The New Normal
The financial crisis has created a general recognition that unpredictable threats can arise in unexpected combinations. This is the 'new normal'. Commonly heard phrases include "no one could have predicted this…" and "it happened far faster than has been experienced before". These threats arise in manners that can be called non-linear. Despite progress, treasury groups remain substantially unprepared.
Assumptions on Preparation
As we enter the fifth year of the financial crisis period it is surprising, at a strategic level, that nearly all treasury groups continue to adopt a linear approach to address non-linear threats. There is an assumption that it is impossible to be prepared for unpredictable events. Therefore, it is reasoned, we will continue to prepare our groups, data and systems in a linear fashion. This is not correct. However, to address this situation requires a different type of thinking and approach.
Assumption on the Risk Framework and Decision Tree
Essentially all risk framework and risk decision trees start with the assumptions that the risks that the organization faces are known and the exposures the organization has to those risks are accurately understood. From foreign exchange exposure, country risk, counterparty exposures across all asset classes and types, industry exposures, commodity and other exposures, it is the rarest organization that adequately understands their own exposures. Their data on exposures resides in disparate systems in different formats and it is changing continually.
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Developmental Stack
The requirement that the conceptual treasury technology stack be deployed in order to respond to non-linear threats has been covered in summary fashion in our other sponsored articles. Treasury also has a developmental stack that moves from operational and control capabilities all the way to the analytical and decision levels where treasury acts as the cerebral cortex of the finance organization.
Required Progression
In the exhibit there are three sections broken out into five individual units. Some text is included next to each area to initiate discussion. The first section, Control and Efficiency, covers the base operational needs and activities of most treasury groups. Leading organizations enjoyed solid capabilities at this level for a decade or more. The second section, Visibility, has been a top priority for most firms since the financial crisis began. We have seen significant progress on this front in terms of access to bank balances and transactions from many firms. The third section, Insight and Flexibility/Foresight, is a key area of modeling, analytics and understanding. This is a vital area for organizations that seek insight into financial relationships and foresight into trends issues and potential events and combinations. Additional flexibility (of staff, data and systems) allows an organization to respond rapidly to many unpredicted events as they emerge. A nonlinear approach allows relationships across numerous dimensions to be understood by the user as real-time events unfold. Additional insight is achieved through dimensional structures and enriched data at the point of consideration.
Linear Approach
The linear approach can be described from several different perspectives including data management and reporting. In a linear approach, when a new issue emerges that hasn't been seen before, the team must determine what information is needed. They then find out where that information is and retrieve it. This data must be normalized. Reporting can then be started as a basis for analysis and action. Typically, additional information is sought and scrubbed several times before being deemed adequate. After that, the process is often automated. When the next issue arises treasury must restart this repetitive linear process. There is a much better way to address non-linear threats.
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