Its time for risk consultants to be players with the team on the line. Learn how to achieve innovative advantage using the case studies.
Sunday, May 17, 2009
Innovatricks
Why meet proteusAdvisors? To introspect and draw analogies about how you are performing using the case studies like below and know more about Innovatricks.
Shree Engineering is a firm having good track record for several years and have grown at 30 % rate p.a. on an average in the last ten years. However, it incurred cash loss during last year. It was able to recover its debts and clear off its funds blocked in the inventory, reduce advances given to the creditors but still it incurred loss. Gross margin reduced and indirect expenses increased.
Every month paying for expenses and to arrange for cash is becoming difficult for Shree Engineering. The firm is already having term loans as well as working capital finances from the banks on which it is paying a substantial amount as interest. The management is trying hard to resolve the issues related to talent turnover and training.
The competition is severe and the horizon looks dusky. Economic slowdown and rising prices of raw material is another concern for the management.
Something similar is the concern of many SMEs nowadays. What they need is to talk to some one. Analyze its situation before it's too late.
Many fell in trap of expending huge on the cure to come out of such a situation or hustle up to play their final dice. It's very tempting and desperation is to come out of the mess clean.
Proteus Advisors meets many SMEs who have their unique situations, but the root cause of the problems remains same for everyone. As risk advisors, we spend quality time with the directors and executives and coach them to come out of the mess clean in a short time.
Sustaining is very important and for that business firms need to understand some golden rules. Once you are free from the bad phase and have learnt a good lesson, chances are that you will better in the future.
Proteus Advisors are Innovative Risk Consultants who bring unimaginable talent to work out your problems. What we need to know is your problems. You share you risks very clearly with us and we bring to you alternative contexts to deal with the issues you are facing at the moment.
Proteus Advisors are your well wishers and our first priority is to make you feel safe and then to facilitate growth and stability of your systems and processes.
We are approachable for one to one session and we will share our innovatricks with you using which you get valuable insights about your business.
You talk of vertical integration, horizontal expansion, outsourcing or engaging in merger & acquisitions, forming business alliance or developing new business line, as a leader if you are able to change the paradigm, you are better positioned to succeed.
Stepping back and looking at a crisis from a different perspective yields new opportunities. When you restrict yourself to a perspective, all other possibilities disappear. With every choice you make as a leader in the business world, you create newer realities, and you make the best choice when you explore all the options.
Let us take example of recent sub prime crisis affecting the biggest economies of the world. How to manage risk and respond to such a crisis? How to see new paradigms or for that matter understand the existing ones?
Commonly accepted paradigm makes chance for a change almost impossible. These stubborn paradigms become the filter through which we see our reality. It is natural that unseen possibilities create fear, but unknown becomes a possibility for change. Conscious choice can only take place when you challenge what you believe to be true, you paradigms.
Our paradigms are filter through which we perceive, interpret, and understand our reality and our options. Bunch of rules, mind sets, regulations, or procedures create limitations and tell us how to conduct our behaviour and make our choices within those set limitations in order to carryout our business pursuit. To bring forth newer options and possibilities that seemed never to have existed is indeed magic.
Instead of thinking in terms of zero sum game start thinking towards identifying win- win options. Challenge you paradigms. Take any area - corporate governance, risk management, sustainable business, social responsibilities of business, legal framework within a country; approach each problem not to find what you hope you will, but to get the entire truth that must be grappled with.
You may not like what you find. But try and be consistent with it. Once Mahatma Gandhi Said it is important not that I be consistent with what I have said but be consistent with the truth as it reveals itself to me.
Leaders be ready; time has come to change the existing business paradigms. You like it or not, just one year down the line, you will be forced to change the way you think.
