The Role of Composite Information Systems The Citibank Corporate Finance and Strategies Analysts Case - WP # CIS-90-12
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The Role of Composite Information Systems
The Citibank Corporate Finance and
Strategies Analysts Case
Dana Pressman
May 1990 WP # CIS-90-12The Role of Composite Information Systems
The Citibank
Corporate Finance and Strategies Analysts Case
Dana R Pressman
Bachelor of Science Thesis in Economics
Massachusetts Institute of Technology
Cambridge, MA 02139
Abstract
This thesis will analyze the use of Composite Information Systems (CIS) within the
context of commercial financial analysis. As part of the Composite Information
Systems/Tool Kit (CIS/TK) research project at the MIT International Financial Services
Research Center, this case study will explain the benefits and difficulties of applying the
theoretical technology to corporate reality.
Information is a basic and yet often misunderstood asset. Most modern economic
theory assumes perfect information, yet modern economic society only realizes imperfect
information. With the proliferation of international markets and firms, information can no
longer be ignored or taken for granted; the loss of efficiency and knowledge will certainly
hamper the competitive firm. CIS is the first step towards bridging today's technology
with today's world and tomorrow's dreams.
The CIS/TK research project is a prototype solution to real problems faced by
individuals and corporations who need the flexibility and robustness of data integration.
This paper will document the purpose, function, and progress of the CIS/TK and further
relate that to the needs of Citibank's Corporate Financial Strategies & Analysis(CFSA)
Group. Both cases represent different resource needs and requirements, yet both call for the
use of a system which can easily connect the many data sources which are often used in a
company to solve a single question. Connect and connection are ambiguous terms in that they
conjure up visions of physical bridges. Yet in this context there is not only 'physical
connectivity' but 'logical connectivity' as well. Even if it is technically feasible to have
complete data integration, it is not necessarily always desirable.
This study has found that CIS/TK type integration is appropriate and feasible in
the case of Citibank's Corporate Financial Strategies & Analysis(CFSA) Group if certain
improvements and enhancements are added to the system. The study has found paths for
CIS/TK to follow as well as the benefits to the CFSA which CIS/TK can contribute.
Keywords and Phrases: Composite Inforamtion Systems, physical connectivity, logical
connectivity
Acknowledgements: I would like to thank David Lipfert, Steve Ellis, Lydia Magliozzi,
Judy Taylor, Robin Miller, and the other individuals I spoke with at Citibank. My
gratitude, of course, extends to Stuart Madnick and the other members of the CIS/TK team.
I would especially like to recognize Bertrand Regaldies .Table of Contents
I The Purpose of Integration............................................................................ 5
1.1 How to Integrate............................................................................. 5
1.1.1 Physical Integration.......................................................... 6
1.1.2 Logical Integration............................................................ 6
1.2 The System e CIS/TK ..................................................................... 6
II Citibank's CFSA ..................................................................................... 9
2.1 Group Description............................................................................. 9
2.2 Connectivity...................................................................................... 10
2.2.1 Physical Connectivity ........................................................ 10
2.2.2 Logical Connectivity......................................................... 10
2.2.3 Inform ation Sources............................................................ 15
2.3 Financial Services Industry .............................................................. 16
2.3.1 Inform ation Uses................................................................ 17
2.3.2 Inform ation Problem s........................................................ 17
2.3.3 Logical Connectivity......................................................... 18
2.4 Utilities Industry............................................................................. 18
2.4.1 Inform ation U ses................................................................ 18
2.4.2 Inform ation Problem s........................................................ 20
2.4.3 Logical Connectivity......................................................... 22
2.5 M edia Departm ent........................................................................... 22
2.5.1 Inform ation Uses................................................................ 22
2.5.2 Inform ation Problem s........................................................ 23
2.5.3 Logical Connectivity......................................................... 232.6 Petroleum, Metals and Minerals Department................................... 24
2.6.1 Inform ation Uses.............................................................. 24
2.6.2 Information Problem s........................................................ 25
2.6.3 Logical Connectivity.......................................................... 25
III General Overview of Needs and Enhancements............................................ 27
3.1 Im plem entation of CIS/TK............................................................... 28
IV Conclusion.........................................................................................................29
V Bibliography................................................................................................ 30
Appendix...............................................................................................................31
List of Figures
(1) CIS/TK Architecture................................................................................... 8
(2) CFSA Organization Chart.......................................................................... 11
(3) Comparison of LIFO and FIFO Inventory Calculations................................. 12
(4) Flowchart of FSI Analyses........................................................................... 18
(5) Flow chart of Utilities Analyses................................................................... 21I The Purpose of Integration
Computers in corporations have been a long time friend of the information hungry
executive. For those who want to pass along information there are word processing and
electronic mail applications. For mathematicians there are spreadsheet and analysis
software. For engineers CAD/CAM programs which allow electronic design and
manufacturing are the answer. Then there is the large database. In any database, linear,
relational, or remote, a large information base is stored in such a form so that any desired
piece of that base can be accessed painlessly. A phone book is a simple example of a large
easily accessible database, the user can access it by either referring to the paper version
which resides in almost every home, or by asking the phone operator to search her
electronic version.
The key word in databases is 'painlessly'. Since every database has its own
particular purpose, every database will have its own 'painless' query procedure. Some
require the user to learn a second language - such as Structured Query Language (SQL).
Others merely require the user to use menus and search words to obtain the desired
information. Local databases are used in a particular setting to hold anything from a
mailing list to a payroll. Remote sources on the other hand tend to offer widespread data,
such as financial statistics of American corporations. Often times two data sources contain
different and unrelated information and therefore are invariably kept separate; there is no
need to integrate.
