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".

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Tour de France 2015: Twins Simon and Adam Yates have a mountain to climb during Tour of duty

Twins have a mountain to climb during Tour of duty

Yates brothers will target the steepest sections in bid to win a stage in France
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life