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Ideas & Debate

Risk management key in Agenda Four projects

 

Coming to terms with operational risk must become a strategic imperative for organisations in all industries, not simply for financial services giants.

In fact the very success of the Big Four Agenda will depend on the real-time collaborative identification, assessment, monitoring and (treatment) mitigation of operational risk. The level of investments being thrown into the projects and the speed with which they must be completed has created the perfect confluence of people's misbehaviour, lax conduct, systems appropriation, and externally induced events. To safeguard the efforts, the time to implement operational risk management control frameworks is now.

To strengthen the view that stakeholders must understand the importance of operational risk is a recently-released a study from the Society of Actuaries, the Casualty Actuary Society and the Canadian Institute of Actuaries called A New Approach for Managing Operational Risk:

"Historically, ORM (operation r9isk management) has taken a back seat to the management of the other major risks, which are often defined as market, credit, insurance, and strategic risk and sometimes include 'liquidity,' 'legal' and 'reputation' risk … This has not only caused the operational risk to be underestimated, but has also obscured the underlying causes of many of the most significant financial losses," the study says.

Stakeholders might view discussions about whether operation risk (OP) risk exists, what it is, how it differs from other exposures, and if and how it can be managed as academic. It's easy to dismiss the debate thinking that, whatever its merit, it has no bearing ultimately on social impact for public projects, shareholder value, reputation, governance or related concerns. However, OP risk experts say it's not so. Those who don't acknowledge their own OP risks are simply setting themselves up for future devastating material failures and losses.

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The seeming minutiae of operational issues can quickly spin out of control into a major balance sheet and stakeholder concern. Or major public works project can quickly become white elephants with serious financial consequences.

One example is the collapse of Galana Kulalu project. Israeli Ambassador Noah Gal Gendler and contractor Green Arava are said to have traded blame with the National Irrigation Board over the project's collapse.

Forget the finger-pointing and the insurance salesman tactics, for now. This was a monumental failure of operational risk management. Not only was there an impact to the public expenditure; there was an adverse impact on the agricultural model farm process, the quality assurance process, the procurement of raw materials, the ability or inability to fulfill (public expectations) customer orders, and both the Kenyan and the Israeli government reputations. The project, “with food security being one of President Uhuru Kenyatta’s Big Four agenda, it aimed to move the country from relying on rain-fed agriculture.”

This a glaring case of failure of Operational Risk management.

Regrettably for stakeholders, no models exist where they can turn to management and boards and ask: "How effectively are you managing OP risk - for instance, against fraud, systems failure, external events, or even people and processes?"

Bankers and insurers worldwide acknowledge that they don't know if their op risk management attempts to date have been successful or even up to scratch. The Society of Actuary’s report says that many financial firms have to develop effective method of managing operational risk and the process has proved to be a daunting task. Meanwhile, stakeholders remain far more exposed than they realise.

Government, financial institutions, and other organisations large or small that choose to remain blissfully ignorant of the importance of operational risk will continue to operate under a false sense of security. They will remain 'under-controlled' in areas where they have the most risk and significantly 'over-controlled' in areas where they have the least risk.

So without addressing OP risk head on, recognising and understanding it and acknowledging the crucial role it plays, we face the prospect of a serious financial crisis in the not too distant future, uncompleted projects of shame while the consequences will linger on for decades.

Finally, operational risk remains a controversial topic, but by whatever name you call it, the risk will not dissipate by being ignored. While managing op risk may be a daunting task, it is one of utmost importance to stakeholders, and companies alike.

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