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Excellence in Leadership

Company insight 3

Keeping a finger on the commercial pulse is an important preoccupation for business leaders but making that pulse beat a little faster is what really counts. Creating new ideas, pioneering products and ingenious solutions is the name of the game and it is important that innovation continues during the downturn if companies are to thrive in the long term.

It has been said that recession is the mother of innovation and this certainly rings true when you look at past activity in times of economic strife. Some of the world’s most well-known brands including Disney, Microsoft, Apple and Google have emerged during recessions. In the 14th issue of Excellence in Leadership we ask business experts from around the world to look at the complexities of breaking new ground and outline how to develop new products and services in a sustainable way.

Syl Saller, Diageo’s global head of innovation, discusses what business leaders can learn from organisations that flourished in the last economic downturn and outlines some of the new challenges that companies are facing this time around (page 36). Looking ahead, Michael Traem, CEO of international management consultants Arthur D Little, sets out five key success factors that companies must follow if they are to move forward in this changing environment (page 42).

Governments and the European Union have been making efforts to persuade businesses to spend more on research and development but there appears to be little evidence that this spending has had any effect on sustainable growth. Mariana Mazzucato, professor of economics at the Open University, warns that businesses must understand the conditions that need to be put in place if their endeavours are to be fruitful (page 52).

Without a doubt, one of the essential factors in successful innovation is ensuring budgets

are monitored carefully. William Nixon, professor of law and accounting and the University of Dundee, analyses CIMA-funded research, which looks at the importance of including finance professionals at the earliest stages of product innovation and how to avoid the twin dangers of missing the boat, or worse, sinking it altogether (page 24).

To cynics, accounting and innovation might seem an unlikely marriage. In the face of increasing workloads and greater expectations from stakeholders, it’s vital that modern finance directors embrace new ways of operating. One of CIMA’s most high profile members, Douglas Flint, group CFO at HSBC, gives a unique insight into the pressures at the top (page 8).

Looking to the future, Ramnath Sundaresan, chief executive of finance, IT and logistics at BASF India, highlights some of the big technology challenges facing finance departments in 2010 (page 17). Finally, to round off our journey, acclaimed writer, business strategist and author Ram Charan studies the findings of a recent global survey on innovation around the world and asks if we are witnessing the decline of big ideas in the West (page 48).

For our part, CIMA will continue to focus on innovation and excellence in a wide variety of business areas. Recently the quality of our articles in these publications was recognised by the International Federation of Accountants. CIMA knowledge specialist, Louise Ross, was a prizewinner in IFAC’s annual Articles of Merit awards for her article on business and social networking technology included in our issue on data management in finance. Louise’s article is reprinted in this issue (page 68). We plan to continue to provide a range of inspirational features and hope that our publication makes your pulse race a little faster.

The heart of the matter

‘It has been said that recession is the mother of innovation and this certainly rings true when you look at past activity in times of economic strife.’

ExcEllEncE in lEadErshipinnovationForeword

Your feedback is important. If you have any thoughts about the articles covered in this issue or suggestions for features that we could address in future editions, please do not hesitate to contact the editor: [email protected]. To download selected articles published in Excellence in Leadership, please go to www.excellence-leadership.com

Charles Tilley, CIMA chief executive

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8 Bridge the gapHSBC group’s CFO Douglas Flint on making existing accounting standards go further.

ExCELLEnCE in LEaDErSHipInnovation

Cultivate creativityphin Foster speaks to Diageo’s Syl Saller about innovation in a downturn.

Cash controlintertek’s aston Swift on how precise cash management can maximise corporate performance.36 72

Contents

High-tech, low costBaSF india’s ramnath Sundaresan on how prioritising investment in innovation can keep costs down.17

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Excellence in Leadership Issue 14 2010

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Excellence in Leadership is published by Global Trade Media, a trading division of Cornhill Publications Ltd, and is an official publication of the Chartered Institute of Management Accountants (CIMA).

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Innovation

Bridge the gapHSBC’s group CFO Douglas Flint on making more of existing accounting standards

High-tech, low costBASF India’s head of finance and IT discusses long-term investment in technology

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ExCELLENCE IN LEADERSHIPInnovation

3 Foreword Charles Tilley, chief executive, CIMA

Vital statistics

7 Vital statistics

Innovation and the finance department

8 Bridge the gap HSBC group CFO Douglas Flint believes

proposed changes to the way fair value is measured in the wake of the financial crisis could have a fundamental economic impact. He speaks to Nigel Ash about making more of existing accounting standards rather than chasing the chimera of regulatory perfection.

12 Essential ingredient The imperative to innovate is well

recognised but some may be surprised to learn that, far from spoiling the broth, the management accountant is an essential ingredient of success. CIMA’s Louise Ross takes stock of the management accountant’s role.

Technology and innovation

17 High-tech, low-cost BASF India’s Ramnath Sundaresan on how

long-term investment in innovation can lower costs, and not only in financial terms.

21 Escape the net RSA, The Security Division of EMC

22 The application of science Genpact

23 Business-critical information MicroStrategy

Tactical innovation

24 Finance first Bill Nixon at the University of Dundee

and Mostafa Jazayeri at Manchester Metropolitan University investigate the charge that the focus on cost at the design stage of a project is too narrow.

29 Collaborate to innovate Asite Solutions

Strategic innovation

30 In the mix IESE Business School’s Antonio Davila

strives for the best blend of accounting and innovation.

Innovation in the downturn

36 Cultivate creativity Phin Foster speaks to Diageo’s Syl Saller

about how some of the world’s most successful and innovative companies have been born in bad times.

41 A clear vision Axa Corporate Solutions

Corporate innovation

42 Five steps to success Michael Traem, CEO of global management

consultancy Arthur D Little looks at the influences driving the modern economy and corresponding innovation success factors.

46 Control the cost of carbon The Energy Saving Trust

48 Against all odds Eminent business consultant Ram Charan

on why Innovation is not just about R&D, it needs to be a discipline that exists throughout the business.

Innovation and investment

52 Intelligent investment in innovation The Open University’s Mariana Mazzucato

explains how an intelligent approach to innovation can prevent over-investment.

56 A secure route to working capital Demica

East meets West

58 Winds of change As companies search for new ideas to

promote growth after the recession, Leslie L Kossoff explains to Ian Duncan what lessons can be learned by studying Asia.

64 Change of direction The WorId Bank’s Mark Dutz explains how

in-depth analysis reveals opportunities in emerging markets for companies to outstrip their Western counterparts.

Social networking

68 Look to the future Louise Ross plugs into the online business

community to take a close look at the risks and opportunities presented by the social networking revolution enabled by Web 2.0 technology.

Also in this edition:Cash management

72 Cash control Jim Banks speaks to FTSE 100 company

Intertek’s Aston Swift about the tools and processes needed to cut it in today’s tough financial environment.

Outsourcing

76 A global view Unearthing the true value of process

excellence, flexibility and improved compliance in many cases means taking a truly global view of the organisation and its shared services provision, as Henkel’s Joachim Jaeckle explains to Jim Banks.

80 Next issue

82 Directory

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Head6 Business continuity management 6

Editorial advisory board

David Blackwood Jeff van der Eems Bev Hampson

David Blackwood is group FD of Yule Catto & Co plc. Formerly he was the group treasurer at ICI. He qualified as an accountant with Deloitte before joining ICI in 1985. After a spell at EVC in Brussels he joined ICI Films as CFO in Brussels.

Jeff van der Eems was appointed CFO of United Biscuits in 2005 and additionally became COO in 2006. Born in Canada, he joined United Biscuits from PepsiCo, where he worked for 12 years in a series of senior finance and strategy roles in EMEA and the US.

Bev Hampson has been with Volvo for 16 years; in the UK in various finance roles for both the car company and Volvo’s finance company. She also had a two-year assignment living and working in Sweden at the Volvo Global headquarters in 2004–2005.

Claire Ighodaro Keith Luck

Keith Luck is director general of finance at the Foreign and Commonwealth Office. His background is in telecommunications, consultancy and banking. He was finance director for two London boroughs before returning to the private sector in a business development role.

A past president of CIMA, Claire Ighodaro’s board roles include non-executive director of Lloyd’s of London, the Banking Code Standards Board and UK Trade & Investment, trustee of the British Council, and council member of the Open University.

Arul Sivagananathan

As SVP for F&A operations for WNS Global Services, Arul Sivagananathan is responsible for transitioning over 400 full-time accounting workers from the largest insurer in the UK to a green site centre in Colombo. He is responsible for F&A across India and Sri Lanka.

Sara Shipton

Sara Shipton is a fellow of the Chartered Institute of Management Accountants and has a BA (Hons) in Accounting and Management Control. She runs her own consultancy business based in the East Midlands and is working on a number of projects for CIMA.

Kai Peters

Kai Peters is chief executive of Ashridge, the business school located in Berkhamsted, near London. Prior to joining Ashridge, Peters was director of MBA programmes and then dean of the Rotterdam School of Management (RSM) at Erasmus University in the Netherlands.

Sriram Kameshwar

Sriram is a graduate in commerce, associate member of the Institute of Cost & Works Accountants of India, qualified Chartered Financial Analyst and an associate member of CIMA. He heads finance operations for Prudential UK’s subsidiary in India.

Keith Luck

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Head 7Vital stats 7

Vital statistics Innovation

‘Innovation distinguishes between a leader and a follower.’ Steve Jobs, CEO, Apple

‘Financial crisis Stalled too many customers CEO no more.’ Jonathan Schwartz, chief executive of Sun Microsystems announces his resignation in an innovative fashion: on Twitter with a haiku.

‘Innovation is the central issue in economic prosperity.’ Michael Porter, leading authority on competitive strategy

Sound bitesDid you know there are only eight women that head companies

in the Financial Times Europe 500?*International Women’s Day

Earlier this month, International Women’s Day celebrated the economic, political and social achievements of women past, present and future.

Thousands of events were held throughout the world to inspire women and celebrate achievements. You can see more details at www.internationalwomensday.com/events.asp

To celebrate International Women’s Day, CIMA is undertaking research on Women in Leadership and is looking for members to share their experiences of achieving success in the business and finance world. If you are interested in sharing your views or contributing to our work in this area, please get in touch at [email protected]

(* Source: Catalyst, 2009)

InternatIonal women’s day: share your experIences

Innovative ways to re-evaluate the business model

Taking a fundamentally different approach to your core business is a high risk, but potential high-return strategy.

Management should ask itself:

Can we crisply articulate the core competencies of •our business?

Can we prioritise them by the value that each creates •and the costs that each incurs?

In which of these competencies are we world-class?•

In which of these competencies are we behind our competitors •– and which competitors?

What would it take to catch up with them or find another way •to neutralise their advantage?

What proportion of our business is based •on ideas or services developed in the last

three years?

What is our alternative strategy for •non-core assets?

Source: Ernst & Young’s Lessons from change:

Findings from the market, 2010

70%

Source: IBM 2010 Global CFO Study.

More than two-thirds of CFOs are advising or playing a critical decision-making role in areas such as business model innovation, enterprise risk mitigation, and the selection of the key metrics linking performance to strategy execution.

Nearly half of CFOs indicate that their finance organisations are not effective in the areas of strategy, information integration, and risk and opportunity management.

Keyconcerns

45%

CIMA is gold sponsor of the World Congress of Accountants (WCOA) 2010. Taking place from 8–11 November, WCOA brings together over 6,000 high level international finance professionals to explore the cutting-edge of accountancy.

Sponsored by the International Federation of Accountants and hosted by the Malaysian Institute of Accountants, the forum will comprise a number of plenary sessions and workshops that will be chaired and delivered by highly experienced

business leaders. WCOA 2010 will feature headline speeches by CIMA chief executive Charles Tilley and CIMA professor of accounting and finance at the London School of Economics, Wim Van der Stede.

WCOA 2010 promises to be one of the most relevant business events of 2010. For more information, or to reserve a place, visit www.wcoa2010kualalumpur.com.

JoIn us

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Innovation and the fi nance function8


Bridge the gapHSBC group CFO Douglas Flint believes proposed changes to the way fair value is measured in the wake of the fi nancial crisis could have a fundamental economic impact. He speaks to Nigel Ash about making more of existing accounting standards rather than chasing the chimera of regulatory perfection.

The titanic events of the past two years have exposed frailties in the IFRS and US GAAP standards. Nevertheless, HSBC CFO Douglas Flint argues: ‘It is ludicrous to suggest that the accounting model was a major contributory factor to what happened. But there is no question that there are aspects of how it was operated, or was required to be operated, that many might say could have been better.’

His take is that the crisis has therefore thrown up a valuable opportunity to

seek a shared view between the US and international accounting standards. Flint who, with former New York Reserve Bank president Gerald Corrigan, co-chaired the Counter-Party Risk Management group in 2008 in an early attempt to analyse the challenges of and solutions to the economic crisis, says the differences between US and international accounting standards are most evident in the financial industry.

‘A bank is a bank is a bank. You shouldn’t be looking at a British bank’s accounts and those of an American bank or a French, Italian or Japanese bank and saying they are all in the same business but they all measure things differently. That is a curious view.’

The obstacle to change however lies in the way that a new and more transparent accounting framework will interact with the banking system’s capital requirements: ‘If the new Basel proposals are adopted, then playing around with accounting rules changes the size

of the banking system in individual countries, which changes the size of the economy.’ That said, Flint hopes there is now a opportunity to get things right and determine over what period the changes should be introduced.

‘The key is that accounting standards should attempt to make things better, not perfect. This is because perfection is impossible, whereas if you make gradual changes, year in, year out, it gets better.’

‘The key is that accounting standards should attempt to make things better, not perfect. This is because perfection is impossible, whereas if you make gradual changes, year in, year out, you make improvements.’

8

Douglas Flint

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‘The finance function is moving away from record-keeping and control to data-rich management information. This better informs management decisions around emerging trends, risks and opportunities.’

9Innovation and the finance function




Innovation and the fi nance function10

Flint is clearly impatient in particular with the reaction to the IASB’s fi nal defi nition of fair value for fi nancial instruments within the new IFRS 9 (replacing IAS 39): ‘As they had been asked, the IASB came out with a draft proposal and received considerable comment of various hues. They fi ltered and dealt with that feedback as they thought appropriate. There were quite signifi cant changes between the draft and the fi nal proposals. It was the product of a properly-governed process.’

It was never going to be the case that everyone would have liked every aspect of these proposals. The alternative was that

the IASB took the least line of resistance to seek absolute consensus in order to create their standard.

‘That would have been a very weak model indeed and not a process that would create the possibility that the Americans would respect it and want to harmonise with it.’

The integrity of the IASB Flint is adamant that the integrity of the IASB’s process should be accepted. ‘It has been speculated that perhaps there was a bigger agenda in some places, all about the independence of and the extent to which the International Accounting

Standards Board is responsive to political pressure. But under its constitution it is not, and that does not suit everyone. But that’s the constitution. So hey, change the constitution if you don’t like it.’

Similarly, even if people disagreed with the fi nal outcome of the IASB’s deliberations, they should still respect it: ‘You couldn’t have a legislative system where people said: “I don’t like that particular aspect of the law because it doesn’t suit me.”’

The EU’s decision to delay adopting IFRS9 until the full standard covering hedge accounting and liabilities is published later this year, whereupon it will carry out its own in depth analysis, has proved particularly vexing. It will, says Flint, leave European banks and insurers out of the loop while some 80 other countries are going ahead with the new fair value accounting standard. He warned the EU commission last November that any delay could place European companies at a competitive disadvantage.

Flint’s reservations about EU fi nancial regulation are not however total. Despite the good business that banks have had from conducting OTC hedging trades for corporate customers, he approves of EU proposals to regulate the practice.

‘The key is that there needs to be a central counterparty, whether it is a formal exchange or not. To have a central counterparty for risk and more standardisation of products are systemically good things.’

Innovation for the corporate fi nance function is going to be as much about process and methodology as about technology, though Flint notes the continuing investments in fi nancial information. While the stewardship role on behalf of shareholders (reporting how capital has been invested and clearly stating assets and liabilities) will remain core, he sees a new and important trend.

‘The finance function is moving away from record-keeping and control to data-rich management information. This better informs management decisions around emerging trends, risks, opportunities and so on. I think that, as people realise that there is more that can be got from all the data that is within financial systems, there will be a great deal of investment to harvest that information as opposed to simply report the score.’

‘Credit losses in this particular cycle are not as aggravated as might have been expected due to a combination of very low interest rates and much more proactive management by banks and borrowers.’

Douglas Flint takes the view that the need for financial products has been and remains straightforward: ‘The world coped extraordinarily well with financing growth and helping people meet their obligations and hedge their risks throughout the 20th century, without the degree of complexity of financial products that were perhaps characteristic of the first decade of this century.’

Complex innovation centred largely on the ways investors with particular return requirements could take leveraged risk. The appetite for such investments has much diminished in the face of unexpected asset price collapses and a dearth of liquidity.

Flint sees some of the opposition to IFRS 9 fi nancial instruments coming from the exponents of complexity.

‘The truth is that IFRS 9 works well for the type of banking activities and fi nancial instruments that regulators and politicians want to see predominate. It may not, as an accounting model, be attractive for some of the highly-leveraged or structured instruments now being wound down. But, if the accounting model favours simplicity over complexity, surely that is in-keeping with the direction of travel that society now expects. So I think that in relation to the underlying economic activity of the real world, all the products that are necessary already exist.’

Douglas Flint takes the view that the need for financial products has been and remains straightforward: ‘The world coped extraordinarily well with financing growth and helping people

Flint sees some of the opposition to IFRS 9 fi nancial instruments coming from the exponents of complexity.

‘The truth is that IFRS 9 works well for the

Back to basics



Innovation and the finance function 11

Therefore, the innovation that is occurring is coming from the growth in importance of business intelligence rather than simple governance. This carries through to the changing way in which borrowers are having to manage their relationships with lenders that are busy trying to rebuild their own balance sheets and looking for quality not quantity in new assets.

Continuous assessmentThere is an evolution in the way banks are managing credit data. At one time, the most significant analysis took place at the time when the credit was advanced and thereafter at periodic renew and review dates.

‘This is being replaced with a continuum of review and risk assessment on individual and portfolio risk, changing the metrics and the credit ratings of portfolios and of individual facilities. This drives further assessments and potential provisioning requirements.’

This much more ‘granular’ basis of measurement is being used increasingly to drive capital and prospectively to drive accounting provisioning.

‘The parameters are still to be defined. There are a lot of short-hand descriptions but when people talk about expected loss provisioning or dynamic loss provisioning, many of them are talking about different things.’

Flint’s view is that the IASB has come closest to defining expected loss provisioning. Traditionally, on a portfolio basis, margin begins to be recognised from day one. The issue was whether to reflect up-front the

expected net return after losses, as opposed to recognising a larger return until losses started to appear.

‘In a typical credit portfolio,’ says Flint, ‘losses will be tail-ended towards the maturity of facilities because it tends to be that these do not usually go wrong very quickly after they are advanced. Someone who advances money is usually fairly confident that, 6-18 months out, a borrower’s financial circumstances are sufficiently foreseeable that there is no risk. But things can change, two, three, or five years out – which is why five-year money typically costs more than one year money.’

The accounting part of expected loss requires, ‘that you take the view that in a discrete portfolio, you expect the net margin after losses to be ‘x.’ Rather than look at a higher margin and then a lower margin as the losses begin to appear, you should smooth that out over the period of the portfolio.

‘The other element in expected loss accounting to note is when expectations change. Because at that point the world has changed and you have to catch up and possibly recognise a loss that is bigger than your original expectation, by way of accelerated provision recognition.’

From this Flint concludes that the new model will have accounting volatility focusing more around changes in expectation than actual events.

This will have an impact on borrowers, who will need to re-profile themselves to meet the changed approach of their creditors. In Flint’s analysis for certain

types of portfolios, such as credit cards and mortgages, data already exists to account for expected losses.

Other borrowers, be they the likes of property developers, hairdressers or restaurants, might very well not have been looked at on a portfolio basis. To capture the expected loss on such risks requires a more granular approach, ‘one is going to have to build a database of history and methodology to determine whether trends are going to change. This means you are probably going to ask your customers to give you far more information than they have had to in the past. Credit origination is going to be a far more data-intense experience for potential borrowers,’ says Flint.

Regular dialogue between lenders and borrowers is crucial and in Flint’s view is probably better now than it has ever been. ‘Credit losses in this particular cycle are not as aggravated as might have been expected due to a combination of very low interest rates and much more proactive management by banks and borrowers. They have been getting into dialogue earlier, before it is too late.’ ■

The China effect

China’s booming state-run economy is in itself an innovation that challenges the perceived wisdom of the absolute rule of market forces.

In acknowledging its roots and its core market opportunity, HSBC last year moved its CEO Michael Geoghegan back to Hong Kong. One of the distinctive characteristics of Chinese finance is that the five biggest banks are majority state-owned. ‘Thus there is a much stronger control mechanism of the system through the policy side of government than there would be in most Western markets where the banking system is independent’ says Douglas Flint, adding: ‘I think it will be a long time before that changes in China.’

In addition the Chinese banking system will still be substantially domestic.

‘Clearly over time that will change but at present there are plenty of good opportunities within its borders,’ Flint explains. ‘It is therefore a different-shaped banking system. It is much less sophisticated in terms of product sets than Western markets. And one might argue that to some extent, in the sort of environment we have come through, that has been a good place to be.’

Thus the most important innovation in Chinese finance in the last decade was that it eschewed major innovation.

Douglas Flint

Douglas Flint is chief financial officer, executive director risk and regulation of HSBC and a non-executive director of BP. He began his career with Peat Marwick Mitchell & Co (now KPMG), where he trained as a chartered accountant. He was appointed a partner of the firm in 1988. Flint specialised in banking, multinational financial reporting, treasury and securities trading operations, group re-organisations and litigation support while at KPMG. He joined the HSBC Group as Group Finance Director-Designate on 30 September 1995 and was appointed to the board on 1 December 1995.

In June 2006 he was honoured with a CBE in recognition of his services to the finance industry. Flint was chairman of the Financial Reporting Council’s review of the Turnbull Guidance on Internal Control between 2004-2005 and served on the Accounting Standards Board and the Advisory Council of the International Accounting Standards Board from 2001-2004.



Innovation and the finance function1212

Essential ingredient


The imperative to innovate is well recognised but some may be surprised to learn that, far from spoiling the broth, the management accountant is an essential ingredient of success. CIMA’s Louise Ross takes stock of the management accountant’s role.

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Essential ingredient

In an interview in 2000, management guru Gary Hamel argued that finance executives, the gatekeepers to finance, were the enemy of innovation. He may also have been alluding to the commonly held prejudices that accountants are cautious, lack creativity and are over-fond of routine. This article begins by explaining why management accountants are a different breed, demonstrates how they are an essential component of the multi-disciplinary teams needed by organisations to achieve their innovation strategy and ends by considering to what extent management accounting itself can be considered innovative.

Conditions necessary for innovationBecause have already alluded to an “enemy” of innovation, we should consider what conditions are necessary for innovation to happen within an organisation. A recent report on innovation from the UK Government advised that to be successful innovators, organisations needed strong leadership and a skilled and motivated workforce. They also needed to invest in systems “which allow decision takers, at all levels in the firm to make decisions on the basis of the best possible management information”. Other necessary conditions include:

a strategy that makes it clear that •innovation is an organisation-wide activity not a departmenta corporate culture that encourages •innovation, promotes curiosity, tolerates failure and provides mechanisms for ideas from employees or teams to be developed or piloted effective knowledge sharing within and, •where appropriate, outside the companyin-depth knowledge of customer needs, •current and potential understanding of relevant technology •and its potential for future products and services

exploitation of networks and •partnerships with academia, government, trade associations, suppliers and other innovators an appreciation that innovation is •not just about product or service innovation, but also about process innovation.

Don’t overlook process innovationConsider what would make more difference to the success of your organisation, another new product or service to add to your portfolio or significant process improvements resulting in:

an increase of repeat business of •10% through better customer datareductions in stock-outs and wastage •by 15% through better supply chain managementmore rational allocation of resources •to projects with the best potential, through better alignment of strategic objectivesimproved speed to market, through •better knowledge management and project managementreduced product development •cycles through better modelling and simulation techniques.

Management accountants are innovation friendlyIt’s common for those outside the profession to refer to finance staff as if they were all one type, without adequately considering the differences between the financial accountant and the management accountant. Yes, both deal with the figures, in many organisations the roles are shared, and there are career paths or roles which incorporate elements of both functions. But they produce information for different purposes, and this underlying difference affects the approach and perspective of each type of accountant.

Financial accountants prepare information ultimately for external reporting purposes, to record transactions which have taken place and report the financial performance of the organisation. Consistency and reliability of the financial statements is vitally important, so there is a regime of standards which govern how transactions are recorded and financial reports produced. Financial accountants are required to master these standards and use their judgement to justify occasional departures where these are required for a truer representation of what has happened.

Management accountants prepare information to support management decisions. They have to be skilled therefore at determining management’s needs, and interpreting the financial data for users. They have to be happy working with different management disciplines, at all levels in the hierarchy and often have to seek or use data from outside the organisation. Management accountants have to be future-orientated, which means they have to be comfortable handling uncertain, qualitative or probabilistic information, not just historic numerical data. They have to use their professional judgment about which measurement or evaluation techniques to use, according to the context of the decisions being made.

The different characteristics of management accountants make them inherently more friendly to innovation. Management accountants are all about providing information to management; not so much owners of information in the organisation as conduits and interpreters. They are business partners to all the various functions in the organisation. The quote above highlights the importance to innovation of having the best possible management information, this being exactly the responsibility of the management accountant.

Innovation should be a multidisciplinary activity, not just the preserve of designers and engineers. Readers who are from the manufacturing sector will be familiar with the idea that the majority of costs of a product are determined at the design stage, when the specifications for the product are decided. The specifications not only determine material and labour costs but how a product is to be manufactured, stored and transported.

