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Company insight



Excellence in leadership Finance and the value chain

Keep finance fighting fit The remarkable success of the recent World Congress of Accountants (WCOA) in Kuala Lumpur, Malaysia, presented a defining image of today’s finance professionals as key players in the development of organisations that are successful and sustainable. It was also extremely enjoyable to meet some of our readers at the conference and to further develop an understanding of what the sustainable businesses of the future will look like.

S&P company Pitney Bowes, discusses the organisation’s global formula and explains why he views the challenge as a journey rather than a destination (page 20).

Looking back at the highlights of WCOA, it struck me that, as management accountants become increasingly involved in every aspect of business activity, they are like financial fitness instructors. They may wear suits rather than sportswear, but they use their unique skills and insight to ensure that organisations in the public and private sectors focus on becoming leaner, fitter and more flexible. This in turn helps to promote the long-term health and success of the bodies they work for.

‘It is clear that financial professionals have a major role to play in developing a sustainable future.’

With fitness in mind, this issue of Excellence in Leadership focuses on one of the most important ways of developing longterm corporate health: toning-up cash management and the value chain. We have covered the topic of supply chain finance in previous issues, but this term is becoming too generic. For this reason, we have sharpened our focus to look at cash flow control, bank lending arrangements and the various facets of the full invoice cycle, including factoring, reverse factoring and supply chain finance. The economic downturn has put the CFO in a more central role as the task of value creation extends to every aspect of an organisation. The tension between short-term gains and long-term investment is a feature of any business but for those on the international stage it is essential to find the right balance. Michael Monahan, CFO of $5.6 billion

Stuart Bridges, CFO of insurance specialist Hiscox, stresses the importance of investing sufficient time into making cash management policies efficient and communicating these strategies throughout the company (page 8).

green energy and provides examples of the move towards sustainable business practices by high flyers such as Toyota (page 54). With all these absorbing articles providing tips on how to improve the muscle tone of the supply chain, I hope that this issue will provide you with some useful insights into how to get your own organisation into even better shape as we move into the second decade of the 21st century. Charles Tilley, CIMA chief executive

The economic crisis has also raised the profile of corporate treasurers and their role in the management of financial risk. Greg Croydon, treasurer of international engineering company IMI, discusses the pros and cons of cash pooling and the company’s recent expansion of the concept into different territories to offset credit and debit balances (page 24). Following a demerger last year, Carol Power, group treasurer at Cable&Wireless Worldwide, was responsible for building a treasury function from scratch. Carol talks about how she overcame the challenge of defining the corporate treasury in a way that would meet current and future goals (page 12). On the subject of sustainability, the architect of the Kyoto Protocol’s carbon market mechanism, Graciela Chichilnisky, discusses why businesses should be more convinced of the return on investment of

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: michaeljones@

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Excellence in leadership Finance and the value chain

Back to basics Hiscox CFO Stuart Bridges discusses how, post-downturn, liquidity management needs to be a major treasury issue.


Clear direction

Michael Monahan of Pitney Bowes explains how CFOs have an ever-growing range of responsibilities to create value.

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Treasury by design Cable&Wireless Worldwide group treasurer Carol Power on the challenges of creating a treasury function from the ground up.

Freedom of expression Paul Kenyon of AstraZeneca looks at how people in the finance function should be liberated to drive business objectives.


Excellence in leadership Finance and the value chain

ISSUE 17 WINTER 2010/2011 £12


Vital statistics

36 The world opens to Islamic finance

Finance and the value chain


Back to basics

12 Treasury by design

The role of treasury is coming increasingly into the spotlight as economic pressures put greater emphasis on functions such as liquidity management. So, it is an interesting time for a company to be given the opportunity to build the treasury function from scratch. Cable&Wireless Worldwide has done just that. Group treasurer Carol Power gives Jim Banks the inside story.

16 Strategic thinking

For those managing liquidity, one of the major challenges is ensuring the ability to fund long-term growth. Stuart Siddall, of the Association of Corporate Treasurers, tells Michael Jones how strategy only works if there is funding to drive it.

20 Clear direction

CFOs have a much wider brief than ever before, with the finance function feeding into every part of the business. From CSR to liquidity management, from business transformation to strategic planning, the CFO’s task of value creation is expanding to encompass every aspect of an organisation, as Michael Monahan of Pitney Bowes tells Jim Banks.

24 Balance your cash

Liquidity management has become a priority for many businesses since the onset of the financial crisis. For Greg Croydon, treasurer of international company IMI, now is the time to reflect on some fundamental issues to optimise cash management.

27 Seize the day


Finance transformation

40 Freedom of expression

44 The Asia perspective

In times of economic downturn, finding financial support is difficult. The corporations that look to their operational processes to assess the impact of supply chain management on their working capital are more likely to survive hard times, writes Aite Group senior analyst Enrico Camerinelli.

Islamic finance

32 The growth of Islamic finance

HSBC Amanah deputy CEO Razi Fakih discusses the growth of Islamic finance and the bank’s development in offering alternatives to Western banking practices.

Finance professionals from overseas businesses operating in the Asian markets face a range of regulatory challenges, says Merrill Lynch’s Naveen Agarwal.

48 Taking the chaos out of change

Finance and the value chain Are all your ducks in a row? Finance leaders from Hiscox, Cable&Wireless, Pitney Bowes and IMI discuss how to align the value chain and help banking relationships remain buoyant Plus: AstraZeneca and Merrill Lynch on business transformation and the finance function

Excellence in Leadership Issue 17 2010 Editor | Michael Jones Sub-editor | George McDonald Production manager | Dave Stanford Group art director | Henrik Williams Designer | Catherine Douglas Client services manager | Derek Deschamps Sales manager | Steven Aylward Circulation manager | Linda Burgess Publisher | Dan Davey Editor-in-chief | John Lawrence


50 Driver of change

Finance is playing a greater role than ever in delivering programmes of change, which not only demand more from finance professionals, but also require the rest of the business to see finance in a new light, Tim Roberts, a former senior finance executive at BP, explains to Jim Banks.


54 Ethical investment

The green economy is vital if we are to avoid potentially catastrophic climate change and the death of biodiversity, but, as Graciela Chichilnisky writes, it is also a place where investors can find some of the most profitable opportunities in the world.

Human capital

58 Talent spotter

28 Free your cash flow

Building a business-focused finance function is a priority for many CFOs, but they are too often met by cultural resistance and external distrust. AstraZeneca’s Paul Kenyon tells Phin Foster why individuals within the function must be liberated to drive business objectives and how empowerment lies at the heart of any successful strategy.

ISSUE 17 WINTER 2010/2011

Hiscox CFO Stuart Bridges tells Ellie Broughton about lean cash management, mitigating supply chain risk and maintaining visibility on a global scale in the post-downturn world.

Finance and the value chain

Islamic finance is taking on a bigger role on the world stage as banks look to tap into its potential and governments consider alternative financial models in the wake of the global economic crisis. Mohd Daud Bakar of the International Institute of Islamic Finance tells Jim Banks where Western capitalism and Islamic finance will meet and, more importantly, diverge.

Laurent Choain, chief HR officer at international accounting and audit firm Mazars, tells Michael Jones why the profession is about feeding development, why metrics must be judged on their own merits and how a former Soviet dictator was responsible for a surprisingly common corporate mantra.

Reputation risk

62 Reputation at risk?

Leslie L Kossoff examines how quantifying popular consumer perceptions about a company can refine and improve a firm’s standing in the market over and above any attempts at branding.

66 Directory

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: John Carpenter House, John Carpenter Street, London, EC4Y 0AN, UK Tel: +44 207 753 4200 Fax: +44 207 724 2089 Email: W. Registered in England No. 01564127 Chartered Institute of Management Accountants (CIMA) 26 Chapter Street, London SW1P 4NP, UK T. +44 (0)20 7663 5441 Ana Barco, CIMA, Senior Product Specialist E. ISSN 2041-2444 ©2010 CIMA and Global Trade Media 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 Warners (Midlands)



Editorial advisory board

David Blackwood

Jeff van der Eems

Bev Hampson

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

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

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

Claire Ighodaro

Keith Luck Sriram Kameshwar

Keith Luck

A past president of CIMA, Claire Ighodaro’s board roles include nonexecutive 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.

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

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.

Kai Peters

Sara Shipton

Arul Sivagananathan

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.

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.

Arul Sivagananathan is a fellow of the Chartered Institute of Management Accountants and managing director of Hayleys BSI. Prior to this he was head of finance and accounting operations for BPO company WNS across India and Sri Lanka.

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Vital statistics And the survey said...

Key concerns

Bank deposits are still favoured by EMEA and Asian treasurers Most surplus cash is allocated to bank deposits across EMEA and Asia despite several recent high-profile banking failures and a drop in banking credit ratings. Meanwhile, the percentage of treasurers permitted by their guidelines to invest in pooled funds has dropped. This is surprising because demand for AAA-rated money market funds has been strong throughout the financial crisis. More than half of survey respondents who use pooled funds are demanding a minimum AAA rating. This is up slightly from just under 50% last year, but is considerably higher than the 35% who demanded the highest rating in 2007. Source: JP Morgan Asset Management’s 11th annual Global Cash Management Survey, 2010

CEOs and the supply chain What role, if any, does the CEO of your company play in managing the supply chain? Over the next five years, what do you expect the CEO’s role to be? Today Actively develops the supply chain strategy with the operations team and works with them to ensure execution. Actively develops the supply chain strategy with the operations team and lets them execute. Sets the strategic direction for the business, including the supply chain strategy and lets other execute. No or limited interaction and lets operations drive the required strategy and tactical operational improvements needed to meet the business strategy.

Over the next five years 21







21 % of respondents

Source: McKinsey Global Survey, November 2010


Over half of Europe’s senior finance executives (57%) say the decisions made during the downturn have actually improved their firms’ long-term prospects.


Seven out of 10 respondents in Europe have seen, or expect to see, a sustained increase in demand for their products and services by the third quarter of this year.


Almost a quarter of European respondents expect their companies will increase headcount in this quarter. Source: American Express Global Business & Spending Monitor, a survey of 479 finance executives, 2010

Sound bites ‘Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality. ’ Peter Drucker, American business management guru.

‘A business that makes nothing but money is a poor business.’ Henry Ford, US industrialist. Excellence in Leadership


Finance and the value chain

Back to basics Liquidity management has become a sink-or-swim issue in the post-downturn world, but low rates of return mean that the message is getting lost. Hiscox CFO Stuart Bridges tells Ellie Broughton about lean cash management, mitigating supply chain risk and maintaining visibility on a global scale.

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Finance and the value chain

The financial crisis stressed the importance of effective liquidity management, especially for international companies. However, low returns on liquidity have eroded the ubiquitous “cash is king” message of the past three years, leavings CFOs increasingly reliant on supply chain efficiency.

is vital for mitigating supply chain risk, and tools such as financing schemes can add an extra layer of protection. Their financial condition is fundamental: as companies move into tougher markets, where finance is much harder to raise, they must ensure that intermediaries are well financed.

The economic climate promises low inflation for some time to come. Many businesses now operate in a fundamentally different way to how they did before the crisis, and global cash management strategies have become an increasingly popular aspect of many corporations.

Hiscox’s “suppliers” are its brokers. Bridges spends a long time analysing their financials, talking through potential problems and advising those looking into the supply chain to expend more time, effort and caution than they expect to. ‘You need to be sure you won’t walk into a problem with your suppliers,’ he says.

Mitigating risk around the investment portfolio has also become a key skill in finance, and managing liquidity in the supply chain has established itself as a key daily function in international industries, from insurance to supermarkets.

‘When you get into this economic position, you need to spend more time making sure the people around you don’t have financial difficulties.’

For specialist insurer Hiscox, around half of its profitability comes from global investment income, making cash management a pertinent concern. As CFO of Hiscox – the 150th-largest company in Britain – Stuart Bridges, manages a portfolio of £2.7 billion. For him, cash management is vital to the survival and success of the company. ‘There’s a common maxim: raise finance when you can, not where you have to. That’s more important now than ever before,’ he says. Global companies sometimes fail to invest sufficient time to make their cash management policies efficient, and many more fail to communicate these efficiency strategies throughout the company.

Bridges advises companies that want to expand into global markets to set formal limits in treasury and monitor these regularly. The treasury team should work not just with its suppliers but also its finance department and its investment managers. ‘It’s formal monitoring that makes the difference,’ he insists. Reviewing limits regularly and producing

The implications of, for example, extending the terms of trade may need to be explained to those negotiating new business. Bridges spends a lot of time training his company to consider the complexities of discounted cash flow. ‘A simple talk to those outside of finance, whether they are buyers or sellers, goes a long way,’ he says. Supplier liquidity

Bridges on banks ‘Banks have to focus on their core business and what their customers want from them, rather than being distracted by what they want to sell to us,’ says Stuart Bridges. ‘Nevertheless, I have always been a keen relationship banking person and I think it works both ways. At times I will have the upper hand and then at others, they will have the upper hand. But we must both treat it as a long-term relationship. The key is to remember that it is a long-term relationship that should benefit both.’

treasuries that rely heavily on in-flow, especially those with serious demands on their liquidity. ‘That was a significant part of their profitability. Or it certainly was when rates in the investment world were high. Oddly enough, insurance is similar: half of our profit is investment income, so it’s critical to us as well.’ The “cash is king” motto has always been at the forefront of Bridges’ mind. Before the crisis, he recalls that he was showed the structured products that took much of

‘If I make an acquisition or write a new line of business, I need to understand the likely cash flows ingoing and outgoing’. realistic projections will safeguard liquidity in the future; he will not include any extra risk in Hiscox’s investment portfolio in the current market.

Core values ‘A few people in the organisation might realise this,’ Bridges says, ‘but it’s a matter of whether everyone does. What to them may be a minor change could become a major point of profitability.’


Bridges highlights the need for companies to build up their core business and profits until the market stabilises again. ‘These are not new priorities,’ he explains. ‘But they emphasise that companies should stick to their core values, understand how and where they make profit and apply disciplined pricing.’ He points to the retail industry as the best example of lean cash management. ‘Supermarkets absolutely understand it,’ he says. ‘They have spent a lot of time on the investment income that came from the timing of cash in-flow against payments. Timing is a key skill for

the blame for the financial crisis. ‘The first question we asked was, “What if there’s a market aberration?’” His question got to the heart of the dilemma and is one that he always asks negotiators. The crisis squeezed the products to the point of collapse, and companies that had refused to work with them breathed a collective sigh of relief. ‘It worked massively in our favour that we didn’t have products that lost liquidity to such a great extent when the crisis hit,’ he says. Those on the outside of the financial world see liquidity as the common-sense thread that runs through accounting operations. The same back-to-basics approach protected Hiscox from the products’ toxic debt. Excellence in Leadership


Finance and the value chain

Liquidity is a vital consideration for Bridges because of Hiscox’s potentially urgent need for cash pay-outs for insurance claims. It’s also the main dynamic of the company’s investment portfolio. ‘We look at the credit quality of investments, of course, but the key is liquidity,’ he says. ‘If you ask why most companies get into trouble and face receivership, it’s usually liquidity rather than trading issues.’ Though a loss of focus may be to blame in making money and pricing, cash flow is usually the root cause of the problem. Bridges says he has not found it any harder to target international trade since the crisis. ‘It’s a matter of having capital, with strong liquidity in the main investment portfolio,’ he says. ‘The insurance market is seeing a more difficult trading environment, because of its high capital, but the challenge is nothing more than normal competition.’

Statistics 22.61 Average number of days a company takes to settle bills. 19.43 Average number of days it takes a micro-business to settle bills. €1,57 billion Total worth of gross written premiums in Europe, 2009. €204 million Total worth of gross written premiums in the UK, 2009. 2.9% Year-on-year growth in the European insurance industry. 24% Insurance’s contribution to the UK’s total net worth. 275,000 Employees in the UK insurance industry. £58 million Daily insurance pay-outs in the UK, 2009.

Sources: Experian Late Payment Index 2010, CEA, ONS, ABI research

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The CFO would like to see the industry turn back to a stronger culture of cash management. A better framework would help companies foresee and dodge the problems that plagued the last few years of finance. Furthermore, when interest rates pick up, they will make a big difference to businesses with rigorous cash management policies. ‘If I make an acquisition or write a new line of business, I need to understand the likely cash flows ingoing and outgoing,’ Bridges says, ‘and ensure I work it into

group cash,’ Bridges says, ‘so that I can see at any time which areas are holding what cash.’ While it might be the right solution for some businesses, cash pooling is not right for the company, despite being operating in a number of countries and currencies. ‘We looked at it and liked the idea,’ Bridges says, ‘but we are not the best size at which it works.’ The CFO holds weekly meetings with his financial team to ensure that they have

‘The first question we asked was, “What if there’s a market aberration?’’’ my cash management strategy.’ The international implications of every transaction must respect the company’s own framework and maintain liquidity in the portfolio. ‘Just because you set a minimum cash limit one year, it may change the next,’ he advises. Hiscox rarely goes into new lines of business but the cash framework is still a major focus for the group during the year, with liquidity, of course, its main concern. Although the company doesn’t use cash pooling, it adopts other tools such as minimum cash holdings for every currency it works with. Hiscox is also shortening its bond portfolio to ensure high liquidity. ‘The vital thing is centralised control of

cash in the right currency at the right time and at the right place. The meetings ensure that communications channels are kept clear and problems are dealt with before they have a chance to escalate. ‘We’ve always done that,’ he says, ‘because our business is one where if you have a large claim, you may need to pay it very quickly.’ He explains that there’s a need for a formalised process, and everyone managing Hiscox’s portfolio has a designated area of interest. ‘We need to know how much liquidity we can realise which means, for the investment portfolio, planning forward six months.’ Hiscox outsources its overnight treasury and makes cash deposits in a systemised

Finance and the value chain

way without running a pooling operation. ‘The company is not big enough for a large in-house treasury team,’ he explains, ‘but the outsourcing teams have a certain professionalism that brings higher rewards.’

sign into the accounts from anywhere in the world via the web. ‘I spend my life travelling,’ he says, ‘and I need to authorise transactions online rather than looking for a terminal.’

Benchmarking their outsourced operation against other options such as utilising the money markets, the CFO says that outsourcing improves the company’s returns.

