Tag Archives: Finance

Elephant Risk Management & Technology Innovations

With dwindling habitats and large appetites, Elephants are increasingly dangerous in countries like India. Elephants are increasingly entering cities, killing people and eating crops of coconuts, ginger and other valuables.  On December 29th, for example, they entered the Indian city of Bhubaneswar, attacking a honking car and injuring six people reports The Times of India.  This video of an Elephant rampage in Sri Lanka shows how hard they are to control.  This elephant plays with a minivan like it’s a toy.

[YouTube=http://www.youtube.com/watch?v=qnOkbVJNaYc]

If you’re a farmer, or just live in a city with a forest that contains wild Elephants, they represent a special kind of
Enterprise Risks to your business, not unlike the Monkey Marauders noted in a previous blog entry.

But in the case of Elephants, several noteworthy options are being tested for efficacy in thwarting the Elephant menace:

1) The man honking his horn was hoping to scare away the elephant, and that strategy backfired

2) Forest officials in Mochapallam brought two trained elephants to drive a wild herd of 13 elephants back to the forest.  They successfully persuaded 12 to follow, but one got away and chased officials and local citizens.

3) The officials in Mochapallam ultimately were successful in getting the remaining renegade Elephant to retreat to the forest by lighting firecrackers.

4) A Bengali inventor, Amunuddin Ahmed, invented an “Elephant Repellent“, that combines sirens, bulbs and wires connected to a battery, or solar power.

Each of these examples, is a real option – the investment, or partial investment, with an uncertain payoff.  In one case, there was not only no payoff – but the strategy backfired.

I’m continuously fascinated by the range of risks that need to be considered by different industries in different countries.  Clearly Elephant rampages are rare, but so are Enron scandals and both have terrible outcomes. Are you considering all the risks to your operations, even if they’re not as exotic as Elephants?  Do you understand your options, and what they’re worth to you?

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Top Conference Salutes The Scientific Leader

The Scientific Leader is pleased to announce that three submissions to the 2009 Society for Industrial-Organizational Psychology (SIOP) conference have been accepted.

The Society for Industrial-Organizational Psychology (SIOP) is the premier professional association for scientists and practitioners of human behavior in the workplace.  Each year, they hold a popular conference with peer-reviewed articles and symposia.  The number of proposed sessions always far outstrips the number of available places, and so the standards for acceptance are relatively steep by the peer-review group who decides on placement.

Three submissions were accepted for presentation at the next conference, to be held in New Orleans

1.  Enhancing Utility Analysis: Introducing the Cue See Model

I’m particularly proud of this paper, as it represents a new approach to asset valuation, both tangible and intangible.  While traditional I/O Psychology has its’ own tradition to quantify the value of human performance called Utility Analysis, it largely does not include any of the other organizational sciences’ ideas.  My paper tries to synthesize finance, psychology, industrial/systems engineering, computational organizational theory, and computer science ideas into the “Cue See Model”.  The hope is that the approach can be useful to managers and theoreticians by helping to specificy how a company creates profit across levels.  Once understood, then the Cue See Model can be used to track it, objectively, without relying on subjective human ratings.  My hope is that future studies will empirically demonstrate the models’ efficacy, and help avoid the fields traditional problem of measuring and monetizing outcomes.

2.  Succession Planning: Beyond Manager Nomitations

Led by our parent company, Human Capital Growth’s Dr. Shreya Sarkar-Barney, this panel discussion will include experts on leadership discussing the use of psychometric assessment instruments and other science-based practice methods for succession.  Panelists include:

Shreya Sarkar-Barney, Human Capital Growth, Chair
Matt Barney, Infosys, Panelist
Eric Braverman, Merck, Panelist
Lori Homer, Microsoft, Paelist
Jennifer Irwin, Proctor & Gamble Company, Panelist
Kevin Veit, Gabbard and Co, Panelist

3. The Role of IO Psychology in Resolving the Healthcare Crisis

I was asked to be the discussant – a senior leader with expertise in the area to comment on all the papers in the session ,as I was the Chief Learning Officer & VP for Sutter Health previously.  It will focus on interventions
targeted at improving outcomes related to quality of patient care. The
interventions to be covered focus on selection, leadership and culture, team
training, safety, and others. The session will represent research on various
levels of the organization, including management, nurses, and frontline staff.

