excellence in leadership september 2009

Manage the flowThe group treasurers of DSGi, BAE Systems and Compass Group discuss risk, supply chains and liquidity in the downturn

Power supplyOlivier Bayzelon explains the mechanics and benefits of Volvo’s supply chain financing system

Plus:Snap up the competitionJörg Pässler of Sappi asks if now is the time for a more aggressive M&A strategy

ExCEllEnCE in lEADErShiP iSSuE 12 2009 £12

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Financial Supply Chain

CIM012_Cover_Final.indd 1 16/9/09 16:06:14

CIM012_021 Advert.indd 1 16/9/09 14:51:15

Excellence in Leadership

Company insight 3

Maintaining an effective supply chain in a downturn is a bit like driving a train; an even momentum needs be maintained at all times. If the brakes are hit in the fi rst carriage then all the others will crash into the back of it. In the 12th edition of the CIMA (Chartered Institute of Management Accountants) Excellence in Leadership portfolio we look at how fi nance can fuse the links in the company supply chain and keep a business’s strategy on track.

In recent years, the continuing improvement of supply chain effi ciency has become a major driver of profi t. Two senior executives involved in supply chain management, Edward O’Donnell, vice-president of business analysis at Teknor Apex Company, and Paul Massey, fi nance leader at Cummins Turbo Technologies, discuss the changing dynamics of their management processes and how they have improved profi tability and growth (p 38).

The current cash drought in the banking sector has led to some companies devising innovative solutions when it comes to protecting their key suppliers. One example is Volvo France’s pioneering supply chain fi nance model. Olivier Bayzelon, the company’s business control director, explains the mechanics of the new model and how it has been fi nely tuned to make sure that both the company and its suppliers have a smooth ride (p 18).

Liquidity management is high on every boardroom agenda, whatever sector they are in. Philippe Perrodin, vice-president of group fi nancial control at one of the world’s largest packaging companies, says the key to avoiding the temptation to squeeze suppliers is better integration of the fi nancial and physical supply chains. Perrodin reveals how real business value can be added by optimising fi nancial processes across the physical supply chain and constantly evaluating the robustness of its suppliers (p 22).

One of the unexpected impacts of the downturn on the fi nancial supply chain is the troubles experienced by suppliers with their credit insurers. Ian Ladd, group treasurer of electrical retailers, DSGi, discusses the effects of a reduction in availability of credit insurance and what companies can do to manage this issue more effectively (p 12).

On a more positive note, Jörg Passler, group treasurer at paper and pulp group Sappi, looks at the company’s recent M&A activity and explains how the secret to a successful deal is a long and steady process aligned with goals that lie beyond the current downturn (p 56).

Looking at the wider picture, a number of contributors stress the importance of continuing to invest in people – despite the recession. When an executive reaches the top of the management tree, it may be tempting to think that their personal development has reached its end. But Norman Lyle, CIMA Past President and Chair of the Financial Reporting Supply Chain Project for the International Federation of Accountants, believes investment in executive development is vital and that there are clear links between business performance and proper training (p 42).

On a similar theme, Lorie Farrell and Rob Jackson from leadership consultants the Burnham Rosen Group argue that a more scientifi c approach is needed to ensure the

effective recruitment and development of key employees (p 60).

Finally, as the weather cools and concern about a new fl u outbreak hits the headlines, Ian Houghton, business continuity manager at leading insurance group RSA assesses the impact of the H1N1 virus on business and outlines the preparation procedures for a pandemic (p 64).

Although we can’t offer a panacea for all business challenges, I very much hope that these publications continue to provide the kind of information that will help ensure that your business stays in robust good health.

Keeping the supply chain on track

‘The current cash drought in the banking sector has led to some companies devising innovative solutions.’

EXCELLENCE IN LEADERSHIPFinancial Supply ChainForeword




EXCELLENCE IN LEADERSHIP ISSUE 12 2009 £12

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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

CIM012_Foreword.indd 3 16/9/09 16:07:21


12 Manage the flowDSGi’s Ian Ladd explains how changes in bank lending and credit insurance are challenging suppliers and customers.

ExcELLEncE In LEaDErShIpFinancial supply chain

Snap up the competitionSappi’s Jörg pässler on achieving sustainable value through long-term strategic acquisitions.

Value transformationSome major differences in the finance function were predicted by 2010, but have these changes come to pass? 56 76

Contents

The big picturecIMa’s nick Topazio on whether we should blame the economic crisis on accounting and in particular fair value rules. 50

CIM012_Contents.indd 4 16/9/09 16:49:42

Excellence in Leadership Issue 12 2009

Editor | Michael [email protected] Sub-Editor | Elliott AykroydProduction Manager | Dave StanfordArt Director | Roberto FilistadClient Services Team Leader | Derek DeschampsProject Director | Christopher [email protected] of Publishing Sales | Richard [email protected] Executive | Alessio RizzoPublisher | William CrockerEditor-in-Chief | John [email protected]

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).

Registered address:Brunel House, 55–57 North Wharf Road, London, W2 1LA, UKT. +44 (0)20 7753 4200 F. +44 (0)20 7724 2089E. [email protected]. www.globaltrademedia.com www.excellence-leadership.com

Registered in England No. 01564127

Chartered Institute of Management Accountants (CIMA)26 Chapter Street, London SW1P 4NP, UKT. +44 (0)20 7663 5441Ana Barco, CIMA, Senior Product Specialist E. [email protected]

ISSN 2041-2444©2009 CIMA and Global Trade Media

Every quarter Excellence in Leadership brings you the latest thinking from top industry practitioners and thought leaders. It is easy to subscribe: Email: [email protected] or call Kam Jannati: +44 (0)207 936 6698.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner.

The products and services advertised in Excellence in Leadership are not necessarily endorsed by or connected in any way with CIMA. The editorial opinions expressed in the publication are those of individual authors and not necessarily those of CIMA or Global Trade Media. While every effort has been made to ensure the accuracy of the information in this publication, neither Global Trade Media nor CIMA accept responsibility for errors or omissions.

Further copies of Excellence in Leadership are available from Global Trade Media at a cost of £12.00, €13.00 or $18.00 per copy.

Printed by Williams Press





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ExCELLENCE IN LEADERSHIPFinancial Supply Chain

3 Foreword Charles Tilley, Chief Executive, CIMA

7 Vital statistics

9 CIMA salary survey

The financial supply chain and risk

12 Manage the flow Changes in the bank lending and credit

insurance markets have made FDs more active in talks about trade, DSGi’s Ian Ladd explains.

16 Successful supply chain finance Demica

17 Easy access and early payment The Royal Bank of Scotland

18 Power supply As bank lending dries up, firms are looking

for alternative sources of working capital, explains Volvo Group’s Olivier Bayzelon.

20 A collaborative solution Asite

22 Think outside the box Philippe Perrodin on how firms should treat

supply chain partners in a difficult market.

26 Take cover One man’s balance sheet inefficiency is

another man’s insurance policy, explains group treasurer for BAE Systems David Brent.

30 Risk around the clock Axa Corporate Solutions UK

31 The changing face of the finance function Genpact

32 Healthy appetite There remains hunger for debt in the market,

even in the most difficult of circumstances, Compass Group’s Justin Besley explains.

36 Surviving today, thriving tomorrow Ricoh UK Ltd

38 Strategic advantage Paul Massey and Edward O’Donnell on

seeking a tactical advantage with the implementation of superior systems.

42 Lifelong learning Former president of CIMA Norman Lyle on

why learning is a key pillar in any successful career, and should not be abandoned.

47 Future-proof your management Kent Business School

48 The masterstroke University of Birmingham Business School

50 The big picture Some blame the economic crisis on accounting

and in particular fair value rules. Others say it has brought losses to light quickly and accelerated action. Nick Topazio investigates.

54 Time to turbo-charge financial reporting IBM

56 Snap up the competition Sappi’s Jörg Pässler tells Jim Banks that long-

term strategic acquisitions are the most likely to yield sustainable value.

Also in this edition:Human capital

60 Spot the difference Lorie Farrell and Rob Jackson on identifying the

motives that influence the best leaders.

64 The pandemic survival guide RSA’s Ian Houghton on how businesses

should prepare for pandemics.

68 Motivating change Echo Research

69 Time to evaluate IT Coda GB Ltd

70 Untangling the web Tackling data management is a daunting

task but, explains Toby Redshaw, group CIO of insurance group Aviva, some companies are proving that rising to the challenge can reveal tremendous business value.

75 Tap into a rich vein of information Computacenter

76 Value transformation Research in 1998 envisaged that the finance

department would become functional rather than physical by 2010. The CIMA Centre of Excellence at the University of Bath School of Management finds out if this has happened.

80 Next issue

82 Directory

Finance transformation

Finance and working capital

Financial supply chain and the economy

Liquidity management

Corporate reporting

Vital statistics

Debt capital markets

Physical and financial supply chains

Executive development

Data management

M&A and restructuring

CIM012_Contents.indd 5 17/9/09 10:21:08


Head6 Business continuity management 6

Editorial advisory board

Look to the future CIMA’s Louise Ross plugs into the online business community to assess the Web 2.0 social networking revolution

Stolen identity Dow Chemical and Viacom address why the secure handling of sensitive information has never been more important


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Plus: Deloitte’s Margaret Ewing on the next generation of CFOs Corus’ Ian Cooper on the emerging emissions trading system Wolseley’s group treasurer on cashflow forecasting

Data Management in Finance

December 2008

ExcEllEncE in lEadErship

September 2008

Back to basics CIMA finds new routes to managing cash in the credit crunch

Change your tune Pret a Manger, Moss Bros and Paperchase’s FDs discuss a more harmonious approach to FSC


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Plus: National Grid’s Steve Lucas on people developmentThe Carbon Discloure Project on a responsible supply chain KPMG on talent pools


Put your house in order Indesit’s Andrea Giubboni on why risk management should start at home

Special deliveryPitney Bowes’ CFO Michael Monahan tells us how to manage risk effectively amid rapid change


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Plus: RSA’s Caroline Ramsay on the new carbon trading schemeBBC’s Zarin Patel on choosing the right outsourcing provider

Strategic Risk Management

March 2009

The right routeHighways Agency CFO Stephen Dauncey on keeping a complex portfolio on track

Perfect fitSainsbury’s group CFO Darren Shapland on integrating finance with operations


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Plus: McKinsey explain why BI can be a vital investment in a downturn

Microsoft’s UK FD balances performance objectives

Performance Management

June 2009

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.

Jeff van der Eems

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.

Keith Luck

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.

Kai Peters

David Blackwood is the group finance director 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, where he mainly focused on M&A transactions, he joined ICI Films as CFO in Brussels.

David Blackwood

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.

Sara Shipton

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 and the National Learning and Skills Council.

Claire Ighodaro

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 between 2004 and 2005.

Bev Hampson

CIM012_Ed_VitalStats2.indd 6 16/9/09 16:09:31


Head 7Vital stats 7

Vital statistics Financial Supply Chain

Basware’s Cost of Control study of 550 finance directors reveals the hopes and fears of senior finance professionals. The survey of organisations with 1,000 or more employees in the UK, US, Scandinavia, France, Germany, Spain and Benelux, reveals how businesses are utilising finance and procurement.

• 28% of respondents to the study say that procurement can have a significant impact on managing financial risk

Lowering costs remains a major priority for most businesses, with •66% stating that bringing costs down was the top item on their agenda. At the same time, strategic goals seem to be taking an alarming backseat for many, with only 38% citing risk analysis as a major concern for them

Only • 46% of financial chiefs see full integration between purchasing and finance teams. The failure to do so drives up costs and inefficiencies

Supplier stability tops a list of increasing risks for FDs with • 40% citing it as their main concern, with lack of spend visibility and regulatory change also causing worries

44%• say that unnecessary costs as a result of poor invoice management are rising

‘The old model has changed and we need new ways to lubricate the supply chain to keep the market running. The economic crisis has forced that change to happen.’

Michael Hitchcock, finance director, Moss Bros Group plc

‘Happiness is a positive cashflow.’Fred Adler, venture capitalist

‘There’s nothing wrong with cash. It gives you time to think.’ Robert Prechter Jr, American author and stock market analyst

Thomson Reuters has announced that merger M&A activity is up 5% on this time last year. In the pipeline:

US food giant Kraft has •made an indicative $10.2 billion bid for Cadbury.

Deutsche Telekom, the •owner of T Mobile, has announced a joint venture with UK based Orange, which if it goes ahead will see them become the number one provider of mobile phones in the UK with 30 million customers.

There is also speculation •that British Airways might buy BMI from Lufthansa and/or merge with Iberia.

Source: Spring Partnerships

Sound bites

43%

of respondents now perform regular scheduled risk reviews, while 32% of respondents in 2007 monitored credit ratings only at the point of investment. Almost half of those surveyed said they had significantly changed their approach to credit ratings and counterparty risk in 2008, in response to the credit crisis.

Source: JPMorgan Asset Management’s tenth annual Global Cash Management Survey, carried out in conjunction with the Association of Corporate Treasurers (ACT), 2009

81%

of executives polled said that foreign exchange was their key concern for the coming year, showing a growing concern over the risk and quality of credit. This is in stark contrast to last year’s key concern, accurate cash forecasting, which received just 10% of the vote this year.

Mergers and acquisitions back on the agenda

Keyconcerns

Source: Basware, 2009

And the survey said...

Western Europe: investment-grade issuance

Source: Dealogic/Moody’s Analytics

$ bi

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0

250

500

750

1,000

1,250

1,500

1,750

20002001

20022003

20042005

20062007

2008

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Western Europe: rating downgrades and effect on debt

Cou

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: $ b

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-

50

100

150

200

Q2-00

Q4-00

Q2-01

Q4-01

Q2-02

Q4-02

Q2-03

Q4-03

Q2-04

Q4-04

Q2-05

Q4-05

Q2-06

Q4-06

Q2-07

Q4-07

Q2-08

Q4-08

Q2-09

-

300

600

900

1,200

Count of downgrades (L) Amount of debt affected (R)

Source: Moody’s Global Credit Research – European Credit Trends, Q2 2009

CIM012_Ed_VitalStats2.indd 7 17/9/09 10:21:52

Santander Corporate Banking is the brand name of Abbey National Treasury Services plc (which also uses the brand name of Santander Global Banking and Markets), Abbey National plc and Alliance & Leicester plc, all authorised and regulated by the Financial Services Authority, except in respect of regulated consumer credit products which are regulated by the Offi ce of Fair Trading, FSA registration numbers 146003, 106054 and 189099 respectively. Registered offi ces Abbey National House, 2 Triton Square, Regent’s Place, London, NW1 3AN and Carlton Park, Narborough, LE19 0AL. Company numbers 2338548, 2294747 and 3263713 respectively. Registered in England. Funding is provided by Alliance & Leicester Commercial Finance plc, Company Reg No. 01533123, a subsidiary of Alliance & Leicester plc. Santander and the fl ame logo are registered trademarks. CIMA CPD SEP 09

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At Santander, we’re forging a new era in corporate banking for businesses with a turnover above £1m. We’re putting more Regional Directors on your doorstep. We’re offering a full portfolio of services from current and deposit accounts to funding, supply chain and risk management. And behind everything is the stability that comes with being part of one of the world’s largest banks.

To hear how we’re reshaping corporate banking, please contact your local team or visit www.ukcorporatebanking.com

For more information, please contact your local team:

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CIMA012_Santander advert.indd 1 16/9/09 14:44:26


Vital statistics 9


Vital statistics9

CIMA global qualified salary survey 2009 – key findings

A total of 1,870 CIMA members contributed to the survey, establishing a reliable benchmark of current and future salary potential. This report looks at the salaries and bonuses paid to CIMA members in the UK, Ireland, the Eurozone, South Africa, Sri Lanka, Malaysia, Hong Kong and Australia, and how these vary according to factors such as sector and size of business. It goes on to examine recruitment and retention issues and identifies the geographical mobility of CIMA members. Finally, it touches upon views of the future economy. Salary information was collected in May 2009 in local currency. A country-by-country comparison is not made for salary information as the cost of living and tax regimes vary tremendously by region.

Salaries and bonusesThe financial value attached to the level of CIMA membership •varies tremendously by country, some areas seeing no or very little difference in remuneration between Fellow and Associate membership levels (Hong Kong, Australia), while others (Sri Lanka, Malaysia) witness a greater gap.FCMAs earn around 68% more than ACMAs on average.•London in the UK, Dublin in Ireland and Johannesburg in South •Africa are the salary hotspots where members are most likely to be in the top salary tier.Globally, on average, men earn a third more than women. The •greatest differences are in Malaysia and the Eurozone where men are earning over 40% more than their female colleagues. Hong Kong is the only country that sees parity.Those with 20 or more years’ experience earn, on average, 69% •more than those who qualified between one and three years ago. Technology, telecoms and utilities along with natural resources, •and energy/fuel have the greatest proportion of respondents in the highest salary tier.69% of respondents anticipate receiving an on target earnings •bonus in 2009. Bonuses are expected to average 9% of their salary across all markets.Those in Sri Lanka and South Africa are expecting to receive the •highest bonuses as a percentage of their salary in 2009, with bonuses equating to around 11%.73% of respondents are satisfied with their salary. The highest •levels of satisfaction can be found amongst CIMA members in

the Eurozone, Hong Kong (82% satisfaction each), Australia and Ireland (80% satisfaction each).82% of respondents are satisfied with their benefit packages.•

Recruitment and retentionThe UK has one of the highest levels of ‘work-life balance’ •associated benefits, along with pensions, which may well explain why its benefit satisfaction level is one of the highest at 83%. Other countries which also have a high satisfaction level (Ireland, the Eurozone and South Africa) have a high incidence of pension receipt along with extra holidays and flexible working hours.Two-thirds consider their promotion prospects with their current •employer to be average, good or excellent.The average working week is generally shorter for countries •in Europe and Australia, all of which placed a high priority on ‘work-life balance’ related benefits. Globally the average working week for CIMA members is 44.3 hours.A third of members are under pressure to increase their workload •outside normal hours, with South Africans most likely to feel they are in this situation (46%).Globally, the key career motivators are related to personal •situations as opposed to financial or career-orientated rewards, namely job satisfaction (16%), flexibility/work-life balance, and achievement and success (15% each).Malaysia has the greatest tendency to desire training. It is •also the only country that doesn’t have leadership as its most desired skill set for improvement (instead stating strategic planning and implementation).

Geographical mobilityCIMA members seem to be masters of their own destiny. •Although 87% are confident that they can keep their current position during the coming 12 months if they want, close to half (46%) are considering moving.For the 16% of CIMA members who intend to move abroad in •the next 12 months, predominately English speaking countries are the most popular choice: Australia followed by the USA, New Zealand, UAE and Canada.

Organisations need to strike a delicate but crucial balance between short-term survival and their long-term future. While there is enormous pressure to cut costs, investing in the training and development of financial business leaders has never been more important. With this in mind, in May 2009 CIMA launched its first ever global salary survey for qualified members, to gauge their views and understand their salary levels and aspirations.

CIM012_Salary_Survey.indd 9 16/9/09 16:10:35


Vital statistics10

Economic futureIreland and the Eurozone anticipate the credit crunch to last •the longest, while Sri Lanka is the most optimistic. Globally, the overall consensus indicates that it will probably last a further 13 to 18 months.

Main findings SalariesThe average salary¹ for CIMA members of each of the countries that participated in the survey can be viewed in local currency on the map below.

UK£56,600

Ireland€84,200

Eurozone€86,600

South AfricaR755,900

Sri Lanka¹Rs.169,400

AustraliaAUS$119,100

MalaysiaRM123,500

Hong Kong¹HK$81,200

Average salary by country

¹ Data refers to annual salary for all countries except Hong Kong and Sri Lanka, which refer to monthly salary

Responses from locations within countries are likely to be concentrated in company headquarters. These are most dispersed in the UK but more highly concentrated in Sri Lanka (95% from Colombo), South Africa (57% from Johannesburg) and Ireland (53% from Dublin), for example.

Salary hotspotsThe table below highlights the salary hotspots where members are most likely to be in the top salary tier.

BonusesThe average bonus globally (including those not expecting a bonus in 2009) equates to 9% of CIMA members’ salaries. Just under one-third (32%) of respondents do not expect to receive an on target earnings bonus in 2009, a lower proportion than seen in the 2009CIMA student salary survey (43%). Australia has the highest proportion of respondents not expecting to receive a bonus (44%), and South Africa the lowest (25%). Anticipated bonuses vary by country with South Africa and Sri Lanka expecting the largest as a proportion of their salary, in excess of 11%.

Average expected bonus in 2009 as a percentage of salary

UK7.6%

Ireland7.2%

Eurozone8.0%

South Africa11.6%

Sri Lanka11.4%

Australia6.9%

Malaysia9.3%

Hong Kong9.7%

Years’ experienceTypically, respondents have between one and three years’ experience (24%) bringing the proportion of respondents with experience of three years or less since full membership to around one third. A further third or so have ten or more years’ experience, 23% have ten to 19 years’ experience and 13% have 20 or more years’ post-qualification experience. The fact that the proportion of respondents is relatively similar at each experience band suggests that globally the CIMA qualification has maintained a consistent level of appeal. However, there are differences by country; Sri Lanka (15%) and the UK (11%) have the highest proportion of respondents who have qualified within the last year, while Hong Kong has by far the highest proportion of the most experienced members with 27% having 20 or more years’ experience.

South Africa has a significantly higher proportion of self-employed/consultant members than elsewhere (12% compared to 4% overall). FCMA’s are significantly more likely to be in this employment situation than ACMA’s (7% vs. 3%) and are more likely to have at least six years’ experience.

Perhaps not surprisingly, higher tier earners (i.e. those in the top third salary band in their own country) are significantly more likely to have greater work experience. ■

Country City Basic average annual salary (in local currency)

Australia Sydney $130,100

Ireland Dublin €90,300

Malaysia Kuala Lumpur RM141,500

South Africa Johannesburg R823,100

Sri Lanka¹ Colombo Rs.164,400

UK London £63,800

UK South East £60,900

More information:The full version of the CIMA global qualified salary survey 2009 can be downloaded on this link www.cimaglobal.com/salarysurveys

CIM012_Salary_Survey.indd 10 16/9/09 16:11:21

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Excellence in LeadershipExcellence in Leadership

The financial supply chain and risk1212

Manage the flowChanges in the bank lending and credit insurance markets have posed challenges for suppliers and customers that have seen finance professionals become more active in discussions about trade, as DSGi’s group treasurer Ian Ladd explains to Nigel Ash.

‘In the short-term, customers and suppliers know that significant changes in the level of supplier credit are difficult to absorb for either party.’

CIM012_DSG.indd 12 16/9/09 16:16:15


The financial supply chain and risk 13

One of the unexpected impacts on the financial supply chain is the trouble experienced by suppliers with their credit insurers. Since the financial crisis began, says DSGi group treasurer Ian Ladd, there has been a significant reduction in credit insurance available to suppliers to many industries, including housing, autos and retail. This he explains has had an unpredicted inverse effect on large customers. Net borrowing at some firms has risen steeply, in large measure because of credit insurance changes and suppliers attempting to accelerate their payment terms.

‘In seeking to assess their exposures in response to the financial crisis,’ Ladd says, ‘with hindsight it comes as no surprise that credit insurers started by examining their largest exposures. Therefore, if a company is large, a market leader, and its suppliers have used credit insurance extensively, it

may find that it is one of the first to hit the credit insurers’ radar. Discussions between the customers’ finance function and the credit insurers are likely to help the credit insurers’ understanding of a company’s financial position and may be effective in ensuring that credit insurance for the company’s suppliers is maintained at healthy levels.

‘In the short term, customers and suppliers know that significant changes in the level of supplier credit are difficult to absorb for either party, especially when alternative sources of funds may take time to arrange. A good early dialogue between the parties is always advisable and in this case, getting the finance function involved in that discussion may result in speedy resolution without disruption to trade,’ Ladd explains.

The problem for large customers was that in many cases they may not have

realised the likely effect that such changes could have on their financial supply chain. ‘Because the commercial relationship between suppliers and credit insurers has traditionally been discrete, companies may not have been aware of the level of cover credit insurers had written to their suppliers. Confidentiality obligations may make it difficult for a company to find this out when the trading environment is normal. Once supplier insurance availability starts to reduce there is an impetus for these discussions to become more open,’ says Ladd.

Companies and suppliers now need to be considering what they could have done to have managed this financial supply chain issue more effectively.

‘I think an understanding of how credit insurance can be affected by the underlying economic environment has

CIM012_DSG.indd 13 16/9/09 16:16:31


The financial supply chain and risk14

now become an essential requirement of a treasurer’s role. This should engage customers, suppliers and credit insurers in an open dialogue that should help limit the impact on the financial supply chain. In addition, customers who understand the organisational structure of their suppliers will be better able to judge whether suppliers will be quick to react to changes or slowed by, for instance, an overseas head office.’

Credit controlFor their part, he believes that suppliers who are able, when credit insurance is scarce, to analyse the non-payment risks of their customers, could be placing themselves at a competitive advantage: ‘Perhaps this will lead suppliers to invest in their own credit control functions and build relationships with their customers that assess credit insurance needs in the context of the relationship history.’

It will, he believes, also be of benefit to customers’ financial supply chains if they now look more closely at their suppliers’ credit insurance providers: ‘Companies that can form good working relationships with the credit insurers that their suppliers are using are also likely to find that this will be a competitive advantage in future.’

