the components of cost and its allocation method for e.g. an activity based costing approach would give far more superior insights as compared to traditional costing for overhead allocation. When we talk about profitability, the challenge does not ends in only adopting the right costing approach but continues till we do the right analysis. As management is more concerned with broader objectives for the benefit of time and faster decision making, they are generally offered with aggregated data to look at 'Big Picture'. But have we ever realized that account level data is also equally important for decision making e.g. the bank wants to offer customized service to high value add customers.

Economic Value Added (EVA) is considered to be an important performance measure that compares adjusted operating profit against the total cost of capital. It is the surplus return earned by a firm after bearing the cost of capital. EVA states that the business should create returns at a rate over and above their cost of capital to be truly profitable. It is derived by deducting Capital charges from Risk adjusted net income and capital charge in turn is derived by combining series of cost components. Imagine what picture you would get, if your cost component is incorrectly allocated and over or under absorbed every time you calculate EVA for different Lines of Business.  

Through OFSAA's Profitability Management (PM) shared infrastructure and data model, financial institutions face the above discussed challenges proficiently. OFSAA's PM has rich allocation features that allow institutions to allocate ledger level data and aggregate account level data for numerous statistical and financial allocations. The tool supports unlimited number of dimensions and hierarchies that can be used to report data from different angle. Using OFSAAs dynamic driver, financial institutions can apportion expenses based on activity based approach and have an improved understanding in what way products, customers, channels etc. are contributing more to the organizations bottom line. With the wake of global credit crunch and implementation of Basel norms another test for banks is to comply with minimum capital requirement. As a result, banks use Risk Adjusted Return on Capital (RAROC) as a vital measure. With OFSAA multi-dimensional modeling and ability to synchronize and incorporate fund transfer pricing in calculations, institutions arrive at more appropriate numbers needed for capital allocation. At the outset, adoption of right cost management approach and OFSAA inherent features enables financial institutions take effective fact based decision instead of mere judgment. 

Look out for Part 2 of this blog series, where I will further detail out my views on leveraging OFSAA Profitability Management features to facilitate fact based decision making.


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