Kristin Charles, Kronos Talent Management, Co-Chair
David Scarborough, Kronos Talent Management/Black Hills State U., Co-Chair
Justin Rossini, DDI, Inc., Author
Sallie Weaver, Univsersity of Central Florida and MedAxiom, Author
David Hofmann, Univ of North Carolina at Chapel Hill, Author
Matt Barney, Infosys, Discussant

The papers I’ll be reviewing in this session include:
Defining quality of care: Behavioral competency models across nursing
departments:
Kristin Charles, Autumn Krauss
Addressing Care Quality, Engagement, and Retention Likelihood: a Selection
Perspective:
Justin Rossini
Can Team Training Improve Operating Room Quality of Care?: Sallie
Weaver, Michael Rosen, Deborah DiazGranados, Rebecca Lyons, Elizabeth Lazzara,
Andrea Barnhard, Eduardo Salas
Leadership Levers to Motivate Error Management: David Hofmann, Adam
Grant

I hope some of the readers of this blog are able to attend this excellent conference, and if you are, please comment below or send me a note (matt at scientificleader.com) so I’ll get to meet you.

Microfinance Human Capital Robust to Crisis

I was pleased to discover that the desperately poor people involved in the microfinance industry appear to be resistant to the current financial market turmoil.  Mary Ellen Iskenderian, CEO of Women’s World Banking, an expert, spoke with Time Magazine indicating that because it falls outside the mainstream economy, microfinance is resilient to the current crisis.  They succeed in repayment rates at 97% to 98%. 

Iskenderian credits good “old-fashioned” banking that forecasts a family’s ability to repay, unlike the wild speculation and government-sponsored irresponsibility in the US (e.g. Freddie Mac, Fannie Mae).  In 2007, commercial capital invested over $3 billion USD in microfinance.  Microfinance is also transforming into for-profit institutions, with the hope that this will service the finance needs of a billion people, espeially women.

Could the the developed world have its’ own form of microfinance for the middle class with similar results?

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Brilliant Process Flow Diagram of Financial Crisis

Three cheers for the blog at mint.com, that crafted a masterful flowchart of the current financial crisis.  Not only is it simple to understand, but they also name the so-called “pundits” who said the crash could never happen. Check it out below:

The clarity of the complex root causes really comes to life in their graphic.  Scientific minded leaders strive to communicate with this level of clarity.  The Scientific Leader‘s next book has a chapter by Andrew Abela on the evidence for communication, and using pictures and simple words is one major aspect of excellent leadership.  Who else loves this graphic?

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Human Capital Carnage or Renewal?

Citigroup announced today it was cutting 50,000 jobs.  Circuit City filed for bankruptcy protection, closing 155 stores and laying off 17% of its’ workforce.  Starbucks closes 600 stores, displacing 1,000 workers, according to the New York Times.  And The Scientific Leader blog has covered extensively the massive casualties at the financial industries catastrophies at Lehman Brothers, Freddie Mac, Fannie Mae, and AIG.  These sorts of layoffs in an economic recession are among the most emotionally difficult business events for employees and employers.  For lower skilled labor, it feels like a mini-death.  For others, especially employees with skills in high demand, a dismissal reflects what economist Joseph Schumpeter calls “Creative Destruction“, in that their labor can be now quickly redeployed to a higher valued use.

What assets can help people weather these storms?  I subscribe to the definition of human capital as those knowledge, skills, abilities (cognitive, physical), traits, interest and values owned by people and leased to employers.  When combined with other assets, such as technology and brands, in a businesses value chain, employees can create value for a firm.  In turn, they agree voluntarily to rent their labor for a fee.