The primacy of cash has led to the disposal of many corporate assets either to release funds or curtail cash calls. The utility of cash from asset disposals, says Ladd, clearly increases as other sources of funds become scarce and cashflow from operations decreases. DSGi disposed of its loss-making Hungarian operations for just €1 but had a sufficiently strong liquidity and cashflow position to defer the sale and leaseback of a Swedish distribution centre.

Ladd says selling is not always the right solution: ‘You need to have a back-up plan to restructure and turn around a difficult business. This sometimes turns out to be the best option when buyers are strapped for cash and place a low value on a non-core asset.’

On the other hand, if the asset in question is consuming cash or

holding it would require raising additional capital in difficult financial markets, he believes that the argument for disposal becomes all the more powerful. He also reflects that the markets are currently more sanguine about the values achieved for asset disposals, especially of non-core businesses.

Public imageWhatever their public protests to the contrary, banks continue to hover by the exit doors when it comes to corporate finance. Only companies with the strongest balance sheets will not have experienced difficulties with bank money to some degree or other.

‘It is a good working assumption,’ says Ladd, ‘that uncommitted facilities are, as it says on the tin, not available when they might be needed most. Pressure on credit within banks means that their own lending strategies have changed. Therefore they are likely to take opportunities to reduce their exposure to a company, unless lending opens the door to other opportunities that make an attractive business case for the bank.’

It is therefore his view that companies that adopt a philosophy of working with a small club of banks that lend their balance sheets and their brains in return for first refusal on cash and banking business may enjoy an advantage when it comes to securing lending capacity.

‘Provided that group of banks is sufficiently diverse to provide strong offers of products and services in the countries that the company operates in, then there should not be a loss of quality and cost efficiency in working with a club,’ Ladd explains. ‘When the going gets tough, it may be better to have a few core bank relationships, each with an incentive for the company to continue its business with them rather than a large, diverse group that doesn’t know the company well.’

Managing the financial supply chain in an internationally diverse group such as DSGi

Financing the supply chain

Given that it can take up to 12 months to fully replace a core supplier, it is in customers’ interests to sustain suppliers facing insolvency and avoid shocks to their financial supply chain. Some banks say they are developing customised solutions for this. However, Ian Ladd believes more is required.

‘There need to be closer relations between customers, suppliers, credit insurers and banks. At present the banks are focusing much more on total credit exposures. Their good house-keeping has involved the removal of ‘dead wood’ credit lines that have not been used or are no longer required. They are also then removing uncommitted lending facilities and are constrained in their supplier financing solutions.’

A supplier experiencing financing difficulties might be offered funding by the customer’s banks in return for discounts: ‘However, supplier financing solutions don’t eliminate credit exposure, they transfer it from the supplier to the banks. But in an environment in which credit is constrained for a company, banks may not want to offer such solutions or worse, terminate uncommitted supplier finance arrangements if their appetite for that company’s risk is later reduced.’

Nevertheless, it is Ladd’s view if all parties start work now on understanding each others’ positions in a way that has not happened before, there will be a beneficial post-recessionary impact on the financial supply chain for those companies that get it right before the markets pick up again.

CIM012_DSG.indd 14 16/9/09 16:16:45


The fi nancial supply chain and risk 15

requires discipline, he adds. ‘Companies that have expanded by acquisition or joint venture agreement may attribute value to retaining local management authority and autonomy.’

Such autonomy might be formalised in a shareholder agreement or just by custom and practice. Ladd believes that local managers view delegated authority aligned with reward packages provide a powerful incentive to achieve. However from a group perspective, the draw backs can be a lack of a common approach, central control and standardised information. A group needs a strong information platform to take central control and make informed decisions quickly when diffi cult times arise.

When it comes to the fi nancial supply chain, a group without such arrangements may struggle to know how much cash businesses are expecting to consume or generate in the short-term, which is diffi cult if there is no standard approach to cashfl ow forecasting. Ladd adds: ‘There is, of course, a difference between the management accounting approach to cashfl ow forecasting that tends to forecast monthly cash movements and the daily fl uctuations of the central funding requirement. For example, if a group’s business units all make their monthly payments on the fi rst day of the month and then collect the same amount from customers over the rest of the month, the monthly management accounting approach would forecast a net zero, disguising the signifi cant spike in the actual funding requirement on day one. Most companies struggle with daily

cashfl ow forecasting because it’s not an easy

task.’ Ladd emphasises the need to set up a task force to standardise the approach

and focus management effort on making a signifi cant

process change. In his view, a continuous improvement effort is unlikely to be successful. ‘Thereafter, monitoring forecasting accuracy is important because it takes several months to get reliable forecasting performance.’

Ladd believes that in the meantime a useful backstop can be obtained from past financial records: ‘A group treasury may be able to provide a decent forecast from a historical simulation generated centrally from records of daily funding requirements in previous years. This can be done quickly and provides a good insight into daily cash movements. In my experience, it is quite surprising just how accurate such forecasts can be, particularly if the underlying business cycles are stable. If nothing else, a historical simulation is a very good straw man to compare business cashflow forecasts against.’ ■

Cold comfort

Some 80 years ago, when companies last had to grapple with such a vertiginous global downturn, the fi nancial supply chain was not even conceived. Ian Ladd takes the view, however, that whatever the economic environment there will always be struggling companies and those whose business models do not have a long-term future.

‘The major banks employ specialists that can treat ailing companies as outpatients or transfer them to the emergency room. After all it is not in anyone’s interest for a business to fail if it has the potential for a long-term future.

‘What’s different at present, of course, is the sheer number of companies that have caught a cold at a time when stocks of the credit cure are scarce.’ He notes that to meet the advice demand, banks and advisors have had to bolster their restructuring teams with foot soldiers from other departments.

‘As a result the specialist advice can be spread pretty thinly and businesses without life-threatening conditions may fi nd themselves lacking access to advisors familiar with some of the issues being faced by companies in the credit crisis.’

Nevertheless, Ladd believes that many of these other companies are working the answers out for themselves: ‘Because the number of insolvencies does not appear to be as high as predicted, and long may that continue.’

Ian Ladd

Ian Ladd is the group treasurer of DSGi plc. He previously served as ICI’s VP of group treasury. He completed a BSc and an MBA at Imperial College London before joining ICI group treasury as a sponsored postgraduate researcher. He also held the positions of group funding manager and group risk manager at ICI.

CIM012_DSG.indd 15 16/9/09 16:17:00


Company insight16

For some companies the recession threatens a serious breakdown of the supply chain, causing unsustainable tension between buyers and suppliers. The impact of a key supplier failing has been clearly seen in industries such as automotive and retail, the collapse of Woolworths a prime example. Squeezing supply chain partners is surely not the answer, but then what is?

For many organisations, supply chain finance (SCF) holds the key to sustainable relationships and future profitability. Yet there can be confusion between banks, suppliers and buyers over what SCF exactly means. So thinks Phillip Kerle, CEO of independent reporting and processing agent Demica.

‘In the auto industry if a supplier goes down it can take two or three years to recover,’ he explains.

‘In talking to banks, from which we get a lot of our business, SCF is a sexy topic and the interest is driven by their customers. They have working capital issues and want banks to act. SCF can help with preservation of cash, but it is a relatively new concept. Financial institutions and corporates have different definitions of what it means.’

Kerle’s company, which is part of the JM Huber Corporation, plays a key role in executing many high-profile invoice-based transactions, providing clients with secure, non-invasive, cost-effective working capital and invoice discounting solutions. Demica’s Citadel platform has become a leading solution for complex cross-border securitisation and supply chain finance transactions, and has processed invoice-based deals worth over €10.5 billion.

‘Typically a supplier extends payment terms and sells its receivables to a financial institution. That will evolve to the financing of purchase orders, too, although that is

more complex. The benefits of SCF are that it cements relationships with suppliers, which is important now that companies are reassessing their supply chain relationships,’ Kerle comments.

‘Procurement and finance groups must come together, although they have not always communicated well in the past. Now, you see large organisations putting finance people in the procurement team and you see treasurers recognising that procurement has a big impact on working capital,’ he adds.

Lift the lid on lendingSupply chain risk has become a critical business issue, but as invoice debt is seen as a high quality security, SCF lifts the lid on lending without unacceptable risk. Banks are working hard to put themselves in the middle of supply chain relationships by offering SCF services. Relationship banks offer working capital management facilities for large corporate clients – buyers of products or services – while providing prompt payment facilities for their suppliers.

The growing participation of banks is causing interest in SCF to grow fast. Demica’s latest research suggests that over 60% of firms in the UK and over 40% of German companies are planning

to monetise receivables or payables to maximise liquidity available to them and their suppliers.

Citadel, which can be used directly by corporates or by banks as a platform for SCF services, has become one of the most trusted solutions on the market. An independent platform can help them avoid the need for major technology integration. Legacy systems can be left as they are, and purchase or sales ledger flat file data can be daily put into systems that automatically format and manage the data. The disruption to suppliers’ and buyers’ processes and systems is kept to a minimum.

‘From a financial institutions perspective the advantage is increased speed-to-market. A bank, which can use Citadel as a white-label solution, doesn’t need to invest in developing the solution, so it generates cost savings. From a corporate perspective our platform offers the flexibility to bring new banking partners, new suppliers and new jurisdictions onto the system. Our solution is the simplest to deal with,’ Kerle remarks.

‘We are part of a stable and sustainable business, and we are good at enabling SCF because we have been working with receivables for over 20 years.’ ■

Successful supply chain financeSupply chain finance is a hot topic, but some feel there is still confusion about what it means. Some technology developers are keen to unravel the mystery and help corporates unlock liquidity, as Phillip Kerle, CEO of Demica, explains to Jim Banks.

‘SCF cements relationships with suppliers, which is important now that companies are reassessing their supply chain relationships.’

Further informationDemicaWebsite: www.demica.com

CIM012_041 Decima.indd 16 16/9/09 16:41:08


Company insight 17

‘RBS was pleased to be able to support this initiative. We believe a healthy relationship between buyers and suppliers is fundamental to restoring the health of the retail economy,’ says Andrew Betts, global head, trade finance and supply chain, RBS. ‘The programme can reduce liquidity risk within the supply chain as well as enhancing Sainsbury’s commercial relationships with its key suppliers.’

The system provides suppliers with an online view of their trading account with Sainsbury’s – including invoices, debit notes, remittance advices and payment dates – and complete visibility of their expected cashflow. All registered suppliers can opt to receive early cash settlement of their invoices by selling them to RBS. For Sainsbury’s, the move enables them to support the cashflow needs of core suppliers, while minimising the risk of supply chain disruption.

Once Sainsbury’s approves invoices from registered suppliers, details are uploaded to the TFP for viewing. Suppliers can then elect to sell some, or all, of their invoices to RBS for early settlement. As invoices are sold, suppliers receive funds equivalent to the face value of the invoice, less the cost of early settlement, on the following business day. Should suppliers decide not to sell the invoice early, they receive funds as normal, on the invoice due date.

At the end of each business day, Sainsbury’s sends payment information to the PrimeRevenue system. PrimeRevenue then uses Access Direct, the RBS global payments and reporting engine, to send supplier payment data and effect the payments. The solution enables the transmission of commercial payment instructions in domestic and other currencies in a single file.

A retail industry first, many of Sainsbury’s core domestic and international suppliers have already signed up to the programme and are successfully accessing the portal on a daily basis. The expectation is that several hundred suppliers will join the RBS funded programme from now on.

‘Since the launch of our TFP in 2007, we have witnessed a significant increase in the number of suppliers utilising the platform to better manage their cashflow,’ says Darren Shapland, chief financial officer at Sainsbury’s. ‘We are delighted that RBS, a key relationship bank, has agreed to provide funding for the programme going forward. We believe RBS’s participation offers considerable scope to grow the programme and further improve liquidity throughout our supply chain.’

How it works

Supplier finance solutions from RBSRBS offers a full range of Supply Chain Finance facilities to over 200 corporate clients in 30 countries worldwide. Its

international network and industry expertise mean it can offer a range of financing solutions at either end of the supply chain. The bank can put in place a structure that allows the buyer to extend their payment terms while simultaneously accelerating cashflow for the seller, the kind of support that helps companies win business and profitably survive a difficult credit climate. ■

Easy access and early paymentSainsbury’s has chosen RBS as the financial institution partner for its innovative supplier finance programme, the Trading Finance Platform (TFP). The TFP is an internet-based payment management system, designed to make it quicker and easier for suppliers to access account information and benefit from early payments, as Andrew Betts of RBS explains to Excellence in Leadership.

Further informationThe Royal Bank of ScotlandWebsite: www.rbs.com

CIM012_036 RBS.indd 17 17/9/09 10:22:52


Finance and working capital18

As bank lending becomes scarce and expensive, corporates are looking for alternative ways of driving working capital and protecting the supply chain. Volvo Group has leveraged the strength of supply chain finance to improve payment terms while ensuring vital suppliers stay in business. Olivier Bayzelon, director of business control for purchasing, explains the mechanics and benefits of the system to Christian Doherty.

As the credit crunch continues, more businesses are finding themselves on tighter credit terms. Buyers are attempting to squeeze payment times and reduce working capital while suppliers, many of them smaller businesses, see getting paid on time as their priority.

The Institute of Credit Management has named chasing payment from larger customers as the biggest headache SMEs face. Naturally some of these businesses will fail as customers pass difficulties down the supply chain, presenting a major risk to ongoing operations. So how can larger buyers protect their suppliers without compromising on payment terms and discounts?

Volvo Group believes it has found the answer. It is one of the world’s leading manufacturers of trucks, buses and construction equipment, drive systems for marine and industrial applications, aerospace components and services. The group also provides complete solutions for financing and service. Purchasing business control director Olivier Bayzelon has spearheaded the company’s move to a supply chain financing model.

Put simply, it works like this: the supplier invoices, the buyer approves then informs the bank, then the bank pays the supplier within 3-5 days at a slightly discounted rate. The setup is totally flexible and suppliers can choose at any time to sell or

not to sell an invoice depending on their need for liquidity. Because the transaction is structured as a true sale and on a non recourse basis, suppliers can achieve an off-balance treatment in most countries. The simplicity and flexibility of this type of financing facilitate negotiations on terms extension by removing the liquidity obstacle for the supplier. The buying organisation is then usually able to push back terms to 60, 80 or even 90 days.

‘I think it’s fair to say we’ve been a pioneer in this. Lots of our business units are in touch with me about new suppliers to see if we can get them on the system very quickly,’ says Bayzelon.

Power supply

CIM012_010_Volvo.indd 18 16/9/09 16:12:34


Finance and working capital 19

‘The driving force behind it was simple: cash. When we started the programme, the Volvo group was at around 60 days for payment terms. So the focus for purchasing has been on finding a way to extend this. Since beginning the supply chain financing experiment, we’ve got to 80 days, and for the group it’s been a massive improvement in our cash position, allowing us the opportunity to expand capacity a lot.’

For the system to work, it requires suppliers to cooperate and Bayzelon says that so far the response has been overwhelmingly positive. ‘We are offering the same conditions to all suppliers but if they can get better elsewhere then great. We are not forcing them to use it, but we offer them the chance to sell their invoices at a good rate. And they get paid in 5–10 days, depending on the territory.’

Volvo and partner bank Nordea have worked together to explain the system and help suppliers adapt to the new process. As well as improving Volvo’s cash position by extending payment terms, supply chain financing protects the company from a key counter party risk: supplier bankruptcy.

‘That’s a major worry for us,’ Bayzelon says. ‘We do feel responsible for the suppliers and their access to credit in difficult times. So even through the credit crunch we are very pleased to have launched the programme because the suppliers get a regular source of finance.’

Changing gearKey to the scheme’s success is adaptability, and Volvo has convinced its bank to adapt to the changing economic climate to make sure suppliers are taken care of by offering flexible financing terms. ‘We’ve made a point, when we modify the terms, of giving the suppliers a chance to adapt. And even during the worst of the credit crunch, the bank really played the game and placed no restriction on the amount of credit available to suppliers.’

With the supply chain financing system up and running for over two years, Bayzelon’s main challenge has been to ensure internal compliance and iron out any ongoing administrative issues.

‘The complexity is an internal issue for Volvo. We have many subsidiaries around the world and of course suppliers in several countries,’ he explains. ‘There is often slight differences in the processes and systems to manage the payables, so the complexity is concentrated on co-ordinating the different payables departments.’

Bayzelon has spent most of his time refining and streamlining Volvo’s internal processes to ensure that suppliers that were sold to on the promise of early payment actually receive what was offered. And that can mean calling subsidiaries into line.

‘It took a long time to negotiate some common ground between the subsidiaries to handle payment flow. For instance, there is a baseline date for the invoice, from which you compute the due date. That was set according to different rules in each country, so I had to tackle that.’

Bayzelon has instituted a comprehensive monitoring system that allows him to keep tabs on how and when payments are made, to whom, and also to check suppliers, the bank and Volvo are all happy. This encompasses a range of issues.

‘One key element that needs to be monitored is payment time. We post the payment depending on the invoice date. Sometimes we miss that because of a stock take or inventory problem, which means the supplier misses out on the benefit. They would end up with a serious cash problem in that case, so I have to constantly monitor the situation.’

Tune-upNaturally, a system that promises to free up cashflow and help suppliers avoid financial difficulty has to work effectively to make it worthwhile. Bayzelon is now in the fine-tuning phase, taking feedback from suppliers and subsidiaries to ensure that Volvo is getting it right.

And it’s not just monitoring suppliers, the banking arrangements also require

attention. ‘On the financing side, I have regular consultations with banks about funding opportunities for our suppliers,’ he says. ‘It’s important, given the number of suppliers and the volume of business we are running, to monitor the financing carefully.’

But given the obvious administration headaches, Bayzelon is still enthusiastic about supply chain financing. He knows the pressure points and has built himself a monitoring system that provides reassurance without drowning him in compliance forms. ‘I check all the major supplier payments at my end, and I will very quickly receive warning message from suppliers in the event some payments would not be made in a timely manner for any reason,’ he says.

Economy driveTwo years in, Bayzelon points out the secrets of a successful supply chain financing programme. ‘The first and most important thing is to have reliable partners, for the administration of the scheme and the financing. The second is not to underestimate how complex it can be. I can remember looking how simple the basic concept was on a Powerpoint chart and thinking how complicated it was to implement.’

He adds that breaking new ground in this area has been very valuable. ‘We’ve pioneered this, and we’ve had to spend a lot of time with accounting experts and lawyers to make sure the deal was correctly structured. That can take quite a long time; when we did it, it was from scratch so that was a huge challenge. We wanted it to work like a Swiss clock. I didn’t want to hear about the funds not being transmitted on time, being delayed and so on; I wanted all the flows managed electronically. Ultimately we want the payments to be made on time, since that’s the whole point. Now, everything works well.’ ■

‘We feel responsible for the suppliers and their access to credit in difficult times. We are pleased to have launched the programme because the suppliers get a regular source of finance.’

Olivier Bayzelon

Olivier Bayzelon is director of business control for Volvo. Since 2002, he has also been director of purchasing business control, Volvo Powertrain, director of supply chain financing, and chairman of the purchasing controllers committee. Before 2002, he held several positions for Volvo 3P and Renault Trucks.

CIM012_010_Volvo.indd 19 16/9/09 16:12:51


Company insight20

When your partners in the supply chain are under pressure it pays to work with them more closely and support key suppliers and customers through difficult times. That is certainly the view of companies that provide the technology for supply chain management (SCM), who are focusing on how to deliver collaborative supply chain processes that are simple and effective.

Among these technology providers is Asite, which provides a collaborative Software as a Service (cSaaS) platform to help its clients realise supply chain efficiencies.

‘There are a number of factors that cause problems in supply chain management, but the main one is failure to look at a holistic approach. A company must look at every facet in the interconnected network of people it does business with,’ says Tony Ryan, CEO of Asite.

Asite’s clients are largely in government and the architectural, engineering, construction and property sectors. They use cSaaS to facilitate sourcing, project management and procurement through all points in their supply chains.

cSaaS is a web-based platform hosted and managed by Asite, which enables its clients to manage and streamline processes more efficiently and at lower cost. The result is a more responsive supply chain, with typical cost savings of 56-70%.

‘Companies often focus on their internal processes, but they need to make sense to all supply chain partners. They need to handle data in an interconnected way, to leverage that data. Let each supply chain partner manage its own data well but in a collaborative way to improve performance. That is where our cSaaS platform can help,’ Ryan explains.

He believes that larger corporates and government bodies that can flex their

muscle in the supply chain can drive this collaborative approach forward. Asite’s list of clients, which includes BAA, the NHS HSBC, Laing O’Rourke, United Utilities and Diageo, suggest that he is seeing this happen in practice.

‘It is all about leaner, meaner supply chains. We take on the burden of managing the hardware and hosting the service. We get greater economies of scale because we do it for thousands of organisations. Our customers have no hardware purchase to make. We manage it all and provide low-cost connectivity to the hardware and software,’ Ryan explains.

Means and motivationMoving towards more collaborative supply chain processes requires a shift in psychology and the tools to connect the many points on a supply chain. With the global hardware platform that Asite has put in place and leveraging the advantages of what has become an accepted IT business model, Software as a Service (SaaS), the shift in attitude among corporates is now starting to manifest.

‘We can hook into a company’s existing infrastructure if it has invested in its own systems. Savings come from many sources, cutting down on paper processes, eliminating postage costs, less re-keying

of data. Companies can manage their own data if they choose, but the multi-million pound investments they would require to achieve similar systems and security levels is not normally where their business focus lies,’ says Ryan.

‘The solution is effective and cost-efficient for the whole supply chain. Companies can’t squeeze their partners in the supply chain, they must be collaborative,’ he adds.

Collaboration being the foundation of Ryan’s message, it seems appropriate that he sees people rather than technology as the most important asset in the delivery of cSaaS.

‘Our people are the most important component of our intellectual property. They are talented people who come from industry and have the right expertise to deliver the technology online. That is important as we are entering enterprise agreements, not piecemeal projects. We need to get into the DNA of our clients and to do that we need to show the success that comes with a planned, collaborative approach,’ he explains.

This message, backed up by a drive for innovation to constantly improve the usability of cSaaS and maximise efficiencies, is hitting the right note in the market. ■

A collaborative solutionSupply chain management comes under the microscope during an economic downturn, as companies seek to improve their cash position. However, as CEO of Asite Tony Ryan explains to Jim Banks, the temptation to squeeze suppliers and customers on payment terms should be rejected in favour of a more collaborative approach.

‘There are a number of factors that cause problems in supply chain management, but the main one is failure to look at a holistic approach.’

Further informationAsiteWebsite: www.asite.com

CIM012_037 Asite.indd 20 16/9/09 16:42:09

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Financial supply chain and the economy22

Think outside the box

Companies must consider many means for surviving the global economic crisis, but the efficiencies to be gained from integrating the financial and physical supply chains make it a top priority for leading organisations. Jim Banks speaks to Philippe Perrodin, vice-president for group financial control at one of the world’s largest packaging companies, about how companies should treat their supply chain partners in a difficult market.

CIM012_012_TetraPak.indd 22 16/9/09 16:14:38


Financial supply chain and the economy 23

In the finance teams of many large and successful organisations you will find leaders who advocate closer integration of financial process with the physical supply chain. Many of them have achieved just that and are speaking from experience. Most finance executives will also stress that, now more than ever, optimising financial processes across the physical supply chain is a key to driving competitive advantage and adding real business value.

One of them is Philippe Perrodin, vice-president for group financial control at one of the world’s largest packaging companies, who has seen the effect of the downturn on his company’s suppliers as short-term cash issues dominate the agenda.

‘Most companies should be concerned with their cash situation, and should be prioritising the protection and securing of debt-generated cashflows. From late 2008, many companies may have got calls from banks that wanted to tighten their credit limit. Banks had their own cashflow problems,’ he says.

Perrodin is responsible for group financial and business control from his base in Switzerland. He has witnessed at first hand many of the problems that stem from the current economic crisis and understands the challenges his company and its partners in the supply chain must overcome in the months ahead.

‘Customers want to delay payment and, for many companies, sales volume is falling. As a result, the level of inventory and work in progress is increasing, so there is a need to finance working capital. It is very difficult to manage cash better unless you can raise prices, which few companies are in a position to do,’ he observes.

‘Food companies may be able to increase prices as commodity prices fall, but few other companies can. So, lots of businesses are very tightly squeezed now, particularly if they are supplying sectors like the car industry, where some suppliers have seen sales fall by 30%.’

Most industries have seen sales volumes impacted, even if the drop off in demand has not been as severe as in the car industry. Even the food sector, where customer expenditure remains firm, has

seen the pattern of consumption change as a result of the downturn.

‘We are seeing a move away from premium products to private labels,’ Perrodin notes.

The changing dynamics of any market place the emphasis firmly on managing a company’s cash position.

‘We sell packaging material and sales volumes are stable, but there has been a decline in equipment sales. Other companies, like Nestlé, are in the same situation. The flow of goods goes through, but there is no increase in sales. We should nevertheless do well because we have managed our cash well,’ says Perrodin.

‘The cash situation can be very difficult, as companies look to cash in receivables and extend terms on payables. Think of it like a train: the first wagon stops and then others crash in behind it. Inventories accumulate, so now we see huge destocking taking place along the supply chain.’