However, what happens when the answer to your question is not found in any one
source? For example, the Career Services office at the MIT Sloan School of Management
offers many services to help graduates find their way into the corporate world. A student is
interested in getting a large overview of the company with which they wish to work.
Career Development Office has access to four distinct databases. Two of which are local,
the other two are remote dial-up only utilities. They have their own recruiting schedule
database which represents the visit dates of the companies and the students wanting to find
a job opportunity. The alumni database is also helpful in locating former MIT graduates
who are currently employed by a company in which a graduating student is interested. The
Finsbury's Dataline database provides financial information on companies which are mainly
based in Europe. The I.P. Sharp represents similar although not analogous information on
mostly American companies. Often the two remote databases share information on account of
the proliferation of international corporations and markets. The combination of the four
sources help to present to the student the most complete information at the touch of a few
keys. Therefore, if a student is interested in working for General Motors, the CIS/TK system
would output all the visit dates of General Motors and some basic financial information on
the present and past status of the company. The student can then access the alumni and get
a better feel for the company. This extra edge can make the difference between employment
and unemployment.
1.1 How to Integrate
There are two basic issues regarding the interlocking of the above databases:
'Physical Connectivity' and 'Logical Connectivity'. Physical Connectivity represents the
actual hardware connections, making the computers talk to one another and understand each
others language. Logical Connectivity asks the question if two databases should actually
converse with one another considering their different purposes.1.1.1 Physical Integration
Since each database is established by different people with different views there
are many issues which stem from the problem of no standard interface. Each database has
its own set of control commands. The physical connections must consider the following
attributes: different platforms, operation systems, database access protocols, and file
formats. For example, the escape symbol maybe represented differently in two systems.
Pressing the ESC key in one database can have the same purpose as the 'p' key in another.
It is relatively easy for a human to change 'vocabulary' as long as he knows the words. A
computer however, does not have the innate adjustment capabilities that humans do.
1.1.2 Logical Integration
The semantics of the data stored in a certain field of a database is often not
equivalent to the data stored in an analogous field of another. Here are some examples:
e Data Location - where can I find the data? Where is it located within the
database? What protocol must I follow to maneuver to the correct location?
" Attribute Naming - is CompName or CompCo the name of the company?
e Data Formatting and Scaling - is sales in thousands of Dollars or millions of
Yen?
" Inter-Database Instance Identification - is MIT equivalent to Massachusetts
Institute of Technology? How many different instances of a company can it check
and should it check?
e Levels of Granularity- Is the data for General Electric eclectic or must I look
at NBC and Kidder Peabody as well? Often companies are not simply one
organization. Although NBC is considered a singular company, it is owned by
General Electric. The question becomes to decide upon the appropriate company with
or without its parent company. In order to get aggregate and complete data on
General Electric it might be necessary to figure in the assets and debts of its other
companies.
e Concept Inferencing - the database does not specify average annual salary,
can it be inferred from several known attributes?
There are many issues which can easily be determined by the human eye and mind,
but the question remains: is it desirable and feasible to program and teach a computer to
perform a complicated repetitive task as in the above example? In each case a thorough
analysis must be completed in order to insure that all the effects, benefits and difficulties, of
the project are well understood. It is costly and inefficient if problems 'pop up' during the
implementation of a system which are unanticipated.
1.2 The System * CISITK
The CIS/TK system architecture is broken down into three distinct levels of
integration.
e Application Query Processor. This processor controls the user interface. It
translates the query information that the user gives into the language which can be7
understood by the system. After the query is executed, the Application Model
Processor reports the results of the query to the user in an appropriate form.
* Global Query Processor (GQP). As the second link in the pipeline, the GQP
determines which databases should be accessed to retrieve the desired attributes. It
discerns the nature of the particular variable and sends the required information to
the appropriate database controller. When the databases return the information,
the GQP assembles the results in order to completely realize the user's question.
* Local Query Processors (LQP). There are as many LQPs as there are
separate databases in the system. The LQP acts as an operator given the task of
finding the attribute specified by the GQP. The syntax, structure, and semantics of
the particular database are all incorporated in the individual LQPs so that an
executable query is passed to the remote or even local database. When it receives
the results it passes that information back to the GQP.
Figure 1 shows a graphical view of the CIS/TK System Architecture.Application
APPLICATION Model - mApplication
MODEL Manager Model Processor
Global
. Schema Joined
Query Table
GLOBAL
SCHEMA
Local Query
Processor I
Figure 1II Citibank's CFSA
In June 1989, David Godes recorded his findings of three case studies in his graduate
management thesis (WP # CIS-89-02). This thesis will be the second stage of the study of
the CFSA as requested by Citibank. Many changes have been made in the information
technology there since Godes' review was performed. An assessment of the modifications
that have occurred is necessary to insure that the needs and constraints of the Financial
Analysts are met. The project is a particularly complicated one in that connectivity has not
been proven to be the correct solution necessary to the situation at CFSA. It is often difficult
to understand the possible uses of a new system as the Associates have been taught to think
in terms of the technology which is available to them.
2.1 Group Description
The CFSA has two basic functions:
1) To identify new market opportunities - companies which need cash to
restructure or buy back some of its own stock, or to sent up a line of credit.
2) To evaluate current opportunities faithfully - using such variables as expected
value, expected environment, and the risk profile.
There are two basic types of analysis which are performed at the CFSA:
1) The annual review of all current accounts.
Purpose - to understand the current position of all presently
maintained company accounts. Is the current strategy profitable or should a
different type of credit be issued?
