GOLD TECHNOLOGY WINNER………The marriage of technology and finance usually means one thing: centralization. Yet, Toyota Financial Services (TFS) chose to use its new credit risk solution to
decentralize decision-making. Where Excel is generally considered a dated and error-prone format, Toyota Financial used it as the central element of its new tool. So much about the technology project that landed a gold Alexander Hamilton Award for the U.S. financing arm of the Japanese auto maker runs counter to generally accepted wisdom about finance IT; yet, Toyota's risk adjusted return on capital (RAROC) model, an application that is used by 30 field offices for loan and profitability calculations, has produced significant improvements in the company's RAROC as sales volume has increased. "How should a big firm like us set prices in 30 different areas?" asks Craig Reider, TFS' national manager in treasury and manager of the project. "We gave the field a model we would have used and let them make all the decisions. It helps us get better market share and react to competitive forces."
But it wasn't always that way. With the expertise and data, corporate headquarters had been making decisions about the theoretical best terms for consumer loans, but without information on the real competitive challenge that only the regional field office employees had. Sometimes theoretical pricing didn't hold up, and sales had to watch good customers being picked off by more nimble competitors.
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Something had to be done, but establishing full field-pricing autonomy was ruled out, since it raised its own control and management risks. Instead, the decision was to disseminate the models and rules at the foundation of all corporate treasury decisions to the localities and let them interpret them to fit their individual competitive situation.
Toyota's treasury and credit departments worked together to create an application that could be implemented quickly but reliably. The new RAROC modeling system–which was developed and ready for testing in eight months–delivers up-to-date data on funding costs, capital charges and 150 other parameters from a common database. Into that, the field officers input the remaining data on specific loans, including probability of default, loss given default, cost of funds, and rate and volume assumptions. From there, the centralized system calculates the profitability, including gross margin, net after-tax profit and RAROC, or profit divided by the capital required for unexpected losses. Users can also run scenarios based on different assumptions. In the end, it is the field officer who makes the decision of whether to accept a particular dealer loan, and he or she may even accept a loan at a loss for competitive reasons. To ensure that the field staff is making the best decisions, the system also tracks post-booking RAROC results, and rewards are given for profit maximizing behavior.
Reider was critical to one of the project's most important design component–its use of an Excel front-end, graphical user interface, a decision that made the project fast to implement and allowed field staff a great amount of flexibility. "The choice of Excel was controversial," he says. The resistance, which included skepticism from IT, was based on Excel's reputation as an easy-to-use, low-control environment that could expose the operation to new risks. But Reider was convinced Excel was the way to go, based largely on his experience on Wall Street trading desks where secure Excel systems are commonplace. The trick was attaching the Excel front-end to a secure client/server back-end, where all data is stored on a central server. The spreadsheet remains flexible, but it only collects and displays data. Financial parameters are stored and cannot be altered by the users. "Spreadsheets as used by a na?ve user is a terrible practice, but that doesn't mean spreadsheets are inherently flawed or can't be made [secure]," says Ballinger. "If you take a spreadsheet for the front-end and put the right IT in the back-end, you can make it SOX compliant."
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