Why Do Corporations Embrace Credit Risk Management Solutions that Don't Qualify as Best Practice?
Yuval D. Bar-Or
April 24, 2008
Some readers may react skeptically at the notion that corporations would settle for less than best practice, especially when it comes to risk management. After all, isn’t risk management the one function where a sub-par solution could mean disaster? Yet, in some cases, firms don’t embrace the best tools available. Here is a selection of reasons and motives for such sub-optimal decisions:
Brand name. Opting for a brand name helps selectors sleep better at night, and can be a path of least resistance, as management is more likely to approve of known brands. However, brand name solutions have been known to fail—blind reliance on them is a very bad idea.
Political motive. As in any human endeavor, awarding of favors or contracts for political gain is a reality.
Ignorance. A basic lack of understanding of what is needed is a common cause of poor and often drawn out solution-selection.
Price. Price is a perfectly legitimate deciding factor among comparable solutions. But taking this route at the expense of quality considerations can be a very poor risk management decision. In a selection process, price should ideally only become a driver once all satisfactory or appropriate solutions have been admitted to a short list or final round.
Absence of a best practice tool. Sometimes, there simply isn’t a solution that distinguishes itself from other approaches. This may occur when a field is in its infancy and it’s impossible to identify one solution or approach as objectively better than others. Such a situation rarely lasts long: eventually better solutions emerge from the pack.
Matching Competitors. In some cases acquisition decisions are based on matching the same solutions a competitor has embraced. Presumably, this is a way of negating any potential advantage a particular competitor may have.
Legal liability. In some cases a firm is awarded a contract in order to ensure that it doesn’t initiate legal action over some real or perceived unfairness it has encountered during the selection stages.
Envy. While it may seem odd that this would be an issue in selection of credit risk management solutions, on rare occasions purchase decisions are made to match an admired person or company.
Each of these factors may lead to a sub-optimal acquisition decision, weakening the purchasing firm’s risk management capability. But there is a broader implication. Choosing a poor solution rewards the wrong provider while penalizing those who do offer best practice. This distorts one of the most important competitive market mechanisms. Instead of encouraging and supporting the best providers, this supports inferior ones.
