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Why Jamie Dimon And Jon Corzine Couldn’t Find Their Money

Tom Groenfeldt

Jamie Dimon and the London Whale are playing a key role in Pamela Pec Cytron’s  marketing campaign for Pendo Systems, although probably not by choice.

The CEO of JPMorgan Chase and the London trader who lost $6.2 billion for the bank have become a leading example of inadequate controls in banking. CEO of Pendo Systems, which provides enterprise-wide  multi-currency accounting for financial institutions, Cytron has gotten into the habit of pointing to current headlines to make her point that even the most sophisticated international financial services firms don’t know their positions. Her presentation about Pendo Systems includes a copy of a clipping from The Wall Street Journal story from May 18, 2012:

‘“On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses,” The Wall Street Journal reported. “But there were no details about the trades themselves. ‘I want to see the positions,” he barked, throwing down the papers, according to attendees. ‘Now I want to see everything.’”

“Jamie Dimon said all he wants are his positions, but he can’t get them because they are all over the bank,” explained Cytron, who says Pendo System’s BasisPoint could have delivered all the detail with a single query.

She also directs people to the YouTube clip of Jon Corzine, CEO at MF Global, telling a Congressional panel “I simply do not know where the money is or why the accounts have not been reconciled.”

Congress being made up of Congressmen and Congresswomen, no one thought to ask why the CEO of a financial industry leader handling billions a day didn’t know where the money was.

Cytron has an explanation for the lack of financial  information that Dimon and Corzine confronted — their companies have been using systems that were developed in the 1980s, or earlier.

That was a period of innovation, she notes. It brought the launch of Windows 1.0 and Apple’s Macintosh personal computer. It was also the time of Lady Gaga’s  birth. Windows, Apple and Lady Gaga have moved on since then, but the securities accounting systems remain pretty much the same.

The client/server systems were revolutionary at the time. Mainframe systems were displaced by PC-based and mid-range systems such as Portia, InvestOne, CAMRA, PAM, Axyis, HiPort, Eagle Global Plus and Dimension. Initially all focused on a geographic or business line silo for banking, insurance, wealth and investment management.

Relatively quickly many of the older industry standard firms that sold mainframe accounting systems disappeared, said Cytron, who is betting that the industry is ready for another major shift. Today’s incumbent systems, she said, were developed in another era, a time when processors were slower, storage was far more expensive than it is today and the investment world was less global.

“We built BasisPoint when technology was catching up with financial services requirements.” It is all Microsoft and built around Microsoft SQL Server.

“We made bets on SQL, cheaper storage and faster processing. At the time people said our approach would never work, but we made those bets in the design and they paid off.”

With Pendo, all of a firm’s data can run on a single database, so the next time Dimon, or the CEO of AIG, needs positions, the staff won’t have to go to multiple databases and then reconcile different accounting practices around the world.

“If I go back to 2010, 2011, 2012 I can find article after article on global accounting, the lack of innovative fund accounting systems. AIG had nine investment accounting systems — five versions of PAM and four of Portia and the valuation swing on the same asset could be double digit basis points because they were all running in separate instances.”

The Pendo system is also date agnostic.

“We don’t do processing at a system level, we do it at the lowest level, so nothing causes you to shut down the system. If you are based in the US and running in Asia, you wouldn’t have to shut the whole system down to update one geography. It can update tiers independently,” she explained.

“From an accounting perspective, you have to bring in indicative data such as market data, corporate actions and prices. In other systems it is a system-wide process; they shut down for an overnight run. We have 8 tiers of hierarchy so you can bring in prices at the lowest level — the fund — and close that level down without affecting anything else.”

Unlike current systems, Pendo can work in three currencies, so a fund buying Japanese equities on an American market can enter the price in Australian and American dollars and Japanese Yen. The critical advantage is that by is simultaneously storing, processing and displaying that data, it offers a single bird’s eye view of these levels by basis, by industry and by issuer while applying regional rules.