There are two sides to the liquidity story, according to Bridges. The first is ‘survivability’, the power of cash to keep a company afloat. Visualising and managing liquidity is part of this aspect. The second half is about understanding where your profits come from, and the

Centralised visibility remains an important issue for Bridges. ‘The key for

‘If you ask why most companies get into trouble and face receivership, it’s usually liquidity rather than trading issues.’ us is that the IT systems allow you to see group cash and ensure deposits are placed efficiently overnight,’ he says. Bridges says the best solution – webbased with a multi-bank overview – is almost within reach. Ideally, the solution will have better connectivity when users

potential returns they offer your business. For Bridges, the post-crisis profit effect seems ‘weirdly decreased’, given the effort that finance directors have invested in their business. Nevertheless, ‘it might be less important at the moment but, when higher investment returns come back, liquidity will be very important again.’ ■


Essentials • Explain the profit implications of terms of trade to everyone in your organisation. • Visualise and manage your cash flows with attention to detail. • Know your core business, understand how and why you make profit and instate disciplined pricing. • Monitor treasury activity in your organisation with regular meetings.

Stuart Bridges Stuart Bridges is the chief financial officer of Hiscox, an international insurance group, that has operations in the UK, Europe and the US. He joined the company in 1999 and is one of the company’s four executive directors and is a chartered accountant.

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Finance and the value chain

Treasury by design The role of treasury is coming increasingly into the spotlight as economic pressures put greater emphasis on functions such as liquidity management. So, it is an interesting time for a company to be given the opportunity to build the treasury function from scratch. Cable&Wireless Worldwide is a large, global organisation that has done just that. Group treasurer Carol Power gives Jim Banks the inside story.

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Finance and the value chain

A major change in the structure of a business is an excellent opportunity to examine the role of the treasury function and determine how it can not only optimise internal processes but also extend its activity to the rest of the organisation. It is a rare chance to see what a treasury function might look like if it could be more closely tied to the goals and processes of the rest of the company. This is the situation that has arisen at Cable&Wireless Worldwide which, along with Cable&Wireless Communications, is the result of the demerger in March 2010 of Cable&Wireless into two separate business entities. The existing treasury team went to Cable&Wireless Communications, leaving a big space to fill in its sister company.


demerger was completed, oversaw the final separation of the two businesses and was in charge of building the treasury function for Cable&Wireless Worldwide. This was not only a challenge, but also a welcome opportunity to define corporate treasury in a way that would meet the current and future goals of the business. ‘One of the advantages of starting with a blank piece of paper,’ Power explains, ‘is that you can consider what you would need in an ideal world, even though you may need to rip up some of those ideas when you start speaking to the different parts of the business. You can shape treasury to fit the organisation, rather than treasury sitting in an ivory tower, as was once perceived to be the case. You can bring risk mitigation into business discussions.

‘One of the advantages of starting with a blank piece of paper is that you can consider what you would need in an ideal world, even though you may need to rip up some of those ideas when you start speaking to the different parts of the business.’ Carol Power, group treasurer for Cable&Wireless Worldwide, explains the demerger was driven by shareholder value. ‘Cable&Wireless identified that it could create greater value for shareholders if the two parts of the business stood alone,’ she says. ‘They had operated relatively separately for some time.’

‘Here, treasury is firmly part of the finance function, as is tax. It doesn’t sit separately from the rest of finance as it does in some companies. It works really well here and everyone is making connections. As a result, finance transformation programmes encompass everyone in the finance function, including treasury and tax.’

What did that mean for the treasury function at Cable&Wireless Worldwide? ‘Well, the company didn’t have a treasury function,’ Power explains. ‘The question was, why did Cable&Wireless Worldwide need a treasury function? We had to show that it could add value to the business in risk management, risk mitigation and the optimisation of cash and risk, for example, so it was an exciting challenge for me.’

The shape of the treasury function at the newly demerged company is, therefore, one possible model for what many other companies would like to achieve, because it reflects the needs of the present and, more importantly, the future.

The separation of the two companies had been planned for some time, with work having begun in April 2006 on bringing two largely distinct operating units out from under their shared umbrella. Power, who joined the company in September 2009, shortly before the

‘There is no room for complacency in this environment. Corporate treasury is not sitting on its own, managing cash and talking with the banks. It is now very involved in the business,’ stresses Power.

A question of priority In defining the new treasury function, a key task is to identify what its most important priorities are. In these times of increased economic pressure, cash and Excellence in Leadership


Finance and the value chain

‘We must shape cash management to suit the business. There is no one-size-fits-all solution, even if banks would like to say that there is.’ liquidity management are high up on the agenda as ways in which treasury can exert the greatest influence on overall corporate performance. ‘Maximising the efficiency of cash and liquidity is important in all climates, but more so now,’ says Power. ‘Because the company recently demerged, it is very important to show that it has strong liquidity. A demerger brings its own concerns, but we have strong liquidity despite the current climate. We have a £300 million undrawn bank facility and £200 million in cash in the bank. But we need to optimise cash, so we have strong management of AP and AR processes through a dedicated team plus pan-European zero balancing cash pooling. We also centralise cash as far as Excellence in Leadership

possible and repatriate it from outside Europe to the UK.’ Once structures for cash management are in place it can be tempting to simply let them be, but Power believes that constant vigilance is the way to maximise their performance. ‘Treasury is, in my view, a fast-moving environment. You can’t sit on your laurels and let the cash management structures run,’ she says. ‘The environment changes in many ways. It’s too easy to say that it’s run of the mill. There are always opportunities to reduce bank charges and optimise cash. ‘Corporate treasury exists to serve the rest of the business; that is what we

are here for. So, we must shape cash management to suit the business. There is no one-size-fits-all solution, even if some banks may suggest there is. ‘The key for treasury is to understand the structure of the business and where the flows of cash are coming from. There are different tools for different jurisdictions. Cable&Wireless Worldwide is predominantly in the UK, Europe and Asia-Pacific, so, fortunately for us, the right tools for cash management are usually available.’

Keep specific One important lesson that emerged from the company’s assessment of its cash management needs as part of the construction of a new treasury function was that there are always opportunities to optimise the cost of cash management structures, while still serving the needs of local business entities. ‘Don’t get carried away with the theory,’ advises Power. ‘Look at the specific needs of local businesses to find the most

Finance and the value chain

efficient tool in terms of bank charges. Look at the value you get out of each country and each business. Question whether the size of the flow warrants the best-in-class solution.’ To do so, a company must consider the impact on banking relationships of the financial crisis, and ask whether its banks are there to give it what it needs across the board. The company has developed its banking relationships since 2008, and Power believes that the role of treasurer is to find a banking group that can service the needs of the business across the different jurisdictions in which it operates.

where ancillary business is available, giving them the opportunity to bid for it.

Systems for success Another consideration for the newly formed treasury function was the choice of treasury management system (TMS). Once the justification has been made and the benefits of a new system clearly extolled within the company, the big question is which vendor to approach (see Taking on a new TMS, right). ‘The first challenge was internal in terms of bringing a treasury system onto the IT agenda through the demerger,’ Power

‘We want an open and honest relationship with a bank. They lend to us, but they want something in return, so we need to shape a group of banks that will provide for all the needs of the business.’ ‘The skill is in unpicking what each of the banks can do for us and leveraging off their strengths,’ says Power. ‘We have not yet felt the need to change our banking group, but we need to tweak the cash management side because we don’t have a single global provider of those services within our relationship banks. ‘We want an open and honest relationship with a bank. It is about shaping banking relationships and quid pro quo. They lend to us, but they want something in return, so we need to shape a group of banks that will provide for all the needs of the business. Relationship banking is a longstanding concept, but it has changed in the past two years. When there was more liquidity in the system, and banks were happy to lend, then there was a less clear requirement for promises of ancillary business than there is now.’ Banks are increasingly looking for a greater share of the wallet from each corporate client, but this must also benefit the corporate customer. Power believes that is fair enough. ‘Banks are reviewing the client portfolios to find where they can get the most bang for their buck,’ she says. ‘But we can’t always drum up ancillary business for them if it doesn’t exist. It is about being true and having a good dialogue with them and,

explains. ‘We needed to ensure that treasury was visible on that agenda in order to make the necessary changes. The demerger was a catalyst in getting a new system in.’ The choice of system, in this case, was based on a clear understanding of shortterm and long-term requirements of the TMS, and how that fitted with the needs of a developing treasury function. ‘We chose the TMS not on the depth of its functionality, because all systems out there do the core things,’ says Power. ‘It was more about which vendor could implement it in the timescale we required, and how they would support and help us in the future. ‘We were clear about what we needed and when we needed it, and we phased the implementation accordingly. Once we were clear about what we required, including a deal recording and basic control framework, the implementation happened very quickly.


Taking on a new TMS In April this year Cable&Wireless Communications implemented the IT2 TMS as a best practice solution to support central treasury operations in a project initiated by the need for a transparent, complete and properly integrated solution to fulfil its needs in cash and financial risk management. The system supports cash and treasury management and treasury accounting, provides full operational and management reporting, and interfaces with the CitiDirect electronic banking service. It also supports hedging operations with derivatives in an integrated STP workflow that eliminates the need for re-keying and for the manipulation of data in spreadsheets, with the result that treasury operations are more efficient, accurate and reliable. ‘The first implementation was very quick but now we must maintain that momentum,’ says Carol Power. ‘We must not be diverted from our wishlist of what we want the TMS to do. We must go beyond deal recording, which is where some companies get stuck. It’s about the people the TMS provider has to help us and whether they look at it as a solution rather than just a piece of software to install. Our provider sees it as a solution to support our business into the future.’

Carol Power Carol Power started her treasury career at Burmah Castrol in 1992. After leaving in 1995, she spent the next six years at TI Group (now Smiths Group). Subsequently, Carol held senior treasury positions with ERM Holdings and Carphone Warehouse before joining Cable&Wireless Worldwide as interim treasurer in September 2009. She became group treasurer in April 2010.

‘A good TMS is a powerful tool that allows treasury professionals to add value rather than spending all of their time cutting and pasting data. Now, the challenge is to scale up the powerful TMS system we have and maximise its use.’ ■ Excellence in Leadership


Finance and the value chain

Strategic thinking For those managing liquidity, one of the major challenges is ensuring the capability to fund long-term growth. Stuart Siddall, chief executive of the Association of Corporate Treasurers, tells Michael Jones that if you’ve got an operational strategy you can’t fund, it’s not much use having a strategy at all.

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Finance and the value chain

As the leading professional body for international treasury, the Association of Corporate Treasurers (ACT) is well placed to comment on whether or not the cliché that “cash is king” still has the same resonance within the finance community as it did in the immediate aftermath of the financial crisis. ACT chief executive Stuart Siddall is unequivocal in his assertion that this is still very much the case. ‘I think what the crisis has done is demonstrate that cash is king and is absolute,’ he says. ‘Without cash, you’re not going anywhere. A lot of large companies have got significant cash balances – they might have some debt on their balance sheets – but they have free cash that gives them the flexibility to secure funding.’ So, what impact does the state of the wider financial world have on the requirement for companies to keep a handle on cash management? ‘I think the thing that has become much more acute in terms of people’s thinking, whether it’s a company or bank, is counterparty risk,’ says Siddall, ‘worrying about whether the other party is going to be around in three, four or five years’ time to meet their obligations.’ He believes that this worry is a direct consequence of the crisis. ‘The Bank of England recently said that it wants to get to a point where the implicit state guarantees are removed from large banks, meaning they can fail without threatening the system. I think that, for a long period of time, people are going to see that need to evaluate their counterparties quite carefully.’ This is, Siddall believes, a good thing. ‘It’s healthy,’ he says. ‘I think some of the things in the crisis wouldn’t have happened if the exposures of some of the counterparties had been under greater scrutiny because they wouldn’t have got as big as they did. I think people are more cautious than they were, generally, which is probably no great surprise.’ Siddall is keen to point out how lowered gearing levels have also played their part. ‘Gearing levels ought to stay at a lower level than they were before,’ he says. ‘The danger is that protectionism can be overt, but it can also be quite subtle, especially in the way that regulations are drawn up. We have to make sure we don’t fall into the trap of

protectionism, however subtle, to ensure we keep the markets open.’ So, have the long-term effects of the financial crisis affected the importance of effective liquidity management for international companies? ‘Absolutely,’ Siddall says. ‘We saw big companies going to the markets when the markets were still quite difficult, but they were disintermediating the banks. Where they could, they were going to the public debt markets and raising more money than they needed at the time and were prepared to carry the cost of that, because they were paying people 5%, 6% even

‘The markets are easing up so the facilities are becoming easier to get again, especially for the household names and the investment-grade companies.’ 7% for raising that money, but were depositing it at a very low rate.’ That “cost of carry” has been significant but it has proved to be more important for companies to fund their strategy than it was for them to save that money. They knew that their chief executives and boards wanted to push ahead with their strategy and therefore needed to have the cash available. While, Siddall believes the markets have made that situation difficult, the outlook is improving. ‘The markets are easing up so the facilities are becoming easier to get again, especially for the household names and the investment-grade companies, but I still think it’s tough for the mid-tier companies that are dependent on the banks,’ he says. ‘Liquidity issues are a much bigger question in the boardroom and you will see people going for the security of funding when they might have been less concerned about it in the past.’


The common mistakes that companies make in terms of liquidity management are actually relatively straightforward to pinpoint, observes Siddall. ‘If you have relatively short-term debt, and are in a relatively long-term business, such as investing in ten to 15 years of manufacturing facilities, but your funding and bank facilities are for three to five years, then you are running quite a high risk and need to spread the maturities of your facilities and match them with the assets,’ he says. One of the lessons of the crisis, then, is that the companies that did not fund their business long enough are going to struggle more than those that considered their long-term funding needs. For Siddall, it’s a trade-off. ‘You have the security of funding, but that will cost you slightly more, and you should be prepared to pay for it,’ he

Siddall on supply chain risk In mitigating supply-chain risk, how important is the liquidity of suppliers and what supplier financing strategies should you have in place? ‘I rate the buyer-driven receivable programme pretty highly because I think it offers simplicity. Interestingly, there is a degree of caution among suppliers about it. This is because they are not quite sure if the buyer or the bank can withdraw the facility at short notice and therefore take away the supply of goods, which could also put additional pressure on them. That’s why there’s almost a corporate responsibility issue about this. The big guys need to have a protocol that they aren’t going to remove these facilities at short notice and that the banks aren’t going to do that either. Now, there are all sorts of accounting and regulatory reasons why the buyer can’t guarantee the facilities, and there needs to be a reasonable degree of transparency about their cost. But I think there should be a protocol that people can start to put in place that says these things will be fixed for a period of time and won’t be removed without a minimal period of notice. Those things have to be protocols rather than something that you can enforce. That, over time, would help suppliers relax, allowing them to be more willing to enter into the agreements.’

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Finance and the value chain

says. ‘There’s nothing worse, from a share price perspective, than the markets being concerned about the funding of a company, because that will overhang in the share price. It could overhang because they are concerned about whether or not they can renew the facilities and there might be a rights issue, so they will be marking the shares down for that. The key thing is to make sure that you have got the liquidity to fund the strategy of the business.’

Remember the past When asked if there is a danger that companies have become too risk averse in the fallout of the last few years, Siddall

cites a recent example that conveys the current attitude to risk by finance leaders. ‘There was a recent article in the FT that said that people are forgetting what they’ve been through and are behaving in the same way that they did before the crisis,’ he says. ‘I think that people need to remember that unexpected things happen. The best lesson people can take away is to understand that when you’re thinking about an organisation and the risks it takes, you’ve got to think about those high impact/low probability issues. If there is one thing that I want to come out of the crisis, it is that companies can address these probability issues in a

‘The biggest mistake that people make is that they don’t understand what they want their forecasting for.’ To centralise or decentralise? What are the advantages of reducing the number of interfaces that a company has with its banks? ‘With a centralised treasurer operation, as opposed to a de-centralised one, you have a relatively small number of banking relationships,’ says Stuart Siddall. ‘If you have better buying power with those entities, you’re going to be a more important customer and probably able to get better depositing or borrowing rates. Administration, therefore, is probably going to be reduced because you’ll be using fewer systems to generate the information you need. That doesn’t work

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for all companies in all circumstances, and there will be some countries or areas where you will need something special that isn’t used anywhere else. And it will need to be accommodated. That’s why I think it’s absolutely crucial that, whatever you’re doing from a treasury perspective, it’s an integral part of how the business is run. You need the business to see the benefit of what you are doing. It’s not a case of “it’s a nice idea to pool all the cash or centralise the cash”, you need to ask if it works for the business. If the latter is the case, then you’ll see the business buying into it and helping make it a success.’

constructive and informed way and not just be considered a pessimist for raising the topic.’ Siddall speaks with the experience of having been ‘the company pessimist’ himself. The former treasurer of BICC, he was subsequently a finance director for several organisations, most recently at Amec, where, during his time there, the company entered the FTSE 100. ‘It can be quite hard,’ he admits. ‘I think that the crisis has shown people, and not just those in finance, that events can happen that have a massive effect on an organisation, but you need to know how you are going to deal with it.’ He is keen to point out that, whatever may have caused them, operational issues have had a huge impact on company structures and their standing in the market. ‘With all of these things, we tell ACT members that if they’ve got a financial strategy and an operational strategy, they must make jolly sure that the two dovetail,’ he says. This integration of operational and strategic approaches is the key, according to Siddall. ‘I think the first thing the treasurer needs to do is ensure that they understand the business and that they are not sitting in an ivory tower,’ he says. ‘The business will be going on around them and they need to be part of that. If they understand the business they can then develop and design a treasury function that works with it. ‘There are some organisations where you would say that a centralised system is right, while there are others where a

Finance and the value chain

decentralised treasury function would be suitable, and some that need to be somewhere in between [see box, left]. The key thing is to make sure that the business and the treasury are one and not in a situation where somebody comes in and forces them to take their medicine. ‘What you want is for the treasury to part of the business, designing the department around the unique features of the business.’ The trick, then, is for companies to ensure that they have visible cash positions across all of the markets that they operate in, be they local, regional or international. There are a number of levels that apply here. ‘A large company is going to have multiple links with a number of banks,’ Siddall says. ‘There are some banks that have substantial networks and you can almost do all of your banking with them globally, but there are very few that can provide the

prominent in companies? ‘Yes, there’s no doubt that it has catapulted treasurers onto the agenda, but for a variety of reasons,’ states Siddall. ‘Financial risk operational factors are an issue. It costs a lot more to do financial transactions, so you’ve got to make sure that you’re being as efficient as you can and that you know the costs involved.’ It’s clear to Siddall that more transparency is required in those areas. ‘Investors have become much more heightened to understanding the financial strategy in the funding of the group, and therefore want to understand what the board’s plans are, and that’s bringing the treasurer more into that side of the business,’ he says. The issue of streamlining systems and processes, improving bank communication and lining in with the cash pool is a huge challenge. ‘The biggest mistake that people

‘I think that the crisis has shown people that events can happen that have a massive effect on an organisation.’ largest companies with everything that they need. Every large company is therefore going to have multiple bank relationships. ‘The key is to reduce the number of interfaces they have with those relationships. There are two things to do. The first is to have visibility of the cash. The second is to actively pool the cash so that’s in the right place at the right time. This avoids paying one bank to borrow money when you’re depositing with another. But you’ve got to keep that within the context of the overall needs of the group.’ Where companies have wholly owned subsidiaries, it’s much easier to pool cash than if they have interests in a large number of companies around the globe that might be a controlling or minority interest. ‘I think that the treasurer has got to look at what the business needs rather than doing something blindly and saying “we must pool all our cash,”’ Siddall says. ‘You must look at what the business needs to do first.’

