Operational Risk

Operational Risk

Human can do great things. They also do errors. It is not a question of whether an error will occur but rather when, how and what will be the consequences. Some human errors have cost $ Billions to their organization, sometime causing their bankruptcy! For this reason, I never liked repetitive manual processes – even the simple ones. It is always a good decision to automate such manual processes. An automated process can be audited and verified – and then trusted.

Even when the cost-benefit analysis of automating a process is not clear, I always tilt in favor of automation. Repetitive manual tasks are always a danger from an operational risk point of view. Furthermore, do you want your portfolio manager producing data, reports, calculation? Or do you want your portfolio manager analyzing reports, verifying that the process went fine and have more time managing the portfolio and improve the process?

In my due diligence review, I have seen tens of Billions of dollars managed manually in spreadsheets! Spreadsheets are great tools for fast and detailed analysis. Many kind of errors can happen and go unnoticed though. It is OK for many tasks, but for managing large sums of money, it is irresponsible. Some people using spreadsheets to manage multi $Billions have the capability of bankrupting their organization!

One investor was surprised to see that I like to visit managers and see how they operate. While marketers are great for obtaining some required information, I always get a better idea of a firm when I meet and talk to the people managing the money. I like to see how they operate and what tools and technology are used.

To conclude, here are some errors found on the internet:

Citigroup trading error on Procter & Gamble:

Dominic Clermont, ASA, MBA, CFA