Single Points of Failure
Do any of these sound familiar?
“We better not lose John, or we won’t be able to pay our advisors for weeks.”
“No one can cover for Jane, and no one wants to learn pivot tables.”
“John plans his vacation around month-end closing.”
If so, then your firm has a single point of failure–whether you realize it or not. Moreover, you are not alone as many broker-dealers and RIAs face this challenge. A single point of failure is defined as a potential risk posed by a single part of a system that, if it fails, the entire system stops working. This term is more prevalent among those who work in IT as there are numerous systems and components that could fail (e.g., ISPs, networks, servers, software, etc.).
At a wealth management firm, single points of failure usually revolve around incentive compensation management. For example, when a firm’s back-office relies on a single employee to process commissions and this individual performs these tasks solely using spreadsheets, both the employee and the spreadsheet software are potential single points of failure. Possible scenarios include the employee unexpectedly leaving the firm or losing unsaved work in a spreadsheet.
People as Single Points of Failure
Unsure how to identify personnel that might be a potential single point of failure? Do you have a sole person that:
- Possesses a unique skillset
- Provides an exclusive function
- Holds distinct knowledge
What would be the impact if that person were to leave the organization suddenly? Can anyone else do what this team member does? Do they maintain exclusive knowledge about how to process the crediting and payment calculations? When one staff member is the sole keeper of critical business data, the firm is at risk.
Steps to mitigate the potential risks posed by people single point of failures.
1. Documentation: Take time to document the specific processes and tasks owned by this individual.
2. Cross-training: In tandem with the documentation, ensure there is a backup employee that is cross-trained.
3. Communication: See to it that your team is in sync and plans ahead for things like extended leaves.
Spreadsheets as Single Points of Failures
People are only half of the equation. Manual incentive comp processes typically include a strong dependence on spreadsheets and pivot tables. Spreadsheets also present a potential single point of failure for your firm’s back office. Research compiled by University of Hawaii professor and spreadsheet expert Ray Panko showed errors in 88% of 113 spreadsheets audited.
Spreadsheets are powerful and flexible tools and will continue to be an essential instrument for any business. However, because of this, they also pose a significant risk. Back in 2012, a simple copy and paste error in Excel cost JP Morgan $6 billion. Besides user error, additional hazards include:
- Improper version control
- Data loss
- Formula errors
- Unskilled users
Ways to mitigate these spreadsheet risks:
1. Training: Whether it be 101 basics or advanced macros training, there is always a need to hone skills or get a refresher.
2. Published Guidelines: Establish a protocol for your team to follow. Make sure there are clear guidelines for maintaining and updating spreadsheets.
3. Version Control: Implement a system for version control. Things like standardized file naming conventions and limiting edit access rights will go a long way.
Although implementing these will help mitigate risks posed by single points of failure, these measures will only get you so far. Consider the fact that people will always remain a potential single point of failure. Also, there are limits of using spreadsheets to manage your incentive compensation program. As your firm grows, consider leveraging incentive compensation management technology.