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Friday, January 27, 2012

The Enterprise Ambiguity Manager

Via Paul (dex) on Flickr
Facebook recently launched their new profile layout called "timeline". It replaces a user's wall on their profile page with a stream of information surrounded with context such as date, place, photos, "likes", and a host of other details. Although it was always possible to view a person's history, the previous layout primarily focused on the events of the moment, a snapshot of what is happening "right now". The new layout provides a way for viewers to see the "flow" of information over the course of the person's life with the context needed to understand how the individual evolved to the "right now".

This concept of understanding information flow is important for managing risk at a firm.  Deloitte Consulting highlights this concept in their "Shift Index" white paper, "[b]ecause of the rapid change, higher unpredictability and volatility...knowledge flows are a particular key to improving performance'.[1]

Yet before diving into the nuances of how this applies to risk, first it's important to understand how measuring information flow is even possible. "Big Data" has become one of the most talked about aspects of business performance analysis in the past year. As W. Brian Arthur argues in a recent McKinsey Quarterly article, the ability to have so much data comes from the exponentially increasing number of sensors being placed all around the world. Individuals are infinitely connected through multiple devices and indeed the entire planet is being wired to track celestial movements and small insects. These connections converge to create an "...unseen, underground conversation [that] is happening among multiple servers talking to other servers, talking to satellites that are talking to computers." [2] Arthur says this is literally creating a kind of "neural network" for the economy and providing a level of intelligence. He says "I’m not talking about human intelligence or anything that would qualify as conscious intelligence. Biologists tell us that an organism is intelligent if it senses something, changes its internal state, and reacts appropriately." [2] 

David Weinberger from the Atlantic then builds on this concept of a system and big data to underscore that with the amount of data being collected it no longer makes sense to understand component parts of a system but to look at the system as a whole. In that same article he says, "[a] new science called systems biology studies the ways in which external stimuli send signals across the cell membrane. Some stimuli provoke relatively simple responses, but others cause cascades of reactions. These signals cannot be understood in isolation from one another... The result of having access to all this data is a new science that is able to study not just 'the characteristics of isolated parts of a cell or organism'...but properties that don't show up at the parts level." [3]

Via Rebecca-Lee on Flickr
Now it's possible to see that there is a network of sensors providing an intelligence to our economic system that produces so much data that the whole can reveal more than the parts.  It is tempting to measure system reactions from the perspective of it's current context -- what it's doing "right now".  However, changes within a system are never static, they continually evolve and eventually turn into yet another reaction leading to yet another state and each state change is related to the ones preceding it. Just as big data forces us to look at the system instead of a single component part, we should also look at the flow of change over time and not just a component instant.  The neural networks mentioned earlier are carrying a vast amount of information and businesses that can harness the "flow" of information will be able to understand state changes in the system of our economy far better than others.  

Flow is essential to managing risk because it prevents strategies based only on current state factors that are going to rapidly change.  "The next decade or two will be defined more by fluidity than by any new, settled paradigm; if there is a pattern to all this, it is that there is no pattern. The most valuable insight is that we are, in a critical sense, in a time of chaos."[4]

Harnessing flow is so important that a new business function needs to be created, traditional enterprise risk management (ERM) is not enough. As Booz & Co. states, "[m]ost ERM groups focus their attention on the risks that businesses most frequently encounter — such as whether the enterprise is complying with regulations, suitably accounting for its activities, and operating in an ethical and legal manner — rather than on black swans."[5]

This new type of manager must not only understand the traditional components of risk, they must be able to thrive in ambiguity, they must be what I call an Enterprise Ambiguity Manager.  The EAM must know how to use information flow to do traditional stress testing of component parts such as the supply chain and the customer portfolio, but also be able to build a model that reveals characteristics of a stressed system and then zoom back out to observe the flow again.  Surviving the chaos requires plugging into the neurons to collect big data on a massively complex system and then tuning in to the flow in order to ride the waves of change.  

Saturday, January 21, 2012

Global Trend: Mobile Banking

It's interesting to see that developing countries and high-tech countries such as South Korea are all massively outpacing the US and Europe in terms of mobile technology. One important trend has been the rapid proto-typing and evolution of Mobile Banking. To see examples of success, one only has to look at Keny's M-PESA who provides services to "9.5m people, or 23% of the population, and transfers the equivalent of 11% of Kenya’s GDP each year; [and] has inspired more than 60 similar schemes across the world.[1] Additionally, in "2010, mobile banking users soared over 100 percent in Kenya, China, Brazil and USA with 200%, 150%, 110% and 100% respectively".[2]

