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18 Risk management technology in financial services
The ability of developing, indeed promoting, dissension is also part of sound gov-
ernance. Dissension provides an all important contrarian view. In his book My Years
with General Motors,
10
Alfred Sloan recounts how, as chairman of GM, he never
accepted an important proposal without having dissension, hence critical discussion,
about:
Its merits, and
Its demerits.
Dissension is a fundamental characteristic of the best risk managers because, by
all accounts, it is an integral part of their job. Being responsible for implementing a
limits system, risk measurements and damage control policy is a job that unavoidably
leads to conflicts with line executives who have risk-taking rather than risk control
objectives.
Still another quality possessed by the leaders of industry is best documented by
the advice by Robert McNamara, former Defense Secretary and former CEO of the
World Bank and of Ford: ‘Never go ahead with a major project unless you have
examined all the alternatives.’ McNamara says that in a multimillion dollar project
you should never be satisfied with vanilla ice cream only. You should have many
flavours.
It is precisely these flavours that we aim to study through a sound experimental
methodology (Chapter 6), and increasingly more sophisticated models (Chapters 7, 8,
9, 10 and 11). However, it should always be recalled that the most important element
is always human capital – and exceptional professional skills are not commonly
available. They must be built up over time; and then they should be placed well above
even the best models and most sophisticated technology.
1.7 Information technology. Does it really matter?
Two contradictory responses may be given to the query this headline has posed.
The ‘yes’ answer says that real power is flowing to firms with a strategic plan for
information technology (IT) investments, provided that both innovation and cost-
effectiveness are guiding management’s and the designer’s hand. Technology no longer
sells itself simply by being ‘new’; its deliverables must be visible (more on this later).
The opposite opinion rests on the fact that information technology has become a
settled business, and a widely spread infrastructure. ‘IT does not matter’ was the title
of a 2003 article in the Harvard Business Review by Nicholas Carr. The argument
behind the article’s title – which raised eyebrows – is that IT is:
An infrastructure, not a differentiator, and
A utility, like railroads, highways, the electricity grid, telegraph, or the telephone,
available to practically everybody.
Carr advises that, further to his judgment, in the 21st century IT is a risk to
business continuity rather than a business opportunity and a cost to be managed
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Innovation in finance 19
rather than an edge over rivals. Therefore, the article in the Harvard Business Review
urges chief information officers (CIOs) to spend less on their data centres, opt for
cheaper commodity equipment, go for commodity software (like enterprise resource
planning (ERP))
11
and focus more on IT vulnerabilities,
From viruses,
To terrorism and data thefts.
The careful reader will notice these ‘yes’ and ‘no’ answers to the query ‘Does IT
matter?’ are not as contradictory as they seem at first sight. The positive response
regards advanced technology; one which is not only ahead of the curve but also sup-
ports the company’s strategic plan in the most efficient way. Only the best technology
will have appreciable return on investment (ROI) as Figure 1.3 suggests.
The negative response looks at information technology as a utility and, as such, it
includes all legacy systems and their software which are largely obsolete and provide
the company with no competitive edge. Mainframes, client/servers, data warehouses
and centralized networks are part of the old computer age, often referred to as ‘EDP’.
12
The EDP age was linear; by contrast, the modern age of information technology is
about exponential innovation in:
Man-made devices and systems,
Derivative financial instruments,
Increasing return economics, and
Analytical and experimental assistance to important decisions.
HIGH
LOW
TECHNOLOGY
RETURN
ON
INVESTMENT
INNOVATION
IN THE
WORKPLACE
SUBSTITUTION OF
BOLTS AND NUTS
STEP-WISE
IMPROVEMENTS
LOW HIGH
Figure 1.3 Innovation in the workplace means new concepts
about the way we work
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