Your ALM solution vendor’s approach to Risk Management should tell you everything you need to know about their product

2020 – a year of reckoning and a signal for change

MORS Software is a leading provider of Risk and ALM Management Solutions to the global banking community. Founded by Risk and Treasury practitioners and with a team primarily consisting of Risk and ALM Practitioners, you’d expect we’d know a thing or two about managing risk. So, in 2020 when the world was shocked to its foundations by a black swan, this time in the guise of the Covid 19 global pandemic, how did MORS Software fair? How did its customers fair?

“…black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight…” Wikipedia.

A black swan, we can surmise, is something so terrible that it’s nearly impossible to predict. Except, by definition, Covid 19 was not a black swan. It was historically not unprecedented and as recently as 2015 such an event had been written about by high profile authors and public figures such as Bill Gates. So, was the banking sector prepared?

The effects of the Covid 19 pandemic were predictable. They were even possible to model, models being the ‘all essential’ ingredient of most ALM and Risk Management systems. The problem was and still is, that almost all models employed by almost all financial institutions don’t consider outlier cases. When a bank talks about a ‘worst case scenario’ it is seldom actually referring to a worst-case scenario. In reality the systems and models that underpin global financial markets, at best, consider ‘not very likely’ to be ‘worst case’.

The consequence of this attitude towards risk is expensive. Banks were not prepared. They were not prepared from a financial point of view and they were not prepared from an operational point of view. In many cases, it took 2 to 3 months for banks to understand the impact Covid 19 was having on their business. Is it the case then that banks are often badly let down by the 3rd party software solutions they rely on?

It’s also clear that banking supervisors were not prepared. After 2008 most regulatory bodies embraced new regulations orientated around the accumulation of capital and liquidity in the guise of buffers designed to safeguard banking customers and the broader economy from another meltdown. Buffers further calibrated through leverage ratios, a belt and braces approach, if you will.

The immediate realization for most financial institutions was that the buffers that they had carefully built were relatively useless in times of stress, because consuming them would immediately cause an institution to breach its ratios. What then was the point? Capital and Liquidity buffers are expensive to maintain. Have they become insurance premiums that don’t pay out when claimed against?

Did banks introduce new systems for Risk and ALM Management post 2008? Did software vendors introduce a new generation of software tools to better equip the banking sector? Could banks immediately visualise and plan for the impact Covid 19 would have on their balance sheet and income statement? Did banks consider the effects of a global pandemic on the operational ability for their entire team to work remotely? Did the banks choose solutions partners with an ability to work fully remotely? What lessons did we learn from 2008?

Prior to joining MORS in Q4 2020, I had not been directly involved in the ALM and Risk Management solutions sector for 5 years. Since last year, I have been continually surprised by how little the vendor landscape has changed. 2 particular things have surprised me. Firstly, that the market is still served by the same tired solutions and vendors that have been around for decades, and that their solutions haven’t changed much at all. I’m shocked by the absolute failure of almost all vendors to develop real-time online solutions for ALM and Risk Management that allow institutions to ‘run the bank’ with an ability to dynamically model multiple parallel scenarios which can simultaneously consider regulatory constraints.

My second great surprise is that so many vendors peddle ‘integrated solutions’. I’d often observed that most of such solution vendor’s products were only integrated in PowerPoint or in the brochure. The number of genuinely integrated solutions in the market for Risk Management, ALM, Profitability, Performance Management, and Reporting are close to none. At best, solutions purporting to be integrated are a cobbled together assortment of legacy products usually bundled together after countless rounds of mergers and acquisitions, held together by a flimsy layer of buzzwords.

It’s not that banks couldn’t understand the impact of Covid 19 on their business, or even understand how to adapt to survive or take advantage of changing market conditions, no. It was the fact that for almost all institutions, this exercise took weeks and months largely because of inadequate technology as per the solutions described above.

In MORS Software’s 2021 ALM Survey (the results of which will be published in April 2021), a majority of respondents acknowledge that it took over a month, and in some cases, many months, to understand the impact of Covid 19 on their business. The banks that said they were able to respond in a matter of days, were MORS Software customers.

