Information as a Competitive Advantage – Part 8, Risk Mitigation


By Kostis Panayotakis


Risk management has always been a critical issue in business. Banks lending money to tens of thousands of Customers, are in absolute need of an internal automated credit risk management system. Businesses which sell products or services on credit, also need to manage credit risk. High value transactions need to be carefully evaluated, vis-a-vis risks of non payment. Customer-information-based credit risk rating systems, allow individual Customer as well as aggregate credit risk evaluation. Past customer payments behavior information, should be captured and used to evaluate future transactions. Dunning systems used in the Telecom sector, aim to manage non-payment risk, while not hurting the Customer relationship.

Risk scoring is usually done in the banking sector, during loan approval procedures. Aggregated credit risk scores (e.g. for all outstanding loans), provide management with information on total credit risk.

Risk scoring systems shape and reflect the nature of the lending decisions, made on a daily basis. The degree of complexity (number of information parameters participating in the scoring model) of risk scoring systems, varies. Higher complexity risk models may yield more accurate risk estimates, while lower complexity models are probably easier to apply. Operating performance can be analyzed based on financial indices (e.g. revenue to invested capital ratio). It can be analyzed in time (time series analysis), or compared to the industry average. This analysis may alert the business, on the risk of reduced competitiveness. Liquidity ratios produced by accounting systems (based on cash, accounts receivable and payable etc), can be used to monitor against low liquidity or bankruptcy risk.

All risk management systems are based on information integrity and accessibility by the responsible roles (e.g. risk manager). The timely use of information is also a critical success factor. The value of information vis-?-vis risk management, is reduced with the passage of time (the sooner a risk is identified, the better the chance to mitigate it).

Many other types of business risks, may be managed via an information driven approach. An information-driven approach, leads to more efficient risk management.

Copyright 2006 – Kostis Panayotakis

Material relevant to information management, can be found at http://www.pleroforea.com Kostis Panayotakis - http://www.pleroforea.com


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