Risk Management

Risky Business

Chinese and Japanese companies are the least prepared to fend off a financial crisis, says a new study from IBM.
Cesar BacaniNovember 29, 2007

If a major financial crisis were to hit
Asia today, the chances are that globalizing
companies in China and Japan will find themselves
woefully unprepared. That’s the finding of
a new study by IBM, which recently polled 1,230
CFOs worldwide, 25 percent of them from Asia-
Pacific. “Chinese enterprises (along with the
Japanese) lag behind in the adoption of global
process ownership and implementation of a
standard chart of accounts,” the authors report.
“Moreover, these enterprises are less likely to
adopt delivery models such as shared services
and centers-of-excellence for decision support.”

Enterprises elsewhere in Asia may be in
slightly better shape. “Asian companies often lack legacy systems and best
practices and have an opportunity to
leapfrog into integration,” explains Colin Powell, IBM’s Asia-Pacific
financial management leader in Australia.
“Because most operate in high growth markets, they will see higher
benefits such as profitability at a quicker
pace than companies in slower growth
markets [such as Japan and the West].”

IBM regards Chinese firms as
exceptions among companies in fastgrowing
markets — they are more likely
to be organized as a holding company, a
structure that makes it harder to transform
the finance function into an IFO
(integrated finance organization). IBM
defines an IFO as a finance department
that has a standard chart of accounts
enterprise-wide, common data definitions,
standard common processes, and
globally mandated standards.

According to the study, companies
with these attributes reported
greater effectiveness in every area of
finance execution compared with non-
IFOs. Still, many IFOs — and even
more non-IFOs — believe the finance
function is not very effective in managing
and mitigating enterprise risk (see
chart above). Indeed, only 42 percent
of the respondents perform historic
comparisons to avoid risk, while just 32
percent set specific risk thresholds,
and 29 percent create risk-adjusted
forecasts and plans. These are scary
findings in a world reeling from the
fallout of the U.S. subprime crisis.

Percent of CFOs who strongly agree that finance is effective in performing certain functions