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sustaining

GROWTH

in association with

Technology Fast500

EMEA 2008GROWTH THE ESSENTIAL GUIDE TO SUSTAINING BUSINESS

CISCO

Your IT strategy for growth

DELOITTE

Transfer pricing in Turkey

The power of information for business survival

PLUS INWARD INVESTMENT • BUSINESS EDUCATION • FX TRADING • PENSIONS


Contents

The essential guide to sustaning business growth

BANKING AND FINANCE

Denmark

06 Growth Finance News 12 EAB Interview - With Mr Ittira Davis,

69

MD of Corporate & Institutional Banking for Europe Arab Bank 22 Cashflow - Surviving the credit crunch - By Nic Beishon of Equifax

Editors Letter

BUSINESS EDUCATION

15 MBA and Executive Education 19 London Business School - Managing

I

growth when times are tough - By John Mullins

20 Venture Navigator - Take your business

f necessity really is the mother of invention, then the current economic forecast suggests we’re in for a storm of innovative thinking. Testing times call for inventive measures, and the turbulent winds of change this autumn have certainly thrown up some cutting edge proposals in this edition of Sustaining Growth. Alternative thinking has always been the hallmark of successful leadership, so we take a look at new ways of weathering the current crisis with a glimpse into the technological advances of voice-over internet communications, an original approach to team building using man’s best friend, and a lesson in how to come out on top with the help of virtual environments.  Tectonic shifts in the global market means that it’s time for a review of the new world economic order, with Denmark and Bulgaria coming out on top as potentially the most attractive opportunities for inward investment.  And, despite the crisis of confidence in trading, there are reasons to look forward to a brighter era of currency exchange.  But how to ride out the forecasters’ worst predictions and navigate through the present tempest?  In this issue, we open up the Sustaining Growth survival toolkit for commercial expansion when times are tough, with resourceful tips on how to turn the downturn into a win-win situation, the benefits of taking your business for an online support test, and the importance of securing your intellectual property rights to keep you and your company exceptional.  And for those who want to keep their head when all about are losing theirs, a crash course in the positive philosophy of continuous growth with the Kaizen Method reassures us that sustaining growth isn’t just about managing the old, but adapting to change and pioneering into new waters.

for an online support test

INFORMATION TECHNOLOGY

32 Cisco - Making the most of your IT Assets - By Tunji Akintokun

INWARD INVESTMENT

62 All together now - by Alessandro Teixeira, President of WAIPA

69 Denmark - The best place in the world to

conduct business 73 Bulgaria - Europe’s most attractive investment location - By Dr. Stoyan Stalev of the Invest Bulgaria Agency LEADERSHIP AND STRATEGY

25 ICC Arbitration - Enabling globalisation 29 Conflict Management - Tips to finding win-win situations

41 Leadership Training - Adopting the Kaizen Method to manage change

44 Long Distance Leadership - How 58

to lead in a virtual environment - By Kate Cowie of the Chaos Game Team Motivation - Alternative team building with the Guide Dogs Overseas Challenges - By Fiona Chaillier MARKETS

Charles Vandeleur | Editor

34 FX Trading - Understanding leverage - By Richard Moorish

sustaining

GROWTH

autumn / winter 2008 | €4/£3

in association with

The eSSenTIal GuIde To SuSTaInInG buSIneSS GrowTh

36 MIG Investments - Banking on the move 38 FX Pro - The future is bright for currency

60

trading - By Adrian Harrow TAX PLANNING

46 Offshore Tax Strategies - Preparing

cISco

Your IT Strategy for Growth

deloITTe

Transfer Pricing in Turkey

The power of information for business survival

PluS

50

Inward InveSTmenT • buSIneSS educaTIon • fx TradInG • PenSIonS

64 Cover Illustration: Ben Hooley | www.benovision.co.uk

All rights reserved. All material in Sustaining Growth is wholly copyrighted and reproduction without the written permission of the publisher is strictly forbidden. The views expressed in this publication are entirely those of the authors and do not necessarily represent those of Raellen Communications Ltd. The information in this publication is carefully researched and produced in good faith. However, neither the publisher nor the editors accept responsibility for any errors.

aggressive tax planning schemes - By Philip Harrison A.C.A. of Cobham Murphy Ltd. Pension Planning - Martin Tilley looks at the key elements to consider when investing in a SIPP Turkey: Transfer Pricing - New rules for foreign investors - By Guler Hulya Yilmaz of Deloitte GENERAL INTEREST

53 Conference Management - Tips for 56 60

running a successful business meeting by Didier Scaillet of MPI Fleet Management - Petrol: welcome to the high price era - By Christopher Duprat of ALD Automative Intellectual Property Rights - securing the commercial rights to what makes you unique

sustaininggrowth | 3


growthfinance news First EIB loan to support SME and municipality projects in Montenegro

Lithuania and the European Investment Fund sign Holding Fund Agreement under the European Commission’s initiative for SME’s

© Valegas | Dreamstime.com

The European Investment Bank (EIB) is lending EUR 30 million to finance projects implemented by small and medium-sized enterprises and local authorities in Montenegro. The loan will support investments in the areas of environmental protection, rational use of energy, industry and services, including tourism, as well as projects helping to upgrade local and regional infrastructure. This is the first EIB line of credit provided to a partner financing institution in Montenegro: Hypo Alpe-Adria-Bank AD Podgorica – a well established bank with a densely developed network of branches in the country. It will serve to further develop the SME sector in the context of the recent strong growth of the economy in Montenegro and help to meet the growing demand from the private sector for finance for productive investments. The loan can also finance infrastructure projects undertaken by local authorities. EIB loans to partner financial institutions have been developed as a successful tool for providing long-term funding for co-financing smaller projects with total costs below EUR 25 million and up to 50% of their investment costs. They constitute credit lines to financial intermediaries that on-lend EIB funds under their own management, at their own risk and on their own terms. However, the EIB partner financing institutions are committed to sharing the financial advantage of EIB funds, provided under favourable terms, with the final beneficiaries – SMEs and local authorities.

6 | sustaininggrowth

The Ministry of Economy and the Ministry of Finance in Lithuania and the European Investment Fund (EIF), have today signed a Funding Agreement to establish a Holding Fund in Lithuania under the European Commission’s initiative for SMEs (JEREMIE). The overall capital amount assigned to the Fund will equal EUR 80m (275 million Litas) which EIF will manage on behalf of the Lithuanian Ministry of Economy; the money comes from the Operational Programme “Economic Growth” supported by the European Regional Development Fund (ERDF). Representatives signing the agreement were Mr. Vytas Navickas, Minister of Economy of the Republic of Lithuania, Mr Rimantas Sadzius, Minister of Finance of the Republic Lithuania and on behalf of the EIF, Ms Eva Srejber, Vice President of the European Investment Bank with responsibilities for the Baltic States. The JEREMIE Holding Fund will via intermediaries finance SMEs. EIF activities for the Holding Fund will include the development of new financial engineering structures and products, primarily in venture capital, micro-loans and guarantees, benefiting Lithuanian SMEs (small and medium-sized enterprises) and micro-enterprises. This initiative is part of an overall Government programme to stimulate further growth of the economy which will contribute to, renewed and enhanced job prospects and a healthy and expanding SME sector. The EIB Vice President, Ms Eva Srejber, said: “With this very important agreement, the Lithuanian government further confirms its readiness to promote and adopt an innovative and efficient financial engineering approach to the financing of its SMEs and micro-enterprises. This new cooperation will no doubt encourage the competitiveness of small businesses, facilitate their access to finance and promote growth and job creation in Lithuania.” The Minister of Finance, Mr Rimantas Sadzius, said: “The Government seeks to secure national economic growth, strengthen competitiveness and promote innovation by a variety of instruments, among which is also the use of EU structural assistance. In this area, we endeavour to make use of all emerging opportunities, and I am particularly glad that we can encourage business development with modern instruments”. The Minister of Economy, Mr. Vytas Navickas, said: “One of the main problems, which SMEs are faced with, is limited access to finance. This is especially important for start-ups and companies with high growth potential, which need investments of higher risk. This project is aimed to improve SMEs’ access to

finance and with this to promote realisation of innovative business ideas and establishment of new technological businesses in Lithuania”. About EIF EIF’s central mission is to support Europe’s small and mediumsized businesses (SMEs) by helping them to access finance. EIF designs and develops venture capital and guarantees instruments which specifically target this market segment. In this role, EIF fosters EU objectives in support of innovation, research and development, entrepreneurship, growth, and employment. The EIF total commitment to Private Equity funds amounted to over EUR 4.5bn at end August 2008. With investments in over 290 funds, the EIF is a leading player in European venture due to the scale and the scope of its investments, especially in high-tech and early-stage segments. The EIF commitment in guarantees totalled over EUR 11.6bn in some 190 operations at end August 2008, positioning it as a major European SME guarantees and securitisation actor and a leading micro-finance guarantor. Since its activities began, the EIF has indirectly supported some 810,000 SMEs and has thus tremendously contributed to economic growth and development in Europe. About JEREMIE JEREMIE (Joint European Resources for Micro to Medium Enterprises) is a joint initiative launched by the European Commission (DG Regio), EIB and EIF to improve access to finance for SMEs in the EU within Structural Funds framework for the period 2007 - 2013. JEREMIE enables the EU Member States and Regions to put money from the structured funds into holding funds that can finance SMEs, start-ups and micro-enterprises in a flexible and innovative way. Holding funds will provide SMEs, through financial intermediaries, with a wide range of financing like equity, venture capital, guarantees and micro-loans, together with potential loans from EIB resources. The Holding Fund allows the structural fund money to “be used several times” and hence more SME’s can benefit from the EU money. Sustainable, tailormade and revolving financial instruments, aiming to develop and foster the role of entrepreneurship within the EU are key elements of the Lisbon agenda and help the structural funding to deliver greater benefits to the market (leverage effect). So far, Funding Agreements have been signed with Greece, Romania and Latvia for a total of EUR 380m.


EIB to boost SME lending at request of EU finance ministers

Greece: EIB ready to boost its support for SMEs © Serban Enache | Dreamstime.com

At the request of European Union finance ministers meeting in Nice (Sept. 12-13), the European Investment Bank will modernise and increase significantly its volume of lending to small and medium-sized enterprises in 2008 and 2009 to help mitigate the effects of the current credit crisis. Ministers agreed the Bank should target loans to SMEs totalling 15 billion euro over the two year period as part of a global envelope of 30 billion euro. This level of lending would represent an increase of around 50 percent compared with 2007, when the Bank lent 5.2 billion euro to SMEs via its network of partner banks from the private sector. In addition, the EIB announced to ministers its intention to give a new 1 billion euro mandate to its European Investment Fund subsidiary to provide mezzanine finance to SMEs. The increase in lending will accompany sweeping reforms to the EIB’s SME loan product that should make loans both simpler and more attractive for companies and the EIB’s partner banks. The first of the new “European Loan for SMEs” is due to be signed in the coming weeks. “For us it is not just a question of doing more, but above all doing better,” said EIB President Philippe Maystadt. The reforms come in response to the results of a consultation (see attached) of the SME lending sector carried out by the EIB in 2007/08 and in the context of the “Small Business Act” proposed by the European Commission in July 2008. The 23 million SMEs in the European Union represent 99 percent of all businesses and, according to the Commission, accounted for 80 percent of new jobs created in the EU in recent years, making them a key engine for growth. The EIB aims to provide companies with the financing necessary for them to fully benefit from the simplification of small business regulations, thereby supporting activity and European competitiveness. The changes will relax the definition of eligible investments, opening EIB finance to a wider spectrum of small and medium-sized companies, and lighten reporting rules on intermediary banks. By the end of the year, the EIB will also develop new products offering to share part of the risk that banks take on when lending to companies that are judged to represent a higher risk. In future, small companies will be able to use EIB finance for investment in intangible assets, which is not the case until now. Investment in research and development, the acquisition of intellectual property rights, the expansion of distribution networks and also the transmission of companies due to generation or staff-related change will all be eligible for EIB loans.

The European Investment Bank (EIB) is ready to boost its support for small and medium-sized enterprises (SMEs) in Greece. On the fringes of a conference on energy security, the EIB Vice-President Plutarchos Sakellaris stated in Athens today: “In view of the importance of EIB lending to small and medium-sized enterprises attached by Greek Prime Minister Costas Karamanlis and the other EU leaders at their regular autumn summit in Brussels last Thursday, we will step up our support for smaller companies also in Greece. The EIB is supporting the European economy and its financial system by granting loans to SMEs worth EUR 30bn throughout Europe. The EIB will use its capital strength to help counter the effects of the erosion of confidence in the financial sector”. Up to 2011 and in partnership with commercial banks, the EIB will mobilise EUR 30bn for smaller companies in Europe, at the request of EU Finance Ministers in Nice last month. EUR 15bn will be made available in the period 2008-2009.

sustaininggrowth | 7


growthfinance news EIB makes loan to glassmaker NSG UK, first in Britain under joint EC-EIB research facility

EIB and OSEO step up their cooperation in support of SMEs to meet the development needs of the Europe of the knowledge economy and the Lisbon Strategy, OSEO wishes to step up its support for innovation and SMEs and foster the growth of intermediate-sized companies. The EIB is ready to get involved in OSEO’s different initiatives. Strengthening the well-established cooperation between the EIB and OSEO will send an important signal to the French market in a difficult business climate. Three first areas of cooperation have been agreed:

© Tatiana Makotra | Dreamstime.com - Flag: Sharpshot | Dreamstime.com

The European Investment Bank is making a GBP 65mln loan to NSG UK Enterprise Limited, which trades under the Pilkington brand, to help modernise its production facilities in St Helens, Merseyside, and fund research and development into new processes and products. NSG UK will be the first British company to benefit from the Risk Sharing Finance Facility (RSFF) set up by the EIB jointly with the European Commission in June 2007 to make finance for research, development and innovation available to a wider spectrum of companies. NSG UK is investing a total of GBP 130 mln (approximately EUR 163 mln) in the project to modernise its Greengate float glass factory and fund R&D at its research centres in Ormskirk, Lancashire, and Gelsenkirchen and Witten in Germany. Approximately 65 percent of the project’s total costs are related to research and development. The project will improve energy efficiency at the Greengate plant, thereby reducing CO2 emissions, and safeguard jobs in the area, which qualifies for assistance under the current EU structural funds programme (2007-13). “This project shows that UK companies can also make use of the EIB to help fund their research and development,” said Simon Brooks, EIB vice president responsible for lending operations in the United Kingdom. “We look forward to undertaking future projects of this sort with other companies.” The RSFF was set up by the European Commission and EIB in June 2007 to extend finance for research, development and innovation to low- and subinvestment grade companies, small and medium-sized enterprises, research institutes and universities. The facility with a target volume of EUR 10 bln can be used to finance intangibles such as R&D operating costs, salaries, and the acquisition of intellectual property rights as well as traditional investment in plant and machinery. Using resources from the EU’s seventh framework programme for research and development, RSFF aims to help further development of a knowledge-based economy in the 27 member states.

8 | sustaininggrowth

Financing of SMEs OSEO is substantially increasing its support for SMEs. It expects its needs to grow by EUR 2bn over the next three years. The EIB will give its backing to this heightened effort by participating in OSEO’s dedicated SME programmes. Its action will form part of the new European SME support initiatives that have emerged from the consultation exercise carried out in 2007 on SMEs’ financing requirements. OSEO will therefore be one of the EIB’s pilot partners in its new SME strategy in Europe. Financing of intermediate-sized enterprises As part of its remit to assist the creation of medium-sized enterprises, OSEO, playing its role as a local bank, will cofinance with the EIB and other banks the substantial investment of mid-cap companies in R&D and the energy and environment sectors. In accordance with certain criteria, the acquisition of tangible assets and certain intangible investment and expenditure (especially on R&D, marketing and distribution networks) will be eligible for this financing. The EIB and OSEO’s joint operation is intended to help round off the financing plans for the medium-sized companies’ key investments. Financing of R&D and innovation under the Risk-Sharing Finance Facility (RSFF) The RSFF is a joint EIB-Commission initiative that enables the Bank to take on a higher level of risk when financing innovative projects. The EIB is prepared to use the RSFF for the benefit of innovative projects financed by OSEO under its two support programmes: Aid for Innovation and Strategic Industrial Innovation. OSEO finances companies’ RDI projects, either on its own or with other lenders, in particular by providing repayable advances. EIB funding under the RSFF can serve to cofinance the innovative projects of companies’ receiving repayable advances from OSEO. The impact of such cooperation will be reinforced by the administrative, fiscal and legal simplification measures brought about by the European Small Business Act in favour of SMEs in the EU Member States. Other forms of cooperation will be pursued in the knowledge economy field (universities, student loans, competitiveness clusters…) or in order to provide venture capital investors with guarantees on innovative projects.


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growthfinance news EIB and European Commission launch new Microcredit Initiative During the Eurofi conference organised in the framework of the informal Ecofin Council held in Nice on the 12/09/2008, Philippe Maystadt, President of the EIB, announced the launch of a new facility which will support microcredit in the European Union. The initiative known as JASMINE (Joint Action to Support Microfinance Institutions in Europe) emphasises the synergies between various European institutions (European Commission, European Parliament), the Eurofi network, banks and the European Microfinance Network. Its purpose is to promote the emergence of a sustainable microfinance sector in Europe, through financial support to essentially non-bank Microfinance Institutions (MFIs) and dissemination of best market practices. The aim is to rectify the imbalance between the inadequate current supply and the huge potential demand which prevails in the European market. To reach this objective, the JASMINE Initiative will primarily focus on MFIs in development phase. In this framework, a dedicated European Investment Fund team will provide two kinds of support to MFIs: • provision of additional capital through a co-financing facility to double the quasi equity participation/ loans granted by banks to promising MFIs (financed by the EIB); • technical assistance (financed by the European Commission). The initial capital base of JASMINE will be EUR 50m and the first operations will be starting early 2009. The JASMINE initiative aims at financing MFIs and not directly microentrepreneurs.