Method - the compilation and assessment of company financial
statements. Often the final statistics are compared to a control group of
corporate peers. The prqcess is done with Lotus 1-2-3 Macro-based templates
and often imported into Microsoft Word forms. The procedure is rather
repetitive as demonstrated by the use of macros and forms. The actual
process depends on the type of company being analyzed. For some
departments the analysis is based almost purely on numbers while other
departments require that more abstract variables, like expected market
conditions, be taken into account. The analysts or associates had no
complaints about the quality of their reviews. The bankers who use the
reviews and analysis use them as reference and background information.
Additionally, each associate had different reactions to the suggestion of
using an alternative system like CIS/TK.
2) Credit analysis of all incoming debt accounts.
Purpose - to decide on the most appropriate portfolio of debt
instruments for each incoming company. What amount of debt should be
issued, for what duration, and at what interest rate will give Citibank the
highest profit and lowest risk?
Method - in this case there is no uniform procedure. Each Associate
must determine which data and technique to use. Often, creativity takes a
large role in determining the final method of analysis.The CFSA uses many disparate data sources, many of them providing overlapping
functions. The CFSA is split up into five 'Specialized Industry Units' and three basic
'Regional Units'. Any Fortune 100 company which can be categorized under any of the
Specialized Industry Units is handled by that unit. Other companies are carried by the
appropriate Regional Unit. Each of the Specialized Industry Units has different methods of
analysis based upon the type of information available. See figure 2 for an organizational
chart of CFSA. Each of four departments will studied in this thesis: Financial Services
Industry, Utilities, Media, and Petroleum, Metals and Minerals. The associates generally use
Lotus and internally created macro models to analyze and manipulate the data. Data is
downloaded from various databases or manually inserted into a general spreadsheet.
2.2 Connectivity
Since connectivity is an ambiguous term, I will again split the subject into two
separate areas: Physical and Logical. The entire CFSA has certain characteristics which
are necessarily functions of the individual units within the department.
2.2.1 Physical Connectivity
In most departments there already is a kind of physical connectivity. The bulk of
the databases, according to the Information Systems unit, is actually accessed through the
Lotus One Source service which provides a direct path to the 1-2-3 program. For the other
separate databases the Associates must either dial up or access the CD-ROM and then
navigate through that system separately. One of the major problems of giving all terminals
access to remote databases is the licensing problem. It is very expensive to provide constant
multiple access to databases which price their services based upon time used. This
particular problem can only be addressed by performing a cost-benefit analysis. Since the
dial-up services are not a major source of information, it is unlikely that constant access by
all the terminals is necessary or warranted. Any other problems are solvable, however, and
are similar to the ones discussed in the analysis of CIS/TK.
2.2.2 Logical Connectivity
Logically this is a very complicated system and not as readily integrated as the
CIS/TK. Much of the semantics of the various sources is capricious and complicated. For
example, the value of a company's inventory depends on the accounting procedures of the
particular firm. A company may chose to use a First-In-First-Out method or a Last-In-First-
Out method. See figure 3 for an example. Often a particular protocol is known intrinsically
by the user.ICorporate Finance Strategies &Analysis
Organization Chart CFSA
November 1989 J. YoungWood
Econoist
P. Cawfr
Spedellied hiduety Wilts Regional Mits
NCD
FSI PM4 East Central West
C. Faveukes* J. Mart S.Barow' 8. Knez oek'$ C. KesslerJ Newbery* H. Chistersen*
J. MacIonakd S.Sdoch
S.Abbasi L Magliozzi J. Mug no* H.Lim8 Applebaum J. Bruce
J. While* E. Bunker K. Starncic R. Rei R.Mier J. Harris R. Herenton
J. Bari
G Hil
R.Calant D. Gupla J. Zavakos V.Fur T. Peter H. Hobart K.FI
G. Craft K. Hamid J. Reed
S.Hurlim R.Racker
8. Alius 0. Know
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C.Thieme
J. Von Feld
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Regional Wils Regional Wilts
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New York NEMA Central Souetwst S Ws
M.Cannea' K. Weinstein S.Lefevre S.WlsW A Muller*
M.Hil C. Crke*
L.Marra J. Coons S.Hipmmn K.Claire J. Karp
M.Harrigen P.O'Connel M.Gales K. Fark R. Lewis
R. Lonna B.Simson
A.Huang W. Wong R. Snell D.Taylor
R.Sdyord J. Mc e Jr. R. Trimble M. Wadchom
R. Mueler
-EMmmmFirst, lets set up the available inventory.
A firm purchas es three television sets to sell:
Date ID Cost
December 1989 TV1 $200
February 1990 TV2 $250
March 1990 TV3 $270
Total Cost of Goods available to sell: $720
Then, a television set is sold for $500.
Financial Practices example:
Financial Statement FIFO LIFO
Sales $500 $500
Cost of Goods Sold $200 $270
Gross margin on Sales $300 $230
Ending Inventory $520 $450
Figure 3After accessing the same database variables many times and using that
information in their models, the Associates learn the meaning of the numbers. It takes a
while for new Associates to completely understand the system. They usually learn through
manuals and Business Solutions training classes which teach them the basics of each of the
systems and how to navigate through them. The finer details as to the meaning of a
particular ratio, for example, is taught in reference to the company itself. Although a
computer could also 'know' these meanings it would be extremely useful for the Associates to
be able to program the formulas and 'meanings' that the system uses. One associate
explained that he would want to be able to track the source of each of the data variables
and change them if he felt that they were inappropriate. This way if the meaning changes
or another variable is used the system is flexible enough to allow insertion and modification
of built-in definitions.