Unfortunately for her, she launched Pendo just as the financial services system came crashing down in 2008. The industry needs new accounting systems but it continues to muddle along with systems that have failed, often dramatically.

Look at the London Whale, she suggests. Why didn’t Mr. Dimon ask why it took so long to get the firm’s exposure?

As the Wall Street Journal reported Dimon initially played down an April 6 report in the paper calling the London’s trader’s position as a tempest in a teapot. The paper later reported that as the losses grew, Dimon on April 30 demanded to know the bank’s positions. It took weeks from the time the problem was identified to determining its size.

Bloomberg has reported that the bank may release its internal report on the loss and that Dimon could see his bonus slashed.

Yesterday the U.S. U.S. Office of the Comptroller of the Currency and the  Federal Reserve will require JPMorgan to improve its controls and risk management and the FSA in London may also be looking at some enforcement action, according to Bloomberg.

Cytron is frustrated that the repeated crises have not led to an examination of the root cause.

“Every major problem has some hint of accounting in them. What feeds all these systems is the underlying positions, but they continue to try to fix the problem from the top.

“Jamie Dimon has been the most respected person on Wall Street,” she added. “Because of the way lines of business are structured, you have these silos of information. Why hasn’t anything happened since 2008 when these problems nearly took down the world economy? We need systems that make positions transparent in a single database and then tag them to exposures in a mutual fund, bonds or a hedge fund so if you want to see the accounting position you can get it across different types of holdings. If the industry doesn’t fix their problem, someone is going to fix it for them with more regulation.”

Accounting data is held in the back office, which has none of the glamor or profitability of the trading operations. Regarded as a cost center, it typically receives little investment and less attention Even in the JPMorgan blowup, attention has focused on risk management and controls, not on the fact that the bank apparently could not determine its losses for several weeks.

With Pendo Systems, Cytron said, users can see the positions in real-time.

When firms ask her how long the nightly run is on BasisPoint she explains that the system operates in real-time. Unlike older systems that have to run overnight reports for users to get at the data, BasisPoint supports real-time queries. One mid-size insurance company which had 600 reports looked at the way BasisPoint works and concluded it could get by with just 30 reports, all of which were already in Pendo, since the rest of the information was always available by query rather than requiring IT to run a report. In fact, 40 percent of the firm’s reports hadn’t been touched in 10 years.

The incumbent systems work with a single cost basis. Although they do multi-cost basis through reports which can incorporate the various internationally recognized accounting standards –  Japanese GAAP , US GAAP, IFRS or Australian Tax — older systems don’t provide online real-time financial impact analysis by basis. Obtaining the data granularity required to feed risk, compliance or management reporting tools is cumbersome and requires a tremendous amount of manual intervention, Cytron said.

“They were build eons ago when memory and fast storage were expensive.

Pamela Pec Cytron, CEO of Pendo Systems

Cytron said that BasisPoint’s most exciting feature — excitement is all relative when you’re talking about accounting systems — is the application’s cancel and rebook feature.

“If you have an error in December and missed a paydown on your bond from February, you have to fix that. In every single system, you have to go in and manually unwind all the paydowns and corporate actions and then rebuild them. Since it is all done manually it takes a long time to fix it and it is prone to error. We show how with one transaction you cancel and rebook and you see all the lot level detail and fix it.”

Existing accounting systems were built from the individual accounts, not the individual positions. Moving to  system based on positions requires a huge mind shift, she said. But if you have granular data you can do mark to market and historical costs, International Financial Reporting Standards or U.S. GAAP, handle bonds or equities, domestic or Asian or European.

More than just a mind shift, the move requires courage, or demand by regulators. Legacy systems might be clumsy and expensive to operate, but they are familiar and reliable.

“Everything that surrounds accounting is massive. The integration is massive since an accounting system could be connected to thousands of feeds.

Moving a core system is expensive and time-consuming, not to mention scary — the reason very few top tier banks have replaced their core systems. (See my story on CBA and Nationwide.)