‘The different characteristics of management accountants make them inherently more friendly to innovation. Management accountants are all about providing information to management; not so much owners of information in the organisation as conduits and interpreters.’

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Innovation and the finance function14

The design also determines the extent to which the product is customisable, or compatible with related products etc. It is sensible therefore to involve the management accountant with their expertise in costing at this early stage, rather than later in the process when there is only the opportunity to influence

a small proportion of the overall costs. Management accountants’ experience at the interfaces of the organisation, speaking to different management functions from logistics to HR means they are well placed to recognise and help manage conflicting requirements from these different functions. For example,

the need to improve manufacturing efficiency of production, which might require long production runs, or increased standardisation would conflict with the marketing department’s need to differentiate products by offering many product options or customised on-demand ordering.

Innovative ideas are like fish eggs, many are spawned but few are destined to hatch. Most organisations don’t suffer from a lack of ideas, but a process to ensure that ideas are captured and then subjected to a rational winnowing process so that only those with most potential are pursued.

Because of their role supporting strategy formulation, management accountants have experience of scanning the external environment, learning what influences demand, and what regulatory, social, political, technological or economic influences affect the organisation. This is all essential intelligence for the innovation strategy, and to help identify the prospects with most potential from the many innovative ideas that most organisations generate.

Management accountants deal with forward-looking information, so they have a tolerance for the unpredictability which is the nature of innovation, and are experienced at expressing information that has uncertainties; for example, representing conclusions as probabilities or expected values.

They are also familiar with computer modelling or simulation, because of their forward-looking orientation. These techniques are also an effective strategy for innovators, to test promising concepts before production. And of course, specific financial expertise is a necessary element of any innovation strategy. Either type of accountant can help with some of the processes which innovators find hardest to get right – project management, resource allocation, and maintaining a balanced portolio of innovations, so that high risk/high return projects are balanced with lower risk projects; as are long and short term projects.

There will be some who are not convinced by this argument, and who will categorise management accountants together with the generality of finance executives, as Hamel’s enemies of innovation. Even if they conclude that the management accountant is a brake on innovation, a cold voice of reason, well sometimes that is what is exactly needed. It would be impossible for an organisation to pursue all the innovative ideas it has; and unnatural to expect an idea’s champion to be other than enthusiastic. There has to be an objective process for considering proposals, and ensuring a rational allocation of scarce resources. Who better than a disinterested management accountant to provide that?

Management accounting is itself innovative One of the key differences between financial and management accounting,

‘Management accountants deal with forward-looking information, so they have a tolerance for the unpredictability which is the nature of innovation, and are experienced at expressing information that has uncertainties.’

CIMA studies on innovation

CIMA has funded three pieces of research in the area of innovation and management accounting.

The first, “Don’t blame the tools: the adoption and implementation of managerial innovations” is a case study based report which sets out the practical steps for an organisation to follow in order to successfully embed an innovative idea or tool in to day to day practices. The report can be read at http://bit.ly/bDTL7u

CIMA’s second study, “Comparative Investigation into the Diffusion of Management Accounting Innovations in the UK and Australia”, suggests that the decision of whether or not to implement any cost and management accounting innovation is significantly influenced by the attributes of such an innovation including:

benefits of the innovation•ready availability of an innovation•running cost•dissatisfaction with the current system•social and institutional pressures •for innovationemployee recognition of need for change•organisational ability to fund the change. •

The findings guide managers and practitioners towards fully understanding the nature and characteristics of new management accounting techniques that they are going to adopt. This will also be helpful in the successful implementation of any management accounting change programme. The report can be read at www.cimaglobal.com/Thought-leadership/Research-topics/Organisational-management

A third study, “Management Accounting Innovations and Fads: Can we understand them better?” studies the adoption of new management accounting innovations. The report helps practitioners to be more discriminating when considering the steady stream of software packages that bundle ‘new’ and ‘improved’ techniques together to support real or perceived problems and challenges. The findings improve understanding of management accounting innovations or fads in their broader contexts, including the process of evolution and diffusion. The report will be available soon at www.cimaglobal.com/Thought-leadership

CIM014_Ross.indd 14 19/3/10 14:08:12


is that the former is governed by accounting standards that specify how financial accounting transactions are dealt with and recorded.

What then governs management accounting in the absence of management accounting standards? The answer is best practice. The management accountant has a variety of tools and techniques which they learn about during their professional qualification and subsequent continuing professional development. New tools and techniques are developed by academics and consultants and there is a healthy flow of ideas between the two. Many of the tools and techniques, because they relate to strategy, performance management and enterprise management will also be familiar to senior non-finance executives.

The creators or providers of these solutions are naturally enthusiastic about the benefits they offer but some are notoriously resource-intensive to implement and for others there can be failure rates of 60-70% . A recent study on management practices and organisational performance found that companies which used widely

accepted management techniques that feature on the CIMA syllabus and the curricula of the good business schools, do outperform their peers. It found that better management practices (the right techniques, implemented properly) were significantly associated with higher productivity, profitability, rate of sales growth and survival rates.

‘There has to be an objective process for considering proposals, and ensuring a rational allocation of scarce resources. Who better than a disinterested management accountant to provide that?’


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16

Note the caveats: the right techniques, implemented properly. This is why a core skill of the management accountant is the judgement as to which techniques to use, depending on the nature and size of the organisation, the context in which it operates, and the drivers of business growth.

The CIMA Management Accounting surveyIn 2009 CIMA asked its members about the use of more than one hundred of management accounting and general business tools. We also asked about respondents’ intentions to drop or adopt tools within the next two years, to enable us over successive surveys to build trend information and determine how and how much our discipline is changing.

More than 400 management accountants from organisations of all types and sizes across the globe completed the survey. The results help illustrate trends in tool use, and may suggest where each tool or technique is in its lifecycle. For example, the balanced scorecard is a relatively new technique (less than twenty years old), and is currently popular (used by 35-40% of respondents) yet it is also the tool most likely to be introduced, so its popularity has not yet peaked.

Overall, the top tools most likely to be introduced were:

Balanced scorecard1. Customer profitability analysis 2. Rolling forecasts 3. Activity based management 4. Environmental management accounting 5. Product/service profitability analysis 6. Activity based costing 7. Post-completion audits 8. Business process re-engineering 9. CIMA strategic scorecard 10.

Innovation and the finance department

The CIMA survey demonstrates that management accounting is innovative as new tools and techniques are continually being applied and considered by respondents. There is a balance between new tool use and the continuing use of well established and proven techniques which demonstrates how management accountants select the appropriate tool for the purpose without an unhealthy churn of techniques or over-reacting to fads and fashions (see Figure 1, below).

ConclusionIf this premise of this article, that management accountants play an important role with respect to innovation, has taken you by surprise, you might wish to consider how to get the most from your management accountant.

Your management accountants can help •with the development of your innovation strategy, and ensure it relates to other organisational strategies. This is because the management accountant is one of the primary sources for the forward-looking, external and qualitative information to inform strategy development. Your management accountants should •be part of the multi-disciplinary teams created to pursue innovation, to combine the enthusiasm for ideas and the knowledge of technology which come from design and engineering colleagues, with an appreciation of the uncertainties of the process of commercialising ideas. Management accountants understand risk and are experienced at communicating between different disciplines. Your management accountants can •provide the necessary discipline to the innovation process to ensure that those

ideas with the best commercial prospects are pursued.Your management accountants can •support organisational change, whether this involves tailoring processes or even changing entire business models to respond to changing conditions. The management accountant can help determine which of the plethora of solutions offered by providers might best suit your organisations goals and circumstances.

The CIMA Management Accounting survey report can be downloaded at no charge from at www.cimaglobal/ma. ■

Net profit margin

SWOT analysis

Rolling forecast

Overhead allocation

Gross margin

Strategic planning

Variance analysis

Cash forecasting

Profit before tax

Financial year forecasting

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 1. Most used tools (% of respondents)

Budgeting toolKey P&L Reporting LineStrategic tool

Performance measurementCosting tool

Tools:

Louise Ross

Louise Ross is a technical specialist at CIMA. Her special interests are narrative reporting, the changing role of the management accountant, and the impact of collaborative web-based technologies. Formerly, she was CIMA’s director of research and retains her interest in bringing academic research findings to practitioners.

Previously, Ross was a senior auditor at the National Audit Office.

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Excellence in LeadershipExcellence in Leadership

High-tech, low-cost Chief executive for finance, IT and logistics at BASF India, Ramnath Sundaresan speaks to Phin Foster about how long-term investment in technology innovation can lower costs, and not only in financial terms.

It is all well and good for CFOs to make public pronouncements on the importance of innovating during a downturn; talk is cheap and ideas, in theory at least, are free. But it takes a somewhat braver individual to go on record discussing the necessity of ongoing investment in innovation. At a time when organisations continue to look towards ways of cutting costs and conserving capital, you will be hard pressed to find a finance department turning a sympathetic ear to requests for cash.

Nowhere is this problem more acute than in the realm of technology. While the financial downturn has reminded the world of the cyclical nature of economic events, IT is very different: systems and processes become dated virtually on release and standing still quickly equates to going backwards.

Of course it helps if you have a foot in both camps and chief executive for finance, IT and logistics at BASF India,

17

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Technology and innovation18

Ramnath Sundaresan has a particularly acute appreciation of the need to control expenditure while keeping pace with innovations as and when they arise.

‘Ultimately, IT investment is not like capital expenditure,’ Sundaresan believes.

‘It is more an investment in efficiency. As a CFO, one always wants to see efficiency in the process and a belief that the money you’re releasing is giving you better mileage. You might have various kinds of businesses, locations, historical backgrounds as to how things have evolved, through acquisitions and so on. Consolidating all your enterprise resource planning (ERP) systems, standardising processes and introducing innovations often requires a large sum of money, but if it brings you a higher level of efficiency then the results are easily measurable.’

It is easier to see beyond the initial investment when one is so integrally involved with the process. A clear example of this

was the recent decision to standardise all PCs used across the region, demonstrating that successful innovation should be as much about scaling down as building up. ‘It allowed us to move our entire maintenance department into a centralised shared service,’ Sundaresan explains.

‘We cut down on every individual maintenance set up and it resulted in real savings and much better value. Everyone is on the same platform, optimisation can now happen very quickly across the entire region and everything moves at the same pace. Yes it was a huge one time cost, but the benefits were easily quantifiable.’

The long viewHaving previously worked for International Computers, Sundaresan does have some background in IT, but he is the first to admit that the minutiae of programming mechanisms are not his speciality. His is more of a ‘big picture’ role and the benefits of marrying the finance and technology functions means

that he enjoys a particularly good view of events throughout the organisation.

‘We’ve got guys with the in-depth hardware knowledge,’ he explains, ‘but my remit is around managing information so that it operates in a far more harmonised way. As CFO, getting a good handle on the systems is a real advantage. When moving beyond merely overseeing the finance function some experience in system or programme management is certainly an advantage, but the essence of the challenge is knowing exactly what needs to be achieved and the direction and areas of innovation required to take you there.’

It is often said that the finance team is the one department capable of seeing how all the dots join within an organisation. As of 31 December 2009, BASF in India employed about 1,800 people and products manufactured by the chemicals company serve an array of end-users including agriculture, textiles, paper, pharmaceuticals, consumer durables and automobiles. BASF SE, which has subsidiaries in nearly every major market in the world, increased its stake in BASF India Limited to 71.18% during the last financial year. There are a lot of dots to join.

‘Most of BASF’s operations are sub-regional and finance and IT are typically integrated within the leadership structure,’ Sundaresan explains. ‘Finance uses the SAP ERP module to ensure all systems are well aligned across the globe, regardless of regional or sub-regional particularities. We have guidelines, but each region is responsible for its IT spend.’

Working from a flat platform clearly simplifies what could be an extremely complex process. ‘Consolidation’, ‘harmonisation’ and ‘efficiency’ are almost part of the executive’s mantra, but where one really sees the benefits of the dual finance/technology role for increasing innovation’s scope is when Sundaresan moves on to ‘integration’.

‘IT should always be looked upon as an information management function and that means considering extremely closely how we partner it with the business,’ he believes. ‘It cannot be a standalone or reactive function. Running it successfully means understanding the business’ needs, how it’s driven, the critical areas. That knowledge allows you to structure the information accordingly.

‘We have specialists, but there are also generalists with a nuanced understanding

‘One always wants to see efficiency in the process and a belief that the money you’re releasing is giving you better mileage.’

Think outside the box

Areas for innovative focus should never be exclusively centred on internal products and processes. Looking back over the past year, an area Ramnath Sundaresan is particularly keen to highlight is BASF India’s efforts to bring external partners up to speed so that both sides could enjoy the mutual benefits of increased compatibility.

‘There have been a number of innovations we’ve brought in over the past 12 months on the IT side,’ he begins, ‘but a lot of our focus has been helping others to innovate as well. When you operate in any local environment, a recurring challenge is how to best bring stakeholders, customers and vendors into your processes. Very recently we moved quite a large segment of our customer base into electronic banking, especially those in remote locations – small distributors in the agricultural business, for example.

IT really looked at how we could show benefits to the end customer by aligning product demonstrations across the country and have those demonstrations fully standardised. We’ve enjoyed real success in that regard and the benefits are easily quantifiable.’

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Technology and innovation 19

of how the business works who look into designing the system and bring up improvements that address the issues driving it. If a particular business requires a lot of information from the field, you then look at designing your information flow around how you get knowledge from the market. Other businesses might need to be more regulatory oriented. Regardless, you need a platform in place that directly addresses your needs.’

Innovation and the recessionWhile efficiency and integration are major internal factors for continually evolving that platform, recent financial events have also had a major influence on how companies address technology functions and their appetite for innovation.

‘With the downturn you start seeing a cut on everything,’ Sundaresan says.

‘Executives ask themselves whether IT spend should also be pulled. We certainly didn’t look at it that way – in fact, we actually upgraded some of our systems over the past year. There’s a financial angle to that, you can get it done at a much lower cost when the market’s struggling, but we were also aware of the need to keep pace. The moment you slow down or scale back you put yourself in the position of having to spend even more money further down the line in order to make up ground. Although it can be difficult to quantify all the benefits, we regained that outlay very quickly through increased efficiency. The alternative is just too expensive to consider.’

Nevertheless, those not as closely associated with the technology function will often take come convincing. Sundaresan believes that articulating the alternatives is the best means of getting people onside.

‘Any investment during a downturn is sure to raise some eyebrows,’ he acknowledges.

‘The classic mindset is to say “no” to as much as possible and expanding capacity or buying a new system when everything is slowing down can look counterintuitive. My major argument was that with business at a lower level we should take the opportunity to really improve our internal processes, as well as the reduction in cost doing so at that point in time would bring. You have to put yourself in a position to fully take advantage of events when the market picks up again.’

Keeping pace with the competition is paramount and once again Sundaresan’s control of the finance function is a core advantage for highlighting areas where innovation is required. BASF uses benchmarking to gauge its financial efficiency and the results help create a road map for generating further wins.

‘In terms of administrating data and so on, finance is the one department that handles all the processes and documents across the company,’ he explains. ‘Benchmarking really gets to the core of how much we’re investing in technology and manual processes and helps us maintain a world class standard. The results clearly indicate where you need to be in terms of size and complexity and IT is the tool that will get you there.’

This is particularly important as size and complexity continue to grow exponentially. In recent years, BASF India has typically expanded at more than twice the rate of GDP. This has been achieved predominantly through a series of mergers and acquisitions, yet the company’s IT platform has slightly shrunk in size over the same period. This is testament to a continued emphasis on efficiency, but Sundaresan is certainly not blind to the benefits that the innovative culture within new arrivals can bring to the existing system.

‘When you have various M&As coming in alignment is a major priority,’ he begins. ‘Some of these companies will have features that we want, however. They can be specific processes conducted by the company in question or simply aspects we’d like to bring in across all our businesses; it’s a question of wanting to get the best of both.

‘From as early a point as possible, we delve deep into the technology processes and

‘The moment you slow down or scale back you put yourself in the position of having to spend even more further down the line.’

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Technology and innovation20

systems we’re set to inherit, studying the differences and similarities. The idea is to align, but you must never blindly shed what is already there. If we come across something that is particularly good, it’s a question of proving that it will have global benefits and bringing it in across the board, As far as possible we try to avoid non-standard practices. They can quickly get out of hand.’

Of course, it is far easier to bring newly acquired partners up to speed than to dictate the behaviour of external stakeholders. A major drive to automate all processes – Sundaresan claims his office is ‘virtually paper free’ – is a noble accomplishment, but one cannot always guarantee that others will follow suit.

‘You do still see manual documents and cheques flowing around and it’s a challenge we constantly face,’ he says. ‘We can influence behaviour through various forums and suchlike, but it’s not going to change overnight. Some just don’t have the appetite for innovation. Whether it be customers, vendors or service providers, our larger partners are usually easier to deal with. We give presentations that demonstrate the benefits of moving into a more automated set up or linking up with our ERP. Tell your customers to place an order electronically and show them the benefits that arise from doing so. Once they see that, especially when it comes to our customers moving onto compatible platforms, it tends to resonate quite quickly.’

This work with BASF India’s larger partners is ongoing and Sundaresan scores achievement thus far at seven out of ten. ‘It was much lower when we started the process a few years ago,’ he says. He believes progress has been made easier by the confident and increasingly tech savvy nature of the sub continent. ‘In India the mindset is generally quite positive and that’s a great bonus for us,’ he declares. ‘People are not afraid of new technologies and the IT environment that’s developed here encourages that further.’

Stay vigilantWhile the outlook from that perspective looks generally positive, Sundaresan does see very definite technology challenges on the horizon. As we emerge uncertainly from the worst global economic downturn since the 1930s, he warns that many of those controlling the purse strings will have their attention turned elsewhere.

Keeping up with technology through further spend will be a battle for a number of organisations,’ he begins. ‘A lot of people passed 2009 waiting, watching and not being too focused on growth. 2010 may see businesses looking towards expansion and that will mean a lot of competition for funds. Those in charge of the IT function will have to put a very strong case forward and many may be left behind. Even though the operating environment will have improved, keeping pace may be even more difficult.

‘That then leads to how other issues such as the smarter use of technology and the green agenda will be addressed. The focus on green compliance is a huge issue on a global scale now, but in order to tackle it correctly you’ll need funds.’

Those responsible should start getting their pitches ready now. One gets the feeling, however, that Sundaresan will be pretty confident of getting a fair hearing from his CFO. ■

Ramnath SundaresanRamnath Sundaresan has over 25 years of experience in the field of finance and related corporate functions.

He has been with BASF India since 1996 and his responsibilities include finance, information technology, logistics and corporate strategy. Prior to joining BASF, he worked with Coopers & Lybrand, Rallis India (a Tata Group company) and Fujitsu.

He has handled diverse assignments in corporate finance, mergers and acquisitions, collaborations, treasury risk management, statutory compliances and internal audit.

European efforts in technology innovation

Launching later this year, the European Institute of Innovation and Technology (EIT) will look to capitalise on the innovation capacity of actors from the three sides of the “knowledge triangle” – higher education, research, business and entrepreneurship – in an effort to engender sustainable European growth and competitiveness through the stimulation of world-leading innovation.

Its stated objectives are: Addressing key societal challenges Knowledge and Innovation Communities (KICs) will combine expertise from across disciplines to ensure innovative and global responses to complex societal challenges, such as climate change mitigation and adaptation, sustainable energy and the future of information and communication society.

Setting a clear business-friendly framework Turning new ideas into tangible new products, services or business opportunities will be the main benchmark of KICs’ successes. Business partners will be crucial players, ensuring they remain focused on real-world concerns and taking new ideas to the markets.

Fostering world-class excellence From the Governing Board to KIC partners, the EIT will bring together the very best European resources in business, research,

higher education and entrepreneurship. By doing so, the EIT will become a major source of attraction for the best talents worldwide.

Promoting new ways of educating people The EIT will allow businesses and research to tap the full potential of leading-edge universities as driving forces for innovation. Higher education partners will offer top quality Masters and PhDs, providing students with the personal, social and entrepreneurial skills they need to succeed in the knowledge economy, focusing on learning outcomes and using innovative teaching methods.

Creating a new generation of entrepreneurs: The EIT will promote entrepreneurship education as a key feature of KICs’ Masters and doctoral programmes by shifting the emphasis from ‘learning about’ to ‘learning by doing’. KICs will also encourage framework conditions in which entrepreneurship can flourish.

Enhancing the free flow of knowledge through co-location: EIT KICs will be organised around co-location centres – geographical locations where most or the whole innovation chain is in close proximity. The emphasis is on people from diverse backgrounds working together with face-to-face contact, thus leading to great mobility of knowledge.

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Company insight 21

The work of the online fraudster has become more difficult as awareness of the risks has grown in the business world. More details are required to successfully access bank accounts online and information is generally better guarded. The fraud community has not given up, however, and is continually developing new ways to compromise security.

It is tougher to target a bank directly because they employ advanced anti- fraud measures. Mark Crichton, RSA’s technical manager, explains that this means third parties are increasingly under threat. ‘Even healthcare organisations and governments are starting to become targets,’ he says. ‘Fraudsters are looking to leverage seemingly trustworthy brands in order to gain information from consumers.’

Broadly speaking, the enterprise of fraud can be broken down into two main divisions: harvesting and cashing-out. The former involves building databases of personal information. The latter uses the details to actually withdraw money. Within these two categories, further specialisations exist, performing a variety of roles, from checking the validity of stolen information to developing and hosting new software.

‘It’s a huge industry, broken down into discrete business units that all perform their own duties,’ Crichton says. ‘If all the elements work together and the data that comes through is quality, that’s how fraudsters get their biggest gains.’

The division of labour is enhanced by technology that allows the planning of large scale attacks. A particular type of software known as a trojan is popular because it enables remote control over infected computers.

‘A recent example called Avalanche effectively allowed use of your computer

to be sold to a fraudster,’ Crichton explains. ‘It brings it into part of what is known as a botnet. The aim is not necessarily launching an attack there and then but to scale-up for a bigger strike against an organisation.’

A network of enslaved computers can then be used to directly steal user information or to send out waves of spam as part of a phishing attack, deceiving users into providing credit card or online banking information.

First line of defenceWhile consumers must protect themselves, companies are well placed to defend their customers and their brand using advanced technology integrated with their existing systems. The best way to combat fraud is to preemptively shut down potential avenues of infiltration. RSA is able to detect phishing or trojan attacks in their early stages and nip them in the bud. When this is not possible, a further range of services spots fraudulent attempts to access accounts and blocks them immediately.

Even if these safeguards are circumvented, RSA’s systems monitor every transaction taking place in its clients’ accounts. If one of them seems suspicious – a large payment to a new bill, for example – it can be cancelled before the money has been transferred.

This kind of protection has become vital after the UK’s adoption of the faster

payments service in 2009. Previously, banks had three working days to perform fraud checks. Now this window has been collapsed to 15 seconds. ‘That was a particular area that fraudsters were talking about when we monitored their conversations,’ Crichton says. ‘They were waiting for faster payments to come because they knew they’d be able to make a quick buck very easily.

‘We’ve taken the product and ensured it’s capable of processing in a faster payments world. By updating the fraud profiles and the risk models, we’re always as close to the fraudsters as possible.’

It is these models, built on RSA’s extensive research and experience, that allow for early detection of fraud. Because the methods and patterns of behaviour are always adapting, intelligence work is vital in the development of effective products. The communication that allows sophisticated attacks to be co-ordinated takes place on forums and chat rooms.

By gaining access, RSA is able to monitor trends and even discover specific attacks before they happen. ‘It’s allowed us to gain access to phishing kits in the past that we’ve then been able to expose,’ Crichton says. ‘This research has great value in protecting our customers.’

Online fraud is an important risk that all businesses need to be aware of and have systems in place to combat. On the back of experience, research and technology, RSA Security is working hard to protect legitimate companies and undermine the fraudster community. ■

Escape the netOnline fraudsters are becoming increasingly sophisticated in their approach to stealing information. Mark Crichton of RSA, The Security Division of EMC explains to Excellence in Leadership how the threat is changing and what can be done to avoid the traps.

‘A recent example called Avalanche allowed use of your computer to be sold to a fraudster.’

Further informationRSA, The Security Division of EMCwww.rsa.com

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Company insight22

Every company has core enterprise level processes. In fact, there are about ten you have to have. How well these processes run has major implications on the key business outcomes of the company, ranging from sales and customer retention to margins and cost containment. It sounds like common knowledge, doesn’t it?

However, according to Patrick Cogny, CEO of Genpact Europe: ‘There is a large variation in process performance across and within companies, and, surprisingly, there are few benchmarks or standards available for core processes. Many CFOs and other executives are operating without the needed visibility.’

Companies must understand if the management of core processes is on a par with, better than, or behind other companies. But what is the best way to do this?

In many ways, the traditional method for measuring processes is misguided. The focus given to process management has been around efficiency gains. This is important, but if the accent is put on driving increased effectiveness, the gain in business outcomes such as cashflow and margins can be two to five times more than traditional approaches.

Traditionally companies have limited their view of a process to what is the responsibility of a given organisation. Looking at a process from a broader enterprise-wide perspective can open the doors to delivering discontinuous process improvements. This is in part because the opportunities for improvement rest at the intersections of organisations and optimising a process for the end goal of the company versus the silo’d goal of a given department.

In other words, companies have limited visibility into what is best-in-class and are unclear on the linkages between process drivers and business outcomes, so they are at a loss on how to change. ‘This is the void that Genpact is setting out to fill with Smart Enterprise Processes (SEPSM). We are applying a much

needed science to a new methodology for managing processes, be they core enterprise or industry-specific,’ Cogny says.

