Trust and Transparency through Standards a look at the external business world

By necessity most business activities at the process level have been remote and opaque from both the customers, and all too often, from those involved too. I use the phrase necessity to cover two very different aspects; commercial advantage, the benefit obtained from having and applying unique knowledge; as distinct from the operational limitations imposed by the tools, structure of the work and/or organisational structure.

Currently I think we can all conclude that there is a shortage of Trust in many aspects of our society today with perhaps Banks and Government feeling this more than most. Trust is usually associated with openness, respect, shared values and other values which can be addressed by the using collaborative technologies. In many respects these are the reverse values of those Government feels obliged to adopt around ‘secrecy’ and control. Let me clarify my comments by saying perhaps now is the time to consider using the shared and open capabilities that the technologies associated with the Web and Internet ‘standards’ are able to bring to this question.

In looking at the issue of ‘trust’ and ‘transparency’ I am struck by just how has happened already, and how much is happening with the pace being forced by ‘credit crunch’ issues. I want to explore this around examples starting with something a colleague showed me around how as the interest rates decline it deters those who have money from saving as there is no real return. John introduced me to www.prosper.com where he is lending directly to those who are in need of funding, thus both lender and borrower are by passing the previously required administrative role of the Bank, (currently the borrowers could well argue that the Banks have removed themselves from this role by their reluctance to lend!).

Risk is managed in this model by eBay style ratings on borrowers, and by the sum borrowed being spread across the many lenders who each decide how much they will subscribe to the total required sum, therefore their exposure to any individual borrower is limited. Look at it more closely and you will see interest rates are determined by those involved in each transaction to reflect the individual cases. All in all very different from a corporate banking policy approach, but you can argue that this is only okay for a limited play around the edge of the lending market. I would have agreed with you until two weeks ago when TaTa when of India’s largest corporations decided to use this model to obtain financing http://en.ce.cn/World/biz/200812/02/t20081202_17560129.shtml . TaTa is appealing directly using this model to individuals to subscribe directly with TaTa in lending very small personal sums that obviously TaTa believes will aggregate to make the kind of sums needed, and at administrative costs that the Web can provide.

There is even an argument that says many banking functions are merely procedures and could be outsourced especially if it is something like a student loan scheme linked to a Government body, and that’s already started in Nova Scotia http://www.gov.ns.ca/news/details.asp?id=20080129003 All of which can be summed up as saying if banks don’t have money to lend or a trust model as to their role in society then their last asset was perhaps operating procedures and now even that seems to be threatened. At this stage I should say this is not meant to be an anti banking piece merely pointing to what is happening out there.

All of this is perhaps part of the unobtainable dream that was promised in the 2000 bubble being made real. The difference? Back then the concept of all these ‘market places’ was built around a closed and propriety application with the role of the internet and the browser standards limited to access and presentation. Now everything is both open and standardised, and that covers a lot of new technology ground from Open Source to Jericho style security. It’s not just a technology change it’s also a business attitude and cultural change too, it’s a recognition that operational administration can gain by being open, and that openness inspires trust in relationships that in turn leads to a reduction of risk, and an overall gain for all involved. It begs the question as to how much of any business transaction involves the pricing for risk,? And that means more that simple credit risk.

I started this around Banks so perhaps I should return to the topic for the most surprising cultural change to me. It’s hardly surprising that Banks are currently somewhat preoccupied with risks and risks management, and though I am sure we all wonder why this didn’t happen earlier in the cycle. It is understandable at least from one perspective though. How does any banking officer understand the risk built into a complex financial instrument which by definition is a ‘manufactured’ product that the constructing bank considered was a product it built to sell. Moreover to sell in a competitive market and there for one that needed to have a competitive advantage? In other words the risk inherent in the product was all but invisible, and the only visible risk to manage was that of the market in which it was traded.

Now it seems obvious that in this area, as with other elements of the financial sector, greater transparency is needed, and I was both heartened and surprised to find that there is active discussion amongst the financial community about creating ‘standardised’ models for financial instruments so the risk inherent in the elements can be clearly identified. (btw the idea of standards for financial instruments is not new to General Accepted Accounting Standards as applying to a business and its accounts, but it is new to the trading markets and tradable products in question). If I understood exactly what I am buying, and trading in terms of the risk resident in the item as well as the risk in the movements of the trading market then things might have been different.

Now try taking this approach into other markets. When you lease a car how much of the lease cost reflects the risk in terms of the car’s residual value being affected by how confident the car manufacturer is in this car model being perceived as a desirable one, versus how much is based on the overall economy being up or down affecting the demand for cars?

And in Government?? Your turn to take the lead and give your views as Government officers!