Smooth operators wage war on risk

The impact of the unforeseen is dawning on the financial sector, writes Richard Phillips

Management consultants are flying a new banner of "operational risk" to woo clients in the financial sector.

Following recent high-profile disasters in the sector - Barings, the Sumitomo copper scandal, and Deutsche Morgan Grenfell's unit trust debacle - there is growing recognition of the impact on business of "the unforeseen".

In the above cases, the problem was fraud, greed, or deception. But the essential nature of the problem, argues the consultancy arm of accountants Price Waterhouse, is not dissimilar to the infamous Hoover air fare fiasco, the Eurotunnel fire or the breakdown in London ambulance's computer operations two years ago. They all represented occurrences outside the normal ambit of a company's routine business.

More recently, Digital Equipment Corporation was fined $5.7m (pounds 3.4m) last week for its failure to inform customers of the potential for repetitive strain injury (RSI) from using its keyboards.

Price Waterhouse has compiled a worldwide database of companies that have encountered severe operational failures in the past three-and-a-half years, which has either put them out of business or burdened them with crippling losses. The sum of money involved totals of $700bn.

Trying to pin a definition on the subject is not so straightforward, however. An ICI spokes- man said: "Surely this is part of day-to-day management, particularly in an industry like ours? Like many of these fashionable theories, it's actually old-fashioned common sense." He added that much of the move may reflect financial services catching up with their manufacturing brethren.

Certainly it seems that financial services is the sector where the concept has won most converts. Barclays Bank now has a dedicated director of group operational risk, Dr Paul Dorey. "Our interest, from the board down, was to see our business in a total risk context," he said. To a bank, credit risk - the likelihood of a loan defaulting - was part and parcel of running the business. Market risk - potentially catastrophic swings in currency or derivative markets - was also well understood. Of these three risks, operational risk accounts for 15 per cent of the bank's total risk exposure.

Barclays defines operational risk as "the risk caused by failures in operational processes or the systems which support them", and includes "errors, omissions, systems breakdown, natural disaster and action such as terrorist attack." The bank went to Shell and the nuclear industry for tips. "These businesses have been dealing with these sorts of issues as part of their day-to-day routines for decades," said Dr Dorey.

Other companies are coy about revealing their efforts in this area. Chris Frost, at Price Waterhouse management consultants, said: "Companies who are introducing techniques for operational risk see themselves as gaining a competitive edge."

To the charge that operational risk is no more than an example of the Emperor's new clothes, he accepts this is often the attitude from companies when they are first approached. "But when we point out that this is an important element in corporate failure, they tend to sit up."

Some banks in the City have yet to wake up, however, to the warning posed by the Barings disaster.

As recently as July, Michael Foot, the head of banking supervision at the Bank of England, wrote to City banks warning that many of them were "still... blurring responsibilities between trading operations' front and back offices".

PROMOTED VIDEO
Sport
Neil Warnock
football'New' manager for Crystal Palace
News
peopleGerman paper published pictures of 18-month-old daughter
Arts and Entertainment
'A voice untroubled by time': Kate Bush
musicKate Bush set to re-enter album charts after first conerts in 35 years
Sport
Angel Di Maria poses with Louis van Gaal after signing for Manchester United
sport
Arts and Entertainment
BBC series 'Sherlock' scooped a hat-trick of awards on the night. Benedict Cumberbatch received the award for Actor, Miniseries or Movie ('Sherlock: His Last Vow') while Martin Freeman won the award for Supporting Actor, Miniseries or Movie. Neither actor was present to collect their awards
tv
Life and Style
tech
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Client Services Executive / Account Executive - SW London

£23000 - £26000 per annum: Ashdown Group: Account Executive / Client Services ...

PA to CEO / Executive Secretary

£36000 - £38000 per annum: Ashdown Group: Executive PA to CEO & Executive Dire...

Generalist HR Administrator, Tunbridge Wells, Kent - £28,000.

£25000 - £28000 per annum: Ashdown Group: Generalist HR Administrator - Tunbri...

Management Accountant

£30-35k + Excellent Benefits: Guru Careers: We are seeking a Management Accoun...

Day In a Page

Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?
Rachael Lander interview: From strung out to playing strings

From strung out to playing strings

Award-winning cellist Rachael Lander’s career was almost destroyed by the alcohol she drank to fight stage fright. Now she’s playing with Elbow and Ellie Goulding
The science of saturated fat: A big fat surprise about nutrition?

A big fat surprise about nutrition?

The science linking saturated fats to heart disease and other health issues has never been sound. Nina Teicholz looks at how governments started advising incorrectly on diets
Emmys 2014 review: Can they genuinely compete with the Oscars

Can they genuinely compete with the Oscars?

The recent Emmy Awards are certainly glamorous, but they can't beat their movie cousins
On the road to nowhere: A Routemaster trip to remember

On the road to nowhere

A Routemaster trip to remember
Hotel India: Mumbai's Taj Mahal Palace leaves its darker days behind

Hotel India

Mumbai's Taj Mahal Palace leaves its darker days behind
10 best pencil cases

Back to school: 10 best pencil cases

Whether it’s their first day at school, uni or a new project, treat the student in your life to some smart stationery
Arsenal vs Besiktas Champions League qualifier: Gunners know battle with Turks is a season-defining fixture

Arsenal know battle with Besiktas is a season-defining fixture

Arsene Wenger admits his below-strength side will have to improve on last week’s show to pass tough test
Pete Jenson: Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought

Pete Jenson: A Different League

Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought
This guitar riff has been voted greatest of all time

The Greatest Guitar Riff of all time

Whole Lotta Votes from Radio 2 listeners
Britain’s superstar ballerina

Britain’s superstar ballerina

Alicia Markova danced... every night of the week and twice on Saturdays
Berlin's Furrie invasion

Berlin's Furrie invasion

2000 fans attended Eurofeurence
‘It was a tidal wave of terror’

‘It was a tidal wave of terror’

Driven to the edge by postpartum psychosis