10 | sustaininggrowth

CIP guarantee in favour of KfW’s StartGeld Programme The European Investment Fund (EIF), the European Union’s financial body for SMEs (small and medium-sized enterprises) and KfW, the largest promotional bank in Germany, have signed the first guarantee agreement under the European Union’s (EU) Competitiveness and Innovation Framework Programme (CIP) in Germany. KfW redesigned its StartGeld programme in favour of start-ups and micro companies. The new product, which benefits from the EU guarantee, aims at encouraging German banks to extend small loans to start-ups, and offers favourable conditions to the target SMEs. Commenting on the event EIF’s Chief Executive Mr. Pelly said “We are looking forward to this renewed collaboration with KfW in support of start-ups and hope that it will be another success story which will help the creation of thousands of small businesses in Germany.” Mr. Sickenberger, Director KfW, added: “The EIF guarantee makes the programme KfW-StartGeld much more attractive: it allows us to charge lower interest rates, and it enables us to provide a higher lending volume to founders of new businesses.” Background information: The CIP, which spans from 2007 to 2013, has been put in place to boost European productivity, innovation capacity and sustainable growth, whilst simultaneously addressing complementary environmental concerns. Within the framework of the CIP, the EIF has been allocated EUR 1.1bn to be split between venture capital – with the High Growth and Innovative SME Facility (GIF) - and guarantees – with the SME Guarantee Facility (SMEG). Under the SMEG, financial institutions are encouraged to enhance access to finance for SMEs. The facility offers an excellent tool to allocate additional financing volumes for those SMEs that would not otherwise have access to resources and financial engineering instruments because of the increased lending risk entailed. As such, The SMEG complements and broadens EIF’s own product offering. The EU CIP SMEG Facility gives the EIF the opportunity to play an essential role in supporting sustainable job creation and entrepreneurship in European SMEs. annual conference in Gammarth at which over 500 participants attended.

Spain: EUR 910 million for financing SME projects In the first half of 2008, the European Investment Bank (EIB) provided EUR 910 million in seven credit lines designed to finance investment projects promoted by SMEs in Spain. These were opened with the following financial institutions: • Agencia de Inversiones y Servicios de Castilla y León • Banco Pastor • Banco Santander • Bankinter • Caja de Cataluña • Institut Catalá de Finances • Instituto de Finanzas de Castilla-La Mancha These loans form part of the Bank’s policy of supporting small and medium-sized enterprises approved by the Board of Governors and its annual meeting. With a view to providing small firms with easier access to credit, the EIB is introducing greater flexibility and simplified procedures, asking in return for increased transparency on the part of the intermediary banks, which will be required to clearly inform their customers of the positive impact of the EIB funds on their lending conditions in terms of longer maturities, more flexible disbursement procedures and lower interest rates. The credit lines are intended to help finance SME projects mainly in the industrial, tourism and service sectors. An innovative feature is that, as well as traditional investment in fixed assets, it will be possible to finance intangibles essential for companies’ growth such as investment in RDI (1) or the creation of distribution networks. At a time of widespread difficulty accessing credit, the financing of small businesses is particularly important. The EIB formulated its new policy in line with the conclusions of a consultation exercise (2) carried out in all the EU Member States in 2007


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europe arab bank

Q&A

Mr Ittira Davis Sustaining Growth’s Charles Vandeleur speaks with Mr Ittira Davis, the Managing Director of Corporate & Institutional Banking for Europe Arab Bank, about the impact of the global financial crisis.

E

urope Arab Bank (EAB) is a wholly-owned subsidiary of Arab Bank plc whose Head Office is in Amman, Jordan. Arab Bank is one of the largest banking institutions in the region with a global network of over 500 branches and subsidiaries, in 30 countries across five continents. It enjoys a prominent position in key markets and financial centres in Europe, Asia-Pacific and the United States.” Despite the current challenges faced by global financial institutions Arab Bank’s profit, before taxes and provisions, for the first nine months of 2008 was $843.2m compared to $714.4m for the same period last year, an impressive growth rate of 18%. This is testament to Arab Bank’s prudent banking policy, which has continued to adopt a strategy of development and modernisation whilst at the same time ensuring sufficient capacity to deal with the many changes which have taken place in economies around the world. EAB opened its doors for business in August 2006 with headquarters in London and offices in Frankfurt, Madrid, Milan, Vienna, Rome, Paris and Cannes. The business is founded on a rich international heritage and experience and provides a commercial financial bridge between the Middle East and North Africa (MENA) and Europe and vice-versa. The events of the past 12 months have seen the “credit crunch” rock the foundations of many major financial institutions. How has Europe Arab Bank coped with this crisis?

12 | sustaininggrowth

EAB has performed well given the unprecedented systemic crisis in the markets. We are part of the Arab Bank Group and have benefited significantly from the characteristics of the Arab Bank Group – i.e. prudent management, conservative in our view of the markets and very much focused in our assessment of the underlying credit fundamentals of any business we consider. We enjoy the A- rating of the Arab Bank Group and have built strong relationships with our customers which range from financial institutions and corporates, to High Net Worth clients is such that our liquidity position is ample and thus able to cope with the extremities of the market downturn. We are very cautious when it comes to placing our liquidity and of course were well placed to manage the present crisis as the drive for liabilities has been on going well before the crisis even appeared. What has been your approach to your lending strategy over recent years and has this put EAB in a position of strength? Our lending strategy has been built on focussing on the key objective of EAB i.e. to build the financial bridge between Europe and the MENA region. Our view is to enhance and provide the funding to necessitate financial and trade flows between the two regions. This lending strategy has allowed us to focus on our regional expertise in both Europe and in MENA, providing our customers with bespoke financing solutions both from a conventional finance point of view as well as in the Islamic finance space. As discussed above our

view is to be prudent – understanding the needs of customers but also ensuring that we have sound credit structures in place to mitigate the credit risk involved. Arab Bank customers are reliant on the conservative management of their deposits and as such being responsible for these liabilities is an enormous honour and responsibility – hence we are completely focused to ensure that we protect the interests of our customers. What do you envisage for the finance and banking industry over the next 5 years and what will EAB be concentrating on in order to sustain your growth? Given the recent events in the market we are expecting to see some consolidation in the banking industry. The bear market is sure to last for a while yet and banks will be cautious as they move forward given also the world wide recession predictions. The market will bottom out and there will be opportunities. However, our approach is not to bottom feed, we look to finance quality transactions fitting our mandate of enhancing trade and financial flows. We expect the stronger financial institutions to whether the storm and given Arab Bank’s historical record in preserving and obtaining liquidity it is only natural for us to see this systemic crisis out – we will concentrate on our steady prudent approach of plain vanilla products which preserve value for our customers and our shareholders. The future is likely to be more plain vanilla for the sector.


europe arab bank

“EAB has performed well given the unprecedented systemic crisis in the markets. We are part of the Arab Bank Group and have benefited significantly from the characteristics of the Arab Bank Group – i.e. prudent management, conservative in our view of the markets and very much focused in our assessment of the underlying credit fundamentals of any business we consider.” Much has been written recently about the strengths of Islamic Finance. With the recent crisis in Anglo-American banking, do you feel that the time is right for Islamic Finance to become a global force? Islamic finance sector has been growing steadily at around 10-15% per annum according to various estimates. We at EAB have been active in the wholesale Islamic finance space for a while now having an established well respected sharia board, Islamic operations, segregated Islamic accounting platform and a dedicated front office team looking after the needs of our Islamic customers. On the private banking side, prior to the conception of EAB,

we looked after Islamic HNWI deposits through Arab Bank’s offices. It is true that Islamic banks per se have not directly been affected by sub-prime because the asset selection criteria of these banks revolves firstly around whether the assets are sharia compliant/based. The sub prime assets and CDOs, other derivatives, CDS’s and such like are not sharia approved and as such the banks were not exposed to them directly. However, the Islamic finance sector has suffered due to the very difficult capital markets situation and of course the very tight interbank liquidity issues as a fallout from the sub-prime and systemic crisis. No bank has been immune either directly or indirectly. Islamic finance is moving more from niche to mainstream regard-

less of the crisis. It is fundamentally a back to basics approach to banking i.e. real tangible assets being financed – and as such the markets view has been fairly positive with respect to Islamic banks from a fundamental perspective.

EAB UK 13-15 Moorgate, London EC2R 6AD UK Tel. +44 (0)20 7315 8500 Fax. +44 (0)20 7600 7620 www.eabplc.com

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© Photo: Luso – istockphoto.com

I

t is fashionable in business circles to talk about the unprecedented and dramatic pace of change these days. The world is changing, we say, more dramatically and faster than ever before, businesses are more complex and the challenges facing business leaders are greater than ever. No one can argue that change is all around us, but neither should we assume that this is somehow a new phenomenon. Organisations have always had to respond to change and to deal with complexity in some form. Challenges have always existed, they simply change over time and, granted, some of today’s challenges are significant. What are these challenges and what do the current trends in business mean for people development and talent management at the senior level in organisations?

There is certainly a sense of insecurity in corporations about the future both in terms of the economy and business development. Large corporations in mature markets are struggling to grow. Fierce price competition from Asia is driving margins down and this is certain to continue. Innovation and entrepreneurship are required in this new climate and the traditional business models are unlikely to have an impact. Chief Executive positions are not so desirable – it’s a high risk job and there has been a trend in CEO firings in recent years - in fact the average term for a CEO in Europe today is said to be less than five years. Chief Executives, aware of the pressure to deliver results or to face dismissal, are necessarily focused on short term targets just to stay in post. At the same time, talented professionals are being snapped up by competitors offering higher

salaries and significant opportunities for development and promotion. Against this backdrop – insecurity at the top, new competition, globalization and the war for talent, companies are looking for support from business schools to deliver management education that meets their needs and provides them with the people and skills to address the challenges. What role does the Executive Education play in helping employers select, develop and retain top talent? It is acknowledged by most successful businesses that training on the job and in-house development programmes are not sufficient to guarantee the complex mix of skills and knowledge required at the top. Such businesses demand senior level people who possess a high level of business knowledge, combined with

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business education

relevant experience and management skills developed in a practical context. The modern MBA, still recognized as the leading international business qualification, is enjoying something of a comeback to meet this demand. The qualification, now over 100 years old, has retained its popularity because of its ability to evolve and adapt, to keep pace with the needs of business and to maintain its relevance and value to individuals and their employers. The MBA is positioned as a post-experience qualification and this is its key strength when compared to other educational programmes. MBA students are expected and encouraged to bring different work experiences to the course, to share them and apply them to different business contexts. The course offers a powerful mix of structured learning and the practical application of knowledge and skills. For employers of MBAs, this is the most compelling feature of the qualification.

excellence in programme content and delivery is intense. There is little doubt that the survival of business schools and their MBA programmes will depend ultimately on the quality of their offerings and their outputs – and this is what accreditation by the Association of MBAs aims to ensure. The Association, established in 1967, represents a membership of 9,000 MBA students, graduates, business schools and organisations, all with an interest in postgraduate management education. Over 150 business school members have achieved accreditation by the Association and the organisation is widely recognised as the international standard for the MBA. Accreditation is achieved following an in

are considering is accredited by the Association of MBAs. The MBA has changed and so have MBA students. The stereotypical 28 year old male studying a 2 year full-time MBA before going into consultancy no longer represents the norm. In general, MBA students are in their 30s, more experienced and working in a variety of roles across all employment sectors. And the full-time MBA programme, whilst still popular, is no longer regarded as standard. In fact perhaps the most significant trend in recent years is the introduction of more flexible learning options. Parttime MBA programmes, distance learning and ‘blended learning’ (involving a mix of face-to-face interaction and online learning) formats are on the increase. Many of these programmes are accredited by the Association of MBAs and meet the same high standards as the traditional full-time course.

Coverage of all the core business functions continues to be fundamenHigher education provision is extal to the MBA – a sound knowledge panding rapidly and new high growth of accounting and finance, marketmarkets for the MBA are emerging in ing, operations, human resources China and India where there has been and strategy is crucial. But these a recent explosion in the growth of subjects are increasingly presented business schools. A range of MBA in an integrated way and in a global programmes is on offer across the context. A series of electives, delivThe MBA qualification, now over 100 years old, world, catering for a diverse and ered in addition to the core modhas retained its popularity because of its ability to well-informed student market. Toules, will allow students to specialise evolve and adapt, to keep pace with the needs of business and to maintain its relevance and value to day’s MBA students are in a posiaccording to their own interests or individuals and their employers. tion to demand value for money, chosen career path. Electives will greater variety, more flexibility, and a include subjects such as mergers quality education which is recognised and depth and rigorous inspection and assessand acquisitions, international finance and valued by employers. ment of MBA programmes by a panel of e-business. Leadership development (inindependent experts. The process involves cluding communication, people skills, enIn this highly competitive market, business the external scrutiny of faculty, curriculum, trepreneurship and ethics) is becoming a schools are striving for differentiation, focusassessment standards and student servkey part of the programme. And additional ing on their strengths and areas of expertise ices. Those institutions that meet the Aslanguage skills – rather than an optional to distinguish their programmes from the sociation’s standards (and many don’t) are extra – are likely to become a requirestandard formats. At the same time innovaawarded accreditation for a period of up to ment for more MBAs in the future. So the tion in design, delivery and marketing is an five years, after which time the process of focus of the modern MBA is on developing important activity for business schools who inspection, review and validation is repeatleaders in a global business environment – rather than teaching people to be are exploiting technology for the purposes ed. Accreditation is not to be confused with operational managers. of teaching, communication and the provirankings. Rankings and league tables of sion of additional services to customers. schools and programmes, published by the The challenges for businesses are many There is also a move towards international media, will give an indication of the relative and the search is on for people at the top alliances between higher education institupositioning of certain institutions. However, who can provide leadership, direction and tions. These arrangements help to strengthrankings do not represent the range of offerinnovation in the face of risk and uncertainen a business school’s appeal, to share ings from business schools, they are based ty. The MBA, delivered by the world’s best world class faculty, to raise the school’s on a selective range of criteria and rely on business schools, continues to provide global profile and to provide a truly global information submitted by the schools themthe solution. experience for students. selves. Rankings do not compare with the in-depth, qualitative and impartial process Of course in this climate the pressure on of accreditation. It is therefore essential to www.mbaworld.com business schools to achieve standards of check that that any business school you

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business education

managing growth when

times are touGh

© fabphoto | istockphoto.com

With many big companies likely to scale back in the face of today’s economic turmoil, the stage is set for entrepreneurial individuals and organisations to take advantage of opportunities and to grow in a less competitive environment.

G

rowing the business is the central challenge for virtually every general manager who wants to create lasting shareholder value. Whether in a listed company, small and medium enterprise, a family business, or in a rapidly growing entrepreneurial venture, the challenges entailed in managing a fast growing company including finding cash for growth, overcoming barriers to growth, and attracting and retaining people to lead and manage growth, and more – are predictable. Addressing these challenges has been a key focus of the entrepreneurship faculty at London Business School over the last several years. Their research has led to the development of captivating case studies on companies like the UK’s Innocent Drinks and Travelex, Africa’s Celtel, and others whose lessons bring to life the lessons that their entrepreneurial leaders can now share with others who follow similar paths. Consider Celtel, the African telecom powerhouse that grew from its 1996 start-up to a $3.4 billion exit in just nine short years. Today’s tough economic climate, where the options for obtaining cash have fast declined, looks munificent by comparison to the conditions in Africa when Celtel got started. “We were seen as slightly mad. Everyone (was saying) you’ll never make money in Africa – they’re all crooks and incompetents.” recalls Lord Cairns of London’s CDC Capital, one of Celtel’s early backers, all of whom earned fortunes by investing in Celtel when others feared to tread. Clearly ‘everyone’ was wrong.