Risk and uncertaintyVolatility in commodity markets is a big challenge for many companies, as it creates unpredictable cost profiles for the sourcing of raw materials. Managing commodity price exposure is, therefore, more important than ever because revenue streams and margins are under pressure. Perrodin uses futures markets like the London Metal Exchange to hedge against changes in raw materials prices, in the same

way that he does for currency exposure, in order to lock in prices.

‘You have to make decisions about when to hedge, but you should do it once you have a clear contract. If you have a large margin you might hedge less, but if your margins are low you hedge 100%. Procurement has to be done more intelligently, too. If you are looking at something like aluminium, which often comes from companies that also supply the car industry, you will see suppliers suffering the extreme effects of a drop in sales volumes,’ he comments.

Risk management must go hand in hand with investment in growth and innovation where possible, regardless of the economic downturn.

‘For those companies that can afford it there is a need to continue research and development. Invest in new markets in order to take market share and be in a good position at the end of the crisis,’ Perrodin remarks.

He believes that the two key objectives for a finance director are clear and simple: firstly generate enough cash to guarantee survival, then look at how to improve the company’s competitive position. It sounds easy, but the key is to retain a long-term focus whenever possible.

‘It’s all about cash. My company is in a good position and we are keeping up our investment in new products and development, although not in capacity. We invest in markets where our capacity is limited, even if there is some risk. We want to come out of this crisis in a better position and with new products,’ says Perrodin.

‘No one knows when the crisis will end, but a strategic plan must look beyond that. There will be renewed demand after the crisis and the first to meet that demand will be successful,’ he adds.

He also believes that any long-term plan must include consideration of sustainability - especially in industries like food packaging - but he understands that such considerations may have to take a back seat in the short term if an organisation is focused on survival.

‘Everyone has been talking about a green economy for a long time, but nothing much

‘No one knows when the crisis will end, but a strategic plan must look beyond that. There will be renewed demand after the crisis and the first to meet that demand will be successful.’


Financial supply chain and the economy24


‘Companies need to look hard at border activities in the flow of goods, and where value is held in terms of the balance sheet.’



Financial supply chain and the economy 25

happened. Now, some companies can’t afford to look at it. Those that can will have a better profile. We have just opened a factory in Mongolia, for instance, that is run completely on green energy. That is very significant, especially as it is in China. We could have withdrawn that project, but we didn’t,’ says Perrodin.

Support your partnersThe ability to maintain a long-term, strategic focus depends wholly on a company’s cash position, which can be optimised by finding efficiencies in the supply chain. For Perrodin, the key to unlocking those efficiencies and avoiding the temptation to squeeze suppliers and customers is to achieve better integration of the financial or physical supply chains.

‘The people responsible for the physical supply chain must understand the financial consequences of their actions, and what their financial colleagues can bring to the supply chain by guaranteeing exchange rates, for instance, or locking in costs,’ he remarks.

‘One of the challenges is hindrance at the border. Companies need to look hard at border activities in the flow of goods, and where value is held in terms of the balance sheet. To do that, they must work more closely with customers and suppliers. Integration of the financial and physical supply chain is natural. It is, after all, a financial transaction – a sale – that sets off the physical supply chain.’

It is very difficult to squeeze suppliers when you are trying to share more information and co-operate more closely to improve the flow of goods and money along the supply chain. Perrodin sees greater value in supporting supply chain partners, provided that there is sufficient focus on credit risk.

‘My company has equipment suppliers, many of which also supply the car industry, who have seen sales volume decline. So, we extend finance to them by granting them a loan, or by giving them large advance payments to secure their ability to deliver, but only if they supply strategic products and will survive the current crisis,’ he says.

‘There are risks both ways, so we do very careful credit analysis on suppliers, just

as we do with customers. We need to know who will survive, so we consider the quality of their management and the quality of their portfolio. We recognise, however, that we have some dependency on suppliers.’

The credit committee at my company not only uses publicly available information to make its analysis, but also the feedback from its own purchasers, who have personal interaction with suppliers’ representatives and who see day-to-day how delivery deadlines are changing. Combining formal and informal sources of data, the company can make better informed judgments about how robust a supplier is. That information exchange is, of course, a two-way street.

‘We are very open about our own orders. It is not a complex process, but we must make sure we leverage all the information we have, especially during the economic crisis. The level of trust has not changed, but the risk has increased. The interbank market has not improved much and all banks are still very cautious about funding,’ remarks Perrodin.

He also points out that there are other risks that arise in a downturn that must be carefully assessed. For instance, suppliers may offer products and equipment to a company like his now because their prime market, the car industry, is suffering. The risk is that when the car industry recovers those products will no longer be available

because the supplier has changed its focus once again.

‘Suppliers are quoting very competitive rates right now, but they may go back to supplying the car industry again when the market picks up. So, we make sure that we are very close to our strategic suppliers and that our credit committee keeps track of their strengths and their ability to survive the crisis. We know more about them than we do about other suppliers, and vice versa, so there is a lot of trust,’ he explains.

Perrodin is cautious about predicting an upturn in the global economy, but recognises that strategy must look ahead to a time when markets improve, and must seek out the supply chain efficiencies that will help a company be in the best possible shape to greet the recovery.

‘I don’t think we have seen the worst of the crisis. Companies have not started to fire people heavily yet, and we will see more of that in the autumn. But I believe we will see a turnaround next year, and 2011 will be much better. So, companies need to ask themselves whether they are solid enough to last until the second half of 2010. For a company like mine there are many opportunities,’ he comments.

Those opportunities largely exist because the company has kept a strong cash position, and has brought harmony to its physical and financial supply chains. In a downturn, just as in a boom market, supply chain synergies will help any company deliver on its strategic vision. ■

Philippe Perrodin

Philippe Perrodin is vice-president for group financial control at one of the world’s largest packaging companies. His responsibilities include business control, global MIS development and roll-out, finance processes and outsourcing. Previously he was vice-president, business control, carton chilled.

‘I believe we will see a turnaround next year, and 2011 will be much better. So, companies need to ask themselves whether they are solid enough to last until the second half of 2010.’



Liquidity management26

Take coverCompanies are finding that improving liquidity means being not only innovative in a downturn, but also prudent and prepared when markets are buoyant. One man’s balance sheet inefficiency is another man’s insurance policy, as group treasurer for BAE Systems David Brent tells Jim Banks.

The effects of the economic crisis are not uniform across industries. Food markets, for instance, have seen sales volumes stay relatively firm, while the car industry has been hit hard. The reluctance of banks to lend, however, is felt in every business sector. Liquidity management is high on every boardroom agenda. Some organisations have shown that is does not take a crisis in interbank lending and a squeeze on funding to focus minds on liquidity.

Among the companies that find themselves in a strong cash position during the economic downturn are those that have carried some insurance against just such a turnaround in global markets.

‘We have always sought to maintain a strong balance sheet and be prudent financially,’ says David Brent, group treasurer for BAE Systems. ‘We have always maintained high liquidity and we are prepared to have debt on our balance sheet.

We use debt facilities as standby, so that we can use banks’ capital for other things.’

BAE Systems is the third largest global defence company, employing over 100,000 skilled people around the world. It has customers in over 100 countries for its defence, security and aerospace solutions, generating over £18 billion in annual sales for 2008 (see box, opposite). The company can trace its roots back over centuries, and it still has a strategy that prioritises durability and longevity.

CIM012_013_BAE.indd 26 16/9/09 16:17:51


Liquidity management 27

In the past it has shown itself to be a willing player in the debt market, and its recent offering of two bonds, one ten-year, the other five-year, show that it still has an appetite for the capital markets. The structure of the industry means that defence companies have a different business model to many other sectors, not least because demand for their products is less vulnerable to short-term changes in the macro-economic environment. Orders generally come through large, long-term contracts from state bodies, which may provide a significant down payment in advance of delivery and additional remuneration at agreed milestones in a project.

Partly because it has a business model structured firmly around long-term goals, BAE Systems has nevertheless maintained the belief that it is good to keep something in reserve for a rainy day.

‘We’ve always done that. Sometimes we have questioned it because it could be seen as inefficient, but we are very pleased with that policy in the last 18 months,’ remarks Brent.

Be preparedThe company’s prudent approach does not make it immune from or indifferent to the impact of the liquidity crisis, although it does mean the company is better prepared than most to weather the storm. Improving liquidity is still a key goal for the finance team.

An important part of its strategy to enhance liquidity is to delegate. Business units are given a high degree of autonomy over treasury functions, although key elements are highly centralised.

‘The company seeks to optimise cashflow by passing it down to individual business units to manage. They are given targets, which are agreed and incentivised. Cashflow management is the responsibility of those business units. Having said that, it should be noted that as a defence company we have always had negative working capital,’ notes Brent.

‘Other companies in other industries might cut inventory to lower cost and increase liquidity, but ours is a more long-term business. We can rely on the strength of our order book, and most of our customers are governments. Of course, governments are not

immune to the economic downturn, and there are questions over defence budgets in the US and the UK, for instance. But it is still more transparent than most industries,’ he adds.

Balance sheets and banking relationshipsIt seems that liquidity is a high priority no matter what the dynamics of an industry, not least because the future now seems less predictable than ever.

‘No one has a crystal ball, so liquidity is higher on the agenda in every boardroom,’ says Brent.

Delegate to accumulateThe delegation of responsibility for liquidity management to business unit level has worked very well for a complex, global organisation like BAE Systems, which has six large home markets – including Sweden, the UK, the US and Scandinavia – each of which is a big business in its own right. Each has control of much of its own cash management activities, although none of those regional businesses has the right to borrow.

‘We centralise all our cash, and we invest it from the centre, too, but the management of individual programmes is done at the business unit level. Each has its own business planning process and each gets cashflow and profit targets,’ explains Brent.

BAE Systems has also ensured liquidity by carrying some ‘inefficiency’ on its balance sheet, and by taking a very thorough approach to the way it structues relationships with its banking partners.

‘It is a form of risk management. The company may not have the greatest volumes in the banking area, but it has the widest breadth of banking services that need to be catered for. There are many things, including interest rate management, funding in the capital markets, foreign exchange management, and structured finance, which can use up bank capital, so we are always looking for banks to support us in those areas,’ notes Brent.

‘We have a strong ethos of relationship banking, but for funding we go to the capital markets. We need syndicated, revolving credit facilities from our banks, as a backstop. Then we give them access to the other services we require,’ he adds.

The company has made no significant changes to its existing banking relationships as a result of the downturn, but when Northern Rock in the UK got into difficulties there was a rethink on how to approach counterparty credit risk. BAE Systems had historically used an external ratings agency to assess its bank risk. Banks were rated in risk categories from one to ten, with one being the lowest risk.

‘When Northern Rock happened we saw that any bank with the same rating or worse could have similar difficulties. So we drew a line, and would only use banks with a rating above that line. That left us around

‘Banks are turning a corner, but they are a long way from lending as they did before… the crisis was a very stark warning, and will live long in the memory.’

Sales on course

28% increase in sales to £9.9 billion

19% increase in underlying EBITA to £927 million

£316 million amount of net debt, down from £708 million

£355 million amount of net outflow from its net cash position.

The half-year results for BAE Systems show that it is on course to emulate the £18 billion in sales of 2008. For the six months to 30 June, 2009:

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Liquidity management28

15 counterparties we could deal with. We kept track of the market capitalisation of many banks. It may sound absurd, but equity markets also show which banks have difficulties. That was important because the capitalisation of banks, such as RBS plummeted and ratings agencies were slow to respond. We also started tracking bank credit default swap pricing as an indicator of credit quality,’ says Brent.

Regulating riskCredit risk analysis for banking partners also happens more regularly at BAE Systems than it did before the collapse of Northern Rock. No longer is a report compiled and verified on a monthly basis.

‘Now, I have devised a new weekly reporting process to watch over where cash and derivatives trades are done. Risk mitigation

is now the prime factor, above returns. We are much more active in reviewing exposure to banks, and it will be a long while before we change our indicators of counterparty credit risk,’ stresses Brent.

‘Our company and its pension fund have also stopped investing in money market funds. We didn’t have the time to review what they were doing with our money. Our priorities have changed and the focus is firmly on risk mitigation,’ he adds.

This means also looking carefully at the creditworthiness of key component and raw materials suppliers, and of subcontractors that assemble components and subsystems. Although the company has not experienced any negative impact from the failure of suppliers or subcontractors, it remains vigilant and thorough in its monitoring of the risk.

‘Risk mitigation is now the prime factor, above returns. We are much more active in reviewing exposure to banks, and it will be a long while before we change our indicators of counterparty credit risk.’

BAE back in the bond market

a $500 million note paying •

4.95% interest and maturing in 2014

a $1 billion note paying •

6.375% interest and maturing in 2019.

A private placement of guaranteed notes raised $1.5 billion. The ten-year bond was sold at a risk premium of 275 basis points over Treasury notes. ‘We also have bonds maturing in 2010 and 2011,’ says David Brent.

In June, BAE Systems offered two new bonds to the market:

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Liquidity management 29

Carrying a few extra poundsThe latest set of results for BAE Systems show that at the end of financial year 2008 it had £2.5bn in cash, all kept on a very short-term basis. It has maintained its strict policy of reviewing bank credit risk and of maintaining some room for manoeuvre by ensuring access to cash reserves. This is unlikely to change even when the global economy recovers.

‘Banks are turning a corner, but they are a long way from lending as they did before the crisis. Now, we are much more comfortable with the banking sector than we were, but we still use our report that shows us which banks are approved and which ones we would not want to deal with. The crisis was a very stark warning, and it will live long in the memory,’ believes Brent.

‘It is our policy always to use credit ratings for banks, and we set lower lending limits for those with lower ratings. But then Northern Rock was low single A, a reasonable rating, and when was the last time a bank with that kind of rating went down?’

Given the company’s willingness to seek funding in the capital markets Brent is glad to see the debt market opening up for companies like BAE Systems, having been moribund for much of the last two

years. Prudence, however, remains the watchword.

‘Money thrown in by governments creates a recovery, but the question is whether it is sustainable. With the capital markets opening, many corporates will dive in because of the opportunity to fund their business, and the demand from investors is there. We’re not alone in going to the capital markets this year. A lot of investment-grade companies have done the same,’ Brent remarks.

The defence industry may differ from others in its structure, but companies

like BAE Systems still show the advantage of keeping a close eye on liquidity in the good times as well as the bad times, and keeping tight control of credit risk, be it with suppliers or banking partners.

In these times of the lean organisation, many companies might benefit from Brent’s advice: ‘Delegate, diversify risk and carry some fat.’ ■

David Brent was appointed to his current position of group treasurer, BAE Systems in October 1995.

He started his career in the company in 1979 when taking up a financial accountancy role in the British Aircraft Corporation.

Brent is a fellow of the Institute of Chartered Accountants in England and Wales and a member of the Association of Corporate Treasurers.

David Brent was appointed to his

‘We set lower lending limits for those with lower credit ratings. But Northern Rock was low single A, a reasonable rating, and when was the last time a bank with that kind of rating went down?’

In a tough time for the global economy and for consumer markets there is a strong drive among companies to make the most of their available cash resources. Cash pooling has become an important tool for corporates and a key service area for the banks that serve them. Managing current credit and debit positions to derive an optimal overall cash balance reduces negative balances on a corporate account and can help a company to avoid some costly bank fees. Negative balances are minimised, positive balances are maximised.

While pooling has become a vital part of cash management strategy for many corporates, domestic or multinational, there are different approaches that enable them to fi nd an optimal solution for their business.

Cash concentration maximises a positive balance to not only eliminate bank fees, but also to maximise interest paid by the bank, but bringing all of a company’s funds into a single, central account. This offers the ability to keep a close eye on cash fl ow, thus easing fi nancial management and increasing transparency within a business.

Increasingly popular, however, is notional or virtual cash pooling. This relies on the same principle of creating a healthy balance and cutting fi nance charges levied by banks if, for instance, there is an overdraft in any account. The key difference is that there is no real movement of funds. Credits and debits are considered together to derive an overall cash position for the calculation of

interest or fees, but the money stays where it is, whether that is in separate domestic accounts or in accounts spread across different geographies.

Virtual cash pooling gives companies a clear view of their treasury position, as they can see the gains on each account in the previous month, but does not require funds to physically travel cross-border. Companies can achieve clarity and fl exibility in their cash management strategies. Banks are keen to include these services in their cash management portfolios to keep themselves in the loop and cement their relationships with corporate customers. More and more businesses are taking advantage of that fact.

Keeping pool in a crisis

David Brent

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Company insight30

For large multinational corporations, with extended supply chains spanning the world, effective risk management is a significant challenge.

‘Providing insurance to large international corporations, whether it is property, casualty, marine, aviation, motor or any of the many other covers required, plus the relevant advice, requires a high level of expertise, as well as specialist services such as reinsurance treaties and the capability to manage risks on a global basis,’ says Nivet. ‘So the decision was made to have a unit within the AXA Group – AXA Corporate Solutions – dedicated to satisfying the insurance and related service needs of these kinds of clients.’

AXA Corporate Solutions focuses on providing products and services to European multinational corporations with an annual revenue of over €600 million and in addition extends its speciality insurances and risk consulting services offer to smaller companies. With its headquarters in Paris, the company has established centres of expertise in the UK, Germany, Switzerland, Spain, Italy and Benelux as well as others in Asia, the Middle East and the Americas. In addition, a specialist team based in New York is licensed to operate in the US. These centres of expertise are supported by a substantial international network of AXA Group subsidiaries, affiliates and external partners, to ensure a global service capability for clients.

Some firms perceive risk largely in terms of the downside, notes Nivet, but this is the wrong approach. ‘Where there is risk, there is opportunity,’ he says. ‘Risk management is not just about preventing failures, but about understanding and managing the risks taken, and transforming these in an optimal way. Risk management is a useful tool for defining opportunities. There is a direct relationship between risk management and product and service innovation, for example.’

While it is not AXA’s role to be the risk manager of an insured firm, says Nivet, the

company uses its knowledge and experience to help provide pragmatic and innovative risk management tools and expert advice. So, for example, climate change means that losses from natural catastrophes, such as hurricanes, earthquakes, tornadoes, floods, wildfires may escalate in future years.

AXA Corporate Solutions has created VisioRisk, a risk management tool that identifies and measures the probable impact of catastrophic events, in order to help firms mitigate the risk of catastrophe related losses. With the help of web-based applications, in particular Google Earth Pro, companies can chart their facilities around the globe on a three dimensional map of the world.

Add in real-time data from a variety of sources, such as US weather service data, integrate with client specific information, and risk managers can track catastrophic events, and visualise their aggregate exposures within a region. This may enable companies to take precautionary measures, close down locations where possible and if appropriate, for example, or report initial estimates of potential losses back to the board.

There are many areas where insurers can assist corporations with effective risk management. Claims fraud, for example, tends to be more of a problem during an

economic downturn. ‘Often, fraud gives rise to problems with liability insurances, and that’s not good for the client,’ says Nivet. ‘In mid-2007 we set up a team to study fraud, and have since investigated many cases, providing savings of over £4m.’

It is essential that insurers keep pace with the fast moving business world that their clients operate in. ‘Clients are dealing with increasing numbers and types of risk – pandemic risk, brand protection, environmental issues, differing regulatory and liability regimes, for example,’ says Nivet. ‘In keeping with our core values, being reliable, available and attentive, we do our utmost to assist clients with managing these risks.’

As Nivet points out, there are risks that are supposed to be uninsurable: those that look insurable but are difficult to assess, poorly understood emerging risks, and unknown, unforeseen risks. Yet, through a thorough understanding of the client’s business, most risks can be dealt with to some extent.

‘There is almost nothing that is uninsurable, the only problem insurers have is assessing the level of liability,’ says Nivet. ‘Once we start to understand a risk it can become insurable. So if we are uncomfortable with some of the coverage requested, we discuss it with our clients to find out what product we can develop that will deal with the risk in a manner we understand, and help clients manage their risk in an effective way.’ ■

Risk around the clockThe financial crisis has highlighted the need for organisations to operate effective risk management strategies. Yet risk management must be a key priority for corporations at all times, not just during difficult periods, Emmanuel Nivet, chief executive of AXA Corporate Solutions UK, explains to Steve Coomber.

‘Risk management is not just about preventing mistakes, but about understanding and managing the risks taken, and transforming these in an optimal way.’

Further informationAXA Corporate Solutions UKWebsite: www.axa-corporatesolutions.com

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Company insight 31


A dramatic shift in the global economy has changed the priorities of organisations across industries. Their first priority is survival in tough economic conditions but they must also try to create bandwidth for growth and optimise their structures to enable future prosperity. New attitudes to risk and liquidity now prevail as companies deal with structural risks, customer bankruptcy and failing suppliers.

The implications for finance are numerous, and it is more important than ever that CFOs be partners with the rest of their business. They are increasingly forced to manage the trade-offs between simply surviving and gearing for growth, while managing risk and liquidity in uncertain times.

‘Companies that are passionate about becoming best-in-class in these tough times should ensure that there is a direct connection between the business and finance function and that it plays an important role in finding the right levers to improve numbers. Companies that do not share this vision and have a disconnected finance function are unable to find those levers,’ says Tiger Tyagarajan, Chief Operating Officer for Genpact.

F&A Practice Leader Shantanu Ghosh builds on this idea: ‘Finance is one of the functions that has the best visibility of what these levers are, how much they will impact the numbers, and how these numbers will affect different stakeholders. In great companies, finance directors have become strategic partners. Most have always been focused on driving efficiency but that is not enough anymore; effectiveness becomes the differentiator.’

‘A company doesn’t change overnight to become a cohesive whole. So how can it drive effectiveness, understand its process performance and create targets? It needs more flexibility in everything it does. The finance cycle of budgeting used to take five or six months, but now you need to revise the budget and the risks weekly,’ says Tiger.

Evolving effectivenessIn such an environment, how can a company deliver the effectiveness it needs, particularly in the finance function? Tiger and Shantanu are clear about some of the options.

‘The demands on the CFO and finance function have increased manifold. Traditionally, progressive finance organisations have leveraged business process partners to do non-core work. Now the need goes beyond that; the leading practitioners are leveraging the expertise and capabilities of best-in-class

business process partners like Genpact to help drive effectiveness across the entire business value chain and effectively manage risk,’ they say.

The other imperative for finance directors in these times of uncertain liquidity is cash.

‘The importance of cash is clear. In the past the efficiency of running the order-to-cash process and managing receivables were given equal importance. Today, the importance of driving receivables down far exceeds the need for an efficient process. The impact the order-to-cash cycle has on DSO is critical; it decides whether you live or not,’ says Tiger.

Today there’s greater appreciation that cash is not only about collecting the dues, but also about managing other cash cycles like the payables cycle. FDs deal with three things: getting lower prices from vendors, paying as late as possible, and providing some certainty for vendors to give them the best trade-offs possible. The best organisations have procurement, sourcing and finance working as one unit. ■

The changing face of the finance function The economic downturn has forced many companies to change their agenda from nurturing growth to managing their businesses for lower demand and simultaneously preparing for potential recovery and growth. Tiger Tyagarajan (left) and Shantanu Ghosh, Genpact, explain to Jim Banks how surviving and growing stronger in a time of scarce liquidity and demand requires careful control of costs, risk management and partnering with businesses.

‘Companies that are passionate about becoming best-in-class in these tough times should ensure that there is a direct connection between the business and finance functions.’

Further informationGenpactWebsite: www.genpact.com

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Debt capital markets32

Healthy appetiteFortunately, for the treasury function, there is still some hunger for debt in the market, even in the most difficult of circumstances, as Justin Besley, group treasurer at Compass Group, the food and non-food services provider, discovered when he found himself on a private placement investor roadshow the day that Lehman Brothers went bust.

It is a tough time to be treasurer of a large organisation. Not only has the credit crunch raised significant liquidity issues for many firms, meaning effective working capital management becomes ever more important, but it has also made raising longer term funding through debt issuance a challenge, even for those firms with good credit ratings.

At Compass, operating at the group level in a team of three, group treasurer Justin Besley sees his role as a strategic one.

‘It is balance sheet risk management if you like,’ says Besley. ‘It is general funding and liquidity management, so debt raising and cash management, counterparty risk management, foreign exchange risk management, interest rate risk management, and capital structures. We have a watching brief on cash management throughout the group, an overall responsibility for it, but not an executive responsibility, because it is done by territory.’

As Besley explains, while financial supply chain management (FSCM) is an important concept for the group, it not something that is handled centrally in a formal way, but via the firm’s operating units.

‘We are a relatively straightforward company operating in the service industry. We have a very large number of relatively small contracts, and tend to be buying and selling within the same country, so we do not have many cross-border payments.

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Debt capital markets 33

‘So FSCM is not an area that I get involved in. It is a very important area for the group, but we have a fairly decentralised treasury operation when it comes to working capital management, accounts payable and receivables and so on. If the country is big enough it will have its own local treasury function as in the US or UK, and manage working capital there in the most appropriate way.’

Besley is, however, involved in the approval at a group level of various financial supply chain initiatives. So Compass has put supplier financing programmes in place in the US, for example, essentially to provide financing to its suppliers to enable them to comply with the firm’s credit terms.

When operations decided to extend payments terms to improve its working capital position, explains Besley, it recognised that the new terms might create difficulties for some suppliers. At the same time there was an opportunity with one of the company’s banks to establish some supplier financing. Any financing arrangement has to be reviewed and approved by the centre. So the proposal was reviewed by Besley to make sure that it received the correct accounting treatment, was properly installed, and that the group approved of the rationale.

