GOLD TECHNOLOGY WINNER
Toyota Financial Services
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,
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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.
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."
SILVER AWARD WINNER
Treasury of the State of Ohio
Before it put in place the State Treasury Operational Risk Management System (STORMS), the Ohio State Treasurer's department had little ability to control and assess the ways employees handled mistakes and general exceptions. The office collects, manages and invests $11 billion in public funds annually. It's the job of some 80 employees to collect cash and check deposits from other state agencies or review financial transactions for compliance. "By the sheer number of transactions, we knew employees were fixing these things every day, but the managers didn't know the level of exposure and didn't know who was causing the exposures for us," says Kevin Talty, director of operations at the Ohio Treasury.
The group developed the STORMS software as a real-time measurement and assessment tool for internal and external operational risk events. Dashboards are available to managers to analyze data and trends for better understanding of risk exposures. The software sits on each employee's computer. When a situation arises, such as a balance amount that doesn't match the amount of a deposit collected, the treasury employee records the event and the correction procedure made. Once recorded, the event is assigned a severity level and e-mail notifications are sent to predetermined recipients, such as stakeholders or vendors. The system also includes standards and policies for making corrections, an important knowledge-transfer feature when employees leave or when a new administration comes to office. "We want to document all rational for business decisions we make, how events pile up against our bank contracts or procedures or policies or a law," says Talty. STORMS can be programmed to send out e-mail alerts to senior management when there are high-risk events being created by staff, or if events are not being resolved within pre-programmed time frames.
BRONZE AWARD WINNER
Tyco International Ltd.
Even after surviving one of the biggest acounting scandals in history, the future of Tyco International Ltd. as a thriving organization was in no way assured in late 2003, when its treasury staff began to address lessons learned from the prior year's credit crisis and the lack of visibility into Tyco's contingent liability portfolio. Tyco's decentralized global structure meant there was little uniformity in gathering information and reporting on letters of credit (LCs) and bank guarantees involving more than 400 Tyco subsidiaries and 100 banks. And, the overly manual processes then in use would not stand up to new reporting requirements.
The answer: Work with software developers at Exigis LLC to develop a contingent liability Web portal. Treasury also retooled an existing risk management interface used for insurance certificate issuance. The resulting portal centralizes and controls the request, approval and issuance processes, guarantees that delegation of authority and audit trail procedures are met and gives treasury more global visibility. More than 3,000 Tyco employees and 36 external bank employees use the system for the company's $1.3 billion in outstanding LCs and bank guarantees. "It's a tool that's been given to operations to empower them to approve their requests and centralize them," says David Fischer, senior manager of trade finance and banking at Tyco.
In the system's first nine months of operation, the time from request to issuance has been more than cut in half. The Web portal has also allowed Tyco to slash bank fees by automating the bidding process for LCs and bank guarantees, lowering average commission fees to banks by more than 25 basis points in six months. As a result, annual bank fees for fiscal year 2006 are expected to fall by $2 million and at least $1.7 million per year after that.
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