BIG DATA: TAKING THE RISK OUT OF RISK?
Big data has become the business buzzword of the 21st century, although in its purest form it is not a new concept. Companies and governments have been collecting data on its customers and publics for a long time. An early example of big data in action is customer loyalty schemes. Supermarkets have been collecting details on the shopping habits of their customers and using that information not only to try and personalise marketing but also to predict future shopping trends.
This is big data in its most basic use. The digital world has caused an explosion in the amount of information that companies of all sizes can collect real-time information about the market, their customers and their financial position. ACCA has long talked about the changing role of the accountant and big data is making that a reality.
The company accountant was the person who would put together the last year’s financial results and report them to senior management. In some cases they would use this information to advise on future budgets, but using their analytical skills to decode and unravel the mountain of data available they are now able to give solid interpretation, in real-time, about financial performance, potential opportunities and of course risks.
Risk is a part of everyday life; business cannot succeed without taking risks. Risk has become a taboo word in the post-2008 global economy, but what we need to see is more following the examples of those using big data to take evidence-based risks. A survey in 2013 by Tata Consulting Services found that 80% of business said that implementing big data initiatives had improved their decision-making process. However, big data cannot entirely remove the risk from decision making, especially when you consider the rapid obsolescence of big data using out-of-date data to inform decisions could be as dangerous as using no data at all.
It is often said that a firm’s biggest risk is its staff, an ACCA and IMA (the Institute of Management Accountants) survey identified the technology skills that they expected to find useful during the next decade. These included: knowledge of data extraction tools for mining business intelligence (72%), and use of tools that support data modelling and analysis (70%), and the significance of these skills was rated consistently highly across every world region. Any business that wants to make the most of the opportunities offered by big data must be wary of the staff they employ to interpret the data. This offers a huge opportunity to finance professionals. Accountants are trained to gather, analyse and benchmark data, they can apply these skills to the strategic use of big data and use their skills to take a more proactive role and prove their worth in value creation.
A decade ago Canadian Tire, retailer of electronics, kitchen supplies, sporting equipment and car accessories, through a study, found that there was a link between consumer behaviour with credit risk. Although they chose not to use their findings to manage its own customers, it showed how companies can use customer data to mitigate risk and make informed choices about who to offer credit to and the risk of those customers defaulting on their borrowing.
We live in a world where the supply chain covers many borders, and this presents increased risk too, but by using data from a variety of sources these risks can at least be identified. External sources such as social media can be useful in breaking news of insurgencies and natural disasters. There are, of course, caveats attached to this, one of the most significant is the danger of confusing causation and correlation. Proving causality demands more than noticing a coincidence of data trends.
The skill in decrypting and analysing big data is already very much in demand and this is a trend that is likely to continue, especially the ability to use information to spot future trends and identify quickly emerging threats. The move from a hindsight based, reactive risk analysis to a proactive approach could mean the difference between a business rising to the top of the market and those struggling to make an impact.
One of the biggest growth areas in the accountancy professions in recent years has been in forensic accountancy. Using live data, forensic accountants will become vital in the defence against fraud. Big data makes it easier for auditors and regulators, such as HMRC, to spot large scale fraud. Looking for negative correlations between different datasets, for example financial and non-financial, could be warning signs of manipulation.
As fraud becomes more sophisticated the methods used to detect it have to adapt. Regulation will also change, to take into account the amount of personal data that is now available to companies. The rise of big data has been coupled with a rise in fear among the public about personal information being held by businesses. In the past few years we have seen a privacy backlash against Facebook and more recently against the UK and US governments.
There will be increased regulation to govern what information businesses can hold, but this may not be enough to satisfy some customers, they want to see business be held to a higher ethical standard. This is where the finance function will play an important role. ACCA accountants are expected, not only to act within the law but also ethically. The accountant will see the scope of their role as the ethical steward of the 21st century business, widened.
The continued rise in importance of big data and the opportunities it offers will change the business world and as a result change the finance profession. There will always be a place for the reactive, but there is no doubt that big data is opening up new areas for finance professionals to use their skills and take a more strategic, forward looking role.
It is an opportunity that the profession must grasp if they are to remain valued and relevant in the global business economy. Accountants must use their skills to act as business advisers. The finance function has always been vital to the success of a company, keeping a control over budgets and ensuring financial obligations are met, but if the opportunities offered by big data are to be grasped we will see the rise of the strategic finance officer. One who looks forward far more than backward.
Faye Chua is Head of Future Research at ACCA (the Association of Chartered Certified Accountants)
http://www.globalbankingandfinance.com/acca-drivers-of-change-faye-chua/ – Faye Chua, Head of Future Research at ACCA, talking about drivers of change for the Accountancy profession
http://www.globalbankingandfinance.com/acca-technology-trends/ – CFO’s and technology