May 04, 2008
The Challenge of Choosing the Right Risk Technology
Selecting the right technology solution for risk business optimization is not a simple matter of choosing Hardware, Software, Storage and setting them up. It is about harnessing the computing and communication technology for achieving optimal results and this is a challenge.
Two things are clear in this context. Technology is an essential condition for effective risk management in financial services because the data gathering and its analysis on real time basis require effective data capturing and transmitting mechanisms across the organization as well as considerable computational power. Second, there is NO single solution that fits all. As a matter of fact, each case has some unique features and requires customized risk solution.
Selecting the right technology for risk management is a critical decision and should be addressed with due involvement of the top management .Typically, the consultants who are entrusted with this job end up putting the cart before the horse, put the technology before the business. Why? Because it is the simpler, often, grandiose option and gets them good mileage as experts and business in the industry. Also because the banks and other financial entities are not themselves clear about the business they want to pursue and not fully aware of their own requirements. Thus, the technology becomes the DRIVER and not the TOOL it is and should be! I can cite in evidence not an untypical experience I had recently while having to respond to a Request for Proposal for risk technology to a major bank in India. The RFP document, apparently constructed by a reputed consulting firm, was actually the imperfectly integrated reproduction of the table of contents from a couple of standard risk books. During the discussions, neither the bank nor the consultants could tell us how the disparate elements in the RFP were relevant to the bank’s current and future business .Worse still, how they were supposed to be integrated. The moral from this is that the business requirements rather than the fancy ideas should dictate the technology selection.
It is possible that the bank may lack clarity about its business and the ways of growing it. In such cases, first, they need to focus on the business strategizing, either by themselves or through external experts. Only thereafter, they should map their business plan to the technology solution. And this exercise is best done on case by case basis. Despite apparent similarities in size and business, often the risk appetite and the growth trajectories of each institution would vary and vary substantially. Second lesson, achieve clarity on business and its growth path first!
Third suggestion. Establish the risk management processes, right from data collection to analytics and modeling, before initiating the technology adoption. I am aware of the cases where the best technology systems are in place without much benefit because the requisite data and skill sets were not available.
Another point to consider is the approach towards risk technology costs. Traditionally, people ask for Return on Investments in Risk technology spending. What they forget is this spending is for the key enabling infrastructure without which the risk business cannot be carried on. The cost of good risk technology may be substantial. The cost of its absence is more : EXIT !
Cost savings are always important to any business. However, the common approach of economizing on the essentials or compromising on the performance in the technology selection exemplifies the penny-wise and pound foolish mentality. In fact, it entails much larger costs both in terms of business results and the cost of enhancing the technology infrastructure to measure up to the business demands.
Yet another thing to bear in mind is that the risk business and the technology are both dynamic .There is no point planning for a “permanent” technology solution. The recognition that the technology adoption is a continuous process would enable the banks to reduce if not overcome, the operational risks emanating from technology.
In sum, risk technology choice is too serious a matter to be delegated away and requires due involvement of the top management on a continuous basis. Further, there is a strong need for the board level executives to be aware of the contours and methods of risk management in sufficient depth so that they can drive their organizations to achieve constantly better business outcomes benefiting from the appropriate technology adoption.
Posted by sssatchidananda at 10:14 PM
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