The scheme, conducted at arm’s length, has been in force for the last couple of years in the US. ‘It is a win-win-win,’ says Besley. ‘The supplier wins because they get lower cost of funding than they are currently paying. Compass wins because it has extended its credit terms and also assisted its suppliers, so there is goodwill there. And the bank wins because it is essentially discounting Compass: it is taking a Compass credit risk at a better rate than it would otherwise.’

Interestingly, while these are the very kinds of arrangements which you might imagine would come under pressure during a credit crunch, Compass is in the progress of extending its supplier financing initiative to other territories.

‘When we first started looking at that, we were certainly told by one or two banks that they would be surprised if we were able to go competitive on our offer,’ says Besley. ‘However, we have discovered that there is capacity there for the right credit, and it has turned out to be a lot easier than we were led to believe initially.’

As Besley points out, supplier finance makes a lot of sense for all the parties concerned in the current economic environment. Especially in those countries where there has been state intervention to support banks, as supplier financing is a product that banks can use to fulfil their obligation to the taxpayer to continue lending to businesses. The banks can take a company with a good credit risk, and assist in providing working capital to large number of the company’s suppliers.

US private placementBesley may not be involved in the day-to-day working capital management of the various business units that make up Compass, but he is certainly responsible for general funding and liquidity, including any debt raising programmes, which is how he found himself in an investor roadshow in the US on the day Lehman Brothers filed for Chapter 11 bankruptcy.

Back in the 1990s, when Compass did not have a public rating from the credit rating agencies, the company turned to the US private placement market to raise funds through a bond issue. It is a market that Compass has turned to ever since, even though the firm now has a rating of BBB+ from Standard & Poor’s and Baa2 from Moody’s.

There are several advantages to using the US private placement market, says Besley. The first is that it is a market that can be accessed by companies that have not gone through, and maybe do not wish to go through, the full public credit rating process. Secondly, in terms of pricing, historically the market has been competitive with the public market, although this is not necessarily the case any longer.

‘And if you want to raise dollars in dollars, rather than swapping from Euros or sterling,

then you have to go to a dollars market. There are considerably more onerous requirements in terms of disclosure and SEC regulation around Sarbanes Oxley if you go to the public debt markets, as well as additional costs,’ says Besley.

‘So it is a cheaper market to go to, more flexible, and less onerous in terms of reporting, because you are not dealing with the wider retail market, you are dealing with qualified institutional buyers; highly sophisticated investors, who are deemed to be able to do their own credit research.’

Using the US private placement market is not entirely straightforward. There are some documentation issues, plus, in the current market, covenant requirements.

‘I’ve been using this market for nearly 20 years, and of course it has changed over that time,’ says Besley. ‘In the early days investors were much less demanding in terms of information, and didn’t see what covenants you had elsewhere. These days the investors want to look at your bank agreements to ensure that, if things went wrong, they would be in an equivalent position to the banking creditors. But, as always, if the covenants are set at the right levels they should not cause you a problem.’

In the USPP market corporations will use an arranger to deal with the placement. It is increasingly common to have a joint arranger, so on Compass’ last placement it appointed two banks which split the arrangement of the placement between them in terms of the work involved.

Most placements are based on a model form agreement, and so are similar in structure from a documentation point of view, although covenants or specific protections for investors will vary, as will pricing. Issues tend to be on a fixed rate basis, and early repayment will trigger a penalty, although some investors will do a placement on a floating rate basis.

There is no secondary market as such either, as the individual institutional investors buy the bonds intending to hold them until maturity, rather than buying them to trade them. Investments may be transferred occasionally but usually between one existing investor and another. In 2008, Compass was looking to complete a private placement on the USPP market in order to raise capital to refinance a bond due to mature in May 2009.

‘These days the investors want to look at your bank agreements to ensure that, if things went wrong, they would be in an equivalent position to the banking creditors.’

CIM012_Compass.indd 33 16/9/09 16:31:13


Debt capital markets34

‘Obviously, we have an internal process; we had board approval in July and started on documentation. You have to produce some presentation materials and do a short roadshow for investors – over a two or three day period you get in front of the major investors in the US to tell the story, produce an information memorandum (which obviously has to be vetted), and you will produce the note purchase agreement based on the a model form,’ says Besley.

‘We brought the information memorandum and note purchase agreement up to date and then went on the road, which meant setting up a programme of presentations to investors, which unfortunately was scheduled to start on 15 September.’

It was, says Besley, a fairly salutary experience. Had it not been for the Lehman collapse Besley estimates that Compass might have done an issuance 50 percent

larger than it actually did get away; and, he adds, it would have been done at one percent cheaper.

However, although the placement was not as good as Besley hoped, it was the very last private placement done before post-Lehman turbulence closed down the markets. There is little doubt that the same placement, if it could be done in the current climate, would be a lot more expensive.

‘We were pretty impressed with the robustness of the market, even under those circumstances, certainly there were some investors who suddenly could not do it, but there were other investors who came in with big offers.’

Safeguarding capitalThe financial crisis is not over yet, and continues to shape the priorities of the treasury function.

‘The two key things are liquidity and counterparty risk,’ says Besley. ‘The liquidity issue has eased up a little but, although a major concern for us, has not proven to be a big issue as we have been generating cash and paying down debt. The counterparty side has been more of an issue. We have had cash and have been depositing it, and have been monitoring our exposure to different counterparties, and trying to reduce that exposure by spreading it across a larger number of counterparties.’

From a business point of view the challenges at the moment are simply the general challenges of the economy and maintaining top line growth, he says.

As for treasury, it is a time for safeguarding capital. ‘The key mantra has been ‘return of capital’, rather than ‘return on capital,’ he says, ‘which is slightly galling for a treasurer.’ ■

‘The liquidity issue has eased up a little but, although a major concern for us, has not proven to be a big an issue as we have been generating cash and paying down debt.’

Justin Besley

Justin Besley has been group treasurer of Compass Group since 2001. Prior to this he was group treasurer of Invensys and BTR, having joined BTR as head of treasury operations in 1993. In his early treasury career, starting in 1987, he joined Balfour Beatty (then part of the BICC Group) and held various positions including those of treasury manager and assistant treasurer in the UK and the US.

He has a BSc (Eng) from Kings College , London, an MBA from Cranfield School of Management, and the ACT (dip). In his early career he practised as a civil engineer working in London, the Middle East and the Bahamas, becoming a chartered Civil Engineer in 1983.

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Company insight36

Technology has long been a major consideration when it comes to how organisations deliver their business strategy, yet at best the business benefits and cost implications of print often remain an afterthought.

As more and more organisations seek to maximise greater value and increased flexibility from their infrastructure, a managed print service (MPS) agreement provides the opportunity to manage and control document and print expenditure without compromising the needs of the business.

What is MPS?Essentially, it is a flexible service offered by an external provider that enables organisations to identify the document needs of the business and effect a solution that will meet those requirements cost-effectively without sacrificing any control or visibility over

speed, document quality or performance. In practical terms, it means putting your print and document environment – hardware, software, consumables, maintenance, and overall fleet management – into the hands of a third-party service provider. This service provider then uses its specialist experience, tools, skills and assets to manage your print and document needs more effectively, transparently, and at a progressively lower cost to your business.

At its most beneficial, a managed print service can be used to optimise your document workflows and help drive efficiencies within your core business processes.

Regaining controlThis targeted and specialised form of outsourcing is becoming increasingly popular among businesses of all sizes. A recent survey showed that 55%

of companies are already engaged in outsourcing document services.

But why do organisations, even those with strong efficiency cultures, still have so much room for improvement in the print environment? It starts with who owns the print environment. In smaller companies it may be every department for itself. Lower cost printers aren’t capitalised, consumables are expensed, maintenance is per device and so the total spend can escape higher scrutiny.

Surviving today, thriving tomorrowIn today’s challenging economic conditions, organisations are seeking ways to reduce their cost base without weakening their ability to capitalise on the eventual economic upturn. Therefore, according to Helen George of document solutions provider Ricoh UK, the ideal financial opportunity is one that provides a rapid cost saving while simultaneously boosting productivity and agility.

Figure 1. True managed print service

CIM012_029 Ricoh.indd 36 16/9/09 16:43:40


Company insight 37

In larger firms, the view may be further fragmented by functional silos. Procurement departments manage supplies and copier fleets, while IT functions support network printers and provide user support. In addition facilities departments may be responsible for running copy centres and tracking assets. Even if all these departments measure cost, the accounting systems may not be set up to compile them on a consolidated basis.

If this situation sounds familiar, prepare for a surprise. Organisations that have added up their formerly hidden corporate print spend have found it can cost between 3–5% of their total turnover. What’s more, the problem is growing. Given employees’ increasing readiness and ability to print documents on demand, and the rise of more expensive options such as colour printing, uncontrolled print costs are continuing to rise. Against this background, it’s clear that, for a company lacking control over its office printing, now is the perfect time to re-assert it.

The prize on offerSo, what benefit could a managed print service deliver for your business? At Ricoh, our experience as a long-standing MPS provider to many thousands of businesses worldwide shows the benefits fall into three main areas: finance, IT and the environment.

The financial benefits are probably the most clear-cut and often represent the most compelling reason why companies decide to move to a managed print service. As we identified earlier, hidden print costs can amount to 3 –5% of turnover. A managed print service can typically save around 30% of this spend.

If you take a medium-sized enterprise with a turnover of £10 million, a managed print service could return £150,000 directly to the bottom line – money that can help support the business through the downturn, while you simultaneously build a solid platform for the recovery.

MPS also delivers an array of other financial benefits. By removing print assets from the company’s balance sheet, MPS can improve the return on assets and boost enterprise value. Further cost benefits may be gained from ‘pay-per-use’ utility-type models, where you pay for each page you print and not for the print infrastructure.

Crucially, the financial impact of a managed print service is not just about moving

costs around. It drives real reductions in expenditure through a wide range of improvements. It enables an organisation to take control, set and enforce user print budgets and if required charge departments directly for usage. Ultimately a managed print service provides you cost reduction, visibility, predictability and control, without impacting your ability to support growing organisational requirements.

Alongside finance, the second major area of benefit is IT. Supporting growing business requirements with reduced budgets is becoming the norm in this economic climate. However with a managed print service you really can do more and spend less. By providing a modern

print infrastructure that is optimised for the business and specifically designed around users’ requirements, a managed print service creates a more productive environment since machines are available as required, have the necessary functionality and provide users with a consistent and familiar interface.

Typically 30% of all helpdesk calls are print related. By using a managed print service, in-house technical staff are relieved of the burden of supporting and maintaining a fragmented print fleet freeing them up to focus on core business priorities. The IT organisation also benefits by access to technical resources and tools that may be too expensive or specialised to keep in-house.

A managed print service enables an organisation to consolidate and aggregate disparate service contracts. Establishing clearly-defined service levels from one provider boosts IT ownership, efficiency and responsiveness. The organisation gains an expert partner and collaborator for identifying and exploiting business optimisation and workflow opportunities.

The third area of benefit is the environment, an aspect that is rapidly becoming more important. In an uncontrolled and fragmented print environment, it is impossible to track and measure environmental impact and performance. With a managed print service the combination of fleet optimisation and utilisation transparency provides the capability to reduce the carbon footprint of your fleet infrastructure, lower wastage and continuously monitor ongoing CO

2 and energy usage through a graphical reporting portal. This enables organisations to drive programs to reduce the environmental impact of fleet and document usage by implementing user campaigns and print policies focused on promoting responsible printing.

Moving forwardOver time, a managed print service can play an increasingly important role in your business’s ongoing drive for efficiency and productivity. And implementing it in a downturn means the business will be in better shape for the upturn when it arrives. The time to consider it has come. ■

How do you get started?

Where as the challenge for many organisations is finding the time and resource to focus on getting the print fleet to its optimal state, a harder challenge is keeping it there and making the gains permanent with constantly changing business requirements. This is where the value of an MPS specialist provider really comes to the fore.

Typically there is a four-stage process to design and implement an MPS framework for your business.

The stages are:

Print study.• Understand current environment and future requirements.Fleet optimisation. • Design the optimal document infrastructure for the business.Implementation.• Transform the recommendations into a actual print infrastructure.On going management.• Proactively manage and optimise the managed print service.

‘By removing print assets from the company’s balance sheet, MPS can improve the return on assets and boost enterprise value.’

Further informationRicoh UK LtdWebsite: www.ricoh.co.uk

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Physical and financial supply chains38

Organisations are continuously striving to meet customer expectations as effectively and efficiently as possible, a strategic imperative all the more critical in today’s economic climate. The advent of customer-centred organisations, ‘everyday’ low prices, and expectations that prices will drop not rise is a huge change in the structure of the global economy.

The ability of companies to increase market share and lower prices is the result of implementing superior logistical and distribution systems. Organisations are competing on how effectively they can move raw materials, components and finished products globally through their supply chain to customers rather than

just those who have the most efficient manufacturing plants. These new supply chains and their continuing improvement have become a major driver of profits.

There is no ‘one size fits all’ supply chain solution; strategies and tactics differ by groupings of suppliers. For example, suppliers of components with low technical content are bought on price alone. Supply chain expectations for service and in-plant support are low and vendor managed inventory is a given.

At the other end of the spectrum are suppliers where large investments in highly technical components are required. Here total cost approaches and partnerships between

suppliers and customers in the product development process are often found. Costs are designed from the outset and often accompanied by contractual obligations and open book costing to share benefits.

A number of supply chains fall in the middle of these two approaches with cooperative development of components but encouragement to manufacture in low cost countries with suppliers bearing the risk of logistical and inventory holding costs.

This article looks at supply chain management from the perspective of two senior executives who are experts in this area. Ed O’Donnell is vice-president for business analysis at Teknor Apex, which

Strategic advantage

CIMA speaks to Paul Massey, finance leader at Cummins Turbo Technologies and Edward O’Donnell, vice-president for business analysis at Teknor Apex, about seeking a tactical advantage with the implementation of superior systems.

CIM012_018_O'Donnell 2.indd 38 16/9/09 16:20:17


Physical and financial supply chains 39

manufactures flexible thermoplastics and Paul Massey is finance leader at Cummins Turbo Technologies, a supplier to original equipment manufacturers in the automotive industry.

CIMA: Why is there so much interest now in supply chain management?Paul Massey: With the various quality and lean initiatives the manufacturing environment has been the focus of improvement for a number of years. This focus has extended beyond the traditional company boundaries to look for the next major improvements in the supply chain. In addition, with the changes in company core processes the amount of product cost outside the company has become much higher. Many companies no longer make products directly themselves. They are outsourcing the full manufacturing process but controlling the design.

Ed O’Donnell: We believe only manufacturing costs trump supply chain costs in order of magnitude. So there is substantial motivation to optimise the five primary supply chain management processes: plan, source, make, deliver and, if necessary, return.Additionally, the process of balancing the supply of raw materials with the demand for finished goods and accommodating the inevitable variability in both requires inventories to be maintained. Inventories often require a substantial investment of working capital and so they too must be brought to optimal levels so that precious cash is not tied up in excess quantities. There is no ROI on dollars invested in excessive quantities on hand. When it comes to inventory, our maxim is ‘enough is a feast’. There is also a growing realisation that excess cost at any point in the supply chain makes the entire supply chain less competitive. So, simply pushing cost on to the previous firm in the chain does not eliminate the cost at all. Supply chain managers work to wring costs out of the procurement and distribution processes rather than just push them around. Finally, efficient supply chain management can help to reduce time to market and bolster a new product’s chances for success.

In general, what impact has this interest in supply chain management had on relations with suppliers and customers? EOD: We are looking much more critically at our supplier relationships across more parameters than just cost per unit. For example, we are concerned about the resilience in our chain and how much at-risk we are to interruptions in key raw material supplies. This is of obvious concern

in situations where materials are sole-sourced. With customers, our supply chain management has caused us to involve them as much and as often as practicle in our forecasts for the finished goods that they buy from us. Without a doubt, the forecasts have added a new dimension to our customer interface. As companies discover the benefits of investing in a good supply chain, they are sharing their successes both up and down the chain. Communication and shared knowledge help, and often force businesses to look at their own processes in order to make them more efficient and less constrained. Once a company begins providing a quality product delivered on time, relationships within the chain become stronger.

PM: The major impact on our relationships with key suppliers and customers is closer long-term relationships resulting in long-term agreements, open book costing and joint cost reduction initiatives to improve profitability and growth for all members of the supply chain. Suppliers have become a further extension of the business and exchange of information to support planning processes has become prevalent throughout the supply chain. The reliance on suppliers and customers has created the need for a conscious review of sourcing practices both with suppliers, by customers, by commodity and whether to single or dual source after reviewing the various risks and benefits.

How has this focus on supply chain management changed your company? PM: In 1997 we created an initial Supply Chain Group out of our traditional materials function to focus on North American supply development, supplier quality improvement and cost reduction. In the next 12 years this group has grown to become global with

dedicated groups in low cost countries to develop new suppliers and to introduce new products. In addition the function has delivered year on year cost reductions for existing products. The focus was adjusted to be commodity focused and used competitive quoting processes across all of our divisions. It has evolved into global commodity teams across the corporation with specific commodity teams for unique commodities. This team now has dedicated financial support, legal support and a key seat at the management table.

EOD: It has caused us to plan centrally and execute locally, and not just with our raw materials and finished goods, but maintenance, repairs and operations items too. For instance, we are much more conscious of the need to balance the supply of raw materials with the demand for end-item compounds and eschew the formation of excess quantities. We also re-thought volume purchases of raw materials to garner a better cost per unit and we brought our operations people into the forecasting process to make sure that they build precisely what has been agreed to in sales and operations planning, no more and no less.

What have been some of the benefits you have experienced in your company as a result of implementing supply chain management techniques? EOD: Benefits include significant reduction in inventory and a measurable improvement in working capital and a statistical, dynamic and programmatic approach to setting supply lead times, safety lead times and safety stocks. We now use mathematical programming techniques rather than gut instinct to convert a highly seasonal sales forecast into a flatter production plan that helps to level-load our plants, and plan inventory and crewing levels well in advance of need. We also have earlier visibility of inventory quantities that are becoming excesive or obsolete and we have more aggressive disposition strategies.

PM: We have been able to grow much faster by using external sources for components previously made in house, reducing our capital requirements, and using supplier expertise to reduce component costs. In addition we have identified excellent global sources for our growth into new countries that have subsequently led to the importation of significantly lower total product costs. The development of global sources has resulted in vendor-managed inventory where an overseas supplier becomes local by managing the pipeline of inventory to a local warehouse.

‘Communication and shared knowledge help, and often force businesses to look at their own processes in order to make them more efficient and less constrained.’



Physical and financial supply chains40

This has supported our ability to become a global company and support customers in all parts of the world.

What have been some of the barriers you have had to overcome in implementing modern supply chain management? EOD: Resistance to change has been the biggest challenge to overcome. There can be a significant amount of time between the date a system is implemented and available for use, and the date on which people begin to use it. There’s also a date further out on which the user community fully embraces the new system. Everyone pretty much agrees on supply chain management concepts and practices in principle but often become defensive or intimidated when systems like MRP are functionalised in their business or plant.

PM: With global sourcing there have been a number of difficult situations where our high volume business was suitable for global sourcing but local sources retained low volume product. The lower volume business remaining required Suppliers to re-evaluate its true costs for proliferated business resulting in cost increase on some parts.

Although vendor managed inventory (VMI) is often used, the agreed commitment in the supply chain requires additional discussion, agreement and management for product changeovers. The pipeline can also be an issue when quality problems are uncovered. From a supplier perspective the cashflow tied up in the supply chain during startup and growth periods can become an issue unless well planned at the outset. With tier-2 suppliers being managed by tier-1 suppliers, problems can be hidden or used to drive cost increases if the wrong tier-1 supplier is chosen.

Can you provide an example of how a change in your supply chain produced a significant benefit for your company? PM: Global sourcing benefits have reduced product costs of some components by 30%. Our supply chain has become global resulting in the ability to supply our manufacturing plants from a local proven source in developing countries speeding up the learning curve and cost benefits. Our ability to invest in new products and global growth has been shared with our key suppliers. This shared growth and capital investment has allowed each company to grow faster.

EOD: Quantitatively: inventory reductions of as much as 20% in two of our US divisions and our most accurate and credible assessment of excess and obsolete inventories to date. Qualitatively: everyone is talking to each other using a common supply chain language. Inventory matters, with their attendant impact on working capital, get as much attention in business decision making as matters affecting earnings.

How has the economic crisis impacted your supply chain and supply chain management? EOD: We have grown more concerned about the financial viability of suppliers and certain customers. On the supply side, we closely monitor the health of those with whom we sole-source. On the demand side, we are watching shipments and payments patterns more acutely. We are also seeing an increase in requests for consignment arrangements from customers anxious to preserve their cash.

PM: The economic crisis has intensified the complex relationships within our supply chain. The financial expertise in identifying supply chain total costs and

‘The financial expertise in identifying supply chain total costs and savings has transitioned to a cashflow focus; understanding company financials and the risks at today’s volumes.’

CIMA and SCF management

For readers looking for more information on supply chain management issues, the Chartered Institute of Management Accountants, the American Institute of Certified Public Accountants and CMA Canada have recently completed a joint Management Accounting Guideline ‘Supply Chain Management Accounting’ by Professor John Cullen of the University of Sheffield. O’Donnell and Massey were reviewers of this Management Accounting Guideline. Please contact one of the accounting organisations above to obtain a copy.



Physical and financial supply chains 41

savings has transitioned to a cashflow focus, understanding company financials and the risks at today’s volumes. Supporting commodity managers’ negotiations by identifying risks and opportunities within suppliers, confirming approaches and strategies within the financial options available and ensuring the correct accounting for liabilities has become critical. With open-book approaches and a willingness to discuss joint cost opportunities we are looking for opportunities to avoid exposures to both companies in the supply chain with the realisation we need each other to succeed in the longer term.

What will be the enduring changes in how people think about and manage their supply chains in the future as a result of our current experience?PM: The relationships developed during the difficult times should strengthen as things improve for those that have worked together to lay a strong platform jointly for the future. Those with suppliers that adopted an adversarial approach to improvements in the economy will create opportunities to exit and find new sources for the future. Financial risk will become a stronger part of understanding supplier selection for the long haul.

EOD: Weakness anywhere in the supply chain places all of the component organisations at risk. Increasingly, it is not one business competing against another, it is one supply chain competing against another. Simply pushing cost to another enterprise in the supply chain doesn’t make anyone more competitive. Competitiveness lies in getting cost out of the entire chain and constantly working to make it more efficient.

What steps should organisations follow if they wish to implement supply chain management techniques?PM: Understand the business strategy and key goals that the supply chain function is expected to achieve. Identify the types of supply base required to achieve these key goals. Review the existing supply base for the right fits, those worth developing and those that require exit plans. Execute the plans and continue to revise the plans in line with strategy, economic and supplier changes.

EOD: Execute the supply chain transformation in stages. We began our transformation project by focusing on bringing our inventories under control and thus implemented material requirements planning. Get senior management

support; talk to them about the benefits of supply chain management in terms they understand. Establish a core group of the few senior managers to resolve quickly any points of contention or pushback from divisional management. Once functional, involve relevant senior management in your sales and operations meetings so that supply chain concerns get equal consideration with those of sales. What gets measured gets done, so set a few key metrics designed to show whether cost is being wrung from the system without any degradation in customer service.

Above all, get good advice; learn what best practice is and use it as your implementation guide. Assess your system and staff capabilities to handle the demands of supply chain management processes, then, train, train, train – before and after implementation – until you are confident that the people who will run the system can run it well.

If you had to implement supply chain management techniques again what would be the pitfalls you would try to avoid? EOD: At the outset of our project, we pulled together a team of managers from each of the functional areas involved in or affected by supply chain management processes. They were our best and brightest and they developed an implementation plan that still makes sense four years later. However, in putting together that group, we left out rank-and-file members of the user community who would actually run the system. Instead I would identify by name each of the key managers and users and get them involved in the planning from the get-go. As with any large business process reengineering or implementation project, people’s lives are affected. Many of the folks involved have spent a career developing relationships with suppliers and customers and they are justifiably concerned about the impact such change will have. Making them part of the system design gives them equity in its rollout and ultimate success.

PM: The integration of suppliers can cause too much dependence on one supplier and a difficult separation process when the relationship changes. An improved early warning system was needed for supplier issues – financial, relationship, management team changes etc. Another pitfall was the use of amortisation for tooling or equipment during growth times. This approach has caused a number of difficult issues during the recession on

amortisation commitments and volume guarantees. The additional integration and reliance on supply chain members requires a more thorough understanding of supplier financial commitments and how important cash is and the management of supply chain inventory during a downturn.

What role do you see professional accountants playing in the management and implementation of efficient and effective supply chains? PM: Measurement of benefits. With open-book costing and intertwined companies, a thorough understanding of the supply chain relationships is required, plus a flexible, integrated support role to partner with the supply chain leadership. Finance needs to be part of the discussions to provide options, not an afterthought. Identifying the costs and benefits of multiple approaches as a guide to decision making, looking at total costs and not just traditional piece price costs is important. This may require flexibility to adopt traditional financial systems in line with the reality of how the costs are segregated among companies in the supply chain.

