An Effective Risk Identification Framework
Risk is a hot topic for anyone looking to make sure their
business survives. Risk (or failure to
appreciate it) was at the heart of many a crisis and there are plenty of
examples out there.
We can either look forward or backward. My view is that looking backward is for learning, whilst looking forward is
about preventing, mitigating or controlling. Whilst looking backward may help in deciding
what went wrong and what decisions contributed to this (and that can take a long time), we need to learn from past
mistakes and make sure that they never happen again, or at least the chances of
this are much lower.
Where to start? The
first thing to realise is that, unlike the last major recession, global markets
(both financial and non-financial) are much more closely interlinked thanks to
a variety of factors. With new financial
products and stock management techniques (e.g. “Just-In-Time” delivery and
“Business Process Outsourcing”), a whole new world of risk has opened up, and
we have been managing it using “old world” methods.
Risk management lies at different levels: the macro level (the "global" view), the industry level
(how your industry operates) and the internal level (how your organisation does things and its relative strengths and
weaknesses). These can combine in any
shape or form to cause a crisis. The
trap into which we so often fall is that we overestimate our knowledge of what
may happen as we don’t like to admit that we can’t be 100% sure all of the
time.
As a result, one sees “Black Swan” events from time to
time. Nassim Nicolas Taleb describes a
“Black Swan” event as “a low probability, high impact event that is impossible
to forecast or predict”. He goes on to
say that “we currently live in a world of opacity where knowledge is
overestimated and chance and uncertainty are underestimated.” In other words, we think we know it all, but
we don’t, and it’s no use pretending otherwise. This is the trap into which the banks fell...
This is no excuse for not attempting to manage what one
can. A great place to start is by using
well-known strategic review tools in the shape of “Macro Analysis”, industry
analysis and internal analysis and applying them to your own organisation.
Macro analysis
looks at the “global” scene on a political, economic, social/technological/
demographic, legal and environmental level.
From this, you build up a view of where world events beyond your control
may impact your organisation.
Industry analysis
looks at factors within the sector in which your organisation operates. These will give you an overview of your industry
and where potential problems may lurk.
The internal review
of your organisation looks to determine what your organisation does better or
worse than the competition. It links
this to the macro conditions that will either improve or harm your
organisation’s competitive position or profitability (or both). It will also look at how you do things and where the pitfalls may lurk.
For example, a UK-based manufacturer of goods imports
materials and parts from a number of countries including France, China, India
and Japan. They convert these parts and
materials into finished goods (say cars) and sell them locally and overseas,
and bill buyers in pounds sterling.
Some possible risks in this scenario are:
·
Tougher legislation on carbon emissions reducing
the market for the type of vehicle currently manufactured;
·
An increase in cost of parts/materials through
currency appreciation in the supplier’s country and/or shortage of commodities;
·
Higher import duties on UK-produced cars in
buyer countries;
·
Failure of a major supplier; increased costs of
shipping parts/materials to the UK;
·
Threat of competitors’ product winning market
share;
·
Trade barriers arising from diplomatic tensions
between the UK and other countries;
·
Risk of production line errors due to
insufficiently-trained staff resulting in recalls and damage to reputation.
There are more, and management’s job is to identify what
they are, the likelihood of their happening, and what they can do about them. This process is described as “looking at the
horizon” to see what may happen so that action can be taken. A useful analogy is driving a car: you look
ahead to see what the traffic is doing as well as close around and behind you
so that you can see what risks there are and avoid them if you can. Despite this, remember that you don’t always see the accident coming…
I have spent more than half my life delivering
change in different world markets from the most developed to “emerging”
economies. With more than 20 years in the world financial services industry
running different service, operations and lending businesses, I started my own
Performance Management Consultancy and work with individuals, small businesses,
charities, quoted companies and academic institutions across the world. An
international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services. For strategic questions that you should be
asking yourself, follow me at @wkm610.Labels: Crisis Management, Productivity, Risk, Strategy
LIBOR Manipulation - Why Does It Matter?
To date, some $2.5billion has been levied in fines on just 3
banks and it’s likely that more will follow.
Why does it actually matter if banks have manipulated LIBOR, especially
if it results in lower interest rates?
Firstly, what is LIBOR? LIBOR stands for
the London Interbank Offered Rate and is set every working day to indicate rates
of interest payable over various periods of time in various currencies. It is used as a “benchmark” for
setting borrowing rates to borrowers (individuals, companies, governments,
other banks).
LIBOR is calculated by the
British Bankers Association through Thomson Reuters as their agent. A number of “contributor banks” are used (16
are used for Pound Sterling LIBOR). Every
contributor is asked to base their submission on the following question: “At what rate could you borrow funds, were
you to do so by asking for and then accepting inter-bank offers in a reasonable
market size just prior to 11 am?”
So, submissions
are based upon the lowest rate at
which a bank thinks that it could go
into the London interbank money market and obtain
funding for a period of time in a given currency.
Once every bank
has submitted its estimate, all estimates are ranked from highest to lowest,
and the top and bottom 25% are eliminated.
The remaining estimates are then averaged to produce an indication rate.
If all
contributors “lowball” their estimates, then the average rate must necessarily
be lower than it otherwise would be.
Why should a
contributor “lowball” their estimate?
The two main reasons that I can see are:
·
They don’t want to people to think that they are in
difficulty by submitting higher (honest) rates, which then means they would pay
more to borrow;
·
Various financial products are based on LIBOR and
contributors can make artificial profits by “forcing” LIBOR down.
One
particular product is the “Interest Rate Swap” or “IRS”. This is used by borrowers to protect themselves against adverse movements in exchange
rates. For example, if rates are low,
you want to protect yourself from a rise.