Synergy is achieved when more value is derived from M&A compared to simply added value of the entities. Many describe it by expression "2 + 2 = 5"
Equations in areas like production, procurement, R&D, management insight, marketing, and distribution can bring about Synergy. However, in most of the real life cases, possibility of Synergy is sheer imagination of optimistic managers who engage in M&A activities with the aim to grow their companies quickly. In fact, some combinations can result in negative Synergy i.e. combined entity having lesser value than the sum of its parts. Blame is then put simply on poor post-merger integration process, cultural issues and costs involved. After all, the managers had spotted the brilliant opportunity for creating Synergy.
Why so much fuss about post merger integration issues and costs when all of the elements that affect success of post-merger integration should have been assessed in determining the fair value of the deal ?
Is it not important to consider the risks and challenges of the integration at the very beginning of the M&A process when companies are expected to deliver benefits of the synergy as soon as possible? Why many companies mistakenly keep apparent issues related to integration pending to be resolved post- merger.
Ideally, pre-merger process should involve review of core processes and IT systems in nitty-gritty. Experts who know how to design and implement changes to systems, processes and organization should be involved up front to determine cost & efforts required in bringing necessary changes.
Post-merger integration should be focused on value drivers than just cost functions. These drivers include core processes such as product design, sales & marketing and supply chain management. Revenue Assurance is also very crucial for achieving planned growth during the integration. Best Practice is to have clear plan for retaining business during the integration.
The focus should be value creation rather than mere integration. Necessary activities and task need to be re-aligned in a methodical way, but instead of bringing blind standardization and using a one size fits all approach, the integration process should be customized to suit complexities and peculiarity of the subject involved.
Risk Consulting professionals can add tremendous value by vouching reasonableness of estimates of potential Synergies, calculating the risks in achieving Synergies, and estimating costs of realizing Synergies. Objective due diligence review in above areas can prove very crucial in arriving at a reasonable valuation. Don't just know Risk or know Reward but know if Risk is worth the Reward.
Many SMEs operate successfully from an operational and a financial perspective but sustainability needs innovation and professional discipline. There is always a gap in implementing ideas in a better way with improved planning and prioritising. Strategic Risk Consulting can improve their discipline in applying priorities and identifying planning schedules for projects and help them maintain focus on priorities on an ongoing basis.
SMEs make both cost and time savings as a result of an improved business planning and prioritising strategy. Timely implementation of projects can be crucial as it would result in significant direct and indirect cost savings. This will also allow SMEs to reach the market sooner than anticipated resulting in opening up of newer opportunities which they might miss otherwise.
In Strategic Risk Consulting, on-going communication and a high level of commitment is required. A broader comprehension of issues and a reality check on any proposed way forward or actions requires both communication and commitment. Assurance that SMEs are heading along the right track in a highly professional manner is provided.
To gain competitive edge, it is crucial for SMEs to utilise knowledge efficiently and to enhance their innovation potential. Managing Intellectual Capital and reporting it to customers and stakeholders systematically is becoming increasingly important for future-oriented organisations. Conventional balance sheets and controlling instruments have lost some of their value because Intellectual Capital, i.e. value-adding knowledge, internal processes and structures along with important relationships with customers and stakeholders are becoming more and more important. The systematic management of knowledge and innovation potential will help SMEs transform from traditional enterprises into "learning organisations".
Strategic Risk Consulting provides measures of a successful transformation such as process maturity, organizational benchmarks and best practices. Recommendations are made for implementing specific models, tools, and procedures that can most usefully be adapted by SMEs. Effective transformation is always purpose-driven. SMEs should bring change by introducing innovative products, services and processes. Innovative Financing, Innovative Designing, Using Innovative Materials, Innovative Approaches, teaming with Innovative People and striving for continuous improvement.
Strategic Risk Consulting starts with identifying and discussing crises, potential crises, or major opportunities in light of the market, organisational and competitive realities. Identifying and engaging a group with enough power to lead the change and getting the group to work together like a team is the second essential step. The third step is creating a vision to bring the change, developing strategies for achieving the objective and constantly communicating the new vision and strategies.