‘We found clients saying, “we want more and you are the experts at what you do, not us,”’ Cogny explains. ‘While a few years back they would want us to do what they did, cheaper, now they want us to be much more prescriptive about what they should be doing. That’s been a marked shift in the expectations of our clients.’

Smart thinkingGenpact’s first step in working with a new client is to consider their business as a whole and what the company is trying to accomplish as a business. This represents a new approach to the way outsourcing partnerships are built, where the focus has traditionally only been on the process that is being taken over.

Genpact’s methodology tests the effectiveness of the client’s processes by measuring performance at each step of the business process and comparing that performance to best-in-class benchmarks from within and across industries. The company diagnoses what is hindering client performance at each step, creating a roadmap to transform that performance in order to achieve improved business results.

‘What we do is use benchmarks, but benchmarks at a much more granular

level than people have been doing so far,’ says Cogny. ‘To that we’re adding detailed process insight and best practices, allowing us to prepare a roadmap for the client from the current state to best-in-class processes.’

Achieving real process improvements requires a high degree of process expertise, inherent technology capabilities, analytic strengths and deep insights garnered from deploying similar processes across a breadth of industries. That is why Genpact – which manages more than 3,000 different processes for its approximately 400 clients today – is able to improve end to end processes that run a business such as Order to Cash, Procure to Pay, and Request to Repair, through a framework like SEP.

’The main aim of SEP is to combine a scientific diagnosis with highly engineered end products. When you look at how you translate the laws of physics into actually building a rocket, there’s a lot more to it than just the laws of physics. That’s what SEP is about. It’s not just the laws of physics, which are the benchmarks, but it’s also how you build that into a roadmap for improvement, which is the engineering,’ explains Cogny.

‘Companies that fully leverage process as a core business differentiator and a driver of end business outcomes will lead their industries going forward. That’s why I believe that SEP is a blueprint for the future of outsourcing.’ ■

The application of scienceAs we emerge from recession, we need to work smarter to survive and thrive. Europe CEO Patrick Cogny tells Excellence in Leadership about Genpact’s new scientific methodology, Smart Enterprise Processes, developed to unlock cash trapped in business processes by increasing long term process effectiveness.

‘Companies that fully leverage process as a core business differentiator and a driver of end business outcomes will lead their industries going forward.’

Further informationGenpactwww.genpact.com Email: [email protected]

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Company insight 23

We all need access to the right information to make informed business decisions. For finance departments, this is especially true and they are often the first port of call for business users seeking information. However, when demand for information outstrips supply – beyond what the current infrastructure can deliver – then it’s time for change.

However, when that information is spread across departments, housed in a variety of disparate locations and formatted in different ways, creating a unified view is a real challenge. Even the best of intentions come to nothing if employees do not have the data available to make informed decisions. Furthermore, the sheer level of work and time required to overhaul the situation often meets with little encouragement from stakeholders.

This was the challenge facing Adrian Stubbings, margin and business intelligence (BI) manager at AAH. Trained as a management accountant and with a background in finance, Stubbings found that skills gained as part of his CIMA qualification were well suited to BI. As the largest distributor of pharmaceutical products in the UK, AAH is a subsidiary of Celesio, employing 3,800 staff and responsible for the shipment of over 15 million items a week.

Increased capacity Stubbings admits to hitting ‘a crunch point’ in 2009. The time had come to expand the BI remit further with a project to produce a single view of customer profitability. This demanded a huge amount of data, from turnover and discount terms to the specific details of each transaction, and the sheer scale of the challenge meant Stubbings had for some time struggled to make the data accessible.

‘We were unable to do anything for a number of years purely because the data was so dispersed,’ he reveals. ‘The assumption was that, in order to get anything done you needed high levels of IT resources. For a business user like me this was very frustrating because it stopped us in our tracks.’

Frustrating, but perhaps understandable: initial estimates said the project would take 300 IT days due to challenges in integrating the data into a single repository of normalised data. This looked impossible, but a gradual shift in mindset and the arrival of new BI technology on the market suddenly made Stubbings’ vision a possibility.

‘People had become increasingly frustrated that we weren’t able to do the reporting we wanted to do,’ he reveals, ‘but that wouldn’t have made any difference if it hadn’t been for a change in the technology as well.’

Time is of the essenceStarting in finance, AAH had been using Microstrategy Business Intelligence software for five years, but it was the advent of the latest release, MicroStrategy 9, that changed the picture. Suddenly 300 IT days to integrate all the data became 25 IT days. ‘MicroStrategy’s multi-source functionality allows us to knit together only the data we need and present it in one virtual warehouse without all the time-consuming manual work that would otherwise be required,’ he explains.

‘This means huge cost saving in time and IT resource to implement, but also has the added benefit of increasing the speed at which we receive the information because we only integrate the specific data we need.’

This may seem like common sense but it wasn’t achievable until the advent of the MicroStrategy multi-source technology that allows AAH to create a variety of reports to identify not just key indicators such as turnover and transaction details, but exceptions and trends, right down to individual account level.

‘We can now report on data from anywhere in the company in an increased number of formats,’ says Stubbings. ‘It’s given us much more flexibility in how we report information to the business. The graphical dashboards are also a very powerful tool. When you’re creating reports via an Access database and Excel spreadsheet, it’s difficult to make something that’s immediate. The ability to provide targeted, information-rich reports in a standardised format makes it easier to train people across the organisation around how to fully use the information at their disposal.’

We can assume that stakeholders across the organisation are grateful for Stubbings’ persistence; the scope afforded by these advancements will be making big waves well beyond the finance function. ‘Historically we’ve tried to do KPI reports into sales but it’s involved a number of different reports with data cobbled together,’ he says. ‘Now we’re putting together a dashboard that enables you to look at the relationship between KPIs. It is going to be hugely powerful. Any attempt to do that before would have involved an unstable 70mb Excel spreadsheet – this is a completely different ball game.’

We could say the same of how business information is being processed, analysed and reported across the entire organisation. If a business is only as good as the information at its disposal, AAH looks to be in very good health indeed. ■

Business-critical informationInformation supply is crucial to organisations so that employees can make informed business decisions, but often demand for information outstrips the capability to supply it. AAH’s Adrian Stubbings explains to Excellence in Leadership how innovations in business intelligence provide a solution to this problem.

‘We can now report on data from anywhere in the company.’

Further informationMicroStrategyWebsite: www.microstrategy.co.uk

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24


Tactical innovation24

CIMA014_011_Uni of Dundee.indd 24 19/3/10 14:09:14


25Tactical innovation

Finance first

The competitiveness of an organisation’s products and services is central to its sustainable performance. Less dispassionately, the CEO of a major international computer company described his view of the product-performance link: ‘You’re always scared you’re not going to have the best products and not enough orders, so you have to design as if the whole world is after you. I don’t know whether it’s strategy or terror.’

A steady stream of new and improved products has become a pre-requisite for survival in most business sectors. The risks of not investing in new product design and development (NPD&D) may be a loss of market share and greater pressure to compete on low-margin prices. The financial management of NPD&D is a difficult balancing act between not ‘missing the boat’ and ‘sinking the boat’.

By the early 1990s the hyper-competitive environment that had evolved in many industry sectors made it impossible for companies to compete on the basis of a cost-plus approach to the market and NPD&D. For example, in 1993 Mercedes CEO Helmut Werner announced that in future all new Mercedes vehicles would be designed and developed on the basis of price-led target costing. This technique has a long history among commodity motor vehicle manufacturers. However, before Toyota made differentiation at low cost an entirely feasible strategy, it was considered inappropriate and unnecessary for the high quality-based differentiated vehicles of the premium auto group (PAG) sector.

Cost management in a new environment‘Control tomorrow’s costs through today’s designs’ had become a refrain of consultants by 2000. A recent CIMA-sponsored case study of a company in the PAG sector, ‘The Role of Management Accounting in NPD&D Decisions’, suggests that the focus on cost at the design stage is too narrow and too late in the NPD&D cycle.

The effects of several reinforcing trends are transforming the technologies and management of the NPD&D process.

Ongoing improvements in computing capability are making long-established NPD&D tools, such as computer-aided design, computer-aided manufacturing, quality function deployment and failure mode effect analysis much more inclusive and accessible. The greater computing power is also leading to the development of new product data management

and product life cycle systems. These improvements facilitate a relatively precise specification of technical and financial targets in the pre-design, strategy and concept definition phase (see Figure 1). Five other distinct trends that are radically changing the context and challenge of cost management in the NPD&D process are:

Development speed; more 1. comprehensive, integrated and distributed digital systems are making simultaneous NPD&D much more

of a reality and compressing product development cycle times.Communication and collaboration 2. among all internal and external NPD&D participants, including suppliers, collaborative networks, alliance partners and customers have been enhanced by the use of intranet and internet capability.

‘A steady stream of new and improved products has become a pre-requisite for survival in most business sectors.’

A recent CIMA-sponsored case study of a company in the premium auto group (PAG) sector, ‘The Role of Management Accounting in NPD&D Decisions’, suggests that the focus on cost at the design stage is too narrow and too late in the new product and development cycle. Bill Nixon at the University of Dundee and Mostafa Jazayeri at Manchester Metropolitan University investigate.

Figure 1. Phases of the new product design and development process

Pre-design DevelopmentDesign DeliveryAfter-sales

service



Product platforms; firms are moving 3. from developing products on a one-by-one basis to platform-based product family development. This trend is increasing exponentially the cost, complexity and risks of platform-based NPD&D projects.Modular product architecture is 4. being used to manage risks, facilitate customisation, outsourcing and assembly.Solutions; firms are increasingly 5. bundling products and services in integrated, customised ways. Solutions may include services such as rental arrangements that can be used to overcome the resistance of early adopters to very innovative products. Solutions are much more difficult for rivals to imitate and the revenue streams tend to be more predictable and less volatile than those from the sale of physical products.

In the last decade these trends have transformed the economics and financial management of NPD&D activity. The initial strategy and concept definition phase of the case study PAG company involves five stages and may take 15 months for a major project. Each stage must be approved at a ‘gateway’ by the Product Strategy Committee (PSC) of the business unit and also, for some key stages, the PSC of the parent company.

The target-setting process in this PAG company is an iterative, top-down, bottom-up process that entails intensive and extensive communication among all NPD&D project participants, including the PSCs. Three categories of interacting target costs are managed: design and development (research

is a parent company activity), production and assembly, and ownership purchase, operating and maintenance costs (see Figure 2). The targets seek to achieve production and assembly efficiency improvements over the life of a vehicle model equal to retail price index increases in the period so that the nominal cost remains the same throughout a model’s production life.

The target setting process is the principal means by which strategic objectives and competitive bases are disaggregated and analysed in operational terms. The balanced targets book, which is a key output from the strategy and concept definition phase, impounds a great deal of data, information, experience and judgement.

The need to consider competing concepts in the strategy and concept definition phase increases the complexity of the

target-setting process. The planning horizons for each cost category may relate to a platform for 14 years, a generation for seven years, a model for 18 months and after-sales owner support services for 25 years. The planning for these horizons has to take account of trajectories for related pacing, emerging and core technologies. As far as possible vehicle design architecture needs to provide for relatively quick and economic responses to technology or regulatory developments. The value of flexibility may be difficult to quantify but it is never ignored in the planning and design activities of this PAG company. Product lifecycle management, including cost, within this PAG business unit is supported by a group initiative to integrate processes.

Much of the target costing and value engineering is conducted by engineers and designers, who report directly to the management accountant, a CIMA member, responsible for the financial management of all NPD&D projects in this business unit. The cost and value engineers play a key role in the strong, dynamic, internal debate to balance the industrial and engineering design targets, required to support the ‘pedigree’ and performance of vehicles, with financial requirements. Similar to many firms that try to avoid low-margin commodity competition, PAG manufacturers do not make utilitarian machines to get from point A to point B, they make moving works of art that express the driver’s love of quality. The special skill of the engineers is to assess the cost and value to the brand and the customers of all the features that go beyond functionality to create these works of art.

Concurrent financial managementA major responsibility of the management accountant is to link all internal and external project participants so that technical design and development targets, the business case and the feasibility assessment meet financial criteria, relating to return on investment, return on sales, profit margins, costs, value, cashflow and risk.

Throughout the strategy and concept definition phase the four related financial management activities of investment appraisal, risk management, cost and value management and performance measurement are conducted more or less simultaneously (see Figure 3) rather than, as is often the case, separately and mostly sequentially. Concurrent financial management appears to be an extension of the principle of concurrent engineering that is well established in the motor manufacturing industry.

The parallel conduct of these four complementary financial management activities supports the circuitous process of negotiation that is necessary to agree and obtain commitment to targets, both technical and financial, by all internal and external participants.

The performance measurement, conducted in the early strategy and concept definition phase, is mostly benchmarking of resources required to achieve critical success factors against available internal and external resources. The benchmarking supports

‘A major responsibility of the management accountant is to link all internal and external project participants.’

26 Tactical innovation

Figure 2: Target cost categories

Manufacture and assembly costs

Ownership and operating costs

Design and development costs



feasibility assessment, outsourcing decisions and planning.

The dynamics of the PAG sector’s technology and commercial environments means that technical and financial targets for NPD&D need to encompass a great deal of relatively uncertain data and forecasts. However, this uncertainty management is vital because, as Andy Grove, former chairman of Intel expressed it: ‘[When] spring comes, snow melts first at the periphery, because that’s where it is most exposed. Factoring in news from the periphery is an important contribution to the progress of sorting out signal from noise.’

The information and financial management systems of this PAG company constantly seek to identify those small changes that have the potential to rapidly evolve into opportunities or threats. The financial management in the strategy and concept definition phase is mostly about translating competitive and NPD&D strategic objectives to operational targets. Although the emphasis shifts in subsequent phases from planning to control, it nevertheless remains more prospective than retrospective in orientation.

For example, the conventional, historic operating statements and variance analyses are produced on a 12-week basis compared to four weeks for planning information. In part, this practice reflects the acute awareness in this PAG company

of the high cost of delays and late changes. Therefore, the emphasis is on anticipating obstacles and supporting the brief of the simultaneous engineering team to align and synchronise all NPD&D activities.

The technical dimensions of financial management in this PAG company are complex and challenging. However, the process of negotiating and achieving a consensus and commitment to targets for costs, profit, return on sales and

investment, among all NPD&D participants with very different functional backgrounds and perspectives is also daunting.

The role of the management accountant in the company is very much about providing an integrating vernacular to facilitate this process. Above all, the design and use of the financial management system in this company requires a deep understanding of the NPD&D process, the disparate, and often

‘Above all, the design and use of the financial management system requires a deep understanding of the NPD&D process.’

27Tactical innovation

Figure 3. Concurrent financial management of new product design and development

Risk management

Value management

Performance measurement

Investment appraisal NPD&D




conflicting, perspectives of industrial designers, design engineers and manufacturing engineers.

There are many important nuances on the continuum between functionality and works of art that have costs and benefits. To a designer, subtle line changes are vital, but to an untrained onlooker they’re hard to see and the accountant finds such subtleties hard to justify. Buyers may not apprehend any single improvement but a collection of subtle line changes makes up the totality of a new design.

Financial evaluation of product innovation decisions and the many possible options that may be provided in very customised versions requires not only a keen sense of these ‘subtleties’ but also a good understanding of customers.

Lessons to be learntThe evidence suggests a number of ‘lessons’.

The intensification of competition and •the accelerating rate of technological diffusion mean that companies must now compete on several bases simultaneously: quality, identity, price and/or service, for example. If you’re not always scared you’re not going to have the best products, and not enough orders, there is a risk that complacency and the ‘don’t rock the boat’ syndrome may stifle the innovation needed to prosper. More succinctly, only the paranoid survive. In fact, discontinuities, disruptive changes and competitive battle suggest that the perceived threat to survival has more to do with a harsh reality than with paranoia.The control of tomorrow’s costs now •begins in the pre-design strategy and concept definition phase of NPD&D (Figure 1). The scope of cost management has also broadened to customer costs relating to price, operation and maintenance and to the cost of design and development (Figure 2).The pre-design phase also involves •assessment of the business case, project feasibility and commitment by all participants to a set of technical and financial targets. Four financial management activities, •conducted in a concurrent, reinforcing way, support the translation of competitive and NPD&D strategic objectives to operational targets: investment appraisal, risk management,

Bill Nixon

Bill Nixon is emeritus professor of management accounting at the University of Dundee. He has a long-standing research interest in

the financial management of new product design and development.

Mostafa Jazayeri

Mostafa Jazayeri is senior lecturer in management accounting at Manchester Metropolitan University, MMU Cheshire. He is an active researcher with an emphasis on performance management systems, world class manufacturing and ERP and management accounting change.

cost and value management and performance measurement (Figure 3).NPD&D is a multi-disciplinary, •knowledge-intensive activity. Financial management of this activity requires a deep knowledge of the process and a good understanding of the perspectives of the non-financial disciplines.

ConclusionIt is relatively easy to demonstrate with the benefit of hindsight the value and importance of product innovation. Prospectively, however, the risks are daunting. The case reported in this article exemplifies the very proactive role of one finance department and its management accountant in ensuring that the NPD&D activity is profitable. ■



Company insight 29

Knowledge management within companies today is heavily paper-intensive. Managing internal business processes and the documentation exchanged with partners in the supply chain creates a huge overhead of paper-based information. The economic downturn has brought supply chain management under close examination and it is now becoming increasingly important to create an interconnected, streamlined ‘extended enterprise’ in order to maintain competitiveness.

Technology supplier Asite offers a collaborative Software as a Service (cSaaS) platform, which makes it possible for companies to restructure processes across the supply chain – and remove the paper overhead. The London-based company’s services cover three core areas – sourcing, project management and procurement – all of which can be streamlined courtesy of the web-based platform configured and created by Asite and utilised via a browser.

According to CEO Tony Ryan, visibility is key. “All businesses begin the year with budgets which are the basis of their management accounting and performance tracking. This tracking information needs to drive the extended enterprise via collaborative scorecards and dashboards showing business health – and this starts squarely with the finance function,” he begins.

“Targets and performance data should be shared across the organisation and selectively with the supply chain so that everybody is aware of what is trying to be achieved. If everybody collaborates from day one, businesses will have more realistic and streamlined budgets moving forwards.”

Moreover, the budgets of all members of the supply chain should be taken into account. “If you’ve got visibility over those budgets too, it gives you a greater ability to create more accurate budgets yourself, as opposed to budgeting in silos,” Ryan adds.

Asite’s cSaaS platform is delivered via a pure utility model, meaning that companies do not need to invest in capital expenditure. “All they require is a simple internet explorer to gain access to the service,” Ryan explains. “It’s an operational cost and customers pay for it as and when they use it.”

This pricing mechanism also has the benefit of making the technology accessible to all members of the supply chain. “It’s important that the extended enterprise collaborates,” Ryan emphasises. “And now one-person shops, which are vital and often very specialist, can get involved because they only need to pay for what they use. We have removed the barrier to entry to true collaboration for the small and medium-sized enterprise.”

The implementation of the cSaaS platform affords companies numerous additional savings. As well as removing all infrastructure costs, hosting and data expenses are eliminated. Storage of documentation such as contracts can be hosted on the service as a utility cost, resulting in the more economical day-to-day management of such data.

With the extended enterprise visible to all employees in the field, there are further savings to be made when it comes to procurement. Members of staff can order goods with the click of a mouse, while invoices and purchase orders are transmitted electronically, eliminating postage costs. “Basically, we are giving people the ability to get to the information they need in sub-second time,” Ryan notes.

The cSaaS platform is highly configurable; capable of taking incoming data and displaying it in a way that makes sense for each and every user within the supply chain. “You can take an existing scorecard and display it in its entirety to the extended network or you can shape it to an individual user’s requirements,” Ryan explains.

Asite’s solution is as transparent as each client wants it to be. “The company has complete control over who sees what – or not. The system is completely role-driven and every piece of data that goes through the platform is auditable and secure.”

Indeed, security has seen the biggest chunk of the software company’s investment since its formation in 2001, with Asite now boasting certifications that cover the globe. “We have to ensure the security and integrity of the data across the collaborative enterprise, by way of our accreditations that are continually being assessed by government bodies,” says Ryan.

For Asite’s CEO, the success of this collaborative approach depends entirely on the people involved. “When groups of people start to interact, they make the technology work,” he concludes. “And the most collaborative, streamlined extended enterprises we are seeing are the ones that will survive and have the greatest profit going forward.” ■

Collaborate to innovate Companies need to cooperate with their partners at all levels of the supply chain to ensure a streamlined end-to-end process. As Tony Ryan, CEO of Software as a Service provider Asite, explains to Excellence in Leadership, the finance department should be leading the way in establishing a collaborative enterprise which is fully integrated both internally and with suppliers.

‘We believe that the extended enterprise should start with the finance function.’

Further informationAsite Website: www.asite.com

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30 Tactical innovation


30

In the mixAntonio Davila, IESE Business School, looks at designing management accounting systems to support innovation in an environment where the correct blend of accounting and innovation is difficult to create.

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Tactical innovation 31

A few weeks ago, I ran into one of my colleagues in the strategy department. The chit-chat quickly turned to the typical question among management researchers: what are you working on? I started my answer by saying that I was looking at the role of management accounting and innovation. Before I could finish, my colleague quickly replied that the answer was easy: the more innovation there is, the less management accounting is needed. The two activities do not mix; they are oil and water.

This answer is still far too common. The idea goes back to the sixties. At that time, strategy was foreign to management. It was imported from the military field and it separated two stages: formulation and implementation (see Figure 1, right). Top management formulated the strategy, often through sophisticated strategic planning mechanisms. The rest of the organisation implemented it. It was then that Robert Anthony came up with the concept of management control systems as a subset of management accounting.

These systems were in charge of implementing the strategic plan. They detected deviations and acted upon the company’s processes to bring them back to plan, much like a thermostat works turning the heating system on and off to maintain the room’s temperature.

My colleague still views management accounting much in this light, as a set of management practices that see deviations as something to be corrected. It fights change because, in this view, change can only happen during the formulation stage. How can something that sees change as bad be good for innovation?

Interestingly, the concept of strategy has evolved significantly and researchers and managers are aware of its progression. Yet, the evolution of management accounting has somehow been ignored, with old clichés still widely accepted. Today’s management accounting is at the core of organisations, capturing and shaping the information that is the basis for decisions, activities, and processes.

Not surprisingly, it is an important aspect of innovation, an increasingly relevant aspect to developing competitive advantage. Through its evolution, management accounting has been closely related to the evolution of strategy. So what have

been the main breakthroughs in learning about the strategic process and how has management accounting adapted itself?

Emergent and realised strategiesThe formulation-implementation dichotomy lasted for quite some time. It was the time when strategic planning gained its prominence as a process to formulate strategy. As it happens with paradigms that have gained strong support, evidence against this view of the world was dismissed until somebody was able to articulate a response to these disturbing examples. Henry Mintzberg was the one who proposed an alternative view.

Mintzberg observed that the strategy that top management had formulated was often not executed as designed. As people implemented the strategy coming from top management, they created a different one. Some organisations did not have a formal strategy, yet the actions of their people showed a consistency much like if a strategy had been formulated. Formulation and implementation were not two separate activities. The thinkers and

doers were not separate. New strategies were created by those people who were just supposed to implement them.

Top management had decided to focus on direct sales but sales through distributors was gaining share. Top management had decided to reduce the number of R&D projects but skunk works kept on getting resources. The traditional strategy coming from the formulation stage was labelled intended strategy, the one that top management had designed and that the rest of the organisation was supposed to implement. The new strategy coming from the people in the field was called emergent strategy. Finally, what was actually implemented was a mix of both and called realised strategy (Figure 2, above).

This view of strategy making brought bad news to the old school. Brilliantly formulated strategies did not have a chance to get implemented, because people throughout the organisation made decisions and adapted them to changes in the market. Top management could at most guide the organisation in a certain

‘[Management accounting] is an important aspect of innovation, an increasingly relevant aspect to develop competitive advantage.’

Figure 1: Formulation and implementation

Stage 2:Implementation

Stage 1:Formulation

Business strategy

Top managers analyse and design the strategy of the organisation

The organisation implements the strategy defined in the

formulation stage

Figure 2: The realised strategy model

Stage 2:Implementation

Stage 1:Formulation

Deliberate strategy

Emerging strategy

Realised business strategy

CIM014_012_IESE.indd 31 19/3/10 16:22:29



direction, but the ingenuity of people would adapt whatever was designed for better or for worse. This new concept of how strategy was created was picked up in management accounting. Robert Simons’ work probably best captures this evolution. Simons identified two main management accounting systems.

Diagnostic systems were the traditional control systems. In line with the traditional formulation school, their purpose is to implement a defined strategy. These systems detect deviations and react to them in an effort to bring the company back to the plan. Budgeting and variance analysis best reflect these systems.

Large variances (especially if they are unfavourable) have to be investigated to correct whatever happened. Variance analysis allows us to quickly detect deviations from the budget and take corrective actions to meet the budget. The Balanced Scorecard is often used as a diagnostic system to implement strategy. Targets for each of the objectives in the scorecard are set with the purpose of hitting those targets, investigating deviations, and taking actions to achieve the targets.

Interactive systems are systems that top management use to interact with the organisation and learn about opportunities in the market. They are used frequently and in face-to-face meetings. They stimulate discussion, analysis, and discovery.

Top management selects these systems to engage people in identifying opportunities. For instance, Pepsi’s top management may use weekly market share reports across the US to pick up changes that may suggest changes in consumer tastes or Coke’s new marketing experiments. These reports lead to face-to-face interactions to brainstorm about opportunities and threats. Because top management selects these systems they determine where the search happens. Interactive systems guide the emergent strategy. Yet, it is still top management that guides the search process.

