Credit Risk Management 2010 Transcript

From Treasury & Risk's 15th Annual Alexander Hamilton Best Practices Awards

TOM DUGGAN: This is the last session of the day, so thank you so much for being here. This is the credit risk management category, and we'll be moderated by Chuck Kane. Chuck has more than 25 years of senior executive level experience, including being the chief finance officer at RSA Security, which is now part of EMC, Aspen Technology, Informatics Software, which is now part of IBM, and well as a role as president and CEO of Corechange, now part of OpenText.

Most recently, Chuck held several executive positions, including president and COO at One Laptop Per Child, a nonprofit organization founded at MIT that provides computing Internet access for students in the developing worlds. So now, I'd like to turn it over to Chuck for our last category. Great.

My credit risk is very simple. I do an LC or I don't do business. So unlike my easy task at this right now with governments, these folks have to face a lot more challenges and a lot more procedural checkpoints in order to take risks.

So with that, I will introduce the winners here. First, the Bronze goes to Omnicom Group, Maeve Robinson, who is the assistant treasurer of Omnicom. Maeve, congratulations. Go ahead.

We also collect every week the cash that's collected around the world vs. those AR, so we have a weekly update of exactly where our accounts receivable stands all the way down again to the client level, the client point of contact at every location around the world. We port all this up through senior management, and now we're able to aggregate our exposures by client all around the world. We didn't have that before in our old program. And the working capital program is integrated with the other two pieces of our program.

Just a couple of screen shots ‑‑ I apologize it's so small, but this is the look and feel of the programs that we've developed. All of our operations again report in all this data on a monthly basis, on a weekly basis for some of it, and again, it's all the way down to the aging by client by location around the world. But then again, it all gets aggregated up.

But again, all of that was very localized. We didn't have visibility at the top, and we really didn't have a handle on what we had insured and what we didn't have insured. So with our risk managers, we pulled together and centralized the procurement of credit insurance into a single global program. It is administered locally, however, to allow for local customs and practices. We identified and cleared up gaps in coverage. We were able to reduce our premiums substantially, and the carrier that we chose keeps all of its data -- has a very robust portal, where it keeps, maintains all of its data on our insurance and our clients.

So we're able to have access to that and we pull that into our own systems on a daily basis ‑‑ again, on a client-by-client operation, by our operation basis. So we're able to pull together the three areas in one comprehensive database. We have all of our working capital with AR. We have our credit evaluation tool, which is our evaluation of the credit risk of each client. And we have the related insurance, where that exists.

We then took this report and put it on to SharePoint, where they could easily access and update the information. So essentially we built a dashboard for sales and credit and collections to be able to utilize and communicate quickly and effectively.

The third thing we did was, which was vital to our success, was redesign our dispute resolution process. So if sales is responsible for inputting the disputes or, excuse me, the campaigns into the system, and if they're inputting incorrectly, as I mentioned, it raises a dispute with the customers. So in order to fix this, we took the ownership from what we consider the account resolution team at the time and put it back on the sales organization.

You know, our prior state was we had this massive balance-sheet cash-investments portfolio that was managed by treasury that contained a lot of credit risks, but we realized that this was only kind of part of the overall exposure to the company. There were other groups, namely, Cisco Capital and Trade Credit, that were also housing significant amounts of credit risks, and weren't having kind of a coordinated, aligned oversight of these three at the time disconnected portfolios.

So what we really endeavored to do was try and reconstitute the advisory group that we had in that singular focus over the treasury portfolio to really take a look at this idea of at least initially integrated credit risks.

So once we kind of solved what the groundwork would be, we had to ‑‑ the next most important thing was, what are going to be the credit risk measures, and definitions that we were going to use? And I don't want to get into the quantitative weeds on this, but we did decide on these three metrics, you know: expected loss, which is greater than 50%; Value-at-Risk ‑‑ it's kind of your 1-in-20 twenty scenario that we're all familiar with; and then the catastrophic would be, you know, that one in a thousand year flood.

So in terms of the output now that we can all

ALSTON:  We would love to do this. I mean, we couldn't do it from a commission perspective, but we could do it from the country's bottom line. So adding that additional sales allowance reserve really incentivized, maybe not the individual sales folks, but the country manager whose bottom line was, you know ‑‑

KANE:  And he'll take care of the individual sales guys.

QUESTION:  I have a question for Omnicom because you are a very decentralized organization. When you took some of the credit risk decisions to headquarters, did you find resistance from the different businesses around the world to that?

ROBINSON:  Well, we didn't really take too many decisions away from the local management because we do operate very decentralized, we are very entrepreneurial ‑‑ that's where the relationship is with the client and that's where we want the ownership to remain.

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