Control IV – Procedures & Checklists or why we don’t need the excitement of a TV Quiz Show

Checklists. A simple trick for a simple business. Memory. We all think we are good at memorizing things. Just like the average guy thinks he is great at driving a car. Still we’d all admit that we are a big forgetful at times. In some professions like being a pilot, forgetting is not an option and they don’t. But lists are for other people, aren’t they?

Those of us of a certain generation can remember Bruce Forsyth’s pre Strictly Come Dancing youth. He was just as annoying and used to host a TV game show called “The Generation Game”. The finalists would watch a slew of household stuff come by on a conveyer belt over about thirty seconds. “Cuddly toy”, “toaster”, “colour telly”. Whatever they could recall they could keep and the viewers would feverishly compete along to see if they could do better. This always proved a challenge and the contestants would normally go home with somewhere between a little and a lot, but seldom, if ever, everything. Before everybody had a mobile phone, we used to memories people’s phone numbers; that was before we could just a button on the iPhone. If you work in a bank today, two things have changed. Firstly, both banking and our everyday lives have all gone digital, so we do less of that brainiac memory stuff. Secondly in most jobs, you have tasks that stretch over a whole day, or even longer. Even if you could remember them all, you cannot physically complete them in one day.

In my early Operations career, one of the things we had to do at Goldman Sachs in Zurich was deal with “new issues”. That means a new investment instrument of one sort or another. Facebook’s IPO (Initial Public Offering) is a new issue, so are all those new bonds the over-indebted Greeks gave out last week. One of the “in products” of our time is the structured product. Their 1990s equivalent was the “warrant”. This was more or less the same as an option; it normally entitled the holder to buy a fixed quantity of a share at a fixed price over a fixed period in the future. Most of the betting was on the price of the related share going up and the price of the warrants with it. In the Swiss market, these derivative things were very popular for a variety of reasons: they avoided the stamp tax on buying and selling proper shares, then they allowed you to have a bit more flexibility in the quantity of things you bought. Back in the day, Roche traded at something like 28’000 Swiss Francs and Nestle at some 10’000 Swiss Francs per share. As was once said of the actress Raquel Welch, you don’t get many of those to the pound. Last, but not least, there was, and thank you so much God of Capitalism, no capital gains tax in Switzerland, either for the locals or for all those nice Americans, Germans and French folk taking a few liberties with their tax returns back home.

Every time the traders at Goldman Sachs decided to issue one of these things, there was a whole host of things to do over the course of about three weeks. If memory serves me well (sic), about 30 different tasks. I think we had a list of sorts and photocopied it a few times. An added bit of fun was that we had to use a typewriter. For anybody 45 and under, this will be a term remembered with some endearment, but in 1992 it was less use than a pager is today; in fact, in the whole of Goldman’s then new swanky premises just off Paradeplatz, there was but one of these things. In every country there is something called a Central Securities Depository (CSD); this is where all the securities issued in the country are registered, kept and the trades settle.

Switzerland being Switzerland, we had a very efficient CSD called SEGA, and like the hedgehog, it was prickly with its rules. As you would expect for Switzerland, “ve hev rules, ja”, which meant filling a bunch of forms in triplicate. So, every time the wise guys on the trading desk came up with the latest cunning plan for a new issue, us poor saps in Operations were in for another round of the 30 steps and one hour’s work including hunt the typewriter and filling in the Gnome Central of forms in triplicate. Well one day, some ginger haired kid with Joe 90 glasses in the FX business decided he was going to blow the roof off and do thirty of these new issues simultaneously. Puts, calls, USD / CHF, CHF / DEM, different strikes.Confronted with this onslaught of admin, once we got through the pain of the issues at hand, we realised we needed a new tool to help deal with this.

With the help of Richard Lumsden, a great consultant from Helix, one of the vendors we used at the time, we cooked up a little checklist for these new issues using a PC application called Paradox, something like the MS Access of the time. With this, we could copy & paste the list each time and keep track of what was not done. We did have to argue with the folks at this SEGA place, the CSD. The Swiss like their rules and their paperwork, and we encountered a particularly rule-abiding dinosaur, Heinz something or other, who was shocked when I told thin the reason we wanted to print our own forms, in triplicate, straight from a software application was that we no longer had a typewriter on every desk and in fact struggled to find the only one left in the office when we did need it. He thought he had the ultimate “gotcha” when he asked how I was going to produce and sign forms in triplicate without a typewriter and carbon paper. “Easy,” we told him, “We’ll print three copies using the laser printer and sign all of them”. Score 1:0 for the good guys vs. the Luddites.