Simons also identified belief and boundary systems. The former are associated with mission and value statements with the purpose of inspiring people beyond the crude shareholder value creation. Companies should strive to choose paths to value creation that

also contribute to society. The latter is associated with limits on people’s behaviour and search efforts. They state behaviours that are unaccepted and businesses that are outside the scope of the company.

Emergent trends reflect the fact that people throughout a company contribute to creating strategy. Interactive systems provide the management tools to guide them. The concepts of emergent strategies and interactive systems suggest small deviations from the intended strategy. People try to implement what comes from the top but they do it imperfectly because markets offer new challenges. Top management chooses interactive systems to sound out where new opportunities might come from. These small deviations are incremental innovations in that they refine the existing business model but do not challenge it.

Autonomous strategic actionsStrategy process research kept on evolving. The new challenge came from new evidence that some strategies came unrelated to people trying to implement the strategy handed down from top management. These strategies are autonomous.

The best example is Intel’s move from being a memory to a microprocessor company. It was not top management who saw the huge opportunity. Rather, it was the managers at one of the plants who started to manufacture microprocessors, not because they saw the opportunity either but because they were more profitable. They kept on increasing the capacity devoted to microprocessors, without top management being aware of such a break away from their memory strategy. At some point, the fact became so obvious

‘Emergent trends reflect the fact that people throughout a company contribute to creating strategy.’

Figure 4: Sources of ideas

CRAFT new strategies

DELIVERvalue

REFINEbusiness model

Source of ideas

Current business model

New business model

Top management

Operational

BUILD competencies

Figure 3: The innovation cycle

Structural context

Concept of corporate strategy

Autonomous strategic action

Induced strategic action

Emerging strategy

Deliberate strategy

Strategic context

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Tactical innovation 33

that top management noticed it. But rather than shutting down microprocessors and going back to their original memory strategy, they grabbed the opportunity to redefine Intel.

Robert Burgelman’s work builds on this idea. First, top management cannot expect to formulate a strategy and get it implemented. Rather it needs to work on the context of the company to guide people’s actions. This context includes plans but also defining culture, organisation structure, performance measurement systems and processes.

A well-defined context has two aspects the structural and the strategic context. The structural is consistent with the emergent strategy. It induces people to create a strategy around the intended strategy that top management defines. It supports incremental innovations to the master plan. The strategic context supports people experimenting with new business models that top management might not have even thought about. People’s ingenuity may well go beyond incremental ideas around top management plan, as it happened in Intel it may define totally new business models (see Figure 3, left).

Four decades ago, leading companies were those able to coordinate their people to implement a consistent strategy. They were good at execution. Two decades ago, leading companies were those able to refine their strategies faster than their competitors. They were good at executing faster and better. Today, leading companies are those that can also have their people experimenting to find new growth platforms. They are good at executing faster and better but most importantly at creating.

Management accounting and innovationThis evolution of strategy has meant an evolution of management accounting. As the information infrastructure of a company, management accounting is not foreign to creating and developing ideas. The innovation process of applying creativity to the development of value enhancing opportunities is grounded on the structure that management accounting provides. If some aspect of this structure fails, the innovation process will fail. A very successful software company in Silicon Valley beat all of its

competitors by a huge margin because of its ability to execute and to move information about new customer needs around the organisation faster than any other company. Yet, it failed when it missed a change in the market that redefined the industry. Its structural context was very strong, but the weakness of its strategic context meant its disappearance.

Management accounting systems have four distinct roles in companies (see Figure 4, left). The first one is the traditional execution role, what Simons called diagnostic systems or systems

to deliver value from the current business model.

These systems are the traditional use of budgeting systems, balanced scorecards, profitability measures,

or more recently CRM or stage-gate

development processes. Without good management accounting systems, a company cannot execute efficiently. Because execution is often the first battle in competitive markets, those companies that are weak at execution will have a hard time surviving.

The second role of management accounting is to keep on improving the

existing strategy. This is consistent with managing the emergent

strategy and interactive systems. Management accounting systems are systems to refine the business model. The second battle

in competitive markets after execution is to improve faster

than competitors.

Companies go through cycles of incremental innovation without compromising execution. Incremental innovation is applying creativity to develop value enhancing opportunities close to the existing business model. Management accounting again plays a role of providing the information infrastructure to make this innovation cycle more effective. For instance, the software company described above had a system to move new customer requirements (quite common in a fast growing market) all the way to the CEO once a week.

In a company with more than 8,000 employees, new information may take months to move up the hierarchy and arrive with the CEO severely distorted. Strategic planning may sometimes be used to stimulate to search for opportunities. Quality circles, continuous improvement often help on the operations side to push creativity for incremental improvements. Interactive systems around CRM or marketing information may help to better serve existing customers.

The third role of management accounting systems is to support top management in developing new growth platforms. These

‘As the information infrastructure of a company, management accounting is not foreign to creating and developing ideas.’

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are systems to build competencies. Business models go through life cycles of birth, growth, maturity, and decline. The growth during the development of new markets will certainly be followed by a period of maturity.Companies constantly look for new growth platforms to reinforce growth once the existing business model matures. This search used to kick in when the existing model reached maturity; today it happens throughout the life cycle.

Top managers devote a significant amount of time to looking for these new growth platforms. Management accounting comes into this search process in different forms. When these growth platforms come through acquisitions, management accounting plays a role in evaluating the acquisition through capital budgeting tools and analyses of strategic fit. They also come in the integration of these acquisitions. When these growth platforms come through the development of new capabilities internally, management accounting comes in through the planning and monitoring of projects.

The fourth and last role fits squarely into supporting autonomous strategic actions. In other words, its role is to support the ingenuity and willingness to create of people throughout the company. In the same way that management accounting is fundamental to empower people to make decisions, it is to empower people to create. This role emphasises the belief in today’s leading companies that discovering radically new opportunities is not restricted to top management. Corporate venture capital departments are one of the visible efforts. But they are not the only ones. A successful hardware company has a simple system to leverage creativity throughout the organisation.

First, it has formalised stimulating people. Engineers have to go and visit customers, distributors, and trade shows at least three times a year. And they always go together with marketing people to bring together the technology and market perspective as low as possible in the organisation.

Second, if one of these groups finds an opportunity and wants to develop it, it can go with its business plan to one of the top managers’ strategic planning meetings. Third, if the opportunity is worth investigating, the team gets money and a certain amount of time to explore the idea. From there on, the project is managed much like a start-up, with

rounds of funding where the progress of the project is assessed in order to receive further funding.

ConclusionsManagement accounting has changed a lot in parallel with changes in how strategy happens. Yet, people still perceive management accounting as unrelated to creating and innovating. They see it as a tool to correct deviations from a plan that have nothing to say when it comes to create. Management accounting is as fundamental today to the process of innovation as it is to the process of execution.

To be effective in companies that need to execute faster and better, and create new growth platforms, management accounting systems are designed to fulfil these various purposes. The information they provide is required to execute efficiently, to improve faster than competitors and to stimulate creativity and transform it into value. If management accounting systems fail to provide the right information infrastructure for any of these objectives, the company will compete with an important weak point that will, sooner rather than later, affect their ability to compete. ■

‘The information management accountants provide is required to execute efficiently, to improve faster than competitors and to

stimulate creativity and transform it into value.’

Antonio Davila

Antonio Davila’s research focuses on the intersection of performance measurement and management systems with innovation and entrepreneurship. He teaches entrepreneurship, innovation, and management accounting as well as courses on sport business management. He has recently published Malea Fashion District: A New Way to Learn Managerial Accounting.

He was a faculty member of the Graduate School of Business at Stanford University for seven years after receiving his doctorate from the Harvard Business School and

before moving back to Europe. He also holds a Bachelor’s Degree in Telecommunications Engineering from The Polytechnic University of Catalunya in Barcelona and an MBA from IESE. He is one of the leading researchers in the management control systems field with publications in the most prestigious journals and a member of the editorial board of various journals.


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Cultivate creativityWhile the recession has undoubtedly made for a diffi cult business environment over the last 12 months, some of the world’s most successful companies have been born in bad times. Phin Foster speaks to Diageo’s Syl Saller about innovation in a downturn.

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Innovation in the downturn 37

‘It is not usually our ideas that make us optimists or pessimists,’ the Spanish philosopher Miguel de Unamuno once observed, ‘but it is our optimism or pessimism that makes our ideas.’

As we emerge from the worst recession in the living memories of all but a select group of octogenarian business leaders, it would be fair to say that pessimism has not been in short supply of late. Consolidation, even survival, has been as prevalent a driver as notions of growth. Much has been made of the need to ‘rethink’ the manner in which the world does business following what has been a cataclysmic shock, but that can be difficult when people are more concerned about whether they’ll still be doing any business at all.

But history clearly demonstrates that for those optimists capable of seeing beyond immediate market conditions, a downturn can be the perfect arena for putting one’s ideas into play. The 22 year depression experienced in the US from 1873–95 saw behemoths such as Eli Lilly, IBM, Merck, Gillette, Chevron, GE and AT&T lay down their first roots. With the Great Depression came the birth of Texas Instruments, HP, 20th Century Fox and United Technologies. Microsoft, Genentech and Apple all launched during the market crash of 1973–76 (see box overleaf for more companies born in tough times).

Each one of these success stories should give real heart to any number of start-ups looking to take the plunge into what remains a difficult market. But larger organisations should not be too quick to dismiss such exploits as being of interest exclusively to this small band of pioneers; many of the drivers behind success in a downturn are equally applicable to established operators. An emphasis on problem solving at a time when companies have problems to solve, efficient use of capital and a clear focus on core requirements are all transferable skill sets. However bad things get, innovation should never be the sole preserve of niche newcomers.

‘Great innovators naturally go against the grain,’ believes Syl Saller, innovation director at Diageo. ‘If everyone else is hunkering down, they should be the people asking: “What else could we be doing?” If you have people that want to create solutions within an organisation looking

to emerge from a difficult economic environment, it’s a wonderful marriage. A downturn is not a time to take willy-nilly risks and spend money inefficiently (when is?) but you need to ruthlessly prioritise and address both the short and the long-term. Rip up your innovation agenda just because times are tough and you’re cutting off your nose to spite your face.’

With responsibility for Diageo’s innovation strategy, encompassing all new product development and launch programmes worldwide, as well as the management of R&D, Saller acknowledges that financial events can change one’s focus in the short-term, but is insistent that the capacity to do so successfully demonstrates a strong innovation framework. Although the department reports globally, teams are divided regionally to ensure innovation strategy is tightly tied to business strategy at a local level.

‘Resources are broken down into different hubs,’ Saller explains, ‘but that model is very flexible and we don’t have people necessarily tied to a single market or a particular brand. That enabled us during the recession to very quickly re-prioritise our efforts according to what was happening out in the marketplace. You need a lot of agility built into your model.’ Saller’s background as Diageo’s marketing director in Great Britain, and before that marketing development director for Allied Domecq Retail, has surely helped sharpen her perspective on ideas being nothing without commerciality; the requirement to fully align one’s innovation department with core business needs is a point that she returns to time and again. It is also invaluable during a downturn, when priorities and threats can change on an almost daily basis. ‘If you look at it as a goal unto itself I think you’re missing the point,’ she says. ‘Great innovation is tied

‘Great innovators naturally go against the grain... If everyone else is hunkering down, they should be the people asking: “What else could we be doing?”’

The fatal flaw

However well an innovation tests before going to market, even the strongest ideas can conceal a hidden defect missed in the early stages. Fail to spot the problem, however, and grand plans soon become obsolete.

‘With some projects we’ll know pretty quickly whether it’s going to fly and in other instances you really need to stick at it and give it time,’ Diageo’s Saller explains. ‘Be patient, continue to invest, but be especially careful that you’re always on the lookout for the fatal flaw.’

This can be difficult with a new product launch, where the number of variables can be staggering and many are beyond one’s direct control. ‘It might be that pre-testing does fine, but the concept is completely undermined by the environment into which it is launched,’ says Saller. ‘If that is the case, you need to pull it very quickly.’

Diageo launched Quinn’s in 2006 with a UK marketing spend of £8.5 million. Made by fermenting natural fruit juice

rather than adding flavours to a vodka base, it was promoted as an exciting new concept. Trials had gone extremely well.

‘All our testing said it should be fantastic and in many ways it was,’ Saller explains. ‘It fitted a growing trend towards natural products, had great packaging, was responsibly marketed and tasted delicious.

‘We had many theories on why it didn’t work, but I tend to boil things down to their simplest level. What we were offering was something quite different, but it was shelved alongside established RTD products. If it looks like a duck and acts like a duck, it’s a duck. Consumers didn’t see it as the unique product we’d seen in pre-testing.

‘The product was removed from the market the following year and established in Saller’s mind the importance of pre-testing in markets. ‘It’s not always bad that you fail,’ she says, ‘the question is what do you learn from it.’

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to the company’s overall strategy and you can’t make that point enough. Growth for Diageo is our ultimate goal and it’s an agenda we share with people across the organisation.’

Bringing others onboard is a fundamental ingredient in creating a successful culture of innovation and ensuring that priorities are

fully understood. Saller has put a lot of work into establishing various forums which allow for the dissemination of cross-functional information and believes input must come from the very top.

‘We need the experience of our senior execs, from Paul [Walsh, CEO,] down, to

drive the team,’ she explains. ‘In June of last year we launched a breakthrough ideas programme. We felt that our core strategic platforms were covered and we’d innovated well during the recession, so it seemed like a good time to push the boat out a little further. People brought ideas they’d been working on, but it was the exec team that really rolled up its sleeves and looked to move these projects along. It was a really exciting session and demonstrated how integral leadership is in building the culture of innovation you need.’

Creating that dialogue can be a challenge, although Saller believes that this is not down to hesitancy on the executives’ part. ‘The barrier that most often needs overcoming is more junior people not bringing their work forward at an early stage because they fear evaluation,’ she reveals. ‘As soon as they make that leap and enter into a dialogue with senior leadership they’ll most often get the help they need and will return time and again. I’ve rarely come across executives who don’t want to help, but you have to create the channels to make it happen.’

This also applies to cultivating a cross-functional dialogue. Saller has seen too much evidence of infighting between various departments at other organisations and will not stand for such a state of affairs on her watch. ‘You must avoid creating a culture of blame,’ she believes. ‘If one of my guys claims not to have got something done because supply wasn’t cooperative, that’s just not going to fly with me. Without a great relationship with sales, supply and finance nothing will ever get done.’

Saller is particularly fervent when it comes to the role of the latter in the innovation process. Some people think they are often the guys associated with saying “no”, but not cultivating a strong relationship with the finance function is tantamount to failure.

‘Finance is one of your most important strategic partners,’ she declares. An innovator who doesn’t have a great relationship with that team from top to bottom is making a huge mistake. Equally, finance can no longer just look at control as its role in the innovation process. Those days are over and it’s now a question of having a total strategic picture of investment for the company.

‘When something does get the go ahead, it’s often based not on what the P&Ls show, but on how carefully

‘Projecting out five years means making a lot of assumptions and it has to be a collaborative effort between innovator and finance.’

Forged in fire – five companies born in tough times

Penguin BooksIn 1935 the publication of literature in paperback was associated mainly with poor quality, populist fiction. As this was initially Penguin’s exclusive format, many held little hope for the long-term profitability of the enterprise. An emphasis on classic design and quality titles soon proved the critics wrong.

MicrosoftWith revenues in 2009 of some $58.4 billion, Microsoft has travelled a long way in the 35 years since its inception. It all started with Bill Gates offering to demonstrate his Altair BASIC programme to the developers of a new microcomputer in 1975. Following a successful commission, he duly dropped out of Harvard, Micro-Soft was born and the rest is history.

FoxtonsUnaware in 1981 that the country was even in the midst of a recession, John Hunt founded Foxtons with £30,000 from an old school friend. 76-hour weeks and evening and weekend viewings tore up the estate agent rule book and led to great success in London and the South

East. Somewhat ironically, the company’s US venture went bankrupt as property prices crashed in the most recent recession.

CNNWhen CNN launched in 1980, it was the first rolling news network. By broadcasting on cable, a relatively new technology, costs were kept low. On the first broadcast owner Ted Turner announced, “We won’t be signing off until the world ends. We’ll be on, and we will cover the end of the world, live, and that will be our last event.” Today CNN reaches 93 million American households and its model of 24 hour coverage has been copied by all the major networks.

LinkedInSet up in 2003 in the wake of the dot-com crash, Reid Hoffman saw that investors were now only interested in start-ups that could offer solid, long-term business cases. Funded by the proceeds from his earlier involvement with PayPal until he was sure that ambition was fully realised, the networking site now boasts more than 51 million members across 200 countries.

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Innovation in the downturn 39

and thoughtfully the P&Ls have been constructed. Projecting out five years means making a lot of assumptions and that thinking has to be a collaborative effort between innovator and finance. At Diageo we have a culture of finance as strategists rather than controllers and that frees people up to really look at how we bring ideas to life from a financial perspective.’

While a lot of talk revolves around the need for integration and collaboration, a successful innovation team also needs a level of autonomy. ‘To have it as a separate function with strategy, clear ways of thinking and a definite idea of what excellence looks like helps us,’ Saller agrees.

‘You’ll often be building an idea from the bottom up and it will have a whole set of value chains and economics attached, it may demand very different things from your supply centres. You need to be able to conceptualise all those things at once and that holistic business is something we look to engender in all our innovation leaders.’

Creating such a “big picture” focus within one’s innovation infrastructure is invaluable when one is confronted by a sliding economy. At a time when many reach for clichéd truisms and self-preservation, Saller

believes maintaining one’s perspective is of tantamount importance.

‘People think they’re asking the big questions,’ she begins. ‘Is luxury dead? Are people now looking for value? These things don’t interest me much because they oversimplify what’s really happening. There are many segments of consumer and these segments want different things.’

A good example of this was the recent launch of a $3,000 bottle of whisky, the John Walker, which quickly sold out. While there is little debate that market trends have been altered in the downturn, a refusal to settle for a single truth or silver bullet helps encourage innovative thinking.

‘We shifted our strategy to address the recession, while at the same time never taking our eye off where we wanted to emerge in order to beat the competition,’ Saller reveals. ‘We put greater focus on premium brands, things right in the heart of what we felt a large section of consumers were looking for, but the John Walker is a clear indication that we didn’t limit our ideas to a single consumer base.

‘Our power is being able to offer things at every price level. If some people are trading down, we want products for them to trade down to. If more people are staying at home, we need to be ready with a pre-mix and cocktail platform to meet demand. At the same time as addressing these short-term trends, it was also essential to ensure a healthy pipeline for the future. We never took our eyes off that.’

Juggling the short- and long-terms in such a way requires a real understanding of one’s customer base, a great amount of self-knowledge and the ability to be self-critical. Saller cites Proctor, Reckitt Benckiser and – ‘It might be a bit of a common example’ – Apple as companies that all demonstrate these qualities and believes each has been able to build a true culture of innovation accordingly.

‘They’re organisations that consistently leverage their strengths,’ she says. ‘It’s all about knowing what you’re good at while always being in the hunt for areas you need to improve. We believe Diageo produces

‘You need to demonstrate that you can see areas for improvement and then really go after them aggressively.’

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the best liquids in the industry, but we realised a few years ago that our packaging wasn’t up to the same level. That led to the formation of a design department who have absolutely revolutionised the way in which we approach the challenge. You need to demonstrate that you can see areas for improvement and then really go after them aggressively.’

The fact that Saller looks beyond her immediate sector for examples of best practise indicates that while innovations must address core business needs, innovation is a more holistic, interchangeable concept.

‘I have a lot of respect for what our competition does,’ Saller begins, ‘but I don’t think the industry sets the bar for innovation high enough. We lead the pack, but I’m not satisfied to rest on that; we should be always setting further goals. That means I’ve set up my own benchmark: those companies the world sees as leaders in the field. You have to reach high.’

Saller is also a member of Innovation Peers, an informal group of cross-industry UK-based heads of innovation who meet for dinner each quarter to discuss latest trends and practices. ‘Benchmarking ourselves against an array of companies, I can see that innovation is alive and well out there,’ she reveals.

Internally, Diageo’s innovation director has also introduced a series of measurements that allow for the ongoing monitoring of successes and failures. This includes keeping a close eye on how much time her team are spending on what she calls ‘the work’.

‘I don’t want my people seeing the job as running their departments or regions,’ she explains. ‘That’s a big part of it, but they should also be focusing on making our total set of ideas better. That’s the initial idea and everything related to it: economics, P&L, supply solutions, etcetera.

‘We have ways of assessing the quality of our ideas and an innovation P&L that’s used internally to see whether we’re on track with revenue and profits, helping drive commerciality into the team. Previously the model was more one of going out into the market and seeing what worked, without a great

deal of financial accountability. What we wanted to carry out upon reorganising the innovation function five years ago was to keep that entrepreneurial flair but give it more commercial bite. Measurement tools are essential in achieving that.’

One imagines that such focus on commerciality served Diageo particularly

well during the downturn, but the creation of a culture of collaboration and shared risk is not something that can be created overnight. An optimistic mindset may be essential for the blossoming of constructive ideas, but the right framework is fundamental in cultivating that optimism and bringing successful innovation to the fore. ■

Syl Saller

As innovation director, Syl Saller is responsible for Diageo’s innovation strategy, which encompasses all new product development and launch programmes worldwide as well as the management of research and development. Although the innovation team reports

globally, teams are based in geographic regions to ensure innovation strategy is tightly tied to business strategy at a

regional level. As such, the teams are

organised into European, North American, Asian, Australian, African, Latin American and global travel hubs.

In addition to her innovation responsibilities, Saller also runs the design function, responsible for all packaging development for Diageo as well as Global Licensing which is the organisation that manages licensing brands into other categories.

Prior to her current role, she was marketing director for Diageo Great Britain. This role involved leading a team of 140 people from within consumer marketing, consumer planning and research, commercial marketing and innovation departments.

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Company insight 41

Understanding emerging risks and communicating effectively with clients are major challenges for insurance firms. Like companies in any industry, insurers can only thrive if they innovate. But, even at times of great uncertainty, policy wordings change very little, meaning they must seek new strategies beyond core product development.

To achieve this, AXA Corporate Solutions has published annual client commitments since 2007. This year’s list covers core areas like product development and claims handling but also extends to risk engineering and, for the first time, corporate responsibility. By establishing a strong framework, the company’s clients gain a clear understanding of its long term objectives.

AXA Corporate Solutions UK commercial manager Paul Lowin sees major advantages to taking such a transparent approach. ‘Our clients appreciate that we communicate in this way,’ he says. ‘We tell them whether we’ve achieved our target or if we failed to meet it to any extent. Having to prove that we have kept our promise builds a climate of trust between us, and they know that these aren’t just empty words.’

Performance managementAn equally important aspect to the commitments is providing AXA Corporate Solutions employees with measurable targets and an ongoing review process determines what progress is being made. ‘Everyone within the company is aware of the commitments and understands their importance,’ Lowin says. ‘They are all personally involved and understand the role they play in bringing the commitments to fruition. Having these goals enables the whole company to move forward in a common direction.’

Once a commitment has been judged to be fully ingrained in the company’s culture it will be removed from the published list. For example, last year AXA Corporate Solutions pledged to process risk engineering reports

within 30 days and, now this is being consistently achieved, it has been replaced with a new goal. However, Lowin believes that for core areas such as product and service development, where there is always scope for re-evaluation, reaffirming the objective every year is vital.

The challenge is finding ways to retain the clarity of purpose that distinct targets provide. Lowin recognises that, if misunderstood, innovation can be an unnerving concept, with employees feeling pressured to constantly revolutionise approaches to their work.

‘What we’re really looking for is improvements designed to respond to our clients’ ever evolving needs, these range from simple process improvement to new products,’ he says. ‘We’ve explained to all our staff that it’s primarily about step change – looking at problems and identifying solutions. By putting it in those terms, people become much more comfortable and are more likely to engage with the process.’

A democracy of ideasNew ideas can emerge from anywhere in the company, and although AXA Corporate Solutions is a single business, it has locations across the world. Products that originate in one country are quickly adapted to be deployed in all its markets. For example, Ecosphere, an environmental liability product, was developed in France but was subsequently tailored to meet the

specific statutory requirements of each country and is now used across the business.

A team of key account managers is responsible for communicating changes to clients and gathering feedback. AXA Corporate Solution’s aim is to build a sense of community among its corporate partners and reach out directly to risk managers and organisations like AIRMIC. By hosting technical forums and client events, the company makes use of its knowledge and expertise in terms of insurance, risk consulting, claims management and managing international programmes to help new ideas take root more widely and nurture examples of best practice among its corporate partners.

‘It’s important for risk managers to look at different perspectives because their job is expanding exponentially,’ Lowin says. ‘Every day there is a new risk that they have to deal with. We will do anything we can to facilitate the learning process.’

Making published commitments is a very simple idea but the benefits it brings are far reaching. In an industry where opportunities for innovation are often unclear, AXA Corporate Solution’s approach gives it particular strength. The combination of paying close attention to clients’ needs and continuous internal review provides the company with all-important focus and a sense of purpose. ■

A clear visionBy publishing a list of commitments each year, AXA Corporate Solutions has found new ways to direct its energies and serve clients. UK commercial manager Paul Lowin speaks to Excellence in Leadership about the benefits of taking such a structured approach to innovation.

‘It’s important for risk managers to look at different perspectives because their job is expanding exponentially.’

Further informationAXA Corporate Solutionswww.axa-corporatesolutions.com

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42

Five steps to successMichael Traem, CEO of global management consultancy Arthur D Little

and author of a new book Innovate Your Company, uses his extensive R&D and consultancy experience to look at the many infl uences

driving the modern economy into seven basic trends, and fi ve corresponding innovation success factors.

