Creative Mode

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

From a previous blog, readers know that I am a fan of Fast Company.  I was recently reading an article on management lessons for Google in the magazine and one of their “lessons” slapped me in the face.  The lesson was “When in creative mode, don’t start with the data!”

 

 

Risk management – thanks to propeller heads like myself – has become fixated with data.  As a profession we always start with the data.  Perhaps that is why the field has not produced more creative solutions.  Perhaps if we start with creativity, thought, ideas, and maybe even pure wackiness, and then let the data decide only after we have developed a new idea the solutions will be better and more effective.

 

In our consulting we almost always bring a “Wow!” factor to our client’s situations.  Remarkably this is easy to do.  They always start with the data, while we always try to start with ideas.  Funny how that works – isn’t it?

 

Starting without the data does not mean you avoid it or even worse ignore it.  Data (in the proper hands) does not lie and thus is necessary.  What data does do is crowd out ideas and creativity.  In other words data becomes the cart leading the horse.  It’s time for risk management to get the horses (creativity and thinking) back in front of the cart (data).

 

Financial Executive International Conference – Ottawa, June 8 - 10: RSD will be there

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

infor@RSDsolutions.com

 

Next week, Financial Executive International (FEI) will be hosting its popular annual conference entitled “Capitalizing on the Future” in Ottawa, Canada. The FEI is a professional association for senior financial executives with over 2,000 members in Canada and another 15,000 members throughout the rest of the North America. Together, FEI Canada and FEI United States represent 8,000 of North America's leading and most influential corporations.

 

The FEI Canada conference is the major event on the financial executive calendar as it is the largest such event in Canada and provides delegates with networking opportunities, information sessions and an Exhibitor Hall.  RSD Solutions Partners Stephen McPhie, Rick Nason and I will be representing the firm in the Exhibitor Hall, providing the 300 or so delegates with the opportunity to chat, learn more about our firm and our views on financial and strategic risk management.

 

For more information on the annual FEI Canada National Conference in Ottawa click on the link:

http://www.feicanada.org/events.php?eid=1028

The Perfect Calm

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by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

The past three years have been the perfect storm for financial institutions in terms of their risk management.  Chaos (folly) seemed to be the operating mode during the height of the financial crisis.

 

What about corporate financial risk though?  It seems to have been lost in the shuffle of the daily business news and perhaps understandably so.  Relatively speaking, exchange rates have been calm – although the recent saber rattling about currency wars might be shifting.  Interest rates for most of the world were at record lows before the crisis and, since, central banks have been playing a game of limbo dancing to see how low they can drive their domestic rates.  It seems that only commodity prices and perhaps demand have been relatively volatile.

 

Has the recent past then been a case of the perfect calm for corporate financial risk?  Will the lessons learned from the financial institutional mess translate to the corporate world?  (Were there lessons learned from the experiences of the financial institutions?)  One thing for sure is that the road to recovery (hopefully there will be a road to recovery) is likely to be interesting risk wise.

 

 

Today’s blog is a re-posting of RSD’s blog on Friday, November 26, 2010.  We thought it was fitting as the FEI members soon gather in Ottawa.

Where’s The Fun?

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Some of us of a certain age remember the old burger chain commercials “Where’s the Beef?”  (For those of you who were raised by video games and the internet you can check it out on YouTube.)

 

Now that I am starting to get to a certain age where some might call me a crusty old person, I am going to ask “Where’s the Fun?”  Where is the fun in risk management.  We all know that managers and teams produce better ideas when they are having fun, so where is the fun?  Is your risk team having fun?  I am.

Boeing’s 7-Late-7: Upside risk takes flight,… finally?

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Nicknamed the 7-Late-7, Boeing’s 787 Dreamliner is scheduled for delivery to its first owner, All Nippon Airways Co. in the next few months.  The project to develop a truly revolutionary passenger aircraft is now three years behind its original May 2008 launch date.  The aircraft is revolutionary on innumerable fronts from studying human psychology to assist in interior design, having no rivets on the outside plastic skin and having engines that are 25% more fuel efficient and with less noise.  Boeing further pushing the envelope in letting go of its intellectual property, allowing vendors to speak directly to each other rather than through Boeing and developing the most comprehensive integrated design software on earth. 

