Performance Controller

"However beautiful the strategy, you should occasionally look at the results"...WC Print

In business intelligence projects, assembling the data is large part of the deal as you go about building an independent data warehouse or set one up in Business Intelligence reporting software itself.

The Pareto theory to focuses on 20% of effort to get 80% of the value does not work in business intelligence projects. You need to get 100% of the data right and cleaned up before it can be mapped and reported consistently.

Even cutting corners by doing a departmental business intelligence may work for a while. But in the end if it is not linked to the published finance results it will be soon be undermined and will eventually end in the scrap bin of good ideas that did not fly; along with those who attempted to fly them.

Using an enterprise level business Intelligence project as a focus to clean up data in itself is a great way to go. The benefits are most often immediate. In fact to get those jobs done any other way almost never happens as the business continues to struggle on with hybrid decision processes that hinder progress.

Building a consistent data-warehouse in fact is the real job in setting up business intelligence reporting. The problem there is cleaning up is often costly and the perception is by most that there is no problem or cleaning adds no value, so it gets left out of the value discussion.

As a Finance or IT manager how often have you heard, “We already have a good data warehouse and all we need is a Business intelligence tool to do our reporting from it.”

As one who lives in both worlds and in my case as a consultant too it actually tells me to beware to do much more proving work on the business case. And do more project due diligence work before locking in on contracts. 

In the case of the CFO or Business Vice President  championing the work, this should also be done before seeking the budget and letting procurement loose to go find a vendor and a competent consultant. Finding the bad data story after the fact, when the installed team and software is on deck, is far too late. No-one cares by then as they know you are between a rock and a hard place with little or no way out.

And if the business is performing well and the goal is for faster decisions information to maintain momentum, then  time to delivery as goal is seen as the most critical project driver. Then things like consistency are automatically assumed to be there or must be dealt with regardless of other change impact considerations.  But of course in this type of case given performance is relative in terms of these constraints, problems that most often show up are on the enterprise’s source systems themselves. So then the paradigm shift as a goal is stalled and the project, which may get off to a great start, quickly falters as these issues surface.

So it actually does take a great deal of resolve, process change management and team work to agree consistent business rules at all levels to solve the issues. That is at the heart of it all. And it is what can trip you up if you don’t stay focused and get it under control. The rest of the work is really just technical and is quite straight forward with limited risk.

Hence in well thought through projects where the value of cleaning is recognized and the correct value focus is brought to bear, it can pay for the project many times over. In such cases this should be recognized as a business benefit to be targeted and not just left as a by-the-way or left out as a buyer beware tactic to get unknown issues solved and cost savings on the cheap.

And in the end who cares what BI tool we use. The truth is if you don’t use one you are foolish as the disciplines they bring alone are worth the money, I should quickly add that this only applies if they are setup by people who actually do know what they are doing. I have seen too many IT selves with software still its shrink packed box never opened. Or when it does it is badly used by installation novices. As one of my software vendor contemporaries said to me recently

“if you don’t have a competent data management team included in your BI project, then I hope you don’t choose my software as I don’t need the reputation”

As too often we aim for the utopian state to exploit what comes only after the hidden work is done. getting there is often actually where the value is as your conversations across the business sort-out the issues in a more natural way. So seeing it as a burden and a delay to project is folly. Doing this will invariably cause frustration and loss of focus and may cause it to even falter and/or fail.

More to the point business leaders who provide budgets for this work, who may also have been part of the evolution that unknowingly or otherwise create the issues, invariable underestimate what it will takes to fix them. They must understand it takes momentum and motivation to get the tough and dirty job of cleaning done. And that business intelligence is about their future and not just some fancy reporting process that sends emails on delinquent performance and helps cuts the costs of doing things in spreadsheets.

As sponsors entitled to see more visible progress to the end game solution that they approved the budget for, they  should call to account project managers to bring to attention any value that gets the money back earlier than expected. By simply enforcing standards and making data process improvements before the project is even completed will delver this.

Hence the value is in the understanding the secondary benefit of cleaning up data and continually selling the value of the process it takes to get that work done is vital.

It is not just all about setting up dashboards and dials to help focus and understand the data but also about having consistent data that has universal acceptance and integrity.  This combination in turns allow business intelligence to be used to create an intelligent business

For many of us doing this do we really need to rethink our mission and how we manage.

 

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In a related post Failing-address-data-quality-and-consistency here are some very key points

Don’t fall into these traps. Don’t assume anything about the state of the data. The areas where data quality and inconsistency problems lurk:

• Data quality within systems-of-record applications may be “masked” by corrections made within reports or spreadsheets created from this data. The people who told you the data is fine might not even be aware of these “adjustments.”
• Data does not age well. Although data quality may be fine now, there’s always the chance that you’ll have problems or inconsistencies with the historical data. The problems can also arise when applications like predicative analytics need to use historical data.
• Data quality may be fine within each systems-of-record application, but may be very inconsistent across applications. Many companies have master data inconsistency problems with product, customer and other dimensions that will not be apparent until the data is loaded into the enterprise Data warehouse.

