Friday 27 August 2010
Risk has as one of its essential elements trust as a foundation.
Trust on the other hand has many other factors that interplay and interact on it.
Markets are created when there are needs that are immediately met from you local environment and therefore scarcity around. Market participants step in to fill the void.
As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.
Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth. Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.
Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management. (For more information or to contact us, please click on the Contact us link).
Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation amidst the regulatory compliance constraints added to your management agenda.
Cost cutting has been a priority in the private sector, ever since the financial credit quake started in 2008, yet the words currently are ‘austerity measures’ and budget cuts in the public sector.
Most of the cost cutting in organisations has been along the tactical and operational lines and we believe that in the ‘age of austerity’ we are within, revisiting cost cutting from a more strategic perspective would add significant value to both the private and public sector organisation alike.
A Zero Based Approach
Within most organisations budgeting and budget setting is an incremental affair. It is very much focused on a business as usual mentality and the status quo is rarely questioned or scrutinised with any level of depth and rigour, as long as the financial plan delivers the numbers senior managers anticipate and the investor community expects.
Yet this is exactly the kind of ‘tyranny of the status quo’ that has destroyed a significant proportion of value in organisations over the past two years.
A zero based approach addresses some of the short comings associated with incremental budgeting and financial planning. It is by no means a perfect replacement for incremental budgeting, it cannot address all the strategic issues and it is fraught with its own pitfalls, yet we assert that a focus on some recent lessons learnt in organisations that have implemented cost cutting via a zero based approach can add value to our clients budgeting and financial planning systems.
Zero-based budgeting can be summarised as the process of preparing financial plans from a change perspective, normally building the financial plan from scratch (the zero base), viewing the process as if the organisation has not delivered the particular service of product in focus before.
Some of the lessons learnt are briefly listed below:
- Many versus few – Instructions and the interpretation thereof by individual users
- Focus on the Full Time Equivalents (FTEs) and people cost early in the process
- Check Payroll Data integrity
- Understand thoroughly the organisational restructuring issues (get Human Resources understanding the financial budgeting language early in the process)
- Ensure a distinction between building a Business Case versus Budgeting
- Confidentiality (how, who, what and staff and managerial morale implications)
- Education process and ensuring skills, knowledge and information convergence to ensure the budget is delivered as a value added ‘conversation’
- Appreciation of management style versus timetable for budget delivery
- Over communicate (more information is better than more or inadequate assumptions)
- Concentrate on the budget story (strategy and changes) and ‘hang’ the budget numbers on the end of the storyline (Making the budgeting process less ‘threatening’ to budget owners)
These lessons can be separated into two distinctive themes, namely the Human Capital dimension and the Systems issues.
Themes to be aware of
As far as the Human Capital dimension is concerned the major lesson is to ensure that both the budget holders and prepares are fully cognisant and understand the language of both budgeting and what the inherent risks and concerns around a zero-based approach is.
Key issues and risk are around work stream teams from different disciplines (HR, Finance, Operations, IT and marketing) not always having a common language and frame of references for similar linguistic terms and phrases. Ensure that potential for misunderstanding the objectives and delivery mechanisms are addressed early in the Zero Based Budgeting approach.
Foster a culture of empathy within the management ranks and never underestimate the emotional impact that getting rid of people can have on both the managers having to make the tough calls and both the staff being called upon to leave and the staff morale of the people earmarked to remain behind and deliver the business as usual processes.
As far as the Systems issues are concerned, ensure that enough time and preparation goes into the planning and delivery of the Zero Based Budgeting mechanisms and tools, as you will be running a process that has not been utilised and thoroughly tried and tested under operational conditions before. There are risks in the following areas to be aware of:
- Data integrity
- Spreadsheet modelling and calculation errors
- Documentation and the support services (handling budget holder queries and concerns)
- Skills and knowledge of the budget holders and preparers might be limited
As was suggested in the Lessons Learnt listing above, over communicate with managers, budget holders and preparers and staff. Ensuring that adequate information is made available in comprehensible and non-technical language is the key to success. Too often we have seen ‘lazy’ and shortcut assumptions being made, when a little bit of extra effort, ‘digging’ and asking the right people with the operational knowledge the right questions would ensure a more robust and rigorous budget.
Finally, ensure that both the process and outcomes are well documented and articulated as they serve as your shield and defence when the reality does not turn out as the best laid financial plan might have anticipated.
We view Zero Based Budgeting as a risk-based change management tool that assists and informs the senior managers in any organisation of the opportunities and risks inherent in designing and building innovative change processes to help add value to the organisation’s overall performance.
At theMarketSoul ©1999 – 2010 we have practitioners available who can assist you on a consultancy basis to operationalise the full 360 degree Financial Management practices most organisations require in order to ensure that they remain competitive, profitable and continue to create value.
Chance and spontaneity are two interesting phenomenon required for innovation and creativity.
We were reminded of this in an interview recorded of a LinkedIn executive recently*. He stated that chance encounters are "where we make some of our most significant connections", be it your life partner, business associates, etc. and that speeding up those chance encounters was one of the fundamental principles and aims of social networking.
That idea struck a chord with us. Like our free market principle of ‘Spontaneous Order’, random collisions and network creation, leading to opportunity exploitation and ultimately wealth and welfare maximisation is intuitively an attractive proposition.
So, we have the mechanisms in place, with online tools and social networking sites, but how much of this activity is outward focussed revenue and income generating? What is meant by this is that the revenues are not focussed on increasing advertising and network operator revenues, but individual participant to participant’s opportunity flows.
And beyond building an online presence with followers and individuals being influencers and thought or trend leaders in their domains, how many of us focus on being revenue leaders and wealth and welfare ‘maximisers’ in this space?
Do you have personal metrics of success, which help inform and modify and moderate your personal behaviours to ensure that you maximise your ‘Return on Ether-time’? [ROET]
Maybe it is well worth a thought because in the neo-classical world of market participation, if you aren’t in the market and making a living (or a half descent living) from it, you might get marginalised and lose out on the wave that hit us when Web 2.0 arrived.
* We are searching for a link / reference to this interview. Once we have found it, we will update this post
“Don’t waste a good crisis” – not entirely sure who first uttered these immortal words, although a Google search on initial analysis seems to attribute it (or some very similar words) to Rahm Emmanuel, the current Chief of Staff of the White House, part of the Barack Obama administration. The actual phrase might be attributed to an economist called Paul Romer.
However, irrespective of who uttered the words initially, it is true that borne out of crisis the spirit of innovation always seem to rise like a new Phoenix bringing both hope and opportunity with it.
That is the great gift that the ‘study of scarcity’ that is economics provides us with.
We have the chance to think creatively about new platforms of collaboration and how Charles Handy's ‘Shamrock Organisation’ will eventually play out.
At the moment we are conducting a research study into how nano and micro businesses might find new routes to market and sustain themselves during these strained economic times as part of the extension of the outsource provider to the Shamrock Organisation. We will be trying to uncover some of the factors that lead to collaboration and other forms of formal and informal business structures that promote and underpin this form of collaboration.
Please watch this space for updates in the very near future.