Mobile banking is really the intersection between 3 main themes happening throughout the world:
  • Successful expansion of micro- financial services products to the world’s poorest communities has proven that the ~ 3 billion “unbanked” global population can be reached in a profitable manner. Further, research such as Portfolios to the Poor and others have shown a sophisticated knowledge of personal finance even at the bottom of economic pyramid and a willingness to go beyond simple savings and debt finance. "The biggest market potential, believes Swiss Re, is in the life and health insurance sectors with the commercially viable market numbering some 2.6bn people with daily incomes of between $1.25 and $4. Swiss Re estimates the premium income potential of this income segment at $33bn".[3]
  • The rapid expansion of mobile technology in only the last decade has brought 2.5 billion people online enabling a customer base of 1.1 billion mobile bankers by 2015 [4] . Solar powered cell towers, wifi, and other technologies enable even remote places to be connected.
  • The search for new markets by all major firms from P&G to Citigroup and the promise of double digit growth in emerging markets has resulted in new and more remote distribution channels, new understandings of rural needs, and large amounts of academic data to guide investment decisions. 
For firms that wish to move into this market, important questions arise around partnership or ownership. In the USA for example, Google is trying hard to launch Google Wallet to allow consumers to use their mobile phones for purchases in stores. Google is a software company, not a financial services institution (FSI) and yet they are pioneering this technology. However, doing so requires partnerships with manufacturers such as Samsung for special hardware, Citi and MasterCard for financial products, Sprint for access to telecom networks, and many other partnerships along the way. And the entire process has been fraught with resistance from major institutions such as Verizon[5] and rumors have said PayPal, Apply, Amazon, and Facebook are all on their way to developing competing systems.[6] In other countries, it may simply be easier for an FSI to simply create the software in-house depending on regulation or even the availability of existing services. In fact, the lines are beginning to blur so much between what a firm categorizes itself as and what products it offers, that it could be said that an FSI now also has to think of itself as a technology company.

There is no doubt that this trend will continue to propagate at incredible rates. The opportunity for customer convenience combined with cost reduction for firms is impossible to pass up. Here is a brief timeline of the action so far:

  • Pre 1999 SMS based banking in US included ability to check savings account balance and recent transaction history.
  • 1999 – WAP internet available for mobile phones, European banks launch internet banking.
  • 2003 – Vodafone uses grant from the UK to develop mobile money transfer tech platform M-PESA in Kenya. Launches in 2007 as is the gold standard for proving it can be profitable.
  • 2009 – Zain launches mobile money transfer in Kenya.
  • 2009 – Telenor Pakistan launched mobile banking solution.
  • 2009 – Syngenta Foundation uses M-PESA to launch mobile property (farm crop) insurance in Kenya.
  • 2010 – Dutch-Bangla launches first mobile banking in Bangladesh.
  • 3/2011 – MTN and Hollard Insurance launch mobile life insurance in Ghana.
  • 7/2011 – ZONG launches mobile accidental insurance in Pakistan.
  • 9/2011 – British American Insurance (4th largest insurer in Kenya) launches low-cost accident insurance in Kenya with Safaricom (Vodafone) and Equity Bank (JV now called M-KESHO) using M-PESA.

Saturday, January 07, 2012

5 Things a Company Can Do To Stay Ahead

It used to be the case that businesses didn't have worry about strategy, it was enough to simply make a product.  Today's businesses however need a strategy that can pivot incredibly fast.  Below are only a few of the current practices that allow leading businesses to stay ahead.  
  • Strive for higher quality products. Quality has always been a competitive advantage but in today's market it is possible to imitate everything from smart phones to cars within a matter months.   Patents and complex manufacturing materials do not provide the shelter they once used to and therefore quality is truly elevated to being the defining feature of a market leader.  
  • Part of providing higher quality products is to offer a portfolio of services or products within a single product.  An even better way to think of this is as a platform with add-on capabilities.  Just like a computer operating system is a platform for building software applications on, a business can be a platform for building on top of.  IBM was able to successfully implement this strategy by divesting its single-serving commodity products and then launch their Smarter Planet technology.  They have created a platform for large entities such as cities and corporations to monitor resource usage with no end to the number of nodes that can be built on top of it.  And, by purchasing PWC's consulting practice they are also able to manage implementation, maintenance, and innovation.  
  • Offering many services within a single product allows a business to enhance customer experience through frequent touch points.  Today's mobile apps and games are fantastic examples of platforms that offer new maps, new abilities and features, and other add-on capabilities for the user.  However, this also has the effect of providing an interaction between the vendor and the customer. Interactions are important for many reasons such as making the company more relatable and "human" to customers, remaining at the front of a customer's mind through weekly or daily interactions instead of annually (or some larger interval) during product launches, and listening to what customers are saying[1] which in turn leads to faster product innovation, quicker responses to crises, repeat business, and a more comprehensive profile of individual customers.  Establishing a direct connection to customer is essential. 
  • Maintaining this level of customer service while growing an ecosystem of products is impossible if internal policies are too tight or if internal information flow is hindered.  A business that successfully implements the above strategy is one that isn't afraid to experiment. Google is often recognized as a leader in product experimentation with their large R&D budget, 20% time for employees, and investments in everything from solar energy to self driving cars.  Yet they stand out as a company that isn't afraid to launch an idea, sometimes only half baked, see where it goes and quickly kill or reinforce it.  The important part of getting this right is creating spaces for creative workers to experiment, having leaders that know how to provide just enough structure to channel that creativity, and then a system for harvesting and promoting the best ideas.  As they say in the start-up world, fail fast and fail forward.  
  • Finally, re-think the pricing models of the past.  Today's online businesses have proven that freemium models can and do work, Amazon is proving that selling the hardware below production costs will payoff when customer's purchase everything that feeds into it, and newspapers are slowly working through the mechanics of digital distribution.  There is little that still works in this world "because it's always been done that way".