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I want to share with you a recent experience I had negotiating a contract. During this process it struck me that even though we know there are no fairy godmothers, we still believe they will take care of us.

As a budding recruit learning the commercial ropes, my boss had once warned me about taking that approach.

You can lose your shirt if you don’t get your pricing right. But you will lose your business if you compromise on your terms and conditions.

Don’t take shortcuts on conditions as there are no such things as fairy godmothers to bail you out.

Recently at work we concluded negotiations on a deal. From the get go we thought we had covered the sales cycle well, first qualifying our prospect to make sure our lead was a genuine with substance and had genuine intent. In the education and needs understanding stage we establish our credibility and could decide too if we were a good fit us to take on the work. Then as we looked at functional matches and implementation priorities along with their organizational change capability and resolve, that placed us well to understand all the risks. This process took some time as it moved to and fro on options discussions and as the prospect employed divide and retreat tactics and checked our competitive value.

But in the end with scope, resources and pricing all agreed , as the selected provider, the final step was to agree the terms and conditions to get their signature on a work order. The terms and conditions we included in our proposal had also been part of the practical discussion so we assumed our conditions and working assumptions would not present any issue.

But their legal people did a turn about rejecting anything that had even a hint of risk as they sought to remove clauses that protected us from events not of our making. In particular one clause that was red lined dealt with redress in the event of uncontrollable organization change in their business

As we struggled to find a compromise, suggestions were made to limit the clause to good faith wording and to deal only with specific risks. The watered down clause of course become unenforceable but the temptation to close the deal was by bow very high. This compromise however was still a red flag to me as I reflected on what my old boss would have said.

Blindly relying on fluffy terms to maintain commercial balance is just like lighting a long fuse and believing the bomb will never go off. Or when it does you will be long gone.

In our example we were concerned about:

1. Many projects have bad experience when key people leave or get re-positioned out. Often too it can even be the sponsors themselves who are gone. In such cases, ongoing carriage of process and managing changes defaults to the service provider to re-sell and continue to implement without the original sponsor support. It also becomes a new ball game as well as you start again at the re-educate stage with a new incumbent and are forced to defend agreements made with a previous one.
2. In cases where of a key person working with a service provider leaves they will invariably take with them knowledge and leave unfinished work This may revert back to the service provider to back fill and or/redo. Not having redress on this can have disastrous results not only for the service provider to unfairly bear the cost but also the weakened project may struggle and fail.
3. When the company gets taken over or itself does a takeover of others, there is always a material impact. Any material change in ownership will mean inevitable organizational change which in turn will always have some impact on a current project scope.

When preparing contracts, experience teaches us that pricing is only one aspect. Working assumptions that make this up must also be included and debated well so they are clear.

Terms should never be compromised without also reconsidering the risk and the pricing again. The negotiating approach should not be to reduce mitigation and cover, but instead to sell this as a mechanism to see fairness is re-balanced in the spirit of the original negotiations so nether side in the future can take an advantage

As a service providers it is not only for the burden of added cost or the overall success and gets us paid that is at stake if we get sloppy on our terms and conditions. Doing that can also lose us our reputations that keep us in business.

Do you have similar experiences?

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There is so much conversation about social media, but it is not only network marketing media interested in exploiting iits potential. The criminal elements in our communities, it seems, are too interetsded to see how they can put it to use.

Are you one those people hooked on twitter who tells the world every time you leave home or go to some event.

If you do, think again before you this do next time. You may well be telling thieves to take advantage of you.

In his oz-analytics post this week headlined mining social media, Steve Bennett updated us on a site he found that detail how robbers can now see who is not at home using simple twitter stream search.

For many of us who have our emails on websites and public profiles, we may also seek to simplify our lives in the explosion of social networking. For this can join it all up on Facebook or similar sites. But beware what you include as it does not take super intelligence for someone to use this to put it together and then watch and wait till we tell them the coast is clear.

Any robber with a phone and a twitter account, may get an open invitation from to take what he likes because as we tell him we are not at home. A simple key word search on twitter give easily robbers the scoop on you . If you don’t believe me, do a search and see how many people say they are not at home. The web on the phone also provides maps and satellite photos of your street and your house to make the plundering job even easier And it is even easier with an alerting tool to send an email when someone says they’re not home.

The only issue then is it may get a bit crowded at your house if more than one robber turns up with the same idea.

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How many of us have our hard earned savings, superannaution or other nest eggs sitting in the hands of people who really have no interest in your welfare. This american call to action to move your money, points out that people in business are generally there for ther health and not yours.