The Scientific Leader’sCue See(TM)” model suggests that people’s ability to do valuable work is what creates this value.   Labor, like physical assets, has value in context.  For example, an accountants’ skills no longer have the value they had in the roaring 1990s at Enron as they would today at Google.  Similarly, the same Financial Analyst at Lehman Brothers who today is unemployed, has a much higher probability of keeping a steady cash flow into her bank account if she has diversified her skill portfolio with other valuable forms of labor.  If she redeploys her financial analyst skills toward Enterprise Risk Management, to mitigate the sorts of risks that destroyed Lehman, she can repurpose her skills toward a new market.  But the most robust human capital that produces the most consistent set of cash flows for employees are those that create value in diverse markets.  An analyst who also has a nursing degree can redeploy herself to care for patients, for a paycheck, when the financial industry goes bust.

Skill Portfolios Mitigate Personal Income Risk
Just like investments in financial assets, possessing skills across a variety of areas relevant to diverse industries reduces the uncertainty associated with future income.  This is because multiskilled people can switch roles, companies, and/or industries as the labor market supply and demand changes.  In this way, multiple skills amount to a set of personal Real Option that represent the right, but not obligation to exercize, if a better opportunity arises.  Robert Cialdini‘s research on ethical influence suggests that people are more likely to recognize your diverse skills if they have “cues” or symptoms that are vetted by credible authorities.  Relevant signs of expertise include certifications, degrees and awards.

For a company that wants to avoid Citibank, Starbucks and Circuit City-style massive layoffs, they can deploy policies that ensure workers are cross-trained; or hired into the firm with multiple skills that can be redeployed as business conditions change.  In this way, economy-driven layoffs can be minimized or avoided.  The Cue See(TM) model provides a framework for helping to assess business risks and invest in a variety of assets required to realize business goals – including but not limited to employee investments.  Details on the model are forthcoming in my 2009 book, “Leading Scientifically: Mitigating Risks and Increasing Returns”, to be published by Pearson Education / Prentice Hall.

What are you doing to hedge your personal portfolio?  Are you continuing to invest in maintaining, expanding or diversifying the industries in which you can work successfully?  Are you systematically using a framework like the Cue See(TM) model to help you detect and manage risks to achieving your business goals?

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Free Enterprise Risk Management Resources

Are you looking to learn more about Enterprise Risk Management, with all the recent high-profile financial meltdowns?  If so, there are some good, free resources you should consider:

  • The Committee for the Sponsoring Organizations of the Treadway Commission (COSO) has a nice free overview of their integrated framework in multiple languages, and a useful PowerPoint presentation suggesting good methods to apply their framework.
  • The Casualty Actuarial Society (CAS), also has a nice free overview of Enterprise Risk Management that is slightly different than COSO’s.
  • The Association of Chartered Certified Accountants (ACCA), have a recent policy paper, “Climbing Out of the Credit Crunch“, available for download that gives 122,000 accounting professional’s view of the primary and secondary root causes for the recent financial disasters.
  • Wikipedia has a good overview of Enterprise Risk Management.

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CFOs Feel Risk Management Practices #1 Root Cause

Poor risk management practices are the top contributing factor to the current financial crisis, according to a study done by an affiliate of CFO Magazine and The Economist, funded by Towers Perrin.  124 CFOs, SVPs, and other finance executives were surveyed September 22, 2008 – the same week that the $700 Billion dollar bailout bill was being sold to congress.  Highlights of the study include the following:
  • 72% were concerned about their firm’s risk management practices, suggesting a need to invest in more effective risk identification, measurement and mitigation actions.
  • 62% blame poor risk management at financial institutions as a major driver of the current crisis.
  • 59% noted the complexity of financial instruments (derivatives) as causing some of the current mess.  To me, this suggests a need for stronger cognitive ability in financial professionals and leaders; and learning to use the more sophisticated stochastic methods of risk management including Real Options, Monte Carlo Simulations, Rasch Measurement, and Computer Adaptive Testing of risk culture, financial skill, and leadership conscientiosness.
  • 55% plan to put their risk management practices under a microscope, from the board down and from the shop floor up

Do your risk management practices address the abilities, skills of finance and leadership professionals in mitigating risk?   Do your Audit and Enterprise Risk Management professionals demonstrate their proficiency at measuring, using modern psychometrics, cultural, employee, and leadership sources of risk and uncertainty?  Are you comfortable with your firm’s ability to detect and mitigate these risks?

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