Get rid of obstacles, change the culture, systems or structures that undermine the change vision. Encourage risk taking and non-traditional ideas, activities, and actions. Hire, promote, and develop people who can implement the change vision. Generate short term wins and reward people who made the wins. Consolidate small wins for producing more change. Rejuvenate the process with new projects, themes, and change agents. Achieve better performance through customer and productivity oriented behavior, better leadership, and more effective management and ethical corporate governance processes. Develop means to ensure leadership development and succession.
So what's the message for SME leaders? Read on. . .
If fear stands between you and something you want to achieve, the only route is through it. As you approach your goal, your fear will diminish and your confidence will increase. Don't fear for making mistakes as they are opportunities for learning. Mistakes can also provide impetus to carry out a change you may have wanted to make for some time, but lacked the motivation to carry through. When you have made a mistake, think of the words of Walt Disney. "You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you."
CXOs sound like some kind of phantoms in your organization. These phantoms should have some kind of specialization and leader's role to play. Why CXOs? Mergers, acquisitions and consolidations are transforming virtually every industry, and the impact is global. Industry consolidation and integration are affecting risk management strategies too. The stakes are quite high in global businesses and companies need specialists to manage its portfolio of diverse risk.
I am sure everyone has heard stories of successful CXO who, in the end, could not achieve their targets of growth. They realized that both organic as well as inorganic growth strategies were too risky to execute.
Your risk assessment affects your decision making as well as execution. The priorities are affected the way CXOs see risks and act. Some times leaders step back fearing risks that are mapped in their risk list. They have painful dreams of phantom risks which are mapped in their brains. Leadership is largely how one responds to risk or posed business problems.
Let's check out risk mapping in the brains of these so called leaders. They say if it's not our core competency, outsource the activity to third party. Now, there are stories of outsourcing companies mushrooming and assuming greater control over their clients' critical business processes and thus becoming more embedded in their enterprise. The accountability is enormous on both the sides, and the margin for error is slim. It's a matter of business continuity for both of them.
Solution is not just conducting a thorough quantitative risk assessment that examines all possible scenarios or point of view as nobody can predict or prepare for every scenario. However, one can manage his response to them. Are processes built into the system that permits needed flexibility? Is leadership role and style predefined for the every phase of the business life cycle?
What role a CXO can play in this era of virtual organization and continuous change? And, do companies have CXOs in place with the capabilities of executing no matter what comes their way?
CXO postion is like a head farmer. How a farmer prioritizes his risks and resources and what is most important element according to him for a successful harvest this year viz. Soil, Seed, Fertilizer, Weed, Pest Control, Sun, Rainfall, Credit or Subsidy, Equipment? A well informed farmer might say it depends on crop stage and condition. Focusing only on using bio-engineered seeds can be too risky just like focusing on quarterly MIS reports.
For leaders, as for farmers, some factors are not in their control. Both leaders and farmers can plan for expected natural progression of events, but there are inevitable surprises that require analysis, agility and response.
A farmer cannot repeat same practices in same way in same field. Soil depletion, crop prices, weather patterns and new equipment, techniques, and supplies alter farming practices. Farming, as well as leading requires ongoing judgment and adjustment and mere rote imitation cannot be a success mantra.
And all knows how correct the predictions of the weather department these days are. :)
Today's leaders need ideas on how to respond to risks. They need to map the risks in their brain correctly to change the gears rapidly based on the situation confronted. Do you fear any phantom risk? If answer is in positive, call the exorcist now for Crisis & Risk Response Consulting.
What made Team India win against the mighty Australians and Proteas during recent test season? Was it a great game plan or great team efforts or vibes of monkey distractions or turning pitches?
How will next parliamentary election be won? By launching superior campaigns or by agitating against increasing inflation or government's china policy? Take any field; sports, politics or business, the question is enticing. Which is more important - a great strategy or great execution?
Traditional consulting firms have commanded influence for long by perfecting the practice of strategy development and helping their clients with strategic solutions to improve their business performance. However, more recently lure of strategy has waned. Now it is quite clear among many top executives that when innovation is at the heart of any strategy, execution becomes so more important as innovation always involves treading into uncertain waters.