The movie theme is about making your savings safer as it aligs with the “movie story told in the classic film It’s A Wonderful Life — a tale about a small banker, played by Jimmy Stewart, who almost gets crushed by a big banker. In the end, though, the community rallies around the small bank and helps save it….. The tag line is “Move your Money” 

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In the US there are around 8000 Banks, many just like the movie. It has been argued this inefficient system is one of the root courses of the American fimacial malaise.  Perhaps but one wonders who profits if they fail? 

Here is another point of view.   

http://www.huffingtonpost.com/arianna-huffington/move-your-money-a-new-yea_b_406022.html,

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Use of consultants in business is commonplace for many reasons. Consultants are often used to focus undistracted on change work, especially as they are bonded to bring about change. They can be seen to be more capable to be effective when perceived as having no vested interest or legacy systems baggage. 

They can also provide expert advice on finite or given change objectives and bring high end objectivity on such things as blue ocean opportunities. Using consultants for decision management is also useful to mitigate risk of internal limits.

On a past consultancy engagement, I got some valuable experience on what all care and no responsibility means. While advising a large US based multi-national on a change process, part of this work involved my attendance at a high level internal think tank as an invited observer. There my client, the VP for Planning, made an impromptu request of me to present his corporate strategy on a change program we had been working on together. His compelling reason was that it is was far better I delivered it, as a so-called credible expert advisor, so they could be objective to discuss any buy-in issues.  This also highlighted another high value I brought. In the event that the plan failed to get buy-in, it would then be easier to just shoot the messenger without any collateral damage. Needles to say my facilitation was focused to make that sure they bought it so the change was a success.

At a  recent workshop, one of my colleagues attended in Singapore they were discussing the value questions there about consultants and their employee counterparts. The group comprised of a mix of employees and consultants all engaged in business to advise on change processes and related IT based projects Specially they looked at the decision making of short term thinkers who may cause long term harm to organization stakeholders.

The debate was initiated with the assertion: 

“When making long term decisions, management may be better off leveraging experts rather than relying only on internal resources.”

Clearly, knowledge and skill in the organization is vital to decisions. But it is necessary to mitigate risk of decision making by employees especially as most do not see themselves in the company for the next 5 years. 

One assertion often made is that a company must seek ways to obviate the risk this presents so long term decisions benefit the company without compromise. The short term aims of individuals who made them,  is often to use that experience to get a better job elsewhere, long before they can be held accountable for the results.

In random order here are some of the pros and cons from the discussion:

1.  Employees often make short term business decisions on Long Term Strategy because they want to “lock in” the rewards that are tied to short term results. (Example: year-end bonuses and next year increment/promotion).
2. Professional employees actually consider themselves as in-house consultants, with reputations to lose and live up to, so short term gain is less likely to be a compromising factor.
3. Employees in management jobs are expected to have  the ability to deliver sustainable outcomes by meeting short term objectives as proof.
4.  In high staff turnover business generations of employees will change previous decisions anyway.
5. In low turnover companies a short term trade-off culture is not tolerated.
6. Too much long term thinking could lead to Companies becoming stagnant.
7. Consultants, especially those tied to a solution may by nature be biased to fixed ideas and may also present short term compromise.
8. Good consultants provide expert input based on a wide range of experience.
9. Employees as they change roles and jobs can often be more effective than consultants.
10.   Business consultants must rely on internal expertise anyway for information and support relationship for internal selling ideas.
11.    Compromise potential is reduced when an experienced export  consultant leads the decision analysis process.
12.   Consultants and advisors can have an advantage as many think naturally about the long term as part of their business.
13.     Consultants relate to customers not as employers and act to ensure relationships  last way beyond the short term. Short term success on their decisions gives them this so they can maintain continuity to support long term executions.
14.   Developing customers is a strategic aim of consultants for customer retention.
15.    If consultants do not think strategically they will show up  as being just contractors, with no more value to add than the cheaper version of employee.
16.   Consultants work in the same culture and face the same compromise to meet short term goals of their business. This may equally translate to their customer.
17. .  To survive business must think short term. Long term is never more than 5 years.
18.   Consider an ideal that a culture can be established in an organization where everyone, employees consultants and  extended service providers alike, think of themselves as their own boss with only the customer holding them accountable.
19.   Consultants by nature generate new ideas and stimulate clients to achieve something that the are capable of. They challenge the norm.
20.   Employers should give incentives so people think like a business owner  to add the value they are paid to deliver. If everyone has this same mindset, results will be predictable and deliverables will be of the highest quality and last longer.

On balance it seems consultants and employees both have a place. The reality that maintains the need for expert consulting may be based on a need for external stimulus and focus and accountability, to deliver a different style of thinking with motivation for more balanced outcomes.

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No it is not a hand in Bridge or Gin Rummy. It is a legal term. Did you ever sign a contract with a Force Majeure clause in it?