Pendo proposes a deliberate migration by moving new business to BasisPoint in a cloud utility and then slowly transferring existing data and finally shutting down the legacy system.

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Why 3D Printed Food Just Transformed Your Supply Chain

Hans Thalbauer

Numerous sectors are experimenting with 3D printing, which has the potential to disrupt many markets. One that’s already making progress is the food industry.

The U.S. Army hopes to use 3D printers to customize food for each soldier. NASA is exploring 3D printing of food in space. The technology could eventually even end hunger around the world.

What does that have to do with your supply chain? Quite a bit — because 3D printing does more than just revolutionize the production process. It also requires a complete realignment of the supply chain.

And the way 3D printing transforms the supply chain holds lessons for how organizations must reinvent themselves in the new era of the extended supply chain.

Supply chain spaghetti junction

The extended supply chain replaces the old linear chain with not just a network, but a network of networks. The need for this network of networks is being driven by four key factors: individualized products, the sharing economy, resource scarcity, and customer-centricity.

To understand these forces, imagine you operate a large restaurant chain, and you’re struggling to differentiate yourself against tough competition. You’ve decided you can stand out by delivering customized entrees. In fact, you’re going to leverage 3D printing to offer personalized pasta.

With 3D printing technology, you can make one-off pasta dishes on the fly. You can give customers a choice of ingredients (gluten-free!), flavors (salted caramel!), and shapes (Leaning Towers of Pisa!). You can offer the personalized pasta in your restaurants, in supermarkets, and on your ecommerce website.

You may think this initiative simply requires you to transform production. But that’s just the beginning. You also need to re-architect research and development, demand signals, asset management, logistics, partner management, and more.

First, you need to develop the matrix of ingredients, flavors, and shapes you’ll offer. As part of that effort, you’ll have to consider health and safety regulations.

Then, you need to shift some of your manufacturing directly into your kitchens. That will also affect packaging requirements. Logistics will change as well, because instead of full truckloads, you’ll be delivering more frequently, with more variety, and in smaller quantities.

Next, you need to perfect demand signals to anticipate which pasta variations in which quantities will come through which channels. You need to manage supply signals source more kinds of raw materials in closer to real time.

Last, the source of your signals will change. Some will continue to come from point of sale. But others, such as supplies replenishment and asset maintenance, can come direct from your 3D printers.

Four key ingredients of the extended supply chain

As with our pasta scenario, the drivers of the extended supply chain require transformation across business models and business processes. First, growing demand for individualized products calls for the same shifts in R&D, asset management, logistics, and more that 3D printed pasta requires.

Second, as with the personalized entrees, the sharing economy integrates a network of partners, from suppliers to equipment makers to outsourced manufacturing, all electronically and transparently interconnected, in real time and all the time.

Third, resource scarcity involves pressures not just on raw materials but also on full-time and contingent labor, with the necessary skills and flexibility to support new business models and processes.

And finally, for personalized pasta sellers and for your own business, it all comes down to customer-centricity. To compete in today’s business environment and to meet current and future customer expectations, all your operations must increasingly revolve around rapidly comprehending and responding to customer demand.

Want to learn more? Check out my recent video on digitalizing the extended supply chain.

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Hans Thalbauer

About Hans Thalbauer

Hans Thalbauer is the Senior Vice President, Extended Supply Chain, at SAP. He is responsible for the strategic direction and the Go-To-Market of solutions for Supply Chain, Logistics, Engineering/R&D, Manufacturing, Asset Management and Sustainability at SAP.

How to Build Customer Loyalty Through Digital Emotional Affinity

Volker Hildebrand, Lori Mitchell-Keller, Christopher Koch, and Polly Traylor

SAP_Digitl_Emotion_BRIEF_image2400x1600_1

 

When the Amazon site was launched in 1995, followed by the heady years of dot-com mania, marketers believed they had reached nirvana with the speed, convenience, selection, and plain cool factor of online stores.