Clear forecast With available cash a precious commodity in tough times, have the events of recent years made the role of the treasurer more

make is that they don’t understand what they want their forecasting for,’ Siddall says. ‘Do you want cash forecasting to help you manage day-to-day cash positions so that you end up with as little idle cash as possible? Because that’s very immediate. It needs good systems around the world and is expensive to manage for the larger companies. Or do you want a system that is indicative of what’s happening within the business for the next six weeks? Or perhaps something that is going to tell you what’s happening in six to nine months’ time, or even longer?’ Finance leaders, therefore, need to know in advance what they want their forecast to do. ‘Once you are clear on this you can start to decide how much effort you put into that,’ says Siddall. ‘What you don’t want is people being overly cautious about a forecast because they don’t want to be wrong, otherwise you get a forecast that has been built up with a lot of caution in it.’ Speaking from experience, Siddall says he would rather set up a forecast that was wrong occasionally, forcing an evaluation of why it went wrong, than one that took longer to produce and had a lot of caution


Siddall on CIMA and the ACT Are you confident that members are heeding the “cash is king” message? ‘One way of testing is looking at our student enrollment, which reached record levels this year. This was partly due to the recognition that it’s a young profession: in the UK we’re just 30 years old. It’s also the case that our members, who are promoting our qualification to their successors, highlight the value of those qualifications. Our qualifications, as well as being academic, are also pragmatically based and link to what’s happening in the markets today. This can help companies save money. Our qualification complements those of CIMA. A lot of our members have got a prior accountancy qualification. We have seen that here and overseas; 88% of FTSE 100 companies have got multiple ACT members in their organisation, and, internationally, membership is growing. There is a complementary aspect between our qualification, which is a finance specialism, and a CIMA qualification. They go hand in hand and provide professional development for accountants but also a specialisation.’ built in. ‘Really knowing what your forecast is for is very important,’ he states. ‘Some companies are happy with a fairly large margin of error because they have the capacity in their borrowing facilities and their loan covenants to offer plenty of capacity. Other companies might not have that luxury and therefore need to design much tighter shorter-term forecasting than others. The purpose of the forecast is crucial and people often haven’t thought that through.’ ■

Stuart Siddall Stuart Siddall is a fellow of the ACT, having been in the first group to take the association’s professional qualifications when they were launched in the mid-1980s. After he began his career in accounting and financial roles, he was treasurer of BICC and has subsequently been finance director of several organisations, most recently at Amec.

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Finance and the value chain

Clear direction Today’s CFO has a much wider brief than ever before, as the finance function weaves its way into every part of the business. From CSR to liquidity management, from business transformation to strategic planning, the CFO’s task of value creation is expanding to encompass every aspect of an organisation, as Michael Monahan of Pitney Bowes tells Jim Banks.

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Finance and the value chain

Since the start of the financial crisis two years ago many aspects of the CFO’s job have become higher priorities, not least effective liquidity management at a time when credit markets are being squeezed. As the role becomes centred on value creation rather than scorekeeping, the CFO must bring a wider range of skills to the table to ensure that the business knows not only where it is heading, but also how to get there. Increasingly involved in strategy, the CFO must keep firmly in mind the long-term needs of the business, while also looking at how to control costs in the short term.


equipment and software for managing documents, packaging, mailing and shipping. From franking machines to mail management software, the company has a diverse range of revenue streams, as well as a large workforce and customer base spread around the world. The tension between short-term gains and long-term investment is a feature of any business, and shapes how crucial issues such as business transformation are dealt with, but for a business as diverse and international as Pitney Bowes it is especially important to find the right balance. For Monahan, the accent has to be on the long term, even if the strategy

‘Companies need the diligence and focus that come from realising we are still in the financial crisis. Uncertainty is still greater than it was two years ago.’ Michael Monahan, CFO of Pitney Bowes, says the two years of the financial crisis have helped his company realise just how critical treasury and cash management are. ‘Part of our business is providing finance to our customers through equipment leases and other lines of credit, which means we carry a lot of debt, so cash management is very important, and in planning and executing our operations I have to talk a lot to the other parts of the business,’ he says. ‘Over the last two years we have structured our borrowing so that we can plan systematically when debt is due. We have secured our ratings with the ratings agencies so that we can access commercial paper, which adds flexibility to our borrowing, and we have maintained an investment-grade rating. ‘This helps us greatly in extending credit lines to our customers, which are mainly SMEs. It is very important to have flexibility in the short-term, but we also need predictability. The pressing need in any business is to balance its short-term and long-term needs.’ Pitney Bowes is a $5.6 billion S&P 500 company that specialises in mailstream solutions, which includes the manufacture, leasing and licensing of

of some investors is sometimes focused on short-term gains. ‘You need to decide what is best for the business, and you need to attract the right type of investor. We can’t look just at the next 90 days. We must look at being around for the next 90 years,’ he remarks. Maintaining this long-term view becomes harder, however, when the wider economic environment comes under pressure, as it has during the financial crisis. The company’s various businesses rest on the core industry of the global postal market, which has come under pressure and has, in fact, contracted as global postal volumes have fallen. This has brought short-term indicators of market direction to greater prominence, but Monahan stresses that this trend should not force the CFO to put too much emphasis on cost-cutting. Innovation is the driver of long-term success and the goal for any global company should be to increase efficiency while also developing new products and services for the future. ‘We have been more careful in our financial services activities about who we lend to and have protected our exposure to weaker borrowers,’ says Monahan. ‘We segment our customer base more to understand how difficult segments might react in different times. This gives us Excellence in Leadership


Finance and the value chain

The evolution of today’s CFO Michael Monahan is well placed to meet the demands made of today’s CFOs, thanks to his experience on the operations side of the business. He started the company’s marketing services department, headed its $2 billion mailstream division and was vice-president of investor relations, which helps him to understand how to communicate financial results to the rest of the business. As well as the financial requirements of the organisation, such as closing accounts and communicating with shareholders and debt investors, the CFO is now more engaged with the business than ever, which can mean very customer-specific activities such as assessing the needs of individual contracts in terms of potential risks and liabilities. ‘The role is more operational and strategic than ever before,’ he says. ‘You have an environment where disclosure requirements are much greater than ever, the regulatory environment is in a state of flux, and there is uncertainty in the

economic environment. That uncertainty means the CFO must have a deeper understanding of the business and must be an active participant in strategy, not just a scorekeeper. You need to know where the business is heading and what the risks and opportunities are. ‘Now, there is more of a trade-off to make on capital investments and there is uncertainty over what returns they will make. That is why the CFO must understand the business. To bring finance and operations together you must understand how operational decisions translate into financial measures, so how those decisions are presented externally. ‘Also, business models change. Look at the rise of software as a service, for example, which changes the risk profile of R&D and raises questions over how to generate a revenue stream. The CFO must understand how such markets are changing. That is why CFOs benefit from operational experience, as they must engage with teams throughout the business.’

‘We want to minimise the amount of physical assets that generate no return but maximise the assets that do, such as the equipment that we sell or lease.’

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better foresight. We are very focused on short-term signals of change, and we have strategies to respond. We are in year three of the financial crisis, though we saw the worst a couple of years ago, and we are still far from normality. ‘Companies need the diligence and focus that come from realising we are still in the financial crisis. Uncertainty is still greater than it was two years ago.’

A keen eye on liquidity The pressures of the global financial crisis undoubtedly bring the issue of liquidity management to the fore. Choosing the right strategy begins with a long-term assessment of the many different strands that make up the overall business in order to understand how every business unit can achieve optimal efficiency. ‘When we consider liquidity management we have to remember that our business incorporates many different business models,’ explains Monahan. ‘There is the core mailing business, the supply of equipment, the financial services we provide through lines of credit and our software licensing activity. So, cash management must start with operational rigour in how each business generates cash. We have to optimise our recurring cash streams to give the business stability. ‘We want to minimise the amount of physical assets that generate no return

Finance and the value chain

but maximise the assets that do, such as the equipment that we sell or lease. We manage our capital day-to-day to optimise cash generation, and in the context of the treasury function we use sophisticated cash forecasting so that we can see the amount of cash each business is likely to generate. We also have a global cash management system and sweeping to consolidate and get visibility of our cash position.’ To optimise its tax position, the company has a centralised, global treasury function, but can view its cash position on a

perspectives, you need to measure the right things, and you need good delivery. It is not just about looking at cost because you have to look at the endgame, which is to have a better functioning and more flexible business so that you can react to opportunities more quickly. Finance has to be geared towards that goal. ‘Too much focus on cost is a risk, so we have always defined our transformation in terms of the net benefit. You reduce cost to create capacity to reinvest in the business, not just to improve shortterm earnings.

‘It is not just about looking at cost because you have to look at the endgame, which is to have a better functioning and more flexible business so that you can react to opportunities more quickly. Finance has to be geared towards that goal.’ country-by-country basis to optimise the movement of cash between markets in a tax-efficient way. Overseeing the structures and processes that define a cash management strategy is one of the key responsibilities of a CFO in a global business like Pitney Bowes, but, however important it might be, it must be considered as part of a much broader remit, the scope of which is constantly growing. The CFO now plays a vital part in defining the strategy of almost every part of a business, not least any transformation programme that shapes an organisation to be leaner and fitter for the future.

Finance shapes business transformation Business transformation comes in many forms, whether it is product and service innovation or changes to organisational structure. Whatever its nature, Monahan believes that finance must take a leading role. ‘The finance function needs to be heavily engaged with that, and, for me, my experience in the operations side of the business is very important in this,’ he says. ‘You must have shared

‘We want a big proportion of our savings to go into innovation for the business, new products, new technology and better customer retention. It is not just about short-term financial gains. To achieve this, you need discipline and a good measure of the benefits of transformation, as well as a good way to measure your progress.’

Test of endurance The key to success is often to define a transformation programme that is broken down into processes for each individual part of the business. ‘We had a series of discrete processes in different areas, including investments to enhance the business in the future. We have metrics in place to define a sustainable business, including things like how we dispatch people to repair equipment,’ explains Monahan. ‘The easy answer is to capture cost benefits as an increase in earnings, but the more difficult decision is to invest for future benefit. ‘Remember, this is a journey, not a sprint, towards becoming a leaner and more customer-friendly organisation.' ■


How CSR can serve the bottom line Corporate social responsibility (CSR) is now firmly on the CFO’s agenda, largely because many companies now see how it can help improve the bottom line. ‘CSR is a very important part of the Pitney Bowes legacy through the years, and I have a personal interest in it through the CFO role, as well as through the culture of the company,’ says Michael Monahan. ‘Previously, it was seen as a good thing to do. Now, it is seen as good business. CSR is a benefit to our business on both a cost and a revenue basis. ‘We have reduced the footprint of our office buildings, cut costs and increased the agility of our workforce by giving them the tools to work effectively anywhere. It is good for the employees, good for the business and good for society. From my perspective, I can leverage the cultural aspects of the business. The CFO’s job is to link those behaviours to improved financial performance, and to make those links visible to the rest of the business.’

Michael Monahan Michael Monahan has been executive vice-president and CFO of Pitney Bowes since March 2008. In this role, he has responsibility for the financial operations of the company on a global basis. This includes treasury, audit, investor relations, corporate development, tax functions and driving results with the business units. Monahan has overseen Pitney Bowes’ entry and expansion in the US domestic and international mail services markets. In five years, the company has achieved a market-leader position, processing over 12 billion domestic letters and over 70 million pounds of international outbound mail annually through more than 30 locations across the US. Current annualised revenues exceed $500 million and lead the industry in profitability.

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Finance and the value chain

Balance your cash Liquidity management has become a priority for many businesses since the onset of the financial crisis and, while the structures that underpin it may appear relatively simple, it is important to reflect on some fundamental issues to optimise cash management. Greg Croydon, treasurer of international company IMI, tells Jim Banks about how to get it right.

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Finance and the value chain

Whether you call it the financial crisis or the global economic downturn, the main source of problems for the business community in the past two years has been the strain on liquidity. The result for many organisations has been a renewed focus on treasury activity, with particular emphasis on liquidity management, to ensure that they have the cash resources to pursue opportunities for growth. Cash management is a higher priority now than at any time in the past decade, due to two parallel trends that have been gathering momentum. ‘The financial crisis has raised the profile of treasurers and their role in the management of financial risks, including liquidity management,’ says Greg Croydon, treasurer of IMI. ‘The management of cash in a business is critical, and its availability is a valuable resource. Credit risks are rising, funding lines are scarcer and more costly, and interest rates are low but the cost of funding is rising. ‘The spread between the cost of borrowing and the cost of deposits has risen. Therefore, it costs more to borrow to fund gross cash on the balance sheet. Credit lines have become scarcer, so it has become harder to raise debt to fund cash. Also, if you have £100 million on deposit around the world then your credit risks are higher. As we have learned, even large banks can fail!’ IMI is a global company that delivers innovative engineering solutions to leading customers around the world in clearly defined niche markets. The strategy of its group of businesses is to convert industry knowledge and market insight into customised, design-engineered solutions through technological innovation. It comprises five business areas: fluid power, indoor climate, beverage dispensing, merchandising and severe service, the latter providing valve solutions and control systems for critical plant applications in industries such as oil and gas, power and petrochemicals. The diversity of the business, in terms of industry and geography, not only makes liquidity management vitally important, but also more complex than for many companies. Croydon is swift to point out that for companies such as IMI, the issue

of liquidity management has never been far from the top of the treasury agenda. That is not to say there haven’t been changes in its approach. IMI has always pooled cash in its main territories, but has now expanded that activity to more of the markets in which it operates. It has increased its cross-border pooling, with a cross-currency notional pool to offset interest rate and currency positions. The cash in the business is held by different legal entities, which the banks allow to offset credit and debit balances. These structures have proven sound and have stood the test of time, largely because they were initially well thought out. Therein lies the first important lesson for any growing business. ‘Once the pools are up and running they are relatively simple to manage, but they take time to set up because of the different legal situations in different territories,’ says Croydon. ‘When cash is in the pool, the process is automated, but you still need to watch the balances to ensure the pooling process is focused on short-term balances, and longer-term

‘Optimisation of your cash position is about the bank balances, which remain outside the pool.’


the group’s major banking partners to compete for their business. ‘When we set up a cash pool in a territory it is with the chosen regional bank, but our local companies may prefer to continue processing transactions with their local banks,’ he says. ‘We don’t insist that they use the cash pool accounts for everything, but balances outside the pool must be kept within set limits. It is up to the cash pool bank to win the transactional business from the local bank through more efficient services. ‘Over time, we have seen our companies switch more to the cash pool accounts because they avoid interbank transfers and enhance efficiency. At all times, the companies are responsible for their own account management. ‘We don’t have visibility of all local bank balances, although this would be possible using SWIFT messages. The cost of collecting such information daily cannot be justified unless you are going to be able to act on it. ’ Furthermore, Croydon points out that while cash pooling has many benefits, it is not a must in every jurisdiction. The key is to identify where its value lies and which markets suit the structure best.

requirements are funded through other processes. Optimisation of your cash position, however, is about the bank balances, which remain outside the pool.’

‘In some countries we do not set up pooling because the cost may outweigh the interest rate benefit. In other areas, we don’t have enough cash to justify it. Also, some countries have regulations that prevent cash pooling. In China, for instance, it is very cumbersome, and in places such as Canada and Greece, it is not straightforward to lend to the business in a tax-efficient manner.’

The right structure for each market

Words of warning and encouragement

Keeping an eye on the balances in the cash pool is relatively easy, as banks provide good visibility across cash pools. Croydon can see IMI’s net position on a daily basis, but this does not include every account held by every local business.

The structure of IMI’s finance function echoes the changes that are happening in many international organisations now but, in some ways, these shifts may not affect treasury decisions. IMI, for instance, has a finance director for each of its five main business units, but the structure does not affect Croydon’s decisions about cash pooling.

Successful cash management across many territories, and the optimal management of local business entities, demands a balanced approach. Croydon stresses that it is important to give local companies autonomy about their banking relationships, while encouraging

Although the company has a market capitalisation of £2.6 billion, it has a relatively small head office, where treasury and other central functions are grouped. Operational finance decisions Excellence in Leadership


Finance and the value chain

are decentralised, to reflect the diverse range of markets in which it operates. ‘Decentralisation is important for our business,’ explains Croydon. ‘We don’t decide centrally on payment terms or chase invoices. The treasury department provides an internal bank to fund the business, so companies can call on us to

placed to offer lessons to companies that are trying to push growth in a challenging climate.

somewhere in Western Europe, as this will improve communication.

‘My advice for growing companies is to understand what you can and cannot do in new markets in terms of funding, cash pooling and the repatriation of capital,’

‘Cash management has not been under prioritised in the past, but it is more important now because credit lines have become scarce commodity, and there is greater credit risk from having cash in many different banks.

