Guest Contributer: Charles Garcia, Head of Sales, North America, Sophis
As financial firms plan their budget allocations for 2011 and beyond, the one crucial area where some companies fail to focus, and which can wind up a costly mistake, is operational risk management. Following the global financial crisis’ industry-wide spending freeze, firms are now finally ramping up investment in their businesses. In order to reduce operational costs and to assure investors and regulators that your infrastructure is stable and secure, investment in operational risk management tools is crucial.
With a smorgasbord of risk affecting the financial industry, operational risk has had a tendency to fall by the wayside. Firms of the past asserted that “if it’s not broken, don’t fix it.” However, with the new age of increased transparency and accountability, the marketplace is demanding a systemic process for managing and reducing operational risk. Gone are the days where meeting the bare minimum can lead to profit. In fact, at the expense of sustainability, new regulatory requirements, as well as increased scrutiny from investors, are driving financial institutions’ demand for better, holistic operational risk management solutions.
A Focus on Costs
Settlement failures are one of the results of an ineffective operations system and cost firms millions of dollars annually. Firms that don’t have the infrastructure to be able to manage the various steps in the trade lifecycle experience costly failed trades. Over the past few years many firms lunged into new asset classes in order to diversify their revenue streams. These new financial products, such as derivatives, require sophisticated IT solutions. Like building a skyscraper with duct tape and glue, firms are left to figure out how to get a handle on enterprise-wide operational risk and report back to regulators and investors. The fragmented internal solutions we are seeing today cannot support dynamic firms for long periods of time and under these systems, firms are struggling to lessen the impact of failed trades and reduce operational costs.
Hindsight is 20/20
Although the industry is recovering from the financial crisis, forward-thinking COOs know that investing in operational risk management will build a better long-term foundation. Focusing just on short-term efforts and funneling the budget allocation for operational risk somewhere else could wind up hurting their firm in the long run. If you look at any large, successful financial institution, the one common thread is that they have a scalable system that is transparent and simplifies the manual operations processes.