One example is that there is often discrepancies between data sources in the case of
cash flow statistics. The associate said that she always compares information retrieved
from Compustat with data found in the Company's Annual Reports. If there is a difference
she replaces the Compustat data with the Annual Report statistics. Information received
directly from clients proves to be a stable comprehensive source of data.
Another example would be the meaning of those cash flow statistics. It is difficult
to know whether or not the number reported includes working capital changes. The cash
flow from operations and working capital turnover ratio are ratios which give insights to
measures of liquidity at particular times. Both ratios are significant and sometimes
combined to give measurements of sales, inventories, and monetary constraints at particular
times. It is for this reason that the statistics are different from one source to another. To be
able to choose the 'correct' statistic takes a knowledge of the company as well as common
sense.
Another problem is that the data is not necessarily meant to be used in parallel
with other data. Often data is provided for a specific type of analysis and calls for a more
mental integration than a physical one. An example would be in the Petroleum, Minerals,
and Metals department the Associates must combine the validity of current contracts with
the possibility of future contracts. The present contracts can be shown as income and future
value of income, where as the potential for future contracts depends on the richness of the
mines and ores which the company owns. Many of the Associates perform manual searches
on textual information which does not call for outright mathematical manipulations. For
example, there are Stock Analyst Reports from other firms such as Kidder Peabody Inc., and
Drexel Burnham Lambert, reported in trade journals which are kept on-line in the library.
These forecasting reports include both textual and numerical information. An associate will
use textual analyses and forecasting data in order to get a feel for the company. When an
associate is first assigned to an analysis, he must gain a sense of the background and current
state of the firm. If the company is unknown to the Associate the first step in the process
will be to check on-line textual sources. A useful function for the system would be the ability
to 'read' through Global Reports or other on-line text based databases and choose the
appropriate selections.
The analyses which are performed are not always integrated. A cash flow analysis
would not be concerned with a bond or stock valuation. Different data is used and no
integration is necessary. However, the possibility of combining the results of the different
analyses into one comprehensive evaluation was never mentioned. A CIS/TK system might
be used to weigh different variables and give a general state for a company. Instead of
performing all the necessary analysis for new accounts, a 'comprehensive' would reveal if
additional interest should be shown in the company.
Many of the Associates whom I talked with were surprisingly suspicious about any
further use of computer technology. They either did not think that more integration was
beneficial nor that the forthcoming data would be trustworthy. They felt that their mental
techniques could not easily be translated into code; computers did not seem to be the answerto the large amount of repetition which they must perform. The repetition is not necessarily
one of an exact nature. Although the mechanical processes of finding data, entering into a
spreadsheet, running macros, and writing reports may seem to be the same, the thought
processes are different for different analyses because each firm has different characteristics.
Even though an Associate may perform a resource evaluation on many companies, the
evaluations may not involve the same calculations. An Associate must understand the
numbers and know the value of a particular attribute.
For example, a changing ratio of minerals in a particular mine will offer different
results depending on the analysis chosen to determine the value of that mine. At one point
in time a mine may contain different minerals; as the minerals are mined and more digging
reveals more of the mine that 'status' changes. The mineral which is being mined decreases
in mass, assuming no more is found, and therefore the contents of the mine change. If one
mineral is more valuable than another, a ratio which compares the amounts of the minerals
in the mine less than one would be negative. Conversely, a ratio of less than one which is
dependent on the less valuable mineral would be positive. Although it is the same ratio,
one mineral relative to another, the differing values of the minerals determine the value of
the ratio. Since the values of minerals are changing, the Associate must analyze the
appropriate numbers. The future value of a mine is very important as it determines the
amount of future profit.
Each of the data sources has different characteristics. Some are thorough while
others have more integrity. Compustat is particularly thorough, although the Associates
often check over the reported statistics to insure sensibility. DayText on the other hand
does not include all possible data, however, it is trustworthy. The Associate learns which
to use through experience and that knowledge is passed from mouth to mouth. The computer
does not have the experience or intelligence to identify statistics which are impossible for a
particular company.
Although integrity constraints can always be followed Associates' knowledge is
difficult if not impossible to categorize into rules. An Associate, however, will be able to
realize when any particular number is outrageous and basically impossible. After all, the
information was put into the database by a human in the first place and therefore open to
human error. There are integrity constraints that a human can enforce which may be very
difficult to put into rules so that the computer can enforce them. For example, an associate
will know that the value of an insurance firm is dependent on their investments and
conversely a cellular telephone company depends more on research and development as well
as marketing. A high value of assets then, is an ambiguous term whose value depends upon
the industry and time. Consequently, the human checkpoint is very integral to an effective
analysis. If the system could give a history of data statistics used, it would be useful so
that Associates would understand the history behind a particular result.
Since ratios are often combinations of many varied statistics the company must use a
formula in order to get a useful result. The statistics may or may not come from different
sources which have different levels of trustworthiness. In this case a data tagging feature
would be most useful so that associates can assess the 'correctness' of the final results. The
Associates stressed the costs of making mistakes and hence their innate mistrust of 'black
boxes' which spit out untraceable numbers.
Different calculations by different databases may yield different values for similar
fields. This is a result of the differences between the values of actual fields in disparate
data sources. If one database uses depreciated numbers and another uses nominal statistics
then the combined or compared statistics will be confusing if not meaningless. The Associate
can choose which one to use, and will understand the meaning of that calculation. By
personally placing the appropriate data into the macro, the associate is assured that the
meaning of the resulting ratios and statistics is the one that he wanted. But how can a
program be taught to understand the differences between the values when the definition of
those statistics is difficult to create? In some cases depreciation is included and in some it isnot. It is basically a decision left to the individual company's discretion. The answer may
be the integration of the data sources and the human sources. By getting human responses to
intermediate statistics and determining the actual value of those statistics, the system and
the Associate can understand the value of the final results.
