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Skip Navigation LinksHome :: Back Issues :: Fine-tuning the survival instinct

September 2002

Fine-tuning the survival instinct


September 11 awakened financial institutions to the inadequacies of their business continuity systems. Across the industry, much thinking has been done about how to implement such systems. But in the course of the past year, some firms have nodded off again.




When the World Trade Centre was hit by terrorists last year, 60% of telephone land lines in lower Manhattan were put out of action. Large institutions' communication systems were hit hard and the New York financial markets were forced to close for four days.
A year on, how much better prepared to cope with systemic disaster is the financial services industry? In the weeks and months following September 11, continuity planning and operational resilience (nobody, it seems, cares to use the phrase disaster recovery) was a priority for every business. Institutions that had been well prepared realized that no plan is perfect and set to work on those issues they had not thought to plan for. Firms that were less well prepared looked to step up their business continuity plans and some that were ill prepared began to think seriously about the issue.
Everyone became acutely aware of the range of deleterious effects loss of continuity could bring. As consultants Celent Communications put it in an October 2001 report: "Lost sales opportunities and the loss of reputation and customer goodwill are difficult to calculate, but in a trust-based industry like financial services, any failure of service can result in losses from which recovery may be very difficult indeed."
And then complacency set in.
Last month, the UK's Financial Services Authority (FSA) said that 40% of the 11,000 firms it regulates were unprepared for terrorist attacks. While these are not among the largest institutions, whose operations are crucial to the smooth running of global financial markets, such a lack of urgency is worrying.
The truth is that in the past year little has been achieved. Collapsing markets and revenues have meant that all but the most essential of spending has been cut back. Matthew Josefowicz, senior analyst at Celent Communications, says: "After September 11 there was a lot of focus on business continuity planning but it's unsure how much resulted in lasting effects. Those that were not well prepared discussed the issue and then let it fall into the background. Overall, across the whole financial industry, they form the largest proportion of firms.
"It's hard for them, with all the pressure on stock prices and budgets. Business continuity planning is critical, but it just doesn't translate to the bottom line unless there's a disaster."
Continuity planning is a secretive area of business. Of dozens of large banks that Euromoney asked for an interview, only one agreed to speak, in even a general sense, on the record, and one anonymously. How a business plans to protect itself reveals a lot about what it has to protect. Estimates of cost are almost non-existent.
Last October, Celent estimated that about 5% of the financial industry's total IT budget is spent on business continuity planning. Since then, only the TowerGroup, in a June research report, has looked at expenditure on continuity planning. It estimates that the North American securities industry will spend more than $790 million in 2002 on business continuity planning, rising to $1.1 billion in annual spending by 2005. This means that more than $4 billion will be spent over the next four years.
Even for firms that deem themselves well prepared already, the spend is far from over. "Business continuity planning is a part of your operating expense," says Paul Honey, chairman of the Securities Industry Association Business Continuity Planning Committee. "It's a process, not a project. It should be built into your day-to-day operations. There is still major capital expenditure to come [throughout the industry]."
But high costs mean that continuity planning can easily slip down a firm's list of priorities. This in itself is putting the financial industry at risk. Tom Perna, senior executive vice-president at Bank of New York, says: "[Though] continuity planning is turning into an industry of its own, I would imagine that some smaller institutions have already forgotten about it because it is costly. And the longer time goes on, the more people are going to forget about it, though they shouldn't."
Business continuity is a question of management more than it is one of cost. Planning to resume operations as quickly as possible in the wake of a disaster or unforeseen event is not new, and some financial institutions have had business continuity plans for the past five or six years. But only recently has it started to become a board-level initiative.
"The bottom line with business continuity is that you don't know what the threat is," says Fred Meyer, chief strategy officer at technology firm Tibco Software. "The financial industry could move quicker [on this issue] but it's always hard to get people focused on loss prevention unless there's some probability of loss."
Regulators push the agenda
To this end, regulatory and industry advisory bodies on both sides of the Atlantic have stepped up campaigns to increase awareness of business continuity planning. A regulatory mandate is important to protect the industry as a whole; convincing any CFO of the commercial value of protecting his company against an unknown risk that may never happen is difficult. Few remember that many of the organizations located in the World Trade Centre at the time of the 1993 bomb attack were bankrupt two years later.
"We want to get business continuity high up on the agenda so that the top people at an institution can oversee it," says an FSA official. "It needs high-level direction and leadership. It's not an IT issue any more, and it's no longer sufficient for low- or middle-ranking people to bear the responsibility for it."
Basle II takes a step in this direction with its proposals on capital reserve requirements relative to operational risk. Original proposals stated that operational risk should represent 20% of total capital reserves. Such a high proportion met with consternation, however, and is under review, especially as there is no clear framework for measuring operational risk.
But Basle II is not sufficient to give business continuity planning the profile it needs. "You need a more holistic approach," says Pierre Pourquery, principal, head of the European e-risk management practice at IBM. "It's not a question of measuring operational risk, or of asking what can I get back? It's about business efficiency. In the end, the industry and all individual firms' interests converge."
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