The global business environment has never been static, but the more companies expand into new regions—and do business with larger numbers of customers, suppliers, banks, and other counterparties, some in far-flung parts of the world—the more they need an overarching view of corporate risk. Treasury & Risk started presenting Alexander Hamilton Awards in the category enterprise risk management (ERM) in 2007. Interest in organization-wide risk management has been intensifying ever since.
The Alexander Hamilton Award-winning project at Siemens Capital Company focuses in on the management of counterparty credit risk. Even so, the project is broad in vision and in operational scope. Siemens Capital Company consolidates credit information about customers—both external information and internal experiences of Siemens business units around the world. Then the group assigns each customer a risk rating and distributes the risk ratings and other key insights about the counterparty’s credit risk to the business units that work with the customer.
Like the University of California, the Siemens Capital team has discovered the power of risk management initiatives to bring together disparate parts of a large organization. “Collaboration among local credit teams on the ground, and between those teams and the Siemens credit warehouse team, is creating new opportunities to raise risk awareness across Siemens,” says Doug Schoch, vice president with Siemens Capital Company and relationship manager for the captive business. Participating units have begun sharing ideas and discussing their common challenges, and the credit warehouse is enabling those conversations. Local teams are learning from one another, and the exchange of information is promoting process improvement.”
The credit warehouse team also built functionality that can automatically transfer the internal risk ratings from the database back to the SAP system of a Siemens business unit, to make use of the metrics even easier to incorporate into day-to-day processes. A daily rating-change report can show up in business units’ ERP systems, as well. “The local teams are constantly being challenged to achieve more with tight resources,” says Ngweh. “The risk ratings help in this regard because they provide a quick, reliable, and cost-effective measure of credit risk.” On top of providing valuable insight into customer credit, the warehouse saves Siemens time by providing consistent credit information globally, avoiding the duplication of effort that may occur when a business unit is assessing credit for a customer base that may overlap with other Siemens divisions.
Siemens does not require business units to adopt the credit warehouse processes, and some groups have been faster to see the benefits than others. “The risk ratings are a bit of a new concept,” says Ngweh. “The business units’ credit managers are experienced professionals, and they have established their own processes for reviewing accounts through many years on the job. So one area of focus for the credit warehouse project has been to educate other groups to explain the value of the product.”
Young and his colleagues educate other university staff about enterprise risk management in general, and the dashboards in particular, through an annual risk summit. The university held its first risk summit in 2005, an event that brought together 143 people. One of its primary goals was to reduce the university’s total cost of risk by 15 percent over two years. The ERM program exceeded that initial goal handily, reducing the cost of risk by around 20 percent in the first 18 months. This success convinced the university to extend both the ERM program and the risk summit. Last year’s summit included more than 1,100 participants.
“Everyone in the university is invited to attend the risk summit,” Young explains. “Our philosophy is ‘Everyone’s a risk manager.’ That’s another way to describe ERM. Anyone who’s in a management position technically manages some type of risk. So the risk summit includes all kinds of people—for example, rec center directors, occupational health managers, food safety directors, and managers in student affairs. It’s a two-day meeting, during which we talk about what ERM is, explain new tools we have available, and share best practices that some of our campuses are doing. We also use it as an opportunity for marketing the idea that ERM is a good thing.” The marketing campaign is paying off. Staff across the university’s many locations have begun thinking about risk on a daily basis.
When this process indicates that Microsoft should be concerned about a particular geopolitical situation, the contingency action plan defines steps that each affected group should take. The global cash management team monitors subsidiaries’ local cash balances daily, as well as keeping close tabs on regulations, capital controls, and the banking systems. The foreign exchange group ensures that the company has sufficient currency to make payments that are due. Cash operations increases the frequency of sweeping cash from local accounts. Payroll and accounts payable work to establish just-in-time funding for items that can’t be paid through the POBO structure, so that suppliers and local staff receive payments but the company doesn’t have any excess liquidity in local accounts.
“As the teams notice that something might be happening in a specific country, we start looking at how we can limit our exposures there,” Scurlock says. “We start accumulating a lot more information about that specific country. We follow the news closely, and we look at what the bond markets are doing. The bond markets are usually a pretty good indicator of what the markets are thinking in terms of riskiness.”