With the battle won, we could put our little tool into production and deal easily with whatever fad and mood the traders had in matters new issues. Slightly inspired, we wanted to create a standard tick list for the regular day’s work. Just to help us to remember the myriad tasks that now made up a day. Making the list was easy, getting people to use it was another thing entirely. At the time, we had two wonderful young Italians looking after our production: Valerio and Giovanni. Great mates they were too, both well trained after a few years at JP Morgan and both super industrious; in at eight, banged out the day’s production, left between five thirty and six. Reliable as Swiss clockwork. So I tried to explain to the guys that it would be good if we had a checklist for the day’s production to help make sure we did not miss anything. The Italian pride was more than somewhat insulted by this. “Whaddya mean? Don’t you trust us? Pazzo!”, accompanied by the the waving of hands in clenched fists with fingers splayed and the great haymaker of a line: “When was the last time we got something wrong, eh?” Well, I had to admit, they had me there. As Italian as they were, these two were as reliable as the Swiss train service. Spot on, never sick, never missed a beat. I was not going to win this one easily.”Guys, I would like you to use this list to guide the day please”. This was greeted with a chorus of “Whatever!”

It was not a sophisticated list, so I had no way of knowing if the guys ticked things off as they went or did a giant end-of-day tick-’em-all-at-once routine. A few weeks later, about five to six one evening, one of the team, Erwin, started yelling. “We have a big problem. The whole batch of settlement instructions for tomorrow has been rejected!” Back in the day, we had a batch submission process. Things did go wrong, but having the whole day’s work rejected was unique and having it happen at this late hour was a potential big problem. The submission was being made to the local CSD, SEGA, the same place we sent those new issues. They were very Swiss and even those who were not dinosaurs were not going to be around after six.

We had a few minutes at best to get some help. Picking up the phone to the hotline, I was surprised that at the other end I found myself talking to the Head of IT. He was obviously one of the last guys in the office. “Joerg, thank my lucky stars I go through to you. Big problem, whole days batch rejected, must be something bad, don’t what it is, but please stay around and sort this out would you?” I panted down the phone, desperate to get the story out and make sure they had some support to help us. Fortunately I knew this guy Joerg Weber quite well, so I was confident we would get help. “Let’s take a look and we’ll be back to you he said”. Less than two minutes later, the phone rang. “Olaf, good news, this is actually an easy one to solve,”,”Oh, really” I exclaimed, relieved but curious. Somewhat embarrassed, I hung up, thanking my friend for his time and quick response.

The good news was we didn’t have a problem. The bad news was we had suffered a “near miss”; in the aviation industry people get excited about these things. Right now, I was pretty excited. It turns out that on this day, our reliable and dynamic duo of Italians had gone off early and left one of the other team members to complete the day for them. He did have a checklist to look at, but one more honoured in the breach than the observance as the guys had not been ticking things off as they went along. So, with the best will in the world Erwin had figured he was at step 22 when in fact he was at step 24. He promptly duped the whole day’s trade submission. Innocent, no harm done, but a few minutes later we would have had a major fire drill to do. Now as annoyed as I was, I now had them, those oh so clever Italians. From bad was going to come good. After this one, they were ever so meek; accepting the edict to actively use the list.

Many years later, at Nomura, I was asked to set up their FX settlement via CLS (Continuous Linked Settlement, the FX industry’s standard settlement mechanism) directly into India. Now normally with offshoring or outsourcing, the stuff that is outsourced is already established. If there is some structure around the business, then there is some cost reduction to be achieved. If there is chaos, all you will get is “cheaper chaos”. This was a challenge and to focus the mind, this process dealt with the singularly most important payments on the planet each day. Failure to pay on time each day would mean a very public humiliation and is likely to ensure nobody wants to trade with you. Fortunately, times had moved on from those early days at Goldman Sachs; there were now tools available to let us create a daily checklist, specifying the time window in which a task should be performed and even having tasks that repeated less frequently than daily, such as the monthly password change on all the external systems involved. And, there was no a lii exercise with an end-of-day sign-off by a supervisor. The timing was built in and we trusted folks to do the work We ended up having to use a tool that the IT department controlled, but we got there in the end. Actually, so successfully that there has never been a incident of failure in that business and that even though a marauding French bank lifted out the top three guys in the Operations shop within weeks of the new process being up and running. The checklist software and being able to tick things off as the day progressed was one part of the success; procedures, which we will look at next week, are the essential complement to the list.

Lessons Learned: According to the U.S. Army, a Standard Operating Procedure, or SOP, is “a clearly written set of instructions for methods detailing the procedures for carrying out a routine or recurring task or study. (Click here for more detail). This is a good thing; it is important to have a view on the routine to be followed. Do not get confused though; in the Army they might say “Son, don’t think”. That is not what is needed. You should be thinking about changes, but until you identify the what and when, follow the procedure today. Arm yourself with the tools to do this in a clever fashion with daily, weekly, monthly recurring tasks. Do not bother with an end of day supervisor sign off, because if you have things set-up right, any major issues will come out during the day. Set things up so that every day is the same. I joke and jest with some of my colleagues that the ideal operations day is “reassuringly boring”. The best tool for the job here will allow you to define exactly when the tasks have to be completed and prompt you to do them.

Epilogue: I am convinced to this day that issuing 30 warrants at once was a sign of cluelessness, throwing a lot of things at the market and seeing what would stick, rather than a brilliant plan by a kid who looked so young, if he was in shorts you’d have asked him why he was skipping school. But what do I know, the partners elevated young Kipp Nelson to a partnership ahead of the IPO and he retired soon afterwards with pockets lined.

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