When capital is available in market easily to risk on new business, mindset becomes vulnerable. There are too many uncertain factors that nobody can resolve. No matter who developed the strategy, it must be assumed redundant. As uncertainty increases, the value of a well-thought-out strategy drops. In fact, when one pursues an entirely new business model, no amount of research can resolve the critical unknowns. All that strategy can do is to give you a plausible starting point. From there, one must experiment, learn, and adapt.
Many leaders mistakenly remain attached to their same initial strategy. For example, a risk consulting firm targeting US and Europeans market; has based its resource commitment and value proposition on basis of talent cost arbitrage advantage that it had envisaged initially. The services constituted a new market - one projected to grow rapidly with boom in outsourcing and advisory services from India that will save a huge sum for US & European clients. However, the market did not materialize as expected due to changed competition, economic and political scenario.
After some self introspection, the firm realized as to what had gone wrong. Naturally, the firm simply blamed the poor timing & execution, incorrect branding and poaching of its' core teammates by another risk consulting firm. After all, their strategy was brilliant. Right answer, wrong reason. Yes, the problem was poor timing & execution, but the sign of poor execution does not amount to (self-judged) brilliance of the initial strategy. The sign of poor execution was that the partners never questioned the strategy in first place and thus never revised it.
Execution. For a proven business, it is about performing at or above known standards. Many large, established organizations are able to sustain success because they are ruthless about holding their partners and directors accountable to meet or exceed standards and Innovate.
Do you have any questions for us? Simply ask us any time - 24 hours X 7 Weeks. We provide Innovative Execution Support & Risk Consulting Services to Smart Entrepreneurial CEOs & Business Owners. Private Equity Funding Venture Capital Asset Management Green Field Project Planning Project Funding Mckinsey Suggest Bolt-on Strategy for Entrepreneurs running SME and needs funding for Expansion and Growth or for Mergers & Acquistions. Talent & Business Intelligence Software & Technology Skills with smart Excel Modelling.
Recently, one Company had sacked one of its director on disciplinary grounds but it was shown as an amicable parting away. Now, what kind of example it is setting for its employees?
Let's talk about business controls from a different perspective today. What is the purpose of having good brakes on a car when you don't realize when you should use it? Some people say having brakes on a car is good control which help you innovate, introduce and advance. They say, like brakes, business and technology controls too allow you go faster.
But imagine the adventure of driving at breakneck speeds of the Grand Prix race. Don't just get excited about sleek blue racing suits and colorful helmets; Listen to your instructor's first lesson about the controls. It's a bad idea to straight away get out on the tack and immediately drive fast. It is time to do a lot of bench racing. Now what the hell is this bench racing? It's sitting on an empty bench and imagining oneself driving the car around the track.
Your ability to bench race determines your success as a race car driver. You have to rehearse braking, downshifting, and steering long before you run the course and immediately thereafter. You correct your mistakes off the track, as there is no time to do it when you are flying around the curves. If you don't bench race, you will repeat the same mistakes over and over again. At that speed you don't have the time to think so take advantage of your time off the track.
At incredible speeds of a car racing if you lose control once, you will become more conscious either to smash the car out of fear next time or to drive it like a snail. This is a right time to reflect and do some bench racing. Find a bench, close your eyes and deliberately run a new script in your mind. See yourself executing the necessary moves to make a turn. Never look where you don't want to go.
As a result of bench racing you will be able to hit the brakes gently, downshift and move the steering wheel at the right time. You will turn smoothly with double-clutch and will fly into the straightaway perfectly with super speed, soon to get the flag for finishing as a winner.
