Operational risk management with process control and business process modeling

Deborah Cernauskas and Anthony Tarantino

Journal of Operational Risk

Abstract: ABSTRACT We propose an approach for the modeling, monitoring and control of operational risk in financial institutions based on a methodology that integrates business process modeling with statistical and engineering process control. Business process management and business process modeling are terms in popular use and are based on the use of electronic workflows as tools to improve processes – often defined as greater efficiencies such as lower costs and shorter cycle times. The same processes can be effective in reducing operational risk exposure when integrated with statistical and engineering process control (EPC). Process control is a discipline that deals with monitoring, adjusting, and controlling the output of a process through the use of various methods, procedures and algorithms. Although control theory is more commonly associated with manufacturing, the methods, procedures and algorithms can be transformed and applied to improving the quality of and reducing the losses associated with the business processes of any firm. We demonstrate the integrated approach with examples of common financial institution business processes. Business process management (BPM) and EPC have been in widespread use for many years along with industry accepted best practices for each. When combined, they represent a next generation technique in operational risk management.

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