This poorly understood clause is often glossed over or omitted when it should not be. The fact is, for many sales people, it is one of those "non clauses" about something that cannot be controlled or never likely to be exercised.  But it is useful to understand how it may be used as it could save you or your company a lot of pain.

Basically, it is a get out of jail clause for liability from acts of god that may stop your ability to deliver on your contract

I looked it up in Wikipedia which defines it as a "common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs.”

Penalties for failure to meet contract obligation can be severe. Imagine your factory is destroyed by a bush fire and customers coming to sue you for non delivery. If you are able to claim Force majeure you may be protected. Then having a Force Majeure clause in contracts makes sense.

Here is post by a fellow Linked In member of the eMarketing Association and senior manager at Verizon, Jim Anderson.  In it he describes "Force Majeure: further and cites examples at Alcoa. Here is Jim’s Force Majeure Post.

For many of us managing risk, it is about understanding what we don’t know, as that usually catches us out. In this case, if you are not full bottle on force majeure, I would quietly recommend you consult with your legal department to see how it may impact you.

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We make decisions all day every day. At times we do this on automatic pilot. At other times the process is much more deliberate. We are mentally more engaged and weigh up the pros and cons.

No doubt we also take risks every day. Some would say the simple act of getting out of bed in the morning involves risk, although it is equally true that staying in bed incurs risk as well.  You might just miss the bus and the opportunity just passes you by.

Perhaps we simply do not think about the risks involved in our day to day activities and it is only scenarios that involve making decisions whilst at the same time as taking risks that really get us to sit up and pay attention.  Just thinking about taking a risk has implications of hazards or chance of bad consequences.

Some risk taking might better thought of as rash or reckless beahviour.   Young people are believed to be more likely to take risks perhaps through experimentation, excess alcohol, drug use and partying too hard.   Although we all know of young people who come through unscathed so  perhaps the stereotype of youth as reckless is not entirely justified.  We may need to consider if assessing risk is a skill that can be acquired. Perhaps some are more likley to pay attention to warning signals?

Do we ever consider the term risk as something that might have some reasonable outcomes rather than carrying with it the notion of excess and loss?   Is there such a thing as a reasonable risk? This notion certainly lives in the business world.  To be  empowered to take reasonable risk is suggested as a pathway to profit.   If there is reasonable risk how do we determine what this is?  And given there is unreasonable risk what are unacceptable levels of loss or harm?

There are many questions raised when considering decision making in the face of risk. We might want to think about  how much of a role our emotions play in decision making?  Do you listen to you gut feeling or try to overide this with a logical analysis? Alternatively we might want to develop some creative ways of thinking about risk.

Perhaps the  decision making models that researchers use  can help witb some understanding of the processes you encounter with the practical day to day circumstances you find yourself in?

And of course does an optimism about finding your way through the maze get safely home?

Your thougths on these issues are welcomed. Certainly the dialogue we have will be interesting.  I look forward to some lively discussion.

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Some have suggested CFO’s risk energy  is better placed to ensure economic fallout is less severe.I have to agree, many CFO’s have been focused on acquisition growth and leveraged efficiencies sometimes at the expense of fundamentals and the basics of risk management itself. Budgeting and expense management are vital but not the only issues that need to be managed as companies struggle to reduce their balance sheet exposures.

I note Dr Kitbamroong’s comment on my post last week entitled “How is Managing Risk a vital CFO role? ?” He made the point very succinctly saying,

“if  one of the daily activities of the CFOs were to monitor and execute risk management  then economies wouldn’t be so bad”.

Squeezing the orange till the skin breaks syndrome on consolidations may not have been all that smart either, as sell-offs are now all the go to rectify debt ridden balance sheets. With extraordinarily high prices having been paid, often for no more than market share based acquisitions, synergy clean-outs and less focused shared service SLA models have often been initiated to justify them and cut cost,s with many likely to fail to deliver the value now in the downturn. This is taking a huge toll on products, capability and good sense in risk management, as overstretched sales forces struggle to  meet their sales numbers at all costs with commercial awareness taking a back seat. All tbis too as they try to sell into confused, overpowered markets, who have also became more demanding and single minded, to focus on ROI, with often higly detaile,d but vaguely qualified business requirments and short term gain and sometimes very doubtful statements about benefits. And of course we all know the consumer and housing markets in the US and everywhere in developed nations all benefited, until it all come crashing down in late 2008 . As the accesses cause bank failures caused money for homes and consumer credit to dry up, the world’s biggest spenders then simply just stopped buying and the cards all started to fall.

Looking back with benefit of hindsight it is seems it was quite inevitable that problems would occur when overcooked demand drops started to kick in early to mid 2008. The risk issues are now clearly being exposed more and more as cover is sought. And as many “Card Pack” builders have already fallen with more likely to come as their reserves run out.

