BearingPoints Chapter 11 filing represents a watershed type event.
The filing by the global consulting firm BearingPoint puts it on life support or at the very least in an intensive care unit. BearingPoint the bulge bracket consulting firm that was spun off from KPMG due to regulatory mandates concerning the separation of accounting and advisory businesses is in serious trouble. It has been struggling under a mountain of debt and the bankruptcy filing will give the firm protection from creditors while it seeks to reorganize its business.
BearingPoint’s filing is an interesting metaphor about the deflation of intellectual capital. Ideas, creativity, knowledge, productivity and innovation are some of the words that that we closely associate with intellectual capital. Once we may have even thought this form of capital to be immune from the vicissitudes of the banality of markets. I surmise that the recent business cycle exposes that idea as based more in our narcissistic prejudices then the cold objective realities of efficient markets. As we witnessed radical capitalism’s continued drive of extreme rationalization through monetization we discovered the price of anything but seriously lost sight of the value of everything.
During the 1990’s I remember always being impressed and astonished by the reports of the rising productivity of the American workforce. Year in year out the rising productivity was the proud boast and confirmation of American managerial brilliance. But today that claim looks spurious at best. Rethinking this proclamation may reveal this was accomplished not by brilliant management innovation but by outsourcing operational functions to subsistence based economies; and some artful balance sheet wizardry that aligned business performance ratios to maximize shareholder returns; particularly senior managers whose stock options were critical design considerations as to how those ratios were engineered. Indeed if productivity is a proxy for innovation, the productivity of American capitalism was outpacing the most aggressive predictions of Moore’s Law. True technology contributed to massive gains in productivity but in many ways was an economic rent seeking agent that enabled a flawed economy to sustain itself through over leveraged economic and misdirected intellectual capital.
Today we are confronted with the evaporation of massive social wealth that the IMF estimates to be almost $4.1 trillion in the financial service sector. I suspect a good portion of this value was carried on the balance sheet as good will. And anyone that has been living close the plant earth the past couple of years can attest to how the good will of corporations has been severely discounted. Perhaps this wealth never really existed and as the saying goes “you can’t lose what you never had”. We can take comfort in that and perhaps we can look on the bemused folly of central governments eagerly trying to stimulate economic growth to levels of our recent unsustainable past. I must admit that my sympathies and conviction stand with the Keynesian but I am beginning to wonder if they are chasing the long tails of ghostly economic shadows cast by AIG’s worthless CDS franchise. Once considered a revolutionary innovation cooked up by the finest minds of the capital markets financial engineers are now perplexing conundrums wrapped in a riddle and remain valuation Level Three FAS 157 mysteries.
To be sure intellectual capital deflation is a huge subject. I must also admit that this blogger lacks the time, skill and brain power to elucidate and articulate the numerous nuances and depth this assertion deserves and requires. I guess we could sum it up in a sound bite like the “dumbing down of America” but I believe that merely addresses the race to the bottom marketers skillfully cultivated to gobble up a greater portion of that ever fickle and fluid market share pie. In a way the deflation we speak of turns this dumbing down on its head and now claims the purveyors of fine ideas and clever tactics devised by the corporate marketing geniuses who were able to enrich themselves by conceiving the brilliant plans to convince us to buy so they can sell as much useless junk to as many people as possible.
The monetization of intellectual capital by incorporated consultants are increasingly becoming inefficient. New technologies that are enablers of strategic thinking has large consultancies disappearing into the computing cloud. Large bull pens of gray matter are inefficient as innovation in small firms are more efficient purveyors of thinking large to solve small problems or thinking small to solve larger problems. The large corporate dinosaurs that protected bloated bureaucracies enmeshed in group think stasis increasing showed an inability to be agents of innovation. They boldly proclaimed best practices to justify and position themselves in the executive office but now that the large corporations have been decapitalized their value creation mantras dissipated as markets capitalization fell.
In appears that the bulge bracket firms viability were dependent on knowledge transfer initiatives to underdeveloped economies to support outsourcing; and rent seeking business models dependent on regulatory mandates of Sarbanes Oxley, GBLA, COBIT, EURO conversions, Basel II, Y2K, PATRIOT ACT, HIPAA, FISMA etc etc. Their business models profited from significant business drivers of the past two decades the reallocation of capital to emerging markets and the guarantee of market protection due to governmental regulatory mandates. In both instances value creation from the deployment of intellectual capital proved to be unsustainable.
