Development

The Efficient Process Frontier

The efficient frontier is defined as “… the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.” https://www.investopedia.com/terms/e/efficientfrontier.asp

In the same fashion, processes inherently have a risk v. value calculation

The “Efficient Process Frontier” is the set of optimal processes that offer the highest expected value for a defined level of risk or the lowest risk for a given level of expected value

In applying the concept of “efficient frontier” to operational processes, we need to define the risk and return our “portfolio” of operational processes

The “Risk” of an operational process is a combination of the dispersion of the timing, process steps, manual intervention, accuracy, and finally, the success of a process relative to the mean of those values. In effect, it is the standard deviation to the measurements of not just the success of the process but its attendant sub-processes, accuracy, and timing. The “Risk” of processes may be weighted differently based on time, number of steps, overall success based on their inherent value to the firm

The Return of an operational process is determined by its overall value to the business of the firm; namely, providing investor value in terms of investment return, risk, and transparency.

The efficient frontier of any operational process is the set of optimal processes that offer the most business value with the lowest risk as weighted for timing, steps, or accuracy.

Operational Processes with an efficient process frontier can range from Compliance and Portfolio Risk to Trading and Accounting.

The typical end of day Profit and Loss reported by the operations group of an asset manager to the Portfolio Manager demonstrates the risk v. value tradeoff.

For example, the risk in this context might be a combination of the risk of inaccuracy of the report  v. the reward to the portfolio manager in being able to see timely information. Timeliness, accuracy, and value are all elements of the efficient process frontier equation. Does the Profit and Loss tolerance need to be less than 1-basis point? 5-basis points? How much longer does it take to verify the end of day Profit and Loss for a 1-basis point difference v. a 5-basis point difference? These are questions that the efficient process frontier can answer. At Ryan, we have developed a unique formula to answer these questions and provide the optimal efficient process frontier for any process.