Digital technology revolutionized the way companies interacted with customers by making the research and purchasing processes more convenient. Yet research shows that companies have a long way to go in effectively using digital technologies to engage with their customers.
Just 49% of consumers say their experiences using Web sites on desktop and laptop computers are excellent, while a mere 18% of consumers say the same for shopping with mobile Web sites or apps.

The reason behind the failings of all this great technology is that loyalty is driven by positive emotions not just efficiencies. Ninety percent of purchasing decisions are made subconsciously, according to Caroline Winnett and Andrew Pohlmann of The Nielsen Company. Meanwhile, neuroscientist Antonio Damasio has found that for patients with brain damage affecting their abilities to feel emotions, making any decision at all is difficult.

By developing a concerted strategy to foster positive emotions in digital, companies can reduce churn, lower customer acquisition costs, and grow revenues per customer. “It’s getting harder and harder to put your message in front of customers effectively and efficiently,” says Tim Peter, founder of Tim Peter & Associates, an e-commerce, Internet marketing, and business strategy consultancy. “If you can get them once, you will more likely reengage them. My clients see emotional engagement as a differentiator.”

How does a company move from the robotic, unfeeling interface of technology to an experience where the customer can sense the people and brand behind it all? There’s no single method here; improving emotional affinity in digital requires a culture that’s hyper about monitoring and pleasing customers. It also begs for a hybrid approach of merging human experiences with digital, investing in omnichannel integration, and developing more creative approaches to online branding.

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The Future Of Supplier Collaboration: 9 Things CPOs Want Their Managers To Know Now

Sundar Kamak

As a sourcing or procurement manager, you may think there’s nothing new about supplier collaboration. Your chief procurement officer (CPO) most likely disagrees.
Forward-thinking CPOs acknowledge the benefit of supplier partnerships. They not only value collaboration, but require a revolution in how their buying organization conducts its business and operations. “Procurement must start looking to suppliers for inspiration and new capability, stop prescribing specifications and start tapping into the expertise of suppliers,” writes David Rae in Procurement Leaders. The CEO expects it of your CPO, and your CPO expects it of you. For sourcing managers, this can be a lot of pressure.

Here are nine things your CPO wants you to know about how supplier collaboration is changing – and why it matters to your company’s future and your own future.

1. The need for supplier collaboration in procurement is greater than ever

Over half (65%) of procurement practitioners say procurement at their company is becoming more collaborative with suppliers, according to The Future of Procurement, Making Collaboration Pay Off, by Oxford Economics. Why? Because the pace of business has increased exponentially, and businesses must be able to respond to new market demands with agility and innovation. In this climate, buyers are relying on suppliers more than ever before. And buyers aren’t collaborating with suppliers merely as providers of materials and goods, but as strategic partners that can help create products that are competitive differentiators.

Supplier collaboration itself isn’t new. What’s new is that it’s taken on a much greater urgency and importance.

2. You’re probably not realizing the full collective power of your supplier relationships

Supplier collaboration has always been a function of maintaining a delicate balance between demand and supply. For the most part, the primary focus of the supplier relationship is ensuring the right materials are available at the right time and location. However, sourcing managers with a narrow focus on delivery are missing out on one of the greatest advantages of forging collaborative supplier partnerships: an opportunity to drive synergies that are otherwise perceived as impossible within the confines of the business. The game-changer is when you drive those synergies with thousands, not hundreds of suppliers. Look at the Apple Store as a prime example of collaboration en masse. Without the apps, the iPhone is just another ordinary phone!

3. Collaboration comes in more than one flavor

Suppliers don’t just collaborate with you to provide a critical component or service. They also work with your engineers to help ensure costs are optimized from the buyer’s perspective as well as the supplier’s side. They may even take over the provisioning of an entire end-to-end solution. Or co-design with your R&D team through joint research and development. These forms of collaboration aren’t new, but they are becoming more common and more critical. And they are becoming more impactful, because once you start extending any of these collaboration models to more and more suppliers, your capabilities as a business increase by orders of magnitude. If one good supplier can enable your company to build its brand, expand its reach, and establish its position as a market leader – imagine what’s possible when you work collaboratively with hundreds or thousands of suppliers.

4. Keeping product sustainability top of mind pays off

Facing increasing demand for sustainable products and production, companies are relying on suppliers to answer this new market requirement.

As a sourcing manager, you may need to go outside your comfort zone to think about new, innovative ways to collaborate for achieving sustainability. Recently, I heard from an acquaintance who is a CPO of a leading services company. His organization is currently collaborating with one of the largest suppliers in the world to adhere to regulatory mandates and consumer demand for “lean and green” lightbulbs. Although this approach was interesting to me, what really struck me was his observation on how this co-innovation with the supplier is spawning cost and resource optimization and the delivery of competitive products. As reported by Andrew Winston in The Harvard Business Review, Target and Walmart partnered to launch the Personal Care Sustainability Summit last year. So even competitors are collaborating with each other and with their suppliers in the name of sustainability.

5. Co-marketing is a win-win

Look at your list of suppliers. Does anyone have a brand that is bigger than your company’s? Believe it or not, almost all of us do. So why not seize the opportunity to raise your and your supplier’s brand profile in the marketplace?

Take Intel, for example. The laptop you’re working on right now may very well have an “Intel inside” sticker on it. That’s co-marketing at work. Consistently ranked as one of the world’s top 100 most valuable brands by Millward Brown Optimor, this largest supplier of microprocessors is world-renowned for its technology and innovation. For many companies that buy supplies from Intel, the decision to co-market is a strategic approach to convey that the product is reliable and provides real value for their computing needs.

6. Suppliers get to choose their customers, too

Increased competition for high-performing suppliers is changing the way procurement operates, say 58% of procurement executives in the Oxford Economics study. Buyers have a responsibility to the supplier – and to their CEO – to be a customer of choice. When the economy is going well, you might be able to dictate the supplier’s goods and services – and sometimes even the service delivery model. When times get tough (and they can very quickly), suppliers will typically reevaluate your organization’s needs to see whether they can continue service in a fiscally responsible manner. To secure suppliers’ attention in favorable and challenging economic conditions, your organization should establish collaborative and mutually productive partnerships with them.

7. Suppliers can help simplify operations

Cost optimization will always be one of your performance metrics; however, that is only one small part of the entire puzzle. What will help your organization get noticed is leveraging the supplier relationship to innovate new and better ways of managing the product line and operating the business while balancing risk and cost optimization. Ask yourself: Which functions are no longer needed? Can they be outsourced to a supplier that can perform them better? What can be automated?

8. Suppliers have a better grasp of your sourcing categories than you do

Understand your category like never before so that your organization can realize the full potential of its supplier investments while delivering products that are consistent and of high quality. How? By leveraging the wisdom of your suppliers. To be blunt: they know more than you do. Tap into that knowledge to gain a solid understanding of the product, market category, suppliers’ capabilities, and shifting dynamics in the industry, If a buyer does not understand these areas deeply, no amount of collaboration will empower a supplier to help your company innovate as well as optimize costs and resources.

9. Remember that there’s something in it for you as well

All of us want to do strategic, impactful work. Sourcing managers with aspirations of becoming CPOs should move beyond writing contracts and pushing PO requests by building strategic procurement skill sets. For example, a working knowledge in analytics allows you to choose suppliers that can shape the market and help a product succeed – and can catch the eye of the senior leadership team.

Sundar Kamak is global vice president of solutions marketing at Ariba, an SAP company.

For more on supplier collaboration, read Making Collaboration Pay Off, part of a series on the Future of Procurement, by Oxford Economics.

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The CFO Role In 2020

Estelle Lagorce

African American businessman looking out office window --- Image by © Mark Edward Atkinson/Blend Images/CorbisThe role of the CFO is undergoing a serious transformation, and CFOs can expect their role to continue to evolve, according to a recent CFO.com article by Deloitte COO and CFO Frank Friedman.

