What are your single points of failure?

We tend to think about single points of failure in terms of hardware. Wall Street has certainly been trained on the issue of redundancy and catastrophe planning, but the recent credit crisis has made it abundantly clear that people need to start thinking more broadly. There are certainly additional "single points" of failure across the enterprise, which can sometimes be shocking. 

All of this makes the Tabb Group's Perspective "Single Points of Failure Are One Things: Minimizing Their Impact Is Everything," a timely read. Consider all those Bernard Madoff victims; in some cases, Madoff's firm was the business. Their entire portfolio was invested with him--that's an obvious one. Consider also, credit hedge funds with a large portfolio of CDOs; clearly, it had a single point of failure.

You might think of non-technology single points of failure as akin to a multiple sigma event. But after conducting interviews on operational risk with over 20 buy-side institutions ranging from $40 million to $160 billion assets under management and employing between two and 1,200 employees, Tabb would disagree.

It concluded that buy-side firms, "regardless of their size or maturity, are vulnerable to several key dependencies including, but not limited to, a key person, process, facility, technology and/or third party relationship whose loss can disable a firm, because the firm has no backup, redundancy or contingency in place." 

The key choke points can be lumped into four areas: People (a critical portfolio manager for example), facilities (single location, no backup; single power source), technology (no contingency systems, telecom assets that aren't backed up) and relationships (single prime broker). 

In most cases, the fixes are easy, the report notes. Still, even after the credit crunch, you have to wonder how many firms have thought all this through. There could be some subtle single points of failure that surprise you. Perhaps, the portfolio management support guy, the only guy that get the system working again. You get the idea, and it's worth thinking about now. - Jim