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Q&A With Rapid Ratings CEO: Evolution of Risk, Post-Crisis

  • By Staff Writers
  • Published: 10/26/2015
GellerthirespicRapid Ratings works with hundreds of Fortune 500 companies to manage supply chain risk and credit risk of customers. In this exclusive interview, Rapid Ratings President and CEO James Gellert provides his thoughts on topline risk.

How have discussions about risk among U.S. financial decision-makers changed in recent years?

Since the financial crisis, we’ve seen a more holistic, integrated approach to risk management. That the word “risk” is being used in so many more discussions inside companies is a major evolution. Previously, there’d be pockets of talk about risk, but nothing like the unified and continuous discussions you hear today. Governance procedures are making effective, planned protection a key practice, changing corporate cultures to be more aware of risk management.  

Appropriately, budgets also are being expanded for risk management. Long term, this builds stronger companies. Risk is now a topic of every board meeting—not just something a few people are paid to think about.

What area has experienced the largest impact from this change?

Traditionally, supply chain managers relied on the payment history of suppliers as a way of evaluating strength. Today that’s inadequate, and this is probably the most striking area where decades of inertia have been upended. Primary source material—like company financials we use for assessments—are now the backbone of sophisticated supply chain financial risk management.

Furthermore, there’s been a cultural shift. Asking for this kind of data and receiving it in a detailed way is now expected and a part of more comprehensive conversations between suppliers and their customers. In cases where a supplier is still reluctant, fiduciaries can play an intermediating role. We receive financials and perform ratings on tens of thousands of private companies, many of them suppliers, where the ratings, but not the underlying financials, are ultimately given to the customer. This is an evolving space.

What are the key lessons since the financial crisis around managing operations on a global scale?

Today, nearly every business has an international footprint of some kind. While this has been increasing organically for decades, recent capital market conditions have allowed companies to raise more money than ever before. As a result, we’ve seen additional cross-border M&A and broadening in everything from supply chains to companies’ customer groups. In short: you can’t operate in a geographic silo. Successful corporations have learned that business operations and evaluations must operate as global processes.

Secondly, and stemming from the expanding market, companies need constant evaluation on common and consistent bases.

In order to reasonably manage this kind of evaluation, corporations learned that replicability is key. If risk evaluation is ad hoc, you can’t assure your board or shareholders that your risk assessment is actually working. They want to see rigor, consistency and assurance, and this comes from a repeatable method and process.

It’s interesting you reference constant evaluation. How important is it to have access to real-time, fast-moving data in today’s business environment?

There are objectives where real-time data is a game changer—interest rates, currency fluctuations and stock market data.

But there are many types of business data, and when it comes to supplier information, the challenge is really how you analyze and operationalize it. If you’re receiving vast, disparate information from different places at different times, and in different use cases, it can be hard to digest.

Say, for instance, you have 100 percent updated information for one company but only 25 percent for another. You can’t evaluate the two on an even playing field. Considering that private companies, which typically share information less frequently, are roughly 75 percent of a corporations’ counterparties, this kind of information disparity is an everyday occurrence.

It may be great to have lots of data, but do you have it uniformly for consistent decision-making?

How are U.S. companies managing the operational practice of outsourcing to other countries like India and Singapore? Is it creating too much risk?

This goes back to what I was saying earlier about how replicability is so important. When you’re going abroad you have to be able to repeat the process with different business cultures. So really the answer is, it’s the same way you manage risk at home. In emerging markets, reliability can be in question, but that’s more about supplier trust, which is a separate, equally important factor.

What has to be at the core of financial regulation in order for it to help businesses take smarter financial risk?

All regulation will be critiqued by somebody. Companies will have different opinions based on the time and cost of compliance. The universal challenge for companies isn’t a particular part of a new regulation. Rather, it’s when a new regulation is ambiguous.

Take for instance Dodd-Frank. Implemented during the financial crisis, it gave guidance to regulators to implement rules. Many of those regulators have only recently implemented these rules, and many of those rules only give guidance. When it takes time to interpret and regulators aren’t giving prescriptive measures, there’s a problem. Businesses need specific directions to comply. Of course, they may not like the prescription when they get it.

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