The future is where we will be paid or not paid by our customers. Hence as credit managers we need to understand what the future may hold so we can prepare a range of plans that we can adapt to best fit what materializes in the fullness of time.
An understanding of what the future may hold can be gained through use of the Scenario Planning technique.
‘Scenario planning derives from the observation that, given the impossibility of knowing precisely how the future will play out, a good decision or strategy to adopt is one that plays out well across several possible futures. These sets of scenarios are, essentially, specially constructed stories about the future, each one modelling a distinct, plausible world in which we might someday have to live and work.’
(How to Build Scenarios –
The way forward for credit managers then (not being bean-counters of the 19th century but rather a remarkable synthesis of economist, commercial lawyer, negotiator, management accountant, business manager, detective and master strategist) is to create scenarios of the future for the market or industry in which their customers will be operating. Then to look back from the vantage point of those futures to identify which customers are most likely to have failed along the way.
A Scenario is not a plan, it is not a projection of current trends, yes the future begins from where we find ourselves today, yes the future is shaped by forces we see existent today - if we open our eyes wide enough and shake off assumptions - but it is also shaped by the future actions of men and women of vision, it is shaped by disruptive technology, and unexpected pivotal events; like the fall of the Berlin Wall.
Nassim Nicholas Taleb wrote in his important book on risk assessment, the following:
‘Before the discovery of
The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the colouring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.
I push one step beyond this philosophical-logical question into an empirical reality, and one that has obsessed me since childhood. What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. Ever since we left the Pleistocene, some ten millennia ago, the effect of these Black Swans has been increasing. It started accelerating during the industrial revolution, as the world started getting more complicated, while ordinary events, the ones we study and discuss and try to predict from reading the newspapers, have become increasingly inconsequential.’
(Extracted from The Black Swan: The Impact of the Highly Improbable, written by Nassim Nicholas Taleb, published: April 22, 2007)
Please refer to articles found at the following addresses for more discussion on the need for and plausible use of scenario planning: