The Unknown Knowns of Vendor Risk

Unknown-KnownI've previously posted about planning technology strategies which factor in the realities of one's environment along with visible industry trends and occurrences.  I've also posted about agile technology planning and how to think about "Known Unknowns" and "Unknown Unknowns", or items you have identified that you don't know, along with items that are surprises.  As consultants, we typically think about the concept of managing risk at a project or organizational level. And when we do assess risks from a macro perspective, we often utilize best practices from academia or industry organizations.  These resources are an invaluable part of our toolset, but identifying risk is something that requires dispassionate thinking, experience, and foresight.

A few years ago I was intrigued by the Rumsfeld documentary "The Unknown Known".  Without getting into politics or views on the man himself, the idea of striving for continual awareness of what you know and don't know along with how it influences your management strategy and risk is highly relevant to the investment management industry, from how investments are made, through the operations and technology that support them.  Basically, the Unknown Known describes a situation where you think something is known but it turns out to be untrue.  The recent sale of Barclay's BRAIS unit to Bloomberg and the retirement of Barclays POINT fall into this category.

What did we know about Barclays POINT?  It's a well-established, best of breed fixed income risk, analytics, and portfolio management solution.  It has a global client base and is used by hundreds of firms.  It survived the global financial meltdown, Lehman collapse, and divestiture of its Index unit to Barclays.  Barclays initiated an auction of the index unit in 2014, reportedly due to depressed financials and a desire to refocus on its banking business.  The market expected Barclays could land a windfall for the unit given a previous deal the London Stock Exchange struck for Russell Indices. Leading data providers and exchanges were rumored to have entered the bidding and the price estimates had doubled from initial thinking.

With this information, the industry thought that Barclays POINT would remain a viable product and many firms continued investing in its use with little awareness that the risk of retirement existed.  One of the most common questions posed by industry leadership to operations and technology leaders is why didn't we see this coming?

The answer is complex and based on key information that wasn't factored into the equation.  What the industry thought it knew about Barclays POINT vendor risk, was incorrect.  Connecting the dots, there is a correlation of the sale of BRAIS to a market scandal years prior.  In 2008, banks systemically manipulated rates to generate profits in what is known as the Libor Scandal.  Regulators focused in on banks providing benchmark and other market data, which we will maintain as an initial catalyst for the divestiture of the Barclays Index unit.  Further, as bidders for the unit conducted their due diligence, it was reported that underlying data rights became a showstopper for the leading bidders.  It is well known that Bloomberg and IDC provided the bulk of externally sourced underlying data for the Indices and POINT.

In the end, it was Bloomberg who had leverage over the data, and pounced on the opportunity to secure the lucrative Index business.  They simultaneously seized the chance to bolster their own platform, PORT, by integrating select POINT intellectual property and attempting to capture its user base through a deal which saw POINT's retirement.  How could this have been foreseen?  Rumsfeld argues that the failure of imagination leads to missed scenarios, and I would argue the dismissal of the seemingly improbable leads to gaps in risk identification and risk planning. 

One simple suggestion is to log a risk and contingency for every vendor and system within your ecosystem in the event, however foreseeable or likely, it disappears.