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As recent history has taught us, companies that don’t know what they don’t know are at risk of failing spectacularly. To a large degree, executives over the past few years had been flying blind, even as their companies had been flying high on the wings of complicated debt instruments and complex derivatives.
This is not to say that human beings are not responsible for the implosion of AIG, Lehman Brothers or, for that matter, the Icelandic national banking system. But most of the companies lacked the technology tools that could have helped them see the warning signs before it was too late. Most legacy accounting and risk management systems simply were not built to handle the current volume and level of complexity of data related to financial transactions to, from and within many investment and retail banks.
More importantly, the systems that could handle the information were not designed to make it make sense. In other words, some legacy financial IT (FIT) systems might have been able to process transaction-level financial data in the months before the crisis, but few could enable the kind of analysis and reporting that would have raised red flags signaling a change in strategy was urgently needed.
Who’s on first?
So, we find ourselves in an awkward place. On the one hand, companies were not looking for data on risks underlying their investments because they didn’t know to look for it. And they didn’t know to look for it because their systems-often consisting of Excel spreadsheets-couldn’t provide it. But the systems were not designed to provide that information because companies didn’t know to look for it in the first place. It all starts to sound like a high-stakes version of the Laurel and Hardy “Who’s on first?” skit.
Some companies are working to cut through this confusion by implementing FIT systems that do more than replace Excel spreadsheets. The new breed of FIT solutions integrate the best of business process management (BPM) software with accounting, compliance and reporting applications to provide a complete picture of risk across the business. Both business users and IT users share tools that let them create the rules and pathways that bring data from the back office into a usable environment where business managers can act on them.
Implementing a Risk and Financial Management Solution
Implementing a risk and financial management solution
A solution that serves both IT and business users? Some might call that utopia. The more cynical among us might call it a serious threat: experienced IT managers know that “business needs” and “system realities” don’t always match up, and business needs are often believed to trump IT realities. So, the new breed of FIT solutions must also quickly and seamlessly integrate with other systems already in place-and they must have champions on both sides of the business/IT divide.
Every new solution implementation must account for the complexities of the individual business, but below are three tips on how to implement a holistic risk and financial management solution that will bring business benefits without sacrificing IT sanity.
Tip No. 1: Consider both your front office and your back office priorities
In the past, front office IT and business priorities have often taken precedence over the lower-profile back office systems. Customer relationship management (CRM) software, ATM interface products and the like were far more critical in an environment where getting and keeping market share was the biggest pain point. Market share will continue to matter in the downturn, but the information managed in the front office environment must relate to what’s happening behind the scenes.
Take ATMs, for example. Business and IT managers should be talking not just about how to market to customers at the point of withdrawal, but how to use customer withdrawal information to know when too many customers are taking out money at once, posing a potential risk for the business.
Tip No. 2: Pretend you live on Wall Street
Even if you’re not in the financial services business, start thinking about your systems as if you were. Imagine that all your data carried critical, underlying risks. How would you funnel it through the business, who would have access, and how would it feed into reports you deliver to your boss, your employees and your board?
Bridging the Gap Between CFO and CIO
Tip No. 3: Bridging the gap between CFO and CIO
In today’s market, dollars and cents are essentially bits and bytes. There should be a language of system priorities, human resource requirements, and strategic goals that get shared between the CFO and CIO. Executives in these roles should consider cross-functional teams to address critical system priorities, as well as cross-training opportunities between the IT and finance departments.
Who’s responsible?
Ultimately, human beings play the most crucial role in helping their companies avoid financial ruin. For example, the CEO of the non-profit retirement investment organization TIAA-CREF was recently quoted, saying that “very good, very smart” calculation by its asset managers about the underlying risk of investing in mortgage-backed securities was essential to that organization minimizing its exposure to the mess.
But behind every good manager is (or should be) a great solution that merges financial management with risk management. Facing an uncertain future, companies must realize that blindness will no longer be an excuse for not seeing the risks in front of them. Now is the time to consider an IT solution that will make risk exposure transparent to the business. This is vital so that executives can set and adjust their strategies based on what we know now-not what we hope to see in the future.
David Sherriff is Chief Operating Officer at Microgen. David joined Microgen in May 1999 as divisional managing director. David became an executive director and was appointed to the Board in August 2002. Prior to joining Microgen, David held senior positions within ECsoft UK from April 1993 to April 1999, the last two years as managing director. He can be reached at david.sherriff@microgen.com.