2.2.3 Information Sources
The CFSA has a separate Business Solutions department which controls the computer
hardware and software used by each of the other departments. Most often the other
departments also have an internal person who is their computer specialist. This person may
be responsible for creating Lotus 1-2-3 macros, for example, as well as being an important
resource to the other members of the department. The Business Solutions department is
responsible for the maintenance of all current resources, training of all new staff on available
technology, support and training for all software upgrades, and research and implementation
of any appropriate new technology. The department is small and rather occupied. They
spend at least 70% of their time involved in everything necessary to keep up with the
current software and hardware platform. When new developments are considered the most
important attributes are ease of implementation and ease of maintenance. Cost-effectiveness
is in particular measured. Measurements are in terms of immediate costs, costs of support and
learning curve opposite expected return on investment(ROI). ROI is based upon the analysts
reports of time savings and quality improvement. A cost benefit analysis must be performed
before any new system is implemented.
The following databases and sources are used by the CFSA:
- Lotus One Source - an integrated data product provided by Lotus which
allows the Associate to obtain data from many databases. The service is
implemented on a Compact Disk which is downloaded weekly onto the network.
The information is therefore available to the Associates at their desks. All of the
data easily downloads into a Lotus 1-2-3 spreadsheet. Since all of the models are
implemented in Lotus 1-2-3 this is a rather useful product which is used by many of
the departments.
* Compustat - part of One Source which provides financial statements for the
Industrial, Utilities, and Line of Business business segments. This is one of the most
heavily and consistently used database. The information is gives is particularly
useful and connects smoothly with the models through Lotus 1-2-3.
- Daily Stocks - part of One Source which provides a time series of stock
quotes of stocks and warrants. Volume, stock dividends and splits are also included
* Bond Database - part of One Source which provides information about
government and corporate bonds as reported daily.
- Daytext - part of One Source which provides textual information about
private companies.
- IBES - part of One Source which stands for International Brokers Estimate
System. Provides earnings estimates for over 3,400 companies based the opinions of
over 2,500 securities analysts.
e Alcar - Is a stand alone application which provides modeling and
forecasting tools to be used with downloaded data(from Compustat). The program
generates cash flow and valuation ratios. The forecasting tool is a knowledge-based
system which asks for interaction with the Associates. Not many of the Associatesuse it because of lack of trust or general dissatisfaction with the provided analyses.
Often they export the data into their own Lotus 1-2-3 spreadsheet models.
Library with a well respected librarian- many of the Associates mentioned the
Librarian as a wonderful source of information. She is able to find the most useful
data on hard to find companies. This was particularly useful in finding new market
opportunities. Associates could just stop by the library and leave with a small
collection of articles, statistics and expectations.
- Quotron - An on-line database which provides almost real-time stock data.
The database resides on one workstation which Associates must access individually.
It is rarely used because One Source has Daily Stocks which is updated weekly.
However, Quotron provides more up to date information, for when it is useful.
- Bests Insurance Blue Books - Provides all the available information on
insurance companies. It is used solely by the Financial Services Industry and is
currently available to the Associates only in paper form(the Associates have to
enter the data manually). By the time this paper is published the department
should have started receiving the information in Compact Disk form.
- Global Reports - An on-line database which provides textual and minimal
statistical data about companies. It is accessible from a stand alone workstation
which Associates must learn how to navigate.
- Department of Commerce - One associate reported this as a source for the
Utilities industry. It was used as an example of rarely used but nevertheless useful
data sources outside the databases available on the floor. The information is
received over the phone but may be backed up by paper documents sent to the
associate.
*Company Stock Holders Reports - a good easily obtainable source of
information for cash flow, asset, and general financial statement information. It is
useful to compare the information found here to that provided by Compustat and to
determine the source of any differential.
9 Other internal information provided by the company - if the company is a
client of Citibank it will usually supply all necessary data directly to the
Associates. Again it provides a way of double checking all statistics and
understanding the exact value of all discrepancies.
Different departments make use of different combinations of the above information
sources depending on the industry. There may be other sources of information which are
infrequently used such as Lexus, Nexus, Reuters, and Dialog or hard to document(word of
mouth for example).2.3 Financial Services Industry
The Financial Services Industry Department is responsible mainly for insurance
companies. As part of the yearly report the Associate must perform peer reviews and create
a forecast based on historical information. The peer reviews compare the company under
review to 'peers' or other companies which are involved in a comparable industry. Of course
it is always difficult to find a good sample of strictly comparable companies, but those
numbers allow the Associate to understand if a sudden rise in premiums is a company
phenomenon or industry wide. It will also show if a company is below average in growth
rate. The forecast will also take into account general expectations such as business cycles,
political trends and other industry wide variables.
2.3.1 Information Uses
This particular department is peculiar in that all Statuatory Statements on
insurance companies is available at this time to Citibank only in paper form. The
department is working on receiving the information on Compact Disk so that the data can be
merely downloaded rather entered. All the information is listed in tables called industry
blue books. The Associates must spend about 20% of their time manually inputing this
information into a Lotus 1-2-3 spreadsheet.
The Associates must also manually input the test ratios for compliance. The
department undergoes a crunch review period annually in which all forecasting, NAIC ratios
and relevant ratios are determined. The Statuatory Statements reveal all current assets and
investments. The models and macros which perform the number crunching calculations are
implemented in Lotus 1-2-3.
