Early in Disney’s movie version of Aladdin, the Genie invites Aladdin, to whom he has just granted three wishes, to imagine the possibilities. While it’s unlikely even the most dedicated asset manager would use those wishes to improve asset management workflow, auditability and analytics, this article will imagine those more mundane items. On the plus side, given changes and improvements in technology, you won’t need a magic lamp to get started on a path to better, more insightful asset management.
When I first started talking with asset managers years ago and saw their processes in detail, I was reminded of a Rube Goldberg device — so many events kicked off processes that kicked off other events that looped back to restart steps that kicked off other processes — it was dizzying! To me, it seemed like asset managers had too many customers — sales, credit, customer service, the finance committee, accounting and auditors — who wanted too many different things. And to get the job done, they had to work with too many different people — vendors, appraisers, outside valuation services, auction houses, all the way down to the repo man. And everything had to be delivered without being impaled on the horns of the classic speed-versus-quality dilemma.
Yet each of these steps and processes are critical components of an equipment finance enterprise’s profitability. In this business, you must know exactly what you’re financing, what it’s worth and how to get top dollar if you must dispose of it. Real expertise and professionalism are required to make this work.
“To be successful, I believe time-tested valuation processes and well-planned exit strategies are the foundational tools,” says Kevin Sensenbrenner, SVP and senior managing director of Asset Management at Stonebriar Commercial Finance. “However, since markets have become more global and as technologies are advancing more rapidly, we now must assess shorter industry cycles and more acute shifts in asset values.”
The equipment managers I’ve spoken with all have impressive, yet largely manual, processes in place to perform their jobs. “For years,” according to Sensenbrenner, “many businesses have relied upon cumbersome filing, spreadsheets and basic pivot tables to retain, track and report information.” Technology is employed, but it is usually at least 15 years old. Hiding in all the data, paperwork, emails and phone calls is a key to making money and keeping the business afloat.
Asset management has been able to piggyback onto more recent corporate-wide tech improvements, so progress can be captured in Salesforce or messaging sent via smartphone. But apart from one or two projects at a few larger companies, I have not seen technology projects directed specifically toward improving asset management processes. Despite its importance to the enterprise, asset management is not the squeakiest wheel.
Reimagining the Asset Management Process
Let’s get back to imagining the possibilities. If asset management were to adopt something like the best practices of the sales process, but adapted to its own needs, the world might look like this:
None of these best practices involve new technology. In this ideal scenario, we are only imagining that asset management will receive a similar level of attention that many areas of the company and business world already receive.
Right now, an indispensable tool for the process described above is the good old spreadsheet. It’s where the asset manager collects key information and tracks progress, and from which she reports and does analysis. Since we all use spreadsheets, we are familiar with their drawbacks. Having all the basic data and history tracked and stored in a clean, consistent format as a basic outcome of a system would be an improvement.
Asset managers often supply information to other groups, such as the valuations risk managers use to measure exposure. An improved system would make providing asset-related data to other users less painful.
Transparency, often a euphemism for keeping the auditors happy, would also result from well-implemented technology. A complete record of the entire process is stored in one place, including documents and emails. The reasoning behind any given valuation can be backed up from one central data store. Such a system could produce standard documents in any format the auditors require. Rather than a research project, the justification for any particular valuation becomes another standard output of the system.
These improvements are easy to imagine. We can walk down the hall and see similar systems used in our own companies. The next step requires more vision. Once the data is stored in one place, in a consistent format which can be sliced and diced any way we want, the analytic genie is out of the bottle.
Today, most asset management analytics fall into two groups: asset management group performance and gain/loss on disposed assets. Other reporting, often ad hoc, is done as well. Any centralized system should provide for and improve upon such analyses, provide opportunity for greater depth and make frequent reporting painless.
The asset manager should be able to see at a glance the throughput speed of her team and the profitability of their activities in any level of detail desired. Challenges and opportunities could be spotted and acted upon more quickly and with greater confidence.
With improved analytics comes an opportunity which requires real imagination. Now that asset managers have this useful data, what else can they do with it? How can it best serve the company? For every asset on the books, the dream system we’re envisioning can have a complete record of how that asset was valued, how it was priced, how the deal matured, what changes were made, how the asset was disposed of and any direct expenses associated with these activities — all in one place. We have a complete history of exposure and can readily dig into those inevitable cases where deals that should have come out about the same instead had very different outcomes. We can easily slice and dice across any axis we can dream of.
With a little more imagination and work, we could even have such a system perform time-value analysis. By discounting cash flows at the corporate cost of funds, we could reveal the exact value of speedy turnarounds in asset disposition. The value of renewals and evergreens could be expressed in the same metrics used in pricing the deal in first place. For example, deals priced to a return on equity of 15% could be shown to have yielded a ROE of 20% for customer A, who often renews, versus an ROE of 10% for customer B, who sometimes returns. This information could assist in structuring deals and targeting customers accordingly. Asset management becomes a source of timely, actionable information to business development, sales and marketing.
Asset management would be in a unique position to produce a predictive outcomes model. The system we’re envisioning would greatly enhance an analyst’s ability to regularly measure actual outcomes — full payouts, returns, renewals and defaults— in economic terms over time and across all assets groups, territories and industries. Profitable outcomes could be seen at any level of detail desired. Trends would reveal themselves. By correlating specific outcomes with customer-specific characteristics on one hand and more general economic trends, such as GDP, default rate or employment rates on the other, it would be possible to create a refined forecasting model with enough detail to be useful for fine-level marketing and pricing. Such a model would be regularly refined and corrected as new data became available. In a time of “race to the bottom margins’’, the insights provided would be very valuable.
Regardless of the outstanding opportunities for enriched reporting and analysis, which a modern asset management system would provide, merely replacing processes built on emails, spreadsheets and phone calls with centralized, managed processes is enough to justify moving into an automated and transparent future.