Magazine article The RMA Journal

Risk Software Solutions: Survey Says

Magazine article The RMA Journal

Risk Software Solutions: Survey Says

Article excerpt

Software solutions are sailing along at an ever-hastening clip to keep pace with operational risk challenges. And more and more vendors are joining the regatta. Raging Torrents International, a risk and technology advisory services business, compiled a detailed survey of existing software suppliers.

Operational risk management as a formal discipline is still in its early years. Its structure is being envisioned, implemented, and reinforced by those in dedicated organizational positions using specific methodologies. There's more than one way to deal with operational risk, as can be seen by a range of approaches now under way. This in turn implies a range of software solutions. In the not-too-distant future, more than 40,000 institutions worldwide will need to address their operational risk requirements.

In time, many institutions will build their own solutions, but a significant proportion will use commercial solutions. Given the range in institution size, demand will vary from small, general solutions costing around $10,000, to sophisticated, integrated solutions costing $750,000 or more. There also is interest in various forms of information and solution sharing, as seen in various data exchange consortia and in application service provider (ASP) models.

Buy-Side Considerations

Major drivers for operational risk software include the desire to automate manual processes to reduce risk, improve risk information flows, and meet various regulatory requirements. In the latter area, the primary initiatives are Sarbanes-Oxley for U.S. banks, Basel II for internationally active institutions, and money-laundering and anti-terrorism legislation for just about everyone. Ideally, each institution will have a single integrated approach across all of these drivers.

However, it is extremely difficult for an institution to establish a compelling business case for investing at the level required to address all of the key areas. Operational risk software solutions usually do not reduce headcount, directly improve profitability or, in themselves, directly reduce unexpected losses. Many of the benefits seem more intangible, such as improved information flows, tighter control measures, early warning indicators, and comparable metrics. The purchase decision process is typically lengthy and requires considerable investment from both the purchaser and all the vendors attempting to sell their solutions.

Sell-Side Considerations

There are many factors affecting vendors in what is essentially a young and relatively immature market: changing business requirements, a lack of standardization in approaches, and price sensitivity caused by uncertain business benefits. With operational risk as topical as it is, there also has been a tendency for many software vendors to portray their offerings as supporting operational risk--yet when any form of serious consideration is made, the shortfalls of such offerings are readily identified.

New vendors enter the market on a regular basis, and the industry has already seen some consolidation and failures, while alliances are now becoming more frequent. The average vendor is relatively small and usually not that well funded. The first vendor to disappear was Operational Risk.Com, with its software solutions now par of offerings from Algorithmics and Fitch Risk--OpVantage. Recently, Amelia went into liquidation; its products now are offered by Methodware and London Bridge Software. On the acquisitions front, Fitch Risk purchased NetRisk, acquiring the OpVar product, and most recently, SAS Software has acquired OpRisk Analytics.

While the majority of operational risk solutions have been designed and built as commercial solutions by their suppliers, other solutions have evolved either from internal developments within banks being commercialized or from a vendor that has undertaken a custom development for some specific institution and then commercialized the resulting application. …

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