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Corporate innovation 43

Innovation is the secret of company success, at least that is what the traditional business models indicate. As long as companies are delivering and marketing innovative products that cannot be easily copied, they are and will remain competitive, regardless of growing emerging market competition or changing market dynamics. But “innovation” and “being innovative” are in no way the same thing and the chasm between the two is much wider than it was just a few years ago.

When companies confront market changes or plan for the inevitable risks of the unknown, every process, function or system is affected, and must therefore be part of the innovation process. There is no innovation without change. When planning for these unknowns and responding to market shifts, business leaders are in constant need of reliable facts upon which to base their thinking.

Because new influences and trends demand new ideas, this framework allows businesses to consider how and where innovation can help them take advantage of new market opportunities and protect themselves against risks on the horizon.

Seven trends companies cannot ignore While most companies react, rather than act, in times of great change, certain trends cannot be ignored. Companies need a clear understanding of their market and its requirements in the short, medium, and long-term to prepare for growth and act accordingly. Innovation efforts are therefore developed as a logical reaction to changing markets and customers. While I’ve often heard from managers that tough economic climates are hostile to innovation, it is during these times of change that innovation becomes business-critical.

1. West-East shiftPeople have become more mobile and the traditional migration from poorer geographies in the South (Africa, Latin America) to richer nations in the North (Europe, North America) is being replaced by a new, even stronger directional pull, the West-East shift.

The Western hemisphere has traditionally been the centre of the developed world, and even in the 1980s Japan was the only major power located outside of Europe and North America. When the south-east Asian economy boomed in the mid-1990s, the world changed for good. Since then, the shift east has gained strength, and

today the Middle East, India, China and Russia are the key locations where wealth is generated.

The new economic areas are not only important to western companies looking for cheap labour. Conquering these new markets will be critical for western multinationals to survive increasing competition from emerging eastern competitors.

Not only is buying power shifting east, but so is IP. The new economies are home to today’s most cutting-edge innovations, from electric vehicle battery design in China to India’s introduction of the Tata Nano, the world’s cheapest passenger car.

Eastern nations have a different world view than countries in the western hemisphere, and attitudes on everything from family values and religion to licensing and intellectual property mean doing business in the East is a steep learning curve for even the most experienced western multinationals.

2. Cost firstWe know cost is still in focus. Even when the overall objective is growth, culture change or a new product or market strategy, every consulting project Arthur D Little completes is ultimately justified by either a desire to cut costs, indicating the continued primacy of cost in the war for competitiveness. However, as companies struggle with today’s economic crisis, the value of cost-cutting alone is under debate.

Acquiring new customers at a reasonable cost has become increasingly difficult in mature markets, leading to a renewed interest in customer value. Companies are investing in innovative customer satisfaction programmes to establish

stable and long-lasting relationships with existing customers.

If good customer relations are the key to good sales, cost savings must be considered in this new context. Newly developed products must be cheaper and easier to deliver, and cost-cutting options have to be incorporated in the supply chain, from outsourcing to de-proliferation, from strategic sourcing to make-or-buy strategies. Cost-cutting in R&D is increasingly achieved through strategic innovation outsourcing; engineering experts and innovative “hired guns” are a rapidly growing global market.

3. Regulation and accelerating state controlRegulation is intended to create optimal frameworks for grid-based industries such as transport infrastructures, telecommunications, energy, even financial services, without being too liberal. Current economic changes are influencing this picture.

In the financial crisis, for instance, governments across the globe for the first time established initiatives to solve monetary problems, to save companies from bankruptcy and to rescue national economies. While some succeeded, and others had less luck, what became clear was that governments suddenly, and in nearly full agreement, took responsibility for banks’ and businesses’ large scale failings.

Politicians did not merely discuss, they acted, just like real entrepreneurs. The effect was a spectacularly newfound belief that perhaps more government is just what our global economy needs.

4. Sustainability and the challenges of climate changeThe climate is not under human control and never has been, but it is clear that without action global carbon emissions are forecast to double by 2030. Developed economies are home to just 20% of the world’s population but are responsible for nearly half of the world’s annual CO2 emissions.

Post-Copenhagen, the discussion has shifted to how and by when companies worldwide can develop sustainable carbon footprints. From modifying products to paying for unavoidable emissions, businesses today must ask themselves how their company can stay competitive if CO2 is part of, or a result of, the production process?

‘When companies confront market changes, every process, function or system is affected, and must be part of the innovation process.’

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Corporate innovation44

While some are grappling with this basic question, smart businesses hope to gain competitive advantage by focusing their innovative activities on ways to reduce emissions while compensating for the extra operational costs involved.

5. Increasing complexityWhile Indian engineers were developing a $1,500 car for everyone, middle class cars in Europe and North America were being sold for the cost of a small apartment. For $40,000, today’s average Western passenger car comes equipped with all the modern comforts and conveniences that would not have been conceivable in even a luxury vehicle in 1980.

Driven by the search for commercial advantage, over the last 30 years the western automotive industry has developed increasingly complicated structures, alliances,

and products and services to serve ever-smaller niche markets. Some companies thrive on this complexity, innovating continuously to resolve complexity and delivering extraordinary value to customers and shareholders. Some high-impact companies even re-shape their industries by marshalling complexity in completely new ways.

Despite this continual innovation, the specialised features and styles that characterise middle-class car ownership today have left many contemporary vehicles disproportionately expensive to manufacturer. Unsurprisingly, therefore, we see a counter-trend emerging. Focused on simple products and straightforward production, the simplicity of Tata’s $1,500 car demands just as much smart innovation as the complexity of many modern manufacturers’ customised vehicle portfolios.

6. Changing consumer classesLooking at consumers globally, buying classes have fragmented more than ever before. New consumer typologies are developed by researchers each day that describe entirely new consumers groups with unique demand structures and shopping behaviors.

But it is not just preferences that are

changing. With baby boomers retiring and pensions making life quite comfortable these days, there is considerable focus on the “greying” consumer.

The middle classes are developing dynamically in the BRIC countries (Brazil, Russia, India and China), and constitute a new consumer class in themselves. Vendors have to cope with growing demand from this new customer group by developing product offerings that appeal to their differing needs by region, cluster, or even by person. The demand for mass customisation is a new frontier for consumer goods companies in particular, and innovation in close coordination with customer insight will be the key to success.

The internet has empowered these new customer groups to realise their preferences. Clearly a middle class

phenomenon, for those consumers with a PC at hand buying power has improved year after year. Today, most companies in all consumer segments offer at least catalogues, if not whole shops, on the internet, allowing customers to compare price and quality quickly and easily.

7. TechnologyImproved IT processes and web-based communications have seen businesses undergo two decades of slow and steady transformation. The virtual business blueprint of the 90s so regularly dismissed at the time is now commonplace across nearly every industry. Countless companies successfully trading today, think Google, Amazon.com, or eBay, would not exist if not for the internet and constantly developing IT technologies.

Technology is business-critical even for companies where IT and the internet are not core to the business model. Smart CRM systems, for instance, help companies to attract and retain more customers, make well-based buying decisions, and speed up decision-making and forecasting times. Technology allows customers to become involved in product development and assembly through online configuration and feedback forms.

By tracking IT trends and their implications, companies will remain aware of new opportunities to leverage communications technology to reach customers, save operational costs, or otherwise differentiate themselves from competitors.

Five factors that foster innovationWithout well-defined processes and an umbrella strategy in place, isolated R&D projects seldom yield long-term benefits for a company, and are rarely equipped to respond to large-scale changes in the marketplace. Companies that take a big picture approach to managing their R&D investment prove that innovation can achieve a lot more than just a new product.

1. Develop a shared visionEvery employee should have a clear vision about how the company could thrive. This vision must be scrutinised and shared beyond the management team to reach the entire workforce, big or small. Employees need the chance to consider how their role contributes to company goals, and how company goals align with larger market or societal goals.

Strong managers often share this collective sense of purpose with their staff inherently. Make the vision explicit and digestible to all employees at all levels, and use an open approach that welcomes employee contribution and encourages staff to care about their employer’s future.

2. Set the base for results with a nurturing innovation cultureWhen under competitive pressure, companies are judged on the results they deliver, not vision, so leaders must avoid letting risk-aversion and short-termism spoil a thriving innovation culture.

While innovative cultures do not escape the impact of recession, leaders can make the most of the situation. Empowered employees and managers, openness to change, no fear of speaking up, and time to think are all company traits that foster innovation, don’t cost a thing, and are set by the tone of the senior leadership team. Alstom in the energy supply chain and Samsung in consumer electronics each demonstrate the benefits of building a strong innovation culture.

3. Innovation management is the backbone of an innovative companyThere is no such thing as a successful company without leadership, and there is

‘While innovative cultures do not escape the impact of recession, leaders can make the most of the situation.’

CIM014_015_Traem.indd 44 19/3/10 14:14:49



also no such thing as innovation without strong guidance from inspired leaders and consistent managers.

Representatives from all walks of company life must have ways of reporting new ideas or flagging potential problems for the innovation process to be a success. First and foremost, this means creating well-managed teams across all functional areas and capabilities within the company.

All staff must be training to develop the skills and capabilities needed to be creative, work efficiently, think about new processes and products, and to recognise the clear advantages of teamwork.

4. Develop and execute a strategy to make the vision become a realityThe right innovation strategy –

based on an inspiring vision, an open and creative culture, and effective leadership – will help any company to reach its goals and set out towards new horizons.

However, managing innovation need not be a high-level corporate undertaking. The strategy should make sense of the corporate vision, identify areas to pursue in support of that vision, and help the company to deliver on those ideas.

Modern innovation processes consider the internal value-chain steps necessary to bring a product to market: product development, design, production, sales and logistics. Rather than revisit long-engrained NPD processes, today businesses are finding new ways to do the old chores.

5. Accept and integrate all new approaches into a new business modelChanging just two or three processes constitutes a new business model: you are doing business differently than the assumed approach among your competitors. This may lead to competitive advantage by making buying easier for customers, speeding up cashflow, or generally reducing operating and maintenance costs.

Most new business models are not strategically built in the boardroom, but rather tactically reveal themselves in discussions about cost savings or efficiency improvements. Companies like Virgin, or more recently Twitter, demonstrate the success businesses can achieve by re-thinking the basic assumptions of their own business models.

Prepare for future growth today by adopting a flexible and effective innovation structure, and continuing monitoring and responding to the trends that dictate changing customer demands. Making innovation an integral part of the business model prepares any business for success during times of change and beyond. ■

Michael Traem

Michael Traem is the global CEO of Arthur D Little and chairman of the Supervisory Board of Altran Germany and Austria. A lawyer by training, he has a long background in management consulting, having previously held senior positions in AT Kearney and Celerant Consulting.

Specialising in innovation, strategy, turnaround management and M&A projects, Traem has published several books about management. These

include The Value Growers, After the Merger, Spearheading Growth and The 100 Day Myth. He regularly lectures as a guest speaker at several universities, business schools and international business forums. Innovate Your Company is published by John Wiley.

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Company insight46

Fleet management is a concern shared by the sales team and human resources as well as the sustainability and finance departments. But, as the second largest cost after payroll for many companies, it is vital for their financial teams to take the lead.

The Energy Saving Trust, which is sponsored and funded by the Department for Transport, offers a free consultancy package, which primarily aims to reduce carbon emissions by limiting fuel consumption but also affords companies considerable cost savings. ‘Often, businesses fail to get the right cohesion between different departments,’ Nigel Underdown, head of Transport Advice, begins. ‘But finance needs to link in with sustainability to prove that cleaner is cheaper.’

The Energy Saving Trust’s Transport Advice department assesses how efficiently a company’s fleet is being run and recommends courses of action. ‘Typically with company cars, we expect to find potential economies of £1,000 each year per car and we also hope to reduce companies’ carbon footprints by 15-20%,’ Underdown notes.

On top of the fuel expenses of running a company car, fleet operations incur various hidden costs. While the price of driving a mile will be 11p or 12p, the expense sustained through unproductive driver time may reach fives times as much. Moreover, the tax implications are wide-ranging; cleaner company cars mean lower national insurance contributions from the employer as well as more advantageous writing down allowances.

There are three simple methods the Energy Saving Trust uses to alleviate companies’ costs and improve their environmental reputation: buying cleaner cars, driving them more efficiently and using them less.

HR departments typically offer senior executives larger cars, which in turn produce higher emissions. ‘Why not offer them two cars (one for their partner), neither of which

will be large or inefficient,’ Underdown suggests, adding that one of the most important issues when it comes to fleet management is the “grey fleet”. ‘We’re keen to get people out of grey fleet and into modern efficient cars. Privately owned vehicles are older and emit higher levels of carbon.’

Alternative technology is always on the Energy Saving Trust’s agenda when making proposals to corporations, but only if it is commercially viable. Electric vans, for example, are expensive and will only work well for businesses in certain areas. However, it is no longer necessary to go to the cutting edge of green development to find options that are affordable and established.

Green cars are readily available in 2010, while efficiency-enhancing add-ons are also becoming increasingly popular. ‘The classic example is stop start technology, which is coming through strongly on a number of cars and vans,’ Underdown remarks. ‘It’s cheap and can more than pay for itself.’ In addition, speed limiters on vans save companies hundreds of pounds each year and increase safety levels.

As well as introducing its clients to cleaner cars, the Energy Saving Trust aims to improve employees’ driving efficiency. ‘We’ve put 10,000 drivers through a one-hour, one-to-one training course, during which they learn

methods to lessen their fuel consumption,’ Underdown explains. ‘The average improvement is just a fraction over 15%, which means that a high mileage driver could potentially save a couple of hundred pounds in fuel per year simply by adopting slightly different driving techniques.’

Driving less is the third item on the the Transport Advice division’s agenda. While Energy Saving Trust consultants will examine fleet performance, the service also includes assessing how policies are structured. Many companies assume that talking face-to-face is the only way of doing business, whereas alternatives such as video conferencing can be more efficient. ‘When driving to a regional meeting, car sharing is another solution,’ says Underdown. ‘We want companies’ policies to point people into doing the right thing, rather than the wrong thing.’

The service offered by the Transport Advice team continues far beyond the initial consultancy. In order to ensure that the dialogue remains open, companies are encouraged to join a scheme called Motorvate, which provides ongoing support and a manual audit. ‘We preach the message: if you ain’t measuring it, you can’t manage it,’ Underdown concludes. ‘So we return every year to audit businesses’ carbon footprints.’ ■

Control the cost of carbon Fleet operations impact many departments, making it a complex area for companies to administer. The Energy Saving Trust offers a free consultancy service which, as head of Transport Advice Nigel Underdown explains to Excellence in Leadership, aims to reduce businesses’ carbon footprint as well as significantly cutting expenditure.

‘We’re keen to get people out of grey fleet and into modern efficient cars. Privately owned vehicles are older and emit higher levels of carbon.’

Further informationEnergy Saving TrustTel: 0845 602 1425Website: www.energysavingtrust.org.uk/fleet

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48 Corporate innovation


48

Against all oddsInnovation is not just about R&D, it needs to be a discipline that exists throughout a company that works at every managerial level and embraces every process in a continuous systematic manner. Eminent business consultant Ram Charan speaks to Excellence in Leadership’s Nigel Ash.

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In Ram Charan’s analysis, many companies have the social processes that do manufacturing, productivity, cost management, financial analysis and the like: ‘However only a few companies have a disciplined and regular, rhythmic process of innovation that is repeatable precisely because it is systemic.’

He moves on to define innovation: ‘Now innovation and invention are two different things. Invention is the generation of an idea. Innovation is converting that idea into differentiation and revenues and margins.’

Embracing innovation, he says, means that every individual leader in a company, including the finance function, must lead toward better ways of working in his or her business area: ‘It could be anything, product, process, even recruitment or teaching. In this business model, the word ‘innovation’ means finding a new need and, on the basis of that need, doing a thing differently from the past.’

The payback, says Charan, is compelling because this corporate-wide innovation throws up the qualities that will differentiate a business. He identifies this differentiation as: ‘That which will make your customer prefer you. This is not something that is entirely arbitrary. The differentiation criterion is very simple. It is something that will make the consumer choose you even though that consumer does not necessarily know what is happening behind the scenes.’

The processes of allocating the resources that sponsor innovation and evaluating those projects to balance risk-taking with the opportunities are, says Charan, critical. Nor should companies be cutting back the funding of innovation during the recession. He cites businesses such as General Electric, Procter & Gamble, IBM and Microsoft who have continued their investment in the new, in Microsoft’s case increasing the innovation spend last year by $1 billion to $9 billion.

‘These are savvy people. They did not cut. Companies that have systemic processes do not go with the sudden ups and downs of the market. It is never zero today and then something tomorrow. It is done as a regular part of budgeting. It is a disciplined process. Every new resource allocation has to be properly assessed. But done this way, the long-term and short-term which might be

concerning analysts are balanced. It is a different psychology.’

Charan dismisses impatiently the argument that in recession businesses should cut back on innovation to boost their liquidity. His view is that economic down turns do not last for ever and that companies that stick to their innovation are going to be well ahead of competitors when prosperous times return.

The finance function’s job is to underpin the innovation drive by focusing the investment, thus aligning the tactical, operational requirements with the strategic targets set by the CEO and increasingly, adds Charan, by boardroom directors. In his view this requires a wide business skill set, beyond the traditional finance disciplines.

‘The finance function has to be part of the innovation system within a company. The orientation is always on how to allocate resources that sponsor innovation and how to evaluate those projects, where you balance the risk-taking with the opportunities. That is the critical element in these companies that do innovation.

‘The CFO has first to have a clear intent to have innovation as a central building block with other building blocks. Once the CFO has that, he or she becomes a good partner in encouraging and driving innovation with the CFO’s peers. If you don’t have the whole intent and if you don’t develop the innovative system, then the whole thing becomes ad hoc.’

Innovation by the book?In ‘The Game-changer: How Every leader Can Drive Everyday Innovation’, which Charan worked on with the then Procter & Gamble CEO AG Lafley, compelling analysis is made that all too often managers decide on a business strategy, on what markets should be pursued and on what products to make for them and only then look to innovation to make it all happen.

This the authors say is entirely the wrong way around. Innovation has to be central to the business to allow managers to select the right targets and strategies. The psychology of disciplined innovation has to exist with every business unit manager, every functional leader including the CFO and not simply with the CEO.

Charan adds: ‘At P&G the CFO is a critical part of the whole system. They participate in the resource allocation, they participate in reviews and they encourage resource allocation to build the company for the future.’

It is not simply some well-established corporate names that carry this innovative gene throughout their businesses. Bharti Airtel, says Charan, built a completely different business model for mobile telecommunications in India and is now the market leader. Its innovative approach is being copied by competitors and Bharti has turned to new markets.

‘I’m a big fan of Bharti. Like many other companies from Asia, it is building a clear business strategy based on expanding globally.’ This February the Indian firm agreed to pay $10.7 billion for all the African operations (excluding Morocco and Sudan) of Kuwaiti mobile telco Zain. Bharti Airtel had twice tried and failed to take over South Africa’s MTN but now, says Charan, it is free to innovate outside of its home market.

‘Companies that have systemic processes do not go with the sudden ups and downs of the market.’

Never stop innovating

Strong managers with a commitment to systematic innovation do not cut back, even in a recession, believes Ram Charan. The temptation to keep analysts happy by short-term moves does not work. ‘Strong managers who have the appropriate innovative systems understand that it is the same analysts who will come back in a year and a half and say: ‘You’re fantastic. You are stronger than the competition. You are ready to go.’

There is, says Charan, a basic truth to bear in mind: ‘The average duration of holding a stock is four months. These therefore are not long-term shareholders. These are traders. You don’t run a company for traders unless you have raiders who want your company. This is what people need to understand - that you do not run a company for traders.’




‘Bharti is building a global strategy, block by block. Telecoms by definition creates links that did not exist before and those

links help build economies which create new opportunities which must be met with innovation.’

Charan points out that over a billion people are coming from a subsistence economy to an economy with incomes: ‘This creates new opportunities. There are going to be different segmentations and different needs. To capitalise on these, companies across the globe are going to do product generation, process innovation and business model innovation and even some management innovation. It is not just one country but many countries that are going to do that.’

Charan’s view is that, given the digital era in which businesses now work, the commoditisation of products and processes is going to be more rapid: ‘Therefore innovation is going to be a continuous process in which companies adjust to cope with this commoditisation.’

‘There will be two central elements to this innovation. One is offensive, the other is defensive.’ On the former, says Charan: ‘The

Is the American dream over?

The findings of a 2009 Newsweek-Intel Global Innovation Survey suggest that Americans are losing confidence in their continuing ability to create innovative technology. While a relatively slim majority of Americans polled believed that in terms on new technology, the United States would continue to best the UK, India and Germany, only 41% believed US innovations would outshine those of China and just 32% thought the same of Japan.

Oddly, Chinese respondents to the same poll consistently rated America’s expected future technological performance far higher than their own.

Almost twice as many Chinese than Americans thought the US would stay ahead in the technology race. This is the more interesting in the light of rekindled Chinese pride in the wake of the Beijing Olympics and their emergence as an economic superpower and the world’s preferred manufacturing centre.

The downbeat US responses may merely be a reflection of the current dismal mood in America or they could represent an historic psychological tipping point in the balance of both business and technological innovation, away from American domination of the new.

‘Innovation is going to be a continuous process in which companies adjust to cope with commoditisation.’




central task of management is always to align the company with the external change. Right now the most critical external challenge, for many companies but not all, in Europe, America and Japan is to realign themselves with where the new opportunities are. These are Asia (without Japan) and Brazil. They offer relatively speaking the largest opportunities.’

Resourcing innovation to attack new markets with new products and processes, which Charan defines as the First Order of the Day, is only part of the story however. The Second Order he says requires taking a hard look at existing markets.

‘Managers must focus on where the opportunities are diminishing. They need

to decide if they should exit or downsize, in order to extract resources and put them where the new opportunities are.’ Once the new and innovative opportunities have first been defined then companies need to work out when to let go of shrinking markets and redeploy assets to where the chances of growth are clearly greater.

The exercise is easier for businesses where innovation is a regularly-resourced and systemic part of their make-up. There are, says Charan, many companies that have still not embraced this approach of a disciplined and continuous innovating process. They will emerge from the recession at a distinct disadvantage to their competitors. ■

Ram Charan

Ram Charan is a highly sought after business advisor and speaker, famous for his ability to solve the toughest business problems. For over 35 years, Charan has worked behind the scenes at some of the world’s most successful companies, including GE, Verizon, Novartis, Dupont, Thomson Corporation, Honeywell,

KLM, Bank of America, and MeadWestvaco. He has shared

his insights with many others

through teaching and writing.

Innovation in CRM: 2010 and beyond

‘For most organisations, the single most logical way to differentiate the business is through great customer experiences, rather than having the lowest cost or most innovative products and services,’ says Ed Thompson, vice-president and distinguished analyst at Gartner. ‘However, gaining a clear understanding on which specific customer-centric initiatives will prove decisive and merit investment will require coordination across departments.’

CRM remains high on the business agenda for CIOs in 2010. According to Gartner, attracting and retaining new customers will be the No. 5 business priority for CIOs in 2010.

Gartner’s predictions for CRM in 2010 and beyond include:

1. By the end of 2010, Facebook will be the number-one social network in all but 25 countries, but not in Brazil, Russia, India, China or Japan.

‘Facebook membership hit 300 million in September 2009, and is roughly doubling each year,’ says Thompson. ‘It is reasonable to assume that it will attain a membership of 600 million (including inactive accounts and a small number of users with multiple accounts) by the end of 2010 based on the trajectory in 2009.’ Marketers and customer service management will need to switch focus from the large number of social networks to the three or four that will dominate specific languages.

2. Through 2010, marketing budgets will remain flat in more than 90% of companies, despite a return to growth.

CFOs are demanding increased accountability from marketing departments, often exerting unprecedented pressure to link programmes to sales results and return on investment (ROI). ‘As a result, marketing organisations will need to automate operational processes and learn how to leverage technology to measure areas previously left unmeasured, enabling them to do more for less and articulate business value,’ says Kimberly Collins, managing vice-president at Gartner. ‘Marketing resource management (MRM) will become a top priority for marketing organisations, and enterprise marketing management (EMM) will take on new meaning as a vehicle for strategic planning, collaboration and measurement.’

3. By the end of 2010, more than 80% of market growth in social applications will centre around a business use case for improving external customer relationships, rather than improving internal collaboration.

Although the hype around any and all social media activities will continue through 2010, companies are struggling to find a business case, including hard metrics and specific business outcomes, using general social activities and generic social applications. Nevertheless, social

projects evaluated by Gartner show that those with a clear and direct mutual purpose (benefits for both company and customer) were the ones likely to show measurable results. Gartner says that the social application vendors that make the transition from general purpose to support for specific business, with use cases and key performance indicators, will see double- or triple-digit growth in 2010.

4. By the end of 2011, more than 90% of Fortune 1000 marketing campaigns will include online marketing, up from 50% in 2009.

Marketers are responding to the expansion of the internet by investing in addressable branding and advertising, and contextual, community and transactional marketing. ‘Being online gives marketers greater access to response attribution metrics to help determine what is working and what isn’t working in a campaign,’ says Adam Sarner, research director at Gartner.

Gartner predicts that marketers will see a 10–20% saving in marketing communications as a result of precise attribution metrics for campaigns. Online marketing will enable faster testing and campaign refinement, and help avoid the continued waste of funding a failed campaign, while engaging in more-thorough campaign testing prior to launch. It will improve the overall success of all marketing objectives. Both speed of analysis and response will be critical to success.

Source: Gartner’s Executive Programs (EXP) 2010 CIO Agenda survey



Innovation and investment52


52

Intelligent investment in innovation

Variety, uncertainty and fat tails: the Open University’s Mariana Mazzucato rethinks assumptions on innovation

and explains how an intelligent approach can prevent over-investment.