‘It is up to the cash pool bank to win the transactional business from the local bank through providing more efficient services.’

‘A good idea is to ensure people in the company understand that everyone is involved in the cash process so, at every level, they must appreciate their role in cash management and forecasting.’

Ease the cash flow access the expertise we provide. Cash management and pooling is done from the centre. We determine what is best and we provide something simple for our business to use.’ As well as his insights into organisational structure, banking relationships (see box, below) and liquidity management, Croydon’s experience of handling the evolving treasury needs of a growing, international business, whether in the financial crisis or in a more favourable economic environment, means he is well-

he says. ‘Ask what the cost is of lending money in those markets and the rules and tax issues around leverage. ‘When it comes to choosing a bank for a new market, consider an international relationship bank that is strong in that territory. But remember that there is a lot to be said for also using a local bank in places such as Indonesia, for example, because it may have more suitable local services at the coalface, if not at the cross-border level. If you do, perhaps use one that has a branch in London or

Well-managed banking relationships Managing relationships with banks is an important task for the treasury team, and Greg Croydon advocates a smart approach to risk management in these relationships. The structure of IMI’s loan arrangements with its family of banking partners, all of which have a clear and close relationship with the company, is based on this approach. ‘In the past few years we have only had one bank leave our main group, and one join,’ he says. ‘We have always worked on a relationship banking model and built bilateral funding agreements. ‘Having facilities with different maturities, as opposed to a single maturity on a syndicated deal, has helped in the financial crisis. We can manage refinancing with the banks one at a time.’ Underlying this strategy is the formula for choosing the members of the company’s banking group. Every relationship must be built on a detailed understanding of what each bank can provide, and what IMI can offer in return

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by way of ancillary business. Openness and trust are the foundations on which successful relationships are built. ‘It helps to choose banks with different strengths in products and geographies,’ Croydon adds. ‘We have one main bank for Eastern Europe and another for the Far East, for example, so we can have all the geographies covered. Some banks are good at specialist product areas such as metals hedging but all have to be able to do the simple things such as foreign exchange. ‘We have always dealt on a relationship banking basis, which is very valuable to us. It makes it easier to discuss what funding might be available in a crisis and creates an open relationship. Some banks continued to lend during the financial crisis, at a market price, and having a range of deep relationships has helped. ‘But, like many businesses, we will rely less on bank funding now, and will look more to maintaining a high level of capital markets financing in the long term.’

Perhaps the most valuable lesson Croydon provides, however, concerns the perception of cash management, and what its ultimate goal is. ‘Cash is not an essential part of the working capital cycle, but a business needs confidence that it can have access to cash to fund its payables, even if its account may sweep to zero. Low confidence makes people hoard cash. ‘But cash is a lubricant for making a business flow, so the most important thing is to have confidence in the availability of cash.’ ■

Greg Croydon Greg Croydon is group treasurer at UK-based multinational engineering company IMI. He was appointed to this position in 1996. After graduating in engineering from Cambridge University, Greg joined GKN and worked for a number of years in various operational roles. In 1985 he moved to GKN’s headquarters and spent time in internal audit, business development and corporate finance before joining the treasury function. He was elected to the council of the Association of Corporate Treasurers (ACT) in 2004 and is chairman of the Member Services Committee. He has also been chairman of ACT’s programme committee and ran the Midlands’ regional group of ACT between 1997 and 2001.

Company insight


Seize the day The idea that cash is king isn’t new, but that doesn’t stop banks developing resourceful ways to free it up every year. Phillip Lindow of RBS examines two trends facing finance managers: cash mobility and cross-currency pools.

Liquidity and its related issues will never be far from the thoughts of many financial directors. When adopting liquidity management solutions, the average financial director might be tempted to fall back on tried and tested approaches to tackle the problem. But Phillip Lindow is not your average money man. As the head of international liquidity and investment management at RBS Global Transaction Services he has overseen the implementation of the bank’s liquidity solutions for hundreds of clients, endeavouring to recycle their internal cash in brighter, slicker ways. He also understands the challenges that treasurers face, the minimal resources available and the search for increasingly sophisticated methods of cash concentration. “When the credit crisis first hit, cash pooling took off like you wouldn’t believe,” Lindow recalls. “But I think it’s always been important. The crisis just highlighted the processes and encouraged people to take control of their cash.” Post-crisis, he says, companies have directed as much cash as they can into centralised solutions. Treasurers no longer instinctively apply tried and tested cash concentration tools, but are curious about new approaches to draining regional cash traps. The latest drivers in liquidity management are increasing access, managing risk and optimising global daily transactions. “What we’ve seen is a move away from end-of-day liquidity situations, to looking more at intraday solutions,” Lindow says. “Clients are asking if they will be able to mobilise their cash to where it needs to go during the day.” Some clients face gruelling daily cycles. For instance, a corporate might have access to cash in the US in the morning and need to use it immediately for late day payments in Europe. RBS strives to

develop global liquidity and investment solutions that enable the client to sweep cash from all its banking partners, take advantage of safer investment vehicles and provide ready access to cash.

Bold sweeps Liquidity, as Lindow points out, is nothing without access. At RBS, a legacy of innovation and leadership in the field of global treasury has led the bank to develop tools for fully automated, end-of-day intra and cross-regional sweeping. The search for liquidity solutions is relentless and the cash question inspires new thinking every month. Lindow highlights how RBS has extended its cross-border cash concentration services to more markets around the world as one example of a recent RBS product

‘The crisis just highlighted the processes and encouraged people to take control of their cash.’ development. Cross-currency pooling has already been recognised as a tool for increasing operational efficiency in multicurrency liquidity systems. Cross-currency notional pooling uses the same methods as single currency notional pooling but throws in new factors: exchange and interest rates combine to optimise interest on multi-national balances thanks to the offset in debit and credit balances between different currencies. One example of RBS setting up an internal bank for a treasury function is its longstanding client Grupo Antolin. The multi-

national auto parts supplier, which works in 18 countries, wanted to introduce a single, fully-automated solution for its operating companies that could accommodate euros, sterling and US dollars, as well as other currencies. RBS phased in two major changes: the implementation of a cross-border pooling solution for the Eurozone, and the expansion of the euro pool through the adoption of automated global and crosscurrency cash pools. Operating companies in Europe and the US manage their payments and receipts locally. Resulting balances in Europe and the US are then automatically swept to a cross-currency pool. Local transactions are more efficient and cost-effective, and cross-currency pooling reduces the need for FX activity. One thing about liquidity management that never changes is the need for expertise. No matter how old the subject, or how new the innovation, a banking partner with experience in cash concentration knows how to find the specifics of every new case. RBS has a global team of liquidity advisors, and dedicated specialists in financial centres that can offer support to those looking for bespoke cash concentration solutions. ■ This article first appeared in Finance Director Europe, Issue 2, 2010.

Further information RBS Global Transaction Services (GTS) Excellence in Leadership


Finance and the value chain

Free your cash flow In times of economic downturn, finding financial support is difficult. The corporations that look to their operational processes to assess the impact of supply chain management on their working capital are more likely to survive hard times, writes Aite Group senior analyst Enrico Camerinelli.

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Finance and the value chain

In a tough economic environment it is not easy to access funds through traditional channels. Banks lend less and corporations, measured on cashconversion cycles and working capital minimisation, must find alternative ways of funding. Cost-effective sources of financing and balance sheet optimisation are primary objectives. Among enterprise customers, it is acknowledged that supply security has become a board issue. Different practices, such as vendor watch, dual source policy and contingency planning,


are put in place by corporations. The underlying accepted principle is that the past cannot help predict the future. From a bank’s perspective, this means that the risk profile of a company cannot be determined by using only a Dun & Bradstreet report. Corporations are increasingly focused on running supply chain management practices as a source of generating extra cashflow and freeing liquidity. Supply chain management is key to injecting resources to fund investments, not working capital. Indeed, in the current

‘It is acknowledged that supply security has become a board issue.’

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Finance and the value chain

economic turmoil, corporations must be fit, pick the best options, exploit cheap opportunities that emerge after the credit crunch, gather information, and put it in front of decision makers in a faster way (such as speed in execution). This underpins a strategic element of today’s economic conditions: more than revenues, cashflow is king. Under the current economic downturn, this new world will be characterised by greater parsimony, less leverage, more diversification and more regulations. Corporations, especially smaller ones, will find higher barriers to accessing liquidity. Businesses rely on a healthy banking system, but financial institutions are now storing their money in Treasury bills

to raise prices to cover increasing costs of alternative sources of capital. This will have an immediate and longer-term impact on supply chains. The key concern of companies is not liquidity – small to medium-sized companies have always battled for credit from banks – the worry is that liquidity shortage leads to recession, triggering a vicious negative circle that is hard to break.

Optimising working capital Working capital is a major factor to corporate survival. It can be derived, beyond widespread anecdotal evidence, by analysing the financial data across Europe’s Top 1,000 companies. In fact, it appears that if a corporation would increase its payment terms – days payable

‘Banks must become more entrepreneurial in their approach to assess corporate risk and inject liquidity to fund business operations.’ instead of extending credit to one another or to customers. The struggles to find cashflow and short-term credit can push enterprise companies to fail or be forced

outstanding (DPO) – by 15 days, and, at the same time reduce collections – days sales outstanding (DSO) – in five days it would obtain a cashflow result

Figure 1: Some European countries present high DPO values. Finland

equivalent to reducing its inventory value by almost 40%. These are conservative improvement targets. (A conservative approach was taken to avoid the potential effects of poor-paying morale, so the third-to-last values in Figure 1 were chosen as the benchmark.) Fifteen days of increased DPO is feasible given that 19.5 days is the average difference between the Euro 1,000 companies’ values of DPO and the benchmark France, 54.35 days. Regarding DSO, the best value comes from Irish companies. Again, a conservative approach was taken with the third-ranking Finland’s DSO figure of 49.43 used as the benchmark in this calculation. The average difference from other European companies’ DSO is of 11.4 days, so a five-day reduction is attainable. The bottom line of the above considerations is that if the average Euro 1,000 company could reach the DPO and DSO benchmark values of, respectively, France and Finland, it would increase its net cashflow from operating activities by over 50%, topping €695.7 billion from the initial average €449.1 billion. Celent interviewed supply chain executives, conducted research and collected data from solution providers active in the practice of working capital optimisation. In detail, the most referenced practices lead to the following lists.

Practices that extend DPO Coach suppliers sharing experiences and practices allow suppliers to reduce inefficiencies. The effort and service provided by the buyer can be compensated through a revised and accepted extension of the payment terms.

Denmark Netherlands Switzerland Sweden Germany Norway

Risk sharing of results is particularly strong in the service industries. For example, British Telecom incorporated its supplier network as part of the final value delivered, while Logica reports that some banks are asking for a breakdown of the services delivered, and want to ensure that at least 25% of such services are performed through offshore suppliers.

Luxembourg United Kingdom Ireland Austria Belgium Portugal France Spain Italy




40 DPO





Source: Celent, 2010 Excellence in Leadership

The shortlist of practices must benefit buyers and vendors. Delaying payments to suppliers as a tactic to increase cashflow before fully exploring how the company can negotiate better terms or gain

Finance and the value chain

discounts for prompt payments is a shortsighted approach. By becoming a late payer, the buyer’s negotiation position is severely compromised.

Practices that reduce DSO The biggest challenge companies are facing is in their accounts receivable. To avoid that money tied up in accounts receivable acts as a drag on working capital, a number of commercial and distribution practices can be adopted, as follows:

‘This new world will be characterised by greater parsimony, less leverage, more diversification and more regulations.’ Forecasting and planning practices also positively impact the values of working capital. The following is a shortlist of the most adopted measures.

reduce credit period reduce cash discounts routine checking for overdue set the right credit policy strategy – includes credit evaluation, credit insurance, terms of payment, delivery invoicing and monitoring of payments • credit limits – should be incorporated in price calculations. By accelerating cashflows, the company has the choice of offering customer better terms • address checks – consistent checks should be made on the billing address • flexible contracts – offer flexible payment terms on the basis of the Bonus-Malus principle. New customers are granted a shorter time period to settle than regular customers, who pay by the agreed due date.

• generate a consolidated master schedule and procurement plan • optimise the supply and distribution networks • advanced planning and scheduling (APS) is an optimisation technique for planning and scheduling manufacturing orders. It takes into consideration finite capacity constraints and material flow from raw materials to finished products. It enables increased resource use and reductions in inventory, work-in-process and lead times • sales and operations planning is a process for a tactical horizon, linking sourcing, production and distribution to financial planning for cashflow projections. The process brings together all the plans for the business (sales, distribution, inventory, production and procurement) into one integrated set of plans.

Practices for DIO

Who dares wins

Inventory management covers all types of physical stocks: raw materials, work in progress (WIP), finished goods and returns. This discipline is well developed among supply chain managers.

The current economic situation closely resembles a post-disruptive event scenario. Just as in biology where breeds that survive transformational events of the environment are the ones more able and faster to adapt to change, the same happens with corporations in a transformed business environment.

• • • •

Practices to reduce WIP can be found in the lean thinking/manufacturing area. A powerful approach to improving the value of days inventory outstanding relates to having a business model geared around make-to-order or make-to-demand, instead of make-to-stock (for example, manufacture against a forecast). Gearing the business model to customer demand is simply more efficient and logical than gearing it to sales projections. At companies that must rely on sales projections (such as food and beverage, pharmaceuticals, oil and gas, and retail), recommended practices that impact DIO focus on developing collaborative forecasting techniques incorporating intelligence from all relevant segments, including sales, manufacturing, distribution and marketing.


The abilities to innovate and be flexible are the conditions in the newly established ecosystem. This becomes especially true among corporations that establish their competitive advantage on modernly organised and structured networks of supplies, where flows of physical goods and information (for example, the physical supply chain), trigger equivalent monetary flows (such as the financial supply chain). In this scenario, supply chain management practices will be strategic elements for corporate growth and sustainability. To do so, a closer acquaintance to analyse and evaluate processes is a must. The true value of a supply chain resides in its

processes rather than only in the physical products exchanged. The profit of the goods distributed across a globalised economy is rooted in the effectiveness and efficiency of the underlying processes used to plan, source, make and deliver them. Liquidity – such as that of credit – is the life blood that will flow in the veins of the survived industry breeds. Liquidity is available, but it is not easily or straightforwardly distributed by those who retain it: the banks. Banks must become more entrepreneurial in their approach to assess corporate risk and inject liquidity to fund business operations. Banks are expected to take a more proactive approach, and to have an entrepreneurial outlook towards corporate clients when offering solutions. Financial institutions will slowly participate in industry networks. Corporations cannot afford to wait passively for this change to happen in such a harsh competitive environment. During this transformational process, corporations will find sources of precious liquidity within their own operational processes, once they are capable of analysing the impacts of supply chain management practices on the components of working capital. ■

Enrico Camerinelli Enrico Camerinelli is a senior analyst at Aite Group, where he specialises in wholesale banking, cash and trade finance, and payments. Most recently, he served as a senior analyst with Celent, focusing on the financial supply chain and Single Euro Payments Area. Prior to that, he was the European director and chief analyst at the Supply Chain Council.

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Islamic finance

The growth of Islamic finance HSBC Amanah deputy CEO Razi Fakih discusses the growth of Islamic finance and the bank’s development in opening up markets and offering alternatives to Western banking practices.

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Islamic finance

Michael Jones: As a constituent of the global financial market, how much has Islamic finance grown in prominence in the last ten years? Razi Fakih: Estimates vary. According to The Banker, Islamic assets reached $894.9 billion in 2010, 9% higher than in 2009. While Shari’ah-compliant assets represent only 1% of global assets, the industry has been growing at a compounded annual growth rate of 23.5% from 2006 to 2010. The Islamic Financial Services Board said in an April 2010 report that the industry’s assets have been growing by more than 20% annually since 2000. It forecasts Islamic profits reaching $32 billion over the next five years and that by 2012 Islamic assets are likely to reach about $1.6 trillion, with revenues of $120 billion. What are the main factors pushing Islamic finance to the fore? The Islamic banking industry has been growing at double-digit compounded annual growth rates over the past couple of years. Malaysia and the Gulf Cooperation Council (GCC) countries in particular have been beneficiaries of the strong growth. According to management consulting firm Oliver Wyman, the Islamic finance industry is expected to grow at about 20% annually until 2012. Growth, over the long term, however, is likely to extend beyond the traditional markets of Saudi Arabia, Malaysia and the United Arab Emirates (UAE) as more countries adopt regulations that support the Islamic finance industry. Indonesia and Bangladesh will be prime contenders, given their attractive demographics and regulatory changes to support Islamic finance. We expect India and China to open up to Islamic finance in the coming years. After weathering the worst of the financial crisis, the Islamic finance industry has made significant progress, which is evidenced by efforts to address risk management issues and governance work being undertaken by the Islamic Financial Services Board, Shari’ah standards led by the Accounting and Auditing Organisation for Islamic Financial Institutions, standardisation of documentation under the leadership of the International Islamic Financial Market and the establishment of the Islamic Liquidity Management Corporation.

These efforts, combined with the sponsorship of customers and support from regulators in the Islamic markets, will ensure continued growth of Islamic finance in the emerging markets of the Middle East and Asia. Another factor facilitating the growth of the industry is the development of its debt capital markets. There is certainly more room for progress but it has played an important role in supporting the funding needs driven by strong growth in Asia and key GCC markets. HSBC Amanah believes 2011 could see issuances from Europe and Far East countries other than Malaysia and Indonesia. At HSBC Amanah, we continue to invest in our people and infrastructure with a view to increasing our market share in the emerging markets of the Middle East and Asia. We will continue to broaden


our extensive geographical presence in Asia (Malaysia, Indonesia and Bangladesh), the Middle East (Saudi Arabia, Qatar, Bahrain and the UAE) and the UK. We also have a complete array of products for a wide range of customers including retail, high net worth, corporates, private banks and institutions. We continuously invest in innovation of our products and services to ensure that we are meeting our customers’ needs. What products and services are banks like yours most called upon to deliver? Our business is spread across all customer groups. We are consistently recognised as a leading sukuk house and we have led all supranational sukuk issuance. We are also proud to be leading more international sukuk deals than any other house.

