The wide-ranging costs of software failure

 

 

Tim Nash of Finextra continues his series of articles with us talking about the payments industry. In this article, he outlines the costs of software failures and how the right kind of investment can minimise the huge costs of a failure….

 

Whilst perhaps not at the top of the list of Executive priorities for action, the effects on a company of a large-scale software failure can be both wide ranging and devastating. In illustrating this point, two recent examples come to mind:

– on 30th May 2017, The Guardian reported that “British Airway’s owner losses £170 million in value after IT meltdown – IAG shares fell 4% as airline’s reputation is dented after IT failure stranded 75,000 people”. In addition to the hit to the share price, the software failure was also expected to cost the airline £150 million in compensation.

– at the end of April 2018, 1.9 million TSB customers experienced severe problems following the attempted migration of their accounts to the Proteo4UK system of Banco Sabadell. This caused Sabadell’s share price to fall by more than 4%, a loss in value of £330 million. In addition, the bank was expected to lose many customers and its income line suffer around £50 million costs from waived overdraft fees and increased current account interest rates. Further, the UK’s Financial Conduct Authority (FCA) announced that they’d be launching an inquiry into the failure.

These examples show the significant damage a software failure can cause a company involving areas such as:

• reduced share price / market capitalisation
• financial loss through various refunds and compensation payments to customers
• financial loss through the costs of correcting the errant software / systems
• financial loss from costly legal cases (TBS are expected to face various civil actions in the courts)
• investigation by Regulators
• fines imposed by Regulators; under the new GDPR rules companies can be fined up to 4% of their annual turnover for breaching data protection rules
• fraudsters / cyber criminals using the well publicised period of systems instability to attack the institution (believed to have happened to TSB)
• reputational damage – loss of customer trust and inability to recruit new customers, both reducing future business growth.

The ill-effects of the above are of course heightened through social media whereby any issues with bank systems are immediately highlighted and discussed by customers as well as financial journalists on Twitter, Facebook etc. The days in which a bank’s Press Office could seek to control and manage the communication of IT and service failure have long passed.

Whilst the causes software failure may well differ widely from case to case – British Airways Check-in and operating system failures were due to human error and the TSB melt-down by what IBM reported as a badly managed migration – their likelihood can only be reduced and their ill-effects mitigated through strategies focused on business assurance. The development and implementation of business assurance tools such as AI-based performance monitoring and automated systems testing, may appear expensive in the short-term. But a business case could surely be created based on the avoidance of the wide-ranging damages detailed above.