What happened to technology in financial management strategy?

2008

The former giant institutions collapsed or almost fell as the incompetence of their 'leaders' came to light. But where did the digital revolution figure in their management strategy?

All of the culprits had access to what was supposed to be the most dynamic, decisive and dramatic force ever to be used for managerial purposes: Information Technology. All management is founded on information, and digital technology can store vastly more relevant knowledge, as well as making it available at far greater speed and analysing the findings much faster.

If your IT is up to date, there is no excuse for inadequate planning – you can check preconceptions and predictions time and again, and on the run. Once decisions have been reached with these marvellous tools, the progress and process of execution can be monitored, analysed and corrected by continuous, accurate feedback.

So what happened to the computers and what were they playing at? Since the very beginning of the IT Age, Wall Street has boasted more of this technology, processing more data than any other sector. However, it failed to spot malfeasance of the simplest nature.

The financial management strategy failure was so acute that after the sub-prime crisis took hold, the major participants did not know the true worth of the sub-prime mortgages, in total or in their own books.

However, it should be a basic IT operation to test a loan application on the fundamental principles of prudent risk and creditworthiness. There's no doubt that IT systems exist at the banks, and anywhere else in business, that are well capable of accessing the relevant information and so preventing the ridiculous overvaluations and the unreal transactions which brought on the collapse.

It is of course unjust to blame the computers themselves for the crisis; after all, the systems were prevented from asking the right questions – those that would have revealed the unacceptable risks that were being taken.

Financial management strategies have to negotiate a complex maze of transactions, from small pay-ins to big daily shifts of foreign exchange deals. The complexity has grown exponentially in this century. It used to be costly to process the numbers manually, but steady money was earned through their completion and recording. The computers eventually and inevitably eliminated paperwork and took over all the processing, cutting costs to a minimum and forcing the humans to look for alternative sources of profit.

In part, this led to the enthusiasm for derivatives and other products which couldn't be devised or marketed without the computers. It wasn't possible for the average bank executive to even understand these temporary goldmines, let alone control them.

This ignorance could have been conquered, but only at a cost. If used properly, the computers could have highlighted the excessive risks that were taken in pursuit of the big loot.

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About The Author

Robert Heller
Robert Heller

Robert Heller, who died aged 80 in August 2012, was Britain's most renowned and best-selling author on business management. Author of more than 50 books, he was the founding editor of Management Today and the Global Future Forum. About his latest title, The Fusion Manager, Sir John Harvey-Jones wrote: "The future lies with the thinking manager, and the thinking manager must read this book".