Posted on February 12, 2009 by

HBOS and Lessons We Can Learn

There have been many bad news days for many banks over recent months however the last few days have been particularly painful as bankers lined up for a very public (some may even say long overdue) whipping. For HBOS, and its former CEO Sir James Crosby, opening the papers today will be particularly harrowing given the recent revelations from Mr Paul Moore.

To find out more, see the headlines below from the FT.

FSA had HBOS risk fears in 2002

HBOS report dismissed concerns

Evidence triggered Crosby’s departure

These headlines follow yesterday’s Evening Standard headlines, including Vince Cable, Liberal Democrat frontbencher, recalling a meeting with Sir James during which Sir James was reported to have said on the subject of high risk mortgages, “I see your point but the fact is that everyone else in the industry is doing it, so we have to do it”.

Whatever the truth about HBOS and Paul Moore, and however uncomfortable Vince Cable may have made Sir James feel, this post is not necessarily about HBOS or Sir James. Rather we want to draw out a couple of points that others in the industry should keep in mind when thinking about Strategy, Performance and Risk.

“Everyone else is doing it”

For Sir James this may well have been the case but it doesn’t make it right. Strategy 101 tells us that blindly following the rest of the industry players is not generally a sustainable strategy. Organisations need to think carefully about what unique value they can bring to their customers/clients. Unfortunately over the last few years there appears to have been a failure by a number of banks to carefully consider what their strategy should be and what unique value they can bring to the market. Instead too many appeared happy to follow the typical industry practice of offering increasingly riskier products and undertaking increasingly riskier transactions simply to gain size and scale in the belief that big is best. How did these products and transactions relate to a sustainable underlying value proposition to customers/clients? How did they relate to an underlying economic rationale? How did they align to underlying capabilities of the banks to take on products, propositions or ‘transformational’ deals?

If Sir James really set strategy on the basis that ‘everyone else is doing it’ well, he and his board should hand back their salaries and bonuses, because as CEO his role is primarily to work with the board to craft a strategy that delivers a compelling value proposition that is sustainable and aligned to the organisation’s ability to effectively deliver the proposition. ‘Everyone else is doing it’ is not a strategy! Incidentally creating such a strategy is not difficult, but, as many banks are learning at considerable cost, making it sustainable over time is very difficult.

Technical ability is not enough

A telling passage from one of the FT stories this morning about Paul Moore was:

“His technical abilities were generally recognised as strong,” but added he was regarded as “not having sufficiently strong influencing and relationship skills”, “being overly verbose and full of self-importance” and “over-stating matters in an overly dramatic and theatrical way”, -KPMG report. 

As we don’t know Paul we cannot comment on his skills, capability or style. But this passage is telling because it reflects an issue in the risk management world. There are many risk management people who are valued for their technical skills; however, often ‘soft skills’ such as influencing and relationship skills are overlooked in risk people. This may or may not be acceptable in a credit or market risk setting where the nature of risk and the amount of data available lends itself to technical analysis of risk. However in the area of operational or strategic risk, the soft skills are much more important. Risk professionals dealing with these type of risks must be able to work with imperfect data and bring it together with a range of subjective information to develop and sustain an on-going discussion around risk taking within the business. The Risk-based performance methodology is designed specifically to support this type of discussion, (see Shaping culture through the interaction between the Strategy map and Risk map) provide the information to inform the discussion and help shape the culture around risk, but at the end of the day, risk professionals and management in general must develop soft skills to complement many of the ‘hard’ or technical skills they may already have.

Moving too fast

One of the key charges that Paul Moore is reported to have levelled at the HBOS board is it was ‘moving too fast’ and the business was taking more risk than it was capable of managing. This is very interesting in light of a recent client engagement we have undertaken at a financial services organisation undergoing rapid change. As part of a major enterprise-wide risk programme, we recommended the use of an ‘Operational Risk Maturity Model’ that we developed in conjunction with clients to support the Risk-based performance methodology and help create the environment for change.

Whilst we will go into further depth in future posts about this Operational Risk Maturity Model, it is worth stating that it goes beyond the traditional ‘process maturity model’ approach so often is seen to incorporate an organisational dimension. This allows our clients to address two questions; firstly, how mature and robust are our risk (& performance) management processes, and secondly, how mature are our organisational capabilities? Addressing these two questions naturally leads to discussion around organisational processes and capabilities which is important but perhaps more importantly it leads to discussion about the alignment between process maturity and organisational capability. Does our organisation have the capabilities to support our current process? Does it have the capability to support the process we aspire to? Where are our organisational gaps and how do we close them? It also enables discussion around what is the right level of process and organisational maturity based on the nature of the business, department etc – not every department needs to reach “Exemplar” level and in fact the cost of doing so would far outweigh the benefits.

As the fall out continues from the credit crunch and past practices in the financial services industry we will seek to draw lessons and explain how the Risk-based performance methodology adds value. We welcome your comments and feedback.