MORS Software’s business and that of its clients continued uninterrupted during 2020. We continued to grow and better support our existing customers and onboard new customers.  Why? Because in everything we do, we assume that the worst can happen, and occasionally does. Everything from our solution to our business operations is designed to ensure our customers are best equipped to understand and react to any and every possible scenario, immediately. Not in batch. Not in weeks and months, but immediately. Our ability to do so serves as a refence for operational excellence both for software businesses and for the products they provide. MORS Software’s approach is based on 5 key pillars:

  1. MORS ALM, Risk, and Treasury Management Solution is best in class

MORS customers were very well insulated from the economic impact of Covid 19. MORS played a critical part in their ability to effectively respond to the macro economic factors affecting their business, domestic and international capital markets and customer behavior. MORS customers could react quicker than the rest of their market and not only minimize the impact of the pandemic, but benefit as early movers:

MORS is real-time, based on contract level granular data, and has a powerful Scenario Analysis and Stress Testing Engine. Using MORS, our customers reacted to market changes in hours and days rather than weeks and months. Modelling hundreds of potential scenarios instantaneously, our customers were quickly able to understand the impact of Covid 19 and restructure their business in real-time.

MORS is so powerful that our customers requested assistance from MORS Software to augment their ALM and Treasury teams during periods of increased scenario analysis and stress testing. The MORS Software team is made up of ALM practitioners with decades of first-hand experience running Treasury and ALM functions in banks.

MORS Software immediately set-up a Business Process Outsourcing service, with the team becoming a natural extension to the customer’s team. Based on MORS Software’s strong relationship with Microsoft, many clients are already using MORS in the Cloud (Azure), providing us with immediate and remote access to their systems. Working remotely and flexibly in this way was highly cost effective for customers all over the world.

2. MORS Software Remote Operating Model:

MORS Software is a technology company and had invested already in solutions to support remote working. There are lessons to be learnt from the country that invented cellular telephony! The team could already work 100% remotely before the pandemic. We designed our working practices this way. The solution, development and service management environments are 100% in the cloud.

MORS Incident Response Protocol was initiated with immediate effect with no lag or break in service, with all activity going on-line with the necessary tools already in place. MORS operates a Virtual Software Development Methodology and Environment, so the development function of MORS Software continued as normal and 2 new versions were released in 2020 in line with our ‘business as usual’ regular release cycle.

3. MORS Software’s Lean Project Implementation Methodology:

Many software vendors generate huge amounts of revenue from large implementation projects with dozens of consultants taking up valuable space at the premises of the customer. Often such professional services costs can exceed the software license 10x. For those vendors, this simply wasn’t possible in 2020 and their customers and customer’s projects suffered as a consequence.

The implementation of MORS is light touch and agile, so all projects continued remotely, and unhindered, new customers were onboarded, and new projects started. All project goals were met as planned, under the new operating conditions.

4. Digital Business Development Tools and Techniques

The volatility and uncertainty caused by the pandemic exposed weakness in many bank’s ALM and Risk Management systems, causing an uptick in interest in real-time analytics and powerful scenario analysis and stress testing engines. MORS responded to this with increased automation of the sales and marketing process through dynamic cloud solutions such as HubSpot, resulting in increased opportunity inflow.

Embracing virtual and digital communication, we were able to sign ‘new name’ customers remotely having never met in person. The same techniques were applied to engaging with and signing new partners to the MORS Software Partner Program.

5. Robust and Adaptable Business Practices

We continued to hire new people, even internationally. We continued to run training and personal development programs virtually and remotely.

Of critical importance was the mental well-being of our team. We established virtual engagement initiatives to maintain team ‘mental health’ and focused strongly on communication with regular informal coffee meetings and socially distanced gatherings.

We have been lucky that the market has had to embrace digital engagement, so we were quick to increase virtual client communication and virtual outbound marketing. We’ve enjoyed some great client engagement with Webinars, Fire Side Chats, Online Training and a whole range of other digital activities.

The events of 2020 tell me that the traditional landscape of solutions for ALM and Risk Management are not fit for purpose, nor are the vendors that sell and implement them. As Douglas Hubbard points out in his book, ‘The Failure of Risk Management’, the problem with risk management models and systems is that you don’t know they don’t work… until they don’t work.

When choosing an ALM solution, choose a solution that supports you in times of stress, not just ‘business as usual’. Think carefully about how your solution vendor manages risk, it will tell you a lot about the philosophy embedded in their product.

The world changed again in 2020. It might now be time to change your solutions and your vendors to match.