Error Management: Controls and Efficient Processes

Given enough time, investment operations professionals usually accumulate a few horror stories at work. Depending on your area of focus, you may have a story about a big penalty for a failed trade or buy-in, a pricing error due to manual entry, or an error in corporate actions processing due to a late election.

Like a classic tale, the story of how the error occurs and the steps to address it often follow a predictable arc. There is the moment of realization, when the error can feel like a monster storming out of the bushes. And then there is the resolution process where it goes through phases like diagnosing the root cause, formulating an action plan, and reviewing their action plan with interested parties. Invariably, the story arc turns to a conversation about the organization’s controls and what can be done to prevent the error from occurring again.

I was recently approached by several investment operations managers to discuss their most recent set of errors. They were preparing to meet with their risk management team, and wanted an outsider’s perspective ahead of their presentation. As they discussed their plan of action, it became clear that their prevailing belief was an efficient operation and a well-controlled operation are mutually exclusive ideas. Their line of thinking begged the question, how could they address their errors so controls complement their processes instead of hinder them?

It is natural to reach for the quick fix when an error occurs. But adding another management report, reconciliation, or four-eye verification is not always the optimum solution. There are several questions managers can keep in mind to help dovetail controls with operating processes:

1. Will my proposed actions detect the error during the process or after it?
2. Is there a technology solution that can facilitate or augment the control?
3. Are my existing controls effective, but failed due to a gap in training?
4. Is my action plan balanced in its approach?
5. Do the actions I am proposing mitigate the error while allowing my team to efficiently execute their responsibilities?

As a former investment operations manager, I have found controls are a key component to a healthy process. While it is critical to establish a well-controlled organization, it is important to avoid sacrificing other priorities, like managing costs or delivering timely results. In many ways, dovetailing controls to an efficient process will prepare your organization to handle its next set of monsters.