John Mullins, Associate Professor of Management Practice at London Business School, has published the seminal work on managing cash for growth. His research and the techniques that he’s discovered enable leaders of fast-growing companies to figure out exactly how fast they can afford to grow without going hat-in-hand to the bank for cash. And we all know what shape the banks are in today. His work on assessing opportunities for growth, in his best-selling book, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a business Plan, is the definitive work on that subject. Professor Mullins’ London Business School colleague John Bates, Adjunct Professor of Strategic Management and Entrepreneurship, has studied recent UK successes like Innocent and Friends Reunited, as well as fast-growing companies such as Cash Crusaders in places like South Africa, where lessons can sometimes be learned much more poignantly than in more developed economies like those in Western Europe or North America. Mullins and Bates have combined the fruits of their research and case writing to create a new two-day executive education programme, Growing Your Business, offered in February 2009. Modelled after the award-winning course they run annually for the Young Presidents’ Organisation, this programme will assist entrepreneurs and executives running fast-growing businesses in managing the challenges that rapid growth always brings. Designed for entrepreneurs or executives running SME’s, family businesses, or divisions of established companies (attending solo) or their top manage-

ment teams (attending as a team), the course will send participants back to the office on the following Monday with a well-developed toolkit in hand. Growing Your Business will bring together entrepreneurs and executives from around the world to wrestle interactively with real-world case studies dealing with the challenges of high growth. Building new relationships with others on the programme will extend your global network as only London Business School does so well. And, for some of the case sessions, Mullins and Bates invite the case protagonists into the classroom, live or on video, thereby bringing the learning to life in a first-hand manner. Whether your challenge is coping with growth you’ve already got or igniting the fire that can renew your growth, this programme will send you back to the office with the tools for the job and the knowledge to deploy them on Monday. A key take-home value, in addition to the network you’ll build and the toolkit you’ll gain, is the development of a targeted, prioritised growth plan for each participant’s business. Professor John Mullins

For more information on this programme, to watch the video and to book a place visit www.londonworkouts.com/gyb. Alternatively, contact the Professional Development Team on +44 (0)207 7000 7390 or gyb@london.edu

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business support

Take your Business for an online support

road test

VentureNavigator, an online business support service seeking to improve the success rate of businesses, has gone from strength to strength since launching in November 2007. By signing up to the service you can access impartial business assessment tools, tailored feedback and advice on key business issues. riginally a collaborative project led by the University of Essex involving 6 other universities and high growth business intelligence analysts Library House, VentureNavigator helps you take a strategic look at your business, your strengths, weaknesses and what you should do next. VentureNavigator is available online 24 hours a day, so it is ideally suited to those setting out on the next stage of growth – you don’t have to leave your desk or your day job to find out whether your idea or plan for growth is based on a winning concept. The service is also supported by NESTA, Enterprise Insight, the British Library and the UK Intellectual Property Office. VentureNavigator’s growing user base of over 5,000 users range from owners and directors of growing companies, start-ups, entrepreneurs and business advisors. Doug Richard, former member of BBC’s Dragon’s Den and Chairman of Library House says: “This is an invaluable service because it doesn’t focus on a simple or narrow interpretation of what a business needs to succeed. It’s able to examine and assist with a broad range of requirements including managerial, financial, cultural and administrative factors, all of which a business needs to develop, grow and ultimately thrive.” VentureNavigator’s easy to use online assessments cover a range of sectors and issues, including Business Viability, Investment Readiness and Leadership. A series of assessments for manufacturing companies from the University of Cambridge Institute for Manufacturing help you look at all stages of developing a new product, from the design process through to the supply chain. These assessments are useful for any SME interesting in improving their processes.

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The service is not designed to be a ‘single use’ solution. Over time you can return to update your information to gain further insights and advice on your business. This is achieved by re-running assessments to see how things have improved or by using new assessments to seek support for other issues. VentureNavigator is also hoping to collect useful information about the success of UK businesses that can be used to improve policy making regarding enterprise and the contribution of new and growing businesses to the economy. Once you have completed an assessment, VentureNavigator recommends carefully chosen resources including articles, videos, podcasts and links that provide guidance on topics specific to your business, saving you the hassle of sifting through masses of printed and online materials. The materials are rated by the users so it’s easy to tell what is really useful in the real business world. The service recently added over 100 articles developed to assist creative businesses. The content, originally developed by MDA in Liverpool for its CreativeBias service, is a comprehensive source of information and advice for businesses operating in the Creative Industries and includes resources for musicians, DJs, photographers, designers and artists. You’ll find information on topics ranging from Tax issues and Market Research to Time Management and Copyright Law, plus tips for marketing using new media channels such as YouTube and MySpace. A survey of VentureNavigator users earlier this year revealed some interesting views on setting up a business. ‘Financial reward’ came a distant third with 7% of the vote, behind ‘passionate about the idea’ (41%) and ‘wanting to be your own boss’ (40%). One of the main surprises of the survey was that the challenge of protecting


business support

don’t necessarily agree with each other, so, as in the real world there are no set solutions. VentureNavigator is continually looking for new ways to improve the site – when VentureNavigator was launched in November last year it was surprising how popular the community area was. It will now become a priority area for further development based on feedback from users. Register and use for free at: www.venturenavigator.co.uk

what’s on offer?

N

ot sure if VentureNavigator has something to offer your business? Here is an example of one of its exclusive online resources prepared by Library House.

Product Diffusion Launching your product into the market at the right time is crucial to its success. Launching too far ahead of the market will mean you have no paying customers ready to buy your technology. However, launching a technology after the curve will mean you have missed the opportunity to sell to a growing market and the technology has moved on before your product has had the chance to make an impact. Your product therefore needs to launch at the right time, ideally just ahead of the curve, ie, the point at which lots of customers start buying. This means you need to understand some basic principles of market behaviour.

Intellectual Property (IP) was not cited as a barrier to success or an area where advice is sought, despite expert opinion that this is one of the fundamentals of starting a business. The service now has new resources on IP including videos on IP and Trademarks to help. Caroline Theobald, Entrepreneur in Residence at Newcastle University and MD of Bridge Club Ltd, a private company that supports early stage growth businesses in the North East, says: “I signed up to VentureNavigator after meeting Doug (Richard) at the first of his UK wide bootcamps in Newcastle. It seemed to me that any and every start-up intervention needed follow up and the opportunity to talk to experts in an impartial environment. Whilst I will always advocate face-to-face for the mutual trust it develops, an online ‘informed chat’ such as that offered by VentureNavigator is an extremely valuable tool.” The Community area of VentureNavigator, as Caroline highlights, provides an ‘informed chat’ with other VentureNavigator users. Once you’ve signed up as a member you can post questions in the Community section and receive impartial advice from a diverse group of business people. Recent questions include:

Product Diffusion: How Customers React To A New Technology Rogers’s innovation adoption curve classes adopters (ie, your potential customers) into various categories, based on the idea that certain individuals are inevitably more open to adaptation than others. These can be categorised as follows: • Innovators: Informed risk-takers • Early Adopters: Educated opinion leaders; will try out new ideas in a careful way. • Early Majority: Careful consumers; will accept on the recommendation of the early adopters. • Late majority: Sceptical consumers; will only try once the product is commonplace. • Laggards: Traditional consumers; anti-change, accepts product only when the traditional alternative has been eradicated. How This Relates To Your Business 1. Trying to convince the masses to buy your innovation overnight is futile. Building this knowledge into your market growth projections will help you to understand your customer and where your product is likely to sit in the market. 2. If you can launch your product into a dynamic market you will find it easier to sell as opposed to selling into a declining market in which you and your competitors fight for fewer remaining customers. 3. Venture Capitalists will look for a product that has huge market growth potential to balance the risk they ensue by investing in your start-up.

• Does anyone have any experience of importing from China? • Entrepreneurs - do you own one business or several? • Enterprise Investment Scheme (EIS). Has anyone had any experience with this? • Any ideas on a better way to share rewards with knowledge workers.. other than time? No one is paid for answering questions so the answers truly are impartial – some questions receive up to five different answers which

www.venturenavigator.co.uk sustaininggrowth | 21


cash flow

Surviving the

CREDIT CRUNCH T Nic Beishon, Head of Commercial Information Solutions, Equifax advises businesses on how to take control as the credit crunch bites

he impact of the credit crisis on the global economy is continuing to play out. Amidst this turbulence, achieving stability, and even growth, for businesses of every size is becoming significantly more challenging, with current economic data and news headlines providing a pretty bleak outlook. Indeed, the latest information from Equifax supports all the other reports that conditions are tough. In Quarter 2, we reported a significant rise in business failures across all sectors with total failures rising in July 2008 by 29% compared to the same month last year.

Fuel costs hit Transport & Communications In July the Transport and Communication sector was the worst hit, seeing a substantial 59% year on year increase in business failures. With the price of fuel spiralling ever higher many businesses are starting to feel the pinch as overheads continue to soar. The Construction sector also saw a high year on year increase at 57%. This provides clear signs that the property downturn is having the expected impact on the building sector as a whole. The Manufacturing sector saw a 39% rise in failures in July 2008 compared to July 2007. This comes as no great shock following the recent Office for National Statistics (ONS)* figures on manufacturing output which decreased by 0.8% in the second quarter of 2008 compared with the first quarter. *Figures from the Office for National Statistics, published 5 August 2008 High Street Spending Slow Down The slow down in high street spending contributed to a 33% rise in business failures within the Retail sector. Low consumer confidence and less spending probably contributed to this rise. And in the Wholesale sector, failures rose by 26% year on year for the month of July with the Services sector, representing organisations such as financial services, hotel and catering, seeing the smallest increase year on year, at just 12%. The ever decreasing circle For any business wanting to achieve growth in these difficult times, it’s crucial to be aware of these figures. Because, as insolvencies rise, the risk of bad debt increases, plus companies take longer to pay their bills. It’s an ever-decreasing circle and it’s one to ensure your business doesn’t get caught in, especially if you have ambitions for growth – not just survival.

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So what needs to be done to protect a business from the threats of late payment, bad debt and fraud as well as facilitate growth? Tackling late payment A recent survey carried out by the Forum of Private Business (FPB) revealed that small businesses are struggling to cope with an increase in poor payment practices. According to the research, 88% of respondents said that their bigger customers are not paying them within contractually-agreed periods. Furthermore, as the credit crunch shows no signs of abating, 72% believe this is having a ‘serious’ or ‘very serious’ impact on their businesses. Organisations must not, therefore, take their eye off the cash flow ball, as the knock-on effects from customers’ or suppliers’ problems could have a serious impact. However, by looking at their payment systems and how well cash is flowing through, from their credit approval systems, invoicing, purchasing and credit collection, businesses should be able to help themselves through the challenging times ahead. Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income. Consideration should also be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it might be appropriate to obtain up front deposits and scheduled payments. But, of course, it’s important to review this practise to obtain a greater proportion of payments faster to improve liquidity. Starting with the Basics But even before you are into the business of negotiating payment terms, you need to make sure you want to do business with the potential


© Nigel Monckton | Dreamstime.com

cash flow customer or supplier. And companies can avoid the risk of late payment or bad debt by applying some basic credit risk management rules. The fact is that rigorous credit checks, that can be done through the Equifax Commercial database comprised of records on all Companies House registered companies and 3 million non-limited businesses, are the crucial first steps to help businesses of all sizes protect their cash flow and avoid bad debt. And this needs to go further than just checking customers. Key suppliers need to be checked too. Reviewing our July Business Failures Report we saw a 5.8% increase in the number of failed businesses with a zero credit limit. Any company checking a customer or supplier and discovering a zero rating, has a clear choice of whether to do business with that organisation and, if so, on what terms. In the case of customers with a zero rating, an organisation could avoid bad debt by changing their payment terms – probably to upfront payment. And for suppliers, if a zero rating is flagged up this gives the buying company the opportunity to discuss the situation or find an alternative provider in order to secure ongoing supply. On-going monitoring Credit checking shouldn’t start and end at the beginning of a new relationship. On-going monitoring is crucial. Of course, the best way to find out how customers and suppliers are doing is to regularly talk to them. But if dealing in volume, this isn’t going to be feasible and that’s where business monitoring services, such as those available from Equifax, can play a valuable role. The Equifax Portfolio Monitoring Service offers an online system designed to help businesses stay up-to-date with the changes affecting their customers’ financial status. An email alert system allows firms to take control and effectively manage their customer base by keeping an eye on changes in company directors, credit limits, CCJs or registered address. On-going monitoring of customers and suppliers also gives businesses the insight to be able to have the right discussions to determine long term mutual benefits. For example, suppliers who are likely to be least affected by the credit crunch can be contacted to negotiate extended payment terms. And key customers who have a good financial record can be contacted in order to try to shorten their payment terms to a business. Avoid the risks when trading online One sector that needs to be particularly focused on maintaining careful monitoring of customers is those businesses that trade online. Trading over the internet, for direct transactions or order processing, has very low margins, offering a cost-effective alternative to the traditional commercial environment. And many businesses are embracing the benefits of the internet. However, driving sales online may make firms vulnerable to issues such as corporate identity and credit card fraud. In addition, e-transactions reduce the need for personal contact, making it harder to sense when a customer might be going through difficult times.

How does your business look to others? As well as keeping a close eye on what customers and suppliers are doing, it’s also wise for businesses to understand how they look to those potential customers and suppliers. This is not only crucial when trying to secure new suppliers or win new customers. It is also vital to ensure that their own business doesn’t become victim to fraud. A good place to start, therefore, is for an organisation to obtain a copy of their own Equifax Business Report. Don’t become a victim It is important to monitor your own report to make sure your business’s identity hasn’t been stolen by fraudsters. Figures from KPMG revealed that government and businesses lost £594 million to fraud in the first half of 2007, almost three times the figure recorded in the six months previously. And as the financial pressure on business continues, the risks of organisations falling victim to corporate fraud will escalate. There are a number of threats to businesses, including copy cat fraud or company hi-jacking, long firm fraud and phoenix companies. But there are some key practical steps that can be taken to protect an organisation from these threats including: 1. Check the current trading address of customers and suppliers against the Equifax database 2. Identify business partners and directors 3. Confirm fax and telephone numbers 4. Check for any connections to previous companies with similar or identical names 5. Are you sure they are who they say they are? 6. Can they provide trade or bank references? 7. Are all references truly independent? 8. Ask for original headed company paper 9. Never accept hand written order forms or faxes 10. Finally, don’t just assume the information you are provided by a business is correct – always double check using the tools available and follow up references Gain the power Information is knowledge and knowledge is definitely power in the current economic climate where it’s important to keep good customers and suppliers on side. However it is even better to be aware of those in a financially strong position so as to target activity for higher levels of trading to increase profit margins. There may be a temptation to cut spending on some of the basic processes and disciplines that would normally be part of ‘business as usual’ activity. And there may be pressure to squeeze suppliers for longer payment periods in an attempt to improve cash flow. But cutting back on checks could be a real false economy and squeezing suppliers is a blinkered approach and not the only answer. Only few winners will emerge if this course of action is taken. Companies need to be more focused on gaining improved visibility and control of cash as well as work intelligently across the supply chain to create win-win opportunities that reduce the cash cycle for all participants. For further information please contact Equifax on 0845 603 3000 or visit the website at www.equifax.co.uk

Nic has 20 years experience in the credit and business information sector. With a comprehensive understanding of how quality data plays an integral part of an effective risk management strategy, he has extensive knowledge of how to reduce the risk of fraud and bad debt for all sizes and types of organisation.

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More informed every step of the way When it comes to managing credit risk, the more you know about the people and businesses that form your financial landscape, the more profitable your relationships can be.

Our consumer and commercial solutions make navigating potential risk easier by delivering the intelligence you need, clearly and accurately. So, before you take another step, give us a call.

Equifax is a global leader in turning credit information into intelligence. Through our passion for innovation and focus on our customers, we are a committed and trusted provider of credit risk solutions that empower your business.

Call 0845 603 6772 or email credit.risk@equifax.com to find out what makes us the first choice as your credit risk partner, quoting ref COR1119AD.

www.equifax.co.uk


icc arbitration

ICC Arbitration Enabling Globalization

ICC Arbitration is the most trusted system of commercial arbitration in the world. The ICC International Court of Arbitration has received more than 15,500 cases since its founding in 1923. By Jason Fry, Secretary General, ICC International Court of Arbitration.

T

he continued growth in international trade and investment has been the main driver of the global economy for many years now. Effective dispute resolution is invaluable to this ongoing process of greater economic interdependence and globalization.

The survey also showed business prefers international arbitration and amicable dispute resolution procedure as an alternative to transnational litigation to resolve these international disputes. Arbitration institutions pointed to savings of time and costs and safeguarding business relationships as the main reasons for choosing arbitration over other methods.

Recent research has indicated that when contracts, especially between partners from different cultures, are inevitably exposed to strain, misunderstanding and even flagrant abuse, ICC arbitration is the preferred method to for resolving these disputes.

What is more, the corporations polled in the PwC survey said the reputation of the arbitration institution, and the convenience of having the case administered by a third party, are the main reasons for opting for this method.

A study published this year by consultancy PricewaterhouseCoopers, “International Arbitration: Corporate attitudes and practices” confirms this fact. The report highlights that arbitration is the method of choice for crossborder transactions and disputes relating to foreign direct investment.

A large number of corporations in the survey – 45% in fact – said they preferred to submit their disputes to ICC. ICC’s stature as the leader in international arbitration has a long history - dating back to its founding in 1919, when the International of Chamber of Commerce was created to

combat insularity and protectionism in world trade. From the very beginning, ICC saw dispute resolution as an indispensable part of the services it was to provide. Today, ICC maintains its large leadership margin by offering enterprises across the world an effective means to restore order in their commercial relations, so that trade can be resumed under normal conditions as quickly as possible. ICC arbitration is inspired today, as it was in the beginning, by three important qualities: neutrality, flexibility, and predictability. These qualities provide a framework within which parties can shape proceedings in accordance with their needs, whilst being assured of appropriate control when required. Neutrality is ensured by rules defining the procedure. These are drawn up by drafting committees made up of ICC members from

sustaininggrowth | 25


icc arbitration many different countries around the world, who are guided by the need to transcend cultural differences. The rules are not oriented towards either common law or civil law, but have a universal application. Flexibility allows parties to determine key aspects of the proceedings. This could be the place of arbitration, the rules used to resolve the dispute, the language in which proceedings are conducted, the manner in which evidence is presented, the identity of arbitrators who decide the dispute, and even the time limits. Predictability is achieved through fallback measures when parties are unable to agree. It is also achieved through the coherence in the administration of cases, objective criteria for determining costs, and the binding and final nature of awards rendered.

tion is currently taking place in Central and Eastern Europe and in Latin America, where the number of cases filed with the court has effectively doubled in the past two decades. At the same time, the number of parties from each of these regions has tripled for Central and Eastern Europe and grown 10-fold for Latin America and the Caribbean over the same time frame. ICC continues to extend the global reach of its dispute settlement activities. In recognition of the growing importance of the Asia-Pacific region, the ICC Court and the Secretariat of the ICC Court will open new offices in Hong Kong and Singapore. A branch of the Secretariat of the Court will be located in Hong Kong. A liaison office dedicated to ICC dispute resolution services will debut in Singapore.