Similarly, in business, the key to effective strategy and execution is having correct thoughts and values upfront. The speed with which you achieve your goals and objectives directly relates to how clearly and how often you visualize them. Unless there are correct thoughts, there cannot be action; and when there is correct thought, the right action follows. You create your reality twice; first in your imagination and then in the world. When dream is grand enough, incredible amount of energy surfaces, whether it is selling a new product or starting a new business, the way you visualize the outcome determine the direction, ease, and speed with which your move.
Now, from above, draw an analogy to understand business controls as well. Companies typically assume risk-averse approach after a control failure or a control crisis. They throw fortress of rules and procedures to fight enemy that got in once. Most efforts are spend on mainly to hide it or to do some reputation damage control.
Most companies mainly adopt following two ways to deal with the crises that happened. The first is to have super tight controls i.e. disciplined financial and accounting system with tough internal and external auditing processes and, line managers are required to review and act on every audit's findings. The second way is to have good internal processes, such as rigorous hiring procedures, candid performance reviews, and comprehensive training programs. However, when it comes to acceptable behaviors, rules, and regulations, one cannot train people too much.
There is one more way although less common - vision and culture of integrity, honesty, transparency, fairness, and strict adherence to rules and regulations. Never focus on what you don't want but, visualize successful confrontation with your team about objectives, ethical values and vision of a culture, where there can be no head fakes or winks. People who break the rules do not leave company for personal reasons or to spend more time with their families but they are hanged publicly and the reasons are made painfully clear to everyone.
If you have got the facts right and have a vivid vision of how you will deal with a situation which you don't want to see it happen again, you should be comfortable laying out who broke the rules and how.
The sub prime crisis is definitely a credit market problem, first and foremost and thus it's advised that people remain long in equities. The root cause of sub prime crises is conjuring trick of structured finance mismanagement, which basically makes bad credit look like good credits. Credit risk is now being repriced throughout the system, impacting greatly the borrowing cost for ordinary consumers and companies in those countries, where the sub prime structured finance crisis has hit. However, the downside is incidentally greater on credits for people who own credit instruments and equities.
The problem with sub-prime crisis was not structured finance instruments per se, but the way these securities were not tracked, not properly rated, not properly analyzed etc. in short, were mismanaged. In sub-prime lending the institutions that granted these loans promptly sold them on the securitization process to other institutions, which sold them on to others, and so on again and again. Those who suffered losses were the ultimate holders. There were so many of them, all over the world, that no one knows where the losses were being borne.
The recent sub-prime crisis is good example of mess created by mismanaging the structured finance instruments and one can draw a few lessons from this crisis so as to exercise caution as far as the microfinance industry in India is concerned.
Looking at the demand, broad basing the reach of financial services to the people falling in the low income category, help them invest in and benefit from their skill sets is a need of the hour. The intentions might sound quite philanthropic however microfinance is turning out to be a profitable market for commercial banks which is quite evident from their presence in this area.
As commercial banks entering this market do not have the infrastructure to ensure the last mile connectivity and have to rely heavily of microfinance institutions (MFI). The MFIs who were grant based organizations have begun to graduate from it to capital based organizations. Equity and Securitization came forth as good methods of sourcing capital for these microfinance initiatives.
MFIs have incentive of freeing up more capital and expanding their reach by selling of the portfolio and transferring the risk to the investor. Although defaults clauses exist in the securitization deal, but as the securities change multiple hands the situation would not be much different compared to the current sub-prime crisis.
The securitization of loans in India is covered by a number of rigorous guidelines. The fact that the sub-prime bust originated in securitized loans should not induce further restrictions on this. It is a useful innovation and the RBI rules should take care not to scare it away totally.
Securitization is a good tool to be carefully used. Let not the RBI make the rules too strict. It is more important to ensure that the originator of the loan practices the appropriate procedures of lending, having adequate security and monitoring of repayments in time.
Microfinance requires new and innovative products to ensure greater reach to further encourage more sophisticated financial instruments to participate in the microfinance market. Taking the stock of current and future developments, regulation of microfinance becomes important. Rating of MFIs, structured securities, regulating secondary market for structured securities would be good precautionary steps.
