They must help them adapt to process-driven risk management and understand the potential applications of advanced analytics. The risk function can also be a catalyst for improving Do these processes operate well in both normal and stress conditions? Conversely, additions to the first line prompted second-line hiring at a higher rate than before, to provide oversight in a more demanding regulatory environment. Digitization and advanced analytics augment and magnify the impact of process streamlining, unlocking potential for full risk-management effectiveness and efficiency gains. Digital transformations offer promise well beyond risk, and banking as a sector is undergoing a digital revolution. Please click "Accept" to help us improve its usefulness with additional cookies. Whether you are a leader or working in a more operational role, read on to learn how to make your organization function (even) better. For example, by automating data capture and improving its decision engine, one bank was able to achieve straight-through processing for 70 percent of loans, reducing cost of origination by 70 percent and the time needed to make decisions to under a minute. In the first decade of building operational-risk-management capabilities, banks focused on governance, putting in place foundational elements such as loss-event reporting and risk-control self-assessments (RCSAs) and developing operational-risk capital models. Such end-to-end risk transformations can reduce the cost base by 15 to 20 percent while meaningfully improving the quality of risk management. These emerging detection tools might best be described in two broad categories: Exhibit 3 shows how a risk manager using natural-language processing can identify a spike in customer complaints related to the promotion of new accounts. In the current environment, piecemeal productivity gains will not lead to significant bottom-line differences for banks. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more, Learn what it means for you, and meet the people who create it, Inspire, empower, and sustain action that leads to the economic development of Black communities across the globe. Using advanced-analytics models to monitor behavioral patterns among 20,000 employees, the bank identified unwanted anomalies before they became serious problems. Please click "Accept" to help us improve its usefulness with additional cookies. operational effectiveness can free employees from one part of an organization to deliver new or better services in other areas, within existing budgets and without layoffs. At large regional banks, the growth rate of the risk function has been as much as twice that of the rest of the organization. Institutions have reduced as many as 30 percent of their policies while improving the quality of the remainder (Exhibit 3). Fortunately, the most potent levers for increasing risk-management effectiveness, if applied in careful sequence, also improve efficiency. Opportunities lie in streamlining and strengthening core risk processes as well as processes that are not owned by the risk function but are risk prone. Moreover, selective relocation of resources (offshoring or near-shoring) can expand talent pools. This approach increases the chances of success and helps quickly demonstrate value. The following central ideas can guide institutions in clarifying roles and responsibilities: Achieving the correct alignment of roles and responsibilities across the lines of defense is a difficult undertaking. For effective operational-risk management, suitable to the new environment, these organizations are refocusing the front line on business resiliency and critical vulnerabilities. collaboration with select social media and trusted analytics partners Never miss an insight. Analyzing functions within each business unit, operational-risk leaders can then identify those that present the greatest inherent risk exposure. The redesigned structure is then rolled out in small pilots and reviewed before a large-scale deployment. But their executives may lack a compelling “globalization story” for employees—global goals, aspirations, and value propositions. Compared with financial risk such as credit or market risk, operational risk is more complex, involving dozens of diverse risk types. Within reach is more targeted risk management, undertaken with greater efficiency, and truly integrated with business decision making. They are adopting data-driven risk measurement and shifting detection tools from subjective control assessments to real-time monitoring. Please email us at: McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Although these factors are interconnected, the authors of the 7-S framework suggest that many essential organizational elements are not considered or analyzed in most companies while deciding how to improve performance. Our Operations...practice assists our clients in solving complex operational challenges. Use minimal essential A small, temporary working group can then remove or consolidate committees according to the design principles agreed upon and the results of the targeted discussions. Already, efforts to address the new challenges are bringing measurable bottom-line impact. If you would like information about this content we will be happy to work with you. Banks can now tap into large repositories of structured and unstructured data to identify risk issues across operational-risk categories, moving beyond reliance on self-assessments and subjective controls. The cases for change are in fact diverse and compelling, but transformations can present formidable challenges for functions and their institutions. Airlines, for example, are arguably more operationally complex, asset-intensive and regulated than hospitals, yet the best performers are doing a far better job than most hospitals at keeping costs low and make a decent profit while delivering what their customers expect. Many organizations have thus viewed operational-risk activities as a regulatory necessity and of little business value. Our flagship business publication has been defining and informing the senior-management agenda since 1964. The original role of operational-risk management was focused on detecting and reporting nonfinancial risks, such as regulatory, third-party, and process risk. 1. Learn more about cookies, Opens in new To meet the challenge, organizations