Businesses can choose one or several ICC dispute resolution services tailored to their circumstances. For example, for urgent measures, arbitration can be combined with a pre-arbitral referee procedure; an expert’s opinion can be obtained on a point at issue; or to encourage a settlement by mutual agreement, an amicable dispute resolution procedure can be used. What sets ICC apart from other arbitration options is the ICC Court of Arbitration. The Court is a unique body, not only in its composition, but in the way it operates. The diversity of the members of the Court and its Secretariat – professional, geographical, and cultural – is what gives ICC arbitration its unparalleled scope. The most eloquent proof of the wide appeal of ICC arbitration today lies in the ever-widening global distribution of its users: last year, parties to the cases filed with ICC’s Court of Arbitration came from 126 different countries and territories, the highest ever, from economies of all types and at all stages of development. Today, the Court is used for international disputes of all kinds, from the simplest sales agreement to the most complex build-operate-transfer arrangement or shareholding structure. ICC procedures are also used to resolve investment-related disputes through bilateral investment treaties. The most striking expansion of ICC arbitra-

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As globalization continues to evolve, ICC has its ear to the ground, and is able to mobilize these resources to ensure international arbitration remains a highly efficient and effective method of dispute resolution in tune with the times - today and tomorrow. ICC Hearing Centre opens for business Members of the international legal community gathered at a special event in October to celebrate the opening of the ICC Hearing Centre. Conveniently located in the centre of Paris, the ICC Hearing Centre is dedicated to arbitration hearings and other forms of commercial dispute resolution. It is the first such facility in Paris and can be used for disputes arising anywhere in the world. The 800 square meter Hearing Centre has opened in response to growing demand from business and legal communities. Last year, the number of new cases filed with the ICC International Court of Arbitration hit a record high of 599. “The increasing pace of globalization in recent years has naturally led to a growing number of business disputes worldwide,” said Jason Fry, Secretary General of the ICC International Court of Arbitration. “ICC has drawn on its many years of experience monitoring arbitration and mediations proceedings to create the custom-designed Hearing Centre,” he added.

Already, the Court has regional representatives serving as contact points and coordinating outreach in the Africa, the Americas, the Middle East and the United Kingdom. Alongside its dispute resolution activities, ICC also has a policy-making body that remains alert to legal and commercial trends in a changing economy. This corpus of 450 members around the world pools ideas, and studies practical legal and procedural issues relating to international dispute resolution. It is this dual capability that gives ICC arbitration a competitive edge: ICC’s unique position as the voice of enterprises worldwide due to its presence in 130 countries. ICC’s global scope means ICC has a special understanding of business needs, and a truly global perspective on trading issues, with direct experience of business practices.

The Hearing Centre is specially designed to meet practitioner’s needs and conduct hearings in optimal conditions. It comprises 10 soundproofed and secured rooms fully equipped with microphones, Internet connections, air conditioning, TV screens and projection systems. The rooms vary in size from 23 square meters to 110 square meters, with seating capacity up to 40 people. The largest rooms are also equipped with translation booths. The ICC Hearing Centre is available for any kind of institutional or ad hoc arbitration hearings as well as for the conduct of amicable dispute resolution (ADR) procedures. It may be reserved for hearings that use the ICC Rules of Arbitration and ICC ADR Rules, and those that do not.

Please visit www.icchearingcentre.org to review rates or to make a reservation. For more information about ICC’s Dispute Resolution Services, please visit www.iccwbo.org/court


conflict resolution

© Kzenon | istockphoto.com

Conflict Management - Tips to finding

Win Win situations

Imagine you have been asked to find positive solutions to difficulties between people. You may have been invited to solve deep-seated conflicts, ongoing arguments or fundamental differences. Such situations are often the result of long-term patterns, so there is not a quick fix...

T

he best route is to go for a ‘win-win’ solution, but this takes creativity and patience. ‘Win-lose’ creates ongoing problems; whilst ‘lose-lose’ spells trouble for everybody.

You can make sure the conditions are in place for finding a ‘win-win’ solution. Two conditions must be in place before it is possible to solve deep differences. a) People must want to solve the conflict. b) People must be prepared to work hard

to - as far as possible - find ‘win-wins’. Timing is everything. Many conflicts only get resolved when the parties are exhausted. For example, couples feel wary from fighting a divorce, terrorists became too old or tired to fight, employers and strikers are exhausted after an industrial dispute. People get fed-up with the negative energy. They are then more willing to sit down and find positive solutions. Before getting involved in any conflict resolution, it is important to ask the following questions:

• Are people ready to work together? Do they really want to solve the problem? (Remember, some people are addicted to conflict.)

• Are they prepared to co-operate to find as far as possible - a ‘win-win’ solution? How high is their motivation to do this on a scale 0 - 10? (7+ is necessary to produce success.)

• Are people ready to focus on how things can be better in the future, rather than simply argue about the past? Providing people want to solve the problem, it is then possible to move onto the next step. You can clarify what each party wants and build on common ground – before then going onto the differences.

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conflict resolution Start by clarifying what each person or party wants. Focus on what people have in common - rather than the differences. Some may try to draw you into arguing about the differences, but return to the similarities. You will have lots of time later to explore the differences. Mediators, for example, create a safe environment in which people feel at ease. They listen to what each person perceives as the challenge. They then aim to build a common agenda. Doing this calls for following certain rules. It is important: a) To show respect and recognise the authenticity of each person’s feelings. Everybody must feel that they have been heard.

Party ‘A’ wants: Party ‘B’ wants: The common ground. The common goals – the real results - that everybody wants to achieve are: The differences. The potential different things that people want are: The things we can do to build on the common ground and get some quick successes are: Build on what people have in common. Get some early successes, create confidence and build trust. Then go onto the next step.

If tempers rise, take a break and have a cooling-off period. Return to the beginning and establish if people still want to solve the problem. If so, resume the exploration. Keep going until they find, as far as possible, a ‘win-win’ solution. Again, build on the good work by getting an early success. Encourage people: a) To set clear goals; b) To make clear contracts about each person’s contribution; c) To get a concrete result. Success breeds success and mutual confidence. People can then move onto the next topic where they want to find a ‘win-win’ solution. Let return to the situation where you may have be asked to help with a difficult situation. Focus on one specific difference and try completing the following sentences.

© Abimages | Dreamstime.com

“Focus on what people have in common rather than the differences”

b) To encourage people to look to the future, rather than fight about the past.

You can then keep working until you find – as far as possible – ‘win-win’ solutions.

c) To get people to be super specific about the desired outcome. Ask people: “What are the real results you want to achieve?”

You can now move onto the differences. Start by establishing clarity. Looking at each difference in turn, clarify what each person/party wants. Then use the 5 C model for creative problem-solving. Focus on the challenges, choices, consequences, creative solutions and conclusions. (You can find an adaptation of this in the piece called 3 tips for facilitating a mentoring session.) Stay calm and invite people to use their creativity. When it comes to the sticking points, keep asking:

d) To encourage the parties to put the challenge in positive terms. For example: “How can the two departments work together to achieve success?” Rather than: “How can they stop fighting?” e) To build on the common ground, get some quick success and begin to build confidence. You can use the following framework to map out what people want, what they have in common and the potential differences.

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How can we find a ‘win-win’ solution? Be patient. People are incredibly creative - so keep asking this question until they solve the problem. (If appropriate, you can share possible ideas, but it is vital to show that you respect each person’s agenda.)

The specific topic where people have differences is: The specific things that party ‘A’ wants are: The specific things that party ‘B’ wants are: The potential options that could be – as far as possible – a ‘win-win’ solution are: Sounds easy in theory - but it is obviously much harder in daily life. So how do painful problems get solved? There are several answers. Some don’t - people go on fighting. Some do because people lose interest - they get tired, accept the differences or move-on with their lives. Some do because people work hard at solving the problem. Focus on situations that fall into the latter category. Equipping people to find ‘win-win’ solutions can provide them with a tool for life. Further information about this topic and its author, Mike Pegg, can be found at www.thestrengthsacademy.com


Greening your business with

guidance from WWF-UK Business and the natural World – connected If everyone in the world was to consume natural resources and generate CO2 at the rate we do in the UK and much of Europe, we’d need three planets to support us. WWF works with international businesses, governments and consumers to drive us from a threeplanet lifestyle to what we call a One Planet Future – where our well-being prospers within the Earth’s ecological limits. We are all increasingly recognising the ways in which business depends upon the natural world as well as the resource and climate constraints that are upon us. Business these days needs to be done in a way that’s aligned with environmental stewardship and this offers a wide range of business opportunities.

Greening is good for business As well as the advantages won through resource and energy efficiency, there are the reputational wins to be had. Consumers increasingly want to know the goods and services they buy are produced with environmental considerations in mind. Climate-friendly brands and green products are becoming more and more attractive. WWF working with industry WWF engages businesses in a variety of ways in pursuit of systems change and economic reform in line with a One Planet Future. We work with companies round the table and in partnership with the likes of HSBC and M&S on various sustainability issues while raising vital funds for conservation programmes around the globe. The author, Dax Lovegrove, is Head of Business & Industry Relations at WWF-UK

For further guidance, please contact our Business & Industry Unit on 01483 412 395/4 and see wwf.org.uk/businessguidance; register for our One Planet Leaders Course – www.panda.org/business/training; or view WWF-UK’s One Planet Future Footprint Calculator wwf.org.uk/footprint


information technology

T

he recession, assuming we can now call it that, is going to mean a lot of changes for business. There will be slowdowns, there will be cutbacks and there will be a general tightening. Some things might appear to be a good target for cuts and IT is one of them. At Cisco we believe this would be a mistake; viewed strategically as an asset rather than simply as a cost, a good implementation of IT should increase productivity rather than act as a drain on finances. That’s OK for Cisco to say, a lot of people will retort, but we’re used to dealing with people in massive enterprises who can hive off an entire department for feasibility studies and testing of any new technology that can take months out to do it. To an extent this is true; Cisco has been a leading supplier to the enterprise size of company for a long time, and nobody should shy away from this sort of pedigree. Advances and economies of scale, though, mean there is now a mutually-beneficial opportunity to take the sort of technology and productivity benefits to the small to medium enterprise. We know - it can look scary, but bear with us. Understandably there are people who wonder whether a classic enterprise supplier will understand the smaller enterprise. To begin with, nobody actually identifies themselves as an SME; they’re a lawyer, they’re a small charity, they’re a web developer, they’re a manufacturing organisation. The one thing all these categories share in common is that they share next to nothing in common. They’re typically cash-strapped (we all know that feeling now but a lot of smaller businesses were already living hand-to-mouth before the crunch started) but they do have the advantage of being able to move quickly when they make a decision - if they want a new network in the place it’s not a matter of months before it’s in, it might be next week. This is why we approach the market through

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MAKING THE MOST a network of dedicated resellers - there’s no substitute for being near a customer and understanding their business intimately. This is most important for the smaller business, which might not have a dedicated IT department at all. So far, so self-evident to the customer. The question is what can be achieved through the right deployment of networking technology. There are actually numerous benefits that can be delivered straight to a company that buys the right technology alongside the right advice. Networking technology does a number of things. It extends the reach of your business by connecting people in real time. If you’ve ever suspected a sale has been lost because someone has had to go and check stock levels or a prospect’s credit rating when they get back to the office, you’ll know how much this will improve your productivity. Customer service will improve - a field support engineer will be able to check the availability of parts automatically, or if you’re in technical support they may be able to diagnose and cure a customer’s problem without leaving their desk. There’s plenty more. Perhaps security is more of an issue to you than simply install-

ing the latest antivirus package on every PC. So a set of network equipment with its own firewalls and other security built in would be useful, particularly if they are built to watch for unusual behaviour on your system as well as known risks. Perhaps your concern is for your premises when you’re not there. Cisco offers a range of fully-featured webcams which will monitor them for you and will feed the images in real time to the Internet - so you can log on and have a glance at your office when you need to as long as you’re near a web browser (that’s correct, you can check what’s happening in your office by using your phone if it’s able to receive Internet images). The fact that some of these cameras are available for under £100 is all to the good. The point is that as you can see it’s not expensive, but also none of this is difficult. It can be complicated, by all means, but that’s why we recommend businesses work with our partners to achieve this. It needs the right skill set to implement the right ‘solution’ as we call it in the industry - and identifying a solution involves diagnosing the business problem that needs solving in the first place. This is when getting the right partner in place is as important as getting the right hardware


© enot-poloskun | istockphoto.com

information technology

OF YOUR IT ASSETS supplier, and here you can help yourself by identifying what sort of customer you might be. Every customer is different inevitably but we divide them into three broad categories. First there’s the basic user - the solid business that doesn’t want the latest and the best but who’ll take IT equipment in reaction to a problem. The second sort is the ‘open to guidance’ customer - who wants ways to improve the business through technology and knows it’s achievable but needs some help, and finally the ‘elite’ early adopter, who values technology and understands that you can build a company’s infrastructure for growth. If you find you’re at the basic level you might want to try to build yourself up to an ‘open to guidance’ level. Nobody’s going to hit you with the hard sell, but specifying your technology reactively can be a mistake. If you buy items only to address an issue with your existing infrastructure it’s very easy to find another issue crops up within months, and if you’d had the right guidance you’d be insulated against it. There are inevitable caveats along the way. The early adopter, about whom we’ve already talked, might find it tempting to buy something new because it’s new rather than

because it’s going to deliver. The basic user is likely to be too conservative and miss something on which the competition will pick up or buy something because they’ve heard it’s working for another business, little suspecting that it works for someone else because it’s great for a service company when you’re in manufacturing. This is why the network of independent resellers - the IT industry calls them Value Added Resellers, or VARs - is so much part of any competent supplier’s commitment to smaller customers. It’s this sort of partnership - between the customer and the reseller - that allows IT to become more than just a cost centre. Let’s take an example. Your growing business (and they do grow, even now) needs an extra two people to handle the workload but you don’t have the desk space. Basic business practice suggests checking prices. The cost of a desk is a lot more than the office space - it’s the extra heat and light, the load on your internal network, the cost of the calls they make - it can run to thousands per year, more if you have to move office to accommodate them. So you decide to opt for flexible working. Now, there’s a lot of managerial adjustment to be made in managing people you don’t

actually see, it’s sold as far simpler than it is, but that’s a debate from elsewhere. Let’s say you’re over those hurdles and ready for the technology. You need a robust connection, something secure that will allow your employee to connect as if they were in the same room as you. You need software to back it up and you need the installation. It helps, naturally enough, if the box you need to buy offers change from £200. Done right it’s a no-brainer. Look again, though, at the mistakes some people have made without the right advice. Take the warehousing company that opted for cheap computers and networking equipment - which can be great in a cushy office but in a more physically demanding environment you need something rugged. Or the manufacturer that bought enough equipment to connect all of her employees, forgetting that the warehousing staff and assembly line people didn’t actually have devices to connect. Those are pretty blatant examples. It gets more subtle of course but the essence remains the same. There are huge, huge benefits to be gained from technologies and suppliers - Cisco being a good example that would traditionally have been regarded as specialising in the big business market. We still do to an extent, but things are loosening up. We’re able to offer our benefits to customers of much smaller concerns than we’d done before. We’ve built a division of people up to address this market, which is new to us, and we and our products are now aligned to the start-up and SME’s needs. We have new product ranges to address this market, including the Linksys products we acquired a few years ago and a new range including small business and small business pro products for the higher fliers. It should be only a matter of time before many people find their technology starts paying its way rather than costing money.

Tunji Akintokun Head of Small Business, Europe

For more information on Cisco Small Business solutions visit www.cisco.com/smallbusiness

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fx trading

Increased regulatory control over FX markets is reshaping Switzerland’s major FX player lineup, pumping up investor expectations and fostering more competitive trading conditions. The performers of this new landscape will be those brokers able to offer clients the highest combination of security, customer support, technological innovation, industry insight and trading options.