Structured Finance Explained
Let's assume a farm equipment manufacturing corporation has some of its sales for cash, but the bulk of its sales are from installment sales contract. Effectively, an installment sale contract is a loan to the buyer of the farm equipment. The loan specifies an interest rate that buyer pays. The credit department of Farm Equipment Corporation makes decision as to whether or not to extend credit to a customer. That is, the credit department will receive a credit application from a customer and, based on criteria establish by the firm, will decide on whether to extend loan and the amount. The criteria for extending credit or a loan are referred to as underwriting standards.
As Farm Equipment Corporation is extending the loan, it is referred to as the originator the loan. Moreover, Farm Equipment Corporation has one more department that is responsible for servicing the loan. Servicing involve collecting payment from borrowers, notifying borrowers who may be delinquents and, when necessary recovering and disposing of the collateral (i.e. farm equipment in our illustration) if borrower do not make loan repayments by the specified time. While the servicer of the loans need not be the originator of the loan, in our illustration, Farm Equipment Corporation is both originator and servicer.
Now suppose Farm Equipment Corporation has more than Rs. 200 Million of installment sales contract shown on its balance sheet as an asset. Now, when Farm Equipment Corporation wants to raise Rs 200 Million it can raise the fund with structured financing rather than issuing corporate bonds for Rs 200 Million.
To do so, the Farm Equipment Corporation will set up a legal entity known as SPV. Farm Equipment Corporation will then sell the Rs 200 Million loan to the SPV for cash. But where does SPV will get Rs. 200 Million to pay to Farm Equipment Corporation? It obtains the funds by selling the securities that are backed up by these Rs 200 Million loans. These securities are called asset backed securities or bond classes that are issued in a structured finance transaction.
Looking at the credit risk, role of the rating agency or a risk consulting firm will be to focus on:
Credit Quality of Collateral as determined by the asset type, borrowers' ability to pay the loan and the borrower's equity in the asset. Currently micro finance in India is mainly without adequate collaterals. Credit rating will also need to see experience of the originator of the underlying loans and to see if the loans have the same characteristic in which the originator has experience in. Rating agency will assess the nature of underwriting standards vis-à-vis historical default rate. It will also monitor default rates over time to determine whether there is improvement or deterioration in the underwriting standards.
The quality of loan servicing: The agency will look at recovery rates along with default rates which determine the ultimate loss rate. This is a high reputation risk area for many banks as recovery is being done using a goon's protection money asking approach.
Cash flow stress and payment structure: Credit rating agency will also look for stress on cash flows for both the originator and the borrower and rationalization of payment structure to gauge the credit risk. Lot of scope exists for innovation in this area which is possible through various public and private extension services.
Our new venture Proteus Advisors; we would like it to be very Unique, Simple but a Powerful consulting outfit. That's the USP. The proteus brand will have strong focus on Innovation, Implementation and Value Creation closely working with its clients' teams. We are positioned to serve the fast growing innovative companies. We are currently based out of Mumbai.
Proteus Advisors may not compete directly with any of Big 4 or companies like Protiviti Consulting or Axis Risk Consulting in India.
We will have boutique consulting firms' approach to provide business risk consultancy and Internal Audit solutions to all kinds of enterprises and not just Small Scale and Medium Scale Enterprises ( SME ). Thus our SME solutions will also be best in class.
We would like to be part of your Internal Value Adding Team and compliment it with our skills and innovations. Our aim is to increase ROI on your Risk Consulting or Operational Consulting Projects, Internal Audits and Special Assignments.
We have always driven by our independence and passion for our work. And, key to our success so far is our commitment to build trust, willingness to share valuable and workable ideas with passion.
To establish ourselves as a Knowledge Leader in Internal Auditing & Business Risk Consulting arena, We would like to share our ideas and techniques with you. Thus this blog is a step to build a win-win partnership with you where you can also be a part of our knowledge sharing effort.
So do provide us with your valuable comments or visit our site to know more about us.
