solidate the information across teams on an enterprise-wide basis
in a timely fashion. This will allow the organization to reconcile
the requirements of greater individual flexibility and more effec-
tive monitoring of the business.
Toward a more flexible organization
The last few years have seen many changes in the structure and
culture of organizations. Before the 1970s the work environment
was relatively stable and structured; people and their careers were
relatively organized; problems and their solutions were well
defined and employment tended to be for life. The industrial land-
scape was dominated by large multinational manufacturing giants
like General Motors and Ford whose hierarchical organizational
structures had been defined in the 1930s. The successive oil crises
of the 1970s, development of new technology and the demand for
increased productivity led to a rationalization of the manufactur-
ing industry. Technology enabled organizations to automate the
manufacturing processes resulting in substantial job losses at
operational levels. During the 1980s and early 1990s the focus
shifted from the manufacturing to service industries. With further
developments in technology and increasing availability of man-
agement information, organizations began to look at their own
set-ups with a view to rationalizing the hierarchical structure. The
subsequent organizational changes led to a large number of job
losses among middle management. Today this trend is continuing,
organizations are becoming more flexible, work is becoming
increasingly global and the management much more decentralized
and devolved.
The investment banking industry has seen substantial changes
over the past two decades. However, the conservative nature of
the banking environment has meant that the industry has been
slow to adopt some of the recent management and organizational
development techniques. One consequence of this has been that
Managing Operational Risk in Financial Markets
Toward a more flexible organization
financial institutions have been trying to manage their complex,
expanding and rapidly changing businesses with inappropriate
organizational models and cultural frameworks. The industry
needs to update its operating models, moving away from func-
tional models to a more customer orientated approach and to take
advantage of the opportunities offered by developments in tech-
nology and telecommunications.
It is surprising to note that despite tremendous advances in tech-
nology and management techniques, the management models
most frequently found within financial institutions are still based
on the scientific management techniques developed by F.W. Taylor
at the beginning of the twentieth century. The main principle of
scientific management is that a business process can be subdivided
into its constituent parts and an individual can then perform each
part. This was revolutionary thinking in the 1900s and had a
tremendous impact on the work environment. The implementa-
tion of scientific management techniques led to a number of devel-
The focus moved away from skilled craftsmen and general-
purpose tools to specialist single purpose machines with ‘skills’
built in the machine. There was a general de-skilling of the
workforce and move toward semi-skilled labour.
In order to achieve increased efficiencies, the jobs were broken
down into their constituent parts and standardized. The time
and motion studies carried out helped define the optimum way
to complete each task.
The system became of paramount importance and control was
seen as fundamental to all good design and efficient operation.
The planning was with the managers; workers merely carried
out the tasks.
Looking at financial institution today, it is rather disappointing to
note that many of these characteristics can still be frequently
7 Managing operational risk
Toward a more flexible organization
found in many areas, particularly within the operations function.
Although technology has begun to eliminate some of the rather
manual processes within banks and financial institutions, the
operating models still owe more to scientific management than to
the more human-resource-management and customer-focused
In order to meet the challenges of today’s competitive environ-
ment and to manage the paradoxes outlined above, the industry
needs to move on from these outdated concepts and adopt a more
customer-orientated approach. Organizations need to focus more
on business processes rather than individual tasks; they need to
develop and train their staff and put in place infrastructures that
will allow them to tap into the capabilities and expertise of their
staff at all levels of the organization.
1 Jarrillo, J.C., On Strategic Networks, Strategic Management
Journal, Vol. 9.
Managing Operational Risk in Financial Markets

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