BANKING on the move... T

he Swiss banking sector is internationally recognized as one of the most stable and secure in the world. Its regulatory demands are also some of the most rigorous in existence presided over by the Swiss Federal Banking Commission (SFBC). In a recent drive to regulate the upsurge of FX brokerage firms in the Swiss market, the SFBC issued new legislation to increase regulatory oversight, bringing higher security requirements, organizational standards, and better protection for investors, all in an attempt to increase the level of consumer confidence in the Swiss financial environment. This progressive operation by the SFBC necessitates every Swiss FX dealer to comply with Swiss Banking Law requirements – in short, to obtain a banking license. Measures taken by the SFBC will have an impact as to the number of brokerage firms that can remain viably competitive. The trend towards mergers and acquisitions will likely rise as will the probability of the relocating of activities outside of Switzerland among industry players apprehensive about meeting stringent SFBC requirements, which include higher capital share requirements,

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better organizational quality management, and optimal information security criteria. The remaining few will capitalize from this professionalization or filtration of the industry to produce an intrepid lineup of major players and instigators, providing a more wholesome trading environment and increasing worldwide investor confidence in the Swiss market at the same time. One such player, well-grounded both fiscally and structurally is M I G Investments, a brokerage firm headquartered in Neuchâtel, Switzerland, one of the few firms which has been preparing for the transition towards obtaining a banking license well ahead of the game. As far back as March 2007, Board members, engaged in dialogue about the company’s future expansion, had already embraced the idea of applying for a banking license as part of the company’s natural growth plan. Wissam Mansour, CEO of M I G Investments discloses: “Since our company’s inception in 2003, our vision has always been to become the preferred FX broker in the industry. In order to achieve this, we blueprinted the industry on five-year plans, including everything from evolutions in our FX product range and new financial services, research and development, innovation in technology, and finally, security and support requirements. Many of


fx trading

tools. Aggressive trading spreads start as low as 1 pip on four currency pairs for institutional clients, and with the recent introduction of new pairs, clients can now trade on a total of 70 different currency pairings. Responding to the demands of new markets and performing currencies, M I G clients benefit from continually revised conditions according to the ebbs and flows of the market – More trading advantages in the pipeline are being rolled-out almost on a weekly basis as M I G takes steps to prepare for its conversion to a bank. The company’s immediate goal is to keep delivering the most comprehensive and competitive FX solutions to traders, while building out other products and offerings within the financial services industry. M I G is also investing heavily in infrastructure, technology, research, its people and processes, and is taking proactive measures partly in response to recent legislation. It has built up numerous arms of its company, and raised the company share capital to CHF 10 Mio and plans to increase this amount in the near future. Driven by substantial growth with its retail and institutional clientele base, M I G has strengthened its corporate expertise with the appointment of experienced board members in the banking sector, and new managers to establish the framework for additional financial services to come. Total employee numbers have doubled within a year to cover support issues from IT and sales, to legal and compliance.

© Sudoku | Dreamstime.com

these goals are inherent to the demands by the SFBC. In many ways, obtaining a banking license was a natural growth process for us.” At the outset, M I G Investments has built a substantial client base in central Europe and the Middle-East based on their ability to package extremely competitive trading conditions with personalized services, offering the FX client a “boutique” type service, specialized in providing the optimal trading environment through a range of world class services. The company has since experienced growth in numerous geographical regions, stretching from East to West. Its clientele base in North America has a large and growing clientele; and business in the Far-East has rapidly expanded in the last 12 months. The company largely attributes this to its strict code of ethics and integrity in professional standards and its ability to place the right people in the right environment. The company is now an ISO certified organization for quality management (ISO 9001) and information technology security (ISO 27001), reinforcing its ability to provide a consummate and secure service to its customers. “One of MIG’s credos is to instill a level of confidence in its customers and to reassure them they are receiving the best trading conditions at all times. Client focus is at the heart of everything we do”, says Mansour. Practicing what they preach, the company ensures clients receive an unrivaled combination of trading spreads and trading

The company plans to bolster its appeal to FX traders as well as to extend its product range across numerous other asset classes to include commodities, equities and CFD’s. One of the ways it plans to attract a greater market share is through unique, value-adding benefits provided by its world-class research department. The research team is comprised of some of the industry’s leading analysts, including Richard Morrish, head of the department and one of London city’s leading exponents. And, Bill Hubard, Chief Economist, and former host on CNBC and Bloomberg TV; known in financial circles as the Prophet of Perrymead. At a time of uncertainty for many FX firms in Switzerland, and for the traders that depend on their services everywhere, M I G went on the offensive with a bold marketing campaign to assert its constancy in the industry. Bearing the slogan Confidence is Capital, the company’s new ad campaign aims to communicate integrity and trust by underscoring its unique offering to investors as specialists in the FX field, while paving the way for the addition of new financial services. Traders looking for a synergy between highly competitive trading conditions and dependability in a brokerage only need to reflect upon the fact that M I G generates between 30-40 billion US$ worth of trading volume per month, or roughly 2 billion US$ per day, ranking it as a major player in the industry in just over 5 years. The company’s credentials with the SFBC are sound, providing better assurances of performance and longevity. M I G expects to be granted the banking license in 2009. Find out more on www.migfx.com

sustaininggrowth | 35


fx trading

Understanding

LEVERAGE

“Choose wisely Dr Jones, choose wisely”

Walter Donovan: “We’re only one step away” Indiana Jones: “That’s usually when the ground falls out from beneath your feet” ‘Indiana Jones and the Last Crusade’ (1989)

I

doubt if Indy ever had much time for trading the financial markets. Those of us that do are also driven by discovering potential treasures, lured by the lustre of some financial Holy Grail. Although the risks we face may not be quite as apparent as a room full of snakes or the odd angel of death, we must be aware of the choices we face and the risk each choice entails. We must look to ‘Choose Wisely’. I often lecture new entrants to the FX market and I occasionally present the following situation to delegates. Imagine there are two rooms and in each room there is a pile of gold. In room one, there are 200 gold ingots stacked to the roof, whilst a more modest 20 gold ingots are piled at the end of the second. Both piles of gold are accessible and have been won in the past. So which room would you choose? The majority will, naturally, pick the one with the largest stack of gold because it has been achieved before and there is more of it. This is human nature and market nature of greed. So is greed bad? The easy answer is no! Greed is a natural part of market functionality. The expression of fear and greed is often used in financial markets and as such is a well know and accepted part of the system. The fear element is the controlling point of greed and it is this part which does not get shown until the greed part has been applied. So we return to the two rooms. You are poised at the entrance of room one but before you enter we will give you the catch to this room over room two. The floors of both rooms are shrouded in darkness and each is littered with holes. In room one, there are two hundred holes, each big enough for you to fall down, thus ending your chances of reaching the Gold bars. However, in room two, there are just twenty holes, again of similar size, that stand between you and your goal. So which would you like to enter now? Normally, most people switch rooms at this point because the dangers have been explained. The brave, the foolhardy and the experienced tend to stay with room

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one. The last comment is very important because the brave will always take the risk, the foolhardy just fail to see the risk and the experienced understand the risk. This is a part that we will return to later. What the two rooms represent is leverage. Leverage is the key to quick returns and depth of markets. Leverage is used by all institutions whether they are banks, hedge funds or private individuals. So what is leverage? This is the amount of trading size you can apply using margin. For example in FX, using a ‘leverage’ of 200:1, you can take a $20m position whilst having just $100,000 of trading capital. This is, naturally, a way of creating large returns, quickly, from a relatively small capital base. It is also a cause of financial disaster for many a trader, be they experienced or market newcomers. Though the pile of gold at the end of the room is large so, commensurately, is the risk. Leverage is probably the most overlooked aspect to financial markets, certainly if we look at the subprime disaster and Bear Stearns which triggered the first rumblings in the crisis leverage was one of the issues. It is possible to obtain amazing degrees of leverage in all markets but these are very carefully set in recognised exchanges like futures. It was an over-leveraged position in a non-transparent market that became the nightmare for Bear Stearns because with leverage an all important aspect is transparency in a market. In markets which have limited liquidity (depth of market) and limited transparency to pricing, leverage in large amounts is very dangerous. Yet Bear Stearns on a limited degree of leverage managed to get themselves into vast amounts of difficulty because of this aspect to leverage. Most leverage is set against what one would expect as normal degrees of daily pricing action. So for example the bond markets normally would have a leverage rate in futures of 1.5% to 2% of value movement as a margin rate or leverage of 75:1 or 50:1. Even though these are high leverage rates the majority of traders would never take positions that would place them on 100% margin. In the FX market


fx trading

Leverage removes more traders in financial markets on a daily basis than anything else - especially in the current times of high volatility in all asset classes

it is common to have leverage rates of 200:1 in small accounts and 100:1 in large accounts. Whilst it is attractive to trade with this degree of leverage it only takes a 0.5% move in price for small accounts and a 1% move in price for the large accounts to lose everything. When you look at the current FX market even in the majors the markets are seeing moves of 0.5% in a day as normal and 1% to 3% in carry trades as normal too. Thus the risks are exceptionally high in employing such leverage, unless the trader is exceptionally good and understands the entire risk. The application of leverage is determined by the type of trading employed. Most trading is intraday trading in most markets, thus employing high leverage to this kind of trading is not so dangerous, so long as the trader understands risk reward. I, personally use a 3:1 reward:risk ratio in all trading, whether day or positional. In easy terms, my expected returns must be at least 3 times greater than the risk I am taking. Under this framework, if a trader wishes to make $6,000 then he must not be expecting to lose more than $2,000 any lower than this ratio and it has become gambling. When it is down to 1:1, it is simply casino trading, red and black. So what level of leverage is sensible? Most professional day traders tend to use a maximum 20:1 leverage on intraday trading (or 5% margin) whilst positional traders tend to use a 5:1 or 10:1 leverage, depending on their aggressiveness. Most hedge funds trade on between 3:1 and 5:1 and banks on a lower scale than this as capital preservation is critical. So why use lower levels of leverage? The easy answer to this is that it means that when a trade goes wrong the damage incurred is not as brutal as it would be if high leverage had been employed. Conversely the profits are also smaller. However, the fact of trading is most people win 75% of all their trades but it is the employment of high leverage which takes them out when the trade goes wrong. This is where we started when we looked at entering a room with either 200 or 20 all consuming holes. With two hundred holes in the room you are more likely to fall down one compared to the room with twenty, even if you are Indiana Jones!

© mark stay| istockphoto.com

We explained that there would be three kinds of traders that would stay at the door of room one, the brave, the foolhardy and the experienced. The brave sees the risks but is prepared to keep trying regardless of the higher risk. The foolhardy just do not understand the risk, period. The experienced have refined their skills in markets from lower levels of leverage and take the occasional foray into this room because they are more certain of the outcome and will have protected the downside risk. It is in our experience better to seek smaller rewards and build one’s success, rather than gambling in a room where the chances of failure are high. This will help refine your skills over time and with a degree of safety, so that one day you may be able to brave the big risk room when you are more certain of the risk. Leverage removes more traders in financial markets on a daily basis than anything else - especially in the current times of high volatility in all asset classes. High leverage is a path to failure for the inexperienced trader – bear it in mind next time you are tempted to enter Room One! About the Author. RICHARD MORRISH, HEAD OF RESEARCH. Richard is head of MIG’s Research Department. He has been a trader for the last 23 years for International Banks, hedge funds and himself. A regular contributor to CNBC for the last five years, Richard has also lectured on global macro hedge fund strategy and technical analysis. He has traded all asset classes from FX to Bonds to Commodities. He is regarded as one of the leading technical trading exponents in the UK and one of the most accurate predictors of markets. His charismatic style simplifies trading to its core elements, and he is a freeman and liveryman of the City of London, with 30 years experience in the City, and the LSE and LIFFE.

Find out more on www.migfx.com

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Photo: © Ronald Hudson | © Yong hian Lim | Dreamstime.com

fx trading

The future is bright for

TRADING

At the moment anyone in the world with access to the Media cannot spend a day without some form of information regarding the global financial crisis. As banks fight against administration, governments create bail out plans and shares drop 40% in one day, making money through trading has become a lot tougher. Stocks and shares can fluctuate by the emotions of traders as a result of announcements from banks or company profits resulting in shares above or below their “true” market value. In addition it’s very difficult to build a proper investment portfolio with stocks and shares. This is why in today’s current climate traders look elsewhere to speculate and create revenue. 38 | sustaininggrowth


fx trading

I

t is estimated that around $1 trillion is traded every day on the Foreign Exchange market. Many of the investors are international banks, financial institutions and other professional investors, but recent years has seen the increase of private individuals trading on the tiny fluctuations taking place in the worldwide currencies. The Foreign Exchange market is the arena for currency trading; the act of exchanging currencies in an attempt to create a profit when converting it back or closing the execution. The Foreign Exchange market offers huge liquidity and attractive potential as traders gain the ability to “go short” anytime, which enables clients to profit while the value of stocks decline.

versification and reduce the overall risk of investors’ portfolios. Investors decide on the possible movement of a specific currency pair, such as the GBP and the Euro, and based on their view decide whether to buy or sell; buying GBP and selling Euros if they expect the pound to rise against the euro, or vice versa, if they expect the GPB to fall against the Euro. Unfortunately it’s not that simple to guess the currency activity since movements are not predictable and depend on different factors, such as interest rates, inflation, which is why FxPro supply market analytics from industry

As a stand-alone investment, the forex market is considered, like others, a risky investment; however, if forex trading is used for hedging purposes or if the investment strategies followed are appropriate for the investor’s circumstances, then as an investment vehicle, currencies may increase di-

Another advantage of currency trading is when you place an order or make a trade it happens instantly. With stock markets, there is often a delay between placing an order and the order going through which can cause problems. This is why FxPro ensures a “No Slippage” policy, so once an execution is made, it happens there and then and not milliseconds afterwards when prices could have changed. As you monitor the Foreign Exchange, the data you see is in real time, which makes trading a lot more reliable even if the market in particular is unstable. Other factors that make the market unique, compared to others, are the larger numbers of people involved and the wider range of possibilities that can affect the prices and sheer volume of trades each day.

The main difference most stock traders notice between the currency market and equities is timeframe. Although the hours of stock trading have been expanding in recent years, the Foreign Exchange market is still the only one which can be viewed as 24-hour. There is trading activity in all time zones during the week, and sometimes even on the weekends as well. Other markets may in fact transact 24-hours, but the volume outside their primary trading day is lean. This is why FxPro offers 24 hour a day support with multilingual agents ready to answer or advise customers on any queries relating to the Foreign Exchange market. Clients are also provided with an extensive collection of tools, information and other resources for both inexperienced and experienced traders. These advanced conditions can be easily managed through one account, where all clients are offered multiple MetaTrader platforms, including mobile phone technology for the demands of the frequent traveller.

tomers can trade at levels much greater than invested but still reap the financial rewards. When using the leverage FxPro also ensures that clients trading with larger quantities do not go into negative equity, should the situation arise, providing peace of mind.

Usually, the majority of investments carry commission charges, either upfront or at the exit while in the forex market investors can find companies that do not charge commissions. FxPro, for example, doesn’t charge clients any commission for trading in the forex market. leaders. If the investor’s analysis was correct and the GBP indeed depreciates against the Euro, then by closing the open position sometime in the future, the investor will profit from the difference between the purchase and the selling price. If, of course, the pound had risen then the investor might sell the GBP, and therefore, will incur a loss. FxPro has incorporated into its trading platform special risk management features, such as “Stop Loss”, “Take Profit”, “Buy Limit”, “Sell limit” and “Sell Stop” that can be used by investors either to limit their exposure (risk) to the market or to secure a predetermined profit.

There is no right or wrong way to trade, but it is advisable that inexperienced investors seek advice from independent financial advisors before they start trading. FxPro is owned by EuroOrient Securities and Financial Services Ltd an investment firm regulated by the Cyprus Securities and Exchange Commission (license number 078/07) and fully licensed within the EU and many third world countries. For further information and to watch video tutorials dedicated to Foreign Exchange trading please visit www.FxPro.com

Leverage is also offered to every customer at a flexible leverage of up to 1:500. So cus-

sustaininggrowth | 39


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© EricHood l istockphoto.com

leadership training

LEADING CHANGE

12 BIG lessons

Valuable research and learning has helped us understand why change fails and in particular what the big lessons are for the future. The following lessons are a combination of input from some of the world’s experts on managing change, and the ‘hands-on’ experience of Kaizen Training working with clients over the past twenty years. The BIG lessons include... 1. The Leader is Critical to Success People in leadership positions can achieve by themselves – but businesses rarely succeed with sustainable transformation initiatives unless they are led from the top. From our experience, the following attributes are essential in great leaders of change: • Vision, courage and courage – individuals that really do mean business about transforming • Ability to take risks both at a personal and a business level, modelling the way, this convinces people that the leader is committed to change not simply demanding it of others • Focus on people as well as process. It’s a combination of people and process change that brings great results. Balancing a supportive, involving and participative style with the ability to force the tough decisions when appropriate is essential • Positive approach – many leaders we have coached have days when they ‘feel wobbly’. The great leaders work through it by reinforcing their own energy and stamina by re-accessing their vision clearly and powerfully 2. Top Team Commitment is a Priority Whether it’s the board of a complete organisation or department heads, managers paying lip service to change is one of the swiftest ways to undermine transformation. This group must act as a ‘Guiding Coalition’. Building such a team is an essential part

of the early stages of any effort to restructure, redesign, retool or improve. But it is not all plain sailing – nor could it be! Real change can be particularly threatening to managers. After all, they got to management positions by doing things in a certain way. At a fundamental level, senior people have to review their roles, responsibilities, attitudes, behaviours, personal leadership styles and their relationships with each other. Some of this can be uncomfortable. Experience shows that a true ‘Coalition’ will learn how to work its way through conflict to get a shared view as to the best way forward. 3. Creating a Powerful Vision is Vital “A Vision refers to a picture of the future with some implicit or explicit commentary on why people should strive to create that future” – J. Kotter Developing a clear vision is important in making the culture change a reality: with an inspiring Vision people can see the exciting possibilities that the future holds and can begin to act in accordance with them. Keeping the Vision in the forefront of an organisation’s thinking will ensure that energy and focus are sustained.