Exacerbating this, the global economy crunch on the consumer credit society that changed the fundamentals of investment multiplier theories in the cashless credit based societies of developed nation is now a large consideration. Consumers with a life style of living on credit in the comfort the future with pay for it, now have a issue to save cash just to survive with a double whammy that they need to pay off their credit card first.

So a US lead recovery is not so easy to understand especially as the double impact effect hits even more as business closures and more unemployment, now over 7% in the US, kicks in. The knock on effect of the economic malaise now endemic in all world economies, will likely metamorphosis differently as supply chains around the world change hands and traditional economies could be reincarnated elsewhere.

People like the small to medium operators and large CFO’s alike, need to get this point well with the likelihood of a long haul and potential W shaped recovery to come. Or worse even a deep U shape recovery with high likelihood we are still on the down side.

These who jumped on the band wagon in the good times and just took the money and trusted they would have it right before the bubble burst, are now paying the price. Hence restructuring, divestment and sell offs and prop-ups are becoming flavor of the month in key industries to fix balance sheets. CFO’s need to look at these issues very hard and do it quickly and too or risk perishing.

So the life of Riley is over as we know it. The power brokers in good shape are now seizing the opportunities with many waiting for more timely pickings to come.

In July last year I was invited to speak at a seminar where I was asked to deal with ideas on understanding and dealing with the dark shadows we were seeing them. In my research it seemed agility to have good information to react and control risk was a key But it was also apparent to watch what the Chinese were buying and move in those markets. For the providers of 60% of the world manufactured goods, there can be no question now about their intent. The Chinese see the opportunities and are talking them. They are literally grabbing control of markets that have evaporated by the developed nations forced abandonment of their excesses, which in turn has created a plethora of wounded and very cheap cash cows.

This of course is nothing new as China has been buying resources and commodities suppliers over recent years as it has cashed up on importing nations endless credit financed spending sprees for manufactured goods. The point is China is practiced at doing this now and is skilled and eager to ramp up their acquisitor efforts as they see opportunity to become the dominate economic leader controlling the world’s supply chains It may seem trite or naïve to say this to ouch my point further, but it may be for no other reason to reduce their risk.

One example is a 19% take up in the RTZ sell down this earlier this month. RTZ is one of the world’s largest resource providers and key supplier to China. Another example headline today in the Wall Street Journal says “Chinese Companies Plan Europe Shopping Spree” and expands on their planned 2.3 Billion spend-up to take advantage of tumbling asset values in hard-hit Western economies” The article contributed by Steven Yang and Shen Hong also highlights China’s $25 billion loan to Russian energy companies in exchange for larger supplies of crude oil. These examples also points up the cashed up leverage position of China which pales into insignificance the combined US EU Aussie and other developed nations bailout money.

But even so at the small end it is people who will take risks we also need to rekindle and lead economies back being confidence at local levels.I am still convinced of the early advice I got to follow the money. But to do that we actually need people now with a combination of a sense economic reality, due diligence disciplines and sharp entrepreneurial skills, to be bullish more than ever as the balance of economic forces change in readiness for a potentially quite different recovery over considerable time.

The trick is now how do we get that under control and help keep business out of more trouble without selling off the farm. And to keep the money flow moving that makes it all work.

CFO’s need to look hard at this now to survive, while all this shakes out.

For business operators, CFO’s and investors alike there is clearly no simple or single answer for sure.

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A guarantee of survival in 2009, is not necessarily a strong order book. The risk it brings can tear the heart out of a business. CFO’s work is not just about managing cash and costs. It is also to get business through tough times.

Equally involving is working with the front line to give them confidence that new and recurring business will be worthwhile. CFO’s must now spend quality time on risk management planning.

Large orders can be a concern with things like exchange rates and supply uncertain. Trying to get a long range view on these is not easy to ensure that margin isn’t lost on volatile currencies or delays.  CFO’s need to be assertively active to help moderate customers and suppliers, who have become intolerant of even the most reasoned arguments.

Business Credit indemnity is also tighter and risks have now shifted. Insurers are rejecting applications as they press for more information, and then charge for re-submissions. Additional guarantees are also being demanded for deliveries schedules keep within to insured limits.  As a result the CFO’s finance teams are required to provide increasing support for sales and purchasing functions.

With Bankers now high risk attentive, facilities and covenants administration vigilance is crucial.  Breaches or tardiness, even just on reporting timeliness, could mean that life line facilities could be withdrawn. At minimum, this may give bankers an excuse to re-price.

Additional facilities for acquisitions or investments will most likely be priced higher, so CFO’s should be sure to shop around and give thought to planning other financing options. They should also beware of “restructuring” advisers whose motivation is getting administration fees.

The insurance market is also more difficult. Underwriters are insisting on more information. Reverting to checking amalgamations of cover is being used for a pricing edge. Things like risk points on product liability between manufacturer and distributor are being painstakingly scrutinized. And previous cursory checks are now being strengthened or extended to things such as professional indemnity cover of contracted technical experts.