. When an Associate is asked to perform an analysis of an unknown company the
process is as outlined in figure 4. The process depends mainly on whether or not Citibank
already has the statuatory statements for the company to be analyzed. If not, the Associate
is responsible for calling either the California or Alabama Regulatory Agencies which
supply all available statuary statements. Once received the process is basically similar in
either situation. Then the information is inputted into each of the four models and the
appropriate macros are run. The report mostly consists of written analysis although the
macros and results are often included for the Bankers' comprehension.
2.3.2 Information Problems
It is the data inputting which makes the crunch period invariably tense and tedious. The
department is currently trying to obtain the necessary data in a magnetic form so that the
relevant numbers will no longer have to be entered manually. Once this step is eliminated
the Associates feel that their jobs will be concentrated and intellectual rather than
mechanical although at that point double checking downloaded data will also be
important. This is basically the only problem which the Associates recognized. Once
solved, the process will be manageable. The department is also working on a database
which will hold all historical and current data on all companies which the associates work
with or analyze. The database is set to be working July, 1990. In this particular industry
there is little need for further integration of data, since the necessary information can only
be gotten from one source, the Statuatory Statements.Get a Statuatory
Retrieve Statuatory
Statement from
Statement and past
California or Alabam
analyses from files
Regulatory Agency
Input appropriate Enter any new data
statistics into the 4 into models and
models review history
'Ode
Compile all models
and perform
analysis
Time: Send final report
Time:
1.5 - 2 Weeks (textual and about 1 Week
numerical) to banker
Figure 4One important problem that the Associates expressed was that of timing. Since they
do not have all available data on hand for every company it takes quite a long time to
analyze a company whose statements they must get from one of the regulatory agencies.
Once the Compact Disk arrives, however, this problem should be solved.
Once the data becomes available on Compact Disk the FSI might consider including
data from other industries in their analyses. For example, the level of research and
development funds which a pharmaceutical company allocates might effect the claims
which Insurance companies encounter. If connections can be made then integration becomes
not only feasible but highly desirable. Although the Associates did not mention such a use,
it might be because they are not in a position to be moving ahead to new procedures and
methods while they are still trying to make the current ones efficient.
2.3.3 Logical Connectivity
In the Financial Services Industry department there is no need for current logical
connectivity since the Associates' duties would not be simplified by the additional data
availability. However, the incorporation of other industry's data into the forecasting
system may be a perfect use of the CIS/TK system. Until new methods are incorporated
though a CIS/TK type of system would not benefit this department.
2.4 Utilities Industry
Similarly to the Financial Services Industry department, the Utilities Industry must
also perform peer studies, yearly reviews and company forecasting. However, this
department is more automated. There is very little manual data processing, although
'double-checking' is an important keyword in the department since mistakes carry a high
price. Compustat downloaded into Lotus 1-2-3 leaves many manipulations to be disrupted
and chances for the data to be copied incorrectly. There are many chances for malfunction.
First, Compustat may have incorrect data, and secondly, there have been cases where
columns of data have been switched by the downloaded procedure. By checking numbers
which seem marginally improbable the Associates may prevent many priceless mistakes.
2.4.1 Information Uses
The Utilities department mainly uses the Bond Database although they also make
use of Global Reports, Daytext, and company suppled data. The Library is another primary
source of information, particularly the Librarian, Teresa.
When creating the annual reports the process includes the downloading of
information into Lotus 1-2-3, running the macros, and checking the results against expected
cash flow statistics. Any additional information needed for the annual reports can be gotten
directly from the customers who freely send Citibank their Annual Reports on paper.
Peer analysis may be more difficult since not all relevant peers will be customers of
Citibank. As part of the Annual Review the Associates are required to perform similar
reviews on comparable companies. In the utility industry, however, much of the information
is confidential and is received directly from the customer. A more intense search for data
about companies which are not customers must be embarked upon in order to make a complete
peer review. A much used source of information is the Librarian; she gives routes to follow
and sources for the Associates to check when they can not find any information in their on-
linedatabases. Industry reports as well as advertising materials provide some useful
information to use as comparison data.
For new prospects the process is not at all mechanical. Each Associate has their own
sources and methods of compiling the appropriate data. If a company catches the eye of an
Associate in a news report or in a merger or acquisition announcement an Associate most
probably will find as much information about a company in order to make an appropriate
analysis. Again, the librarian often provides a first stop on the route to success. One
Associate said that
she used the Chamber of Commerce as a reliable source of unbiased information. Any legal
method of acquisition is acceptable, and this is the detective part of the Associate position.
The route to follow when assigned a company is as follows and outlined in figure 5:
1) Check the company's Annual Report as found in the internal Investment Library.
Any other public documents which are available about the company are compiled as well.
Companies will send out public information.
2) Use the on-line global Reports database. It includes articles and news reports
about individual companies. Although it often includes statistical data as well, it is not a
particularly up to date source.
3) Find any information about the company in Regulatory Journals found in the
internal Library.
4) Use the company's equity reports from the Compustat database for further
forecasting ability.
5) Using Lotus 1-2-3 compile statistics, run the models, create the report in Microsoft
Word and include any relevant model and spreadsheet data.
2.4.2 Information Problems
For annual reviews the process is generally simple and uncomplicated. However, there
are problems which may arise. For example, not all statistics found in the Annual Reports
are deemed valuable since the information may be up to a year old. The numbers are not
always as current as is necessary. Finding that current information is easier than finding a
needle in a haystack, the only problem may be where to find the appropriate haystack.
Daily Stocks, another source of information, although current, does not always have all of
the necessary figures. Since the company is a client, the information can be found with
enough phone calls but as with the FSI speed is often a limiting factor.