CIMA014_013_OpenUni2.indd 52 19/3/10 16:28:20


Innovation and investment 53

One of the most important lessons that economists have learned from the recent crisis is the danger of assuming in their models that economic variables, like stock returns, are distributed ‘normally’. The normal ‘bell curve’ distribution assumes that most events cluster around the average value, so that those events that lie three or more standard deviations (symbolised by the Greek letter sigma in statistics) from the mean are essentially ignored. Such events are deemed almost impossible, or so rare that they do not matter.

Critics of this assumption draw attention to the role of these so-called high-sigma events, which have proved to be much less rare than the bell curve assumes, such as the sudden fall of major stock markets on Black Monday, 19 October 1987, or the recent fall of Lehman Brothers on 15 September 2008, which took everyone by surprise. In fact, the actual distribution of stock returns appears to be much fatter than the normal distribution implies. A distribution with fat tails means that high sigma events are not so unusual, and have a higher probability of occurring than the normal distribution allows.

Average returns are in fact important only in situations where the underlying dynamic is one of reversion to the mean: what goes too high or too low goes back down or up, with no positive feedback. Positive feedback, where success leads to more success or over-investment leads to more over-investment, will cause the types of important and less rare outliers that constitute fat tails.

For example, if over-valued shares become even more over-valued, leading to a bubble, this is an example of positive feedback and something that we have seen repeated in the railway bubble in the 1800s, the dot.com bubble in the 1990s and the recent housing bubble. As policy makers are banging heads about how to regulate financial markets, such insights are crucial in making sure that the policies are not founded on erroneous statistical assumptions, which invalidate the models.

Schumpeterian economists, economists who put technological and organisational change at the centre of competition, have been arguing that this lesson is also fundamental for understanding innovation, and hence innovation policy. Innovation is characterised by strong

positive feedback, and also permanent heterogeneity between firms, which is difficult to reconcile with distributions that give too much importance to the ‘average’ company, and to ‘reversion to the mean’ dynamics.

Innovation is true uncertainty Innovation is a perfect example of true uncertainty. When considering the dynamics of risk, it is important to differentiate risk from uncertainty. These two concepts are often, mistakenly, confused with one another. Risk refers to situations where it is possible to calculate the probability of the event occurring: ‘One out of a million chances you will

win the lottery’, for example. Uncertainty instead refers to situations that are impossible to calculate probability distributions because the situation is truly unique, such as the probability of getting divorced, of winning a war or of R&D spending being successful.

Both Frank Knight and John Maynard Keynes, who have regained popularity after the current crisis, emphasised these differences in their work:

‘The practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known. While in the case of uncertainty that is not true, the reason being in general that it is impossible to form a group of instances, because the situation dealt with is in a high degree unique.’ (Frank Knight, 1921)

‘By “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention. About these matters, there is no scientific

basis on which to form any calculable probability whatever. We simply do not know.’ (John Maynard Keynes, 1973)

Technological change is a good example of the truly unique situation referred to by Frank Knight, because R&D investments by firms not only take years to materialise into new products, but most in fact lead to no product, failure, or a ‘dry hole’. Furthermore, the ability of companies to engage in innovation differs greatly and is one of the main reasons that firms are so different from each other, and why it is nearly impossible to find firms distributed normally; around an ‘optimal size firm’, a concept so dear to microeconomic theory.

Positive feedback One of the main forces leading to the disequilibrium is the role of positive feedback. It is often the case that those firms that are high innovators today (for example, with a high rate of patenting or an above average level of R&D spending) are also high innovators tomorrow, and low innovators today remain the low innovators tomorrow. The degree of persistence differs between sectors.

Among all this heterogeneity, which firms grow from their innovation efforts and win the competitive race? While there is some indirect evidence, at the macro level, that higher aggregate R&D spending is related to higher rates of GDP growth, we actually have very little ‘micro’ firm level evidence confirming any strong relationship between innovation, sales and profits.

That is, while Schumpeterian economists have been relatively successful in bringing technology back to the core of the economics of competition, we have been less successful in understanding the degree to which technology allows some firms to win over others.

The literature linking innovation to growth is far from inconclusive on this issue. In some cases, it even appears that innovation has a negative effect

‘One of the lessons that economists have learned from the recent crisis is the danger of assuming in their models a normal distribution: the bell curve of stock returns.’



Innovation and investment54

on growth. The negative influence of spending on innovation possibly reflects the high cost of research, which cannot be recovered through increased sales or profits. It may also come from the need for innovation to be combined with ‘complementary’ assets such as marketing, distribution and business networks. And of course it is also related to the fact that many R&D projects fail to produce any new product, let alone sales.

In recent work with Pelin Demirel (Demirel and Mazzucato 2009), we have confirmed the fact that it is indeed very difficult to find a relationship between an organisation’s innovation and its growth rate. Looking at the pharmaceutical industry we found that the relationship between different measures of innovation, mainly R&D, and citation weighted patents and growth is not obvious at all.

As can be seen in Figure 1, most pharma firms in fact do not benefit from spending on R&D and not even from their patenting. Only some do. In fact the only organisations that achieve growth from R&D are those that patent persistently and have alliances with biotech companies. For the remainder, R&D spending was a waste of money.

Hence it is not that innovation does not lead to growth but, for it to do so, it must be combined with these other factors. And no doubt these factors will

differ across sectors. Discovering what they are is fundamental to the success of innovation policy.

The second fascinating aspect is the relationship with the fat tails as mentioned earlier. Fat tails in variables like growth and profits might be present due to the lumpy aspects of the growth process, related to Schumpeter’s notion of innovation coming in waves or ‘clusters’, very different from how it is treated in traditional theory as arriving as simply a random shock, a necessary assumption for the bell curve to emerge

What we find is that the growth rates are normally distributed only when we take out of the sample those firms that patent persistently, precisely those that achieve the growth benefit from R&D spending! When persistent innovators are taken out of the sample, we revert to normally distributed growth – an easier

world to model. When instead they are included in the sample, the world is more complicated and cannot be modelled using the bell curve.

Who cares? The degree to which innovation leads to growth is very important. No matter what one thinks about capitalism in terms of human welfare, many would not doubt that somehow it is more efficient at selecting the ‘best firms’ than other economic systems.

If we are going to build at the national and international level policies that encourage firms and countries to spend more on R&D (such as the EC Lisbon strategy that tries to get EC countries to spend 3% of their GDP on R&D, or the UK Government’s 2008 DIUS Innovation Nation White Paper), it is fundamental to know the micro-economic foundations about this process, and whether there is in fact a foundation.

Figure 1. R&D and growth for different types of firms in the pharmaceutical sector Small firms Large firms All firms

Patentee + + +

Non-patentee 0 0 0

Persistent patentees + + +

Non-persistent patentees 0 0 0

Involved in biotech + + +

Not involved in biotech 0 - 0

‘Most firms in fact do not benefit from spending on R&D and not even from their patenting.’



Innovation and investment 55

What these studies reveal is the need for innovation policy to better understand corporate fitness as a mix of criteria, and better understanding what is in that mix, and how it differs between sectors and between periods in the industry life cycle, will make sure that we don’t spend too much on R&D without getting the ‘bang for the buck’ that justifies the spending. This might shed some light on the low productivity of R&D in different industries such as pharmaceuticals, where R&D has increased exponentially with the number of new drugs falling far behind.

What kind of bubble is a good bubble? Another reason why we should care about the R&D growth relationship is that many stock price bubbles are in fact related to the dynamics of R&D. The true uncertainty underlying innovation often leads to stock price bubbles, especially in high growth sectors such as computers, biotech, and perhaps the next bubble in ‘green technology’ and nanotechnology. Stock prices are driven by expectations about future growth rates, and one of the main factors leading to changes in such expectations is the potential innovativeness of a firm.

The advent of computers and the internet presents great hopes for the future of the companies and sectors in question, but since technical change is so expensive, uncertain and takes so long, with many R&D projects taking up to 20 years, the potential remains just that: potential.

Some win but most lose. Too many firms enter these new industries, trying to strategically place themselves in light of the prospects of higher growth and demand. But new firm entry is often in excess of what the particular market in question can carry; there are only so many telecom companies that can exist and thrive. Hence competition drives returns downwards (due to the overcapacity, or too much supply), causing most of the new entrants to be forced out of business, and the bubble to burst. Google and Amazon won this race, with most of the other hundreds of entrants sinking without trace. And investment funds which include the stocks of these companies sank with them.

Research by Mazzucato and Tancioni (2009) show that those firms that spend the most on R&D, and have the most patents (and the most highly cited patents), experience the most volatility in their stock returns. The eyes of investors are focused on these potentially high growth firms, and so react more quickly to changes in their R&D spending, and to other signals about the success that might, but often does not, arise from this spending (patent announcements).

Perhaps a price to pay for having such innovative firms is also the volatility and bubbles that such uncertain investments inevitably bring about. Bubbles that arise from expectations about new technologies are what one might call Schumpeterian bubbles. The last bubble we saw was not, however, of this nature. It was based on pure speculation in the housing market, with no underlying technological innovation. Yes, there were financial ‘innovations’, such as the use of ‘structured investment vehicles’ but these did not produce any long lasting infra-structures that could continue to foster growth after the bubble burst, such as the internet after the dot.com bubble burst or thousands of miles of railway

after the railway bubble of the 1800s. Only damage that might take decades to get over. This latest bubble was what one might call a Sorosian bubble. So the lesson here perhaps is that the world needs more Schumpeterian and less Sorosian bubbles. ■

Mariana Mazzucato

Mariana Mazzucato is professor of economics at the Open University and coordinator of FINNOV, a three-year (2009-2012) European Commission Framework 7 Collaborative Project on Finance, Innovation and Growth. She isfounder and deputy director of the OU’s inter-faculty research centre: Innovation, Knowledge and

Development (IKD) and Economics Director of the ESRC Centre for the Socio-Economic Study of Genomics.

‘Recent research on price bubbles shows that firms that spend the most on R&D, experience the most volatility in their stock returns.’



Company insight56

As the global economy struggles out of recession, securing access to working capital is a major challenge for all businesses. For the foreseeable future banks will continue to be conservative about lending terms, making it difficult for companies to raise funding. London-based Demica provides consulting and technology services to allow their clients to raise capital on trade receivables, which as relatively liquid and transparent assets are still attractive to banks.

As Phillip Kerle, CEO of Demica, puts it: ‘Receivables aren’t sexy. Banks like the fact that they are not sexy. It means they can get their head around who the customers of the company are. They can look at the company’s collections history. It’s such a substantial asset on the balance sheet of a company and it’s an asset that can be used.’

In December 2009, Demica published a research paper that revealed over a third of companies in France, Germany and the UK were already borrowing against their invoice books.

Trade receivables securitisation is most beneficial for sub-investment grade companies who can lean on the higher rating of their customers to access credit more cheaply than they otherwise could. The difficulty to be overcome is that banks demand up-to-date reporting of the state of the asset pool, which can be difficult for companies to supply.

Demica’s Citadel platform is software specifically designed to facilitate this reporting process, even in the largest companies operating multiple divisions across the world. ‘You’ll often find that larger companies have grown through

acquisition and they have systems that don’t talk to each other,’ says Kerle. ‘What we are able to do is bring together all these disparate platforms and provide the reporting.’

In addition to supplying technical tools, Demica works with its clients to ensure that securitisation is a viable option for them. There are numerous factors that can make a bank cautious about offering a security, so it is important for pools to be accurately assessed.

‘The thing that banks are nervous about is concentration,’ Kerle explains. ‘For example, if a company only has three customers but they’re worth €4 billion, banks won’t want to offer them a security.

‘Banks like a diverse pool of receivables. Sometimes government invoices can’t be securitised because you can’t assign the receivables or else governments are very slow payers. There may be currencies they don’t want to take on, there may be jurisdictions they don’t want to take on.’

Demica’s overall mission is simple. ‘We help these large complex companies get themselves a securitisation in place and running efficiently.’

Businesses turned to trade receivables financing as a direct response to the shocks of the banking crisis but Kerle predicts interest will stay strong. Demica’s research found that half of finance directors polled expected businesses to increase their usage of trade receivables-based finance in the next year. The reason for this is that, even as the general economy recovers, the banking sector will take longer to get firmly back on its feet.

‘What people have learned through this recession is that you live and die by your working capital,’ Kerle says. ‘That mantra has been true forever but it’s really being driven home at the moment. For a number of years banks are going to continue to be more conservative in terms of lending, I think that’s inevitable.’

Securitisation might have been at the root of the recession but companies and banks alike are now recognising that, when it comes to reliable liquid assets like receivables, there are real benefits to be had. There are challenges to be overcome but, by working with a partner like Demica, borrowing against trade receivables can be an effective way of ensuring access to working capital. ■

A secure route to working capital Trade receivables securitisation is often seen as a complicated and expensive process but, as CEO of Demica Phillip Kerle explains to Excellence in Leadership, this does not have to be the case. Companies and banks alike are recognising that, when it comes to receivables, there are genuine benefits to be had.

‘What people have learned through this recession is that you live and die by your working capital.’

Further informationDemicawww.demica.com

CIM014_002_Demica.indd 56 19/3/10 14:32:01

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CIM014_CIMA Hays Recruiting.indd 1 19/3/10 13:57:07


58

Winds of changeThere is a long-standing tradition of different approaches to innovation in the East and West. As companies search for new ideas to promote growth after a protracted recession, Leslie L Kossoff explains to Ian Duncan what lessons can be learned by studying Asia, and what mistakes must be avoided.


East meets West58

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East meets West 59

Just as it looked as though it had successfully ridden out the recession, Toyota announced the recall of over eight million cars. Company president Akio Toyoda summoned reporters to Nagoya for a hastily organised press conference in early February, bowing for the cameras and apologising for any anxiety caused. But the damage had already been done.

Toyota’s problems are expected to cost $2 billion to fix, wiping out its fourth quarter profits for 2009, and come as a huge blow to a company that recently emerged as the world’s largest car manufacturer. Businesses all round the world are reeling from the shock of the downturn and searching for ideas to drive growth.

New ways of thinking will be central to this process, which is why the news about Toyota was so troubling. The company had built its reputation on combining innovation with safety and quality, but the recall of the Prius in particular demonstrated that even major new products are no guarantee of future success.

Leslie L Kossoff, is an executive adviser who has worked with many of the biggest brands in Japan, Europe and the United States. With experience in industries as diverse as aerospace, pharmaceuticals and entertainment, she is well placed to consider innovation on a global scale.

In her view, Toyota’s experience demonstrates the risk of a company

forgetting its roots. ‘In wanting to be the number one car maker worldwide it expanded too quickly without ensuring that the same controls that they normally put in place with their suppliers were there,’ she says. ‘It shows that the company didn’t scrutinise all aspects of the build as it had in the past.’

Sony is another example of a large, successful Japanese company that, having seen aggressive growth built on the back of major technological advances, now faces major challenges. ‘There was so much hubris inside of that company,’ Kossoff says, ‘It was convinced that it was the untouchable brand name for any kind of new entertainment product but they

never expected Apple. The iPod was the game changer.’

Kossoff has worked with Sony and praises the intelligence of people at the company. ‘It has to let loose the thinking that currently exists inside of the corporation and get past the leftovers of its bureaucratic systems, which is where a more Western notion of management will serve the company well.’

Bucking trendsDespite Kossoff’s belief in a flexible attitude to management it can be very difficult to make generalisations about the East and the West. Sony were caught off guard by Apple, but have made a comeback with Blu-Ray and by focusing on home entertainment, where the American company is not so dominant.

Similarly, the Prius still represents a major step forward in automotive technology. ‘Japanese manufacturers have already made the leap,’ Kossoff says, ‘and they’re already so many steps ahead that American automobile manufacturers are playing catch up. In that situation you’re always at a disadvantage.’

The Prius did not spring into being over night and Toyota first announced its intention to build a low emission vehicle as early as 1992. The company achieved its success by carefully analysing trends and anticipating that demand for a major new product would emerge.

‘Everyone looks at exactly the same market research,’ Kossoff explains. ‘The difference between the Americans and the Japanese is that the Japanese pay attention to it. As a result they came to market more quickly with a hybrid car and they were even ready to come in with an all electric car. Chevy has been talking about the Volt for so many years it’s a joke. When it does come in there’s going to be an aspect of ‘who cares?’’

However, Toyota has tripped up at a time when its competitors are eager to strike, making that process of catching up Kossoff describes easier. She believes that Ford in particular has developed a number of interesting products in recent years and is well placed to seize the opportunity.

‘Take a look at what [CEO Alan] Mulally is doing with the company: his foresight in

Leslie L Kossoff

‘Everyone looks at exactly the same market research. The difference between the Americans and the Japanese is that the Japanese pay attention to it.’

‘In wanting to be the number one car maker worldwide [Toyota] expanded too quickly without ensuring that the same controls that they normally put in place with their suppliers were there.’

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East meets West60

orienting it before the recession hit, and how quickly he has moved to solidify its position,’ Kossoff says. ‘Because he comes from Boeing, he understands the design cycle and every one of the obstacles to success but he also understands a competitive marketplace that is absolutely dependent upon innovation.’

Large Japanese combined companies called keiretsu were successful in the 20th century as their breadth provided great stability, minimising the negative impact of risk taking. Because they were often organised around a large bank, ample funding for new projects was always available. Now, Kossoff argues, this model is largely irrelevant because capital can move freely between organisations.

‘In a networked world, the benefits of keiretsu are built in,’ she says. ‘If you take a look at venture funds, for example,

they started out mostly focusing on the US and specifically Silicon Valley. But for a number of years now they have been looking out into other countries and identifying funding opportunities for start-ups. So the money will always be able to find the talent.’

Tech noticeKossoff believes that technology companies have an especially savvy approach to investment. ‘The question is the extent to which you’re willing to look out and reach for opportunities,’ she says. ‘If you study the models in the technology sector, there is Google, Microsoft and Cisco all buying. These companies have got phenomenal war chests of money sitting there but they’ve also got this orientation towards acquisition.

‘What you don’t hear as much about are the internal venture capital funds that

these corporations have; they will take a piece of a company but it doesn’t mean that they’re going to own the whole thing.’

These internal funds are used to promote innovation in the sector and to foster close relationships with potential future partners. In this ecosystem, the big company is the top carnivore but it benefits from all the life thriving below it. The problem that has beset some Western businesses is an unwillingness to integrate established practices with radical ideas from outside.

‘What everyone at the executive level needs to do is take a markedly different look at how technology has changed the face of innovation,’ Kossoff says. ‘It is a brain switch that is not yet altogether understood. It’s still seen as a threat, not for the opportunities and possibilities that can be created.’

Eastern promiseKossoff believes Asian companies have traditionally been more open to new ideas. ‘Philosophically, the East looks at things from a more synthesised holistic perspective whereas we tend to disaggregate and we study it in small pieces,’ she explains. ‘They study the small pieces but always in the context of a larger whole. That difference is at the base of why they can look at everything from a world view and we tend to create blind spots.’

Just as Japanese manufacturers have successfully analysed market trends in the 21st century, they imported ideas to rebuild their shattered economy after the Second World War. It was the work of Americans such as W Edwards Deming on quality control and tolerances, and Japanese manufacturers’ willingness to apply it (the kaizen method), that helped develop the country’s reputation for making incremental improvements and reliable products.

‘The Japanese in the 50s and 60s didn’t steal from the West,’ Kossoff, a former associate of Deming, explains, ‘they invested in the thought leaders of that time, people they knew would be able to turn around their industries. That was why they had Deming and [Joseph M] Juran come over.

There was a need for quantitative and management thinking to understand

The Toyota problem in Kossoff’s words

‘For the Japanese, admitting to any kind of mistake happens as rarely as possible. Historically, if someone in a high position lost face, they would commit hara kiri [ritual suicide] as penance and a sign of honour. So, typical of the Japanese, Toyota’s management were slow identifying that the problem was as bad as it was: they’re much better at identifying problems before they happen.

‘The company’s ‘Toyota Way’ requires a level of management scrutiny and attention that it has now learned will need more specificity than it had previously believed. If it has learned anything, it should be that the company’s culture of unmatched quality is one that it will have to manage much more closely than before. I expect that there will be a number of suppliers who will be double- and triple-checking their procedures to make sure they make the grade.

‘I think that part of this problem stems from the inconsistencies between the Western and Japanese culture when it comes to everything from how to identify problems to how to manage an organisation. The one thing the Japanese can’t export is the culture as it operates within Japan. Given Toyota’s size and complexity now, it is going to have to find new ways to manage its external resources.

‘Eventually the trust issue will reverse itself, but whereas over the past decade or so there haven’t been any questions at all about the quality of their cars, now they will be open to greater competition. They’re not the last word in quality any longer. If the rest of the world’s auto manufacturers are paying attention, they’re going to take advantage of this big time.’

‘What everyone at the executive level needs to do is take a markedly different look at how technology has changed the face of innovation. It is a brain switch that is not yet altogether understood.’

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61East meets West

how they could put their ambitions into practice. Industry leaders and the government worked together to target areas based on what they saw as the upcoming consumer markets: automobiles, electronics and textiles. And that was it. It was a clear cut, very clean strategy: they focused on it, they built on it and they learned.’

By the 1970s, Western companies were desperate to find the secret of Japanese success. They were surprised to find that it was founded on lessons taught by American industrialists and academics and had to set about re-learning them.

Chinese manufacturing has yet to achieve the same reputation for quality but the

country is now leaning heavily on post-war Japan’s strategy of borrowing the best international ideas, moving from manufacturing other people’s goods to designing its own innovative products.

Careful researchKossoff stresses that any analysis of China has to be underwritten with a note of caution because it is such a large, complex country. ‘My understanding is that China is two worlds within itself,’ she says. ‘There is the world that is not progressing, not innovating and then there is a whole other sphere that is pushing the barriers so hard and so fast and we’ve not yet seen the outcomes of the kind of innovative work that they’re doing.

‘They are being smart like the Japanese were in the 1950s and 60s by targeting very specific markets and industries that they know they can take if they innovate well enough. Using the Japanese model, they’re incredibly focused, like a laser, and going after industries like green technology. The whole environmental arena is one that they’re putting their best minds to and that’s getting a lot of attention.’

The big question is how the rest of the world will react. ‘What they’ll be able to do with it, and whether other countries will introduce protectionist measures, I have no idea, but the Chinese can already create from within or buy the innovative brains that they need.’

‘China is two worlds within itself. There is the world that is not progressing, not innovating and then there is a whole other sphere that is pushing the barriers so hard and so fast and we’ve not yet seen the outcomes of the kind of innovative work that they’re doing.’

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East meets West62

Again, though, Kossoff returns to the importance of flexible thinking. The Western approach to management is deeply ingrained in the higher education systems of Europe and the US but the ease with which Asian students can gain access to universities in the West means that boundaries are being broken down.

‘Take a look at the number of Asian students that are matriculating to US universities, staying in the country for a few years to get some job experience and then taking their academic knowledge and on the job experience back home,’ Kossoff says.

‘There may come a time when education in other countries is more geared towards the kind of free thinking that is still very much part of the American system but until then they don’t actually need it because US universities want the funds that international students bring.’

By analysing what it is these students are studying, Kossoff believes Western businesses should be able to get a clear idea of what is driving Chinese progress. At the moment, she perceives an overriding fear of China’s size, preventing executives from treating it like just another competing economy.

West is bestIndeed, the West still holds the keys to innovation in many ways and, no matter how much the Chinese government might wish it were different, European and American companies will continue to drive the economy in the coming decade. Despite that, Kossoff has some harsh words for business leaders who thought the good times would never end.

‘In an upturn, no one ever wants to look at the downturn, which is short sighted and frankly stupid,’ she says. ‘It’s a self imposed blindness because everyone knows a cycle has an up and a down. I am not always completely sympathetic with organisations about this because they could have been better prepared when they were in the upswing.’

Relenting, Kossoff recognises that the financial crisis created problems. ‘No one was prepared for this particular type and length of recession and no one knows quite how to get out of it,’ she says.

‘The problem with not knowing is that it keeps you off balance – you can only find your feet when you understand what you’re working with. People are not sure how things are going to move from this point. Not having had any real preparation or warning makes them afraid, and that’s worse.’

Ultimately, it all comes down to risk taking and Kossoff argues that US businesses are more accepting of setbacks. ‘The more that culture can be built into the DNA of the United Kingdom, the faster the economic turnaround will be,’ she says. ‘Failure is a learning opportunity for future success.’

Kossoff is optimistic about the UK’s ability to emerge from the downturn with renewed strength. By seeking out new sources of inspiration and leveraging its educated workforce and capital, she believes British business has the potential to ride a wave of innovation.

Toyota’s problems demonstrate that no company is unassailable and, while Kossoff believes lessons can still be learnt from Japan, the West must recognise its advantages. Even in the

wake of a major recession and facing an ambitious China, flexible thinking will allow European and American businesses to innovate and succeed. ■

Johnson and Johnson’s lesson in crisis management for Toyota

Toyota received a great deal of criticism for their handling of the recalls. While they are in a situation no company hopes to deal with, in the 1980s Johnson and Johnson performed a textbook reaction to a safety scare involving one of its flagship brands.

In 1982, seven people in the Chicago died as a result of taking deliberately poisoned capsules of the pain killer Tylenol. Johnson and Johnson were quick to react. The company were able to get the product back on pharmacy shelves within two months in new triple-sealed tamper-proof packaging. As copycat attacks continued to spring up throughout the

mid 1980s, Johnson and Johnson led the pharmaceutical industry in developing better standards to prevent product tampering. Eventually, caplets – solid pills shaped like capsules – were introduced because of their much better security.

These innovations combined with a strong PR campaign, allowed Johnson and Johnson to rebound from the crisis and within a year, Tylenol was the most popular analgesic in the USA. The murders have never been conclusively solved but the case remains a textbook example of effective crisis management.