EOD: A professional accountant from our finance department, with no previous supply chain experience, leads our worldwide supply chain transformation project. He has relied heavily on his skills to understand supply chain systems, plan their implementation and test their effectiveness once they have been put into service. He also quickly saw the favourable impact supply chain efficiencies could have on the balance sheet, especially on working capital and value added earnings. Putting the benefits of the supply chain transformation project into financial terms helped us to gain senior management support. ■

Ed O’Donnell

Paul Massey

Ed O’Donnell is vice-president for business analysis at Teknor Apex, which manufactures flexible thermoplastics.

Paul Massey is finance leader at Cummins Turbo Technologies, a supplier to original equipment manufacturers in the automotive industry.



Executive development42


42

Lifelong learningAlthough it is important for an executive to amass the right qualifications for a given role, that approach is in many ways narrow-minded and limiting, explains former president of CIMA Norman Lyle to Jim Banks. Learning is a key pillar in any successful business career, and should not be abandoned when a person reaches the higher echelons of the management hierarchy.

CIM012_Lyle.indd 42 16/9/09 16:33:19


Executive development 43

Not so very long ago, when the war for talent was raging, many companies recognised the need to offer personal development and training as a key part of their strategy to attract and retain the best people. Increased remuneration alone was not seen as sufficient. Now, times have changed and the weakened global economy has changed the dynamics in the labour market.

As a result, there is perhaps less emphasis on providing opportunities for learning from the corporate side, but some advocates of continued personal development feel that it is not solely the responsibility of an organisation to push the importance on ongoing learning, instead it should be up to individuals to realise the benefits of constantly seeking to add skills and experience.

In any function within a large organisation it is important that key individuals have the right skills and qualifications, and finance is a prime example. But for many successful business leaders learning must go far beyond this box-ticking exercise if it is to yield real value. This is true at all levels within an organisation, including executives.

Norman Lyle, former president of CIMA, says: ‘Learning and development is critically important. There are two types, formal learning and lifelong learning. The latter is about exposure to different situations, it is about activities like reading newspapers and keeping up-to-date with what is happening in the world. It is also important to do formal learning throughout one’s career, seek exposure to new thoughts and take the opportunity to network with other business leaders from different industries and different cultures, especially if you are part of an international business.’

At 61, Norman Lyle is semi-retired, but his career has included time at some of the leading companies in their industries. A Chartered Management Accountant, he is chair of the Financial Reporting Supply Chain Project for the International Federation of Accountants, having retired as group finance director of diversified business group Jardine Matheson in Hong Kong following an eight-year tenure.

Prior to this, he was general manager of finance for leading pharmaceutical company Zeneca and was formerly group treasurer at Imperial Chemical Industries (ICI). He has also been Chair of the British Chamber of Commerce in Hong Kong, and was awarded his OBE for services to

Norman Lyle

Norman Lyle is chair of the financial reporting supply chain project for IFAC.

Lyle retired as group finance

director of Jardine Matheson Limited in Hong Kong in March 2005, a position he had held since 1997. Prior to this, he was general manager of finance for the pharmaceutical company Zeneca and was also formerly group treasurer at ICI.

Lyle is a chartered management accountant and a fellow and former president of CIMA. He was chair of the British Chamber of Commerce in Hong Kong from 2002 to 2004.

CIM012_Lyle.indd 43 16/9/09 16:33:43


Executive educcation44

commercial relations between the UK and Hong Kong. As a non-executive director he is on the board of Standard Chartered Bank (HK) and Doha Land Company.

Throughout his long and illustrious career, which has seen him work in the UK, Kenya, Hong Kong and Malaysia, Lyle has always prioritised learning and development, for himself and for the employees that have contributed to the success of the organisations he has served. While he understands the time pressures that business leaders must bear, he believes that there should be no excuse for abandoning the learning process when one reaches the top.

‘It has always been important in my career. I have studied in many places, including the US, and I have made many good contacts, got new perspectives and made links to new countries. When you are an executive it is always easy to put learning on the backburner, but it is important that senior executive development is part of the culture of any large organisation. Furthermore, it is important that development is linked to the reward system, as that helps to concentrate the mind,’ he remarks.

Passion and prioritiesWhen an individual achieves a measure of personal success by reaching the top of the management tree it may be tempting to think that the journey of personal development has reached its end. It might be easy to make learning a lower priority when the short-term pressures of a leadership role are demand that many important decisions about the future of an organisation be made every day.

It may not be through arrogance or complacency that an executive shelves his or her learning process, but simply because their job forces them to reassess their priorities. This may be especially true in the current economic downturn where many corporates are focused on survival as much as on future growth. Nevertheless, Lyle urges executives to think again about their personal development and the positive implications that continued learning may have for their organisations.

‘As people become more senior it is easy to be tied to the day-to-day issues of the organisation, but you must have a balance. In the current economic climate investment in executive development may be reduced, partly for cost reasons, especially if an

‘It is important that senior executive development is part of the culture of any large organisation, and is linked to the reward system.’

Leadership, can it be learnt?

Developing leadership skills is vital for any executive, and although some inherent ability to lead is a necessary starting point, no one can rely wholly on their innate qualities.

‘Some people are born with leadership skills, but it is possible to develop those skills further. For instance, recruits come from different backgrounds, but most come out with the ability to lead men and women. So, leadership skills can be developed and must be,’ says Lyle.

‘Someone with inherent leadership skills may show them, but there are some who won’t. So, you must work to identify those people who can lead. In my career I have always encouraged people to take responsibility, including throwing people in at the deep end. I am often surprised by how people rise to a challenge. Many organisations probably don’t give responsibility early enough,’ he adds.

CIM012_Lyle.indd 44 16/9/09 16:33:59



commercial relations between the UK and Hong Kong. As a non-executive director he is on the board of Standard Chartered Bank (HK) and Doha Land Company.

Throughout his long and illustrious career, which has seen him work in the UK, Kenya, Hong Kong and Malaysia, Lyle has always prioritised learning and development, for himself and for the employees that have contributed to the success of the organisations he has served. While he understands the time pressures that business leaders must bear, he believes that there should be no excuse for abandoning the learning process when one reaches the top.

‘It has always been important in my career. I have studied in many places, including the US, and I have made many good contacts, got new perspectives and made links to new countries. When you are an executive it is always easy to put learning on the backburner, but it is important that senior executive development is part of the culture of any large organisation. Furthermore, it is important that development is linked to the reward system, as that helps to concentrate the mind,’ he remarks.

Passion and prioritiesWhen an individual achieves a measure of personal success by reaching the top of the management tree it may be tempting to think that the journey of personal development has reached its end. It might be easy to make learning a lower priority when the short-term pressures of a leadership role are demand that many important decisions about the future of an organisation be made every day.

It may not be through arrogance or complacency that an executive shelves his or her learning process, but simply because their job forces them to reassess their priorities. This may be especially true in the current economic downturn where many corporates are focused on survival as much as on future growth. Nevertheless, Lyle urges executives to think again about their personal development and the positive implications that continued learning may have for their organisations.

‘As people become more senior it is easy to be tied to the day-to-day issues of the organisation, but you must have a balance. In the current economic climate investment in executive development may be reduced, partly for cost reasons, especially if an

‘It is important that senior executive development is part of the culture of any large organisation, and is linked to the reward system.’

Leadership, can it be learnt?

Developing leadership skills is vital for any executive, and although some inherent ability to lead is a necessary starting point, no one can rely wholly on their innate qualities.

‘Some people are born with leadership skills, but it is possible to develop those skills further. For instance, recruits come from different backgrounds, but most come out with the ability to lead men and women. So, leadership skills can be developed and must be,’ says Lyle.

‘Someone with inherent leadership skills may show them, but there are some who won’t. So, you must work to identify those people who can lead. In my career I have always encouraged people to take responsibility, including throwing people in at the deep end. I am often surprised by how people rise to a challenge. Many organisations probably don’t give responsibility early enough,’ he adds.

CIM012_Lyle.indd 44 17/9/09 10:24:38

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organisation is struggling to survive. But learning is always critical. It is motivational for staff to be involved in training and development, and there is a clear link between business performance and proper training,’ stresses Lyle.

The shift in the rules that govern the war for talent may be leading companies to turn down the volume on their calls for training and development opportunities to be a major weapon in the battle to attract and keep the right people at all levels, including senior executives, but Lyle is convinced that turning away from learning is a big mistake for any corporate and any individual that wishes to build a successful future.

‘I suspect that now that unemployment is rising people are focused more on the getting the job, securing the move they want. They are not driven by development opportunities, which were higher up the list of priorities when employees had more choice,’ says Lyle.

He believes that there is no excuse for putting less emphasis on the structures, processes and opportunities that enable business leaders to build on their skills and experience. He also feels that executive involvement in learning and development should be a priority not only for their own personal gain, but also as a driver for greater engagement and cohesion within their organisations.

‘Executives must lead by example and participate. I found that in the large organisations I worked for, like Zeneca and ICI, training programmes at every level were well understood, and I believe that executives must emphasise the importance of those programmes, not least by participating in them,’ he says.

‘The CEO and senior managers must talk to younger people in their organisations as part of these programmes. I always did. I may not have done formal teaching, but I talked about my experiences, aspirations and what I expected from the people in the organisation. Executives can help people understand the strategy of the business. That may not involve teaching formal courses, although the CFO would certainly be involved in those discussions,’ he adds.

Looking specifically at the finance function, Lyle is keen to stress the relevance of learning to the role of finance director as much as to any other senior executive. Furthermore, he points out that FDs should not confine the continuation of their learning process to the specific field in which their skills lie, but should ensure that they gain a more rounded view of their organisation by adding experience and understanding of other parts of the business.

‘The finance director is on the board and has a functional responsibility like any

other director in the boardroom, but the role is also broader as part of the senior management team. There is a need for FDs to have financial skills, but they must also understand operations, IT and every other part of the organisation in order to understand the implications of those things on the business as a whole,’ stresses Lyle.

‘You can’t be on the board if you only have a narrow range of experience. For senior executives to function effectively they must have familiarity with all disciplines within a company.’

Explore every avenueFormal learning is highly important in the career of most executives, and the world’s leading business schools play a prominent role in providing structured programmes (see box, left). Nevertheless, it is important to look beyond the many courses that are on offer. Learning is not just about the content of those courses, but also the opportunity to meet great thinkers from different countries and a variety of cultural backgrounds.

Not only can the networking opportunities provide executives with access to new ideas that enable them to see specific issues from a range of different perspectives, but also the contacts that are made through formal programmes often stay relevant throughout a person’s career. This is certainly true for Lyle, who has grasped many opportunities to forge ties that have formed a solid basis for a successful life in business.

‘I also did a Cabinet Office programme, for example, where I had the chance to meet top people in the business world, and leaders in the political field were also part of it. That has had great value for me in the following 20 years,’ he remarks.

‘I would encourage executives to think of learning, both formal and informal, as a lifelong commitment. For me, that includes things like voluntary work outside the organisation. It would do many executives a lot of good to work in the community to get a much wider context for their skills and to broaden their experience.’

Lyle himself is an example of how lifelong learning can breed success in the world of business. For him, it is about taking every opportunity to engage with the learning process and to constantly be aware that every experience is a chance to grow as a person, a leader and decision-maker. ■

‘Executives must emphasise the importance of training programmes, not least by participating in them.’

The role of business schools

The constant challenge for business schools is to adapt to the changing needs of executives when it comes to learning and development. They must keep their subject matter up-to-date, and change the way courses are delivered in order to suit executives’ busy schedules.

Lyle believes that business schools have largely done well in achieving these goals. They have made a push into online and remote learning, for instance, but he feels that a person-to-person, classroom agenda is as important now as it ever was.

‘I am biased about business schools. I had the opportunity to go to Harvard, where

I met a lot of people and networked. The quality of courses is very high and business schools do generally adapt. I’m in favour of their executive programmes, although some organisations prefer in-house education. It is important to understand cultural issues and context, and I believe that comes from external business school programmes,’ Lyle comments.

‘It may be expensive to send executives to external courses, and the current economic climate may mean that there are cutbacks, but the value of those programmes is great. There is valuable experience to be gained and the networking opportunities can be a good basis for a career,’ he adds.

CIM012_Lyle.indd 46 16/9/09 16:34:22


Company insight 47

The Centre for Employment, Competitiveness and Growth at Kent Business School works with businesses in Kent to promote sustainable performance. In a workshop held recently with business leaders and senior managers it was clear that many felt they lacked the knowledge and skills to train people and identify the right kind of training. But one of the main problems they flagged up was the need to generate engagement with and passion for the business at the same time as increase employee confidence. Another problem was cost.

People are an investment, not a costOrganisations need to understand the paradigm shift: in the past people were a cost and now they are an asset. Companies need to enhance the value of their assets and hold on to them. Management development plays an important part in employee retention. Angela Ransley, Senior Lecturer in Accounting and Finance and Head of Executive Education at Kent Business School, is convinced that investing in management development can actually help the bottom line:

‘Why should we spend money on paying for a member of staff to do an MBA only for them to leave us in a couple of years?’ employers often ask us. The answer is: ‘Think what would happen if you did not invest in staff; assets can become liabilities and prevent a company from moving forward. One thing we try and make organisations aware of is that they should try and match the needs of the individuals to their organisational needs by making sure that the programme is appropriate. A good business school will be able to help identify what those needs are and tailor programmes to match them.’ Management development stretches peoples’ capabilities. Bottom lines suffer

if people are simply trained to do what they have always done. Management development should facilitate the ability for staff to embrace change so that it becomes the norm. Sustainable organisations are those that have continual development embedded in their culture.

How can organisations justify an investment in management development when they are cutting costs and making redundancies? Employees who stay on need to be given the skills and toolkits to work in a leaner environment, learning to do more and better with less. Often a lean workforce becomes demotivated and needs to have confidence in the company restored.

Business leaders also need to recognise that executive education is not just about professional development for senior management. Executive education needs to address the needs of all levels within the organisation, from graduate trainees, through middle management, to CEO-level. Management development can also provide an insight into the perspectives and minds of colleagues from different environments. This provides an opportunity to identify potential collaboration with peers which may lead to more opportunities and innovation that can have also an impact on the bottom line. Essentially, it allows individuals to identify opportunities,

seize them and acquire the toolkits to convert them into gain for the organisation.

By understanding the need to develop employees for the future, organisations will be more efficient, have higher levels of retention and have a starting point for succession planning.

Mind ‘the gap’Take the example of the Balanced Scorecard. Few people know that it took as long as seven years before the model was first developed, presented to top journals for peer review and publishing, then disseminated, often through consultants or management developers before reaching the practitioner. This is known as the ‘research-to-practice gap’.

When executive education courses are developed by teams of both research-active academics and experienced practitioners who are working with organisations to identify and understand the challenges they are facing, organisations will benefit from the competitive advantage that comes from ‘future-thinking’ and the gap is no longer a problem.

In this way management development goes beyond the development of the individual, creating real value for the organisation. ■

Future-proof your management In today’s world of rapid change and uncertainty, smart organisations are developing their managers to future-proof their success. Angela Ransley of Kent Business School explains to Excellence in Leadership how to invest in sustainable growth by using management development to build trust, improve employee engagement and innovate.

‘If you do not invest in staff, assets can become liabilities and prevent a company from moving forward.’

Further informationKent Business SchoolWebsite: www.kent.ac.uk/kbs

CIM012_023 Kent.indd 47 16/9/09 16:44:25


Company insight48

Ranked in the Financial Times and the Economist and accredited by the Association of MBAs and the European Quality Improvement System, the Birmingham Business School MBA is internationally acclaimed. The MBA offers a high-quality suite of programmes in a variety of flexible formats, designed to meet the needs of those wishing to study full or part-time.

With a history of business education dating back to 1902 and state-of-the-art facilities, Birmingham Business School offers a complementary combination of the traditional and the cutting-edge.

History lessonOver a hundred years ago it was a founding condition of the University of Birmingham that business studies should be taught. This tradition of management education has been given a contemporary edge with the school’s recent move into University House, a purpose-designed new home. University House is situated in its own extensive landscaped grounds on the edge of the University of Birmingham campus. A multi-million pound teaching and learning centre with state-of-the-art facilities has been added to the original historic building of 1908.

It offers the best of both worlds: an elegant and atmospheric building in keeping with the school’s long history and tradition, coupled with extensive teaching and learning facilities appropriate for the 21st century.

Students from all around the world choose to study at the school and each year it expects to represent over 50 different nationalities on the MBA. The Birmingham MBA appeals to international students because of its relevance and global perspectives and because of the support the university and school offer students from overseas.

The masterstrokeTaking an MBA is one of the most important decisions you will ever make; along with where to study it. Birmingham Business School has been a major player in business education for more than a century and provides a wide variety of highly regarded programmes across a range of business disciplines.

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Company insight 49

With over 70 lecturing and research staff, many internationally recognised authorities in their field, all major business subject areas are represented. A number of research centres have been developed to build on areas of specialised excellence reflecting a dynamic global environment, including international finance, strategy and procurement management, industrial strategy and EU-South East Asia trade.

Members of the school maintain close links with industry, the financial community and major business professions. Consultancies have been undertaken for many companies and organisations such as the World Bank, the Bank of England and the Asian Development Bank. There are links with a number of governments and members of staff have been seconded to play major roles in the regulation of industry and in advising national institutions.

FieldworkThe University of Birmingham is situated in 234 acres of parkland and includes large lawns and even a lake. Its architecture is varied; from the grand traditional Victorian redbrick buildings of the Great Hall to the

recently built extension to the business school. The campus contains a variety of retail outlets including restaurants, banks, bookshops and supermarkets. The Barber Institute houses a concert hall and holds an international collection of paintings within its gallery. The library is one of the

most extensive university libraries in the UK, housing well over one and a half million volumes.

As England’s second city, Birmingham is an exciting, bustling, vibrant hub and ideally placed for studying. It is the largest centre for the financial services industry outside of London and is known for its historical manufacturing and commercial industries with national and international links.

Over £9 billion of investment in the city over the last two decades has created new business growth in addition to retail and leisure developments that include canal-side bars and restaurants and the famous Bullring Shopping Mall. The city has an enviable location and convenient road and rail links across the UK. It is also served by Birmingham International Airport. ■

Further informationUniversity of Birmingham Business SchoolKate Salter, Marketing Officer Email: [email protected] Website www.mba.bham.ac.uk

Victoria Rayner - Exec MBA Profile

I studied on the Birmingham Business School Exec MBA programme between 2004 and 2009 and graduated with a distinction. Since enrolling as a student at Birmingham University my life and career has changed significantly. I started the MBA in June 2004, carried out the first two modules of the course and then took six months off after the birth of my son. I returned to the university, carried out another three modules and then took a year out after the birth of my twin daughters. I then completed the remaining three modules of the MBA in April 2007. I returned to work in between maternity provisions and because of my MBA experience was able to negotiate a secondment from my original post and take on an additional senior management role.

After my twin girls were born I returned to work for a second time and within six months had competed in an external recruitment and been promoted to the position of CEO. I feel certain that the experience and confidence secured

from being part of the MBA programme was instrumental in supporting my application. I regularly draw on the examples and case studies used during the course, and the essential learning derived from my peers.

It was the format of the MBA course that initially attracted me. I already had an MA from another institution, which I had studied on a part time basis. However, I found that evening classes did not work for me, and I was keen to find another approach. I really enjoyed the model of teaching modules in a week block, and found that the learning experience enabled me to quickly develop good connections with peers and enjoy a stimulating academic environment. It was also an escape from hectic family life to come away and do something completely different.

Some of my favourite moments were sitting in the leather sofas in the senior common room, engrossed in debate about a case study or presentation. Taking the opportunity to learn from other students was encouraged and

provoked some of the most significant challenges. The groups were full of strong personalities and it was a real opportunity to test out the strength of my conviction. I also enjoyed the continual change of pace within modules; module leaders demonstrated a real understanding of the need to break up sessions, change the mode of learning, bring in experts from industry and engage all of the students.

I think that almost all elements of the MBA will have a direct bearing on business life, often in terms of learning how not to do things. There were some particularly helpful sections focusing on finance and understanding of the international business environment, which proved academically and practically challenging. There were also opportunities for hands-on application of skills including media training and assessed presentations, where role play and peer pressure created an atmosphere of reality to cement the learning. I had a very positive experience at the business school.

The student

The school features a multi-million pound teaching and learning centre.

CIM012_038 Birmingham.indd 49 16/9/09 16:45:12


Corporate reporting50

The big picture

Some blame the economic crisis on accounting and in particular fair value rules. Others say that mark-to-market has brought losses to light more quickly and accelerated corrective action. There is a degree of truth in both statements and standard-setters are working intently to review the appropriate standards. CIMA’s Nick Topazio examines the environment in which this review is taking place.

CIM012_017_Topazio.indd 50 16/9/09 16:21:58


Corporate reporting 51

The International Accounting Standards Board (IASB) is responsible for setting International Financial Reporting Standards (IFRS). These standards are gradually replacing the International Accounting Standards (IAS). IASB standards have been adopted in over 100 countries worldwide and in Europe all listed groups have had to use IFRS since 2005.

However, there is one major Western economy not using IFRS: the US. The Financial Accounting Standards Board (FASB) in the US has been working for some time with the IASB to merge standards and adopt IFRS by 2014. However, following the change in the political administration in the States earlier this year the head of the Securities and Exchange Comission (SEC) changed, as did the impetus for adopting IFRS, now on hold pending a major review.

Adoption of IFRS by the US is a major goal for the IASB. Without it IFRS cannot be regarded as a global accounting regime and as such the IASB has tried hard for the alignment of IFRS and US GAAP. This has caused others to question whether the IASB takes non-US views sufficiently into account when it agrees its agenda or develops new standards. This view is especially prevalent in the EU political establishment.

Taking responsibilityThe European position seems to be that the IASB should take a preferential position reflecting the fact that Europe is the largest economic bloc using IFRS. The European political view is that the IASB does not have sufficient accountability for its actions. For instance, Charlie McCreevy, the EU internal market commissioner, has said: ‘Accounting is now far too important to be left solely to accountants, standard-setters should be independent but accountable.’

Another criticism of the IASB from Europe relates to the reaction of the IASB to the economic crisis. McCreevy has said: ‘There is a growing concern among finance ministers at the perceived slowness of the IASB in responding to the systematic crisis we have endured. Many ministers have complained about what they see as an over-academic approach to standard-setting, which many see as out of touch with today’s reality.’

Others including the G20 group of leaders from the world’s largest economies have called for urgent action from the IASB to revise accounting standards in light of lessons learnt from the financial crisis. These calls for

action want changes within months rather than the usual IASB timeframe of years.

The environment in which accounting standards are being set is tricky to say the least. The IASB is trying to drive adoption of IFRS in the US in the face of criticism from Europe and at the same time deal with pressure for urgent changes to accounting standards as a result of the present economic turmoil.

Those blaming accounting rules for exacerbating the effects of the financial crisis have called for the scrapping of the requirement to mark financial instruments

to market. The suggestion is that mark-to-market reporting of financial instruments has had a pro-cyclical effect on the economic downturn. Having to report that the value of a particular financial instrument has plummeted has depressed confidence in other financial instruments, entities and financial markets and accelerated the downturn.

These views have been explored by a number of bodies including, internationally, the Financial Crisis Advisory Board, a group of senior international financial market leaders, and in the UK by Lord Turner, chair of the Financial Services Authority. The consensus

‘Adoption of IFRS by the US is a major goal for the IASB. Without it IFRS cannot be regarded as a global regime, and as such the IASB has tried hard for the alignment of IFRS and US GAAP.’

Topazio on CIMAsphere: new proposals for financial instruments

The IASB has set itself the ambitious task of revising IAS 39, the troublesome financial instruments standard, by the end of the year. It came under considerable pressure from G20 leaders, the EU, the US Congress and others to accept this onerous task. So far the project seems on track with the latest exposure draft on classification and measurement issued in July.

The EU is proposing that financial instruments should be classified into two primary measurement categories: fair value and amortised cost. The amortised cost category would be available for financial instruments if two conditions are met:

they contain only basic loan features; •and

they are managed on a contractual •yield basis.

All other financial instruments would be measured at fair value with gains and losses recognised in profit or loss. The changes should reduce the complexity that results from many categories and related impairment methods in the current IAS 39.

Accounting for embedded derivatives

(ED) is another source of complexity in corporate reporting and one which the ED plans to eliminate. The proposals would simplify accounting requirements by

proposing a single classification approach for the entire financial instrument.

The ED retains the fair value option that permits an entity to elect at initial recognition to measure any financial asset or financial liability within the scope of the ED at fair value through profit and loss if such a designation eliminates or significantly reduces an accounting mismatch.

Although the IASB propose to have the new standard available for 2009 year-ends it is unlikely to make the standard mandatory before January 2012.

There is a clear need for IAS 39 to be simplified, and this seems to be a welcome step in the right direction. But as usual, there’s no gain without pain. The changes are fundamental and will have significant implications for companies with considerable financial instrument portfolios. But this is exactly what the IASB is being called on to deliver. The IASB now needs to be told whether the benefit of simplification outweighs the cost of change.

Nick Topazio uploads regular blogs onto CIMAsphere, the global online community for management accounting. Check the website for more information and to access the latest blog posts: www.cimaglobal.com/sphere.

