31 March 2008

Volatility: Enemy #1...

Organizations implement Operational Risk solutions to lower "volatility" in earnings growth and return on capital. The focus on volatility is because no institution likes to see peaks and valleys in their earnings or their return on capital. A steady and consistent growth curve without "Volatility" is the goal by many steadfast organizations.

Contrary to the goal of minimized "volatility" there are also those who feed off of the chaos and the large swings between these highs and lows in the marketplace and with specific companies in vital sectors of the financial economy. Will a Blueprint for Regulatory Reform be the answer?

As a hedge fund investor, can you explain what the strategy is for your investment fund? Do you know what your money is being invested in? Does your hedge fund manager provide transparency on calculating your return on funds invested? What was the reason you invested in alternative investments to begin with?

Carrying this analogy to the operational processes within your organization, the goal is to keep the processes running smoothly. When people or systems deviate from the agreed upon "Rule Sets" then change ensues along with the volatility of the performance measures. Errors, Omissions and systemic "glitches" are the catalysts to volatility that creates fear, uncertainty and doubt. Do you understand the Math? When the process gets to this stage and people don't trust the rules anymore, you are on the brink of a failure and impending loss, in dollars or peoples lives.

Operational Risk Management is a discipline that is emerging in corporate ranks because it has already proven that it saves lives. The regulators and inspector generals are going to demand it. The "Rule Sets" of playing business in the financial, health care and energy sectors are not the only ones being subjected to this increased scrutiny and renewed focus on OPS Risk. Now the Defense Industrial Base (DIB) and the Defense Department are under increased oversight at the highest echelons of the Pentagon as a result of a failure in Operational Risk Management.

Last week, the Department of Defense learned that four non- nuclear nose cone assemblies and their associated electrical components for a ballistic missile where mistakenly shipped to Taiwan in the fall of 2006. These items were originally shipped in March 2005 from F.E. Warren Air Force Base in Wyoming to the Defense Logistics Agency warehouse at Hill Air Force Base in Utah. There are no nuclear or fissile materials associated with these items.
Upon learning of the error, the U.S. government took immediate action to acquire positive control of the components and arranged for their safe and secure recovery to the United States. These items have now been safely returned to the United States.

Lessons learned are being discussed in the ranks of the U.S. Treasury Department and the Department of Defense all relating to the failure of people, processes, systems and or external events. Operational Risk is all around us and now ready for prime time focus in terms of strategy execution, implementation and measurement.

Whether you utilize Operational Risk Management (ORM) in the Defense Industrial Base or in the Financial Services sector it's important to revisit what it is NOT:

Operational Risk is Not:

  • About avoiding risk
  • A safety only program
  • Limited to complex-high risk evolutions
  • A program -- but a process
  • Only for on-duty
  • Just for your boss
  • Just a planning tool
  • Automatic
  • Static
  • Difficult
  • Someone else’s job
  • A well kept secret
  • A fail-safe process
  • A bunch of checklists
  • Just a bullet in a briefing guide
  • “TQL”
  • Going away

The goal of Risk Management is not to eliminate risk, but to manage risk so the mission can be accomplished with minimum impact. We manage risk to operate, not avoid risk as a means to prevent loss.

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