Looking just at risks with customers and taking cover on getting paid is also now not enough. It is equally as important to assess suppliers to ensure supply chain integrity. In doing this credit information may be out of date, so monitoring submission dates, utilizing associations and networks, check-listings and swapping information with colleagues can reduce risks of the unexpected.

In summary the CFO has an onerous task to ensure future financial viability of the company’s ongoing business. A duty of care to involve all C-Level executives in a regular  run through of the business risk profile and mitigation strategies.  Vital for this in business now  is well understood assessment processes, transparent & well monitored metrics and an embedded always-alert risk management culture.

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Reading this sentence caught my eye. “If the average annual return goes up a bit, and the average volatility goes up a lot, and you don’t desperately need that extra return to meet your needs, you need to stop and ask yourself what you are doing.“ Lowering the Bar by Suzanne McGee In this she talks about change of attitude of baby boomers and a need that they lower their expectations.

 

I also wonder too, in terms of business modifications to the Need not Greed approach she refers to, as we are now forced to shift gears to be more risk management alert for all ongoing investments be-it personal or business.

Being a baby boomer myself, some years ago my wife and I took the plunge to manage our own family investments. Some said it was folly to learn by mistakes and take risks, when professionals could do not that for us. However it was not so much about balancing greed or need that has saved our family nest egg as stock markets have all but halved in recent months. More the truth is a balanced approach with the rigor of team oversight that has ensured our caution on changing things that work to things we didn’t understand.

 

We learned that self-accountability was a big one to master and that it depends on having some checks and balances for objectivity and ongoing motivation. Previously we could leave it to the professionals but then even though the prizes were high, taking big chances on an asset like a nest egg, never seemed to have had a good feeling, when we considered long term. Assisting the process too. (albeit sometimes annoying) was the ever present regulatory and reporting control that also imposes risk limiting investing rules on certain compliing funds receiving tax breaks.

While we considered strategy together my wife did very well on day to day operational decisions of buy and sell. On the control side, which was my job, we had some issues. A spreadsheet did an okay job for a while, but we found it inadequate to track and analyze the entire dimensions we needed to see everything operationally. We then moved to some all singing all dancing online software tool with an attached advisory service and subscribed to several high priced newsletters. But that all got too much too when we saw our expensive subscriber system and its advisors go out of business.

 

We then set up an analytical database service for managing our equities tracking, and linked it to a to an on-line information service feed (mostly free). From there it was easy for dally tracking and to sit down quarterly to review our positions and plan our next moves.

 

One thing we are thankful for is we set up the meetings formally outside out daily ebb and flow of activity and used performance reporting tools to bring it to focus. An hour or so of strucured discussion each quarter was all that was needed to ensure we stayed on track; followed by a night out for dinner together, which made for a good recipe to ensure we maintained our pledge. It proved so productive in spite of our mistakes. The simple act of just stopping to review our experience routinely gave us high vigilance and alerting ability for all our funds and asset performance. And using only simple analytical formats this kept us abreast of long term and total value growth as well as daily detail to give us confidence that we have each risk perspective was under control. And even though, like everyone investing, we could not avoid taking a beating on equities, in our case we have mostly blue chip, so the long term will likely come back. And for our business ventures as part of our family investments, our objective is to ensure we are running them this way too.

 

In essence our portfolio management is no different to business. We work as a team to plan and review all parts together; operationally we have separate responsibility for executing the day to day sharp end decisions with support and control jobs being independent. Being able to factor in forward plans with some confidence in the predictability of our forecast outcomes is our bonus; now with our equities and like business without it like many we’d be panicking and making more mistakes too.  

 

But in businesses, as opposed to personal investment, tactics and the associated risk attitudes seem different. Or are they? In fact the governance process is quite similar. In a bull run with its ever upward sales and product demand being all forgiving, taking some risks seems less of an issue. Conversely it can be quite fatal to learn by mistakes in a downturn especially for those highly geared financially. So the need now, more than ever, is a review process on exposed weaknesses with balance and objectivity to keep us from getting right out of our depth.

 

Even a husband and wife business team needs transparent and objective review of various aspects of risk across the spectrum of their business and respective roles that manage it. For most small business for good control a simple hierarchy of management and a feedback system can do the job. And despite the shortcomings even just a simple web shared spreadsheet with plans, critical success and operational measures on it, can work as you progress from there. Regardless of size more than ever a Board of Directors model, even for the two man shows, will take seriously shared views of the same position.  This model is no less relevant to Small or Non Profit organisations, as it is to large enterprise or multinational corporations. And if you cant invent one that works perhaps engage your Accountant.

 

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“Stepping outside of your comfort zone can trigger the pump. The natural response to being on unfamiliar ground is to expect the worst. However, consider data you have to hand to help you determine just how much you need to be concerned.