Leslie L Kossoff

Leslie L Kossoff is an internationally renowned executive advisor, specialising in strategy and corporate turnaround. For over 20 years, she has assisted clients ranging from Fortune 50 to small and mid-sized firms in a broad range of industries and sectors in the United States, Japan and Europe.

A former C-level executive in the aerospace and defence, pharmaceutical and entertainment industries, Leslie enjoys an outstanding reputation as an invited speaker, is the author of two books – including Executive Thinking – and over 100 articles in journals including the Financial Times and CEO Magazine. She also writes regularly on business issues related to the agricultural sector for the trade magazine Horticulture Week.

‘In an upturn, no one ever wants to look at the downturn, which is short sighted and frankly stupid. I am not always completely sympathetic with organisations about this because they could have been better prepared when they were in the upswing.’

CIM014_018_Kossoff.indd 62 19/3/10 14:21:23

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CIM014_CIMA Business Sense.indd 1 19/3/10 13:57:31


64


Change of directionInnovation among businesses in the developed and developing worlds is taking different paths. No longer can it be said that developing countries take smaller, faster steps while mature economies make giant leaps. The WorId Bank’s Mark Dutz explains to Jim Banks how in-depth analysis reveals opportunities in emerging markets for companies to outstrip their Western counterparts.

64 East meets West

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East meets West 65

Innovation is an essential driver of economic growth. It is vital that companies in the developing world pursue innovation to take advantage of the opportunities that rapidly expanding markets present. However, successful innovation requires not only the effort of companies, but also the right combination of public policy support affecting incentives, skills, information and finance.

International organisations including the World Bank are now working hard to better understand and encourage innovation in developing countries. Their starting point is to understand how innovation works in many places around the world in order to support sustainable growth.

Typically, approaches to promote innovation around the world have tended to be too simplistic. There is a widely held belief, for instance, that the mature economies of the industrialised West were able to make great leaps forward through heavy investment in research and development, while the more dynamic developing countries such as China and India have made a series of smaller, more incremental advances. Now, a more detailed and complex picture is emerging.

Mark Dutz, responsible for innovation and growth in the Poverty Reduction and Economic Management arm of the World Bank - an industrial organisation economist - is focused on the broad policy environment, with a brief to examine how public policy can better promote innovation as a means to driving inclusive growth in developing countries. He believes that to categorise innovation in the more dynamic developing countries as incremental, and that of the industrialised West as occurring in larger and more radical steps, is too stark.

‘As developing countries build technological capabilities they are gradually moving towards more radical innovation, while the success of most Western economies has also relied on a great deal of incremental change. Often in the West there has been an over-focus on equating innovation with formal cutting-edge R&D and product patents. That might be where an important part of the currently-available data on innovation resides, but this view needs to be broadened,’ Dutz explains.

‘Take Apple, for example, which is perhaps the most innovative Western consumer products company over the last ten years. Its strength is using existing technology to make new products in ways that are responsive to consumer needs. As illustrated by Apple,

there is no need to specialise in cutting-edge R&D to be innovative. Most companies in the developing world stand to gain most from better understanding the needs of their domestic customers and better meeting those needs by adopting and adapting existing technologies. That also is innovation.’

Shifting perspectivesProof of the concept that using existing technology creatively - as opposed to inventing the next generation of cutting-edge technology - can be greatly effective in emerging economies came from Dutz and his team’s recent work on India. In examining how the country can best unleash its capacity for innovation they found that among a broad range of manufacturing companies there was great disparity between levels of productivity even within the same business line.

‘Some companies were very unproductive and way behind the industry’s vanguard. The leading group was five times as productive as the average company. There is scope, therefore, for many companies to dramatically increase productivity by adopting and using existing technology better. Innovation is not just about big changes. Techno-fetishism, or too much emphasis on new cutting-edge technologies, should be avoided,’ says Dutz.

‘In India, there is a very skewed productivity range in any sector. The technology used by most companies is far below the frontiers of what is available. So the technology adoption agenda, making innovative improvements to adapt existing technologies to local contexts, is a very important one.’

A significant trend is emerging that highlights the dynamic and changing nature

of innovation in developing countries. For companies in the developing world, there exists the opportunity to use technology developed in mature economies and learn from the big steps in innovation that have been taken by companies in those markets. This knowledge can then be used in ways that allow these companies to overtake what is already available and deliver new products that may be specific to their domestic market.

Dutz explains: ‘A new term has been coined based on the potential for companies in countries like India and China - piggyfrogging. The term takes the notion of piggybacking by developing countries on existing global technologies and puts it together with their ability to leapfrog existing technologies by better understanding the needs of their own domestic customers. The global fragmentation of production chains, for instance, provides niches in which this can happen.’

He cites as one example the Baidu search engine in China, which in many ways imitates Google, but in the domestic language of Chinese customers and in a way that specifically targets China’s home market. Other examples of piggyfrogging have already made it to the global marketplace.

‘Piggyfrogging will have a huge effect in the years ahead. Take the GE research centre in Bangalore, which opened a few years ago with 275 scientists and engineers, but now has over 4000. That is one in every six of GE’s research technologists worldwide. The centre developed a handheld electro-cardiogram unit, which was an innovation for the Indian market but has since been used globally. The same is true of Google’s transliteration capacity, where users can type phonetic imitations of words that then appear in the language’s script, which is now being extended to cover Arabic,’ remarks Dutz.

‘In India and China, poor customers are highly sensitive to price. If you engineer products for them you may find a growing market there, but also the ability to extend low-cost solutions globally. Tata’s Nano car is a very good example, but there are also examples in the FMCG market, solar power, mobile telephony and many others.’

Tata Motors’ Nano car was commercially launched last year as a small, inexpensive and fuel efficient vehicle. Intended to be the least expensive production car in the world, it was designed to offer affordable motoring in a developing domestic market with a rapidly growing population. The design

‘As developing countries build their capability they are moving towards more radical innovation, while in some Western economies there is evidence of incremental change.’



East meets West66

parameters were firmly rooted in the needs of the domestic market, but the resulting product is of interest to consumers around the world.

In India and China there is certainly a growing trend for reverse innovation, or developing local technologies in emerging markets first and then distributing them globally, rather than the traditional business model of developing technologies in the West and then adapting them for emerging markets. This trend has been spawned in part by the rapidly growing number of MNC (multinational companies) research facilities in those countries.

In India, for example, three existing MNC labs in 1985 mushroomed to over 200 by 2007, with the likes of Google, Microsoft and GE setting up operations to take advantage of low-cost engineering capability. Increasingly, this resource is being used to tackle domestic issues in India that are later applied to tackle the same problems globally.

‘There is scope to solve technical problems in India, such as where there is a lack of infrastructure, and then extend that low-cost solution to the global market. Again, Tata’s Nano car is a good example, but the same company developed a low-cost water filter that requires no electricity but can remove bacteria. This kind of piggyfrogging is a growing trend,’ Dutz remarks.

The means to measure innovationAnother important strand to emerge from Dutz’s examination of India is the need for the growth fostered by innovation to be managed in such as way that it becomes inclusive growth [see boxout], rather than simply an absolute increase in per capita income.

‘There is a need for not only innovation, but also shared growth. There should be no enclaves of growth. Israel, for example, focused on developing leading edge technology, but only a small part of the economy benefitted. The focus on promoting innovation in the information and

communications technology sector, primarily for export, was far too narrow,’ he says.

‘India, for instance, could encourage formal enterprises to meet the needs of its poor and its emerging middle class. It could look at helping rural development through partnerships, and by scaling up production this way it could see increasing product demand from the grass roots.’

To manage innovation in the right way to support growth in developing countries, there is a need to measure the process of innovation more accurately. As Dutz is charged by the World Bank with looking at the linkages between innovation and growth, he recognises both the challenges and potential advantages of finding a workable system for measuring all the factors that contribute to innovation.

A broad definition of innovation is the starting point to better serve the needs of policymakers and society at large: the innovative act combines technology

‘Companies everywhere in the world can benefit from better measurement. More sophisticated companies can use it to raise more capital for investment, while policy-makers can use it to see if the actions they are taking are having any impact.’



East meets West 67

(including improvements in product, process, organisation or design/marketing) with transformational entrepreneurship. Innovation includes a continuum of activities from incremental, informal new-to-the-firm adaptation of existing technologies to radical new-to-the-world creation of patentable disruptive products and processes based on formal R&D expenditures. Traditionally, there has been too much focus on the technology side, not enough on the entrepreneurship side.

‘Companies everywhere in the world can benefit from better measurement. More sophisticated companies can perhaps use improved innovation metrics to raise more capital for investment, while policymakers can use better measures to see if the actions they are taking are having any impact. The first step is to look beyond just spending on formal cutting-edge R&D, or the number of new patents that are developed. One important step may be to get better data on intangible investment – capitalising company expenditures on informal R&D and other product development, and on economic competencies such as brand equity, skills training and organisational planning by treating them as investments resulting in future output rather than as current expenses,’ says Dutz.

‘This could influence the whole agenda of impact evaluation, policy programmes and innovation. It is about better understanding how innovation works in practice. Having a clearer picture would be a very productive avenue, but we need to be able to measure what is actually going on in companies, which may mean getting some help from the accountancy profession to identify incentives for companies to start measuring the right things. Perhaps they could use it as leverage to get more access to finance.’

A challenge is to accurately measure innovation and what contributes to it. By Dutz’s own admission it remains a fuzzy area, in part because companies have a strategic interest in keeping information about innovation to themselves. Yet he feels that the right incentives might get companies to open up about the process of innovation, and that there is value to be gained through partnerships not only for companies in emerging markets, but also for global companies responding to the needs of customers in the developing world.

His work will continue to concentrate on improving technology adoption and adaptation in developing economies, on

gleaning insight on innovation around the world to inform public policy, and on ways to ensure that the economic development that innovation creates is inclusive.

‘We need to understand the potential for inclusive growth that innovation can generate and also the appropriate protection of IP rights to support economic

development. The challenge now is to provide incentives for companies to tap into the technology that is out there not only to meet global needs through export but critically to better meet local consumer needs,’ Dutz says.

‘Clearly that is a lot of priorities, but the playing field could change very rapidly.’ ■

Mark Dutz

Mark Dutz is a senior economist in the World Bank’s South Asia Finance and Private Sector Development unit. His responsibilities include promoting private participation in

public services, spurring competition and entrepreneurship, and more broadly assisting countries in facilitating the growth of agile and

innovative enterprises for higher

standards of living.

Prior to joining this unit in 2003, Dutz was on extended leave, most recently as senior advisor to the State Minister of Economy, and advisor to the Turkish Treasury on Infrastructure and PSD Issues.

During his prior work at the World Bank Group, Dutz worked on competition, infrastructure and private sector development issues, first by providing targeted advice across the bank’s countries of operation, then in an operational capacity in Latin America, and finally as a member of the Competition and Regulation Task Force in the Office of the Chief Economist.

What is inclusive growth?

Inclusive is often used interchangeably with terms such as ‘broad-based growth’, ‘shared growth’ or ‘pro-poor growth’. While it shares some common features with the growth pattern these terms describe, it also has some subtle differences.

Inclusive growth describes both the pace •and pattern of growth, both of which must be addressed simultaneously.

Rapid growth is vital to reduce poverty •in developing economies, but it must happen across a broad range of industry sectors.

Economic growth should include a large •proportion of a country’s labour force.

Macro-economic growth should •accompany micro-economic factors, reflecting the importance of structural transformation for economic diversification and competition, including creative destruction of jobs and firms.

‘Inclusiveness’ encompasses equity, •equality of opportunity, and protection in market and employment transitions, including access to markets, resources,

and unbiased regulatory environment for businesses and individuals.

Inclusive growth takes a long-term look •at productive employment, not direct income distribution.

Inclusive growth is ‘pro-poor’ only in the •sense that inequality of income declines, not in the sense that poor people’s income increases in absolute terms with no change in inequality.

A long-term perspective is required for •policies targeting inclusive growth, given the need to emphasize improvements in the productive capacity of individuals and the creation of a conducive environment for employment, rather than income redistribution as a means of increasing incomes for excluded groups.

The key factors are firstly to increase the •pace of growth and enlarge the size of the economy, but secondly to level the playing field for investment and increase productive employment opportunities.

Source: World Bank, What is Inclusive Growth? February 10, 2009



Social networking68

Look to the futureLouise Ross plugs into the online business community to take a close look at the risks and opportunities presented by the social networking revolution enabled by Web 2.0 technology.

The term Web 2.0 was coined in 2004 by Tim O’Reilly, the computer book publisher, for a seminal conference which was intended to re-inflate the internet industry after the burst of the dotcom bubble in 2001. The term suggests an updated technical specification, such as the release of a new generation of software, but actually refers to the concept of the second-

generation internet and how users interface with it. Some, including internet pioneer Tim Berners-Lee, argue that the worldwide web was always intended to be about people communicating and sharing.

Rather than offering a concrete definition, O’Reilly describes Web 2.0 in terms of relationships and even a ‘meme map’,

more on which can be found in his essay referenced at the end of this article. But he does say that the most important principle is that ‘Web 2.0 is about systems that harness collective intelligence’. Web 2.0 concerns various technologies that enable collaboration, such as web-based communities, wikis, blogs and other social networking applications.

Previously published in our ‘Data Management in finance’ edition, CIMA knowledge specialist Louise Ross’s article was recognised by the International Federation of Accountants and was a prize-winner in IFAC’s annual Articles of Merit awards.

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Social networking 69

Risky businessEven if an organisation does not make use of Web 2.0 technologies, it will be affected by users among its employees, customers, suppliers and competitors. Although a recent survey suggested that only 28% of organisations have included Web 2.0 in their risk management process, awareness of the risks of these technologies should register on every organisation’s radar. It is important to keep a sense of proportion. In many cases Web 2.0 is not creating an entirely new risk, but a new twist that exploits an existing vulnerability. It may be helpful to remind ourselves that the underlying issues are mostly related to human behaviour. ‘People remain the weakest link’ was one of the key findings of the recent global information security survey conducted by Ernst & Young (E&Y).

The survey found that half of respondents felt organisational awareness of such risks was the biggest challenge for business – more so even than limited financial or other resources to prepare defences against information security threats. ‘Hackers have long known the easiest way to circumvent an information security system is to exploit the people. Simple techniques – such as impersonating IT or company personnel – can be used to gain access to information from unsuspecting employees. A large percentage of respondents (85%) confirmed they regularly perform internet testing, but only 19% of respondents conduct social engineering attempts to test their employees,’ the survey said.

Many organisations also ignore another significant information issue, which is how to protect data no longer within firewalls but shared with third parties. It’s sobering to realise that large companies are almost guaranteed to have such an incident every year, at an average cost of over £1 million.

Issue: misuse of personal information. Users reveal a lot of personal information on social networking sites, which is often inadequately protected and therefore vulnerable to misuse by cyber criminals. Some specific risks are listed below.

• Personalinformationmightbeusedtoguess employee’s passwords for corporate IT systems. A 2004 survey showed that the most commonly used passwords in offices in the UK were a partner or child’s name (15%), football team (11%) and pet’s name (8%). Many people are poor at managing multiple passwords, and use the same one for many sites.

• Personalinformationmightbeusedtohackinto and gain control of poorly protected personal email accounts. Recent high profile victims include Sarah Palin and Paris Hilton. This practice is known as a Tinkerbell hack, in honour of the latter’s Chihuahua, whose name was her password. If there is traffic between personal and work email accounts, hackers can identify valid work email addresses and use these for spear-phishing. This is a refinement of the speculative mass spamming of emails purporting to come from another source, known as phishing. Spear-phishing is more targeted; tailored emails are created that appear to come from a named individual or team, possibly IT or HR, in a position of authority such that the recipient will comply with requests to supply information or download files. Cyber criminals construct their own virtual corporate directories and can target new and more vulnerable members of staff.

Issue: people discuss their work on social networking sitesAccording to a recent YouGov survey quoted on the Personnel Today website, 42% of users in the UK discuss work online. Organisations cannot and should not dictate whether or how people can use social networking sites in their private life, so inevitably there are risks:

• Usersmightpostmisinformed,maliciousor otherwise damaging content about their employer (or its customers or suppliers). Many organisations take action where they feel an employee has brought their company into disrepute. Research quoted on the Management Issues website indicated that over one in five companies had disciplined an employee for violating blog or message board policies in 2005, with 7% of US companies and 4% of UK companies dismissing the individual concerned. One of the most famous European examples is that of the UK accountancy firm Dixon Wilson, employers of the Paris-based secretary who blogged as ‘La Petite Anglaise’. Despite her care not to identify herself or her employers by name or nature of business, Dixon Wilson argued that she had made herself, and therefore the firm, identifiable by including her own photograph on her blog. The firm dismissed her for gross misconduct, but she subsequently won her unfair dismissal case.

• Informationmightbedisclosedthatiscommercially sensitive or price sensitive, which gives away intellectual property or damages the organisation’s reputation. Information disclosed online is searchable, easily shared, persistent and impossible

Web 2.0 tool Description Examples

Social networking sites

Websites that allow users to meet people with similar interests and link up with contacts, friends and family

Facebook, MySpace, Bebo

Blogs Short for web log, blogs are online journals containing whatever the user wishes – images, thoughts, news, links etc.

Beehive (Steve Bee, cartoonist and head of pensions strategy at the Royal London Group), Freakonomics authors continuing where their book left off, and millions of others.

Wikis Web pages, the content of which can be added, removed or modified by a group

Wikipedia, Wikileaks, WikiTravel

Virtual worlds Simulated environments that offer an alternate existence or “avatar” in hyperspace, with virtual landscapes, buildings, vehicles and more, creating another world.

Second Life, Nicktropolis, The Sims Online

Popular social networking applications

‘Hackers have long known the easiest way to circumvent an information security system is to exploit the people.’ Ernst & Young



Social networking70

to eradicate. BERR’s “Ninth information security breaches survey, (2008)” used the following example when discussing the risks posed by the use of social networking. ‘The IT staff at an insurance company used an internet chat room to help them solve technical issues. However, this resulted in them inadvertently disclosing the company’s security setup and configuration in a public forum.’

Issue: downloads from social networking sites or blogs can contain virusesUsers tend to be less suspicious of downloads, messages or instructions purporting to come from friends, colleagues or familiar websites. A recent report from IT security company Sophos advised that the primary source of malicious code, responsible for 2% of it worldwide, was Google’s blogging tool Blogger. This is because it’s easy to set up new pages without requiring identification – as it is on Facebook and other social networking sites. If employees are accessing these sites on the company’s server, they can provide a gateway into the organisation. Specific risks include:• Downloadssentbycontactsoften,

intentionally or unknowingly, contain viruses. Facebook, for instance, has thousands of downloadable applications contributed by users – for example to send each other virtual beers or cupcakes, to rate each other’s attractiveness or turn each other into virtual zombies. Some of these applications can contain harmful code.

• Contacts’identitiescanbemisappropriatedto send malware (software designed to infiltrate or damage a computer system without the owner’s informed consent).

• Asitecanbecounterfeited–userslog-onto what they think is the genuine site and are advised to download supposedly the

most recent version of the software used, for example to upload or view videos. What they actually download is malware.

Technical solutions to these risks are not necessarily within a business leader’s purview – they have an IT department for that. But it is their responsibility to be alert to the possibility that there are major gaps in a firm’s defences and to create a culture that addresses the human issues. Specific defences include: • Good password protocols. Hopefully

your IT department has specified that passwordsshouldcontainsomenon-alphabetic characters and be changed frequently etc. It will help to create the necessaryco-operativeandresponsible

culture if it also explains why certain practices are risky. For example, the reason that employees should not use any word contained in a dictionary as apasswordisthatcommonpassword-cracking tools are based on dictionaries.

• Reinforced training about password protection. Remind employees to be suspicious of anyone asking for passwords – whether your own IT team or HR department, by phone or electronically. Most attacks can be deflected if suspicious users enter

the full, legitimate URL of established corporate pages in browsers, rather than clicking on links provided by the phisher.

• Requirements for information security in contracts with third parties.

• Setting up a virtual private network (VPN). There should be little need for employees to forward mail between their personal and work email accounts, if you provide a VPN to enable employees to work flexibly wherever they have access to the Internet.

• A policy for online conduct. Remind employees that bringing the organisation into disrepute or disclosing commercially sensitive information is a disciplinary

offence, whether it takes place online or not. Advise them that information disclosed online is searchable, easily shared or linked to, persistent and impossible to eradicate. Therefore, it has more serious consequences than venting about a bad day to friends in the pub. Inthisarea,youmightfindtheTUC’swork useful (please see the resources at the end of tis article). Advise employees about the risks to the organisation of work-relateddetailspostedonsocialnetworking sites. Ask them not to post detailsabouttheirjobs.Considerwhetherto carry out social engineering testing (please see Wall Street Journal article in resources).

• Business-oriented sites for work-related networking. If you allow/encourage employees to use networking sites for business purposes, advise them to use business-orientedsites,suchasLinkedIn,which do not include personal information on family or hobbies.

Web 2.0 opportunitiesEnthusiasts argue that one of the biggest risks posed by Web 2.0 is to not exploit its opportunities. ‘Web 2.0 is a game changer –itholdsthepotentialtoturbo-chargeback office functions, foster collaboration and transform every business unit in the enterprise,’ says O’Reilly.

Small (<50 staff) Large (<250 staff) Large (<500 staff)

Companies that had a security incident in the last year

45% 45% 96%

Average number of incidents, median (mean)

6(100)

15(200)

>400(>1,300)

Average cost of worst incident in year

£10,000to£20,000

£90,000to£170,000

£1 millionto£2 million

Information security breaches

Source: “Ninth information security breaches survey, (2008)”, BERR.

‘Web 2.0 is a game changer – it holds the potential to turbo-charge back office functions, foster collaboration and transform every business unit in the enterprise.’



Social networking 71

Data to measure benefits is hard to come by, partly because it is quite early in the lifespan of these technologies, but also because it is hard to measure those. In lieu of hard data, I can contribute cases that I have come across, which illustrate the potential benefits.

Issue: harnessing expertise outside the organisation Innovative organisations have recognised that they can tap into talent and ideas outside their own product development teams. There is a parallel between this sort of web-based collaboration, and the open source software development model. The principle upon which the latter is based is that allowing free access to source code for anyone to use or modify as they see fit accelerates the development of new applications. Instead of the traditional proprietary model in which developers seek to ensure that users cannot use, modify or share the product unless specifically allowed to.

Open source development is the most effective approach in many circumstances, for example, where there is a need to quickly build a critical mass of users, or where it is necessary because of short product life cycles, to get products to market quickly; or to avoid a costly battle of rival technologies. And these reasons also apply to the kinds of Web 2.0 collaborations I discuss below. Note the new role of the originator in these cases – no longer the sole developer, but providing the protocols, objectives, framework and channels for users or others to provide content or solutions.

Case: GoldcorpGoldcorp was a mining company in terminal danger if it didn’t find new gold deposits. Its chief executive took the radical step of publishing the company’s geological data, previously considered proprietary and strictly confidential information, on the web and threw out an open challenge to suggest which areas should be prospected at its Red Lake mine in Ontario. Goldcorp offered nearly $600 000 in prize money for the best ideas (methods and sites) and was staggered by the quality of the applications. It had tapped a wealth of expertise it didn’t even know existed. Of the targets identified by these new collaborators, more than 80% yielded substantial quantities of gold, totaling $3 billion. The success of this project kick-started a wave of innovation in drilling techniques, data collection procedures and geological modeling that transformed the company.

Issue: collaboration and team working Web 2.0 tools enable better collaboration, but some organisations are specifically considering

how to use them to improve team working or to harness communities of volunteers. IBM is one of the most enthusiastic proponents of Web 2.0 technology, which represents a significant business opportunity for the company as well as some methodologies for managing its own community of developers, suppliers and users. For example, IBM is currently developing technology to enable users to create virtual meeting places, with the facility to make them secure so you can discuss legal, patent or other commercially sensitive issues. IBM believes that this technology brings participants together in a more natural and effective way than teleconferencing or emailing.

Case: IBMIBM is also the most enthusiastic corporate presence on Second Life. Irvine Wladawsky-Berger, IBM’s VP of technical strategy and innovation, believes that ‘highly visual and collaborative interfaces will become very important in the way we interact with all IT applications in the future’. IBM uses Second Life as a tool for testing new ideas. It has twelve islands, some public and some private, where its engineers, consultants and designers can brainstorm and collaborate on projects such as the 3D internet.

Case: The RSA The 250-year-old Royal Society for the Encouragement of Arts, Manufactures and Commerce is considering using a tool such as Facebook to communicate with its fellows. In common with many membership organisations, the thousnads of fellows are geographically dispersed and run local groups, stage events and undertake various projects. There is evidence of a bottom-up call from the fellows to use this technology to reinvent, or at least reinvigorate the society.

ConclusionsThe key word running throughout this article, and one to keep in mind when Web 2.0 is ever mentioned, is collaboration. Web 2.0 technologies bring people together to comment, innovate, suggest or complain. These are levelling technologies, enabling individuals to have a platform for their opinion or ideas nearly equal to an organisation’s.

As well as equality, collaboration implies trust. There is a need to trust that partners in an industry consortium will protect data with as much care as its owners do and not exploit what they learn for competition. It is also important to recognise that customers might have insights about how a product might be used that may not have occurred to

a company itself. Trusting that employees will act responsibly when discussing their work lives on social networking sites is also crucial. Work and personal life will always intermingle – we are not machines. But we all – not just the “IT guys” – should be alert to the new risks that Web 2.0 poses.