 

For managers, senior executives and shareholders the downside risk for this project were huge from a safety perspective and just plain bad press; and Boeing has certainly experienced its share of problems.  While I do not have access to the Boardroom at Boeing, I can imagine numerous heated debates between the risk adverse (who only see downside risk) and the dreamers (the upside crowd).  In the end, I believe the company realized that despite downside costs, the upside potential of their new form of operations and their aircraft would easily compensate those cost.  In your firm is risk looked at from both sides and with equal “weight” or is the fear (?) of downside risk either exaggerated or considered a more likely event despite the potential magnitude of the upside? 

 

For more information on Boeing’s 787 click on this Bloomberg link:

http://tinyurl.com/3nbngs2

Fast Company

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Fast Company is the magazine that is known for companies that are at the edge of new.  New developments, new products, new thinking, new markets, new people … well you get the idea.

 

I have been a long time subscriber to Fast Company.  In fact I was at one of the early launch parties while attending a complexity conference a long time ago in Boston.  I have seen many different faces, and many different ideas profiled on the cover of Fast Company.  However I have never seen a Risk Officer or a risk management idea, or a company profiled for their risk management expertise.  There may have been one and I missed it, but I doubt it.

 

This raises a serious issue.  I believe that risk management should be a “fast discipline”.  Risk management should involve lots of creativity, original ideas, and out of the box thinking.  If so, then why is there not more risk managers profiled in this popular business magazine?

 

I believe the answer to the question is that risk management has forgotten how to take risks.  That’s right, I believe that risk management as a discipline has forgotten how to take risks by having new ideas, and bold original plans.  As a profession we like to stick with the tried and true – with our innovations simply being pushing the envelope just a little bit.

 

Risk management can be a strategic advantage.  The raid that “got” Bin Laden was accomplished through strategic risk thinking.  Getting a man on the moon was achieved through strategic risk thinking.  Winning a formula one race is achieved through strategic risk thinking. 

 

To do anything great, bold, daring and worthwhile almost always involves strategic risk thinking.  It is time for risk management as a profession to take off its scaredy pants and get its face on the cover of Fast Company.  It’s time for risk management to become a “fast discipline”!

Wobbly dollar …. wobbly America

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Forget Greece, Portugal, Ireland and Spain for a moment.  Reuters[1] reports that the United Nations warns of a possible collapse of the U.S. dollar.  No wonder!  And no wonder S&P placed a negative outlook on U.S. government debt!  Such public utterances were inconceivable in the very recent past, which indicates just how fast things seem to have got out of hand.  The U.S. has hit its $14.3 trillion federal debt ceiling (close to 100% of GDP and close to post second world war levels) and there is now a game of political chicken going on.  Some accounting contortions are allowing ongoing funding of expenditures but this can only be very temporary.

 

The level of spending cuts being mentioned falls far short of dealing with the deficit, let alone the gargantuan mountain of debt.  Meaningful tax increases don’t seem to be on the table.  Add to this debt at State and municipal level, the demographic time bomb of pension and health care liabilities, etc., and we have the script for a disaster movie.  With debt at existing levels, even tiny increases in interest rates will lead to huge increases in interest expense.  Currently, U.S debt yields are slightly above those of Germany.  However, the more scare stories there are, the more this gap is likely to rise.  Canada fell into this trap in the early 1990’s when it found out just how insidious compound interest is – spending cuts were more than offset by year over year increases in interest spending.  And the latter cannot be cut.  The more it rises, the more spending elsewhere must be cut and the fewer options are available.

 

Unfortunately, due to the staggering size of the problem, it has the potential to affect almost everyone on the planet but most of us can only look on with astonishment.  We don’t have a say in any of this.  Foreign currency exchange rates and interest rates have the potential to be very volatile for some time to come.

 

There is not a lot that we as individuals or companies can do but there are some things.  Companies should urgently re-evaluate their foreign currency exposures, even if they have done so recently, and revisit governance and risk management strategies for hedging and mitigating such exposures.  They should also examine current and future interest rate / capital structures.  It is imperative to have strong handle on these risk exposures and perform extreme scenario analysis.

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[1] www.reuters.com/article/2011/05/25/economy-un-idUSN2511223620110525