‘The Islamic banking industry has been growing at double-digit compounded annual growth rates over the past couple of years.’ our product offerings and open more Amanah branches. Our launches of two new international banking services – HSBC Amanah Premier and HSBC Amanah Advance – are prime examples of our continued commitment to ensure our products are tailored to meet customer needs and are “best in class” when compared with traditional banking products and services. Can its growth be quantified in any meaningful way? Besides the assets and revenue growth data provided earlier, competition is intensifying. Data from The Banker shows that about 150 new banks offering Shari’ah-compliant finance entered the market between 2007 and 2009. In 2010, 18 banks started offering Shari’ah-compliant finance while six conventional banks began offering services via Shari’ah-compliant windows. How fast and by how much has the business of HSBC Amanah grown in recent years? HSBC Amanah is the world’s leading international provider of Islamic financial services. We have achieved this through

Our aspiration is to provide world-class, Shari’ah-compliant banking that offers global connectivity across Asia, the Middle East and Asia. The launches of HSBC Amanah Premier and HSBC Amanah Advance are prime examples of this. How receptive do you think Western organisations, including banks, have been to understanding and engaging with the principles of Islamic finance? In addition to fully-fledged Islamic banks, there are a significant number of conventional banks with Islamic windows. The majority of the Islamic windows of conventional banks have a dedicated Shari’ah advisory board which supervises their Islamic banking activities to ensure they are Shari’ah-compliant. We have seen many of the non-Islamic countries, such as the UK, Singapore, Luxembourg and Hong Kong engage with the Islamic finance industry and changing their regulations to facilitate this. Does Islamic finance provide a real alternative to Western practices, or are they likely to evolve a complementary or even symbiotic relationship in the future? Excellence in Leadership


Islamic finance

Over the past 30 years, the Islamic finance industry has transformed itself from a peripheral financial system to a sizeable complementary system. Islamic banking is for anyone seeking Shari’ah-compliant financial products and services. The users of Islamic finance comprise Muslims as well as non-Muslims. For example, a large portion of HSBC Amanah’s customers in Malaysia are of Chinese origin. The vast majority of Islamic finance customers are, however, followers of the Islamic faith. What are the most significant challenges that the business of Islamic finance will face in the next decade as it grows in prominence on the world stage? As Islamic finance grows and becomes mainstream in more markets, the key challenges that Islamic banks will face are: • moving beyond core Islamic finance markets and preparing to embrace the

regional players that are better able to meet customers’ increasingly global interests. For this reason, multinational banks are more likely to be able to grow robust Islamic finance businesses. The industry’s infrastructure will also need to be enhanced to support growth. Steps include building more conducive regulatory frameworks through proactive dialogues between regulators and industry players, encouraging the growth of local currency capital markets, harmonising accounting and Shari’ah standards globally, and increasing the number of branches and call centres so that customers will be more aware of Islamic finance offerings. Lastly, there is a need to focus on building a pool of Shari’ah-trained talent to drive the business. This includes Islamic bankers, risk managers, industry support professionals and Shari’ah scholars.

‘In 2010, 18 banks started offering Shari’ah-compliant finance while six conventional banks began offering services via Shari’ah-compliant windows.’ trade and capital flow from the Middle East to Asia • the need to consolidate • enhancing the industry’s infrastructure to ensure sustainable growth • embracing customers’ evolving needs. The industry has grown in the past few years and diversified out of traditional territories into countries with large minority Islamic populations. Besides Saudi Arabia, the UAE and Malaysia, which are the main markets for Islamic finance, other countries that have or are looking to participate in the growth of the industry include China, India, Africa and France. The challenge for Islamic banks is to help and participate in the opening of these new markets. To advance to the next stage of evolution, there is likely to be consolidation among Islamic banks to gain the scale needed to compete. HSBC believes the industry will have a different landscape in the next five to ten years. Small, single-country players will lack the scale to compete, making them potential acquisition targets. Consolidation in the industry will create Excellence in Leadership

In the past year, HSBC Amanah has made significant investments to reduce turnaround times for clients and the necessary documentation process, which have traditionally been time-consuming. As a result, some of the documentation process in Malaysia has been halved. In the UAE, HSBC is planning to launch a simplified commodity Murabaha process, which will reduce the amount of documentation needed from customers. To build a pool of qualified, Shari’ahtrained talent, HSBC Amanah has established a graduate trainee programme to prepare potential business leaders. The bank has also made the Certificate in Islamic Finance by CIMA accessible to staff who want to understand Islamic finance better. The last challenge involves keeping pace with customers’ needs so that Islamic banks can thrive. Over the past few decades the industry has developed a comprehensive set of products and services, but these are mainly replications of conventional banking products. There is now a need to innovate and enhance the

product offerings so that customer needs will be better met in future. As the industry strives to meet these challenges, HSBC Amanah has been able to benefit from the resources of the wider HSBC Group. We have been transferring the best practices of HSBC to the growing Islamic finance industry. In what respect do you feel Islamic finance and Western financial instruments contrast most significantly? Islamic finance differs from conventional finance in that it forbids the payment and receiving of interest and also restricts what funds can be invested in. This precludes alcohol, pork and casinos, among others. What challenges do scholars face in approving Islamic finance instruments? Are there issues over the number of scholars available or the presence of scholars on multiple bank boards? Shari’ah approval is a thorough process that includes a careful review of a product structure, documentation, execution process, and a post-execution audit by the Shari’ah scholars. The scholars need to deal with regulatory restrictions, customer requirements, tax regimes, technological limitations and the complexity of some products’ commercial requirements. Based on all these, the scholars will then come up with Shari’ahcompliant solutions. ■

Razi Fakih Razi Fakih is the deputy CEO of HSBC Amanah. He was one of the founding members of the business and was previously managing director and head of HSBC Amanah’s Global Onshore Banking unit. HSBC Amanah is widely recognised as a market leader in terms of global reach, innovative products and services and investment in industrybuilding initiatives.

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Islamic finance

The world opens to Islamic finance Islamic finance is taking on a bigger role on the world stage as banks look to tap into its potential and governments consider alternative financial models in the wake of the global economic crisis. Jim Banks meets Mohd Daud Bakar of the International Institute of Islamic Finance to discuss where Western capitalism and Islamic finance will meet and, more importantly, diverge.

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Islamic finance

The last three years have brought the shortcomings of Western banking models into the harsh light of day, prompting many to ask whether other approaches to finance can offer the world any lessons in managing risk and, above all, improving the integrity of the world’s financial markets. As the economic power of the Middle East and Muslim countries elsewhere increases, Islamic finance has caught the attention of banks and governments across the world as a model worthy of consideration. Shari’ah-compliant financial instruments in some ways echo Western structures, but must be judged by religious scholars to be in accordance with the tenets of Islam. The most notable difference is that the payment of interest, so fundamental to Western financial practices, is forbidden. Yet sukuks, for example, can be compared with bonds in their structure and use. The growth of Islamic finance is driven partly by Western banks and governments, but to a great extent domestically by Islamic states. In Saudi Arabia, for example, the retail market is up to 80% Shari’ah-compliant, and Islamic finance is penetrating further into the corporate sector. Opening up a new financial sector also creates new employment and attracts new sources of capital. ‘Another reason is that we have seen how the conventional financial systems have performed and failed in the West,’ says Mohd Daud Bakar, president and CEO of the International Institute of Islamic Finance and Islamic finance specialist for CIMA. ‘This gives a boost to an alternative financial system to be pushed further and appeal to the global community at large. ‘Couple this with the “faith” factor for the 1.6 billion Muslims around the globe, who want to comply with the learned way of doing things, and you have a new source of financial economy and power in the world.’

Banking on integrity Western and global banks such as HSBC Amanah, Standard Chartered and Deutsche Bank are increasingly active in the Middle East and Far East, carving out a significant slice of the Islamic Finance market. A big

draw is the resilience during the global financial crisis of Shari’ah-compliant instruments, which have maintained their integrity when some of their Western equivalents have crumbled. ‘Because they were guided by Shari’ah principles, the scholars prohibited investments in toxic assets or “non-real” assets such as credit default swaps or transfer of risk, so they were not directly exposed to the crisis. They were, however, overexposed to “real” asset classes through excessive funding and financing, but these were not as toxic as in the West,’ says Bakar. In Islamic finance, any investment proposal approved by the management of the bank is passed to Shari’ah scholars, who analyse it from the core principles of Islam and will reject anything deemed to be part of a “non-real” economic sector. Their issue of a fatwa, or judgement, on an


Islamic banks in Muslim countries are locally focused, though there is growing encouragement for them to become global. In the West, the challenge is not for banks to accommodate the Shari’ahcompliant elements of Islamic finance, but for governments to create legal and tax-friendly frameworks. ‘You have to adapt to the issues of withholding tax, dividend on equity and VAT,’ says Bakar. ‘We need more comprehensive amendment to the relevant taxations laws to put Islamic finance on a level playing field. ‘Hedge funds are sensitive to Islamic finance because it has been deemed as negative in the past. Islamic finance is more about equity, mutual funds, trusts and property funds. The emphasis is on equity not debt, and not on something speculative like a hedge fund where you might have to sell an asset before you own it.’

‘Islamic finance is more about equity, mutual funds, trusts and property funds. The emphasis is on equity not debt, and not on something speculative like a hedge fund where you might have to sell an asset before you own it.’ investment is crucial. To receive a fatwa, investments must be backed by an asset, such as a building or land, by services or by a venture in which the money clearly goes to a specific project. ‘These are what we refer to as the “real” economy or minimum asset-based transactions,’ explains Bakar. ‘Tangible and intangible investments are considered acceptable provided that you can trace your money to the ultimate investment vehicle. ‘In the West it does not necessarily work like this. If you buy a bond issued by Fannie Mae or Freddie Mac out of the securitisation of mortgages, the investor is not able to see the link between their bond and the underlying asset. The missing link of the investment instrument and the underlying asset is obvious in the West.’ Global banks have a prime opportunity to become prominent in Islamic finance.

Preparing the ground Developing Islamic finance skills in the West is one of the simpler challenges to overcome. Finance professionals in Western institutions can build on their knowledge of conventional banking systems, adapting it to accommodate Shari’ah principles. As a professional chartered accounting body, CIMA was the first to issue an Islamic finance certificate, targeting those already working in the conventional banking world. The qualification equips them with a basic level of knowledge, but the advanced diploma that CIMA and the International Institute of Islamic Finance are developing will add insight into the policies and structures that underpin Islamic banking and finance. Building skills in the West will support the efforts of global banks to enter the market and this could see Shari’ahcompliant finance become a major feature of international markets. Excellence in Leadership


Islamic finance

‘I would envisage that Islamic banks will come to many more parts of the world,’ notes Bakar. ‘Mergers and acquisitions will be a mass phenomenon in the coming years because, given the current capital regulations that Islamic banks have, I don’t think that they are competitive on a global scale. Secondly, the development of

healthy for the European market because the business originates from the Middle East, not Europe. ‘Until there are comprehensive amendments made to taxation matters, tackling all of these on the ground to achieve a level playing field for Islamic financial products, I

‘Because they were guided by Shari’ah principles, the scholars prohibited investments in toxic assets or “non-real” assets such as credit default swaps or transfer of risk, so they were not directly exposed to the crisis.’ Islamic finance in the West will slow down if they do not address the issue of taxation comprehensively, which was limited in the past to stamp duty and property gains tax. We have already seen this trend where business has been transferred from Europe to the Middle East. That phenomenon is not

can see a shift in terms of focus and product development, origination and employment from the West to other parts of the world which are more tax-neutral. Governments will need to manage the expectation of a new, young and fast-growing industry. It is a matter of getting the right synergy.’ ■

Mohd Daud Bakar Mohd Daud Bakar is the president and CEO of the Amanie Islamic Finance Learning Centre, the International Institute of Islamic Finance and Amanie Business Solutions. Prior to this he was the deputy vice-chancellor at the International Islamic University Malaysia. He obtained his PhD from the University of St Andrews in the UK in 1993. In 2002 he went on to complete his external Bachelor of Jurisprudence at the University of Malaya. Bakar is the chairman of the Central Shari’ah Advisory Council of the Central Bank of Malaysia and a member of the Shari’ah Advisory Council of Securities Commission of Malaysia. He was also responsible for contributing to the CIMA Certificate in Islamic Finance.

CIMA Islamic finance qualifications Certificate in Islamic Finance

What does it cover?

The CIMA Certificate in Islamic Finance develops skills in Shari’ah compliance and knowledge of the complexities of the contracts that underpin this compliance. Students will also develop confidence in using the terminology and applying the knowledge that sets Islamic finance apart from conventional finance.

There are four modules; each is covered by a detailed self-study guide that will prepare you for the final assessments: • Islamic commercial law • Banking and Takaful – products and services • Islamic capital markets and instruments • Accounting for Islamic financial institutions.

Who’s it for? The certificate is valuable for newcomers to Islamic finance as well as finance professionals seeking to broaden their understanding of wider aspects of Islamic finance while gaining accreditation. It is designed to give professionals two significant advantages: • the professional recognition of a CIMA international qualification • demonstrable expertise in the complex, fast-growing world of Islamic finance. Excellence in Leadership

Professional diploma in Islamic finance structuring and strategy CIMA recognises that there is a demand for a higher level qualification that meets the needs of professionals working in a strategic or managerial capacity in the industry. With this in mind CIMA is currently completing development of the Professional Diploma in Islamic Finance Structuring and Strategy (PDipIFSS), launching early 2011, to

complement the material covered in the Certificate in Islamic Finance. The aim of the PDipIFSS is to allow students to demonstrate their ability to take the knowledge and understanding they have already gained and apply this to the complex situations that arise in the industry. The CIMA Certificate in Islamic Finance is supported by HSBC Amanah. To find out more or to discuss corporate rates: Tel.: +44(0)20 8849 2251 Email:


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Finance transformation

Freedom of expression Building a more business-focused finance function is a priority for many CFOs, but they are too often met by cultural resistance and external distrust. AstraZeneca’s Paul Kenyon tells Phin Foster why individuals within the function must be liberated to drive business objectives and how empowerment lies at the heart of any successful strategy.

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Finance transformation

In a growing number of sectors the traditional view of finance as an inwardlooking function disengaged from the rest of the business is starting to become obsolete. For other industries, however, it has proven a slower process

acquisition of MedImmune in 2007 that saw the company suddenly operating with net debt for the first time in working memory, also brought sharper focus to bear and helped define the role Kenyon and his colleagues could play.

While “business partnering” has been a popular buzz term for some time, those looking to embed what can be quite a revolutionary shift in mentality often struggle to find support. Seen by many as more of a hindrance than a help – dogmatic realists rather than ambitious visionaries – the idea that finance might actively support strategy, decisionmaking and operations elsewhere in an organisation does not sit naturally with all stakeholders. It is therefore the task of the function to prove its credentials.

‘In pharma it’s the big events that act as a catalyst for change,’ he says. ‘If we’re talking about an acquisition, the management team is on the hook for delivering the synergies it’s promised and ideally a bit more. If it’s a major patent going or the failure of a late-stage compound, how are we going to help cover that loss?

Having the capability to do so often requires a great deal of restructuring. Freeing up individuals to align their roles more closely with core business activities involves the removal of existing responsibilities as well as the addition of new ones, the rationalising of systems and processes, and a clear definition of roles and responsibilities. The cutting of costs can prove a great initial driver for change, an aspiration people from across the enterprise will get behind, but in a business of high margins bringing others onside is more of a challenge. This has traditionally been a problem faced by the pharmaceutical industry, which has lagged behind other sectors such as consumer goods when it comes to harnessing the power of business partnering. ‘We haven’t been dreadful at managing costs in the past but it hasn’t been pharma’s top priority,’ acknowledges AstraZeneca’s Paul Kenyon. ‘For a long time we were in a period of strong growth, and when you combine strong growth with high margins the focus, rightly, is on growing the top line.’ But that is starting to change. The operating environment has become more competitive and the pharmaceutical and biologics giant’s SVP of group finance describes AstraZeneca as being perched on the edge of a “patent cliff”, with a number of its most profitable proprietary products set to be released on the generic market over the coming years. M&A activity, including the $16 billion

‘The drug discovery and the regulatory environment have become more challenging, so there’s been an increased

‘Structured development is an essential element of putting the right people in the right places and allowing individuals to play to their individual strengths.’ focus on cost and value. Finance now has a clear role to play in terms of helping the business understand what we need to do in order to deliver on both fronts.’

Inspired into action


into global centres of excellence and freeing up their people to focus exclusively, or as exclusively as possible, on business partnering and decision support. It was a case of refocusing various parts of the finance organisation on more specific agendas.’ The company has some 1,600 people working across the finance function, which is focused on three core roles: specialist finance, transactional finance, and business partnering and support. The first of these has been embedded in global centres of excellence, while many elements of the second are now outsourced through Genpact. The move from generalists to specialists can be a seismic cultural shift and Kenyon admits that it requires work winning over hearts and minds. ‘It is fair to say that some senior finance leaders were resistant to having their jobs broken up,’ he says. ‘A CFO in a large market or region with ownership of pretty much the entire scope of the function may see transaction processing pulled out and specialist resources going to a separate organisation. What he or she is left with may not be what they signed up for. You need to win those people over quickly, but they invariably either become comfortable or move on.’ In order to accelerate the process, a major investment has been made in people and skills. This not only involves getting internal stakeholders onside but also recruiting individuals with first-hand experience of having travelled a similar route. ‘In the main, the bulk of finance got behind this quite quickly,’ Kenyon claims. ‘This was helped by the fact we have also been refreshing our talent pool and have brought in a lot of people from consumer goods. That is a path finance went down many years ago and having employees come in who can reassure those around them is invaluable in terms of pushing things forward and gaining acceptance.’

Finance-driven business partnering at AstraZeneca can trace its routes back to 2007. Kenyon clearly takes great pride in how much has been achieved thus far, but is equally adamant that success has not required reinventing the wheel. While such integration may remain unusual among a number of his competitors, inspiration was derived from a number of sources elsewhere.

