18 March 2012

Product Innovation: Individual Responsibility for Risk Management...

The next generation of Operational Risk Management professionals will be focused on a whole new set of thinking. Mitigating business risks that are associated with running the day to day functions of the enterprise will require people who have a command of their own accountability. The management of risks in their particular area of operations, will have an acute sensitivity to the level of experimentation, testing and innovation. This responsibility for individual levels of proactive risk management, begins with a new mind-set shift about the world of work itself, and our own management of our personal work product.

When you analyze where the financial services industry has exposed itself to tremendous losses over the years, it will no doubt be tied to some innovative instrument or product that was invented by some very creative and innovative people. These losses surrounding Credit Default Swaps (CDS) or Collateralized Debt Obligations (CDO) as an example, all started when an innovative person utilizing the latest tools available created a new product to be introduced to the marketplace. Sure, there were risk management professionals involved in the pipeline to production including lawyers, math quants and finance experts. Yet a failure of Operational Risk Management, led to serious losses and a global crisis, that may well be just the precursor to something even more sinister.

The humans quest for innovation, creativity and the ability to adapt is built into our DNA. So is the ability to survive and to overcome the adversities of our environment to sustain ourselves. Whether that is in the form of food and water or capital and manpower doesn't really matter. Leveraging the available resources to stay alive, being competitive and gaining more power in the conference rooms of Wall Street, or the Madrasahs in South Waziristan, remains a constant.

Innovation in the workplace, is vital for our employees to thrive and for new products to be discovered and old ones to be enhanced. Those new products are invented by people who will have the simultaneous task of doing a sound operational risk assessment. Managing risks at the same time you are innovating, is hard to separate from each other. The trade-offs and the decisions on whether to use this material or algorithm based upon use, shelf-life and the environment that the new product innovation will be operating in, takes prudent risk analysis.

So what will be different for our next generation of Operational Risk Management professionals? What will the new thinking be all about? It will be about engineering the four-step process into everything we do, and to reinforce the compliance with each step of the teams process:

1. Assess the situation.

The three conditions of the Assess step are task loading, additive conditions, and human factors.

  • Task loading refers to the negative effect of increased tasking on performance of the tasks.
  • Additive factors refers to having a situational awareness of the cumulative effect of variables (conditions, etc.).
  • Human factors refers to the limitations of the ability of the human body and mind to adapt to the work environment (e.g. stress, fatigue, impairment, lapses of attention, confusion, and willful violations of regulations).
2. Balance your resources.

This refers to balancing resources in three different ways:

  • Balancing resources and options available. This means evaluating and leveraging all the informational, labor, equipment, and material resources available.
  • Balancing Resources verses hazards. This means estimating how well prepared you are to safely accomplish a task and making a judgement call.
  • Balancing individual verses team effort. This means observing individual risk warning signs. It also means observing how well the team is communicating, knows the roles that each member is supposed to play, and the stress level and participation level of each team member.
3. Communicate risks and intentions.
  • Communicate hazards and intentions.
  • Communicate to the right people.
  • Use the right communication style. Asking questions is a technique to opening the lines of communication. A direct and forceful style of communication gets a specific result from a specific situation.
4. Do and debrief. (Take action and monitor for change.)

This is accomplished in three different phases:

  • Mission Completion is a point where the exercise can be evaluated and reviewed in full.
  • Execute and Gauge Risk involves managing change and risk while an exercise is in progess.
  • Future Performance Improvements refers to preparing a "lessons learned" for the next team that plans or executes a task.

So what does the renewed emphasis on the process being embedded into our work actually do for our work product? It gives the human a sense that the innovation is now ready for experimentation and field testing. This means that it is still not ready for prime time or the marketplace. You see, this realization is important. The recent focus on rapid prototyping and a push to get products to the marketplace before the competition, has produced the sinister and evil outcomes we have all witnessed. Why does it take so long for a new drug to make it through the pharmaceutical pipeline and end up being advertised on the CBS Evening News?

And even then, after so much testing and study, we find that a new drug (product) is not really so safe compared to the long term complications of using it as prescribed. The risk reward equation is at stake in our financial services industry and every other economic sector that is striving to be more innovative in todays global marketplace: For individuals, here are $18 Million reasons:

Attorney Lynn Szymoniak had spent a career investigating insurance fraud when a bank moved to foreclose on her Florida home in 2008. Almost four years later, the fraud she said she uncovered by combing through mortgage documents earned her $18 million.

Szymoniak, 63, is among six whistle-blowers who will pocket $46.5 million as part of a $25 billion national foreclosure settlement that state and federal officials reached in February with five banks, including Bank of America Corp. andJPMorgan Chase & Co. (JPM), according to the U.S. Justice Department.

“When they did this to her, they picked the wrong person at the wrong time in the wrong place,” Richard Harpootlian, Szymoniak’s attorney in two whistle-blower cases, said in an interview. “They stuck their hand into the beehive.”

Szymoniak’s examination, in which she relied on her experience as an insurance-fraud investigator, led to her claims against banks for submitting fraudulent documents to the federal government asserting that they owned loans insured by the Federal Housing Administration, she said.

The national foreclosure settlement with the five banks, which resolves claims of abusive foreclosure practices, provides mortgage relief to borrowers, pays $1.5 billion to those who lost their homes to foreclosure, and sets standards for how the banks service mortgage loans.

Who will be your choice for effective operational risk management as your new innovative products are consumed by the marketplace?

A. Your employees or workplace stakeholders

B. Your customers or consumers

The choice is yours as your institution puts new resources and new incentives in front of your workplace stakeholders.