Web 2.0 is not just a concept for companies to worry about though; it is also a powerful tool to be made use of. The implementation of Web 2.0 applications has energised the user – accelerating innovation, creating new market for product development, turbo-charging the efficiency of a supply chain and motivating dispersed teams. ■

Louise Ross

Louise Ross is a technical specialist at CIMA. Her special interests are narrative reporting, the changing role of the management accountant, and the impact of collaborative web-based technologies. Formerly, she was CIMA’s director of research and retains her interest in bringing academic research findings to practitioners.

Previously, Ross was a senior auditor at the National Audit Office.

Web 2.0 resources

• TimO’Reilly’sarticle‘WhatIsWeb2.0’can be found on his website, http://oreilly.com/

• EIU/KPMG’ssurveyisdownloadableat www.us.kpmg.com/news/index.asp?cid=2587

• The“InformationSecurityBreachesSurvey”isavailableat www.security-survey.gov.uk

• TheWallSreetJournal’sarticle “SpearPhishingTestsEducatePeopleAboutOnlineScams”,TechnologySection,canbefoundat http://online.wsj.com/public/us

• TheTUCbriefingforemployersonuse of social networking at work is available at www.tuc.org.uk/extras/facinguptofacebook.pdf

• TheFinancialTimes’article‘Fraudsterstarget social networkers’ can be found on the newspaper’s website, www.ft.com



72 Cash management


72

Cash controlA precise cash management strategy can make a major difference

to corporate performance, but when markets change as rapidly as they did at the onset of the credit crisis it is not easy for a

global business to respond quickly. Jim Banks speaks to FTSE 100 company Intertek’s Aston Swift about the tools and processes

needed to cut it in today’s tough financial environment.

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Cash management 73

Few need reminding that the last two years have been difficult times for many large companies, even those that have managed to grow during the liquidity crisis and the global economic slowdown. No one anticipated that financial markets would seize up or economic indicators reverse trend so quickly. For those working in treasury, these events were stark reminders of the importance of cash management, and of the need for flexibility in the strategy that governs it.

For the treasury teams of multinational organisations looking to balance peace of mind with growth, the current environment poses many challenges and has forced changes to the way in which they approach cash management. Even if these changes are tweaks rather than a fundamental rethinking of strategy, they are nevertheless vital to the success of cash management policy.

‘Our number one priority is ensuring liquidity for the company to operate effectively and to achieve its acquisition and investment ambitions,’ says Aston Swift, VP tax, treasury and corporate communications, Intertek. ‘We want operational managers to know that cash will be available for investment opportunities.

In the current environment, cash management has become more of an issue for other people in the company. For instance, in the liquidity crisis we made sure that operations managers were more aware of cash and bank funding issues.’

Headquartered in London, Intertek has more than 24,000 people in over 1,000 locations, who serve clients in over 100 countries. At the end of December 2009, the group had a market capitalisation of approximately £2 billion, and reported total revenue for the 2008 financial year of over £1 billion. Its primary function is to help local and global organisations to ensure their products and processes meet industry standards and consumer expectations for safety and quality. It provides these services for virtually any market around the world, thanks to its depth of technical knowledge and breadth of industry expertise.

Serving corporate clients as well as national governments, the company is growing on the back of the increased emphasis on quality and safety among

manufacturers and retailers, particularly those sourcing goods or raw materials from emerging markets and those moving business processes offshore.

The company’s growth has been largely organic, but has been helped by acquisitions. In a market sector with relatively few direct competitors, it has a diversified and geographically dispersed business, which gives it a strong platform for future growth.

‘Product recalls can be disastrous for a manufacturer or retailer, and new legislation around the world, notably in the US and Europe, is putting greater focus on quality and safety. Our services are very important to big brand companies and retailers as well as organisations that care about quality. We help them in Asia and other emerging economies, for instance, where they are

looking to source at a lower cost, but without compromising on quality. Our work in these markets is predominantly for exporters to the US and Europe, but we also see rapidly increasing demand for our services in domestic emerging

markets, especially in China, which are potentially huge,’ explains Swift.The flipside of its geographic diversity, however, is that the important activity of cash management is relatively complex. Hence the need to involve operational managers more closely in the cash management process, which enables the company to optimise the balance between keeping cash in various locations to fund growth when the timing is right and the need to drive cash up to group level.

Involving parts of the business beyond finance and treasury in cash management issues ensures that there is a better understanding throughout the organisation of the demands and restrictions on the availability of cash.

‘Managing the cash side becomes more difficult across a highly diversified business. We have over 100 countries to manage sometimes with more than one entity per country, so there are well over one hundred pots of cash in the company. It can be slow to get cash out of (and into) some countries, so it is important to be on top of where it is sitting, as well as to continuously drive it up to the centre of the business, especially from emerging economies,’ he notes.

‘Cash management is the responsibility of all financial managers – regional and local – who manage working capital and ensure that cash is in the right place at the right time. Operational managers, however, need to be alert to future demands on cash, and they need to understand when and how cash constraints may arise. They need to ensure finance management is in line. Better communication between

‘In the liquidity crisis we made sure that operations managers were more aware of cash and bank funding issues.’

Intertek’s response to the liquidity crisis

When the credit crunch starved companies of liquidity from banks, Intertek took four key precautionary steps to ensure that it maintained sufficient headroom.

It quickly began negotiations with 1. two key banking partners about extra bilateral borrowing facilities to increase the company’s headroom, in case required.

It launched the second bond issue 2. in the year, drawing down $100m in two weeks from start to finish.

It immediately began the remittance 3. of large dividends out of its Asian markets, pushing cash from its highly profitable emerging economies up to the centre of the business.

As sterling had weakened 4. dramatically, quickly increasing the value of Intertek’s US dollar borrowings on a sterling denominated facility, the company took out hedging facilities to effectively temporarily convert its US dollar borrowings back into sterling.



Cash management74

The rise of trade receivables financeThe latest research shows that firms are increasingly seeking to raise finance from traditional asset categories such as trade receivables. The report, from working capital solutions provider Demica which surveyed over 1,500 firms with over 50 employees in the UK, France and Germany, revealed that Europe is turning back to trade receivables, considered to be one of the most liquid and creditworthy asset categories on the balance sheet. The current scarcity of credit was listed as a major setback, encouraging firms to raise a greater proportion of finance in this way. A significant number of firms also reported having no other choice but to offer asset categories such as trade receivables if they were to convince banks to extend lines of credit.

Some 36% of European companies (UK 31%, France 43% and Germany 34%) reported that

they had already raised finance against the security of their trade receivables. Furthermore, finance raised on this asset category is set to grow substantially over the next 12-18 months. Just under half of respondents (44%) said they planned to increase their levels of finance raised against the security of trade receivables. Germany and the UK showed the most interest in developing this technique, suggesting that they will soon match already elevated levels of uptake in France.

The European Securitisation Forum forecast overall securitisation issuance to fall to €272 billion in 2008, the lowest level since 2004. However, the decline in overall securitisation activity is thought to be a direct result of problems caused by low quality assets – with solid assets such as trade receivables not experiencing the same negative impact. Securitisation of more robust, stable assets

such as trade receivables is expected to rise. Demica’s research sought to quantify this, and found that 56% of European firms believe the scarcity of standard bank credit will see large firms choosing to raise a greater proportion of their finance on the basis of trade receivables securitisations.

Banks seem equally keen for firms to offer this asset category, as the solution lifts the lid on lending without taking on unacceptable risk. Over the last year, commentators have witnessed a rising demand for greater levels of security from banks’ clients to avoid facing caps on their credit limits. Demica’s research showed that 61% of European firms had experienced this, recognising that certain banks are unwilling to extend credit unless businesses can offer stable assets such as trade receivables as security.

operational and financial managers basically means that forecasting is more accurate and we can be more efficient.’

Time is of the essenceIn managing the treasury function of such a complex and diverse business, Swift has come to recognise that debt and cash headroom is all important. The liquidity

crisis has thrown into sharper relief the need for a cushion – a fact that many organisations realised all too late.

While some large organisations, Intertek included, are lucky to have sufficient headroom to absorb the sudden seizures in financial markets and the global economy, the lesson that there is no room for complacency in any multinational organisation is not lost on Swift. He recognises the unpredictable nature of the financial crisis and the speed of events must make the treasury team of any large

organisation alive to the potential for sudden surprises.

‘The speed of events meant that companies lost much of their headroom, although we were fortunate that before the crisis took hold, we started off with a high headroom buffer, and due to quick action, we maintained a healthy

level throughout which would have been sufficient should the credit crunch have deteriorated further,’ remarks Swift.

The key lessons Swift has for any large, multinational company are simple, but vital. He urges them to have the financial and human resources to remain flexible, to err on the side of caution by ensuring there is a cash or committed debt cushion to fall back on. In addition, he stresses the importance of strong relationships with banking partners to optimise cash management processes and provide short term finance if required.

‘Companies need to be able to respond quickly and they must be close to their banks, too. That was not easy during the liquidity crisis, partly because some of the people I spoke to at the banks were concerned about their own job security. You need to have more than one point of contact at the bank,’ says Swift.

Build bridges with banksIn the current climate, relationships with banks are a prime concern for the treasury department. The liquidity crisis severely tested confidence in banks, and many organisations have felt the need to rethink, or at least verify, the criteria they use to select banking partners.

‘We did have to rethink our banking relationships during the financial crisis. Our bank group has evolved from the first syndicate that was put together at the time of the MBO in 1996, and then refreshed at the IPO in 2002. Now we are more selective. Companies like ours need to have banks that like and properly understand the business and see a good fit. Clearly the banks have to be prepared to commit to the balance sheet, for the long term, not just to the next refinance date, and to provide relevant ancillary services,’ says Swift.

Intertek now has 14 banks in its syndicate, which Swift thinks may be too many. Of

‘Companies need to be able to respond quickly and they must be close to their banks, too. That was not easy during the liquidity crisis.’



75Cash management

these, the most important are the cash management banks we use around the world or those with specifi c services either the others cannot provide or are a cut above the rest.

‘You don’t want to spread yourself too thinly. I’d prefer to have around ten banks that have a good fi t with our business and should therefore be capable of stepping up the commitments when required. Between them, they must be able to provide front offi ce treasury services like derivatives and foreign exchange, and they should have local services like effective cash pooling backed by good technology and a strong cash manager. There are some that we use just for local overseas banking and some only for foreign exchange. For overseas banking we need full electronic banking that allows our regional and head offi ce to get full visibility on local banking and manage the authorisation controls in place through one portal. We want control, basically,’ remarks Swift.

‘It is also important that my relationship bank manager has enough infl uence locally to resolve any issues we are having with the local banks and to ensure we are getting best possible service. Even in a company like ours, where there is a fair degree of local autonomy, we push local operations towards the relationship banks, where the benefi ts from cost, service and control come through to us and in exchange the

bank that commits balance sheet extracts a return for this, thereby encouraging future commitment,’ he adds.

Swift also believes that banks could do more to differentiate themselves at a time when banking relationships are under greater scrutiny, from treasury activities to local, regional and global cash management. ‘The banks vary enormously in their provision of foreign exchange, but it is diffi cult to know in advance who will be the best provider in the syndicate,’ says Swift

‘The majority of our banks were severely affected by the crisis. Importantly they did well to keep us abreast of the changing environment, although we did not have to refinance heavily during that time. We are lucky to have a supportive bank group although it can’t be taken for granted and has to be worked on. It is so important to be in regular dialogue with your banks,’ urges Swift.

If the liquidity crisis and the difficult times that have ensued hold one lesson for large organisations, Swift believes that it is to enable responsiveness, whether that comes through internal cash management process or through relationships with banking partners.

‘You can have all the systems and processes in the world, but cash and treasury

management is really about watching the changes in the environment and responding quickly. Culture is a big part of it, too. You need to ensure that everyone is in line with the objectives of the group, one of which should be the old but well understood truism “cash is king” and to maintain enough headroom to give you some comfort when circumstances suddenly change.’ ■

Aston Swift

Aston Swift is group vice-president, tax, treasury and investor relations. He joined the Government Services division of Intertek in 1996 as a fi nance manager, became divisional chief fi nancial offi cer and then in 1999 moved to head offi ce as group corporate treasurer. Prior to Intertek, Swift worked in internal audit at BSkyB, the UK based satellite television company and before that at Buzzacott & Co, a fi rm of chartered accountants in the City of London. He is a qualifi ed Chartered Accountant and Corporate Treasurer.



76 Outsourcing


76

Jaeckle on global finance

Governance is a global requirement, •needing global guidelines and local implementation

Cross-regional shared service centre •strategy will only deliver full benefits if it is supported by aligned processes and systems

Overall efficiency will increase if •tools are used globally, for instance because of shared infrastructure and purchase volume

A global finance network offers more •opportunities for the talent we have

Global projects and initiatives require •global project management

A global viewShared services promise much for large, multinational organisations, not least the chance to reduce costs by moving processes to low labour cost economies. But unearthing the true value of process excellence, flexibility and improved compliance in many cases means taking a truly global view of the organisation and its shared services provision, as Henkel’s Joachim Jaeckle explains to Jim Banks.

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Outsourcing 77

Cutting costs is always attractive to any large organisation, and moving processes to offshored shared service centres is a popular way of achieving it. The true value of such a transition, however, may lie in improvements in efficiency and process excellence, but these advantages may be blunted by the complexity of operating shared service centres around the world unless a globalised strategy underpins their management.

Finance processes are prime candidates for shared services, and some leading,

multinational organisations have found that implementing a global approach to managing such processes in shared service centres not only

achieves cost reduction, but also leads to greater synergies within the business,

higher efficiency and standardisation of processes and systems across the business.

One such company is Henkel, a leader in three business lines – laundry and homecare,

cosmetics and toiletries, and adhesive technologies – with well-known

brands such as Persil, Schwarzkopf and Loctite in its portfolio.

Henkel’s experience provides a useful template for a global approach to shared services

that could unlock value for many large businesses, as it highlights

many ways in which they can overcome major challenges and integrate shared services operations (SSO) to perform more cohesively and more effectively.

‘Historically, we started to look at shared services in the financial organisation, but we are now about to add other parts of the business to it,’ says Joachim Jaeckle, corporate senior vice-president financial operations for Henkel. ‘First, we looked at transactional processes and then later some control processes. The key challenge in using a different service delivery was that many people had to change how they worked in a process. They were no longer sitting around the corner from each other, so change management is the biggest challenge of all.’

‘Having a global view of shared services means that there is one story globally, which is good for communication, although it is more complex in terms of execution. We wanted standard processes and systems, which is difficult to achieve,’ he adds.

Employing more than 50,000 people worldwide and selling to customers in around 175 countries, Henkel controls a diverse range of brands and sells into a host of international markets. This drives the need for a more consistent approach across all of its shared services activities. The first steps in defining its global SSO strategy were to set clear targets and to understand exactly what the group wanted to achieve through shared services. A clear understanding of the problems SSO could solve was the best starting point.

‘The first step was to acknowledge that the cost position was not satisfactory,’ Jaeckle remarks. ‘So, we set benchmarks. The finance function at Henkel would accept the results of benchmarking, but it did not see how useful they were. We had to see the value in it and how comparing the function with peers and industry groups would help. In the beginning, myself and others thought that cost improvement would be the main driver of shared services.’

‘Now, we realise that cost is not the only criterion. Equally important are quality improvement, making processes more transparent and becoming more compliant in every region through standardised electronic processes. If you only think about cost then you don’t explore all of the opportunities that shared services present.’

Clear targets for the finance functionHenkel’s initial venture into shared services covered a range of finance processes that it wished to standardise worldwide: purchase to pay, order to cash, control functions, general accounting, tax, treasury, travel and entertainment.The key strands in its efforts to globalise

‘If you only think about cost then you don’t explore all of the opportunities that shared services present.’

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Outsourcing78

its SSO were organisational alignment, the definition of a process expert network, system standardisation and a comprehensive approach to change management. All of these require investment and planning well before any transition to shared services begins.

Of these four strands, the priority was investment in systems standardisation, from which all other parts of the SSO strategy could flow. The company, therefore, set to work on harmonising process descriptions and process templates for all countries within each region. The establishment of common cross-regional kernel definitions for all processes then ensured comparability and efficient reporting.

Another benefit of having one shared systems infrastructure is that it enables synergies in IT support. Similarly, globally standardised organisation and processes enable the company to leverage the expertise within and between SSCs. Best practice rollouts increase process efficiency on a global scale, and are coupled with worldwide, harmonised KPIs to enable clear benchmarking of process efficiency.

The result for Henkel was a choice of shared service centres located in Bratislava, Slovakia, and Manila in the Philippines.

‘I would not envisage putting all activities in one shared service centre, partly because we have many global markets, and partly because it would pose a very high

business continuity risk. We find that using shared services in emerging markets gives us access to a diverse pool of talent. The importance of being in emerging markets will increase over time,’ says Jaeckle.

Its approach to SSO has had tangible benefits for Henkel’s customers, and Jaeckle believes that any global organisation could reap the same advantages with the right shared services strategy.

‘Shared services help improve our customer focus. If there are many diverse processes then a company spends a lot of time dealing with itself. Standardisation of processes means we can focus more on value-added tasks. An organisation loses less energy and time on issues such as how to pay its suppliers or how to collect revenues,’ he observes.

‘If every country does these things in a different way then there is inefficiency, and there is no reason to do things that way. Standardisation across global shared services also means the organisation is better integrated because it speaks the same language,’ he adds.

Lessons in SSOThe success so far of finance functions that have moved to global shared services

is encouraging Henkel to consider the transition of other processes, both financial and non-financial, to its shared service centres. This success, however, has not come from adopting a radically different approach to the planning of SSO. In fact, the company’s goals are similar to those other organisations would target, but there can be a great difference in results depending on how implementation is handled.

‘It is interesting to see that the ingredients of the shared services concept are clear. Execution is what makes the difference. Companies have the same path, but some do far better than others. Commitment from the top of the organisation is vital, or people will not move fast. You have to move fast or you lose morale and you lose focus,’ believes Jaeckle.

‘The transition can be difficult and challenging. Jobs are eliminated in some locations and moved elsewhere. You also need to have the right team in place. Success depends on having the right people to steer the process,’ he adds.

At Henkel, Jaeckle is responsible for both sides of the shared services equation. He oversees the shared service centres and also the parts of the business that receive those services. Such a role is, he believes, crucial to success because it helps to balance out any conflicts that arise and to ensure that the needs and capabilities of both service provider and internal customer are aligned.

The creation of such a role was part of Henkel’s in-depth planning process before any action on shared services transition was taken. This carefully considered approach is, in Jaeckle’s view, another key ingredient of a successful globalisation of shared services provision.

‘It helps to take time to plan. We chose how to standardise processes first before we moved to shared services, although it is impossible to get 100% standardisation beforehand. Companies have many decentralised processes before the transition, but you can standardise certain things, like the ERP system, which is part

‘Using shared services in emerging markets gives us access to a diverse pool of talent.’

Jaeckle on the right people to drive change

The key requirements for global financial managers in outsourcing are:

communication and language skills •to collaborate across boundaries

the ability to think outside the box•

a desire for continuous learning•

the ability to adapt to new challenges•

consultancy and facilitation skills•

an excellent understanding •of the business

the ability to translate information •into knowledge and to deliver it

self-initiative•

the capability to oversee •activities in a broad context.

CIM014_022_Henkel.indd 78 19/3/10 16:27:29


Outsourcing 79

of the investment that you need to make,’ he remarks.

‘It is important that any company looking at global shared services does not limit itself to wage arbitrage. It must have a system in place to enable standardisation of processes across the organisation.’

Jaeckle is not, of course, suggesting that labour cost arbitrage should not figure in decisions about where to locate shared service centres. He is merely emphasising that it should not be the only criterion.

‘You need to look for places where there are skilled people and, in many cases, language skills, especially for front office functions. You need to look at the political and economic stability of the country, which can have a big influence on choices. You also need to consider whether a market is flooded with shared service centres, or whether you will be the first to set up there,’ he comments.

‘It is also worth remembering that choices about location are not made for eternity. Once processes have been dislocated and moved to another location then they can easily be moved again to another place or reshaped in some way. The big thing is the initial move to shared services. After that, moving location is much easier. That is the kind of flexibility you have when you take a globalised view.’

He leaves us with a reminder that the transition to shared services is a long-term move. True, there is some low-hanging fruit that can incentivise an organisation to pursue the development of global shared services, but the real rewards are seen in the long term.

‘The benefits of shared services are seen quickly, but the real impact is only felt after much time has passed. The real benefits are qualitative, and these arrive only if there is the right leadership, careful planning, the

right people and when you know what you want to achieve,’ Jaeckle remarks.

‘One more element that is of critical importance is that you need to have discipline during implementation. Do not deviate from your plan. We experienced

ourselves the temptation of changing the plan as we got more information that was previously hidden in the decentralised world. Remember, you can always come back and revisit those things once implementation is complete. At first, stick to the plan.’ ■

Joachim Jaeckle

Joachim Jaeckle, senior vice-president financial operations, is responsible for the finance organisation of Henkel Group worldwide. This role includes the responsibility for the captive shared service centres in Manila and Bratislava where mainly finance processes are off-shored. As a part of his role, Jaeckle defines the finance transformation programme within Henkel. This includes worldwide responsibility for process design and harmonisation,

IT setup and talent management with finance operations.

Jaeckle joined Henkel 1991. Among other positions he has been group treasurer and regional CFO for the Asia Pacific region.

‘The benefits of shared services are seen quickly, but the real impact is only felt after much time has passed.’

Sealing the deal

In the summer of 2009 Henkel signed IT outsourcing agreements with three separate companies covering the fields of application development and maintenance, data centre services and end-user computing, with an aggregate contract value of around €500 million.

Henkel began its IT sourcing program in autumn 2008 in order to leverage existing agreements with its strategic IT providers. As major contracts are due to expire in 2010/2011, Henkel sought to both reduce IT running costs and increase service delivery quality.

A professional RFP (request for proposals) approach was taken that engaged multiple vendors, both current and potential, to participate in the process. After a first selection round based on the coverage offered by each supplier, Henkel invited leading global and regional players in the market to a bidder conference at the beginning of 2009. There they were informed of the programme, the scope, timings and participation procedure. Based on this selection process, Henkel proceeded to the transition planning stage.

CIM014_022_Henkel.indd 79 19/3/10 14:25:46


Next issue80

June 2010

Outsourcing and shared servicesEnabling new ways of doing business

In our next edition


Shared services and outsourcing – the good, the bad and the uglySaatchi & Saatchi has fi rst hand experience of the shared services/back offi ce model. When it was purchased by Publicis Groupe, the shared service concept was introduced within fi ve years. We address the challenges, setbacks and achievements in that process.Johann Xavier, CFO EMEA Saatchi & Saatchi

The pros and cons of outsourcing A round-up of the major challenges, latest developments and implementation strategies.Ulrich Borgne, CFO, GE Healthcare UK & Ireland

Shared service centre process developmentDeveloping a world-class finance shared services strategy and managing by process rather than by regional activity.Ian Robertson, EVP, finance operations, Royal Dutch Shell Group

On-shore captivesElevating the value of your SSO to a key commercial asset.Adam Williams, head of shared services, Co-operative Group

End to end finance effectivenessA look at the development in outsourcing of traditionally core F&A activities, including understanding how the finance function has evolved. Plus: analytics – why is this a growing trend in outsourcing and finance?Paul Blackburn, senior vice-president and financial controller, GSK

Procurement and BPOAn analysis of supplier relationship and contract management, innovation, gain share and insight into driving value add whilst taking costs out, CSR and developing a responsible sourcing/procurement strategy.Karen Mansell, head of corporate procurement and business process outsourcing, AstraZeneca

Establishing world-class SSC operations Leveraging technology as a way to keep shared services in-house and onshore.Steve Swientozielskyj, head of financial shared services, Network Rail

Learning the recession’s lessonsOutsourcing expert Mark Kobayashi-Hillary explains how the recession is forcing a reassessment of business models and a move towards outsourcing.Mark Kobayashi-Hillary, director of the National Outsourcing Association

CIM014_NextIssue_final.indd 80 19/3/10 14:28:18


Next issue 81

Defining the shared service centreConsolidating common service activities into a discrete shared service centre (SSC), where expertise and technology can be brought to bear on work processes and information flows, is an emerging development in the continuing evolution of the multi-divisional company. Can the SSC claim that significant efficiency savings can be achieved through process re-engineering and can the elimination of shadow systems and location cost arbitrage also be supported? How can SSC enable a quasi-market feel to relationships with its ‘customers’ in the business units, and allow management to retain hierarchical control over service activities?Ian Herbert, lecturer in accounting and fi nancial management, Loughborough University Business School

Also in the next edition:Human capital CIMA will be launching ‘Women in Leadership’ a high profi le, international initiative to feature CIMA and non-CIMA high-powered women offering advice on leadership skills and how women can progress to senior roles. We examine the business case for women leaders, share top tips from senior CIMA women with the wider membership, and showcase employer policies that support female advancement in the workforce. Sandra Rapacioli, research and development manager, CIMA

Finance transformation The key fi ndings from a new report based on the global fi nance transformation research: ‘From ledgers to leadership: A journey through the fi nance function’CIMA Centre of Excellence at the University of Bath School of Management

Business partnering A unique insight into into the shifting focus of the fi nance function from cost reduction and effi ciencies to value creation.Dominik de Daniel, CFO, Adecco

Entrepreneurial accounting Strategic human resource management, entrepreneurship and the innovative accountant. Dr Travis Perera, CIMA Sri Lanka

Editorial contributors are subject to change

Excellence in Leadership is a series of offi cial quarterly publications specifi cally designed to address the CPD needs of the top tier of CIMA members.

Excellence in Leadership is a must-read for this elite audience of CIMA members, helping to manage their career development while maintaining professional competence and employability. Visit www.excellence-leadership.com


June 2010

Outsourcing and shared servicesEnabling new ways of doing business

CIM014_NextIssue_final.indd 81 19/3/10 14:28:49


Head82

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