Another problem is that companies are not always distinct entities. Rather they are
made up of many other companies that have different departmental entities which may or
may not work as corporate individuals. For example, Long Island Lighting Company also
operates, or is trying to operate, a nuclear reactor, Shoreham. However the data and
specifically the costs of Shoreham may not be included in LILCO's statistics, since it may be
considered its own company. This is a simple example, however, many times it is more
complicated. There are parent companies which do not actually produce anything and
companies which own companies which report their data in an oversimplified manner, such
that the atomic data is difficult to isolate.Associate is assigned
an analysis.
r..
Retrieve the
company's Annual
Report and other
public documents
Retrieve any
available
information from
Global Reports
Retrieve any
available
information from
Regulatory Journals
Retrieve financial
statements from thE
Compustat database
Compile all models
and perform
analysis
Send final report
(textual and
numerical) to bankez
Figure 5Statistics found in Annual Reports and common databases may have different values
for companies which are often different than what is needed. Associates must determine
the varaibles represented in the ratios and add or subtract complications as necessary. The
problem the Associates are faced with is to find which data entry is the one which they
are actually looking for. Which has the value that they believe it does?
Since the macros and models were created by one person inside the department there
is no formal training on how to use the system or the models. Systems support people are not
enough since they are not entirely familiar with the particular system. When there is a
problem, there is a problem, as different people in the department have different levels of
competency with the models.
One possible solution would be to have a formal training session or manual. Another
possibility would be an on-line help session which would allow users to access a library of
responses or pose new questions which can then be answered by anyone on the system who
knows. The answers and original questions can then be stored for future reference. If a
CIS/TK system were set up, training and appropriate help functions would be a great benefit
to all the users.
2.4.3 Logical Connectivity
In general, the department is fairly well connected to their most widely used sources
found in Lotus One Source. The appropriate processes have been successfully automated and
integrated. Although the individual Associates must go to separate workstations to access
remote databases such as Quotron, they did not seem to feel that it would be a tremendous
advantage to have that type of information available at their desktops. The Associate I
talked with felt that the present level of models and macros was appropriate and effective.
A CIS/TK system would seem to benefit the department although by today's standards it
does not seem to be a need.
2.5 Media Department
This is the youngest of all the departments at CFSA, basically it is responsible for
companies which pursue the technology market. Their first customer was a cellular phone
manufacturer. One interesting facet of the companies dealt with is that they are mainly
private companies and therefore do not have publicly traded stock. Information is harder to
obtain and often presents a great challenge to the Associates. This department is very
important as all of its clients tend to prefer equity to stock. Analyses must be thorough and
sensitive to the market since products' status is volatile and sometimes, hard to predict.
2.5.1 Information Uses
For annual reviews the Associates most often rely on the internal data which has
been collected on the company by the Associates as well as financial statements released by
the company. There is only one database which is concerned with private companies,
Daytext which is found as part of One Source. Global Reports, an on-line news service, also
offers some valuable information. Most of the internal analysis are highly based on
assumptions which the Associates make. The forecasts are therefore very sensitive to hard-
to-isolate variables such as market trends.Because of the nature of the companies which fall under the jurisdiction of the
Media department, Associates are forced to search everywhere and anywhere for signs of
new prospects. They may find their initial buzzword on the front page of an industry
magazine or on the tip of a colleagues tongue. Any interview by a CEO for example that
includes any kind of predictive information about an industry or a company is useful.
Industry newsletters as well as internal rumor sheets are continually read to catch the sign
of a possible customer. The first step is to visit the librarian to dig up any newspaper or
magazine articles on the desired company. DayText and Global Reports offer other good
places to get an initial feeling as to the potential of a company. Sometimes research may
include getting a superior to call an equivalent officer or friend in the company in question to
find information which is not publicly disclosed. Although this method is not always
successful, it can yield results.
The Alcar application available on the network is used as a valuation analysis tool
although it is not really appropriate for the companies which are basically manufacturers.
The knowledge-based system asks specialized questions which are not always applicable.
This program originally provided great hope to the associates since it was the first
forecasting tool kit. However, it has proven less than a miracle to most of the departments
as it does not seem to meet their needs.
2.5.2 Information Problems
The main problems with the annual reports is that information is scarce. Although
clients usually provide financial statements freely, it is difficult to find an unbiased source
of information. Compustat only offers information about publicly owned companies. Peer
studies are particularly hard to make as often times there is no appropriate peer. For
example, how can a company which only manufactures cellular phones be compared with a
company which manufactures phones, pagers, and other radio-wave devices?
The industry is fast paced and certainly not static. Mergers and acquisitions are
commonplace and add to the complexity of any analysis. Most of the companies are
entrepreneurial and eccentric compared to more conservative industries. Equity is easy to
find and therefore the speed and quality of the proposals are important factors. In these
respects the Media industry is completely different than the other basic industries and
different analyses must be done.
The risk and exposure analysis is done manually as the information is changing
daily and is not documented in any available electronic form. The acquisitions and
divestitures which are so prevalent in the industry deem it necessary to take the upmost
care in selecting appropriate data.
One problem which may effect the accuracy of an analysis is the market. It seems
that the Media market is particularly volatile and difficult to forecast. Therefore, the
dynamics of the market is a hard to develop variable which effects the Media market.
2.5.3 Logical Connectivity
The Media Department uses the local area network for Alcar, DayText, and
occasional glances at Compustat. CIS/TK system would need to have a utility which allows
users to enter information into their own dynamic database since much of the important
data, especially for annual reports, is information which has been previously entered into
various analysis routines. So far the department is only a year old and therefore has a
limited resource. They are working on creating a department database which copies the
extensive Compustat database. Unfortunately, it is impossible to create such a databaseovernight and can only be made worthwhile if it can be dynamically created and
maintained. It would have to be more complicated than Compustat in order to effectively
track all acquisitions, mergers, and divestitures.