Consider the financial services industry and hedge funds. Hedge funds claim to offer uncorrelated investment products but most of the hedge funds performance fell in lock step with the market index averages. Investors pay premiums to participate in absolute return strategies offered by hedge funds. Fund managers make the claim of absolute returns based on their superior insights that their intellectual capital confers on their investment strategies. Last year that claim was demolished to devastating effect.
Newspaper publishers are also experiencing a decline in the portfolio value of their intellectual capital. But many believe that it is more of a question of their antiquated business model and once they figure out how to Googlize their business model to sufficiently monetize its intellectual capital shareholders will once again be rewarded with an appreciation in its investment and the true value of their intellectual capital will be realized.
The markets are dramatically changing. Today the question is not so much about ideas and strategy its a question of execution. Just as in the recent past it was about raising capital and acquiring assets now its about making informed capital allocation decisions and liquidity. Its true you need the target to shoot at but you also need munitions, a good scope with adjusted cross hairs and a gun. The value proposition of consultants is quickly becoming marginalized.
Its a poor business model. It scales poorly, its racked with inefficiencies, its built on protected markets and knowledge segregation. Now that those barriers are falling and more and more MBAs are out of work the value of this form of intellectual capital continues to fall.
Consultants all to often are beholden to their process biases. They find it difficult to get out of the box and routinely ask their engagements to climb into the box with them. That said it is an absolute necessity that business redefines its business model to address current market realities. It needs to do so with dispassionate dispatch and it needs to create a unique value proposition that differentiates the brand and adds identifiable alpha in an expanded value delivery chain.
Its a big challenge that many professional services firms need to confront. Our firm went through that transition 6 years ago. We went from a strategic sound practices consulting firm to a product creation and marketing firm dedicated to the commercial application of sound practices. For Sum2 creating value was a very different value proposition then delivering value. The need to build equity in our business was our principal concern. Building and marketing tangible product value is how you create a sustainable business model.
Corporations are becoming disenthralled of their self perceived cleverness. Many believe that major investments in applied intelligence create a culture of insularity that hedges all risks and builds enterprise value. In the past it allowed executives to hide behind a wall of opaqueness. They bought the best and brightest minds from our esteemed business schools convinced that this treasure of intellectual capital would protect them. They believed the digital blips of risk models to be sparkling Rosetta Stones containing the secrets that unlock the mysteries of effective risk management, value creation and business sustainability. The codified results of these algorithmic exercises are revered as holy Dead Sea Scrolls that offers the protection of an supernatural mojo. This is the thinking of a bankrupt brain trust.
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Risk: Group Think, sustainable business model, value creation
Sum2 announces the publication of the SME Risk Management blog. The blog will be integrated into our SME Risk Management Apps as a way to communicate with our growing client base and examine how the risk can be managed and utilized as a driver for business growth.
Sum2 strives to deliver essential risk management apps that are easy to use and highly effective at affordable price points. Our products help Small Mid-Sized Enterprises (SME) manage…
- SME Credit Risk App (Credit Redi Mobile Office)
- SME Enterprise Risk (Profit Optimizer MS Office)
- Money Laundering / BSA Compliance Android App (AML/SAR)
- AML Financial Service Audit App (AML Audit Mobile Office)
- SME Macroeconomic & Event Risk App (MERA Mobile Office)
- SME Tax Audit Risk App (IARP Mobile Office)
Our assessment products are early warning detection and opportunity discovery applications that empowers managers to react and take corrective actions that avoid losses and reward business initiative.
Sum2 products provide a rigorous assessment framework for SME’s to determine potential risk events, product threats and emerging market opportunities that are designed as commercial applications of a defined sound practices program.
Sum2 uses industry standard application platforms to create and deliver products. MS Office, Mobile Office, Drop Box, Google Play, MS Windows and Android are some of the product design conventions employed to deliver effective value driven solutions to our customers.
We welcome the opportunity to demonstrate how our sound risk management practice applications can differentiate your firm and create value for your product brands and company shareholders.
We appreciate your interest in our work.
We hope to be of service to you.
Yesterday Ben Bernanke’s statements about changing sentiment of the Federal Reserves’ Quantitative Easing program touched off a mini stock market crash. Though you took a solid hit in the value of your investment portfolio and retirement account the changing stance of the Fed will also impact the financial health and business conditions of small and mid-size businesses (SME). The days of near zero interest rates and the massive liquidity infusions by the Fed through Treasury purchase programs are coming to a close. That will effect the availability and the cost of capital for SMEs.
Macroeconomic risks are quickly becoming one of the greatest class of risk factors for SMEs. Credit availability, customer buying power, inflation, supply chain disruption, cyclical and market sector risks are growing in significance and threaten the profitability and financial health of all SMEs and their customers. Unfortunately, some businesses will not be able to surmount the acute challenges posed by these emerging economic risk factors and will find it difficult to continue as a going concern.
