Risk Management

Big Data Makes for Smarter Risk Management

CFOs can draw upon insights gleaned from Big Data to predict where things may go wrong and devise proactive strategies to get back on course.
William FuesslerJune 28, 2013

From the smallest business decisions to the largest ones, risk influences all that we do. But taking a risk is not exactly like spinning a roulette wheel, where luck is the primary ingredient for success. With use of the right tools, risks can carefully be calculated, controlled and managed, greatly reducing the variable of bad luck.

Many successful CFOs today are accounting for the impact of outside forces – from regulatory changes, interest rates, supply chain and other operational events to natural disasters and even consumer sentiment – to inform, shape and govern their corporate strategies.

While the nature of the finance function has historically been to analyze past performance, risk is inherently forward-looking. CFOs must move beyond their traditional domain and use performance indicators and risk to predict the future. By discovering hidden patterns of risk rooted within their ledgers and spreadsheets – and integrating risk with financial management – CFOs can provide critical linkages between strategy and execution and stay ahead of the curve.

Since every risk comes home to roost in a financial number between the lines of the balance sheet, CFOs are playing a much larger role in risk management. They increasingly are influencing, setting and driving corporate risk strategies, working closely with the chief risk officer and chief operating officer. Armed with financial and operational data that can inform decisions, CFOs are in position today to help their organizations avert roadblocks and wrong turns, as well guide the business down new paths of profitability.

The Power of Predictive Technologies
Forward-looking CFOs are using insights gleaned from Big Data and predictive-analytics technologies to accelerate business performance. By embracing a data-driven approach, CFOs can influence major, strategic corporate decisions involving acquisitions, divestitures, demand planning and forecasting, new markets and more.

Today’s predictive risk models can be enormously helpful to anticipate and control levers of uncertainty by using “what-if” scenarios to determine specific outcomes. CFOs can draw upon Big Data insights to predict where things may go wrong, and then devise a proactive strategy to get back on course.

For example, if a CFO notices that customer retention is on the decline by analyzing social media chatter, he/she can make a new directive for the business to implement new loyalty programs. By using customer data as a leading performance indicator, the CFO can spearhead smarter growth strategies.

Alternatively, CFOs can use Big Data insights to instill innovation and open up new channels of growth. One CFO of a national auto supplier company triangulated Department of Motor Vehicles driving data against its customer database to modify the corporate sales strategy to increase sales by 20 percent.

Looking Past the Rearview Mirror
To fully understand its risk position, a CFO of a pharmaceutical company could consider looking at large amounts of unstructured data – such as comments on social media or international news – to supplement its financial analysis. This could include using sentiment analysis to validate a result predicted by a financial model, or identifying a new drug regulation change in a foreign country that could restrict the company’s overall market potential.

Every company needs to have a C-suite leader in place to understand the costs and benefits of assessing risk across financial, pricing, customers, competitive, costs and security functions. The CFO can be the objective voice in the organization to do that.

The beauty of Big Data and analytics is that it has the power to reveal the opportunity cost of not taking a risk. To stimulate growth, businesses must be disciplined about what markets and industries that they chose to invest in, and those they do not.

As the CFO’s role is on the verge of change, finance professionals have an opportunity to become more than just the corporate scorekeepers. By using Big Data to manage risk, the CFO can emerge as a true power player in the C-Suite for strategic decision making.

William Fuessler is the financial strategy and transformation leader at IBM.