Through the Looking Glass

badge and IDWith the holiday season officially in full swing, retailers are feeling the heat to push out their hottest releases before the year-end shopping frenzy cools off. As always, the most anticipated releases of the year come from the tech sector. Both Sony and Microsoft launched new all-in-one gaming and entertainment systems last month, Samsung released its newest iPhone competitor, and the 800 pound gorilla is offering a new iPad, and two new variations on the iPhone. Unfortunately, techies with the new smartphone-like wearable headset from Google, called the Google Glass, at the top of their holiday wish list will have to wait till next year to impress fellow denizens of their cubicle pod.

Even though Google will not be bringing it’s much hyped Glass to market in 2013, all eyes are watching as it takes the first leap into the market of wearable computers. The idea behind Google Glass is the seamless integration of technology as an extension of the body. The Google Glass uses a rimless, lens-less glasses frame with a tiny projector to broadcast digital directly into the wearer’s retina. The look and feel of the Google Glass is somewhere between an overgrown Bluetooth earpiece and the VISOR worn by Star Trek’s Lt. Commander Geordi La Forge. Google claims that Glass is the ultimate hands-free device, delivering all the functionality of a smartphone without the encumbrance.

But does Glass really do what it claims? In a study by Terhi Mustonen of the University of Helsinki, test subjects using a Google Glass-like head mounted display while walking a predetermined route walked erratically and performed poorly on basic cognitive tests administered through the display. Ultimately, Mustonen arrived at the conclusion that the human brain competes with itself for a limited supply of cognitive resources, and that these resources are finite. The brain only has so much processing power to divvy up between all of the body’s functions, and the more ways that cognitive pie is cut up, the smaller the portions become. This means that when it comes to your business, any tasks not central to your core directive are competing for the cognitive resources that drive your competitive advantage.

The resources of any organization are finite. Many businesses are increasingly turning to outsourcing non-core business competencies as a way to free up their own cognitive resources to focus on their core directive. The question, “Can we do this ourselves?” becomes, “What more could we be doing if we took this off our plate?” When deciding what functions to externalize, some key items to consider are access to technology, expertise, subject matter familiarity, and return on investment. In the arena of risk hedging, these questions may center around the economics of purchasing derivatives. How do I know I am getting the best price? How can I be sure banks are modeling their products fairly? Derivatives pricing may seem simple and transparent on the outset, a bit like walking while using Glass. But the reality is that banks’ pricing models can be complex and always skewed in their favor. On a $50 million, 5 year interest rate swap at today’s rates, one basis point carries a $25,000 price tag. By offloading price negotiations to someone who is purpose built for the task, you could find a not-at-all unheard of 10 basis point price savings. That’s a quarter of a million dollars’ worth of cognitive capacity you just freed up.

As regulatory requirements become increasingly important, it is ever more difficult to understand what is required of any organization. Dodd Frank compliance in particular can be time consuming and complicated. Having your ducks in a row before you need to trade can save time and money, not to mention headache and back-office pain. What about data integrity? What systems does your business have in place for making sure trade data is safe and accurate? And how about hedge accounting? Many accounting departments are not set up for the complex requirements of hedge accounting. Mistakes made here can necessitate restating financials, which can spell disaster on all fronts. Walking and talking might not seem like a tall task, but the reality is that every new task your business takes on makes demands on your finite pool of competencies and resources. Weighing the cost and benefit of outsourcing these core functions is key in developing a risk management strategy for any business.

The more cognitive resources the brain can reserve for its most important functions, the better. Whether your primary focus is investment, development, retail, or even just chatting it up on Google Glass, outsourcing non-core functions to entities that specialize in those areas leaves you free to do what you do best. So if you’re thinking of buying a Google Glass, why not order a self-guided Google Car as well so you can Glass all the way to work and back without having to watch the road. And if you feel like your business is competing with itself for its own cognitive resources, give Chatham a call and let us tell you what functions we can take off your plate.