4. Get help Teams or individuals who hold the irrational belief of ‘I must have all the answers’ or ‘using others for help is a sign of a shortcoming’ will be limited by their own thinking. Often it’s the coaching from an external input, someone outside of the organisation that can help businesses break free from ‘stuck’ thinking. 5. Set your Sights on Measurable Objectives and Celebrate Success People need to have the vision broken down into what it means for them in their job. Make sure that objectives are SMART, i.e. Stretching, Measurable, Agreed, Realistic and Time-bound. If your company does not already have a culture of measurement, people will need to be trained in these skills, including process mapping and measurement, objective setting, continuous improvement tools and so on. Publish performance data and transform the surrounding to a ‘Visual Workplace’ where it’s easy for teams to see when they’re doing well. 6. Get Middle Managers on Board Early Directors have a key role to play in leading from the top, but the attitudes and behaviours of middle managers are also vitally important. During the initial stages of a change programme, there can be sustaininggrowth | 41


leadership training a great deal of excitement and activity. Keeping middle managers fully informed can ensure there is not a feeling of being marginalized, which in turn could result in the blocking, and undermining of progress. For example improvement action teams with good management support tend to go from strength to strength. Conversely, such teams fizzle out (and have to be rekindled) where the manager isn’t interested or see the teams as a threat to their role. The ‘buzz’ that comes from successful projects can die down and projects that don’t quite come off can be disheartening. 7. Create and Train Champions of Change Engaging people in change activities, by its very definition, is a departure from the old hierarchical, directive style of leadership. Instead broad based action is achieved through teamwork and a key enabler of the success of the teams is through trained facilitators. The word facilitator comes from the Latin facere – to make easy or simple. Armed with powerful tools of problem solving and an ability to inject energy and enthusiasm, these individuals can act as the conscience of any change initiative. Credible, skilled change champions can make all the difference. 8. Find Out What is Really Going On – Do the Research Too many change programmes flounder on the mistaken assumptions of senior people. It is vitally important to ask customers what they really want and to check on the beliefs, attitudes and opinions of staff. Be prepared for surprises – some positive, some challenging! When you’ve done the research, you know where you are, as well as where you are aiming to get to – and this puts you in a strong position to build a robust transformation process. The key thing here is follow up. To be true to ‘modelling the way’ good leaders of change don’t just do the research and leave it there, they take the appropriate action. 9. Have a Top Down/Bottom Up Approach It’s the combination of strong leadership to provide the vision and direction, and teams that are empowered to deliver the improvements that brings outstanding results. Some organizations have allowed teams free reign to decide what they would like to address. This can be critical to getting people on-board; they can influence not only how things are improved, but also what is improved. This feeling of being able to make a real difference lets people ‘warm’ to change and shows that the organisation has faith in its people. 42 | sustaininggrowth

10. Balance Impatience with Patience If change is to happen, senior people need to be hungry for it. However, it is important to remember that patience is crucial. People will be on a learning curve, and need to be given a chance to build their confidence. Once they find their feet, they will go on to greater challenges. An important lesson when moving from one type of culture to another is that things take time – particularly in the early stages. You may worry that things are not progressing as quickly as you’d like them to, or that the ideas are not radical enough, but it’s the level of commitment that’s really important. You need to win hearts and minds first. At the same time, avoid complacency. Create an environment where people are dissatisfied with the status quo, drive people out of their comfort zones and support them in the process, create urgency and momentum, help teams choose issues that will generate quick wins. Don’t just launch the change initiative and expect it to happen – people need to keep hearing the messages and they need to be acknowledged for doing things differently throughout the process. Be especially vigilant if people are delaying due to ‘day-to-day work pressures’ – this is day-to-day work. 11. Communicate, Communicate, Communicate The biggest problem with communication is the illusion that it has occurred! The lesson is clear – communication takes time and effort – but the investment is worthwhile. It is critical for people not only to be reminded of the Vision but also how far they have come – this helps maintain morale and belief in the change process. It also helps in battling with the cynics with examples of positive evidence that things are changing Communicate about ten times more frequently than what you think you need to – don’t allow things to fizzle out. In his research, John Kotter estimated that the total amount of communication going to an average employee over a three-month period is 2.3 million words or numbers. The typical communication of a change vision over a period of three months is approximately 13,400 words or numbers. So on average the Vision communication captures only 0.58% of the company communication market share. Some guidelines that help effective communication include: • Simplicity - remove all jargon and techno-babble • Use metaphor, analogy, example: A verbal picture is worth a thousand words • Multiple forums and formats: big meetings,

• • • •

small, memos, e-mails, newspapers, formal, informal – all are effective at spreading the word Repetition: ideas sink in when they have been heard many times Emotion: Long term memory is processed by the emotional part of the brain Leadership by example - walk the talk Explanation of seeming inconsistencies – leaving inconsistencies unexplained can undermine the credibility of communication Make it two-way: Team listening is 10 times more powerful than team briefing!!

12. Anchor New Approaches Into the Culture It’s so easy for the huge gains made in a change process to be gradually undone such that the organisation can revert back to the ‘old way’ of doing things. After all, everybody will be well practiced in the old way. To ensure that change sticks requires more than just a winning hearts and minds. Changes to systems and processes also need adjusting in line with the new way of doing things. For example rewards need to fit new behaviours and attitudes, HR strategies need to be aligned including recruitment, selection, development, performance management systems and so on. Change means more than a quality poster, T-shirt, coffee mug or half day seminar. The entire infrastructure needs to make the new behaviours more likely, easier and more rewarding than the old.

www.kaizen-training.com

Develop the leaders you need for the future • Create and sustain momentum for rapid, elegant, enjoyable change • Help you become lean (but not mean!) • Develop a cadre of in-house facilitators who have the skill and will to drive real change in your organisation • Grow and fully engage your people through inspiring and practical skills workshops that are designed to meet your precise needs • Supercharge your trainers so that they can design and deliver learning experiences for your people that are fast, fun and fit-for-purpose • Coach your key performers to raise their game • Build high-performance teams where trust, transparency and creativity become the norm • Provide a skilled facilitator or an inspiring speaker for that conference or team awayday that’s coming up For the past twenty years, Kaizen have been helping organisations – large and small - create the full engagement of their people.


long distance leadership

The art of long distance

LEADING How to lead in a virtual environment

A major change is affecting the way people work and it has happened almost overnight. The move is on from same-time, same-space working to virtual working, and it is challenging our assumptions about the nature of work and how leaders need to lead in order to get things done. From home-working to off-shoring to regionalisation and now globalisation, business leaders are faced with the task of raising performance through people whom they rarely meet, and hollow slogans such as ‘work smarter, not harder’ provide little insight into what they should actually do. We are struggling with a profound – some say maddening – paradox: as technology expands to increase the number of options for keeping people connected, our organisational strategies and structures are driving people apart.

A

t The Chaos Game, we work with time-and-distance strapped leaders in complex organisations to enable them to develop the skills they need to lead others in this new world. We believe that there are five key skill areas which are important to all leaders but are essential in virtual environments.

Creating Strategic Purpose. Your primary focus as a distance leader, with staff in different places and perhaps in different time zones, is not the day-to-day business of getting things done. It is neither possible nor appropriate for this to be so. Your focus should, instead, be on guiding your organisation into the future. As coaches and educators, therefore, our first task is to help our clients to map their ‘system’, paying particular attention to the external forces that are acting upon it. When they are clear about the nature of this system, they are able to create their leadership agenda, their strategy for moving their part of the business forward. This will, necessarily, involve delegating much of the responsibility for ‘doing’ to subordinates. For some leaders, this may raise issues of control, or of trust, or of self-doubt and so on – but being able to ‘let go’ is an essential aspect of distance leadership. Demonstrating Courage. In the new environment when you are leading into the unknown, and, as is often the case, leading when you are not sure, it is essential that you have a good understanding of who you are as a leader. To that end, we help our clients to identify their strengths, those capacities that represent the platform for their leadership. They may, for example, be visionary thinkers, or they may inspire great followership or they may be able to energise people to overcome seemingly insurmountable barriers to success. We also help them to identify their weaknesses so that they can make informed and realistic choices about how to be more effective. In some instances this may involve refocusing their personal development effort; in others it may involve helping them to manage around their weaknesses. We all have strengths, we all have weaknesses, and we all have fears,

44 sustaininggrowth

too: we may fear conflict, we may fear failure, we may even fear being fired. And our fears are magnified, of course, when we are leading across distance, when we have even less control over what is happening than we had in traditionally designed organisations, and when there are fewer people available to us to help us work through these fears. So, as skilled executive coaches, we help our clients to develop a deep understanding of themselves: when they can lead from their strengths, when they can address or manage around their weaknesses, when they can combat their natural fears, they can take the courageous decisions that are often required to lead their virtual organisations into the future. Creating Ownership. In the new environment, where you cannot oversee the people who work for you, it is essential that you create alignment (so that everyone knows what is expected of them) and that you invest in your relationships (because nobody will put your requests to the top of their ‘to do’ list if you fail to demonstrate your commitment to them). Meantime, it is also essential that everyone in the team delivers on the performance promises that they make. This requires excellent engagement skills on your part and, as practice does, indeed, make better if not perfect, our favoured approach is to use a range of experiential learning methods to help our clients to communicate a compelling vision of the future, to co-create a change plan, to listen to understand, and to develop more open, trust-based relationships of challenge and support. There really is no alternative to ‘practising it for real’! Executing Across Boundaries. One of the great opportunities for everyone working in the global world is to recognise, value and draw upon the differences that are inevitably present in all geographically dispersed groups of people. It makes good business sense for you to foster this awareness. It is also, of course, the right thing to do. So we help our clients to understand the social and cultural imprints that have shaped their view of work and leadership behaviour, in order to increase their capacity to promote more meaningful ‘contact’ amongst and between those who work in their organisations.


long distance leadership

© Morgan l istockphoto.com

Distance leadership is a human not a technical endeavour: technology enables but leaders, through their actions, make the difference.

Virtual leadership requires new skills, then, but it also requires the new application of old skills. The ability to communicate, coach and manage under-performance are in the standard kit bag of any organisational leader but you need to be aware that old ways of performing these essential activities are unlikely to be serviceable in the new, virtual world. So you need to learn how to communicate across cultures, you need to coach using non-directive methods and you need to be able to conduct difficult conversations (which are, by definition, never easy) without the advantage of being face-to-face. We work with our clients to refresh their repertoire of these basic skills – and, again, we favour an experiential approach to this kind of learning. Influencing Upwards and Outwards: All organisations are political environments. This is the reality of organisational life – it was ever thus but now, in more networked environments which are more complex and less hierarchical, it is essential that you develop sophisticated strategies for influencing those who lead you and those who do not work for you. Your default approach will be helpful to you in certain situations but it is unlikely to be sufficient in all. By helping leaders to develop a wider range of influencing strategies, we prime them to be more effective in a wider range of business scenarios. In summary: Distance leadership is frontier stuff. Leaders and educators alike are still trying to understand the challenges of the globalised world and to develop solutions to them. But what is already clear is that we do need to lead differently if we want to succeed. In the words of Fisher and Fisher, authors of The Distance Manager, “….the distance managers who do it well offer a tremendous competitive advantage to the operations they lead. Those who do not may watch the unraveling of both their organisations and their careers”.

our offering At The Chaos Game, we offer one-on-one executive coaching to distance leaders. In association with The NTL Institute for Applied Behavioural Science, we also offer two formal development programmes: Leading Across Distance™: a five day programme (integrated with one-on-one professional coaching sessions) which addresses the five themes identified in this article – creating strategic purpose, demonstrating courage, creating ownership, executing across boundaries, and influencing upwards and outwards. The programme leaders are Dr Richard C Harris, former Managing Director (Great Britain) and Head of Global Research for The Forum Corporation, and Kate Cowie, a Member of The NTL Institute and Director of The Chaos Game. ntlglobalab™: a four day intensive group technology which enables leaders from different cultural, social and business contexts to develop understanding, attitudes and behaviours that support meaningful and powerful relationships across their differences. The programme leaders are Dr Fred Massarik, Professor at The Anderson School, UCLA, Dr Ted Tschudy, NTL Member and former NTL Board Chair, and Kate Cowie

The Chaos Game is a network of international consultants who specialise in the design and delivery of innovative, business-driven and research-led leadership development programmes, in association The NTL Institute for Applied Behavioural Science. The NTL Institute for Applied Behavioural Science has been the premier source of experiential learning since it was founded in 1947. It has a well-deserved reputation for creating compelling learning opportunities which fully engage participants and bring theory to life. Since NTL first began its work, its member trainers have shown more than 100 000 people how to be more effective in their professional and personal lives. The author: Kate Cowie is Director of The Chaos Game and a Member of The NTL Institute for Applied Behavioural Science

sustaininggrowth | 45


offshore tax strategies

Preparing Aggressive

TAX

Planning Schemes

W

As the burden of taxation has increased over recent years, and many businesses have suffered from the adverse cashflow of funding PAYE and NIC every month, VAT every quarter and mainstream Income Tax and Corporation Tax once or twice every year, a considerable number of business owners have been wooed by the thought of reducing their tax burdens by setting up offshore tax structures or entering into what the authorities consider to be aggressive tax avoidance schemes.

ith Corporation Tax in excess of 30% and personal taxes and national insurance more than 50%, the temptation to succumb to the advances of the sharp-suited salesmen peddling these schemes has never been more intense.

Providers of tax avoidance schemes are required to disclose their products to HMR & C so that by the time the necessary entries are made on an individual’s Tax Return, it is certain that the businessman, who has paid substantial fees for his tax avoidance scheme, will become subject to a high level tax investigation.

Normally hard-nosed, sharp-minded businessmen fall to such temptation often without understanding the distinction between what is avoidance and what actually constitutes evasion.

The distinction between avoidance schemes and evasion schemes is that there is no disclosure to H M Revenue & Customs of evasion. The consequences of avoidance are usually financial; payment of usually quite heavy fees for the scheme, together with tax, interest and – usually – a penalty in relation to the tax avoided. However, the consequences of evasion, whilst also including financial costs, can extend to imprisonment.

Simply put, the distinction is that avoidance is the legal use of the law, often by way of loopholes, to minimise the tax burden, whilst evasion is to minimise or reduce a tax burden using illegal means, ranging from simply not recording income in the business books to highly sophisticated use of techniques which are artificial in nature. Tax avoidance is not welcomed by H M Revenue & Customs but the debate about any specific avoidance scheme would normally be at a high technical level between an HMR & C Head Office Section and the scheme provider. If the scheme works – and some certainly do – HMR & C is likely to change the law to prevent further tax loss from that arrangement.

46 | sustaininggrowth

Cases where clients are prosecuted by H M Revenue & Customs are comparatively rare when compared with the number of investigations settled for financial penalties only, says John Green (Managing Director of Cobham Murphy Limited, Chartered Accountants and Tax Advisers based in Liverpool, and an expert in HMR & C investigations and prosecutions) but they do happen and the signs are that more cases will be prosecuted in future, especially when it is thought to be in the public interest for high-profile businesses to be taken to the criminal courts. John, who spent more than 20 years working for


offshore tax strategies the Inland Revenue where he was an expert in the detection of fraud and anti-avoidance schemes, says that many businessmen have rushed headlong into tax avoidance schemes, many provided by the largest accountancy and legal firms, without really understanding them or the possible consequences when challenged by H M Revenue & Customs.

© Christopher Meder | Gianna Stadelmyer | Dreamstime.com

John left the Inland Revenue in 1997 and undertook consultancy work for Cobham Murphy assisting with some of its more difficult tax planning and tax investigation cases. He very quickly demonstrated his ability to achieve solutions in the most complex cases and was offered an immediate partnership with the firm. Since then, he has built an international reputation for being able to defend all businesses from investigative attack by fiscal authorities in the UK and elsewhere. In recent years, John has witnessed many varied changes in the tax planning industry. “The Treasury, under Gordon Brown, was determined to plug tax leakage and in addition to increasing Revenue & Customs’ powers to deal with evasion has specifically attacked tax avoidance schemes.” Some scheme providers, notably large accountancy firms, have exited the market altogether and others have downsized their operations and/or moved to much narrower schemes aimed at the exceptionally wealthy businessman. A vast amount of information from banks, both large high-street

clearing banks and smaller private and merchant banks, has been obtained by H M Revenue & Customs and many thousands of investigations started up as a consequence of that information, which has been secured using new powers and a new approach by the authorities. In addition to this, the last Budget saw the introduction of retrospective action against some schemes, meaning that even where there was a loophole and the tax planning had been implemented accurately, the scheme could be undone with serious tax consequences. Tax planning through the use of avoidance schemes is now more complicated than ever and there can be no guarantees that any scheme will work. All that is certain is that large fees will be incurred and businessmen are now, rightly, becoming more cautious. “Quite recently, I was consulted by a client whom I had known for many years and had seen his business grow rapidly and him become a very wealthy man” reports John. “He had invested heavily over the years in tax mitigation schemes and paid seven figure sums to scheme providers. Now, whilst his property empire crumbles due to current economic pressures and the credit crunch, he has been selected as a test case by H M Revenue & Customs in respect of his tax planning. The schemes now seem vulnerable and very expensive, with the scheme providers running for cover. It is likely that the

managinggrowth | 45


offshore tax strategies case will have to go to the House of Lords and this once very wealthy client cannot fund such action and faces personal ruin.” Despite this gloomy picture, businessmen need to realise that there are still legitimate ways to make their tax affairs as efficient as possible without paying what nowadays seem to be outrageous fees to scheme providers and which do not offend H M Revenue & Customs. A close relationship with a competent firm of Chartered Accountants like Cobham Murphy will ensure all possible effective tax planning without the attendant risk of avoidance schemes and evasion. It is inevitable that some people will be investigated by H M Revenue & Customs but John has noticed a slow-down in new cases this year, whilst H M Revenue & Customs concentrate its resources on what it terms “marketed avoidance” – i.e. tax strategies and schemes.

prosecute appropriate cases. He adds “H M Revenue & Customs are, at the moment, gathering information from as many as 150 banking and other financial institutions, and it is inevitable that people with offshore bank accounts with any bank that has a UK branch could find themselves caught up in a major investigation within the next twelve months. So, what is the future for tax mitigation schemes? John believes that there will always be legitimate planning opportunities but, if you buy into a scheme, you should be prepared for an in-depth investigation of your affairs and some potentially high financial costs at the end of the day. If tempted, any businessman should obtain copies of briefs given by scheme providers to their barristers, who will have considered those schemes, and should also obtain copies of the formal Opinions and Advice given by those barristers. Independent advice should then be taken from a firm such as Cobham Murphy to provide an appraisal of its likely success.

