The March of the New Luddites

The March of the New Luddites   

We are in the midst of what economist and World Economic founder Klaus Schwab has termed “The Fourth Industrial Revolution” in his book of the same name. “It is a world of the now: a real-time world where traffic directions are instantly provided and groceries are delivered directly to your door,” says Schwab. “This ‘now world’ requires companies to respond in real time wherever they are, or their customers or clients may be.” It is also abundantly clear that Artificial Intelligence is more than just hype – it is changing business and society in ways that are now part of our daily lives, and its use is accelerating daily. And while not without its challenges, automation is enabling humans to do more, faster, and with greater precision than ever before.   For risk managers, and particularly those responsible for third-party risk management and vendor relationships, this requires managing risk in real time, and at scale. Skilled human beings leveraging powerful information tools represent a dramatic improvement over past practice. Yet emerging from this dynamic environment, we are starting to see a distinct bifurcation in firms’ organizational approach to risk management challenges. In one camp there are a group of risk managers that are embracing change—reimagining and reengineering processes, proactively responding to market, regulator, and stakeholder requirements, introducing improved tooling, and implementing better reporting and governance.   In another group are what I like to call the “New Luddites.” These “New Luddites” either ignore or actively reject innovation and automation.

“So what exactly is a Luddite?” you may ask. “And how do they manifest themselves in my organization?” If you’re a senior manager this matters more than you may think. The Luddites were members of a 19th-century movement of English textile workers who opposed the innovations that had had made the first Industrial Revolution possible. They protested manufacturers who used machines in "a fraudulent and deceitful manner" to replace the skilled labor of workers and drive down wages by producing “inferior” goods. But the English public actually liked the manufactured clothing which was far less expensive and of a more consistent quality than the hand-made alternative.  The New Luddites share many of the attributes of their 19th century namesakes and their arguments are no less specious. It is important that senior managers be able to recognize the Luddites in their midst because they truly represent a cost and a danger to the company.

In my discussions across the industry, I find a few common arguments that Luddites attempt to deploy to avoid technological improvements. 

“I need more headcount.”

I had a discussion with the Head of Third-Party Risk Management (TPRM) for a well-known Italian universal bank a few weeks ago regarding his greatest challenges. He lamented at length that he needed more headcount to complete his backlog of questionnaire-based, point in time assessments.   

“I’ve just put in a request for the 100 new hires that I need to complete my entire backlog of risk assessments,” he proudly proclaimed. Our conversation turned to a troubled technology firm widely used in financial services and to which this firm had significant exposure.   “Rather than hiring 100 people, have you thought about how automated continuous monitoring of suppliers might make your onboarding due diligence process quicker, and less expensive?” I asked him. “And rather than focusing on reviewing line 57 of a Business Continuity Plan, would it not be of more value to take a more strategic focus, concentrating on the fact that this particular supplier’s share price has just declined by 40% in the last two months, that they have had to organize an urgent syndicated credit facility in the capital markets, sell their IT managed services business and Italian subsidiary, and are in negotiations with the country’s government to nationalize three business units?”   Like the Greek god Proteus who could tell the future but when he was asked a question that he didn't want to answer, would change shapes, my Luddite friend squirmed, grimaced, and responded, “I don’t have the resources to reengineer my manual process. And management would never invest to automate it.”  

“Management has decided to accept the risk”   

Another common Luddite tactic is to minimize the probability of an event (or repeat event). Often these individuals justify taking no action at all because the perfect TPRM tooling solution is not available in the market.   I recently had a discussion with a senior Third Risk Manager at a large pharmaceutical firm. The firm had just experienced a product contamination incident caused by a critical supplier, resulting in a number of children sustaining life-changing injuries. The firm was quite understandably looking to improve their TPRM processes and tooling to avoid a repeat occurrence.   After several weeks of discussions, he told me, “Management has decided to accept the risk. There’s simply not much we can do about it.”   That’s a very material risk to accept on behalf of the firm,” I responded. “Would the shareholders be comfortable with that decision? Keep in mind these children will never be the same.” But in management’s eyes, the crisis had blown over and the consequences to the firm were perceived to be limited. Nothing to see here; moving on. How very Luddite of them.  

"I don’t need real time risk information”

This is probably the most pervasive of the Luddite justifications for failing to implement  ai in their TPRM process. The New Luddites have learned to become comfortable with either not knowing, or even more pernicious and cynical, they argue that by identifying a risk they’ll be forced to act, so it’s best not to know in the first instance.  

This was the case with the Head of TPRM for a major Asian financial services firm, despite her boss having specific risk management responsibilities as part of the UK Senior Managers Regime.  

To this, I generally respond, “In what other area of your daily life would you be prepared not to know or to accept months-old information or notification of an event? Would you rely on monthly bank statements sent in the post? A trade confirmation or personal investment portfolio performance? And would you prefer not to know about a life-threatening cancer diagnosis for a loved one?  

In none of these areas would this be even remotely acceptable. Klaus Schwab is correct. We live in the ‘now world.’ And yet the New Luddite has made a conscious decision to be willfully ignorant. 

The career you save might be your own  

In a discussion with a seasoned Gartner Third Party Risk Analyst just last week, we discussed the Luddite phenomena. “I see a whole group of TPRM and Procurement professionals,” she said, “Who think that they can survive by operating under the radar, and above the fray.”  

So as a senior manager, you must identify these low-impact players and replace them. Fortunately, the post-COVID market for talent has improved and there are skilled, innovative, energetic, and relentlessly curious TPRM specialists available.  

Lest you underestimate the damage that a TPRM Luddite can do to your firm recall, that several recent disasters can be directly attributed to poor TPRM management practice – BP and the Deepwater Horizon disaster, PG&E and the devastating Northern California Campfire wildfires, and the UK Post Office accounting system false fraud accusations. The result in every single case was financial loss or even bankruptcy, reputational catastrophe, loss of livelihood on a massive scale, and loss of human life. Yes, in each case there was a loss of human life.  

So beware the Luddites in your midst! Whether they are TPRM managers who insist on staying true to antiquated practices such as manual third-party risk assessments and analyzing individual vendor questionnaires—or they are equally entrenched in the old ways elsewhere in your company—these folks are singularly uncurious, contemptuous of change, comfortably mediocre. For left to their own devices they can and will inexorably march your firm straight off a cliff, and with it your own career and professional reputation.  

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