CIM012_017_Topazio.indd 51 16/9/09 16:22:10


Corporate reporting52

view is that the financial crisis is principally an economic issue not an accounting one; the consequence of inappropriate selling and overly complex financial instruments in a lax regulatory environment. Nevertheless there are implications for accounting standards and in particular accounting for financial instruments.

No accounting for tasteAccounting for financial instruments is a major area for debate. The international standard, IAS 39, is over 300 pages long if you include its supplementary guidance and chairman of the IASB David Tweedie has often remarked that if someone says that they fully understand the requirements of IAS 39 then they haven’t read it properly. The standard was issued before he joined the IASB.

The IASB is proposing to review IAS 39 within six months and have new proposed guidance published by the end of 2009. G-20 and European political leaders have called for a replacement standard in that timescale. In an attempt to resolve this difference, the IASB have split their project into three and accelerated the measurement and impairment sections.

Firstly, in terms of measurement, the IASB has tentatively decided to simplify IAS

39 and to proceed with two classification approaches. There are currently many more.

The second phase of the project will address impairment rules. The major issue here is whether an alternative to the IASB’s incurred loss approach would have helped to alleviate some of the adverse affects of the financial crisis. The argument is that if during the good times, before the present crisis, banks had been able to provide for expected losses rather than just be able to reflect actual losses then there would have been buffers to protect them during the bad times. The IASB intends to allow provisions based on history and current expectations but does not accept that it is the role of accounting standards to ensure sufficient capital buffers, which is seen to be the role of capital regulators.

The third phase of the project will address hedge fund accounting, which is perhaps the most difficult area of the three to resolve. The aim is to reduce complexity and increase transparency of hedge accounting activities. It is not easy to see how this can be achieved; perhaps simplified designation requirements and effectiveness testing. But hedge fund accounting is inherently complex and this may need to be tolerated as the cost of discouraging hedging activities, which are genuinely needed, through an

inappropriately-drawn standard is likely to outweigh any benefit through simplification.

Political pressure on the IASB has been immense and it was inevitable that mark-to-market rules would need to be reviewed. Timeframes for international accounting standard-setting have become inordinately long, however the intention to replace IAS 39 within six months is extremely challenging to say the least. Whether we look back and state that the changes that will undoubtedly flow by the end of the year were a result of undue haste or a speedy resolution of a global challenge remains to be seen. What seems clear is that international accounting standard-setting will never be the same again. ■

Nick Topazio

After working in industry for over twenty years, Nick Topazio joined the CIMA staff in 2003 as a technical expert focusing on corporate reporting. He is actively involved in the formulation of CIMA policy on a range of related topics in response to UK and International consultations and developments.

‘Political pressure on the IASB has been immense and it was inevitable that mark-to-market rules would need to be reviewed.’

CIM012_017_Topazio.indd 52 16/9/09 16:22:26

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Company insight54

The spreadsheet has been a staple of business admin for decades. In fact, before the computerised spreadsheet was created (as far back as the 1970s), accountants used them in paper form for hundreds of years. For financial reporting in particular, they still create the backbone of performance management and planning for many modern businesses.

However, as the business world has evolved, so have the demands of its reporting tools. Simply calculating profit and loss and documenting assets and liabilities is no longer enough. Now, external customers can pay for services and products in a variety of ways, from online banking to electronic invoicing and PayPal. Similarly, corporate intranets allow employees to manage their own accounts, using self-service HR software for flexible benefits and online expenses. Add external payroll

providers to the mix and it’s easy to get lost in the maze of systems.

Herein lies the problem. Spreadsheets are integral to modern admin. But the myriad payment types and systems could threaten the foundations of financial reporting, particularly for midsize companies (up to 1,000 employees and revenues below £250 million) who strive for growth but may not have the robust technology in place to report or predict it. At a time when tight financial reports are an absolute must, it’s time for every business to ensure its own technology can keep up with change.

The spreadsheet trap It’s easy to see why many midsize companies have fallen into the spreadsheet trap. Unlike more sophisticated software, spreadsheets are very easy to use. A rudimentary IT skill, they rarely require

extra training for employees. Similarly, spreadsheet programmes are usually included as standard on most administrative software packages, so there’s no need for additional investment. In short, basic spreadsheets have been an easy option for a very long time.

The main disadvantage of spreadsheets, however, is that they are often a collaboration black spot. A spreadsheet document cannot be updated by more than one person at a time, so they are not only

Time to turbo-charge financial reportingGed Simmons, country manager, IBM business intelligence and performance management, UK and Ireland, looks at how performance management is a bridge too far for the humble spreadsheet.

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Company insight 55

inefficient, but often leave companies with a document management nightmare. On top of this, they require a time-consuming, if relatively simple, administrative effort to collate all the financial information from the increasing number of systems at work in modern business.

While efficiency and productivity issues will undoubtedly dent the spreadsheet’s dominance, recent changes to legislation have threatened the status quo with more immediate effect, especially for public companies. The Sarbanes-Oxley Act of 2002, relevant not only to US companies but also global companies working with them, has enhanced corporate responsibility in terms of financial disclosure and accountability. Similarly, the EU Transparency Obligations Directive requires a number of stringent accounting methods, including periodic financial reporting.

Turbo-charged accounts Essentially, many midsize companies have accepted that their financial reporting systems need streamlining. But what some don’t realise is that this doesn’t mean getting rid of spreadsheets altogether. In fact, spreadsheets are still a useful method of documenting information in a simple and inexpensive way across the business. The first step is understanding which features to exploit, and which limitations to avoid.

For example, spreadsheets are still useful as personal data files for every employee. But when it comes to accounting, collaborative software should be used to avoid different employees updating different systems and leaving them with multiple, inaccurate accounts. Similarly, spreadsheets can still be used for basic figure analysis, but they are entirely unsuitable for data storage. Databases give you more control, stability and flexibility over the information you store.

There are a number of ways you can use your existing spreadsheet system more effectively. Dashboard tools can take basic spreadsheet analysis and give it an intelligent edge, allowing you to make better-informed financial decisions for the future without having to update your entire reporting infrastructure. It’s also important to share best practice across the organisation. Information sources such as the IBM Cognos Innovation Centre (www.ibm.com/software/data/cognos/innovation-center) allow you to access a number of blueprints to make the most of financial reports.

In the current economic climate, accurate financial reporting is absolutely business critical, for now and for the future. However, it is also a time when many midsize companies are unable to overhaul their reporting systems owing to slashed IT budgets. The answer to the problem lies in making the most of what you already have: taking your existing system and turbo charging it so it can match the pace of modern business. This doesn’t mean abandoning spreadsheets altogether, but simply using them better.

Connecting with the futureMLL Telecom sharpens financial focus using IBM Cognos Planning to replace spreadsheets, allowing staff to concentrate on core tasks.

MLL Telecom is a midsize company that plans, deploys and manages wireless networks for UK mobile operators. A leader in radio wireless technology, and its augmentation with copper or fibre, MLL is one of the UK’s largest providers of wireless backhaul.

Dealing with data difficulties MLL’s financial data is split into two main groups: existing contracts and prospect information. Using spreadsheets to account for these two very different data models was becoming increasingly impractical, according to Zoë Turner, financial planning manager at MLL Telecom.

‘We rely on our financial data to make accurate forecasts for the future,’ she says. ‘But our spreadsheet-based system was becoming unmanageable. The system was so complex that it needed an expert to run it, and it could take up to half an hour to refresh the data.

‘We weren’t comfortable with the integrity of our data, because the spreadsheets were exposed to potential corruption. In turn, we

couldn’t rely on producing accurate sales predictions and forecasts.’

MLL needed a business-planning tool that would not only speed up access times, but also present accurate and relevant data, to ensure that revenue forecasts could be relied upon to support the business. Furthermore, Turner and her team needed a future-proof reporting tool that could be developed in line with market changes.

A new era for financial forecastsMLL Telecom trialled six planning and forecasting products. However, Turner opted to implement IBM Cognos Planning: ‘We selected IBM Cognos Planning because of the strong dimensions and the size of the data cubes, it was the only solution on the market that exactly suited our needs. The time analysis and rolling forecast features mean we can keep a realtime eye on our budgeting.’

‘MLL’s finance team can follow a step-by-step process to submit data and access the information they need at the click of a button,’ comments Nick Patrick, account manager at Inca Software.

Inca Software, an IBM Cognos Business Partner, trained Turner and her team to be able to build, manage and maintain a model on IBM Cognos Planning, to anticipate future developments in the market.

Sharpening the financial focus‘Before, we spent most of our time worrying about the integrity of our data. Now, we can actually concentrate on what it really means,’ Turner explains. ‘IBM Cognos Planning has actually changed the focus of our department to give us several benefits for the future.’

Now, MLL is considering a wider roll out of IBM Cognos Planning to the sales teams and account managers. ‘Our sales teams give information to us and we input that data into the system. In the future, we’d like to cut out that middle stage, and allow the sales teams to use the solution themselves,’ Turner says.

‘IBM Cognos Planning has transformed the way the finance team works, allowing us to concentrate on what we’re here to do.’ ■

‘Before, we spent most of our time worrying about the integrity of our data. Now, we can concentrate on what it really means.’

Further informationIBMWebsite: www.ibm.com/cognos/uk

CIM012_022_IBM.indd 55 16/9/09 16:45:59


M&A and restructuring56

Snap up the competitionThe economic crisis put the brakes on much M&A activity, but it did not take long for talk to start about the possibility of cash-rich companies buying up competitors at bargain prices. Group treasurer at paper and pulp group Sappi, Jörg Pässler, tells Jim Banks that long-term strategic acquisitions are the most likely to yield sustainable value.

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M&A and restructuring 57

Some industries are more exposed than others to changes in the macroeconomic landscape, and the current crisis has impacted many companies suddenly and harshly. Yet even in those business sectors that are more vulnerable to the slowdown there are signs that M&A activity will play a key role in changing the structure of their industries.

This may seem odd when there are constraints on funding for such acquisitions, but companies with a a strategic vision now have the opportunity to build their market share. Global pulp and paper group Sappi has shown that well-conceived acquisitions can succeed in a downturn.

‘The paper industry is highly correlated to the general business cycle. In the coated paper sector there is a strong reliance on advertising. Our high-quality paper is used in glossy magazines, for example, and those magazines carry a lot of advertising, which is great for us because it increases the demand for our products. In the recession, however, those magazines are getting thinner,’ says Jörg Pässler, Sappi’s group treasurer.

With a primary listing in South Africa, Sappi is the world’s leading producer of coated paper, owning brands like Magno, HannoArt, Tempo, Quatro, Royal and Allegro. It also has strong brands in speciality labelling, and packaging papers and boards. It remains in a strong market position despite the heavy impact of the economic crisis on the paper and pulp industry, in which most paper manufacturers have seen sales crumble.

‘There has been a sudden collapse in demand. The

paper industry is affected worse than others

because it has a very long supply chain. Although

consumer demand has fallen by around 18%, some paper manufacturers have seen demand suddenly drop by up to 30%, because other companies along the supply chain are de-stocking,’ says Pässler.

The drop-off in demand is a severe blow to some companies in the industry, although re-stocking will need to happen eventually.

‘We had to adjust very quickly. In the US, our machines were operating at 100% capacity for most of 2008, but then in a

few weeks we saw demand fall by 30%, so we took commercial downtime and reduced the number of runs. We had to be certain that we were only making paper that we could sell. We, and our competitors, have taken some machines out of service permanently,’ he remarks.

‘We have been very open with our investors that we have limited visibility of an economic recovery, and we will remain conservative, although there are signs that re-stocking has started. We expect the economic recovery to be very slow.’

Focus on strategic growthWith some competitors struggling, a question inevitably arises over whether a company like Sappi, which has leading market positions, should take advantage

of potential bargains to push consolidation and snap up market share. Although Sappi is certainly focused on growth and made an acquisition at the end of 2008, it has not yet taken such advantage of bargain-hunting opportunities.

Having been involved in Sappi’s recent acquisition of competitor M-Real’s coated paper assets, Pässler believes that it is certainly possible to complete a deal successfully in the current climate, but he is sceptical about whether his industry will see a lot of consolidation just because there might be some good value deals in the market.

‘The industry was in need of consolidation, and had been very slow to achieve it, but you must remember that the coated paper market is not a single global market. It is highly regional, because volumes of paper don’t travel well. Furthermore, each region behaves differently. The US market is consolidated, the top five companies have 80% of the market, so there is good demand and supply balance and prices have risen. Consolidation has been slower in Europe,’ says Pässler.

‘It is also different for Sappi because we focus on coated paper, and competitors like Stora Enzo are very broad-based forest products companies. That means there are few obvious M&A targets. It might be possible to get assets cheaper than two years ago, but this is not an investment-grade industry. It has suffered from years of over-capacity.’

Although Sappi, like many other paper producers, have removed some capacity permanently, it has also brought in more machines through its acquisition of M-Real [see boxout]. The deal adds four mills - the Kirkniemi and Kangas mills in Finland, the Biberist mill in Switzerland and the Stockstadt mill in Germany, which together have a capacity of 1.9m tons.

Although there has been much talk about the potential for consolidation in Europe’s coated paper industry for many years, this €750 million deal is the region’s first major acquisition in a long time. It furthers Sappi’s position in coated paper, but also brings it into the lightweight coated paper market at a time when overcapacity has been plaguing the industry and prices have been under severe pressure.

‘We know the market, we know what we need. We don’t look at anything that doesn’t fit with our strategic objectives, so there are very few integration issues to address.’

Sappi on paper

18% Consumer demand for paper has fallen by around 18% but some manufacturers have seen demand drop by 30%, because other companies along the supply chain are de-stocking.

30% Sappi’s machines in the US were operating at 100% capacity for most of 2008 but then in a few weeks saw demand fall by 30%.

80% The top five US coated paper companies have 80% of the market.

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M&A and restructuring58

Given those circumstances it may have seemed sensible to question the timing of the deal, but Sappi saw many reasons to press ahead, not least because Sappi was seen as one of very few companies that could turn the loss-making assets into a profitable part of its business. The acquired assets made a loss of €30 million in the first half of 2008, but Sappi saw the potential to generate synergies of €120 million in just three years.

‘We bought the coated assets of the second biggest player in the sector, while other competitors were reducing capacity. Overall, capacity has fallen by 1.7m tons in the coated paper sector. What this actually means is that our transaction is very timely, as the industry is better placed to deal with the reduction in demand,’ says Pässler.

Sappi secured the assets of M-Real for a price in the region of $500 per ton, at a time when anything less than $800 per ton is good value. The deal certainly seems to be a bargain, but it is part of a long-term strategic growth plan for Sappi, not the catalyst for a campaign of opportunistic acquisitions.

Since 1990, Sappi has made five key acquisitions, all driven by a focus on long-term strategic value and competitive positioning.

‘It is the kind of strategic transaction that we have targetted for some years now, and we closed the deal before there was any sign of the dramatic drop in demand in the last quarter of 2008. Even if we had known that was going to happen, we would still have done it. Markets will normalise eventually and when they do we will be well placed.’

Secrets of successThe fact that the M-Real acquisition would have gone ahead despite rapidly weakening demand is proof that the construction of a successful deal is a long and steady process aligned with business goals that lie beyond the current downturn.

‘Before the merger we spent months looking at the synergies we could generate. We were not buying operating profit. In this industry, the more machines you have the more you can allow them to keep running 24/7 making the type of paper that is most cost-efficient for each machine,’ says Pässler.

If there are fewer machines in the operation, as M-Real had before the acquisition, there is greater downtime as machines are switched off and on to accommodate different paper grades. Sappi can now run these machines longer for the same grade. Such synergies may have been clear to Sappi, but the company still took a cautious and measured approach.

‘We had external consultants provide an objective view of the expected synergies. Once we were clear that it made strategic sense we could look at funding, with the confidence that we could show how to run the machines at more profit. Once the due diligence was done we needed to think about how we could raise the €750 million,’ Pässler explains.

At the time, the first option was to look at bank bridging funding and the possibility of going to the capital markets to raise debt. It soon emerged that a different approach to funding would be necessary.

‘The capital markets had shut down and the second half of 2008 was bad for banks. So, we financed €500 million with equity because the debt market was essentially closed. It would have been reckless to expose the company to the short-term refinancing risk, so we went to shareholders rather than to banks or the debt market. It worked because shareholders engaged with the deal and bought into the value it would bring,’ says Pässler.

That said, Sappi has not become averse to debt market issuance. It has recently closed an $800 million bond deal, now that the market is once again open to non-investment grade companies after benchmark deals in 2009.

Meanwhile, the M-Real acquisition has been quick to yield value, and Pässler is in no doubt about what has made it successful.

‘Even though the market is difficult, in the first nine months we will have squeezed out €60 million in synergies. The success factors were all about our position in the market and the reduction of capacity. We are aiming to be the biggest producer and to have the lowest cost assets. This deal worked because there is a strategic fit with our company,’ he says.

‘We know the market, we know what we need. We don’t look at anything that doesn’t fit with our strategic objectives, so there are very few integration issues to address.’

Sappi’s experience suggests that acquisitions can deliver great value even in the economic downturn, but the value comes from thorough preparation and strategic planning rather than swooping to buy out struggling competitors available at knockdown prices. ■

Jörg Pässler

Jörg Pässler is group treasurer for Sappi. He is based in Belgium where he manages the treasury team at Sappi’s global treasury. His responsibilities include corporate and structured finance, managing the group’s interest and foreign exchange exposures, designing hedging strategies and financial risk management.

Financing the M-Real deal

In late 2008, Sappi bought the coated graphic paper business of M-Real, adding four mills and bringing in strong to strengthen Sappi’s market position in coated wood-free paper and lightweight coated paper. To finance the deal it needed to raise €750 million. This is how the funds were secured:

Rights issue to raise €450 million at •ratio of six rights offer share for every five Sappi shares held

€400 million payment in cash from •the rights offering

€220 million through a vendor loan •note

€50 million in new shares issued to •M-Real

‘Even though the market is difficult, in the first seven months we will have squeezed out €60 million in synergies.’

CIM012_019 Sappi.indd 58 16/9/09 16:24:17

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Human capital60

Spot the difference

Lorie Farrell and Rob Jackson explain to Excellence in Leadership how empirical behavioural and psychological research make it possible to precisely identify and predict the unconscious motives that influence the actions of the best leaders.

While, as the saying goes, we are all equal in the eyes of God, this is not necessarily the case in the business world. We pay people differently, reflecting differences in perceived worth and, though we endeavour to provide opportunity to all, in a meritocracy our goal is to encourage the best to prosper.’

With progression based on merit and dependent on the successful navigation of selection processes one might expect genuine homogeneity in levels of performance. Yet data and everyday

experience suggest there can be enormous differences in performance between people in the same job. Performance management systems are the organisational device that should ensure the business ultimately promotes and benefits from the most talented; at least that’s the principle.

There is however a frustrating passivity about relying on such systems, and their effectiveness often becomes diminished by other organisational dynamics. Can we in fact identify why some people substantially out-perform their colleagues? Can we predict

who will turn out to be a superior performer for any given job? Farrell and Jackson say yes, but not by using the methods commonly found in organisations today. ‘360 degree appraisals, psychometric testing and the like are simply not sufficiently reliable predictors of outcomes. Bringing a more proactive and scientific approach to the investment decisions around people is the core focus of our work in Burnham Rosen Group’, says Farrell.

Lorie Farrell, with a career in senior finance roles and a solid grounding in the field of motivational psychology, sees the

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Human capital 61

Spot the difference

relevance for human capital management. ‘There is a remarkable opportunity to take the guess work out of some of the big decisions we have to make when planning changes within our workforce,’ she says. ‘We often don’t really understand which roles in our businesses drive organisational performance. Even if we did, few organisations invest the energy to find out for sure how their best performers achieve what they achieve.’

Rob Jackson, a lead practitioner for Burnham Rosen, adds: ‘Many businesses use behavioural competence frameworks, skills profiles or personality assessments to support an analysis of their human capital, at either individual or team level. The consensus of opinion among development specialists is that these tools are not enough in themselves to answer the question about what differentiates top performers. They tell us what good looks like but they tell us remarkably little about how to transform good into exceptional.

‘The chances are your organisation already tackles poor performance. Unless you have been robust in your analysis, the chances are too that your model of ‘desired’ performance and behaviours is most likely a reflection of the merely average to good. Talent management programmes built on this basis only reinforce norms. They are not going to be transformational and may add little if anything to your human capital.’

Farrell takes up the point. ‘Taking a more empirical approach can help avoid this trap. Even our basic assumptions about our business are rarely tested. For example, many managers make the underlying assumption that the more senior the role the more central it is to driving value. But this is a huge assumption,’ she remarks.

‘We’ve researched different roles in organisations and this assumption is simply not fact. A role of regional manager in a retail business may well be needed, but is it a value-driving role? In one study we did the answer was no. Careful analysis of the performance of the business showed that the calibre of the post-holder in these roles was irrelevant for results, as long as they were not a poor performer. Since this business was tough on poor performers this problem did not arise. Yet the assumption the organisation had made was that this role was central to the goals of growing market share. They were gearing up to invest heavily in this role.’

‘Understanding your human capital is about more than understanding the collective capability and commitment of the people working in the organisation. Understanding the value-add potential of roles underpins any meaningful analysis of human capital.’

Of course this opens up the question of the basis of assessing performance. ‘A subject for another time perhaps,’ suggests Farrell. ‘It’s a fascinating field though. It’s remarkable how poorly businesses do this. Our work is very research based. As busy managers we can be seduced by the rational and we are often too busy to take an empirical approach.’

‘For example, take fighter pilots in one national air force we’ve studied. Top guns

were rated as such because they scored the best in deploying ordnance accurately. But the margin between the best and the majority was tiny. It is enough to differentiate performance, but of little practical relevance in the real world. Yet the future deployment of newly qualified pilots is driven by their performance against such measures.

‘The trouble is the motivational attribute that drove this superior performance in war games is associated with low boredom thresholds. Unfortunately the standard practice was to assign top guns to a particular tour of duty that carried little new challenge. So the attrition rate in this cohort was enormous (98%) and represented a huge waste of resources. It begs the question as to whether this organisation

Human motivation, the historical context

Curiosity about human motivation has driven psychological enquiry since the birth of this science. In the late 19th century Sigmund Freud along with other prominent figures such as Carl Jung and Josef Breuer first began to explore the impact of the unconscious on behaviour. These so called ‘drive theorists’ were highly influential but their ideas were not without controversy.

In the 1930s Henry Murray, the first chair of the newly formed psychology department at Harvard University, identified some 300 drives, recurring patterns of thought. He hypothesised that these thoughts, what he termed ‘motives’, drive our behaviour. Sometimes we have conscious awareness of these thoughts, like when we feel hungry, and sometimes we don’t.

By the middle of the 20th century a new perspective emerged that challenged the assertion that unconscious motives and drives are fundamental to understanding why people do what they do. Psychologists such as BF Skinner and Ivan Pavlov demonstrated how environmental factors, such as rewards and punishments, ‘condition’ behaviour. This ‘behaviourist’ school emphasised the role of environment in determining behaviour.

The very well known psychologist Abraham Maslow took a behaviourist approach to Murray’s list of motives. He suggested our motives were ordered in a hierarchy. If the environment met the needs of a lower-order motive (e.g. hunger) energy would be released to higher level motives (e.g. achievement). As such Maslow’s theory put the emphasis on the environment as the dominant factor in motivation. David C McClelland, at the time a student of Maslow, set out to empirically test this idea.

Remarkably, McClelland’s research disproved Maslow’s theory (not that this has stopped the theory being taught in management education around the world). Subsequently, a completely new approach to understanding human behaviour emerged. McClelland’s work endorsed the basic assertion of drive theory, that human motivation has a significant unconscious component. But motivation is more complex than Freud suggested.

In the last 60 years McClelland and co-workers such as David Burnham have gone on to demonstrate how motives and the environment interact together in many aspects of our lives. Understanding these interactions has opened up a unique approach to development and change for people.

‘Understanding the value-add potential of roles underpins any meaningful analysis of human capital.’



Human capital62

was really valuing the right thing. This work had led to a rethink on how best to manage this most expensive example of human capital.’

Leading by example‘Understanding and leveraging human capital starts with understanding how important specific roles are to the business,’ Jackson says. ‘You can only do this properly if you figure out the real success criteria for a role. The question then of course is ‘what enables some people in any given role to accomplish so much more than their colleagues?’ This is no trivial question but it is one that can be answered.

‘Take ‘leadership’ for example. What makes a great leader in your organisation? The not uncommon approach to answering this question is to ask the senior executive. Of course there is a political element to such an approach. But there is also the implicit assumption that senior executives, by being examples of success, embody the essence of superior performance. Even if this were consistently true, most psychologists would question whether people’s attributions of their success are bias free.

‘With perhaps the exception of people suffering from depression most people are hard-wired to attribute successful events in life to inner traits and characteristics. ‘I’ve always had a stubborn streak. I wouldn’t let it go and eventually we came out on top!’ Whereas we bias our thinking about negative outcomes towards the influence of external factors. ‘The collapse in the market for our product was overwhelming. No one could have turned that round.’

‘Add in the whole question of values and social desirability (who really wants to be an introvert?) and it’s clear that accepting at face value people’s explanations of how they do what they do is a less than reliable research method.’

Jackson adds: ‘This goes some way to explaining why it can be very difficult to identify at a behaviours level what truly differentiates, that is, what behaviours are common across high performers in a role and not present in average to good performers.’