Shared expertise

‘To be honest, this wasn’t driven by any phenomenal insight,’ he says. ‘We saw that a number of multinational finance functions were going down the path of trying to strip-out transaction processing and consolidating specialist disciplines

But profiting from others’ expertise needn’t necessarily focus exclusively on importing talent. While AstraZeneca has done some work with consultants, Kenyon is a firm believer in the benefits of finding answers for oneself and looking towards more informal channels for guidance. Excellence in Leadership


Finance transformation

‘I believe companies are missing a trick if they don’t at least explore what others might have to offer in terms of guidance.’ This approach is a prime example of engendering a far more outward-looking finance function and, in his eyes, may constitute an opportunity overlooked by a number of multinationals. ‘There’s value in consultants but you should never become over-reliant on them,’ Kenyon says. ‘Where I think you can find real insight is through partnering with other large companies. Clearly they need to be in non-competing sectors, but we’ve worked with corporations including Unilever and Vodafone, sharing best practice and benefiting from each other’s expertise.’ Kenyon cites the role Diageo played when AstraZeneca was looking to go down the shared services and outsourcing route as a case in point. It was one of half a dozen or so companies that his side consulted and proved extremely helpful when it came to offering access to their solution and the people behind it. In exchange, AstraZeneca, one of the fastest closing and reporting companies in the FTSE, was able to help the beverage giant with its thinking in that area. The scope for mutual wins without any loss in competitive advantage is clearly something the organisation will tap into for the foreseeable future. ‘At the end of the day, we are all facing similar issues, regardless of the industry we’re in,’ Kenyon declares. ‘Getting that external view from people who are meeting challenges day-in, day-out generates extremely powerful insight. It tends to come through personal contact that senior management has within other organisations and is often quite opportunistic, but I believe companies are missing a trick if they

CIMA and finance transformation CIMA has a series of research activities and outputs focusing on the changing finance function and its impact on the structure of finance and the skills and competencies required of its executives. To find out more on CIMA’s research and ongoing work in this critical area visit transformation Excellence in Leadership

Finance transformation

don’t at least explore what others might have to offer in terms of guidance.’ AstraZeneca’s recently launched finance knowledge centre is playing a fundamental role in creating a robust, progressive and business-focused function and was directly influenced by a model already in use at Unilever. With employees spread across over 100 countries, a real challenge has been creating a community framework that empowers employees and drives business partnering across the enterprise. This solution, launched using Microsoft SharePoint, seeks to create that platform. ‘It is about harnessing the power of the function,’ explains Kenyon. ‘One of my real frustrations is that you travel the world and see great work being done everywhere you go, but it’s being done slightly differently in each location. Imagining the hours that one can save through only inventing things once was a real driver. ‘Previously, models would be developed at a group level and then sent out as a global standard. This would lead to incremental degradation as different teams applied different tweaks. The power of the knowledge centre is that it allows us to establish shared standards that people across the function can have a hand in developing.’ Recent examples include work on the company’s capital investment appraisal process. Members were invited to send in example of models they had used in the past or enhancements made to the existing platform. The community discusses the pros and cons of each suggestion, before arriving at a general consensus over what best practice might look like. This solution then goes to an editorial review board that either provides further feedback or signs the updated solution off, entering it into the best practice tool kit as an approved tool for use across the organisation. This process not only brings together stakeholders who would never otherwise meet, it also helps engender a sense of ownership across the function and provides a real insight into the core needs of the business. The centre contains a huge amount of information regarding market share and competitor insight, as well as any number of brokers and industry reports. ‘No one person or group of people should have a monopoly on knowledge and insight,’

Kenyon declares. ‘One of the frustrations for people working in finance for a large organisation is that they will often be accused of being inward-looking, but at the same time it’s difficult for them to get access to corporate and strategic information. Helping them get a handle on both the bigger picture internally and what our competitors are doing is extremely empowering.’ Alongside the knowledge centre runs the company’s finance academy. Launched just over three years ago, it focuses more on progression and places the control of one’s career directly in the hands of the employee. Offering clear role definitions, roadmaps and capability assessment tools, the overall result is a more proactive, better informed team across the enterprise.


able to help the business to expand its gaze. We’re talking far more about working capital, earnings performance and cash flow and people are rallying around these principles. That general shift dovetails extremely neatly with a finance function that fully understands the business and has individuals embedded at its heart.’ As Kenyon acknowledges, this is a process undergoing constant evolution with some elements, such as the knowledge centre, still in their infancy. But he is already certain that his company has embarked along the correct path, clear in the conviction that individuals must be liberated from the more process-driven elements of finance and empowered to play an integral role in driving the business forward.

‘Getting that external view from people who are meeting challenges day-in, day-out generates extremely powerful insight.’ ‘It enables for more constructive conversations with management around where the scope for personal improvement might sit,’ Kenyon explains. ‘Whether that lies in training interventions or particular project experience, outlining clear role requirements means you can plot your own path. If you aspire to a new role you can benchmark yourself against what is expected and also demonstrate well ahead of time where you want to be. Structured development is an essential element of putting the right people in the right places and allowing individuals to play to their individual strengths.’ Doing this successfully has relied on those at the top creating clearly carved-out roles for the business partners, defining the performance and strategy cycle so as to collaboratively set targets, develop the business plan and allocate resources. It has also forced a rethink as to how one measures success. Kenyon acknowledges this can be quite a subjective process when it comes to some of the softer elements, but that the changing operating environment has helped bring people onside when it comes to defining what constitutes overall business objectives. ‘When I first arrived in 2006 the focus lay almost exclusively with growth,’ he begins. ‘Now that has started to slow, we face new challenges and finance has been

‘We have a clear role in helping the business understand what it needs to do,’ he concludes. ‘The challenge is finding the right way to enable us to do so.’ ■

Paul Kenyon Paul Kenyon joined AstraZeneca in 2006 as its group financial controller. In 2007 he was appointed interim CFO prior to Simon Lowth’s arrival in the autumn. In 2008 he was appointed senior vice-president, group finance, with responsibility for group controllers, tax, treasury, insurance, pensions and business risk management. In 2010 Paul also assumed responsibility for the global finance change programme. Prior to that he held a number of senior finance roles with Allied Domecq including European sales and marketing, global operations, global duty free, global marketing and group planning and reporting. Paul led the finance integration workstream following the joint acquisition of the business by Pernod Ricard and Fortune Brands. He previously worked at Coutaulds and Mars, Incorporated in a variety of local and regional roles.

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Finance transformation

The Asia perspective Finance professionals from overseas businesses operating in the Asian markets face a range of cultural and regulatory challenges, as Merrill Lynch’s Naveen Agarwal explains.

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Finance transformation

The key issue facing finance functions in Asia is the regulatory environment. For Naveen Agarwal, CFO Asia Pacific and India, global wealth management at Merrill Lynch, it is not that regulations are so different in the region from elsewhere in the world, but that they operate in subtly different ways. ‘You have to reconcile yourself to the local requirements and the local culture,’ he says. ‘One of the biggest challenges is that people coming from First World countries will not experience the same professional ease or even the same pace that they are used to when they are dealing with countries such as Vietnam, China or India.

‘You have to take into account local modalities and the way things work, which means you need to build your team locally and have local talent. ‘When you move staff to these emerging markets, you have to appreciate that the expectations of the locals are very different. This is why senior financial people can feel frustrated, because things do not move as they would back home. ‘You therefore have to work within the local parameters, ensuring that you get the best out of what exists in those emerging markets, rather than trying to change it straight away.’

‘You have to take into account local modalities and the way things work, which means you need to build your team locally.’


Upgrading talent When the downturn hit, Asian corporates laid off staff. However, Naveen Agarwal noticed that this was not truly a panic measure. ‘Companies were not simply firing people, but were firing in order to hire better talent and upgrade the quality of their employees by releasing some of their people and, for the same price, getting more talented replacements,’ he says. This seemed to be matched temporarily by a move away from the strong Asian focus on training: ‘It was a bit lackluster 18 to 24 months ago. Because of the financial crisis, everyone was under cost pressure and it was not a priority. But things have changed radically,’ he adds. Employers are, once again, having to pay top-dollar for the best young talent and there is increasing job mobility with a rise in poaching. The most expensive market, however, is for top flight senior financial managers, who, says Agarwal, are at a premium.

Agarwal cautions that business in Asia tends to be more centred around the family and that the strength of a business case alone does not necessarily make for successful transactions. ‘People value emotional aspects and do not see everything as clean-cut. So when they get into a relationship – boss-to-boss or with a peer group – it takes a while to build that rapport. However, once it is established, it is not only restricted to dayto-day work, it includes asking each other about their families and so on’, he says. ‘As long as outsiders can circle back to that culture and embed themselves within it, there shouldn’t be an issue, but it is a key requirement. ‘I have seen many finance professionals from the US and Europe follow this path and succeed, but I have also seen many who did not enjoy working in Asia and had to go back home.’ From a regulatory point of view, there are clear differences from country to country. In advanced economies, such as Singapore and Hong Kong, the regulations are clear and the regulators efficient. Excellence in Leadership


Finance transformation

‘They are very focused in terms of requirements and what we have to submit to them on a daily, weekly monthly or quarterly basis,’ Agarwal says. ‘And it is not just a case of filing a return; people in these regulatory environments go through the numbers and come back on a regular basis with questions. They are engaged and active.’ In the fast-growing economies of China, India, Indonesia, Pakistan and Vietnam regulators face greater challenges. ‘This is particularly true if you look at India

‘In Indonesia or Vietnam, for example, the regulatory environment is not that well-developed or sufficiently robust,’ Agarwal explains, ‘but there are always pros and cons to working in less regulated environments. If a regulatory environment is not tight, it is relatively easy to get into the market and start building your business, because you do not have such a high burden of licensing and paperwork. But the flip side is that something is likely to go wrong compared with those areas where the regulators are more vigilant.’

he says. ‘Finance professionals need to strike a balance and ensure that, as financial gatekeepers who are working in local economies, and who are embedded in their culture and environments and building business in line with local requirements, they ensure that they have strong internal controls in place.’ Agarwal does not see the emergence of unified accounting standards in Asia any time soon but points out that because of the presence of US businesses in many markets, US GAAP is well known.

‘Regulators are vigilant but they tend to shift their focus to some of the big players in the market.’ and China,’ Agarwal notes. ‘Their size and number of corporates means it isn’t easy for the regulatory bodies to query and question every aspect of each business. ‘In my view, the regulators are vigilant but they tend to shift their focus to some of the big players in the market rather than worry about every individual local corporate.’ Overseas businesses seeking to establish themselves in Asian markets also need to understand that there are distinct variations in the development of commercial courts and arbitration.

Take a different view Agarwal believes that companies need to take a view on whether they are getting into these economies and markets for a short-term play, to ride a market boom or to make a long-term strategic investment. If it is the latter, while going along with the regulatory requirements in these local economies and, if possible, helping them build the regulatory structure, they should ensure that their own internal controls are far more aggressive and superior. ‘When we talk about multinationals, we are always talking about two rule books,’

Paying the pipers to call the tune There is a differential between the pay of finance professionals in the corporate world and those in the regulatory sphere, but Naveen Agarwal believes that in Asia the difference is no more than 15-20%. ‘It used to be a problem. But nowadays the regulators don’t pay badly and the authorities tend to keep pace with the market,’ he says. ‘Finance professionals have their own priorities. Private players may pay well but they also have their own expectations in terms of delivery and aggression. That is where people make their choices. Do they want to work in that environment and get well paid or do they want to work in a more comfortable environment where they can be themselves and be paid a little less? Excellence in Leadership

‘The differential is also the price of job security and job profile – the hours and the work/life balance.’ Agarwal also notes that in the past two years, regulators have been hiring from the finance industry. ‘They need more professionals who understand the business and its nuances, how people want to play around with the numbers, the systems, and the balance sheet. So they are hiring people from the banks and the finance world. ‘At the same time the banks are also hiring people from the regulators, because they know more about what the regulators will look in to and how to tackle those issues and put better systems in place.’

‘Many business and regulatory policies in Asia are driven from the US,’ he says. ‘For example, the local GAAP in India will not be too different from the US. In general, accounting processes are being taken from US GAAP or IFRS and tweaked to local standards. I do not see any difference between local and US GAAP policies in the way that they advise us to do the accounting. Having said this, I have not seen a lot of initiative to get a standardised code in the region.’ While accounting for fair value in Asia is not the burning issue that it is in Europe and North America, Agarwal points out that the regional economies learnt some hard lessons on the subject in the 1998 collapse of the Asian Tigers. ‘Given the financial crisis that Asia underwent, the revaluation of assets because of market sentiment, the way stock prices were taking the heat, the way credit agencies were rating corporates down, Asian businesses had no choice but to re-value their assets downwards,’ he notes. ‘Accounting for the right value is a good discussion point in the Asian region but, having said that, we did not see a big erosion of values in Asia in the recent crisis. Moreover, we have seen economic improvements in the last 12 to 15 months where Asia has been spearheading growth. Singapore’s GDP was up 10% year-on-year

Finance transformation

in the third quarter of 2010.’ Over and above the changing international economic axis, Agarwal believes that the build-up of financial reserves against future risk has helped sustain Asian economies. This was underpinned by the increased post-1998 role of regulators who applied tighter checks on corporates. ‘I would say that the level of regulation was lower than in the First World, but it is much improved over what had existed before the Asian financial crisis,’ he says. ‘As a result of the 1998 crisis, things have been much better in Asia than in many other economies.’


‘In Indonesia or Vietnam the regulatory environment is not that well-developed or sufficiently robust.’ and cannot do according to a book of rules that you have to follow, rather than working with the business partners and trying to figure out a solution, which says that if a business cannot do ABC, how can it do XYZ? ‘There is still a strong need to ensure that the compliance function is not compromising its controls and policies, but at the same time it is working out a way for the business to manage. That is where it is lacking.’

means they are free to focus their time and energy on building the business. This is more the case with upcoming corporates, SMEs or emerging local corporates.’ Yet typically larger firms, says Agarwal, tend to keep in-house functions such as accounts payable and receivable, because they see outsourcing as no longer cost-effective and believe they have better control of their processes by handling them themselves. ■

Easy as ABC With better regulation comes greater transparency, clearer balance sheets and easier due diligence. However, Agarwal points out that in some Asian jurisdictions there are still issues with the corporate compliance functions.‘The compliance function is pretty good in corporations and banks,’ he says, ‘but there is often a disconnect that comes when the people in compliance are working simply as gate keepers rather than as a business partner. ‘Wherever I have seen it, the quality of compliance people is good but somehow they try to put things in black and white. They tend to say this is what you can do

Agarwal notes an interesting development in Asia: new and fast-growing companies are outsourcing back office processes because they do not have their own specialised finance functions, and want to focus on their core business. Indian companies, in particular, are outsourcing to Indian BPO companies and so benefiting from their state-of-the-art systems. ‘There is a lot of outsourcing. Treasuries are outsourcing cash management functions to the banks,’ he says. ‘If it’s an accounts payable or receivable they are outsourced to BPOs or local consultants. These specialised companies really work well for them. It

Naveen Agarwal Naveen Agarwal is finance director for Asia Pacific Merrill Lynch’s global wealth management business. He has 13 years’ experience in capital markets and banking and has been working in India, Dubai, London and Singapore. Before joining Merrill Lynch in 2007, Naveen worked for Citigroup.

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Company insight

Taking the chaos out of change Bringing about corporate transformation can be a stressful and costly process, with the prospect of poor staff satisfaction and lost productivity. Genpact offers services that go beyond providing simple plans for change to offer customised solutions that bring value and ease transition, says Shantanu Ghosh, senior vice-president and global head, practices, solutions and transitions. Dealing with change is one of the most critical and often underrated activities in any corporate transformation programme. As a result, companies either put off meaningful transformation opportunities, daunted by the prospect of months of disruption and lost productivity, or they dive headlong into projects without focusing on making the change sustainable, thereby realising less than the anticipated benefits. In the current economic climate, maintaining the status quo is not a luxury most chief experience officers have. For global companies, rolling out processes, operational structures and systems involves the coordinated effort of many operational groups, which are often pursuing different goals and responding to conflicting incentives. For example, a lack of planning and dedicated change leadership led to an expensive failure in the case of a major storage products manufacturer during an ERP rollout. Afterward, its initial requirement for a more efficient system that would help it become more competitive and cost-effective remained unachieved, compounded by a lack of enthusiasm to try again. By contrast, for one major software company, attempting to roll out 23 processes across three geographic regions within a year seemed an impossible, although vital, goal. Faced with strong employee resistance, ongoing anxiety, confusion over new terminology and process drivers, loss of key personnel, mistrust of where the changes were headed and unrealistic expectations, the company could have found itself mired in an endless cycle of rising costs and reactive attempts to overcome a parade of problems. Instead, the teams were delivering 100% of service level agreements at the end of the rollout, which saved an unanticipated 25% in time and money, while delivering over $26 million in savings. Excellence in Leadership

The difference is that this company sought help from a partner with extensive transition experience and a dedicated change management practice. Rather than flinch from the very word ‘transformation’, CXOs should be looking for ways to manage the necessary changes to minimise disruption and maximise results.

Managing change vs instituting processes It is easy to come up with a new system and process. Successfully adopting it, however, takes a structured process, a planned approach to transition individuals, teams and organisations. The key to successful change is making change management an integral part of the process from the start, which requires more than a part-time manager torn between his or her ‘real’ job

‘Genpact’s robust collaborative approach clearly identifies how each proposed change will impact the organisation and individuals.’ and the struggle to meet deadlines set without fully realising the problems lurking inside a simple-looking project. Genpact has been managing transformation since it began as a division of GE in 1998. It has taken its experience of successfully transitioning over 3,000 business processes

worldwide, all involving small to complex transformation agendas, one step further and distilled it into a formal change management practice. The value to its clients is immediate and demonstrable, such as the results experienced by the software major it recently transitioned. In addition to the operational savings, the client also adopted other practices recommended by Genpact that boosted its spend under management by 100% within eight months. Poor planning can kill any project, but when instituting enterprise-wide changes, a host of other factors come into play that must be considered and managed on an ongoing basis.

Manage, not react A significant reason for Genpact’s transition success rate is the company’s fundamental understanding that change is a matter of managing individuals and groups, from anxieties and expectations to knowledge and process efficiency. It starts with leadership. As some companies have discovered to their dismay, successful change management takes dedicated focus as well as experience. In this regard, Genpact has invested considerable resources to attain a core group of ‘change champions’ who lead a wider team of practice, solution and reengineering experts in implementing Genpact’s ACTIVE (Anticipate, Categorise, Tools, Interact, Vision, Execute) change management model. ACTIVE focuses

Company insight

on the few critical essentials, customised for each client, and provides consistency across the project’s lifespan, mapping directly to Genpact’s processes and sub-processes and embedding the changes through each stage of the engagement. Leadership is only part of the puzzle, however, although a vital one. An aggressive, tailored and coordinated approach is needed, one that anticipates problems, manages solutions and, most importantly, is collaborative.

