Get ready: global debt and sluggish economic growth, fueled by dwindling fossil fuels and other critical resources, are about to usher in an era of capital scarcity. This isn't just a challenge; it's a fundamental shift that will force businesses to prioritize capital optimization like never before. And for banks, that means a complete overhaul of their operations.
Risk Reduction: The Key to Capital Optimization
In a world where capital is scarce, reducing risk becomes paramount. Why? Because capital consumption is directly tied to risk, whether it's market risk or counterparty risk. Optimizing capital is simply another way of saying "reducing risk."
So, how do you reduce risk? By sharing and integrating relevant information throughout your business processes. SAP, for example, understood this principle decades ago, and their systems' ability to facilitate information sharing is precisely what made them a market leader for the past 30 years.
Consider inventory management: comparing sales forecasts with actual sales provides the data needed to determine a safety stock. An accurate safety stock minimizes the risk of lost sales. If a company improves its forecasting with advanced statistical analysis, external data, or by collaborating on forecasts with key customers, it directly reduces its risk of losing sales.
These risk-hedging techniques aren't just theoretical; they have a tangible impact on the cost of capital. Just as non-payment insurance reduces credit risk, effective inventory management reduces opportunity costs from lost sales, reputational damage, or inventory obsolescence. The investment in implementing and incentivizing these processes is akin to paying an insurance premium. Conversely, poorly implemented processes carry the risk of suboptimal outcomes, much like choosing the wrong financial instruments.
The Missing Piece: Financial Services and Collaboration
While real-economy businesses have significantly improved their processes over the past three decades, driven by SAP best practices, the financial sector hasn't kept pace, particularly in solvency and liquidity allocation.
Today, businesses across the value chain are intensely focused on synchronizing logistics processes. Vendors, manufacturers, retailers, and logistics providers are collaborating, sharing information to align demand and supply, all while navigating various constraints.
Banks, however, have largely remained outside these collaborative networks. It's not for lack of incentive; it's due to a lack of know-how, technology, and appropriate processes. This represents a significant weakness for the banking sector, but also a massive opportunity for those players capable of pioneering a new paradigm in financial services. This is a crucial step for optimizing capital.
Synchronizing Capital and Liquidity Across the Enterprise
Every business process consumes and generates capital and liquidity, albeit with varying maturity periods. This is precisely why the financial system exists: to cover capital and liquidity needs during shortages and provide investment opportunities during surpluses.
Capital and liquidity synchronization demands a clear understanding of a company's financial position across different time horizons. This means allocating capital and liquidity (through financial instruments) in alignment with their distribution within business processes over those same time horizons.
To achieve this, we must first translate real-economy events into terms of solvency and liquidity generation and consumption. By integrating these insights into business processes, we can measure capital and liquidity surpluses or shortages for each process at every time horizon. Aggregating this data across all processes will reveal the organization's overall capital and liquidity position.
Taking it a step further, by including the processes of other subsidiaries, partners, and even suppliers, we can gain a holistic view of the entire network's capital and liquidity. This opens the door to powerful collaboration scenarios, where some processes can provide capital, liquidity, or investment opportunities to others within the same network.
Think of it like Vendor Managed Inventory (VMI) in logistics, but instead of replenishing stock, we're exchanging financial instruments like loans, deposits, and derivatives.
We're developing a system to bring this vision to market and are actively seeking business partners and investors. If you're interested in learning more, please don't hesitate to contact me at ferran.frances@gmail.com
I look forward to hearing your thoughts.
Kindest Regards,
Ferran Frances
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