What does seem to matter, what really transforms the science of human motivation, is to study the unconscious. We’re not talking about deep mystical or Freudian drives, but patterns of thought called ‘motives’. We have low awareness of these patterns of thought, but they are there, playing away

in the background of our mind. This is a field of human motivation that only a few organisations have come close to exploiting. There’s an enormous body of academic research in this field, much of it originating from Cambridge University in the UK and Harvard in the US. Some 64 million people have participated in one way or another into research into motives. This work opens the door to a true scientific approach to explaining why some people are consistently high performers in a given role.

To propose that what we think about drives our behaviour and therefore influences the outcomes we achieve sounds like a statement of the obvious. “We need to grow market share, therefore we must become more competitive on price,” might be our train of thought. We obviously have conscious analytical capabilities, we can set a goal and then work backwards to what we need to do. What needs to be added to this analysis is an awareness of the influence of our motives.

Critically, motives work differently from conscious goal setting. Motives drive

actions which result in outcomes, outside of our awareness. So depending on our motive profile, we unknowingly interpret life and work goals through a particular lens. Though it’s an uncomfortable observation, research suggests many conscious explanations of our actions are actually retrospective justifications.

‘It can be difficult to conceptualise motives,’ points out Farrell. ‘One needs to experience the process of discovering one’s own motivational profile to truly grasp the significance and power of this knowledge. Their importance is without question though. We’ve studied leaders in large organisations across the world, different industries, sectors, nationalities, and we find that a very high proportion of the most successful have the same motive pattern. But different roles require different motive profiles for success. Take small business entrepreneurs. The very best, those that significantly out perform their peers for five years or more, have the same motive profile as each other, but different from the most successful leaders in large organisations.

Application of motive theory to retail banking

There are few roles where there is a closer link between individual contribution and revenue than wealth management. For this large retail bank the data was clear. Market analysis and modelling meant sales targets can be set accurately against opportunity. So the performance of wealth managers could be compared reliably.

This comparison showed very real differences in performance between managers. No other mitigating factors were involved. Simply, some wealth managers were better, much better than others. Burnham Rosen Group set out to work with this client to find out why.

A cohort of truly excellent performers was identified. These managers significantly exceeded the average levels of sales, month in month out over the last three years.

Motive profiling revealed a very different picture between these high performers

and others. These managers thought about their work in a way that was very similar to each other and very different from average performers. Yet they had all been subject to the same technical and behavioural training regimes. Where they differed was at the motive level.

Armed with this insight a motive-based training programme was designed. The training group were selected from poor performers. These managers had all performed at 10% or more below the national average for this role, for more than two years.

The organisation’s own sales data demonstrated that the performance of these managers increased to near the national average almost immediately and then over subsequent months exceeded the national norms. These managers were followed up for over 12 months and the improvement in performance was sustained.

‘Though it’s an uncomfortable observation, research suggests many conscious explanations of our actions are actually retrospective justifications.’



Human capital 63

‘A typical study would bring all these components together: determine the critical performance criteria, identify which roles are more central to driving organisational performance, then do an analysis of a statistically valid sample of role holders to look for what differentiates performance. Study after study shows that the basis for the difference between good and superior performers is not in behaviours or personality, but in patterns of thought, pre-conscious motivation.

‘Returning to the area manager example, this study was in a vehicle parts retailing business. The organisation’s primary goal was to increase market share, having grown share-holder value in recent years by improvements in efficiency, supply-chain management and so on. The retail outlet managers and their area managers were studied by Burnham Rosen Group. Counter to expectations, against the goal of growing market share, the area manager role appeared to have little influence. However, the performance of individual outlets in growing market share was greatly affected by who the outlet manager was.

‘We studied outlet managers at the motive level and found a dramatically strong correlation. The manager’s attributed with most growth in their local market had in common a particular motivational profile. This profile was different from average performers. We also carried out in-depth interviews and ‘coded’ the interviews for particular patterns of thought.

In summary, we found that the average manager’s motive profile fell broadly into two types. In some, the manager’s unconscious goal, their motive, was to compete with

themselves or others. For others their dominant unconscious concern was about impressing people and having impact.

Customer relations‘What might this mean in action? Well, take for example a customer who has a requirement for a part the outlet could not source immediately. The average performing managers became determined to solve the problem. They either saw it as a personal challenge or as an opportunity to impress. Consequently they often held on to the customer’s vehicle for days, promising that they would soon have the elusive part. Frequently they would have to admit defeat, if the customer had not already stormed off elsewhere in frustration.

‘The more successful manager’s motive profile was different. Their unconscious concern was truly about helping customers. Therefore, in the same scenario they made more realistic assessments of their ability to fix the customer’s problem. If they knew they couldn’t get the customer back on the road quickly they might refer them to a competitor who they knew could. Sure, they lost a possible sale, but they built the type of reputation with customers that led to repeat visits and positive referrals, driving the expansion in market share.

‘All three outlet managers consciously desired to please their customers. They had all been through the same training programmes around customer care. So it’s not their conscious thinking that drove different actions, but their unconscious. They simply reinterpreted the same situation in three different ways, ways that are consistent with their unconscious motive needs.

‘We’ve studied senior health and safety practitioners, account executives in professional services, human resource directors, sales managers and sales people and many more roles. If done carefully the findings are so insightful. Once people have knowledge of their motive profile and of the profile that drives most success in their role it’s entirely possible to change these thought patterns. Our research is often just the ground-work before helping individuals and teams develop.

‘Working on thoughts may feel alien to many,’ acknowledges Jackson. ‘We are all experienced in behavioural methods. Most of us will have experienced management training based on a behavioural approach. Of course, culturally, the concept of personality is pretty deeply entrenched. Again, most middle to senior managers will have completed some form of assessment based around a personality type or trait instrument.

‘We’re not setting out to question the usefulness of these methods across the board. Rather, the more general point here is that organisations could be more sophisticated and questioning about the assumptions that underpin some of these methods. Investment in scientific, outcome-based research might lead to surprising conclusions for organisations. Selection and development of leaders, for example, should not be a leap-of-faith investment. Human capital management involves humans, we shouldn’t expect it to be easy or rational.’ ■

Authors

Lorie Farrell is a management consultant and associate at Burnham Rosen and a former FD of St Ivel Creameries Ltd. She has 16 years’ experience of working primarily at board level on strategy creation and implementation, coaching directors and developing leaders.

Rob Jackson is a management consultant and lead facilitator at Burnham Rosen Group. He has over 14 years’ experience in human resource development and organisational change, having previously held senior scientific positions with line and operational management accountabilities, mainly within the energy and defence sectors.



Human capital64


64

The pandemic survival guideIan Houghton, business continuity manager at RSA, looks at the impact of the H1N1 virus on business, and provides a guide to procedures to be followed in preparation for pandemics.

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Human capital 65

Health experts have been monitoring the H1N1 pandemic since the first cases were reported in Mexico on 19 April 2009. In July, World Health Organization (WHO) raised the alert over H1N1 to level six indicating the start of the 2009 influenza pandemic and so far, 3,200 have died from the disease worldwide and there have been 271,000 cases reported.

Most commonly affected are pregnant women, the elderly, those with underlying health issues and children. However, the disease affects a large number of the working population and it is important for businesses to take precautions.

A key approach is to compile a business continuity plan. This addresses how an organisation can remain operational in the event of a disaster and one can be created specifically to plan against the effects of a pandemic such as H1N1.

The current threat of a flu pandemic illustrates the need for ‘end-to-end’ planning, addressing not just loss of facilities but also taking into account that without people organisations cease to function. It is recommended that businesses review their ability to work in different ways and from different locations, identify ‘keyworkers’ and consider how they would continue to work with a significant proportion of their workforce out of action.The UK Health Protection Agency estimates that 25-40% of staff during the first phase (8-12 weeks) would be absent from work

for 5-10 days. This assumption includes the effects of closing schools, nurseries and day-care centres for the elderly as well as caring for sick family members and those reluctant to travel to or from work.

While the period of absence due to sickness is likely to be limited to 5-10 working days, some people will have symptoms which go on for much longer, such as weakness and depression sometimes lasting for weeks.

The spread of H1N1 has been difficult to predict. While the UK at one stage reached 100,000 new cases of H1N1 per week, this figure has fallen dramatically. However, as we approach winter, the spread of disease is expected to soar as temperatures fall.

In July, the UK’s NHS released figures claiming that businesses would be crippled within two months because H1N1 will force one in eight workers to stay at home. Sir Liam Donaldson, the chief medical officer, said that up to 12% of the workforce would be sick by September, in addition to the 9% of workers predicted to contract the virus in August.

It was feared that the combination of high sickness levels and holiday absences would put pressure on businesses already struggling with the recession. Given that so many businesses already have enough on their plates trying to stay afloat, it is no real surprise that many are still not adequately prepared for a pandemic.

Taking the UK as an example, recent Chartered Management Institute business continuity management awareness research highlights that only 19% of organisations have plans in place that they consider robust. 32% of public bodies consider their plans to be robust compared with 13% of private. Only 10% of SMEs have addressed flu pandemic in their business continuity plans.

80% of those with business continuity plans in the corporate area have not considered at all the financial impact of a pandemic, and fewer than 30% have looked at their supply chain at all. This is a shocking statistic considering the impact that a pandemic can have on your bottom line. While the costs to the economy of H1N1 remain unknown at this stage, some estimates suggest SARS, the 2002 pandemic which originated in China, caused economic losses of between $30 billion and $150 billion.

In July, Ernst & Young’s ITEM Club said a pandemic reaching 100,000 cases a day by August, lasting six months, would lead to a 7.5% fall in GDP this year. The lingering damage would cause a further fall of 1.2% next year. It also said the UK’s GDP would fall 4.5% even if H1N1 did not take hold on the scale feared. This is worse than the 3.5% fall it predicted in April shortly before the Budget.

The main reasons for this are that productivity will suffer, given that sick

‘80% of those with business continuity plans in the corporate area have not considered at all the financial impact of a pandemic.’

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Human capital66

employees cannot go to work and, on the demand side, spending on non-essential goods and services such as restaurants or tourism will decrease as people stay away from public places to avoid infection. Furthermore, uncertainty about the future will make businesses postpone investment projects.

For those businesses that do not have an adequate business continuity plan in place that considers how to manage the threat of a pandemic, the following steps are recommended:

1. Assemble a pandemic flu working group Set up a group of people from key areas of the business and draw up a list of issues that may arise in a pandemic fl u scenario, drafting appropriate procedures for each one. Then work with all areas of your business to produce a Pandemic Plan that meets the nature, scale and complexity of your business.

2. Identify your most critical areas of workThink about the minimum number of staff you would need to fulfi l adequate service level agreements and the number of sites you have. If you have two sites or more, you may be able to move work between those sites if the need arose. Identify single points of failure and minimise impact; technological and human.

3. Plan and test, plan and testIn the event that key members of staff are taken ill or cannot attend work, or work remotely, consider your succession plan, including:

key staff skills mapping• contingency cross training• identifi cation of capable deputies•

drawing up and testing succession plan.• 4. Make sure your HR policies are clearConsider whether or not you will need to change your HR policies during an outbreak and if you will pay staff if they are off looking after their children and loved ones. Establish a procedure with HR for the capture of information regarding the number of staff that are unwell and those that are unable to work because they are looking after sick family members.

5. Don’t forget your suppliersConsider and communicate with external suppliers of business critical services such as IT, fuel, transport and food.

6. Get hold of the information you needMonitor WHO and local government websites in order to ascertain a level of alertness. You might want to appoint an information offi cer to constantly monitor the major health and government websites.

7. Communicate effectivelyIf staff can work from home then where possible advise that they do as this creates a large number of single points of failure rather than having all your staff in one offi ce where they can pass on the virus. Maintain clear communication with all your staff, suppliers and customers.

8. EscalationIn the event that the pandemic escalates, you may want to restrict business travel to affected areas. If you have more than one site or your staff travel to suppliers or customers you may want to stop or restrict this as the pandemic threat rises. Implement a quarantine period of up to ten days for staff who have come into contact with anyone suffering from H1N1. This may help to reduce the spread of the

virus within your business, but you must record and monitor this closely. Ensure staff are aware where major outbreaks are occurring around the world in case they plan to visit these areas while on business or holiday.

9. Get the basics rightUse a hand sanitation product at least 6-8 times a day and ensure staff use basic personal hygiene: use a tissue to sneeze, cough or blow your nose into, then throw it in a bin. Ensure your decisions are in line with the Government’s pandemic advice. Increase cleaning of all offi ces and areas used by staff: all hard surfaces, desks, buttons on drinks machines, door handles, everything. The virus can stay on hard surfaces for up to 24 hours.

10. Keep it simpleFocus on business-critical processes and key staff to ensure business continuity. Remember that failing to plan is planning to fail, and your business cannot afford to fail. ■

Ian Houghton

Preparing for the second wave: global lessons from current outbreaks

Ian Houghton is Business Continuity Manager for RSA. He recently implemented a project to standardise continuity management and communications across the 28 sites that make up the UK Region of Royal & SunAlliance Insurance UK.

Monitoring of outbreaks from different parts of the world provides suffi cient information to make some tentative conclusions about how the infl uenza pandemic might evolve in the coming months. The World Health Organization (WHO) is advising countries in temperate parts of the southern hemisphere to remain vigilant. As experience has shown, hot spots of increasing transmission can continue to occur even when the pandemic has peaked at the national level.

The pandemic will persist in the coming months as the virus continues to move

through susceptible populations. Close monitoring of viruses by a WHO network of laboratories shows that viruses from all outbreaks remain virtually identical. Studies have detected no signs that the virus has mutated to a more virulent or lethal form.

Likewise, the clinical picture of pandemic infl uenza is largely consistent across all countries. The overwhelming majority of patients continue to experience mild illness. Although the virus can cause very severe and fatal illness, also in young and healthy people, the number of such cases remains small.

While these trends are encouraging, large numbers of people in all countries remain susceptible to infection. Even if the current pattern of usually mild illness continues, the impact of the pandemic during the second wave could worsen as larger numbers of people become infected.

Larger numbers of severely ill patients requiring intensive care are likely to be the most urgent burden on health services, creating pressures that could overwhelm intensive care units and possibly disrupt the provision of care for other diseases.

continuity management and communications across the 28 sites that make up the UK Region of Royal & SunAlliance Insurance UK.

CIM012_RSA.indd 66 17/9/09 10:37:36

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CIMA President's dinner.indd 1 16/9/09 14:55:50


Company insight68

A company ran a prize-winning programme for employees to become energy conservation ambassadors among their colleagues. This was a step-change, yielding significant money savings to the company. Team members were urged to behave energy-efficiently at work, cut consumption at home, and provide practical suggestions on further changes. Taking part made them eligible for prizes, such as low-consumption electrical appliances. A conservation contest film featured football fans cheering on people who turned off their lights or unplugged their mobiles.

Employees dressed up as these fans for a chance to be in a company advert, posting pictures of their costumes online to be voted upon; people were motivated, commitment and behaviour change rippled through all teams. Formative research among the target groups inside and outside the organisation shaped and validated the programme and evaluative research assessed its success and pointed to lessons to support a lasting and sustainable culture change that would drive dividends internally and externally.

Sadly, this happens all too rarely because many change programmes simply don’t deliver and don’t last, partly because they don’t motivate teams by tapping into their values. Or it is because the urge to win or gain something is not there, or the recognition of efforts and demonstrating impact are missing. Perhaps the pleasure in doing something intrinsically satisfying is absent. Sometimes there is a sense that leaders are leading not by example but by edict, or the present climate could be making people wary of yet another change programme.

A common circumstance of failure is when people understand in their minds the case for change, but physically and emotionally it has not become part of them, not been embedded, internalised, or integrated.

Refreshing changeMoreover, leaders who understand the insidious effects of subjectivity will not let the organisation do its own research into its own people, or let outside change management consultants design research that subliminally plays to the solutions they offer, but will ask an independent research company to cast a fresh and unbiased eye on the situation and recommend new directions.

With CEOs on ever-shortening tenures, other risks to watch out for include the desire of leaders to make a short-term big splash rather than stick to a long-term plan to monitor change and keep the programme on track.

You need to ask what it is all going to look like when the changes are done. People need to be inspired by what the future will be like, echoing management guru Stephen Covey’s direction to ‘begin with the end in mind’. Provide evidence that progress is indeed being made and that people are making a difference.

A crucial leadership skill is the ability to understand the holistic picture of change across key audiences, internally and externally, and find that fine midpoint between heavy-handed steering that fails to catch a favourable breeze, and the

laissez-faire surrender of stewardship, which lets the boat run uncontrolled before the wind. A close listening to the echoes of their perceptions and expectations helps to inform the judgement calls required.

As the impact of greater competition collides with declining levels of trust globally, the demand for insight and evidence to support planning, decision-making and resourcing is set to grow, and not just in internal change management.

The awareness and understanding of intangibles is growing across management generally as a feature of greater professionalism; and greater sophistication in appreciating these intangibles is helping organisations to feel their way with greater speed towards competitive differentiation based on values.

Insight, benchmarks, reputation scorecards as products of intelligently conceived and conducted research – a specialised skillset, not easily acquired, and rarely found in full flower even among professional research firms – is key to success and to showing people the route map, the potential pitfalls and the progress that they are making on the journey. ■

Motivating changeGroup CEO of Echo Research Sandra Macleod explains how successful change programmes need to be underpinned by an understanding of the values held by the team members taking part and a strong vision of what the result of change will be.

‘A crucial leadership skill is the ability to understand the holistic picture of change across key audiences.’

Further informationEcho ResearchWebsite: www.echoresearch.com

CIM012_Echo.indd 68 17/9/09 10:26:10


Company insight 69

Change can be unsettling, painful and expensive. Many of us stick to familiar systems and processes just because it is easier and less disruptive, even though we know there are alternatives that would help us to work more effectively.

But settling for the comfortable life is not an option in today’s competitive landscape, where we are all under pressure to do more with less and to make every aspect of our lives more time- and cost-efficient.

So why do we put up with software that hinders rather than facilitates our ability to take advantage of the opportunities available to our business? And why do we keep systems that fail to help us adapt to change, without evaluating cost and exploring alternatives?

We know that technology is a significant investment in terms of time and cost. No one makes a decision to buy software lightly and the choices we make are based on the needs of our business at the time we buy and the events that we believe are likely to occur in the future. But we are living at a time when no-one knows when things will return to ‘normality’, or if they ever will.

So the standard rules of predictability and the forecasting models applied previously are becoming redundant and we all need to ensure our businesses and systems are set up to change at a moment’s notice.

‘Our system won’t let us do that’ is no longer acceptableWe would argue that many of the systems on the market and installed in businesses across the country can’t cope with this radically changing trading environment without incurring extra cost and inconvenience. But many organisations

stick to the system they have bought rather than looking for a new, more agile solution because they have invested so heavily in their current software that they feel they have no option but to keep feeding that investment.

This may be a false economy and an approach that could seriously damage or even destroy your business. Typically

companies with less agile, more traditional systems find themselves stuck in a need-spend-need-spend cycle, which is time consuming, costly, frustrating and far from efficient. Many such companies are:

spending a disproportionate amount •of time and money just to ensure that their software keeps up with the many internal and external factors that drive change

over-spending on expensive external •IT consultants to make essential system changes

failing to deliver the standards of •service and information demanded by stakeholders missing opportunities to grow the business or respond to threats because they are spending time and money managing inefficient systems

managing an inflated and expanding •software maintenance budget and not getting a quantifiable return on spend.

If all this sounds scarily familiar, think differently. Don’t let your system run your business into the ground, evaluate whether changing it could be better for you. You need a solution with architecture that enables you to quickly make changes yourself, without the need for external consultants or specialist IT staff, while also being flexible, easy to use and easy to integrate with your other applications.

A change-embracing solution will ultimately cost less and provide a measurable return on investment, while ensuring your business keeps pace with its own objectives and with the demands of the outside world. Don’t wait until it’s too late, now is the time to evaluate. ■

Time to evaluate ITDavid Turner, Group Marketing Director at CODA, explains that continuing to invest in legacy systems in an unpredictable trading environment, when businesses are all under pressure to do more with less, can prove costly. It is time to invest in agile software.

‘Many of the systems on the market and installed in businesses across the country can’t cope with this radically changing trading environment without incurring extra cost and inconvenience.’

Further informationCODA GB LtdWebsite: www.coda-financials.co.uk

CIM012_021 Coda.indd 69 16/9/09 16:46:56


Data management70

Untangling the webThe volume of data in large companies has reached unprecedented levels, and new methods of customer interaction such as social networking mean more of that data is in an unstructured form. Tackling data management is a daunting task but, explains Toby Redshaw, group CIO of insurance group Aviva, some forward-thinking companies are proving that rising to the challenge can reveal tremendous business value.

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Data management 71

A vast tide of data is already swamping many large companies, but as emerging phenomena like social media, Web 2.0 and its cousin Enterprise 2.0 exert more force on business the volume of useful data is growing ever faster. One of the main challenges any leading organisation faces is how to make use of the unstructured data that comes from Facebook and Twitter, and from contacts with customers across all channels.

Sifting this data and marrying it to the structured, transactional data they already have could be one of the most important and most demanding tasks in the years ahead.

Useful information resides among the chatter on any forum where people seek recommendations from their peers, but it may not be immediately clear among the noise which data are precious. Companies have a choice between treading water and diving into the expanding world of unstructured data to unearth real business value.

‘Managing unstructured data is hugely important. Think about what any company does; it gets, keeps and grows customers with a set of intertwined products and services. All companies have four things; cash, people, ‘stuff’ like buildings, office equipment etc., and information.’

‘My people may be smarter but all companies have their stars and their journeymen. My ‘stuff’ isn’t any better or worse than anyone else’s. But the smart use of information could be the source of sustainable competitive advantage,’ says Toby Redshaw, group CIO of insurance group Aviva plc.

‘Most companies are plagued by what I call ‘uninnovation’, which is largely unknowingly attacking the same problem or process gap over and over again in different ways in different areas around the company. Data, whether structured, unstructured or process data, impact the quality and speed of how a business is run. Connecting the right people with the right information and knowledge can not only help drive innovation but also shrink uninnovation,’ he adds.

Aviva is the world’s fifth largest insurance group and the largest in the UK, and globally it has over £380 billion of assets under management. It also has a pioneering approach to IT and is placing great emphasis on its future plans to improve efficiency via business process management (BPM) software and the increased use of social media / web 2.0.

Collaboration technologies support its ‘One Aviva Twice the Value’ mission, launched in 2007, which aims to harvest the benefits and synergies across the disparate parts of the group. In support of this will be the broad use of social networking technologies, wherein lies a wealth of unstructured data that could inform key decisions Aviva makes in the future.

‘External unstructured data is very important. You must watch and be aware of what is said about your company on external social media sites and blogs, but many companies are not involved in that space. Twitter may not be the future of marketing, but you can track the positive and negative comments that are out there. Peer recommendation is a very important factor in purchasing decisions,’ says Redshaw.

‘You also need to look at customer contact data to see what issues are raised in calls, gauge customer satisfaction and make recommendations based on previous calls. You need to capture and codify what happens during those moments of truth with a customer. You need to ask whether you know your customers, whether you are transparent and whether you are consistent.’

Data synergyFor Redshaw, value can be derived from marrying unstructured and structured data. He advocates taking what you know about customers from transactions and linking it to the information on individual customers and the perception of the company in the marketplace, as this can be key in how to up-

sell or cross-sell more effectively. Ultimately, this increases the lifetime value of a customer compared to your competitors.

‘That is how you keep and grow customers. From the customer’s perspective, you’ll do things right the first time. You’ll deliver better service from fewer calls. We have great Web 2.0 and BPM tools that can, if implemented well, give us a proactive and preventative process that links the unstructured and structured data in various sources to a knowledge management system. You want to be able to know where to focus and then to know what has worked in the past, that is how you kill a lack of innovation,’ he remarks.

‘Link those systems to our experts and we have a way of learning from our mistakes. We can tap into the collective IQ of the whole company.’

This approach is already proving its worth internally by linking Aviva’s experts around the world to solve problems. Redshaw cites the example of a blog posted from the company’s office in Melbourne, Australia, which raised an issue that a team in York, UK, had already encountered.

‘That communication killed a load of rework and improved the quality and speed of our decision-making. The platform that we launched last year has grown virally and is now getting 50 million hits a month. There are lots of blogs and wikis that have been put up, which allow us to tap into the knowledge that people have throughout the company,’ he comments.

‘Ten years ago the technology to do this didn’t exist, so companies built campuses to bring together their knowledge. Now we have virtual, connected campuses. We also create global centres of excellence, such as the one for SOA in York. These offer a virtual community of knowledge that people can easily access.’

These internal efforts are matched by an external presence in the new wave of social media with which customers are increasingly familiar. Many will be familiar with Facebook, but there are also communities like Second Life that can be the source of valuable intelligence on consumer preferences, and which can be used to network internally and externally (see box, overleaf).

It may be hard to quantify the benefits of a presence in this space, but for Redshaw the issue is not about understanding

‘Most companies are plagued by what I call ‘uninnovation’, but using information is how we focus on innovation. Data, whether structured, unstructured or process data, determine the quality and speed of how a business is run.’

CIM012_Aviva.indd 71 16/9/09 16:27:40


Data management72

exactly how much it will affect a company’s financial performance in the short term, but recognising that this is the future and wanting to play a part in shaping it.

