B2B Integration could Accelerate Repayment of Taxpayer Dollars from AIG and Others

Public outrage towards Wall Street reached new heights last week with the announcement of $165M in bonus payouts by AIG to its Financial Products Group.  American citizens are growing increasingly outspoken about their desires to see greater accountability amongst Wall Street executives for the financial crisis plaguing the globe.   And US citizens are seeking stronger resolve from US government officials to ensure that taxpayer funds are being appropriately utilized by the recipients of TARP assets.  

How can B2B integration help the situation?  Unfortunately, B2B integration cannot reclaim any of the billions lost by Wall Street firms in the past 18 months.   Nor can B2B be used to control executive compensation policies.  But integration could be used to accelerate repayment of the government loans.

Every major financial institution in the US has implemented B2B integration to improve the efficiency of processes such as securities trading, insurance distribution and corporate purchasing.  However, many of these financial institutions have only achieved successful automation of a subset of their business processes and only with a minority of their business partners.  As a result, significant quantities of manual processing still occur via paper-based or e-mail oriented workflow processes.  Exploiting B2B integration technologies to their full potential in the TARP-funded government entities could result in hundreds of millions of dollars of savings.  Lower expenses results in greater net income and cash flow, which could be used to repay the loans, subsidized by US taxpayers at a faster rate. 

Source: Associated Press

Listed below are three examples of business processes which could benefit from further automation through B2B integration:

Insurance Distribution

Many of the firms receiving government aid such as AIG are best known for selling life, auto and home insurance policies to individual consumers.  Insurance policies are typically not sold directly by the firm whose name is on the policy.  Instead a distribution channel of captive and independent sales agents is utilized to sell policies to individual consumers.  To conduct their day-to-day sales, claims processing and policy management activities, the agents must be able to communicate consistently and electronically with the insurance carriers.  Over the past few decades the interactions between the distribution channel and the carrier have been highly automated through specialized EDI networks such as IVANS and insurer-sponsored web portals.   While higher levels of automation could be achieved in the agent community, the bigger challenge for insurers is B2B integration with corporate customers for their commercial policies. 

Corporations buy insurance to cover the vehicles in their corporate fleet; to protect properties they own against damage and to compensate workers for on-the-job injuries.  The processes for rating and issuing commercial insurance as well as for policy maintenance, claims and billing are highly manual at most firms.  In addition to buying liability insurance, corporations also negotiate with insurers to purchase group benefit plans for their employees.  Such benefits might include dental and vision coverage; long term care policies; and supplemental life insurance policies.  To underwrite such group benefits policies, insurers need an accurate accounting of the employee population and their demographics.  Unfortunately, very few insurance companies have the ability to integrate with the corporate human resources applications which houses the employee data.  As a result, there is a cumbersome, costly and highly error-prone process needed to perform an activity as simple as collecting employee census data.  These are just a few of the examples of how greater efficiencies can be generated in the insurance sector.

Securities Trading

All of the financial institutions receiving government aid are in the business of investment management and securities trading.  Some financial institutions act as money managers on behalf of their individual or institutional clients.  Other firms offer brokerage services to conduct actual trading of securities on electronic exchanges and over-the-counter markets.   And some of the institutions act as custodians, which perform recordkeeping and safeguarding of asset portfolios on behalf of clients.   In fact, most of the firms receiving TARP funds act provide two or three of these services.   Most of us have the perception that trading, clearing and settlement of securities is a highly automated process.  And for certain processes this is true such as the actual order execution on the NASDAQ market.  However, much of the activity before and after the trade is not as automated as it could be.  In fact, the capital markets are still highly dependent upon e-mail, fax and phone based conversations to perform trading today. 

Source: LA Times

Ideally, each securities transaction would enjoy straight-through-processing from the time of order execution to the final transfer of funds.  For example, a mutual fund portfolio manager seeking to buy or sell 1000 shares of GE should be able to route trade instructions electronically to their broker.  After executing the order on the appropriate OTC market or exchange, the broker should send an electronic confirmation with the details of the trade back to the mutual fund manager.  The mutual fund’s custodian, which safeguards the records for the mutual fund, should be carbon copied on the trade details.  The custodian can then electronically facilitate the clearing and settlement process with the seller of the GE shares.  Upon settlement, funds are exchanged between the buyer and seller electronically using a wire transfer or automated clearinghouse system.   Many of the larger firms have implemented B2B integration technologies using FIX and SWIFT standards to automate these securities trading activities.  However, there are numerous small and mid-size firms acting as buyers, sellers or role players in securities trading, which have not automated processes.  Even amongst the largest firms there remains a high degree of variability in the usage of technology standards and automation of business processes.

Spend Management

All of these firms, whether they originate sub-prime mortgages, trade asset-backed securities or engineer credit default swaps, have a need to procure goods and services to run their businesses.  Through smarter purchasing processes financial institutions can save millions per year in indirect materials expenses.  Indirect materials purchases might include physical goods such as office supplies, computer equipment and conference room furniture as well as services such as telecommunications, utilities and advertising expenses.  E-procurement applications enable financial institutions to optimize the supplier selection process with techniques such as electronic RFPs and reverse auctions.  In recent years, specialized, category-specific spend management applications have emerged to optimize purchasing strategies.  For example, specialized legal spend analysis applications can ensure that financial institutions are not being overbilled by the expensive outside law firms they employ.  And energy spend management can identify waste and inefficiencies related to heating, cooling, lighting and powering commercial office buildings.  Commercial cards have become popular for travel and entertainment, temporary staffing and fleet operations.  Card issuers can help accounting staff by providing detailed data for each individual purchasing transaction.  The data can be analyzed to identify patterns of abuse or maverick employee spending.  Of course, e-procurement, spend management and commercial cards are all powered by B2B integration.  While most financial institutions have implemented all of these technologies to some degree.  However, very few conduct e-procurement with 100% of their vendors, 100% of their spend categories or 100% of purchases.  In fact, the average firm probably has only fully exploited spend management technologies for 50% of their purchases.