If it is disaster you anticipate, just imagine the event as one that simply challenges this concern and as something your cautious side tells you to consider?

Weighing up the evidence will either support conservative steps you really should take, or it give you a view that shows the usual dips and flows you might reasonably expect”.

This is an excerpt from a contribution by Nada Mills, a notable Australian organizational behavior management specialist and clinical psychologist, living in Perth. Recently retired from full time practice and devoting time to writing, she says “gathering evidence is vital to keeping your eye on the prize’

We are facing a world where the traditional organisation structures and boundaries of control, as we know them  are light speeding to new paradigms. Unprecedented business intelligence power and band width means it is inevitable we will see a multilevel approach. With economics pressures so high, the concept to reality time compression crunch may be sooner rather than later. In Gary Cokins insights in his What is the Best Organization Chart for Performance Management? it is clear already business leaders see systems able to allow the customer to become the “Boss.” And ultimately being accountable for performance decisions that threatens traditional supply chain management processes as the very concept of today’s middle management evaporates.

Nada Mills now plans a series of discussion papers on Decision Making in the un-relenting high risky change of these new paradigms. The decisions and changes ahead are far reaching and may be way beyond the vision or capability of many who will sadly be caught in the fall out of the change this heralds. The obligation as advisors, is to move to cover that gap.

These will be published in this forum and will focus on the decision environment where supply and demand and business processes are reincarnating in ever shorter and shorter cycles. Aimed at understanding the likely fall out of major shifts in behaviors they will frame discussion and thought around best practice approaches on understanding the problem and effective handling of the constant of change itself.

To downloaded her papers ongoing I recommend you subscribe to the RSS feed at www.PerformanceController.com If you would like to contribute, please submit/register or make request via the comments on this section in this web page.

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This series of short articles about risk management aims to provide high level insights about risk reduction. This item adds an update on the use, relevance underlying power of Dashboards.

 

From the incident report, for monitoring problems, we can use dashboards to great effect to convey messages simply. Summary statistics are usually enough to provide relevant view of the situation.

 

Reporting items with an evolution over time and comparison to targets and similar activities may include such things as:

 

number of events,

sum of losses,

max, min,

average amount of losses.

 

A views of losses and their cause, with comparison with either similar or related activities, is also easier to understand when shown in graph, chart or bar. But without a stable publishing format like a dashboard to relate things together, key issues may still be overlooked.

 

The power of the dashboard is also in the designing. In the first place it requires full co-operation and ownership of operational teams to understand the related business process they manage. And then define the risks in measured  terms. The dashboard is an effective way to assemble and focus this key risk information for consistent awareness communication and active responsiveness throughout the organization.

 

Using a Dashboard, Managers can not only easily identify risk but have a greater likelihood of reacting to its impact.  

Previous articles:  

1. Operational Risk Management – II: Incident reporting 
2. Operational Risk Management – I 

 

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Reading Dr. Kitipan’s reference articles on Operational Risk Management lead me to Randy Fellhoelter’s. Site, ifeltcomfortable.com. This is a practical view on the subject. In his preview video, Randy tells his dramatic story and discusses attitudes and hard lessons learned from personal risk taking. His photos graphically testify to his horrific injuries after taking a short cut.

The underlying theme is about complacency and convenience to save time. It is about health and safety. It is also equally applicable when considering investment risk and the related performance management. Investment failures can hurt equally as badly, especially when surgery is required to repair ignored business risk. Like it was for Randy, it can be just as painful.

And even with good systems, the Increasing pace of business so often makes us revert to taking short cuts to keep up. Of course, taking risks on opportunities to grow is required even more so in tough times, but it can no longer be a matter of expedient convenience. The potential this has as a Russian roulette style management can result in disaster.

Randy’s 1989 disaster, as it relates to people, is still very relevant today. It also reinforces a continuing need for quality planning and performance management at all business levels of business; be-it exploiting quality people and processes, our business intelligence and knowledge to grow, making effective use of and returns on our money and of course ensuring our continuing and future value to our customers.

 

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Incident reporting: static analysis is the first step normally used to identify losses. Summary statistics first display frequency and severity data by event type and by business line, according to the regulatory categories. This report is of certainly needed for compliance purposes, however it might be not the best tool for the risk management of a financial institution, which has a different structure or nature of activities.

An example of a more useful set of summary statistics would match the organization chart of the financial institution, bank, or company that uses its database. With a capability in viewing the reports in dimension splits by department, by people in charge, or by geographical zone of activity.

For a bank retail network for instance, the reporting may be split by bank branch, and, or by type of client. Even before detailing the frequency and the severity of each type of loss, incident reporting in an organization or in a department should first display the total loss amount caused by operational events.