The upshot is that when subject to an investigation, it is possible – with proper support from someone with John’s experience and expertise – to negotiate a speedy, pragmatic and cost effective solution which will not lead to insolvency or other problems.

John’s advice is not to rush headlong into any tax mitigation scheme and to use the same caution as you would in any other business decision to determine whether it is the right thing for you and your business at that moment in time.

John anticipates a further round of investigations into offshore accounts and other assets, with a further Amnesty opportunity being a possibility. H M Revenue & Customs are currently investigating many people who did not take advantage of the 2007 Amnesty and will

The author is Philip Harrison, A.C.A., who is a Director of Cobham Murphy Limited. John Green is Managing Director of Cobham Murphy Limited, Chartered Accountants, Liverpool. www.cobham-murphy.co.uk


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Dentons Pension Management Limited is Authorised and Regulated by the Financial Services Authority


pension planning

Key Elements to consider when investing in a

SIPP

Self Invested Personal Pension Martin Tilley, pension consultant at Dentons Pension Management, highlights the key elements for investors to consider when choosing a Self-Invested Personal Pension (SIPP) and investigates the introduction of Protected Rights within them. he near collapse of the banking system in recent weeks has been a major wake up call for many and whilst it seems that some institutions will have lost considerable sums of monies, most Small Self Administered and Self Invested Personal Pension trustees will at least be covered by Government guarantee or Financial Services Compensation Scheme. Those individuals that chased the top rates of interest for their deposits are now breathing a sigh of relief that their decisions, as a result of government intervention, are not going to cost them dearly. They will however suffer the irritation as the process and time scale for repayment of their funds becomes apparent. The underlying message from this exercise is a realisation that you should not take anything purely at its face value. There are no free lunches and where an attractive rates exists for deposits, to offer such a rate the depositer must be lending these funds on at a premium to make a profit. The simple question follows to whom may the funds be leant and why are they paying these inflated high rates? A similar, but reversed argument can be raised with the selection of a Self Invested Personal Pension. Why are some more expensive than others and what additional features or facts need to be taken into account when selecting a SIPP product. Since the Financial Services Authority’s (FSA’s) requirement that all SIPP providers be regulated, over 150 have secured such status, offering a bewildering array of choices. Since, as often quoted, “a pension can be the most valuable asset held after one’s house”, should the selection of the appropriate vehicle not be given the highest degree of scrutiny before signing on the dotted line? From experience to date it would seem that, surprisingly, this would not always appear to be the case. Even industry publications focus attention on the measurable aspects only as headline charging rates, and while these should never be discounted there are potentially far more crucial factors that might initially be missed. The good news is that SIPPs ordinarily have charges at a defined level, irrespective of the size of the fund and, as such, larger accounts do not subsidise the smaller. But we need to dig deeper

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at this early stage. Some of the providers include services within their quoted headline rates, but others do not. For the latter, a menu of additional fees, on either a fixed or hourly time-costed rate will apply. These may include, for example, tax reclamation on investment income, or even a certain number of investment transactions within an annual period. For those at the more expensive end of the market, are the additional features included required and do they offer value for money? At the lower end, will a provider really set up and run a SIPP for nothing? After all, income has to be derived from somewhere. Cash questions A feature of all SIPPs is the default bank account into which contributions or transfers must be paid and from which investments are purchased and benefits paid. While one would hope that cash would not consistently be a major proportion of a long-term investment strategy, there will be occasions such as the accumulation of funds before investment, a strategic hold, or a float to cover pension payments, when a substantial cash balance could be held. Thus, the interest rate on the account might be crucial. Some SIPP providers pass on the full interest rate from the bank deposit taker, but, some providers have received, and continue to receive, a “cut” of the interest earned on their client’s deposits. Even a modest sum of £50,000 held on deposit with the provider taking a one per cent cut would yield £500 per annum to the provider! Some providers will insist that all deposits are held in the default account for this very reason. Others will let you select your own deposit holder for larger amounts or long-term money. This immediately makes the headline fees look less of a major factor in cost analysis. Property charges Another favourite is the requirement on property transactions that the client uses provider-specified solicitors, property managers and insurers. While the familiarity with the provider’s requirements should allow a competitive rate, it is certainly not as clean as one would like,


pension planning

secured pension, the means by which the payment of income from the fund can be continued when past the age of 75. Additionally, there are some factors that are currently difficult to measure but remain no less important in the choice of an appropriate SIPP. Since April 2006, the SIPP market has seen a boom in numbers, and many providers have not fully dealt with the changes in legislation brought about by simplification, nor have they increased their staffing numbers to cope.

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and the possibility of there being introductory fees, or some form of fee sharing, should not be discounted. Similarly, how transparent is the relationship between stockbrokers and SIPP providers regarding transaction costs. Choosing the right plan Moving on, one of the most critical decisions to make must relate to the feature required by the client. SIPPs essentially fall into three categories, with those towards the bottom end offering online access to sharedealing accounts, giving access to individual equities and a number of funds on a single platform. Moving up the scale, generally where the insurance company and medium-sized SIPP providers enter the market, they will add the ability to purchase commercial property, albeit with some restrictions, as well as a wider range of investment funds and ancillary deposit takers. Only at the very top end of the market will you find those providers allowing access to all commercial properties, including shared ownership (both on and offshore), together with unquoted equities or unquoted funds. For many investors, the investment flexibility available from the lower two tiers will be sufficient for their immediate needs, particularly in the growth phase prior to pension benefits being take. Certainly, it would not be appropriate for a full SIPP at the top end of the market to be employed only for the purposes of holding a managed portfolio of unit trusts, since this could be accommodated further down the SIPP range, or even in a platform-based personal pension. Limited availability One should not assume, however, that all features are permitted by all SIPP providers. And, while not all of these features will be required at the outset when the SIPP is selected, they may well become factors at a later date, and establishing a second SIPP necessitation the transfer of assets from the one that fails to fulfil requirements can be a costly exercise. Examples of features not always available are the ability to accept contributions and pay benefits in specie, or to offer a multi-phased income drawdown facility or, most topically, to offer an alternatively

Protected Rights - Where is the Rush? A further boost to SIPP popularity this past year has been the fanfare surrounding the introduction of the acceptance of Protected Rights (PR) (contracted out benefits) within SIPPs, which became effective from 1 October. Articles have heralded the creative use to which these funds could be put, largely before the ink of the final legislation was dry. Subsequent events, however, have dampened enthusiasm and many Providers are reporting a particularly lukewarm interest, initially. There are a number of reasons for this: Firstly, the industry received late clarification of HMRC guidelines concerning the separation within a SIPP of PR monies and non PR monies. Although it transpires that full self investment of PRs is permitted, it is necessary to ring fence them, at least until 2012, as the benefits payable from PR monies are treated differently to non PR funds. Financial planning in advance was not able to be handled with certainty. The Financial Services Authority (FSA), the financial regulatory body, as if it was not busy enough with supervising the impending banking crisis, also issued guidance to Independent Financial Advisers. It suggested, quite rightly that the new investment flexibility within a SIPP was not an excuse to review existing PR policies and recommend a change, unless the adviser could demonstrate that the benefits to be provided from the PR from the SIPP would be greater than those payable from the existing arrangement. Seeing as “possible investment performance” cannot validly be used in such an argument, an adviser would need to demonstrate that the SIPP is a more economically costed vehicle, which in the vast majority of cases, they are not. The financial markets themselves conspired to cause uncertainty. With world stock markets crashing and the financial security of major banks under scrutiny, many would be investors were more concerned with protection of capital in existing arrangements than transferring to vehicles with wider investment powers: Many PR policies issued in the late 1980’s when contracting out was first permitted, invested in With Profits Funds, which have been particularly badly hit and are currently suffering large market valuations adjustments on withdrawals. There are of course those clients for whom self investment of their PR funds is right, for those who wish to operate the same levels of control as they do with their other pension and personal monies, but the numbers for whom this is appropriate is far less than the press would have you believe.

Martin Tilley is a Pension Consultant at Dentons Pension Management Ltd, Linden House, Woodside Park, Catteshall Lane, Godalming, Surrey GU7 1LG. Telephone: 01483 521521; email: martin.tilley@dentonspensions.co.uk Dentons Pension Management Limited is Authorised & Regulated by the FSA.

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conference management

© Demarco | Dreamstime.com

Top tips for running a successful

business meeting With budgets and return on investment being constantly analysed and evaluated, meetings and events are actually increasing their share of marketing budgets according to EventView 2008 produced by MPI Foundation, Event Marketing Institute and George P Johnson. Didier Scaillet, MPI Vice President Global Development takes a look at the research findings and highights top tips to ensure a business meeting runs successfully.

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he research highlighted the steady importance of meeting and events not only in the overall marketing mix but in a company’s strategic development. Face to face interaction, together with the ability to reach highly targeted audiences are the primary reasons attributed to event and meetings high ROI rating. Additionally, those companies that measure are one and a half times more likely to expect an increase in their marketing budgets than those that do not measure. With these points in mind, the planning of meetings and events take on even greater importance in a company’s growth and development. Those companies that ignore the planning process are in danger of not maximising their ROI and potentially seeing budgets cut! No one meeting is the same. Every one

is unique with different dimensions and their own personalities. Corporate conferences differ from training courses and associations. This article aims to take an approach that in planning terms can be transposed onto any meeting. What is key though to remember, even before planning, is that meetings are a means to an end. They are rarely an end in themselves. The conclusion of a meeting is usually just the beginning of activities or actions generated from the meeting. Planning should always be seen as an investment. So where to start? Start by doing nothing. Take some time to clear your mind in a relaxing environment where you do your best thinking because the first essential in planning a meeting is to give yourself some quality thought time. A conference or meeting of any size is a complex affair, involving a

multi disciplinary approach and a variety of skills. Your role is like that one of a theatre director who needs a grasp of design, stage management, finance, getting the most out of your team. So time spent letting your mind roam freely around the challenge will be time well invested. Equally, no planning can begin until you know the parameters and purpose of the meeting. What are the aims of the meeting? What are the key objectives? How is the meeting to be evaluated? What are the client’s expectations? Consider when should the meeting take place? Are there geographical constraints or mandatory requirements? What degree of autonomy do you as the planner have? Are you the overall director with the authority to decide on the venue, the programme, the speakers, the leisure

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conference management or other person with fiscal responsibility in your company to sign off/approve any budgets

The Meeting Professionals International (MPI) Checklist to successful meetings

Selecting a destination 1. Determine if there are any needs that might make a particular destination more appropriate 2. Choose a convenient location based on where guests are travelling from considering travel times, costs to reach destination 3. Consider seasonal hotel occupancy rates 4. Check flight schedules/frequency - most attendees will prefer direct, non-stop flights 5. Consider factors such as weather, security, political climate

Pre planning for any meeting is essential. This initial checklist will stand you in good stead. 1. What type of meeting are you arranging? 2. What are the key aims and expectations? 3. What are the expected outcomes of the meeting? 4. Consider the size of the group, gender mix, ages of attendees and any special needs 5. Determine meeting dates – avoid dates that coincide with other company, industry events, bank holidays or religious festivals 6. Create an outline for each session or activity, including expected attendance, seating arrangements, required set up, starting and ending times and audiovisual and production requirements 7. List food and beverage requirements for each session, including meals, receptions and breaks 8. Consider air and transportation needs 9. Plan entertainment, group activities and team building exercises 10. Product a timeline for producing invitations, event promotion, registration and production of meeting materials 11. Designate a person to oversee and organise name badges and coordinate written material 12. Budget for all sponsor expenses 13. Schedule speakers Getting the finance right Preparing a definitive budget is essential. Get the figures wrong and…Well, we don’t want to go there! 1. What is the overall budget? 2. How is the budget divided? 3. What needs to be included in the budget (eg delegate travel)? 4. Can the meeting be self financed or partly financed by sponsorship? 5. When must all accounts be settled? 6. In which currency should the account be run? 7. Are there particular suppliers that need to be asked to quote or is it an open field? 8. Have you set aside an emergency/contingency fund? 9. Secure the signature of a financial officer

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activities or the chief steward required to serve up the decision of others? Crucially what degree of control do you have over the budget?

Choosing a venue 1. Do your research 2. Decide what your venue selection procedure will be 3. Visit the chosen shortlist of venues – speak to those who have used the venue 4. Determine the type of hotel that will best suit your meeting needs – an airport hotel, convention and meeting resort, conference centre 5. Determine the type and number of guests rooms needed 6. Determine the number and size of meeting rooms needed

7. What AV and supporting equipment is required? 8. Negotiate best rates and ensure you sign a contract 9. Understand what the cancellation policy will be – is there a cut off date prior to which any cancellation will be refunded in full 10. Submit a Request For Proposal (RFP) Food and Beverage 1. Agree numbers 2. Don’t compromise on quality – don’t underestimate the power of food 3. Be aware of a variety of dietary requirements 4. Generally allow 30 – 40 minutes for breakfast; 45 – 60 minutes for lunch and 20 minutes per course for dinner 5. Consider a buffet lunch - they offer variety and faster service 6. Check with organisers how many servers per table 7. Plan to serve a variety of finger foods during cocktail receptions – think visually 8. Offer non alcoholic drinks 9. Consider donating leftover food to local homeless shelters of charities Choosing a professional speaker 1. Know your objectives – what is the role of the guest speaker? 2. Understand your audience’s needs – match speaker to them 3. Request a DVD of the presenter in full flow – ask for referrals 4. Don’t get star struck 5. Brief the speaker – meet them 6. Gain an outline of their presentation – no surprises! 7. Make the most of the time the speaker is with you 8. Trust your instincts 9. Keep to budget ROI and evaluation 1. Make this a priority 2. Get feedback from delegates on all aspects of the meeting – venue, food, transportation, speakers, key take away learnings 3. Use as a benchmark for future meetings As mentioned at the beginning no one meeting is the same. Each provides different challenges and opportunities. By being prepared and planning, there is every likelihood that your meeting will prove a real winner with a high, positive ROI whilst leaving delegates enthused, motivated and wanting more. So here’s to the next meeting!


fleet management

PETROL

Fuelling the Debate Welcome to the high price era

This year, for the first time, companies have discovered that adding the usual 10 percent increase to the previous year’s fuel budget did not meet with reality. Indeed, in the first six months of 2008, crude oil barrel price rose from $94 to above $140. Immediate actions were rapidly undertaken.

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o limit the impact of the fuel price rise, some companies settled a validation workflow to ensure that long journeys are really necessary. Other companies lowered mandatorily speed on highways for their employees (130 to 110km/h, which turned into a demonstrated 25 percent drop in fuel consumption). Other companies encouraged home working when feasible. Thanks to these first “quick wins” actions, these reactive companies were able to limit the increase of their fuel cost. From June 2008, the worsening of the economic crisis has also affected the crude oil price, which went back to its level of January ($94) in three months of time. The fear of recently observed fuel price volatility associated with the lack of perception of the price drop at gas stations has encouraged companies to pursue their efforts toward fuel economies. As the answer to the fuel price rise has turned into a cost-saving oriented commitment, new long-term actions are now being taken in that direction. We can separate them into five categories: 1. Reconsidering new parameters to adapt the car catalogue to the new economical situation The price difference between petrol and diesel is decreasing and small petrol engine vehicles are being reconsidered. With a lower purchase price and cheaper maintenance than diesel cars, the balance equation between petrol and diesel vehicles is to be analysed. Some companies have already re-introduced some petrol vehicles into their car catalogue, following post behaviour analysis recommendations from lessors. 2. Adapt the car policy… smartly While expecting more environmentally friendly technologies for vehicles, the tendency is now at downsizing. Considering that one employee out of three is ready to leave his current job if he is offered a better company car, the question of compensation appears to be critical.

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Until now, improving comfort with leather, sunroof, etc.. was the usual and only compensation to limit the perception of downsizing. New solutions such as leasing together in a bundle a vehicle plus a scooter, or short term rental vehicles made available for week-ends can also be proposed. The tendency will be guided by innovative proposals from leasing companies. 3. Adapt the way of driving Eco-driving sessions are proposed by most important leasing partners. Results may achieve a 15 percent lower fuel consumption by regularly checking tyre pressure and driving ecowisely. Moreover, the 15% decrease immediately leads to a 15% pollution decrease. But since most experienced drivers already apply many driving tips themselves, they will finally show lower additional achievements. Considering that a new driving style cannot be learnt in one day, ALD Automotive proposes a program in which drivers are accompanied for a year when learning a more sensible style of driving. This results in a profound change in the way of driving, inferring a long term fuel consumption decrease. 4. Adapt working methods Is direct presence at the office always necessary? Sometimes home working complies with business efficiency and employee satisfaction while cost reduction is running. When applicable, such new policies can achieve up to an immediate 30 percent less mileage driven, inferring same ratio fuel economy. However, these adapted new working methods require an exceptional agility from the companies’ point of view. 5. Take advantage of innovative solutions proposed by leasing companies Leasing companies also have their role to play through more technical and analytical aspects. By compiling fuel card invoices, actual fuel consumption can be monitored and compared with car manufacturers’ fuel consumption. A 10 to 20 percent difference is understandable according to the context of driving, but greater differences should be highlighted by lessors (for instance, 30 percent over consumption for a rural driver


fleet management

Representing now up to 40 percent of the TCO, fuel costs are today closely monitored by both fleet managers and leasing companies. Following leasing companies’ recommendations such as eco-driving training, fuel expenses analysis or low-rolling resistance tyre fitting can be implemented rapidly and have already provided a response to the sharp fuel price rise. Further changes, more structural, such as modifying car catalogue, adapting car policy toward downsizing, or proposing new working methods require a strong involvement from companies and take longer to put into effect.

