24 August 2014

Inspect v. Study: Quality of Operational Risk Management...

As this weblog reaches it's 1,060th post in the next few months, much has been documented on the course of "Operational Risk" over the past ten years. We have continuously witnessed the dawn of new threats and vulnerabilities that could only have been imagined in the last millennium.

At the same time, we could not have predicted the new found solutions, to many of the same operational risk related incidents that have plagued our institutions, governments and the planet we call Earth. Every time you think you have heard or witnessed it all and that all new future risk events will just be some variant of those that have preceded us in history, we are surprised and blind-sided. The "Black Swan" has visited us once again.

Yet one item that remains consistent over the course of risk incidents and numerous after action findings is this fact. We have not devoted enough resources in preparation and in scenario-based exercises to improve our resiliency. We remain in denial that we could ever be subjected to the 1-in-100 year event. However, there is someone named Warren Buffet who to this day, is still adding reinsurance companies to the Berkshire Hathaway portfolio. Do you think it is because Mr. Buffet is betting on more risk or less in the world over the next decade?

Risk Managers think about the "What if" more than anyone else, in many cases because they are paid to do this on behalf of their employer. Yet as human beings, we take risks every day without even thinking twice about how much risk we are taking on and what the possible outcomes could be. We just move through life in a wait and see totally reactive mode. So how do you get at least a majority percentage of the people walking around the halls of your organization to think more like a savvy risk manager? What does it take to inject a little more "What if" into the consciousness of each person and the roles and jobs that they play in your institution?

The first is to design and engineer your management system to incorporate a risk-based standard for operations. Secondly, to incorporate the applicable risk management controls to produce the rules-based behavior that you are adopting. Finally, to test the rule-sets with a continuous approach to ever so incremental improvement over time. Sounds familiar doesn't it. Plan-Do-Check-Act.

Whether you are trying to improve the awareness, implementation and/or measurement of Operational Risk on the deck of the aircraft carrier, at the FOB, on the trading or manufacturing floor or within the supply chain of the vital resources that fuels your organization, "Plan-Do-Check-Act" (PDCA) works. And you have heard it before, those who are hit by the "Black Swan" event will die or go out of business relative to the previous attention they have paid over the years to PDCA.

Establish the objectives and processes necessary to deliver results in accordance with the expected output (the target or goals). By making the expected output the focus, it differs from other techniques in that the completeness and accuracy of the specification is also part of the improvement.
Implement the new processes, often on a small scale if possible, to test possible effects. It is important to collect data for charting and analysis for the following "CHECK" step.
Measure the new processes and compare the results (collected in "DO" above) against the expected results (targets or goals from the "PLAN") to ascertain any differences. Charting data can make this much easier to see trends in order to convert the collected data into information. Information is what you need for the next step "ACT".
Analyze the differences to determine their cause. Each will be part of either one or more of the P-D-C-A steps. Determine where to apply changes that will include improvement. When a pass through these four steps does not result in the need to improve, refine the scope to which PDCA is applied until there is a plan that involves improvement.

It's clear to the "Operational Risk" professional why PDCA has one little flaw. The "Check" could and should be replaced by "Study" to emphasize analysis over inspection as Dr. W. Edwards Deming has said. To analyze and study takes us to the core of the issue. People are always looking for expected results, not unexpected outcomes. If we are to expect "unexpected" results, perhaps the "Analyze-Study" mindset would then perpetuate the plethora of risk professionals who are still caught up on the "Check". Inspection will get you killed and it will produce more "Black Swans" in your lifetime than you would ever expect. Check = Inspection. Study = Analyze.

So we think it is safe to say, that Warren Buffet is betting on the current trend of a mentality of inspection and not study. He is investing in the future of insurance companies needing insurance to hedge their own underwriting failures. Study and analysis are the ingredients of success for the most sought after risk managers on the globe. Unfortunately, too many still have not figured out that "Check" is out and "Study" is in.

The future quality of Operational Risk Management will lie in the hands of practitioners who are analyzing and studying before they apply new changes to gain new improvements. Now think about your organization. Where are the people who are patient? How long do they take to study the business problem or assess the climate you operate in every day? When you find these individuals you need to keep them close and you will soon find that you are well on your way to a more resilient future.

No comments:

Post a Comment