By DAVID HATCHER: Senior vice president Logica Inc.

Reengineering should start with a clear statement of an organization's business vision - a definition of the goals to pursue. An organization's vision identifies its activities and the processes needed to support those activities, along with the support systems required by the processes.

The profitability of commercial lending is threatened by decreasing revenues and increasing costs. In response to competition between banks and alternative sources of capital, credit agreements have grown more sophisticated as deals are tailored to the needs of more knowledgeable borrowers.

This raises processing costs as operational groups try to administer these sophisticated lending agreements using older, "legacy" applications with limited functionality.

They must work around these limitations using expensive and error-prone manual procedures.

Profitability goals spark interest in cross sales of bank products and services. Unfortunately, separate operations and unintegrated legacy systems mean that the vision of integrated banking is difficult to achieve.

Increasing profitability requires attacking business issues, seeking both revenue enhancement and cost containment. Addressing back-office processes alone may deliver cost reductions, but will miss new business opportunities. Business process reengineering can help financial institutions address both sides of the profitability equation.

For commercial lending, operational processes begin when bank representatives visit customers. Too often, reengineering project managers, driven by a back-office perspective, decide that representatives exist to gather the data and documentation required to book a loan.

As a result, they conclude that the best way to increase the productivity of operational staff is to delegate their data entry tasks to relationship managers.

We believe that bank representatives visit customers to sell services and build relationships - not just to lend money, but to sell all offerings.

This business perspective highlights revenue opportunities. For example, consider the links between cash management and commercial lending.

Viewed from the back-office perspective, cash management and commercial lending are separate services with independent business processes and systems. Viewed from the business perspective, they are interrelated.

At the business level, a bank-to-customer relationship exists. Bank representatives need to know a customer's business and the history of interactions with the organization, not just the balance due on a loan.

Knowing the customer and the relationship can provide the competitive advantage needed to win the customer's trust and future business.

At the operational level, interconnections between supporting systems can create value for customers. For example, both cash flow and available credit are sources of working capital.

Integrated access to cash position and available credit can help customers make better financial decisions, and can make the bank a more attractive source for both services.

This business perspective removes the "blinders" of existing procedures - opportunities can be identified that may be considered impossible because of existing procedural or system limitations.

Recognizing revenue-enhancing opportunities does not preclude the cost-reduction benefits associated with traditional back-office process engineering. Information technology staff have always recognized the productivity to be gained by capturing data at its source - in front-office operations.

Unfortunately, front-office staff have historically resisted "data entry" responsibilities, citing minimal benefits for assuming back-office responsibilities.

By involving this staff in the reengineering process and creating processes that support their activities, the bank can gain the benefit of point-of-origin data collection.

A look at revenue-generating issues can also identify process changes that enhance existing offerings. For example, cash flow in excess of corporate needs can be "swept" into repayment of outstanding line-of-credit balances, reducing a customer's borrowing costs.

Working from the back-office perspective can create risks. Focusing just on cost reductions can yield processes that constrain a bank's revenue-generating capability.

For example, restricting the complexity of credit agreements would make processing more efficient. Unfortunately, it would also reduce the organization's competitiveness in the credit marketplace.

A successful commercial lending reengineering project faces multiple challenges. Staff fears can create internal resistance to the reengineering process and its results.

Legacy lending applications can be active barriers to reengineering because they "hard-code" existing procedures into their user interfaces.

The reengineering effort itself requires management that must remain focused on achieving results rather that on the process itself.

Reengineering commercial loan operations for increased profitability requires resources to meet these challenges:

* Active participation of lending executives. The bank's vision of its lending markets, strategies, and tactics must drive every aspect of the reengineering effort.

* Meaningful participation of knowledgeable staff. Only the members of credit, lending, and loan processing staff who are too important to be spared from their day-to-day duties know enough to help make the situation better.

* Focused participation of information technology staff members. Their knowledge of legacy lending systems and tools is important input. However, their existing expertise should neither limit the vision nor define new approaches.

* Lending-sensitive facilitation. Business process reengineering is a discipline itself, a process that requires knowledgeable management.

A facilitator that has both lending and reengineering expertise can manage the process and contribute to the solution.

Acquiring expertise is the first step toward increasing commercial lending profitability through process reengineering.

With expertise, a bank can set reasonable expectations for the project, define and allocate required resources, manage the process, analyze results, and plan the implementation of new processes and systems.

When acquiring expertise, look for organizations that can deliver the expertise that you need: (1) market exposure that can help identify new business opportunities; (2) business process experience that can facilitate your reengineering; (3) banking experience that can contribute to the definition of new processes and systems; and (4) systems integration experience that can identify "off the shelf" solutions that avoid the risk of custom development.

Most important, look for organizations that can transfer methods as well as deliver results. At the end of the project, you should have both a new business process and a staff with new management skills.

Mr. Hatcher is senior vice president and general manager of retail banking and commercial lending at Logica Inc., Lexington, Mass. Focusing just on cost reductions can yield processes that constrain.

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