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CFOs turning to risk analytics software to spot financial, operational threats

Regulatory compliance, loan covenants and currency risk are common targets, as organizations sift through ERP and other data looking for patterns that might give early warning.

As CFO of TIBCO Software Inc., Tom Berquist spends a lot of time working on risks, such as the failure to live up to loan covenants. Berquist uses risk analytics software to stay on top of things.

"As a private equity-backed company -- we're owned by Vista Equity Partners -- we carry a large amount of debt," he said. "We have covenants associated with that and they're tied to a number of our financial metrics." Consequently, a major part of Berquist's risk-management process is to stay in front of what's going on with the business. If there's going to be softness in TIBCO's top-line revenue, he has to make sure to manage the company's cost structure so it doesn't violate any of the covenants. Berquist said he has a lot of risk analytics tied to that business problem.

The intent of risk analytics is to give CFOs and others in the C-suite a complete, up-to-date risk profile "as of now," said Thomas Frénéhard, director of solution management, governance, risk and compliance at software vendor SAP.

"There's no need to wait for people to compile information at the end of the quarter and send you [information] that's outdated," Frénéhard said. "What CFOs want now is their financial exposure today."

Looking for patterns in corporate data

Risk analytics involves the use of data analysis to obtain insights into various risks in financial, operational and business processes, as well as to monitor risks in ways that can't be achieved through more traditional approaches to risk management, financial controls and compliance management, said John Verver, a strategic advisor to ACL Services, a maker of governance, risk and compliance software based in Vancouver, B.C.

Some of the most common uses of risk analytics are in core financial processes and core ERP application areas, including the purchase-to-pay and order-to-cash cycles, revenue and payroll -- "analyzing and testing the detailed transactions, for example, to look for indications of fraud [and] indications of noncompliance with regulatory requirements and controls," Verver said.

Once the data is in one place, CFOs should be able to easily visualize the data in a risk dashboard.
Dan Zittingchief product officer, ACL Services

Using advanced risk management -- i.e., risk analytics software -- will allow CFOs to access data from complex systems, including ERP environments, and easily identify key areas of risk, said Dan Zitting, chief product officer of ACL Services.

"The technology can be set up to pull data from the HR, sales and billing departments, for example, and cross-reference the information within the program's interface," Zitting said in an email. "Once the data is in one place, CFOs should be able to easily visualize the data in a risk dashboard that summarizes activity and flags changes in risk."

Berquist also uses risk analytics to manage foreign currency risk for TIBCO, which is an international company, as well as risks connected to managing cash.

"Every month I close the books, I get all my actuals and I export them all into my data warehouse and I load up my dashboards. I happen to use TIBCO Spotfire [business intelligence software], but you can load them up in any risk analytics tool," he said. "Then I review where we stand on everything that has happened so far. Are expenses in line? Where does our revenue stand? What happened with currency? What happened with cash? How does the balance sheet look? That's the part of the problem."

The second part is forecasting what will happen with TIBCO's expenses, which helps Berquist ensure that the company is going to generate sufficient cash to avoid violating covenants and mitigate the effects of offshore currency fluctuations.

Berquist said there are general-purpose risk management technologies, some of which are tied to such things as identifying corporate fraud, but there is also company- or industry-specific risk analytics software.

"My big concern is financial risk, so most of my [use of risk analytics] is around those types of measures," he said.

Risk analytics software helps CFOs make better decisions for the future because without an approach that allows them to run different scenarios and determine potential outcomes, they end up making gut instinct-oriented or seat-of-the-pants decisions, according to Berquist.

Sharing a similar view is Tom Kimner, head of global product marketing and operations for risk management at SAS Institute Inc., a provider of analytics software, based in Cary, N.C.

"What makes risk analytics a little bit different, in some cases, is that risk generally deals with the future and uncertainty," Kimner said.

Cristina Silingardi, a former CFO and treasurer at HamaTech USA Inc., a manufacturer of equipment for the semiconductor industry, concurred with Berquist that risk assessment can no longer be done as it used to be based on individuals' knowledge of their businesses, their instincts and a few key data points.

"There is so much data right now, and the biggest change I see is that now this data encompasses structured internal company data as well as unstructured external data," said Silingardi, now managing director of vcfo Holdings, a consulting firm based in Austin, Texas, that specializes in finance, recruiting and human resources.

CFOs started getting more involved with risk analytics when they needed better revenue metrics to understand predictability and trends, she said. Risk analytics software went beyond traditional risk-management tools by adding real-time reporting that puts key metrics right in front of CFOs and updates them all day long. Such data can help CFOs keep an eye on regulatory and contractual noncompliance from vendors, according to Silingardi.

"It helps them with pattern recognition, but only if [they] can translate that to really good visual dashboards that are looking at this data. [CFOs] used to focus only on a few things. Now, [they're] using all this data to get a much better picture," she said.

Forward-thinking mindset is key

Historically, risk analysis and assessment has tended to be a reactive and subjective process, according to Daniel Smith, director of data science and innovation at Syntelli Solutions Inc., a data analytics company based in Charlotte, N.C. After something bad happens, the tendency is for people to say, "'Let's investigate it, or, 'Let's all huddle up and think about what could happen and create a bunch of speculative scenarios,'" he said.

That's exactly the way many of SAP's customers still look at risk: through the rear-view mirror, said Bruce McCuaig, director of governance, risk and compliance solution marketing at SAP.

"Once or twice a year they report to the board and they look backwards, but what I think we're seeing now is the ability to look forward and report frequently online and in real time," McCuaig said.

In modern analytics and modern business, companies want to focus more on proactive, predictive and objective risk, Smith said. While focusing on risk in this manner gives CFOs visibility into the future, many don't have the pipeline of data and a single source of consolidated data to enable them to do that.

"They need a system, a way to collect that data and be able to analyze it," he said. "From a strategic point of view, it's more of a data initiative."

The goal is to give people the skills and applications to view highly interactive and multidimensional data as opposed to a traditional, two-dimensional tabular view in a spreadsheet, Smith said.

When it comes to risk analytics, CFOs should be thinking about techniques, not specific tools. Risk analysis is more about understanding ways to mine data better than about which platform can do it, according to Smith.

"Risk analytics is part of something larger. At SAP, we don't have a category of solutions called 'risk analytics,'" McCuaig said. "There are a variety of analytics tools that will serve the purpose."

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