Smooth operators wage war on risk
The impact of the unforeseen is dawning on the financial sector, writes Richard Phillips
Sunday 15 December 1996
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".
- 1 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 2 Mother of newborn Baby No 59 trapped in sewer pipe told Chinese police she 'heard crying' when she raised alarm
- 4 Tennis fan suing Australian Open organisers for 'failing to shade spectators' during Murray match
- 5 This crazy skiing video will leave you feeling queasy
Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
AirAsia QZ8501: Black box reveals warning alarms 'screamed' before crash, as more bodies recovered from near fuselage of jet
Rob Lowe hits out at White House decision not to meet Israeli leader
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign
British Muslim leaders outraged after Eric Pickles says followers of Islam should 'prove their identity'
UK terror fears: My jihadist son returned from Syria mentally scarred – now he is being ignored
Nigel Farage: NHS might have to be replaced by private health insurance
Billy Crystal: 'Stop shoving gay sex scenes in my face'
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
iJobs Money & Business
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...
£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...
£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...