Poor Operational Risk Management Leads to Loss

More than $10 million in losses, that is, for 90 percent of companies surveyed, according to study from Risk Waters Group

More than $10 million in losses, that is, for 90 percent of companies surveyed, according to study from Risk Waters Group

Cary, N.C.  September 9, 2003  A global survey of 400 risk managers at 300 financial institutions indicated that although operational risk management is moving up in the priority list for financial institutions, they are still suffering annual losses incurred through poor operational risk management that range into the millions of dollars, according to a survey of corporate risk managers conducted by the Risk Waters Group and SAS, a business intelligence provider.

The results show that a fifth of all companies in the financial sector still do not have an operational risk management program, despite the fact that 90 percent of them lose more than $10 million a year because of poor risk management.

Even those companies that have put programs in place are reluctant to invest the money for a framework, such as personnel and additional software functionalities, needed for it to work, concluded Risk Waters Group. The survey showed that despite annual losses that cost the industry hundreds of millions of dollars, 33 percent of the risk managers surveyed expect to spend $1 million dollars or less in improving operational risk management in 2003.

"Despite the focus on compliance and the litigation that many financial organizations are facing because of poor risk management, many companies are at a loss to know what to do about this threat to their businesses," said Peyman Mestchian, head of risk management for SAS UK. "While new regulations such as Sarbanes-Oxley and Basel II have pushed risk management further up the agenda, expenditures  both in terms of systems and procedures and headcount  are still a fraction of what they should be."

The survey also revealed that many companies have been slow to identify areas where their business is most at risk, the analyst firm said. IT systems failure was identified as a key concern by 47 percent of respondents, while less than a third were concerned about the company's ability to retain key employees. However, awareness of the potential losses involved through failure to manage operational risk has increased. Twenty-one percent of those surveyed said their company suffered losses between $10,000 and $100,000 at least once a day. Thirty-five percent believe this could be as much as $120 million per year.

"It isn't a question of identifying the problem," continued Mestchian. "It is more a question of knowing what to do about it. Companies are struggling to identify where the danger areas are. The loss of a chief financial officer or key account director at a major bank and associated PR around it could be far more damaging in terms of shareholder value and customers' faith in the company than a system failure."

Mestchian added that without a skilled team that can identify the key areas of risk and impose the right systems and reporting structures, any money that is being spent is effectively wasted. "Companies need to focus on what needs to be done rather than just throwing budget at the problem and hoping it goes away," he said.