Dirty deals done with databases

Maybe IT managers could help bring their companies out of the global recession after all.

I was intrigued by an article in the New York Times this past Sunday which looked at the impact of the economic freefall in Europe, particularly Russia. One company is offering a fortune in underwear in exchange for a car, while car companies will consider sneakers or circuit boards as a trade-in. This is bartering like you’ve never seen it before, or just maybe on a scale we haven’t seen before. And that’s before a database even enters the picture.

The Times story mentioned an industrialist named German L. Sterligov, who once ran against Vladimir Putin in the federal election. If that wasn’t gutsy enough, consider his more recent proposal:

“He plans to use a computer database to create chains of six or seven enterprises having difficulty selling their products for cash, in which the last firm on the chain would pay the first in a single cash transaction,” the Times story said. “It is the kind of multiparty barter that rose to prominence in the 1990s, when managers of factories across Russia devised complex barter chains to keep the maximum number of enterprises in business when none had cash to pay their bills. A computer, he said, can do the same job faster and more efficiently.”

I don’t really think this particular venture will get very far, but it’s an interesting example of how technology will create further interdependencies among firms. Some would argue that in some ways this kind of network already existed, except instead of barter it was called credit.

What Sterligov is talking about is accelerating these financial relationships and scaling them, but that, of course, is where the complexity comes in. I recently sat in on a panel discussion about risk management that included some leading economists, and they all agreed that it was lack of understanding about the models being used that lead to this crisis in this first place.

“Management judgement and foresight are things that just didn’t happen this time around,” said Dan Borge, director of a consulting firm called LECG and designer of RAROC, one of the industry's first enterprise risk management systems. He added that even if the IT underpinning the risk assessments showed the fragility of the lender/borrower relationships, no one in financial services wanted to risk losing their bonus. “Mortgage originators had no incentive to screen clients.”

Whether it’s bartering or outright loans, it makes little difference. We need systems that do a better job of factoring in the human greed that clouds even the best information systems, and not get so excited about technology as a enabler that we ignore the misuse it enables.

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