In the futurist article, Friedman says one of the biggest factors that will contribute to the CFO’s significant change over the next five years is technology.

Digital technology is obviously expected to drive change in high-tech companies, but Friedman says it’s industries outside of the tech sectors that are of particular interest, as they struggle to understand how to grasp and harness the digital capabilities available to them.

Working with high tech in low-tech industries

Five years from now, a finance team may be defined by how well it uses technology and innovative business tools, regardless of what industry it’s in. The article outlines some examples of ways that digital technology will increasingly be used by CFOs in “non-tech” sectors:

  • Predictive analytics: CFOs in manufacturing companies can forecast results and produce revenue predictions based on customer-experience profiles and current demand, instead of comparing to previous years as most companies still do today.
  • Social media and crowdsourcing: You may not think CFOs spend a lot of time on social media or crowdsourcing sites, but these methods can actually expedite finance processes, such as month-end responsibilities of the finance organization.
  • Big Data: CFOs already have a lot of data at their fingertips, but in 2020 they will have even more. CFOs in both tech and non-tech sectors who understand how to use that data to make valuable, informed decisions, can strategically guide their company and industry in a more digitally oriented world.

To do this, Friedman says CFOs can lead the way by addressing some critical areas:

  1. Know the issues: Gather the key questions that leaders expect Big Data analytics to answer.
  1. Make data easily accessible: Collect data that is manageable and easy to access.
  1. Broaden skills: The finance team needs people with the skills to understand and strategically interpret the data available to them.

The tech-savvy CFO

The role of today’s CFO has already expanded to include strategic corporate growth advice as well as managing the bottom line. In 2020, Friedman says expectations placed on the CFO are presumed to be even greater, and CFOs will likely need a much more diverse, multidisciplinary skill set to meet those demands.

The article details several traits and skills that CFOs will need in order to keep up with the pace of digital change in their role.

  1. Digital knowledge: CFOs must be tech-savvy in order to capitalize on technical innovations that will benefit their company and their industry as a whole.
  1. Data-driven execution: CFOs will need the ability to execute company strategy and operations decisions based on data-driven insights.
  1. Regulatory compliance: Regulations continue to be more stringent globally, so CFOs will need to be proficient at working closely with regulators and compliance systems.
  1. Risk management: With the growing global economy comes increased cyber and geopolitical risks worldwide. The CFOs of 2020, especially those in large multinational organizations, will need to have the expertise to monitor and manage risk in areas that may be unforeseen today.

The future CFO’s well-rounded resume

By 2020, the CFO role will require much more than just an accounting background. According to Deloitte’s Frank Friedman, “CFOs may need to bring a much more multidisciplinary skill set to the job as well as broader career experiences, from working overseas to holding positions in sales and marketing, and even running a business unit.”

So if you’re a current or aspiring CFO, you have five years to round out your resume with the necessary skills to be ready for the digitally driven role of the CFO in 2020.

The above information is based on the CFO.com article What Will the CFO Role Look Like In 2020?” by Deloitte COO & CFO, Frank Friedman – Copyright © 2015 CFO.com.

Want to learn more about best practices for transforming your finance organization? View the SAP/Deloitte Webinar, “Reshaping the Finance Function”.

For an in-depth look at digital technology’s role in business transformation, download the SAP eBook, The Digital Economy: Reinventing the Business World.

To learn more about the business and technology factors driving digital disruption, download the SAP eBook, Digital Disruption: How Digital Technology is Transforming Our World.

To read more CFO insights from a tech industry perspective, read the Wall Street Journal article with SAP CFO Luka Mucic: Driving Insight with In-memory Technology.

Discover 7 Questions CFOs Should Ask Themselves About Cyber Security.

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Estelle Lagorce

About Estelle Lagorce

Estelle Lagorce is the Director, Global Partner Marketing, at SAP. She leads the global planning, successful implementation and business impact of integrated marketing programs with top global Strategic Partner across priority regions and countries (demand generation, thought leadership).