‘ripple’ effect of the change throughout the organisation as well as upon its customers and suppliers. Genpact’s robust collaborative approach clearly identifies how each proposed change will impact the organisation and individuals, communicates how the changes will be implemented, and lowers resistance through transparency and proactive engagement at all levels to answer questions and foster cooperation.

A shared framework for success Genpact views change as a process that involves more than just handing a plan to the customer and walking away. The company helps manage and implement change, and its people live with the impact. The changes the company implements are wound into the entire engagement, so that it succeeds alongside its customer. This shared approach is a key factor in Genpact’s high level of success with transitions. The company considers change management as integral to the entire process. It sets up vigorous and ongoing dialogue and collaboration with the customer from the outset and maintains it throughout the relationship lifecycle. Without such close cooperation, road blocks can be numerous, daunting and generally found in places unanticipated by client management.

A well-managed transition anticipates the operational and emotional impact, clarifies roles and responsibilities, and actively solicits employee acceptance.

Navigate road blocks However experienced the leadership or enthusiastic the staff, successful change management still needs a clear road map. Many companies quickly find themselves


Genpact’s diagnostic at the beginning of each engagement spares companies from the guesswork surrounding these issues. The tailored road map it creates for each client is designed to anticipate change and lower anxiety, to communicate the change to all concerned parties to achieve consensus and to support the change as the client teams adapt to the new processes. In the case of Genpact’s global software client, transformation involved a major cultural, as well as operational, shift. On top of learning new terminology and processes, client staff had to learn to collaborate remotely with external teams and adapt to a metrics-driven operation. Resistance from retained employees was high. Genpact, through ongoing training, regular meetings to pinpoint problems and measure progress, and complete transparency successfully worked through every issue, in large part by having a plan

Bring the entire organisation along When Genpact engaged with storage solutions manufacturer following its unsuccessful ERP rollout, Genpact’s chief experience officer-level management team was strongly on board with the company’s change management vision. However, lower-level employees were less enthusiastic, with unpleasant memories of the earlier failure and anxiety about their job security and process knowledge under the new system. Such employee resistance is a major but often unanticipated consequence of change, underlying many other problems companies experience. Transitioning operations from internal to outsourced resources, as in the case of the global software client, usually means painful personnel changes, with the attendant loss of key players, skills and institutional knowledge. Genpact’s change management model begins by analysing the customer’s preimplementation state to understand the

floundering during a rollout because they failed to anticipate some fairly common problems that Genpact has learned to factor in from the outset. The company’s ACTIVE model evaluates such critical criteria as how jobs will be impacted by the change, what changes to management practices will be involved, what skill levels will be lost, and what communication challenges might result from the loss of certain personnel. Failure to understand how customers and suppliers will be affected during and after the implementation can lead to a serious loss of customer goodwill and vendor frustration. And a common and project-killing mistake made by many companies is simply underestimating the time and effort that will be required.

in place that anticipated each challenge. Change management is about more than simply setting goals for success; it is about anticipating how failure might come about and making sure it doesn’t happen. Change doesn’t have to mean chaos. For Genpact’s clients, well thought-out change management minimises the disruption inherent in shifting to a new operational model while delivering results designed to maximise effectiveness. It requires holistic thinking from the chief experience officerlevel down, and delivers measurable results time after time. ■

Further infomation Genpact Website: Excellence in Leadership


Finance transformation

Driver of change ‘Transformation’ is a watchword for many organisations, whether across the entire business or in a specific function such as finance or IT. Today, finance plays a greater role than ever in delivering programmes of change, which not only demand more from finance professionals, but also require the rest of the business to see finance in a new light, as Tim Roberts, a former senior finance executive at BP, explains to Jim Banks.

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Finance transformation


‘Finance now has a much stronger role in transformation and change. It is really the backbone of the organisation… so it has a key position in managing transformation, whether it is in IT or in any other part of the business.’ While businesses would no doubt like to neatly define business transformation in terms of projects with a clear beginning, middle and end, the truth is that programmes of change are, in many ways, never complete. Specific projects may have clear parameters and come to fruition on time and on budget, but in a rapidly evolving business environment, many organisations must adapt to fit their markets. Although this may not be how some companies would like it to be, because it involves a more sophisticated approach to transformation and a constant grappling with the complexity of conducting

business in a fast-moving world, it does validate and reinforce fundamental changes taking place in the finance function, namely the move towards business partnering and value creation. In many large organisations, finance has a duty to change its structure to keep up with the rest of the business. ‘Finance transformation is a continuous process. It follows business transactions. Business partnering is a very important step to take. It’s a big challenge,’ remarks Tim Roberts, former head of a global centre at BP in Malaysia and now an independent programme director to large organisations working on

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Finance transformation

transformational change. ‘The historic responsibilities of finance have not changed, and there is, possibly, an even stronger focus on fiduciary responsibility, governance and providing meaningful management information. Finance professionals need to ensure that these things are done more efficiently and effectively. They are like the silent running of the company, they are the things that are expected to happen. ‘But while finance gets no additional resources to do this, it also has to deliver a value-add from business partnering. BP, for instance, has spent a lot of time in recent years looking around in finance to sort out its shop and make it a true partner for the rest of the business. Some companies find this a real challenge, so finance is often very concerned with getting its organisational structure right so that it can be efficient, effective and add value.’ Since 2003, Roberts has been working on transformation projects for BP, which

pursued a strategy of acquisition at the start of the decade [see key BP acquisitions, below] and needed to integrate the companies it had taken over. One major focus was, and remains, finance and IT. Originally, as a regional CFO for the company, Roberts oversaw these projects, and he continues to play a prominent part in his role as a programme director. ‘Finance has been a major focus for large companies, especially at the time when Sarbanes-Oxley came into force. There has been a lot of work done around business controls, standardisation, reducing complexity and increasing the ability of finance to partner effectively with the rest of the business. So, I have been focused on the organisation and standardisation of people, processes and systems,’ he explains. ‘Business partnering is the future of finance at BP and other large companies, but finance has had to work on its own responsibilities internally first.’

Key BP acquisitions 1998: Amoco • Amoco is merged into a newly formed BP first-tier US subsidiary.

• Production in 14 countries and exploration in 18 countries boosts BP Amoco’s portfolio.

• The group becomes the leading producer in the North Sea, the North American gas business and Alaska.

• BP Amoco takes on Arco’s 82% stake in Vastar Resources.

• The merged entity assumes greater prominence in emerging areas of production, including the Caspian region, the Gulf of Mexico, Angola, Venezuela and Norway. • New projects are opened up in emerging markets, including Trinidad, the Far East and the Greater Mediterranean. • The group leverages new relationships and access points in Russia and the Middle East. 2000: Arco • BP Amoco adds the $0.6 billion net income of Arco to its portfolio. • The group’s production capacity adds Arco’s 0.6 million barrels per day (bpd) of crude oil and natural gas liquids, and 2.1 billion cubic feet per day of natural gas. • Arco brings proven reserves of 2.8 billion bpd of oil and 9.8 trillion cubic feet of natural gas.

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2000: Burmah Castrol • BP boosts its downstream strategy with world-leading brand Castrol. • The group benefits from Castrol’s 5% share of the global lubricants market. • BP targets synergies delivering cost savings of at least $260 million before tax per annum. 2000: Vastar Resources • BP purchases the remaining 18% of Vaster Resources to boost its US upstream oil and gas portfolio. 2002: Veba Oil • BP acquires a majority shareholding in Veba Oil and realises the full value of Ruhrgas. • The acquisition results in BP/Aral fuels market leadership in Germany and Austria. • The deal opens up integration cost synergies of at least $200 million per annum.

The power to transform One consequence of the move towards business partnering is that the finance function is taking on more responsibility for the delivery of transformational projects. This highlights the different ranges of abilities needed within the department, which build on the traditional quantitative expertise by adding the skills that allow finance to be an effective business partner by communicating in a more effective way with the rest of the business. ‘The skills required are very different at the CFO level. You need a much broader set of skills than ever before. As well as the traditional competencies, you also need other abilities to operate effectively in this environment, especially when it comes to communicating in a way the rest of the business will understand,’ observes Roberts. ‘Finance has a much stronger role in transformation and change. It’s really the backbone of the organisation – an enabler for the organisation – so it has a key position in managing transformation, whether it is in IT or in any other part of the business. This is partly because transformation can be risky, so there is a focus on identifying and managing risks, which is part of what finance is good at. Also, any transformation project must be delivered on budget.’

Different perceptions Outside the finance department there is also a change to be made. Other areas of an organisation may have wellestablished views of what finance does, but this perception must be updated as the operational parts of the business accept the expanded role of finance in delivering change. ‘Initially, it is not always obvious how the involvement of finance benefits transformation programmes, but as a company moves forward it becomes clear that the common theme is finance, which has touchpoints across the organisation – in IT, human resources and every part of the operational side. Finance has the span of vision to see how all these elements fit together,’ says Roberts. ‘As companies try to link those things to get a single data stream, it emerges that finance brings the organisation together to speak a common language. It is effectively the custodian of management

Finance transformation


‘I predict the job of the CFO will continue to evolve… there is a greater element of taking the business to the next level of performance, the next stage of process development, and ensuring it gets the right data to do that.’ information, so it must drive a common language, a standard way of speaking, within the company.’ There may, in some organisations, be resistance to the new state of affairs. The expanded responsibilities of the finance function in defining corporate strategy and driving business transformation may not, at first, be easily accepted. Nevertheless, Roberts urges patience, in the belief that if the concept is not clear immediately, it will reveal its value soon enough. ‘Over time, the rest of the organisation sees the benefits of the new role finance has, but you have to earn that respect by ensuring the core activities of the finance function are in order,’ he says. ‘The silent running must work well. You must give the business what it needs in a costefficient way. It is also about confidence in the capability of finance to enable and deliver change.’

Change is the only constant It falls largely to the CFO to build confidence in the ability of finance to play a more prominent role in business transformation. This is just one facet of the constantly changing description of the job, which has taken on much broader proportions in recent years, and has yet to arrive at the final incarnation that this process of evolution will create. In fact, there may be no end point in this evolution. The significant shift in the responsibilities of the CFO, and in the set of skills required to fulfil them, may slow in pace but it is unlikely to come to a stop. As the business environment and the duties of finance continue to change, so will the demands made of the CFO and, therefore, the qualities required of the person taking on the role. ‘From what I am seeing, I predict the job of the CFO will continue to evolve,’ Roberts notes. ‘CFOs are taking on more and more activities in support of the business. Seven years ago, US companies put a heavy focus on a back-to-basics

approach, especially because of the incoming regulatory requirements, which put an emphasis on control. Now, however, the focus has become much broader again. There is a greater element of taking the business to the next level of performance – the next stage of process development – and ensuring it gets the right data to do that. ‘The quantitative skills will always be crucial to the role of the CFO, but the job is becoming more challenging. It involves looking at a much broader range of issues and having a much broader skill set. The strategic role of the CFO, for example, demands that it brings an internal and external perspective to the table.’

A different angle An interesting consequence of this need for the CFO to take two different perspectives is that it increasingly opens the door to advisors such as Roberts, whose involvement as a programme director, despite having left BP, is vital to the company’s business transformation projects. It shows that not only are more resources needed to support the CFO in some organisations, but also that someone who understands the business in detail, but can perhaps provide an external perspective from a well-informed standpoint, can be invaluable to a CFO trying to bring together internal and external perspectives. ‘I advise or sit alongside the CFO delivering the programmes of change,’ says Roberts. ‘In talking to CFOs, I find they feel the table is filling up, so they need help to fulfil the role, especially as competition in many industries is increasing as we begin to come out of the downturn.

There can be no doubt that delivering meaningful change in any large organisation will require ever greater input from the finance function in the years ahead, supporting every part of a business in its efforts to adapt to the demands of the market. As CFOs and their teams grow into this role, they are likely to find that managing change will be an endless but rewarding part of their remit. ■

Tim Roberts Tim Roberts was programme director and a regional chief financial officer at BP where he successfully built and executed large complex global finance and IT transformation programmes. A graduate of Manchester University in chemical engineering and an alumni of London Business School, Tim’s career spans more than 25 years in the oil and gas industry, gaining extensive global business experience in the chief financial officer function. His specialisations include business and finance transformation, major system implementations, IT strategy, offshoring and shared services. He has worked throughout Europe, the Middle-East, Asia Pacific and Australia. Based in Asia Pacific, Tim provides strategic advisory services and programme/project directorship to CFO and CIO organisations looking to deliver complex business transformational projects.

‘I can be more objective and take a different point of view. But everything that is done must be sensitive to the different corporate cultures and their needs, even though the building blocks of finance and other functions are similar in many organisations.’ Excellence in Leadership



Ethical investment The green economy is vital if we are to avoid potentially catastrophic climate change and the death of biodiversity, but it is also a place where investors can find some of the most profitable opportunities around, writes Graciela Chichilnisky. The recent financial downturn has left the global economy in a shambles. In rich industrial nations such as the US, unemployment has increased and financial instability has involved trillions of dollars in losses in the wake of tumbling credit and housing markets. To make things worse, we appear to be heading towards an environmental crisis of potentially catastrophic proportions.

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We can either resolve the two crises we face by producing economic growth with a safer atmosphere, or continue limping along with instability and outdated forms of energy and economic growth. The choice is ours. The economic downturn and the environmental crisis are two sides of the same coin, and both require the same solution. We need a new model


of sustainable economic development, as was expressed by the G20 leaders in September 2009 in Pittsburgh, US. An insatiable appetite for natural resources has been the trademark of industrialisation and globalisation. While this has benefited rich countries, its victims are the poor resource-exporting nations of Latin America and Africa that have not been able to shake-off outdated models of development. And now, as China flexes its economic muscles, Latin America has become the main exporter of resources to Asia. Without changing our use of the Earth’s natural reserves, there is no way to reach sustainable development. So how can we achieve this? The Gordian Knot is the energy market. Energy is the basis of economic development all over the world. There is no way to grow the economy or produce goods and services, jobs or exports without energy. Today, 87% of all power plants in the world are fossil fuelled, representing, according to the International Energy Agency, a $55 trillion infrastructure. We must change this set up to make a dent in the climate change problem, because these same power plants originate 41% of global carbon emissions. Either we transform the energy infrastructure or there is no solution to the carbon emission dilemma.

Business opportunity As dire as the situation seems, there is a solution staring us in the face, one that frames the problem as a profitable business opportunity. The world’s energy infrastructure can and will be transformed, we know that. In addition to being a $55 trillion business – the size of the world’s total GDP – energy use will double by 2050, driven by developing nations’ rapidly increasing energy use. This monumental development allows investment in innovation, job creation and export markets. Renewable power plants are already starting to attract interest. According to the World Wind Energy Association, wind energy grew by 31.7% in 2009, the highest rate since 2001. And wind is not the only burgeoning

energy sector: the solar power industry, particularly concentrated solar power, is capable of producing ten times the energy produced by fossil fuels with less than 1% of the solar power the Earth’s surface receives. According to the US Department of Energy, solar power is expected to be competitive with coal in the near future. Nuclear energy is also clean of carbon, although it produces waste that mortgages future generations. Since 2005, China has become the largest exporter of wind and solar power, and has created one million new jobs in the clean technology industry.


could cause irreversible damage, so the transformation of the energy industry to focus on cleaner forms of energy has a brief window of opportunity. My favourite solution is carbon-negative energy power plants, which capture more carbon from the air than they emit. Such plants show the path we need to follow if we are to tackle potentially catastrophic climate risks. Fossil plants can be made carbon-negative if they are coupled with carbon air capture technologies. This method – cogeneration

‘The economic downturn and the environmental crisis are two sides of the same coin, and both require the same solution. We need a new model of sustainable economic development.’ What happened in 2005? The carbon market of the Kyoto Protocol, which I designed and wrote into the protocol, became international law. The market is now trading $165 billion annually and has transferred $50 billion to developing nations such as China and India, which are among the world’s largest emitters. Kyoto makes coal plants more expensive and undesirable, and clean power plants more profitable and desirable. The carbon market shows that clean profits can be made, because, after all, energy is the mother of all markets.

Go carbon-negative Time is of the essence if we are to avoid temperature increases of more than 2�C, which can be caused by 400 parts per million of carbon in the atmosphere. This

– means producing electricity and carbon capture with the same energy input: heat. In the case of coal plants, it can cogenerate carbon capture with the production of electricity and captures twice as many carbon emissions than regular electricity production. Carbon-negative power plants create more energy for economic development while they clean the planet’s atmosphere, which is an irresistible double win. Carbon plants also allow developing nations to draw from the Kyoto Protocol carbon market and its Clean Development Mechanism (CDM) to pay for power projects in areas such as Latin America and Africa, where a lack of energy sources and funding has been a major problem. In

Global climate negotiations In 2009, at the Copenhagen COP15, I proposed to the US Department of the Treasury and Department of State the creation of a private/public fund – the Green Power Fund. It would invest solely in low-risk power plants for the purpose of building negative carbon plants in poor nations, favouring development and energy sources to motivate and adapt to climate change. The fund was announced by Hilary Clinton

four days after I proposed, and it was supported by many of the G77 nations. It is now growing into a fund that was discussed at the United Nations by a special committee designated for this purpose. But while the fund is being taken up, there is no mention of the use of carbon-negative or even carbonrenewable plants, and much work remains to be done in the creation of the Green Power Fund.

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‘Reducing emissions is too slow because carbon can remain for 100 years or more once emitted. With negative carbon, the energy industry can be transformed from a foe to a friend of the global environment.’

This is a major opportunity and is largely overlooked by small or medium-sized investors because it is not clear how the various economic factors play out, how large the sector is and how much it needs new investment for transformation.

Growing the carbon market The carbon market changes the entire pricing system for all goods and services in the world economy. Its “carbon price” favours clean products and clean growth, which then become more profitable. While US legislation is far from clear and positive for the environment, some of the largest states, such as California, have introduced a carbon market of their own.