have to prepare leaders, business staff, and specialist teams to think and work in new ways. Banks looking to transform risk management should, in our view, focus on four mutually reinforcing areas: organization, governance, processes, and digitization and advanced analytics. Together, analytics and real-time reporting can transform operational-risk detection, enabling banks to move away from qualitative self-assessments to automated real-time risk detection and transparency. cookies, McKinsey_Website_Accessibility@mckinsey.com, Pathways to vulnerability (such as the impact of a threat like NotPetya), The bank’s most valuable assets (the “crown jewels”), Sources of exposure for a given organization, Senior status to engage the business and technology organizations, Fraud patterns (for instance, through the dark web), Interdependencies across fraud, cybersecurity, IT, and business-product decisions, Cybersecurity professionals, ideally with an analytics background, Ways employees can game the system in each business unit (for instance, retail, wealth, and capital markets), Specific behavioral patterns, such as how traders could harm client interests for their own gain, Former branch managers and frontline supervisors, First-line risk managers with experience in investigating conduct issues. We believe that this mandate should expand so that the second line is an effective partner to the first line, playing a challenge role to support the fundamental resiliency of the operating model and processes. Many Japanese companies understand the benefits of globalization. Successful organizations begin by establishing principles for which type of activities fall into which lines of defense. Transformations involve significant behavioral shifts. Developing effective risk-oversight frameworks for human-factor risks is not an easy task, as these risks are diverse and differ from many other operational-risk types. Risk can shape that transformation so that it supports risk-management effectiveness and efficiency directly—by making needed data easily accessible, for example. The following four principles are essential, each addressing common pain points: Institutions have reduced as many as 30 percent of their policies while improving the quality of the remainder. While banks have been aware of risks associated with operations or employee activities for a long while, the Basel Committee on Banking Supervision (BCBS), in a series of papers published between 1999 and 2001, elevated operational risk to a distinct and controllable risk category requiring its own tools and organization. Please email us at: McKinsey_Website_Accessibility@mckinsey.com Leading indicators are forward looking and critical to ensure that employees perform proactively, for example, identifying risks early on and initiating countermeasures instead of reacting after the risk has materialized. Are these widely understood and properly communicated in a way that excites and energizes the organization while addressing the anxiety that comes with big changes in direction? Whether in information security, data, compliance, technology and systems, process failure, or even personal security and other human-factor risks, the advanced-analytics advantage is becoming increasingly evident. POBOS Pharma Quality measures quality performance and risk, total cost of quality, quality productivity, as well as operational maturity and quality systems effectiveness. While some banks have focused risk improvement in one or two particular areas, experience demonstrates that the greatest gains belong to institutions that carefully sequence efforts across organization, governance, processes, and digitization and analytics. Flip the odds. Banking regulators remain appropriately concerned about the strength and integrity of risk functions. Progress will require time, investment, and management attention, but the transformation of operational-risk management offers institutions compelling opportunities to reduce operational risk while enhancing business value, security, and resilience. To achieve this operational effectiveness, organisations use a num-ber of methods, where implementation is supported with formal tools and techniques. Furthermore, while regulatory pressures may ease, they will not disappear. Many self-assessments in the first and second line consequently require enormous amounts of manual work but still miss major issues. Included on this page, you'll find detail s on the phase-by-phase implementation plan, operational excellence KPIs, case studies of operation excellence improvements, and much more Press enter to select and open the results on a new page. our use of cookies, and Institutions attempting a transformation can discover that nearly all policies merit some adjustment, if not total rewriting, to better reflect risk appetite, improve clarity, and achieve the right level of detail. See Basel Committee on Banking Supervision: Working paper on the regulatory treatment of operational risk, Bank for International Settlements, September 2001, bis.org. Legacy processes and controls have to be updated to begin with, but banks can also look upon the imperative to change as an improvement opportunity. At the same time, business leaders become better risk managers by understanding the existing controls and their intended purposes. These may include benchmarking, either internally, within a particular Most transformations fail. Measurement remains difficult, and risk teams still face challenges in bringing together diverse sources of data. The working group should be small and include respected leaders from both the risk function and the business—success depends on contributions from the right people from the business, support functions, and risk, highlighting specific policies and pain points. Address the new environment, including the evolving operational effectiveness mckinsey landscape count in these areas by Tom Peters Robert! Continue to shift process streamlining, unlocking potential for full risk-management effectiveness and efficiency if... Adopting new technologies are the final steps in capturing the full impact of process redesign, which enabled. By making significant investments in operational-risk capabilities @ mckinsey.com, manage the considerable associated ethical, regulatory,,! 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