Several simple measures, long neglected and sometimes never measured in financial institutions in the past, may provide a powerful tool to raise awareness on operational risk within an organization

Next, the analysis can identify the “low severity, high frequency” losses and the “high severity, low frequency” losses, with the remaining events. Both need further investigation, since they can be the symptoms of serious breaches in control within the organization. One of the key criteria in operational risk management is whether a possible loss is capped or not. That is, in case of an operational event, the potential loss amount is limited by any type of control. Capping potential losses is, and should be, a main concern for senior management. To that extent, rare events of large amounts are the first candidates in the identification of uncapped risks.

Likewise, recurrent minor losses require further investigation, at least once. They might also be the consequence of an effective cap of losses in an activity highly exposed to operational risks. Operational losses due to processing errors are frequent but limited due to effective control procedures and systems design. But recurrent losses could also be a more worrying symptom of a systematic breach in control or in process that lead to systematic or frequent losses, with possibly very large amounts at stake.

An incident database is a view of the operational losses in an organization that can provide, if interpreted correctly, a list of priority controls and investigations to be performed. Database analysis provides the facts, but does not identify the risks.

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Today I had a chance to discuss with a client regarding Operational Risk for banking and financial sectors and would like to share the ideas here. 

Operational risk is defined as “the risk of losses resulting from inadequate or failed internal processes, people, and systems or from external events. The definition includes legal risk, but excludes strategic risk and reputation risk.” [1].

1. Incident Reporting – static analysis. It gives a chronology of past events, their nature, their cause and how the case was handled.
2. Dashboards – dynamic analysis. They describe the evolution of operational events by activity or by department, providing a dynamic representation of the losses.
3. Key Risks Indicators (KRI’s) / Key Performance Indicators (KPI’s) – benchmarking analysis. Allows a comparison of the dashboards to predefined standards and an assessment of the evolution of the risk.
4. Risk and Control Self Assessment (RCSA) – proactive analysis. Provides a prospective view of the potential risk based on the collection of information by experts in the field.

In our discussion, we realized that banking and financial sectors in Thailand still deploys only up to static analysis from the various case studies that could be found and read in public forums like http://pantip.com/cafe/sinthorn. The point addressed was now that the Bank of Thailand has announce that commercial bank has to compile with the BIS policy, where should they start, which solution should be considered and weather the solution deployed completely answers the subject given. I’ll write about this in the coming articles.

[1] Bank of International Settlements, (2003): “The New Basel Capital Accord”, Consultative Document, Basel Committee on Banking Supervision.

[2] Bank of International Settlements, (2002) “Sound Practices for the Management and Supervision of Operational Risk”, Basel Committee on Banking Supervision.

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Today, business faces several risk from both internal and external factors. Several examples can be found in various business, here are some taken from the press

• Dispite the economics downturn and fuel cost rising up over 100%, Quantas still manages to see a profit rise of 44% (press) while everyone is the business is seeing loses, how did they do that?
• CP All Plc, the operator of 7-Eleven convenience stores in Thailand, aims to build revenue this year by 15% or 12.2 billion baht and net profit by 20% or 500 million baht (press), what strategy was used there?
• PTT Exploration & Production Plc, Thailand’s natural gas exploration flagship, posted an increase of 82% in second-quarter profit from a year earlier (press), how was risk mitigated here?

To be more specific what are the risk? Let’s look at some external macro economic risk. A report made by BOT reported that ”overall sales of the business, private consumption and investment was reported to decline due to continuous increase in the cost of raw materials, hence consumers became more cautious in their spending and selectively purchased focusing on quality products. In addition, unstable political situation by protests against the government decreases businesses confidence.” 

Internal Risk Management involves operational and system contingency planning to respond to and mitigate damaging events; continuity of operations for the identification of vital records, systems, and processes; and preparation required to ensure that these systems and processes will be available in the event of a catastrophe. We can see those on a day to day operation, weather the raw material will be delivered on time, the logistics deliver the products to the store successfully.

However, having said all this, risk management is not a new subject. It’s just that it hasn’t been processed and managed well enough to be understood and used within the organization similar with strategy management.

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Risk Management is not taken concern much in organization. However, almost everyone practices risk management everyday e.g. taking the route to work, arrange priority during work or even basics such as organization who to date during Valentine’s day. But when it comes to business decision, it turns out that a lot of people don’t know how to handle it. Compare this with having a family, I’m sure every one is excited when the off spring is born.

Risk Management from the very first day e.g. how to take care and bath him, what does he want when he cries, is this milk safe, what if it goes wrong … I’m sure all young couples face those risk, yet manageable.

One of the reasons that risk management wasn’t taken care in organization is that no one is [assignedto be] responsible for it.

Everyone thinks that it’s the boss’s job, not mine. To a factor yes, the boss takes the risk and he has to manage it – however, the criteria for good decision making comes from good information, of which comes from good data and source. If the information is not correct, scattered, unreliable etc., it would possibly be impossible for the management to deal with risks.

So the question really is, “Do we have quality and analyzed information to use when it comes to decision making?”.

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