A difficult economy presents challenges for all businesses. SME’s require risk assessment tools to help better manage business threats and seize opportunities that fluctuating market conditions produce. Many believe that mitigating macroeconomic risk factors are difficult if not impossible for SMEs to mitigate. After all what can a small business do to immune itself to inflation or spiking interest rates? though it may seem to be an impossible task to shield a business from macroeconomic risks; executives that effectively engage to manage these type of threats Can profit from the opportunities severe market conditions produce.
Sum2’s risk assessment products help SMEs deal with the problem of rising macroeconomic risk factors. Small business managers use our SPOT application to aggregate and score all enterprise risk factors. This helps managers to focus on the most pressing risk factors that ironically have the potential to generate optimal returns on capital employed.
Credit|Redi is a series of assessment applications that help SMEs improve the company’s financial health. As a company’s credit rating improves, access to bank loans and other sources of capital become readily available at more favorable terms to the SME. This is a particularly pressing problem as SME’s have born the brunt of financial distress ignited by the Great Recession. As interest rates rise SMEs borrowing costs will increase placing further stress on profitability and financial health.
It brings us great satisfaction to place world class risk management tools in the hands of small businesses to better manage business threats . The macroeconomic risk module is one of twenty risk assessment modules offered in SPOT.
The effects of rising macroeconomic risk factors will begin to appear in an SME’s operations and target markets potentially stressing the company’s financial health. SPOT potential problems and opportunities before they emerge. SPOT and assess the current business conditions to make adjustments and initiate actions to overcome difficulties and seize opportunities the new business cycle is sure to present.
Risk: credit, inflation, market, buying power, customer risk, supply chain
The underlying financial health of Small Mid-Size Enterprises (SME) has always been difficult to determine, hard to identify and its never been more important.
To manage risk in the credit and capital markets it is critical for lenders and credit suppliers to understand the relative financial health of counter-parties, customers and suppliers. Effective credit extension decisions cannot be made without superior analysis generated by forward-looking, unbiased tools.
The credit crisis and recession has devastated small and mid-sized businesses. Getting a bank loan or securing capital from investors is a big challenge for small businesses. Banks have become extremely cautious in lending to small businesses. To be successful in securing credit you’ll have to demonstrate that you are a good credit risk, that your company’s prospects for growth are strong and that your business model is sound.
Why Credit Score is important?The quality of your credit rating and financial health form the basis for decisions other businesses make about you. Managing your business to improve your Credit Score will improve your company’s financial health. A strong Credit Score indicates good financial health and is used by lenders, capital providers, customers and suppliers to determine:
- How much business credit a supplier will extend to you
- What interest rates you will pay
- How much money lending institutions will loan you
- How your customers view you
- What your insurance premiums will be
- The level of potential investor interest
Sum2 utilizes Altman’s Z Score method to determine fundamental financial health ratings. The Z Score credit rating is valid measure of financial health for any public or privately held corporation. The Z Score rating methodology is a proven credit risk indicator that is widely used by banks, investment managers, Fortune 1000 companies and small to medium sized enterprises to determine and manage risk. Sum2’s clients use the Z Score rating products to determine financial health, remain in compliance with loan covenants, and assess credit worthiness of clients and mission critical suppliers.
Altman’s Z score method examines fundamental financial data derived from a company’s balance sheet and income statements. A credit rating is generated by the use of ratio analysis that yields valid comparative results regardless of the currency utilized. Working capital, earnings, reinvested earnings and leverage are integrated into a composite credit rating score. The components and standards are similar to those used by traditional lenders. It is an easily understood approach that provides comprehensive financial details not available with the standard agency reports.
Click here to access Sum2’s Z Score Input Template.
Click here to access zip file of sample reports. Palm Corp Z Score Report.
We recommend supplementing the analysis with trade reports from firms like the Credit Management Association (CMA) or Experian and others for their pertinent data and services.Businesses that extend credit can determine cutoff scores needed to qualify for credit as their risk tolerance and economic conditions change. Lower scores and classifications indicate higher probabilities of default.
Credit ratings must include a careful analysis of the income statement, balance sheet, changes in financial position and key metrics along with consideration of trends, economic conditions and other available data.
Credit|Redi is a set of business assessment tools that helps businesses determine credit worthiness. It is a critical business tool SME’s need to incorporate to better manage and assess credit risk.
More information on how to manage credit risk can be found here: Credit|Redi