Copenhagen, wording was introduced into the CDM to allow it to fund negative carbon projects. There is little time to achieve a reduction of carbon in the atmosphere without reducing carbon itself. Reducing emissions is too slow because carbon can remain for 100 years or more once emitted. With negative carbon, the energy industry can be transformed from a foe to a friend of the global environment. By helping to resolve the economic problems caused by the financial crisis through creating jobs and export revenues, the energy industry represents the largest business opportunity on the planet. It is a rapidly growing industry that has the power to attract the attention of some of the largest investors in the world, such as Silicon Valley in Excellence in Leadership

The US mid-term elections sent a clear message of support to California’s carbon sector, with voters repealing Proposition 23, which would have eliminated the carbon market. The US House of Representatives voted for cap and trade legislation in June 2009, and the Supreme Court gave President Obama and the Environmental Protection Agency the right to limit carbon emissions without Congressional approval, which led to the limiting of vehicle emissions in March 2010. Equally important as an indicator of the future is the shift in the private sector as a whole, over and above the power plant sector. Toyota was the first car manufacturer to commercialise a hybrid vehicle, the Prius, in 1997, which achieves speeds of more than 66mp/h using a combination of petrol and electricity.

Today, the company invests $1 million a day in developing new technologies, and eight out of ten hybrid vehicles in the world are built by the company. In April 2009, Prius sales topped 1,400,000 units, and the firm estimates it has reduced 4.5 million tonnes of CO2 with these vehicles. Yes, the green economy is real. It offers investors fantastic opportunities to create new jobs, expand export markets, produce killer applications and develop innovative technologies. It is possible to create economic growth with a safer atmosphere, pointing to a sustainable future with positive investment opportunities. It is our choice. ■

Graciela Chichilnisky Graciela Chichilnisky is co-founder and CEO of Global Thermostat. In addition to extensive management experience and a professorship at Columbia University, New York, she is an active scientist and acts as a special adviser to several UN organisations and heads of state. The architect of the Carbon Market of the Kyoto Protocol, her pioneering work uses innovative market mechanisms to reduce carbon emissions, conserve biodiversity and ecosystem services.

PHOTO: Chris Schmauch.

California. Clean tech is the fastest growing investment sector in the risk capital industry today.

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Human capital

Talent spotter Laurent Choain, chief HR officer at international accounting and audit firm Mazars, tells Michael Jones why the profession is really ‘selling education’, why not all metrics are useful and what can be learnt from the questionable people skills of former Soviet dictators.

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Human capital

Michael Jones: How fundamental is it to implement a sound talent management strategy in a difficult economic climate? Laurent Choain: If we had spoken three years ago, we would have talked about Generation Y and how companies would fight because job offers were so numerous compared with the availability of applicants. Today, that attitude is reversed. It has been six months, maybe, since people began to realise that the global structure has downturned and the shortage of talent is still there. So, the first point I would like to make is that we are still, especially in Europe, experiencing a shortage of talent and we are all fighting for the same type of people. The second thing I want to mention is that it’s obvious that we are in an education business. What do we sell? We sell analysis and knowledge of standards. We sell education and have to ensure that our people remain at their peak. This is an increasingly complex business, by the way, because the credit crunch has reinforced financial restraints, so operating today is much more complicated. Do you see the talent shortage issue as a European problem? Yes, for sure. It’s also a problem for the US, although it has migration flows that can compensate for this, more so than in Europe. It’s not the case in Asia though, where we are fighting for the same resources. We are all looking for the same people but Asia is heterogeneous. We are present in Indonesia and the nature of resources there is different from that of India, China and Singapore. For me, it’s difficult to talk about Asia as a whole, but what I do know is that the problem is not about a shortage of talent, it is about attracting the right people, retaining them, making sure that we educate and develop them and eventually make them leaders further down the line. Have large corporates taken their eye off this challenge in the past few years? I don’t see the talent challenge in terms of a structural issue. I see it instead as a competitive challenge. My competitors are not just the Big Four; they are any company looking for talented people. In our business, getting the right people at the start is an intense challenge.

But I also pay attention to managing the senior people. This is something less traditional in our business. With the Big Four, most of the time you start in your profession and then you have a “cream of the cream” process, after which the partners go on to stay with the company for 20 years. We made the choice that we would have a complete and fully integrated partnership. This is the huge difference between our company and the rest of the industry: we decided that if you join us, you join the whole company. There is no Mazars London, no Mazars Paris, or Mazars Buenos Aires. It means that we have different sector groups and cultures that integrate with all of our offices around the world.

‘The key thing for us is that, against a high global attrition rate, we are keeping the right people and developing a retention strategy.’ Does that make the selection process even harder? We need people to integrate into the culture, and you don’t do at the rank and file level. You have to have the right leaders and people who will bring this to life. We need more and different types of talent. For example, if Arriva, one of our clients, decides to open a branch in Kuala Lumpur, they might ask us to check the books there, just like we would at the group level. We then have to secure the same level of competence and acquaintance that we would anywhere else, keep the quality that we are providing at a management level and then improve it. How do you maintain the standards for identifying and recruiting talent? There is no direct link between technical skill and the ability to become a manager. If you are in the banking industry, there is a regular, natural progression between joining as a clerk and becoming a managing director. In our business, it’s quite different.


First of all, the simple notion of hierarchy is different: you work in teams and can have several bosses at the same time. You can also work for several clients. We have to pay attention to the fact that, besides what people are learning on the job, we also provide the right level of management and development skills because we determine if an employee is a future people leader or a business leader. This is where the difficulty lies, because with managing talent, you can’t always manage on the job. We also have to be more creative than other industries. The filter for capability analysis is not the same and we have to be innovative and see talent in what people don’t do today necessarily, but could do tomorrow. That’s why, for me, one of the things that I reinforce is the selection of the management line, as well as education. Training is for the job, but education is for life. That’s why I am going to invest more in education. How much emphasis do you place upon managing the retention and development of human capital? We operate in an industry where the business model is based on people attrition. The system is based on a pyramid leading to the top so you cannot keep 100% of your people. If 100% of our staff said they wanted to make partner, we couldn’t make that happen. So, we need to explain that, for some, if not most of the people, their experience with us will be a kind of post-graduate one: they will acquire things that will be very useful for them in a different career track later on. The key thing for us is that, against a high global attrition rate, we are keeping the right people and developing a retention strategy. This is crucial and the reason why education is the answer. If we just provided salaries, career progression and a regular career track then we would definitely lose good people. But because of the integrated partnership, we can listen to people who want to become the boss of the office in, say, Kuala Lumpur, and help to make that happen. Do you struggle to retain talented staff when you are effectively competing against the Big Four? How do you stay ahead of the curve? The real fight is at the start when we are attracting people. They have started their Excellence in Leadership


Human capital

career in the audit system and it’s rather rare that they would change company. The real challenge is to get the good people to begin with. We are fighting at the universities and the business schools and we try to develop different strategies. For example, in the UK, we are open in terms of recruitment. We take people with a background in literature, mathematics, whatever, but the training begins once

Everybody joining the company shares those founding values, believes them and feels them. What measurements for identifying and recruiting talent levels do you have in place? During the company’s last general executive board meeting I had many accountants in front of me, so I asked if they agreed that people are our most

‘We focus on education, the development of people and integrated partnerships. Career opportunities, therefore, come sooner with us than with our competitors.’ they are with us. It’s a little different in France where there are grandes écoles [graduate schools]. Students finish their time at the grandes écoles, then they do their internship and from there we try to keep them. How are you able to reinforce an employer brand at country and international level to attract the best talent? It goes back to education. A good package and a good salary is a basic, but it’s not what makes the difference. What makes the difference is if you offer good education, visibility and employability to people. We focus on education, the development of people and integrated partnerships. Career opportunities, therefore, come sooner with us than with our competitors. How are you able to provide your partners and staff with the right environment for individual and collective development? There are two things. Firstly, we work in very open, organised teams. Someone is not going to stay with the same clients and with the same team during their time with us. There is a “blending” so that people are exposed to various experiences. Secondly, we have a strong set of values at the company that we have maintained since our formation. We are the only company in the world to have had two leaders in over 70 years. If you look at General Electric, they had five leaders over 128 years, with Microsoft it’s three leaders in 30 years. It’s incredible. Excellence in Leadership

important asset. ‘Yes,’ they said. I asked if the knew who said that? It was Josef Stalin in 1941. He was making his inaugural speech in front of a new class of officers of the Red Army. We agreed then that you have to accept the right idea even if it comes from the wrong people. Stalin may have said the right thing, but he also killed millions of people. It also means that the challenge is not to just to talk the talk. We have to walk the talk, too. Secondly, I asked if we agreed that we cannot improve what we cannot measure. My colleagues agreed. It’s a basic of accounting; if you can’t measure something, you cannot improve it. ‘Do you love your children? And do they love you?’ I asked. They replied ‘of course’. I said: ‘how do you measure the love of your children?’ They said they couldn’t. I asked if that meant it was not important. It’s the same with a company. There are plenty of things that are important that are very difficult to measure. People are inventing so many different metrics, but often for things that are of no importance. Nonetheless, there are many things that are very difficult to measure, but even if we cannot measure them we can make the difference between what is important and what is not. For me, key talent and retention of leadership talent is crucial for the company. I want to create trust and attention for what counts. If the measurement aspect is not there, who cares?

Is a clear picture of career progression the most fundamental aspect of retaining talent? It is and it is going to be much more crucial. We have to make sure that we give early exposure on an international track too. We have to value the fact that people who are taking on challenges abroad should have a faster track as well. If we are talking about the leadership of a company, you have to ask who can develop into a leader of the company? We have to ask how much time do we spend with these people? How early do we expose them to a critical situation? When do we expose them to other leaders? When do we give them certain clients so that we can observe how they are doing? This kind of exposure makes future leaders increase their own vision as well. ■

Laurent Choain A graduate in science and HR management from the Reims Management School and Paris I Sorbonne University, Laurent Choain has led a four-track career as a senior executive in several large companies, a lecturer in management, a consultant and an entrepreneur. As a senior executive, Laurent successively served at Kempinski Hotels & Resorts as VP education and development and special advisor to the CEO before joining the Caisse d’Epargne Group as chief HR officer. When the Caisse d’Epargne Group merged with the Banque Populaire Group in 2009, he was appointed Sr VP leadership and management of BPCE. On the education side Laurent worked from 1991 as a lecturer in leadership and organisation design at Reims Management School, prior to leading the HR and management department.

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Reputation risk

Reputation at risk? Brand management works to project an idealised external image, but how a company is regarded by its customers is determined by its reputation. Leslie L Kossoff examines how quantifying consumer perceptions can refine and improve an organisation’s standing in the market.

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Reputation risk

When the iPhone 4’s antenna problems were first reported by customers, Apple was taken by surprise. After all, its new products are considered better than earlier models. In terms of design and features, Apple keeps outdoing itself, doesn’t it? In this case, the company continued to maintain that it did – first through silence and then through software fixes to show signal bars. That was the approach taken until the venerable and independent Consumer Reports magazine reported that it, too, experienced what had come to be called the “death grip” phenomenon of poor reception. The magazine’s recommendation: don’t buy the phone. Not too long after, the company broke its silence and Steve Jobs held a press conference. His message was clear: Apple is all about making its users happy, and if that meant it was going to have to buy bumpers and cases for the already sold iPhones, or accept more returns than normal, that was fine, because the company only cares about its customers. The estimated cost to the company for the fix ranged from $75 million to $175 million, depending on whose account you read. More importantly, though, is that during the press conference, Apple’s share price increased 3%. And that’s why quantifying reputation isn’t an amorphous, undefined measure.

Costly lesson One of the best known reputation-saving examples comes from Johnson & Johnson (J&J). In 1982, Tylenol bottles in the Chicago area were found to be tainted with cyanide. Seven people died as a result. As far as anyone knew, the incident was limited to that location only, but J&J’s CEO, James Burke, made what many analysts considered the dangerous decision to pull Tylenol products off of the shelves in all its markets at an estimated cost of $100 million. Because of the scare – and with that decision in play – its market share dropped from 37% to 2%. The talking heads said it would never come back. But by the mid-1980s the product had regained most of its previous share. Tylenol managed to reestablish itself as the premier brand in its category, and has maintained that status through all the intervening years. In fact, the company’s means of addressing the problem makes “taking a Tylenol” as ubiquitous an expression as “taking an aspirin”, with just as trustworthy a reputation.

Behind the public face The easiest way to differentiate between brand and reputation is that a brand is the external image of a company. Firms are hired or use a company’s internal resources to determine what its “look” will be, in everything from its logo to the way its advertisements are presented. It’s an organisation’s public face.

‘From global strategy to local supply chain mechanics and front line customer service, reputation will either build a brand or kill it.’ Just as there are hard measures for brand equity which, in part, determine the costs that bigger beasts pay for smaller acquisition targets, there are hard measures and specific means of tracking the monetary value of reputation. Now, more than ever, when consumers continue to feel the pinch or are simply afraid to spend their cash, or when companies are doing their best to squeeze the last penny out of their suppliers, reputation is far more than part of a sales and marketing promotion; reputation is about corporate life and death.

Reputation, on the other hand, is the internal execution that creates the external image – the real image. This is not the one you buy, but the one your customers have of you. Reputation is all about aligning strategy, operations and execution. It’s making sure that when a CEO says the company’s promise is to its customers, it is reflected in every interaction and transaction with internal and external customers and suppliers every day. Reputation is also knowing that every decision works to build the image a company wants externally


CIMA and reputational risk As you become more familiar with the process of managing your corporate reputation, you may want to consider incorporating it into the CIMA Strategic Scorecard. This is a tool developed to help boards balance the time spent on strategy and governance. In particular it is designed to help boards – especially independent non-executive directors – in the oversight of a company’s strategic process. There are four basic elements to the card: • strategic position • strategic options • strategic implementation • strategic risks The strategic risk category would be a good place to base your reputational strategy. Embedding reputation at the heart of the company’s oversight ensures that this major strategic risk is kept on the corporate radar. Further details of the CIMA Strategic Scorecard can be found on the CIMA website: .

by having best-of-breed systems in place internally. From global strategy to local supply chain mechanics and front line customer service, reputation will either build a brand or kill it. That is why quantifying a company’s reputation is so important: it’s a cost that can be identified and needs to be managed to ensure the greatest profits and opportunities.

Apple’s core In its early years, Apple was a computer company. It was considered the little guy while specialised, higher-priced units did things differently. But Steve Jobs had a different view of what the user experience could and should be. As a result, we were brought new worlds of graphic user interface, “what you see is what you get”, and more. With a share that spent most of its life between 2.5% and 3% of the desktop market, Apple was considered an interesting company, but one that only a mother could love. Excellence in Leadership


Reputation risk

‘Reputation is also knowing that every decision works to build the image a company wants externally.’ And all the while Apple’s operating systems were being copied to create new products that matched the user experience, or at least as close as Microsoft could come within its Windows structure. Over time, Apple added more graphics and audio-oriented capabilities. It became the darling of the media sector so that in most small and large video production houses you would see at least one Mac, if not banks of them. All of this raised a question: was Apple’s reputation for user experience and graphic/audio capabilities as a computer company or a media company? In that context, the iPod makes all the sense in the world. Why wouldn’t a company that is already focused so extensively on the audio and video experience take that knowledge and extend it into a consumer marketplace? They would, if they were paying attention to the reputation they had built not as a “computer company” but as a media company, which makes its advent into the smartphone market such a savvy move.

The Drucker question The management theorist Peter Drucker would ask his client companies a core strategy-to-innovation question: ‘what business are you in?’ Not what products do you produce or what market you operate in or how your services are performed, but what business are you in? This is not an easy question to answer, mostly because, in the process, executives are so tied into what their company is doing that they lose sight of the value their company brings from the customers’ perspective. The Apple example demonstrates how, by looking not at what it does but how it is perceived by customers, a company can determine what immediate and long-term steps it should follow in order to become the type of organisation it wants to be: a firm that successfully catapults itself into new markets and is readily accepted as the preferred provider for whatever it is on offer. Conversely, by using the same process, a company can far more easily, quickly and cheaply identify the disconnects that are keeping it from getting where it wants to go.

This is a strategic progression based on a reputation that it built on the marketplace value and utilisation it was creating and seeing, not on its product lines. From that point on, it was a matter of building on what people already thought of it.

That said, because reputation building is an internal process, once a company has the information at hand, it becomes easy to address the disconnects and do what needs to be done quickly, cheaply and successfully.

Soon it became accepted that if you wanted good and beautifully designed technology for anything media oriented, Apple was your answer. This worked because Apple’s market capitalisation is now greater than Microsoft’s.

Quantifying reputation

Excellence in Leadership

To achieve the quickest start at quantifying a company’s reputation, the first step is to look at errors of omission (EO) and errors of commission (EC).

If an organisation has lost opportunities to grow by not building adequately on its reputation, EOs represent lost revenues and future streams. An organisation has committed ECs by not acting on the known disconnects and problems created within that keep its reputation – and opportunities – from growing as they should. By starting the quantification process using EOs and ECs as guide, it is easy to give executive teams the information they need to determine where to set their targets and what the ROI will be. ■

Leslie L Kossoff Leslie L Kossoff is an internationally renowned executive advisor, specialising in strategy and corporate turnaround. For over 20 years she has assisted clients ranging from Fortune 50 to small and mid-sized firms in a broad range of industries and sectors in the US, Japan and Europe. A former C-level executive in the aerospace and defence, pharmaceutical and entertainment industries, Leslie enjoys an outstanding reputation as an invited speaker, is the author of two books and over 100 articles in journals and newspapers such as the Financial Times. She also writes regularly on business issues related to the agricultural sector for the trade magazine Horticulture Week.

Reputation Why it matters and how you can manage it From banking to oil, technology to automobiles, industry reputations have been hard hit in recent years. Some were deserved and others were not. They all had ďŹ nancial implications for the companies involved – and their shareholders.

This new case study based report analyses the importance of an organisation’s reputation and how it can be managed in an era of 24-hour rolling news and increased social networking. You can download your complimentary copy today at

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Excellence in Leadership December 2010  

Excellence in Leadership December 2010.

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