Operational Processes and Operational Efficiency have been likened to any other asset that a firm purchases. For instance, the “Return on Investment” of operational processes is freely bandied about as if processes are like any other asset. In another example, “Process Mining” likens the artifacts of any process, it’s audit trail, to the ore of a precious metal. However, it’s viewed, it makes sense to think of these operational processes as assets in the asset manager’s portfolio; With any asset, there is a cost involved and overhead to ensuring that the investment delivers the return expected. What has been woefully lacking though, is the application of investment management discipline to the “asset” of operational processes. Most frameworks for operational efficiency come from industrial analogies. This means that as a company, the investment manager, is saddled with a view of their firm that applies to much larger firms that have, at best, a view of investments limited to the production of a good or the delivery of a service or a mining operation.
Asset Managers, and especially hedge funds, like their investors, are much more opportunistic. They may enter into special investments or deals that last only for a month or two. Each of these special deals may require different processes to ensure the proper measurement of the investment’s return as well as any inherent compliance or trade related requirements.
Asset Managers are best served by viewing their internal and external processes as simply a portfolio of assets each with different purposes. They should evaluate that portfolio of operational processes as they do any asset. For example, it’s not enough to evaluate the “Return on Investment”; instead they should ask the same questions as they do of any other investment in their portfolio.
1. What is the cost of the operational process?
2. What is the expected rate of return? How does the Operational Process deliver return?
3. What is the performance of the operational process? How do you measure the performance of the process?
4. What is the volatility of operational process?
5. What is the dispersion of the operational process if the same processes are repeated across multiple areas?
6. What are the operational processes hedging costs? What are its financing costs?
7. How are operational processes correlated with other processes?
8. What is the risk-free return of any operational process?
The investment management industry method for evaluating a portfolio of investments is far more sophisticated than any large industrial company, applying some of these concepts to their operational processes yields better application of t