If they are high, you want to take advantage of any fall. To do this, you would take out an IRS with
your bank.
Suppose
Company A wants to protect itself against a rise in interest rates. The company go to their bank and make a deal
whereby, if LIBOR rates rose above a certain level, the bank would pay them the
difference between the new rate and the level agreed. If rates stayed below a certain level,
Company A would pay the difference to the bank.
In this case, they’re swapping “floating for fixed”.
If Company A
is borrowing at high rates but thinks that rates will fall, they would want to
take advantage of any fall and so would arrange with the bank that if rates
fell below a certain level, the bank would pay them the difference between the
lower rate and the actual rate they’re paying.
In this case, they’re swapping “fixed for floating”.
So, it’s in
the banks’ interests to pay out as little as possible (or receive as much as
possible). Where LIBOR rates are
artificially low and banks have customers who have swapped “floating for
fixed”, they want to make sure that they don’t have to pay them. At the moment, I suspect that most customers
will swap “floating for fixed” as interest rates are at an all-time low and the
only way that they can really go is up.
Banks want to avoid this.
Some banks
have been accused of selling IRSs as part of a deal to customers and/or to
customers who lack the sophistication to understand the risks of them, hence
the mis-selling accusations that are now flying around.
The point
is, manipulating rates for personal financial gain is unethical and results in
potential losses for customers. Imposing
a product that takes advantage of manipulated rates on customers is
unethical. A bank has a duty to look out
for the best interests of its customers, and this may not be happening.
I have spent more than half my life delivering
change in different world markets from the most developed to “emerging”
economies. With more than 20 years in the world financial services industry
running different service, operations and lending businesses, I started my own
Performance Management Consultancy and work with individuals, small businesses,
charities, quoted companies and academic institutions across the world. An
international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services. For strategic questions that you should be
asking yourself, follow me at @wkm610.Labels: Customer Care, Financial, Regulation, Risk, Selling
What's Your Brand Worth?
“Brand” or “reputation”
attract or repel customers. Companies can
have reputation and product brands; people have reputations (although these
days recruitment agencies talk more and more about your “personal brand”).
The word “brand” originally meant a permanent mark made with
a hot iron (as in branding livestock, criminals or slaves in ancient times). Later on, it came to mean a trade mark or
goods of a particular make or trade mark.
Buyers recognise these trade marks and know that they mean that they can
expect certain things of a product or service.
If they don’t recognise a trade mark, then that product/service has to
prove itself to them.
We associate certain qualities with certain brands of
goods. Look in your larder and at the
labels on the food stored there. Do you
buy the same brand every time without thinking?
Why? Do you buy it time after
time without thinking? I do.
Now imagine that you can’t find that brand any more. I found that I couldn’t buy Macleans toothpaste (which I had been
using since childhood) in Asia when I was first posted there at the age of 24,
so I had the choice of either not using any toothpaste or switching to another
brand. In the end, I chose Colgate.
I had to get used to a new taste, but it did the job just as well. Since then, I’ve used Colgate. I never think about
it, I just buy it when I need more toothpaste.
Supermarkets now offer their “own brand” foods and
products. Some (to me) taste no
different to the “original”, but are cheaper, so I buy them. Others are noticeably different in taste,
texture or size, so I stick to the original.
In some cases, I’m prepared to put up with the differences, at other
times, these differences are too great, despite any obvious price advantage.
A good “brand” doesn’t have to compete on price - at least
not initially. People are prepared to
pay a higher price for the quality/taste or whatever advantage that that
product/service gives. Equally, they
tend to go into “autopilot” and buy the same brand every time unless something drastic happens to change
their mind.
You can buy exactly the same laptop computer made by the
same manufacturer from two different companies.
The only difference will be the company name or logo on the case. One will cost more, the other less. Why?
Because one company simply has a better brand than the other, built up
over years (if not decades) of providing quality products and/or services.
People won’t think twice about buying a laptop computer made
by, say, Toshiba, but they will think hard about buying a laptop from a
relative “unknown” as they won’t know how well-made or reliable it is, so price
has to be the differentiator. After a
while, the “newcomer’s” quality will become sufficiently recognised that they
can either boost their prices, or else the competition may have to lower
theirs.
Consumers have any number of “dimensions” (or “criteria”) which
motivate buying decisions, depending on the goods they buy. These include (but aren’t limited to):
·
Price
·
Quality
·
Taste
·
Durability/longevity
·
Availability
·
Reliability
·
Warranty/guarantee period
·
Brand
·
Disposable income
·
Past experience
·
Anecdotes of friends
·
Advertising/promotion
·
Service
·
Store premises
·
Returns policy
·
Who the decision maker is (this isn’t necessarily
the buyer!)
Although it takes ages to build up a brand, it can take
almost no time for the brand to lose its appeal. One case I remember was Dasani bottled water which made significant inroads into the
bottled water market in the early 2000s until claims about the quality of the
product forced it off the shelves literally overnight.
When disaster strikes, brand owners take immediate action to
calm markets as preserve their brand.
This is clear from the recent saga of beef products containing horsemeat,
in the face of intense press coverage and criticism by politicians . I have received
an email from the Chief Executive of Tesco assuring me that they were acting to
remove any product containing horsemeat and to ensure that horsemeat couldn’t
penetrate their supply chain.
A good brand means continuing business. What is your brand doing for you? What could “kill it”?
I have spent more than half my life
working in different world markets from the most developed to “emerging”
economies. With more than 20 years in the world financial services industry
running different service, operations and lending businesses, I started my own
Performance Management Consultancy and work with individuals, small businesses,
charities, quoted companies and academic institutions across the world. An
international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.
Labels: Crisis Management, Customer Care, Productivity, Risk, Selling, Strategy
