In the banking industry, we know that account reconciliation systems will eventually drift out of compliance. When initially implemented, central reconciliation teams are typically the ones who have the most in-depth knowledge about the reconciliation process and accounts.
Their understanding often leads to a well-documented and understood process. These processes are then value stream mapped into highly optimized tolerance (HOT) processes which are automated by the account reconciliation systems. Once automated, these HOT Process are refined over several cycles and establish themselves as highly trusted reconciliation processes.
Set It and Forget It
Central reconciliation teams are taught how to use the systems during implementation by experts, who also help create the HOT processes for automation.
During the process, these teams learn and understand deeply how the systems works, how to operate it and how to maintain it over time.
With instructor and expert-led training along with personal experience, these teams are the institutional experts in account reconciliation that possess a bridge of understanding from the past operating state to the new operating state. A “set it and forget it” mentality becomes the normative operating for the central reconciliation teams.
Sharing the System With Other Teams
Once central reconciliation teams are established and the system has settled into operations, other teams are offered an opportunity to use the system.
These teams have less account reconciliation responsibility and accountability than the central recon team, yet they desire the benefits of the automated system. To learn the system, these teams rely on documentation, online instruction, trial and error and guidance from the central reconciliation teams.
These other teams are a self-organizing system (SOS) that are doing the best they can with what they know, without the benefit of expert guidance or training. They will get the system to work for them, but often bring a lot of reconciliation overhead, poor data integrity and little structure.
When looked at individually these SOS processes seem minor, but when examined collectively across the institution,
they are often major – and sometime represent more account reconciliation than the central reconciliation.
HOT and SOS Processes Within Account Reconciliation
Highly Optimized Tolerance (HOT) processes are very robust, operating daily with little to no intervention. Small changes in the process are tolerated well and it keeps humming along.
Change events cause problems for HOT processes such as:
- a systematic change to the process
- reorganization
- major system upgrades
- mergers and other events
These can disrupt the process to such a degree that it stops functioning correctly and must be redesigned, tested and reimplemented.
Self-Organizing System (SOS) processes:
- retain a great deal of manual intervention to operate correctly
- little changes are very disruptive
Staff needs to intervene to correct the system, and as a result, they never enjoy the full benefits of a high functioning system. Conversely, high impact system changes are well tolerated. These SOS process teams are accustomed to tinkering with the system, and a major change is well absorbed.
Most institutions have a mix of both HOT & SOS processes automated in their account reconciliation system and as a result, at the institutional level they experience all the benefits and problems.
The Ups and Downs of HOT and SOS Processes
Once implemented, account reconciliation systems enjoy a bathtub curve reliability.
During implementation and for several cycles, problems can occur which result in adjustments and corrections to the system until it settles down into a state of trusted reliability. This trusted state can last for years – perhaps even decades.
However, account reconciliation systems tend to drift into a critical state over time based on incremental changes in the organization such as regulations, constant tinkering, and technology upgrades that contribute to a mounting incoherence within the system.
Account reconciliation systems rarely experience a technology system failure. A failed account reconciliation systems means a collapse in confidence and trust.
How Does Failure Occur Over Time?
The primary goal is to reconcile so that when exceptions and outages do occur, the teams’ immediate action is to seek resolution to the exception or outage immediately. A monetary impact tolerance is used to make the process efficient.
Many minor monetary reconcilement exceptions are never researched or analyzed.
Some exceptions are so common that workarounds were created to address them with no understanding of the root cause. As a result, data integrity degrades over time as discipline slips and exceptions are tolerated.
Some groups revert to manual reconciliation and forced entries.
Over time, the system becomes less trustworthy, and confidence erodes.
Requiring an intervention can result in one of four options:
- Start Over
- Hand Over
- Start New or
- Overhaul
Start Over
Start Over involves keeping the existing technology and reimagining the whole reconciliation ecosystem from the ground up.
What is involved:
- an institution-wide effort requiring significant resources, time, and capital
- it has a lower technology risk and cost
- experts are brought into every reconciliation team to map out the reconciliation process at the account level.
- the entire system is redesigned as a HOT process and starts over
A Start Over is often termed “fixing the engine while in flight” and is the riskiest of all options. Why? Because Start Over is redesigning a production system while in use and any disruption could cause a production outage, reputational and compliance risks.
Hand Over
Hand Over is moving the reconciliation operations over to a managed service.
The hand-over process is driven by the expert service provider. The institution will be required to detail all its current processes and redesign them to fit the managed serviced provider’s models and practices.
The institution remains accountable for reconciliations – but not responsible. The problems will go away, and the institution’s reconciliation teams will have to conform to the service provider’s disciplined approach.
The downside? Over time, the institution will lose its institutional knowledge of account reconciliation and be unable to bring the capability back in house. It is also difficult to move to another reconciliation service. The price of solving the problems is being trapped in a relationship where the price only goes up over time.
Start New
Start New involves creating a new system using the state-of-the-art technology and building the new system while the old system still operates.
While this is the most expensive option and takes time to implement, it has many advantages for the institution. Fall back system is the production system.
The new system will have all the industry-best capabilities and all the teams will have to reimagine reconciliation processes. The whole system will be reimagined from the ground up.
Disadvantages? There is the risk of project overruns in time and budget. Ultimately, the anticipated benefits may no longer warrant the cost. Additionally, It can be a disruptive technology project that affects other technology projects.
Overhaul
Overhaul is the least expensive and lowest risk option. It must be pointed out that all the risks associated with the above options must be fully understood by executives for the Overhaul option to work correctly.
Overhaul requires governance and disciplined accountability that may be uncomfortable to organizations, leadership, and staff. It requires additional work at all levels.
An overhaul uses manual process, automated exceptions, and outages as symptoms to a root cause of potential system failure. All manual processes must be documented with valid reasons for non-automation and approved as an exclusion by governance. No matter what the cost, reconciliation exceptions and outages must be documented, researched and have a root cause. Each exception and outage is treated as a defect with its own business priority and governance severity rating.
Ownership is assigned to the exception with an expected root cause analysis and resolution. On a regular basis reports are issued describing expectations/outages by organization and personal ownership. Volumes, opening, closing, root cause analysis, resolutions are all documented and reported. Each organization is held accountable to their progress in resolving root causes as well as having to reconcile.
This process requires diligence and dedication from all those involved in the overhaul process.
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