If Global Reports, a text-based news service, which is available only at a stand
alone workstation, could also be implemented into the CIS/TK system then the Media
Department would make use of such a system. When Associates first spy a company prospect
in a newspaper or industry newsletter, they could use the system to bring up the names of
any recent articles or expectation information currently available. After reading the
material, the Associates can then decide whether or not they are actually interested in the
company and get ideas from the articles as to where to find additional information. The
system could then open a record for the new company so that the Associate could record all
found information, even if it were only to be used in the future or as part of a peer review.
2.6 Petroleum, Metals and Minerals Department
The Petroleum, Metals and Minerals Department is like each of the other
departments, quite individual. There is a high cost for analytical mistakes, and therefore
the Associates are very wary as to the source of their functional data. Consequently, any
computer systems are suspect to low trust values. The mysterious 'black box' holds many
suspicions because of the lack of control the associates feel they have. Much of the
historical information is not quantitative since the profits of the firms are not measured in
amount of goods produced but instead the number of contacts held and fulfilled. Firms rely
on contracts of varying length for their income. Many of the contracts are Government
contracts, and the ability of the firm not just to produce, but to be able to get contracts and
fulfill them is of the upmost importance. Even though the firm may be showing great
profits presently, the associate must take into consideration the future potential of the firm
relative to other firms in the industry against which they will be competing. Therefore,
the contracts, reserves, potential, and methods of the firms must be analyzed to get a
complete picture of the firm.
2.6.1 Information Uses
Much of the information gathered about each of the firm clients is difficult to
quantify. For examples, engineers are required to go to the mines and ores to make a forecast
as to the potential of the firm. Without enough of a reserve or potential of mines a PMM
company will be unable to compete against its peers. Another important factor are the
states of the contracts on which the company is currently fulfilling as well as the ones
which they are working on acquiring.
Annual Reports are extensions of the financial statements which the companies
provide. The Associates include the Citibank financial information and forecast based upon
those values. Alcar is used quite frequently for its forecasting capabilities. The debt
instruments are extremely complicated and the rules for those products are constantly
changing based on the variables of the company such as contracts, ability to meet contracts,
ability to make future contracts, and the ability to fulfill future contracts. If a company has
failed to meet a current contract, for example, it will have trouble trying to secure a future
contract even if it has proof of a large supply. Trust is an important factor between
companies which deal in contracts. It is difficult to quantify trust since it may not be uniform
across all relationships. Certain firms may have had a better relationship with the firm
under analysis and it is difficult to obtain that information. Because of the complications it
is very difficult to use Alcar and its rigid tools for forecasting.There are three or four tables which Compustat provides for comparative studies.
However, the Associates felt that they must constantly double check the statistics and the
calculated fields. These comparisons are most often used for the oil companies whose
product is rather uniform. The metal and mineral companies tend to be more conglomerated,
selling a variety of products. The PMM Associates also use the Global Report news service
and the Bond Database which is part of One Source.
2.6.2 Information Problems
Most of the problems stem from the physical nature of the data which is required to
do the analyses. The data on the actual mines of the company, for example are not kept in
any public database. It must be retrieved by the engineers which Citibank sends out. It is
historically kept on file and manually analyzed. Another problem is the value of the
individual statistics. For example, does the equity value of the company in a particular
database represent the book value or the current value for the equity.
Another major obstacle is the diversification of the metals and minerals companies.
Some companies make aluminum and sell it raw, but some are more vertically integrated and
also may make their own frames, pots, and pans. It is very difficult to make a peer study
with this type of assortment among the companies.
Another problem that the Associate mentioned which is an issue for all of the
departments which use different data sources is the different definitions used among them.
For example, does an operating income include depreciation? The answer depends upon the
accounting procedures of the firm. In general, the Associates seem to not trust the computer
sources very much and would require some sort of assurance that the data given is what the
Associate is looking for. Any magical results which the computer could 'punch out' would be
open to skepticism since the Associate I spoke with felt that the computer would not be able
to have the sophistication to understand the data correctly. Since the price of a bad
analysis is so high the Associates felt more assured and comfortable to double check all
numbers that could be checked. It is unknown whether this is just a temporary mistrust or if
the sophistication of technology would alleviate the misgivings the associates felt.
2.6.3 Logical Connectivity
One facet of this industry which differs from the others is the use of data collected
on-site. A computer at this time can not make that trip and record and analyze the visual
information which the engineers do. The findings of the reports are less quantitative and
more qualitative. Although the Associate may create integer type data variables this
translation is the analyzing part of the job.
This is another group which would benefit from the addition of Global Reports to
the system. The Bond database is also used and therefore a limited about of integration
would be useful. Another additional capability which would be an advantage for CIS/TK is
the ability for the user to create his own database and mapping procedures. If the
Associates were able to kept all historical information about a company in the system
further annual reports would be somewhat simplified. Although these particular analyses
call for qualitative analysis, the actual procedure could be simplified by the system. For
example, the 'PMM Database' would have a certain amount of text fields to store the
engineer's reports directly and then would have quantitative fields which the Associates
would be responsible for entering. The system could then save the deduced values and use
them for current reports, peer reviews, and future reports as well.
The immediate need for a system is nebulous for two reasons: the qualitative nature
of much of the data, and the mistrust of the Associates of data compiled by the computer by
hidden formulas and conversion mechanisms. However, it is probable that if a system wereYou can also read