‘This is an area where people get peer-to-peer recommendations. A lot of companies fall into the trap of thinking purely in terms of cost accounting. Inability to see the discrete benefits to the P&L make some firms steer away from involvement in these areas. Some companies don’t see the reality of the benefits, but the world is changing quickly, and leading business thinkers at places like MIT, Harvard, Oxford

and Stanford are all talking about using information for business advantage and about how to leverage Enterprise 2.0 and unstructured data,’ he stresses.

‘This is very different stuff in terms of technology, processes and leadership. My advice is to get some grown-up help. If you manage a winning soccer team you don’t turn it into a winning hockey team just by buying the right kit. Go to the vendor community and get help to get started faster and better. Go to the market and take someone on the journey with you who has done it before.’

Don’t dabble, dive inAviva’s work on unstructured data is matched by a commitment to managing structured data, and its investment in BPM technology. The aim is to get best practice from processes within the company and leverage them across the entire group as needed.

‘When you hit a particular statistical control for a process, such as call handling in a call centre, you can identify new sales opportunities, for instance. You can then look at new process areas. I spent 17 years at FedEx, which does this kind of thing really well. It is about sharing process and execution knowledge,’ believes Redshaw.

Aviva is currently implementing a new BPM tool from Lombardi, which will set new standards for process implementation and design while also enabling proactive and preventative controls (see lower box, left).

The aim is to turn process information and unstructured data into reusable tools.

‘In insurance a lot of our business is repetitive, and a lot of it has been done before. There are unstructured and process assets that have a lot of value, and might enable us to identify new ways of handling common process opportunities,’ Redshaw explains.

‘You need to have the right tools. You don’t want to take a knife to a gunfight. BPM is a game-changing tool.’

Redshaw makes no bones about having a very demanding approach to the implementation of IT projects, including Aviva’s work on unstructured data, social media and BPM. His approach may seem brutal and uncompromising to some, but there is no questioning the quality of its results.

‘Set very aggressive goals and tolerate a bit of failure. Speed matters and value matters. Competition is intense, so you need to push hard with good IT to kick the stuffing out of your competitors,’ he urges.

‘In our work on unstructured data, one vendor set us a timescale of 18 months at a forced march. We set a deadline of 125 days. We recognised it was borderline impossible, so we missed that deadline, but we still got there in a fraction of 18 months. If you have an outrageous goal, work hard and miss it, you still learn a lot, you deliver much faster and no one dies. IT must focus on delivering faster and better, not setting targets in ways designed to ensure on time

‘Set very aggressive goals and tolerate a bit of failure. Speed matters and value matters. Competition is intense, so you need to push hard with good IT to kick the stuffing out of your competitors.’

Aviva on Second Life

Redshaw’s approach to choosing a BPM partner

Second Life is a virtual community launched in 2003 in which users, or ‘residents’, create online personas known as avatars, which interact in an online world. Residents, of which there are currently around 20 million, create new identities, have jobs, trade property and services, and can travel throughout the virtual world. They form relationships, create virtual objects to populate their world and drive a virtual economy based on Linden dollars.

This online community has become immensely popular, and Aviva US was the first insurer to build a presence there. It invited agents to the private island it created in the virtual world as part of its efforts in recruitment and training. Aviva took this step chiefly because social media sites are increasingly becoming an important part the future and it was important not to fall behind the curve.

‘We use Second Life because it is cheap, it works, and because we recognise the pace of change. If you had said five years ago that a big mobile phone company would run a marketing campaign anchored in Facebook functionality alone in its home market, people would not have believed you. Vodafone did just that, selling people a mobile phone because it has a one-button link to Facebook. Just three years prior to that it would have sounded ludicrous to suggest that,’ says Redshaw.

‘The hallmark of modern technology solutions, now that there is ubiquitous IP connectivity and a stack of useful standards out there, is that it is faster, better and cheaper. It is also very simple to use, but it is learning intensive. There are no shortcuts to learning, you have to be involved and engaged with the new technologies and platforms.’

Look at the underlying architecture of a •BPM tool, not the list of features

Check how well a vendor has met its •development roadmap in the past

Examine a vendor’s investment structure •to ensure it is not backed by a VC that wants to flip a company for profit

Make sure the vendor has a strong •balance sheet, especially in the current economy

Look at the vendor’s engagement team •to ensure there is mutual benefit

Look deeper than a feature/function •comparison

CIM012_Aviva.indd 72 16/9/09 16:28:04


Data management 73

(slow) delivery.That particular project came in at 143 days, which was three times faster than it had ever been done before.’

Redshaw is now applying a similarly aggressive deadline to Aviva’s next big IT commitment, recognising that if the deadline is missed by 10% then it will still be a world-class performance.

‘People aren’t stupid. If they see an 18-month deadline they will work towards it, and may still miss it. There are surprises in any technology project that threaten delivery. The secret is to have the team constantly thinking

about how to deliver benefi ts faster rather than a bottom-up assembly of all the tasks in a programme to yield what is usually a long and safe project schedule. A key here is that multi-year IT projects don’t often work well and nor do giant project teams,’ he remarks.

Redshaw’s fi rm belief is that it is not enough to stand on the sidelines and watch as new technologies like social media develop around you. The place to be is out front, being an early adopter trying to uncover the value that lies in unstructured data, and marrying it with what you already know about customers, process and structured data. ■

‘People aren’t stupid. If they see an 18-month deadline they will work towards it, and may still miss it. There are always surprises in any technology project.’ Toby Redshaw

Toby Redshaw joined global insurance group Aviva as CIO at the beginning of 2008, following six years at mobile phone giant Motorola. At Motorola, among other things, he dealt with IT architecture, ebusiness, in-house collaboration and data warehousing. Redshaw’s career has taken him around the world with stints in Asia Pacifi c, Europe, the Middle East and Latin America.


IT architecture, ebusiness, in-house collaboration and data warehousing. Redshaw’s career has taken him around the world with stints in Asia Pacifi c,

Middle East and Latin America.

CIM012_Aviva.indd 73 16/9/09 16:28:35

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Company insight 75

The volume of information generated by large corporates continues to grow at an astounding rate, bringing many challenges in terms of storage and data management. Amidst the repetitive and the redundant lie gems of information about customers, products and market perception, but it is a brave company that dives into the data to find the hidden treasure.

‘Any large company is now into petabytes of data. A few years ago the maximum was one petabyte, but now companies may have two, three or four petabytes of data to manage. A lot of that, often 80%, is unstructured data, and a lot of it is duplicate or dormant data. Getting value from it is very difficult unless you look at all the data, and I don’t know any tools that can do that efficiently,’ says Matthew Yeager, Practice Leader of Storage & Data Protection for Computacenter (UK) Ltd.

Computacenter is a leading independent provider of IT infrastructure services, helping customers to maximise the value of their IT investment. As such it has seen the volume of its customers’ data grow exponentially. To put this growth into perspective, one petabyte is equal to one quadrillion bytes. That is 1,000 terabytes or 1,000,000GB.

‘It is hard to quantify the value of that data, which could hold credit card data or important customer information. It could be a treasure trove. Some companies coming from a transactional process background may want to trawl through all of their emails and so forth to get to the useful data, but if I were to do it I would institute the use of a particular equation,’ Yeager remarks. ‘You must look at the spend versus the value, while considering the disruption to the business. It is hard to point that

equation at data en masse, so the first step is to reduce the amount of target data by identifying duplicate information and dormant data that has not been touched for a long time. Usually the ratio of duplicate information is about 40:1, but it can be as high as 200:1. Identify the duplicate data and you reduce your actively managed data footprint. Then you can run your analysis,’ he stresses.

The equation is Return on Investment (ROI) + Cost Benefit Analysis (CBA) + Disruption.

Be practical, prioritiseMinimising the amount of unstructured data is undoubtedly the first step in making it manageable and uncovering its value.

‘A lot depends on how your data is structured – how much of it, for instance, is tier-1 data? How fast does it grow? We have industry standard guidelines and we have deep vendor relationships, so we can look at how techniques like virtualisation could reduce the amount of storage

you need across different tiers of data,’ explains Yeager.

‘We tell you how much you could save and what’s more, we underwrite those savings because we have confidence in our solutions. In the downturn it is all about cost savings, so after due diligence, if we are wrong about the savings then we write you a cheque. That’s what sets us apart. There are some great data management products out there, and we show how these technologies can reduce your data footprint. We are confident enough to underwrite it, and that has to be attractive to finance directors,’ he adds.

Computacenter will apply Yeager’s equation and show a specific level of savings that can be made for a given spend by a company, and if it is wrong then it will pay the difference.

‘Over the last 20 years storage has become something of a black art. We can show you that it is not as complex as it seems.’ ■

Tap into a rich vein of informationUnstructured data like emails, call-centre contacts and comments on social networking sites could be of great value to companies, but the huge volume of data and uncertainty about its value have prevented many from trawling through it. With the help of experts they could rationalise their storage needs and discover a goldmine of information, Matthew Yeager of Computacenter explains to Jim Banks.

‘In the downturn it is all about cost savings, so after due diligence, if we are wrong about the savings then we write you a cheque. That’s what sets us apart.’

Further informationComputacenterWebsite: www.computacenter.com/services-new/fast_track/ Telephone: +44 845 604 5151

CIM012_Computacentre.indd 75 16/9/09 16:47:21


Finance transformation76



Value transformation Thought provoking research published by KPMG1 in 1998 provided a vision of finance becoming a function rather than having a physical presence, with personnel liberated by technology and outsourcing to maximise the contribution that their expertise can make. The CIMA Centre of Excellence at the University of Bath School of Management finds out if these change have really come to pass.

In KPMG’s predicted financial world, transaction processing would be outsourced or exported to shared service centres, a specialist advisory team would deal with matters such as treasury and tax, and all control functions delegated to the line, leaving finance personnel to add value to their organisations by integrating with operations and providing decision support throughout.

This would be a radical departure from the traditional role of finance and its people but questions remain as to how far this paradigm has been achieved in practise and what lessons can be learned for the future.

For example:How has the structuring of the finance •function developed?Has the finance department disappeared?•Is it necessary for the finance function to •be a business partner?How do practices vary among •organisations, for example, in different size and sectoral groups?What now is the future for the finance •function? What does all this mean for the •development of the finance professional?

The CIMA Centre of Excellence at the University of Bath School of Management has been established to research, over a five year period and on a global basis, the answers to such questions, among others, and determine best practice in the further development of the finance function

This is the first comprehensive work, based on substantive global data with more than 4,500 consultations with finance and senior management, to give an invaluable, objective view of the nature of the finance function in today’s organisation, the path it has taken over a decade of rapid change, and its likely future trajectory.

A decade of changeThe last ten years have certainly seen many changes in the finance function, particularly cost reduction and reduced headcount (on the back of IT and improved systems) but also increased collaboration, a key characteristic that suggests the function is moving more towards actively supporting the organisation’s strategy, decision-making and operations: business partnering. Finance function changes can be motivated by the 1 Finance of the future: A guide for business users, KPMG 1998

CIM012_Transformation2.indd 76 17/9/09 10:27:34


Finance transformation 77

need for cost efficiency and/or the need for value creation, and are oriented either to the internal or the external environment. An analysis of this shown in Table 1 (below).

Organisational size, sector and location all affect the range and extent of finance function changes, but so too do the drivers of organisational change. Most frequently reported drivers are increased competition, advances in IT, increased risk and uncertainty, the impact of external reporting requirements and regulation, new markets, changes in top-level management and increased service demands. Only then is globalisation cited, which is often a focus of attention in discussing drivers of change.

This appears to be because the term is both complex and a catch-all; the actual effects of globalisation, such as competition and new markets, are reported widely. Finally, while most drivers have multiple effects in terms of the finance function changes with which they are associated, it is notable that external consultants have a very limited effect: where they are reported as having had the greatest impact as drivers of change they are associated only with one actual change, which is more emphasis on BPR.

Especially among large organisations, further significant finance function changes are widely seen as necessary for the finance function to improve its contribution, particularly in relation to the value creation possibilities of improved collaboration between finance and other functions (business partnering), and improvement in the performance of systems (both in the sense of technology and for processing accounting information).

We see an evolution rather than a revolution in practice with regard to the finance function taking on business partnering roles and being integrated within the business. These roles are often associated far more with value creation changes in the finance function (internal processes and product focus) than with cost efficiency (cost reduction and BPR). Very few organisations reported that no business partnering had taken place, but only 11% reported ‘full’ business partnering, including relinquishing the primary focus on financial information and the processing of transactions.

Small and large organisations exhibit more business partnering characteristics than those in the middle of the size range; the small ones because the finance function is already

more integrated into the business’ operations and strategy, and the large ones because their complexity and opportunities for value creation are arguably greater.

Business partnering/finance function change grids can serve as a useful practical tool for mapping between types of finance function

change and business partnering characteristics in the organisation. The research found that the most widely exhibited characteristics of business partnering are concerned with supporting strategy and decision-making. Fewer finance functions additionally undertake roles in leadership (of change and in relation to identifying new business opportunities) and non-routine reporting, and only a small minority have abandoned the traditional roles of transaction processing and focusing on financial information.

Business partnering activities generally complement rather than substitute for the traditional roles of the finance function itself. That is, we generally see a full service model, in which the finance function is responsible for accounting processes and financial information as well as business advice and support. It is

mainly in larger organisations that the shedding of traditional responsibilities is encountered more widely, facilitated by outsourcing and the use of shared service centres (finance function BPR).

Abandoning traditional roles is not a necessary condition for adopting business

partnering practices, however. BPR may release time and personnel for business partnering roles, but it is important to note that it is not necessarily a driver of change or the only way of implementing change. For example, improved systems with distributed inputting may free up the time of finance professionals for other activities without resorting to outsourcing and the use of shared service centres.

Improving business support through business partnering activities is found not to be dependent on disintegrating the finance department, with finance professionals being physically dispersed throughout the business, nor on those professionals having to spend a large part of their time outside the finance department. Instead, the cross-functional collaboration that is required in supporting the business can be achieved through virtual communication and cross-

Table 1. Motives for finance function changes

Orientation of change

Internal

Motive for change

Cost efficiency Value creation

Cost reductionGreater emphasis on •cost reduction Reduction in •headcount

Internal processesCloser collaboration •Greater emphasis on exposing •poor performance Increased external benchmarking•Increased emphasis on developing •future business leaders

External

Business process re-engineeringIncreased use of

SSCs •outsourcing •

Product focusIncreased work and focus on product/service

pricing •development •differentiation •

‘Improving business support through business partnering activities is found not to be dependent on disintegrating the finance department.’




functional projects and initiatives which allows personnel to interact across departmental and geographic boundaries. Attachment of finance professionals to the finance function, regardless of where they physically sit, is the predominant model and this does not inhibit collaboration at all – even where finance professionals are part of the finance function around half see their duties as supporting or most directly related to other parts of the organisation.

Limiting the degree of integration of finance professionals with the business may set a limit on the extent of business partnering activity, but there are benefits which appear to carry greater weight. Notably, having finance professionals accountable to the finance function helps to maintain their independence and objectivity – a quality

often valued as much by non-finance personnel as those within the function. Limits on integration may also derive from some resistance to becoming more business facing by individual finance professionals more comfortable with traditional quantitative roles.

Some commentators saw a potential barrier to the further integration of finance within the organisation in the potential loss of independence and objectivity of the finance function. A ‘front office’ finance professional whose duties are business facing in support of other operating units is likely to spend more time on activities associated with a strategic/advisory role.

The time spent on strategic/advisory activities increases when the front office

individual’s duties mainly relate to other parts of the organisation, and it also increases in line with their seniority, reflecting the importance of the strategic/advisory role within the organisation. The links with being business-facing and with seniority reflect too the importance of having well-developed business skills as a complement to the strong technical skills that are a sine qua non for the role.

Although strategic/advisory activities and the business skills that support them largely define the business partner role, we

find that many more finance professionals see themselves as providing business advice rather than undertaking business partnering. The distinction between advisor and partner may lie in whether the finance professional takes a stake in or feels jointly responsible for the operational and strategic decisions with which they are involved. Doing so represents a somewhat radical move away from the traditional role of the finance professional for all but those at the most senior level. It is perhaps a step too far for some finance professionals given that they may have been drawn originally to a role that was at most advisory, the nature of historic professional education and training, and the potential effects of taking such a stake on their independence.

Journey to true partneringThere is also the issue of differences in perception between those within the function and those outside it. Finance function personnel, particularly those with business-facing roles, report higher levels of business partnering activity than

‘The cross-functional collaboration that is required in supporting the business can be achieved through virtual communication and cross-functional projects and initiatives.’

Finance Transformation: Evolution to Value Creation

The report is a comprehensive global research report to provide a guide of the state of the finance function and the likely future development of the function and its people.

It includes the CIMA Finance Transformation Tracker, a simple tool to help you answer the question: How satisfied is your business with the progress your finance function has made so far in its finance transformation journey?

Pre-order your copy of the report now and claim a 35% discount.

www.cimaglobal.com/transformation



Finance transformation 79

those outside. Whether finance function personnel over-rate the extent of their contribution or this contribution is not sufficiently apparent to those outside the function, there is clearly a call for action by finance function management. They need to ensure they understand and are meeting the demands of their stakeholders, or least improve internal communication of the contribution made by the finance function.

A portfolio of roles and skillsSo long as the finance function operates a full service model, there remains a pronounced need for finance professionals who do not necessarily fulfil a business partner role. Those who have not developed the requisite business skills, or whose strengths are primarily technical, are still vital to undertake activities outside the strategic/advisory role, in financial and management accounting, regulation and systems roles. Even in performing these activities, however, better business skills would enable the finance professional to improve their contribution to the organisation.

While specialist professional qualifications are widely valued for the technical skills they deliver, they are the second most critical requirement for organisations when recruiting for the finance function. However, it is the personal characteristics of the finance specialist when on top of their finance qualification which are also recognised as critical to the development of future leaders, negotiators, and communicators.

The evidence is that the roles undertaken by the fi nance function and its personnel have evolved away from the traditional information-provision model and towards a more business-oriented model. However, the change has not been revolutionary in that, for example, traditional structures such as the fi nance department persist and it remains the case that the vast majority of fi nance professionals still see themselves as part of the fi nance function, it is alive and well.

Rates of change have varied across the range of organisations and there are constraints on how far many will travel down this path. Notably, continuing demand for the traditional services of the fi nance function indicate the need for a portfolio of skills and talents within the fi nance function, with an important continuing role for those

fi nance professionals who do not seek to operate as partners integrated in the business. Those who do develop as business partners will help the fi nance function to better integrate its activities with and meet the needs of the organisation shifting towards the creation of value. The organisation’s business partnering vision will, however, require management sensitivity to preserve the independence and objectivity of the fi nance function. ■the independence and objectivity of the

ING Direct UK’s Feike Brouwers on fi nance transformation

Feike Brouwers, chief fi nancial offi cerat ING Direct UK, part of ING Group, shares his opinions on the extent and impact of fi nance transformation.

‘In my view, there will always be a fi nance function and physical department, except that its focus might be somewhat different than we were used to in the past. With the rise in BPO we have seen that many simple, low value-added, repetitive fi nance tasks have been outsourced and that fi nance is more focused on providing more value-added services to organisations. This is something that we are seeing at ING, and which will continue in the future, with general accounting more and more outsourced or combined in specialised shared service centers, whereas the remaining fi nance teams will be better educated, specialised and provide more value-added services to the business.

‘Finance, especially in times of turmoil, can play a very important role in managing through diffi cult times. Also in organisations that are changing strategic direction or their long term plans, fi nance can add a tremendous amount of value by acting as a partner. So, the current economic climate has enabled the fi nance role to be more involved as a forward looking business partner rather than a scorekeeper looking at past results only. Finance already has a joint responsibility and is being held accountable in many organisations, certainly at ING this happens often, together with marketing for example, for decisions about pricing, margins and risks. The idea is not new and I defi nitely see a lot of merit in this change.

‘The only caveat I would like to make is that the business partner role should never overtake the primary responsibility of fi nance to ensure accurate and reliable

record keeping and maintaining a sound internal control framework for preparing fi nancial information. If CFO’s become too ‘commercial’ we all know what could happen, as we’ve seen in the cases of ENRON and others.

‘Independence and integrity is a concern, if the fi nance function becomes too preoccupied with ‘business partnering’, this could come at the expense of keeping an eye on the ball. The regulatory introductions of the Sarbanes Oxley legislation has helped here to a certain extent, but personally I also see it as a healthy trend that more and more we see that next to a Finance Director an independent Risk Director is appointed who both report into the CEO or Board.

‘In terms of skills, I still think that it is a key requirement for fi nance business partners to have a solid technical fi nance background. For those aspiring to a partner role I think they may need to have different personal characteristics and motivations. To start with one should have a certain passion for ‘doing business’ rather than number crunching. I always jokingly say though that the fi nance business partner should be able to calculate the provision for deferred taxes him or herself.

‘A thorough technical finance background is essential to spot problems and opportunities at an early stage. But indeed, next to that you need people with business acumen and strong communication skills. These are difficult to find by the way. So I definitely see finance business partners to be finance people that have been cross trained and experienced with additional skills. Of course, there are always exceptions to the rule.’



Head80

December 2009

Human CapitalAttracting, managing and retaining talent

In our next edition


Finance transformation and business partneringAs previewed in our article ‘Value transformation’ on page 76, The CIMA Centre of Excellence at the University of Bath School of Management has been established to determine the state of the finance function and research best-practice in its development over a five year period and on a global basis. This is the first comprehensive work, based on substantive global data with the consultation of over 4,500 finance professionals and senior management, to give an invaluable and objective view of the nature of the finance function in today’s organisations, the path it has taken over a decade of rapid change – and its likely future trajectory.

In a roundtable discussion we take in the views of a number of finance directors addressing business partnering in the context of shifting the focus of the finance function to value creation rather than the more traditional focus on cost reduction and efficiencies. Has the current economic climate had a major impact in this approach? If so, do our interviewees see it playing a long term role in how the finance function is perceived and in its development?

Plus: the corporate world has been integrating ‘Finance business partnering’ over the past decade to different degrees. Many ‘business partners’ are now seen as providing key advice and information to enable organisations in decision making at the operational unit and strategic level. How do our experts think that this trend has seen finance reach a true business partnering or advisory role or do they think there is a benefit in progressing further to true partnering - where the finance professional has a stake and thus takes responsibility in the decisions that are made based on their advice, information or analysis?

Featuring input from: Simon Louth, CFO, AstraZeneca Morten Sorensen, Finance Director, Central Europe, Middle East & Asia Pacific, SSP Philip de Klerk, CFO, INEOS Olefins and Polymers EuropeErik ter Horst, Vice-President Finance/CFO EMEA and Latin America, BT

Pre-order the report now to receive a 35% discount at www.cimaglobal.com/transformation

Human capital turnover in organisations Organisation research into the performance effects of employee turnover originally regarded turnover as a wholly negative proposition, then increased in its sophistication by recognising that turnover relating to more senior executives were more problematic than for junior employees. Recent research being conducted, however, finds that employee seniority may not be positively related to turnover concern. Prabhu Sivabalan, London School of Economics

Investing in staff and the value of human capitalHow managing the retention and development of human capital can help to build a future on world-class, worldwide talent. Plus: measures for identifying and recruiting talent, particularly in relationship to finance the finance department, the importance and the challenge of defining talent, and the methodology for identifying individuals when developing an effective talent management programme. David Fairhurst, Senior Vice-President UK and Chief People Officer, McDonald’s

CFOs and human capital – the missing link?A CFO’s mission is to ensure that all assets of his organisation produce the maximum return on investment.

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Head 81

However, there is one key asset on which many CFOs seem to stumble and fall: human capital. But in a global business world dominated by massive labour movements and talent shortages the best financial management skills are useless unless organisations have the right people in the right place at the right time and use them wisely. Chris Roebuck, business consultant and former head of global talent, UBS

Human capital and social mediaIn recent years, Pitney Bowes, which has about 36,000 employees, has become extensively involved in social media, using it internally to collaborate and externally to glean new ideas from business thinkers who they might not otherwise encounter. The company uses social media to present a more human face to its global network of business customers. That human face very often belongs to Aneta Hall, who has been the driving force for social media at Pitney Bowes. Aneta will discuss how organisations can successfully use social media to drive change and manage employees using twitter, Facebook and the other forms.Aneta Hall, Emerging media manager, Pitney Bowes

Keeping performance up when business is downDuring tough economic times it’s more vital than ever to hold on to and leverage your top performers: they’ve got the intelligence and dedication your firm needs to survive recession and emerge stronger. Yet in 2009 many employers are failing to support and sustain their best people. Loyalty and trust are out the window. Engagement is through the floor. Flight risk is at an all time high. Sylvia Ann Hewlett presents new data detailing what has happened to top talent in this brutal down cycle. She then explains how companies can re-engage and re-energize their stars.Sylvia Ann Hewlett, economist and the founding president of the Center for Work-Life Policy.

Also in the next edition:Cash management Making the most of banking relationships, inter-company lending, debt and equity issuance, asset-based lending and asset-backed securitization, overseas finance – how do these options weigh up in the current economic climate?Robert Allen, Group Treasurer, BAT

Editorial contributors are subject to change.

Excellence in Leadership is a series of official quarterly publications specifically 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


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Head82

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CIMA would like to thank the following organisations for their support in funding the Excellence in Leadership series:

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