Implementing new credit risk management standards and best practices may require an overhaul of current utility IT systems.
Information overload is a serious risk to the effectiveness of the credit management process, especially as it relates to developing IT systems to implement the recent credit risk standards developed by best practice group, the Committee of Chief Risk Officers (see the CCRO's Credit Risk Management Report, www.ccro.org [Nov. 19, 2002]).
While the CCRO's leadership should be commended for putting forth a well thought-out framework of recommendations that are timely and insightful, particularly in regard to helping address credit and contract management issues, they raise another set of issues altogether: the ability of energy companies to actually implement the recommendations using the current technical and business processes in place at many of these companies. Plainly, the implementation constraints are now likely to be examined by those considering adoption of the recommendations.
Most companies lack the well-structured environment that allows the streaming of key information from various base IT systems, filtering out the uninteresting information, highlighting the interesting outliers, staying alert for predefined conditions, and allowing one-click access to the base system data.
What is required to successfully implement the recent CCRO recommendations in the reporting area is not so much the calculations behind the credit information, but the ability of an analyst, manager, or executive to digest and process the existing wealth of information, on a timely basis, leading to relevant and actionable intelligence. Notwithstanding, attempts to implement the CCRO recommendations will face significant business and technical challenges.
Implementation Issues
Two key implementation issues particularly stand out. First, the ability to obtain relevant credit information from the noise of background information regarding counterparties can be difficult. Second, it is often difficult to obtain relevant information in time to take preemptive action (see Table 1).
The CCRO also has compiled a large sample of desirable information sets, or reports, surrounding credit management and monitoring. Leading companies likely will expand information requirements from this list, owing to innovation typically seen at such companies or imbedded processes within their organizations.
Given the typical sizing of credit departments and their day-to-day operational responsibilities, staying on top of all this information consistently and on a timely basis appears to be a daunting challenge.
Credit risk management for virtually all corporate entities is rapidly becoming a core competency in today's competitive and turbulent capital markets. Ultimately, a corporate credit policy has the goal of ensuring that a company fully understands the credit risk associated with a counterparty and that it uses that information to properly price such risk into the product. In a non-financial corporate setting, this typically takes the form of working to minimize open credit exposure and bad debt write-offs while not constraining top-line business growth. As simple as it appears on paper, establishing and enabling sound credit practices is a daunting challenge-as many companies have learned during the past two years.
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