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shows uncommon driving behaviour that should be rectified). TCO (Total Cost of Ownership) management is increasingly becoming a business requirement for all sized fleets. Beyond selecting optimal vehicles, TCO approaches also apply to vehicle-related expenses such as tyres or fuel. Newly released low-rolling resistance tyres, for a moderately higher purchase cost, can demonstrate an optimised cost per km. Thanks to a longer proven lifetime (25 to 40 percent more according to conditions) and proven fuel economy (average -0,16l per 100km) a slightly higher initial investment can pay for itself.

Whether the fuel price will rise again or not, agile companies will continue to take the opportunity to surf on the environmental wave to achieve savings on fleet. Thanks to leasing companies’ expertise, actions undertaken already show demonstrable savings, mostly depending on client’s commitment and driver’s awareness. In addition to new environment-wise taxation, fleet operators are expecting in coming years radical technology changes, inferring today in a sweeping change in the modelling of the vehicle resale value.

The same demonstration could possibly apply to premium fuel versus ordinary fuel depending on vehicles and driving context. For more information on how to reduce your fuel costs: • ALD Automotive – Christophe Duprat Tel : +33 1 56 76 13 68 • Mail : christophe.duprat@aldautomotive.com • www.aldautomotive.com

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team motivation

Alternative Team Building

BREAK THE MOULD! Nowadays it is becoming ever more difficult to come up with creative ways to inspire staff and align individual and corporate objectives. By working in association with a charity however, it’s possible to access an inspiring events portfolio which can produce great results – both for the organisation and the charity.

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iona Chaillier-Zeiler, Guide Dogs National Events Coordinator explains: “Fundraising challenge events are designed to provide individuals and groups with a tough yet rewarding experience that will enable them to raise vital funds for the charity whilst achieving personal or organisational goals. Guide Dogs receives no government funding and depends entirely on public and corporate donations to continue its work, and these type of events are a great way to really get involved and leave the office setting!” Guide Dogs’ well-loved brand engenders enormous respect and trust. As well as generating a wonderful feel-good factor and increasing staff motivation, taking part in a Guide Dogs overseas challenge can help companies achieve specific corporate objectives. The business benefits Overseas challenge events can provide many tangible benefits, both for the organisation and the employees who take part. They are recognised as being beneficial in building better teams, problem solving, networking, understanding diversity issues, and communicating key messages – all by learning through doing.

Corporate social responsibility Overseas challenges in aid of Guide Dogs enable companies to demonstrate their company’s corporate social responsibility policy whilst developing their greatest asset – their people. A team of highly motivated and moved employees can become powerful advocates for your company and the cause they have supported, bringing to life the value of your donations. Relationship building Team challenges bond clients, customers, partners, and suppliers like no other experience. Strong relationships are formed between team participants due to the shared emotional experience and common goal that is achieved. The challenges improve personal relationships by breaking down barriers, improving trust, respect and flexibility between people. Participants talk of “being more alive again” of “feeling more motivated” and of “having respect for their

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employer.” Individuals return knowing that they have not only successfully completed a challenge but are in possession of new skills directly relevant to their work. Public Relations Fundraising challenges provide an incredibly powerful opportunity to communicate (both internally and externally), how the company is living and breathing its mission and values. By engaging staff in a charity event highly motivated ambassadors for both the cause and the company are created. Participants return to their work wanting to share their incredible experiences with other staff, clients and customers, and explain how the company’s involvement has made a real difference. Often the personal stories are so powerful, they are communicated through company-wide presentations and films, online diaries and blogs, exhibitions in reception HQs and articles throughout in-house magazines and intranets. Incentive and reward packages Most recently, there is a growing trend of companies using overseas challenge events as a tool to thank and motivate staff. Fiona explains: “We recently had a sales manager contact us after taking part in an individual challenge in aid of Guide Dogs – he felt so inspired by what he had achieved and the contribution he had made to Guide Dogs that he wanted to share his experiences and encourage his staff to become involved. So, this year, instead of offering a financial reward for meeting sales targets, his staff will be rewarded with the opportunity to take part in an exciting overseas challenge and the chance to celebrate and bond as a team.” For more information on how your company can take part in an exciting overseas challenge in aid of Guide Dogs please contact us on 0845 600 6787 or online at www.guidedogs.org.uk/overseaschallenges


Guide Dogs [Overseas] Challenges

With over 120 different challenges across 4 continents, taking part in an exhilarating individual challenge or team building event couldn’t be easier. Overseas challenges offer a great development experience as well as meeting other business objectives such as employee motivation, corporate social responsibility, networking opportunities or incentive and reward packages. Challenges include: • Great Wall of China Trek • Kilimanjaro Summit Climb • Everest Base Camp • Cuban Revolution Cycle • Thailand Jungle Experience • London to Paris Bike Ride • Rajasthan Tiger Challenge • And many more…

0845 600 6787 www.guidedogs.org.uk/overseaschallenges events@guidedogs.org.uk In association with

Registered charity in England and Wales (209617) and in Scotland (SC038979)


intellectual property

think business potential

think ip

I

Once you have an idea that puts you ahead of the pack, imitations and rip-offs could follow, unless you take steps to protect your originality.

ntellectual property (IP) gives you the basis for securing the commercial rights to what makes you unique. In a world where ideas can easily be transmitted and reproduced at minimal cost, IP helps stop anyone else using your brainwaves and gives you a proper chance to profit from them. But it doesn’t just apply to radical breakthroughs in thinking. IP offers legal protection for all sorts of information and techniques that you use to run your business. It is an everyday commercial issue, which offers you a variety of ways to protect your competitive edge. First to market – think Copyright When speed to market counts, copyright may well be your preferred currency. It arises automatically, so you do not have to fill in any forms or pay any fees to protect the way in which you express an idea. Don’t be fooled into thinking that copyright is just for artists, writers and musicians. You can use it to protect any original material in your presentations, catalogues, adverts and websites. For these types of business document, copyright lasts for the lifetime of the employee who created them plus 70 years. Be aware though, that unless you have an agreement in place, sub-contractors will retain the ownership of any work they do for you. Breakthroughs – think Patents If you are breaking frontiers in your industry, then consider applying for a patent. It will give you exclusivity for 20 years from the date you file for the patent. You do not have to make a huge inventive leap to obtain a patent. Even by protecting minor technical solutions, you can oblige your competitors to produce their goods less efficiently than they might otherwise like. Holding a patent helps financially, too. As well as raising your standing with investors, you can earn royalties by allowing other people to use your technology. In confidence Alternatively, you can build a wall of secrecy, keeping a tight lid on how you make your goods and preventing other sensitive information about how you run the business from leaking out. When you talk to potential investors, or manufacturers of your goods make sure they sign a confidentiality agreement to prevent them copying your ideas. Off the shelf – think Designs Shape, decoration, pattern, texture and colour are usually the reasons why consumers pull your goods off the shelf, as opposed to someone else’s. You can register a distinctive design and protect your outward appearance for 60 | sustaininggrowth

© Mykola Velychko | Dreamstime.com

up to twenty five years. Unlike copyright, you do not have to prove any intention to steal your ideas. You are free to stamp on any design that even unwittingly resembles yours. Your good name – think Trade Marks Every business uses some form of branding, whether it’s a company name, word, or product logo. Reputations associated with a brand can take years to build and a Trade Mark stops anyone else cashing in on the trust and goodwill that consumers associate with your name. By registering your Trade Mark, you can swiftly stop anyone from trying to confuse customers by using a similar name as yours and from exploiting your main marketing asset - your brand. More clout More often than not, you will use a combination of these IP rights to protect your goods at each stage of their development, production and distribution. Taken together, they will give you significant legal and commercial clout. If you notice anyone infringing your rights, first consider writing them a warning letter. That often works. If not, you might then take them to court or impound their goods. For smaller companies, rather than pursuing costly legal actions, it is usually better to reach a negotiated solution. So before going ballistic with anyone copying your goods, think about asking for a licensing fee instead. They could end up paying you royalties for years to come. Want to know more? The UK Intellectual Property Office is responsible for granting IP rights in the UK. For help and advice on IP contact us on 08459 500 505 • enquiries@ipo.gov.uk • www.ipo.gov.uk


inward investment

© Kodo34 | Dreamstime.com

“The bubble started slowly, lasted for several years, and did not reverse itself immediately when interest rates started rising, because it was sustained by speculative demand, aided and abetted by ever more aggressive lending practices and ever more sophisticated ways of securitizing mortgages. Eventually the moment of truth arrived (…)” The New Paradigm for Financial Markets – George Soros

ALLTOGETHERNOW

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he U.S. financial system, with huge current account deficit and lax fiscal and monetary policies gathered the right conditions to generate imbalances. Although the crisis the world now experiences was slow in coming, it could have been anticipated several years in advance. Its origins go back to the bursting of the Internet bubble in late 2000. At that time, the Fed responded by cutting the federal funds rate from 6.5 percent to 3.5 percent within the space of just a few months. Then, to counteract the disruption of the economy after the terrorist attack of September 11, 2001, the Fed continued to lower rates. For thirty-one consecutive months the base inflation-adjusted shortterm interest rate was negative. Lower interest rates made mortgage payments cheaper and the demand for homes

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rose, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. Mortgage lenders invented new ways to stimulate business and generate fees. Investment banks on Wall Street developed a variety of new techniques to hive credit risk off to other investors, like pension funds and mutual funds. Merrill Lynch estimated that about half of all American GDP growth in the first half of 2005 was housing related, either directly, through home building and housing-related purchases like new furniture, or indirectly, by spending the cash generated from the refinancing of mortgages. The largest leveraged asset and credit bubble in history led the U.S., and later Europe, Japan and the rest of the world, to a global financial crisis. Beyond the housing market, excessive borrowing by financial institutions and some segments of the cor-

porate and public sectors occurred in many economies. As a result - as a scholar of the Stern School of Business at the New York University wisely put -, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble and a hedge funds bubble. Their simultaneous burst triggered a tumultuous new phase in September 2008. The overall notion that markets always know best proved itself obsolete. The delusion that economic contraction in the US and other advanced economies would be quick and superficial was replaced by the certainty that the world economy was entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Financial chiefs and governments of other affected countries admitted their tardy response. The im-


inward investment

pact has been felt across the global financial system, including in emerging markets to an increasing extent. The strains in global credit markets over the past 15 months have presented progressively challenging backdrop for capital flows to emerging markets. However, for most of the period, as highlighted in a study by the Institute of International Finance (IIF), private capital flows to emerging markets have been maintained at a remarkably strong pace. Unsurprisingly, such flows have dropped sharply in recent weeks, which led the IIF to revise its numbers for 2008 and estimate net private sector capital flows to a sample of thirty key emerging market economies to US$ 619 billion, down from their March estimate of US$ 731 billion. Developing economies, or as the United Nations Conference for Trade and Development (UNCTAD) Secretary-General recently called, the “innocent bystanders” have suffered more severely in the past few weeks than at any time since the onset of global credit problems. The main channel of this weakness has been a slump in net interbank lending. Considering the stresses across global interbank markets, that kind of institutional behavior was somehow expected. Nevertheless, prospective returns in developing markets continue to appear more attractive than those available in mature markets. Particularly about emerging and developing economies, it is important to notice that although they have not decoupled from this global downturn, as a group, they have so far sustained market access better than in earlier episodes of financial turbulence. Such context reflects thus improvements in policy frameworks and stronger public sector balance sheets. The October issue of the International Monetary Fund (IMF) World Economic Outlook points that their growth is also projected to decelerate, falling somewhat below trend during the second half of 2008 and early 2009 before picking up during the course of the year. Yet, the overall growth is projected to remain well above rates experienced in the 2001–02 global downturn. Export growth will continue to slow and domestic demand will also moderate, although demand will continue to be supported by the strong productivity gains made in recent years. Commodity-exporting countries—particularly oil exporters— are expected to maintain their momentum, but growth in countries dependent on food and fuel imports or external financing is expected to slow quite sharply. Intensifying solvency concerns have led

to emergency resolutions of major U.S. and European financial institutions and have badly shaken confidence. Extraordinary measures aimed at stabilizing markets were designed and put to practice, yet, the moment calls for an internationally coordinated strategy, ranging far beyond the heroic efforts of the world´s leading central banks. As the European Commission president, Mr. José Manuel Barroso recently noted, “we are living in unprecedented times, and we need unprecedented levels of global coordination”. Indeed, the restoration of financial stability would now benefit from a publicly-stated collective commitment by the authorities of the affected countries to address the issue in a consistent and coherent manner. The Peterson Institute for International Economics, in an editorial addressing the response to the global crisis, noted that different gov-

“Imbalances call for concerted measures, we live in a world of interdependent economies and never before has the expression “the beat of a butterfly’s wings in Sweden can cause a hurricane on the other side of the globe” been more accurate.”

ernments could use different policy tools. China, for instance, had room for fiscal expansion, while Europe could ease monetary policy and the USA could combine the two. A coordinated effort should boost confidence and reflect the interdependent vulnerability of the world economy. I am not sure whether a new Bretton Woods, as the British Prime Minister Gordon Brown has called for earlier this month, would have the power to fix so many imbalances. More than just a new system of rules, institutions, and procedures designed to regulate the international monetary system, we need the reform of existing structures, e.g. the IMF and the World Bank. We need to develop a cooperative framework to prevent and resolve crises as the one we experience, to build on confidence and liquidity. The refashioning of the global financial system must indeed be “a global effort”. Despite these times of uncertainty, it is unquestionable that investment is a rel-

evant key to development. It expands the economy’s productive capacity, drives job creation and economic growth, promotes innovation and trade, and ensures essential infrastructure. It is the main force of innovation, economic transformation and growth. As the president of the World Association of Investment Promotion Agencies (WAIPA), I am aware of its decisive role in enhancing knowledge sharing in Foreign Direct Investment (FDI) among Investment Promotion Agencies (IPAs), strengthening the cooperation between them, facilitating their access to technical assistance, supporting their capacity building projects and helping them in proposing environmental improvement to their governments. As a financial/monetary challenge is posed before governments and investors worldwide, WAIPA board and members renew the work to promote the understanding of features, implications and perspectives for global economy. The first borderless crisis in the current era of globalization has taught us a few hard lessons: a) markets do not passively adjust to changing circumstances, but actively contribute to shaping the course of events – they cannot thus be carelessly left at their own pace; b) monetary authorities have to be concerned with controlling both the money supply and credit creation; c) regulatory policies should aim at increasing the transparency of financial products; and the toughest one, d) no one is immune. I do not see any of these as excruciating burdens, but as opportunities instead. Imbalances call for concerted measures, we live in a world of interdependent economies and never before has the expression “the beat of a butterfly’s wings in Sweden can cause a hurricane on the other side of the globe” been more accurate. Secondly, markets do not sort themselves out. Multilateral governance and transparency are an imperative for us to help build confidence and promote sustainable growth. And finally, the era of effortless hegemony of a few trading blocs is definitely coming to an end. This is not the first crisis in the financial system, however, this time we will depend on international cooperation to bail out of the turmoil – all together now. The author, Alessandro Teixeira, is President of the World Association of Investment Promotion Agencies (WAIPA)

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transfer pricing : turkey

TURKEY NEW TRANSFER PRICING RULES FOR FOREIGN INVESTORS

For those foreign investors that plan to invest into Turkey, an important recent development to be considered and followed-up in the Turkish Tax Legislation is the introduction of Transfer Pricing rules and documentation obligations that entered into force effective from 1 January 2007 through Article 13 of the new Turkish Corporate Tax Law which was officially announced on 21 June 2006.

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he introduction of transfer pricing rules in Turkey in line with the “OECD Transfer Pricing Guidelines” has made it possible to analyze and evaluate the former concept of “disguised profit distribution” within group companies and among related parties based on more objective criteria in today’s global business environment. The transfer pricing methods defined in the OECD Transfer Pricing Guidelines are also recognized in Turkish Tax legislation and applied on the basis of “best method” approach. The basic concepts and principles about the new transfer pricing rules in Turkey were specified through Decree No. 2007/12888 which was published on 6 December 2007. Further explanations about the definition of “related party”, type of transfer pricing methods that can be used, annual transfer pricing documentation obligations and applications for Advance Pricing Agreements were made through Transfer Pricing General Communiqués No. 1 and 2 officially announced on 18 November 2007 and 22 April 2008, respectively. I. Annual Documentation Requirements Detailed annual transfer pricing documentation requirements were introduced in Turkey through Transfer Pricing (TP) General Communiqué No. 1 which was announced on 18 November 2007. The acceptable language

64 | sustaininggrowth

for documentation is Turkish. In case the original information and documents are available in other foreign languages, their translations into Turkish shall be required and made available to be presented to the Tax Authorities upon any official request. I.1. Form Relating to Transfer Pricing, Controlled Foreign Companies and Thin Capitalization Starting from the fiscal year 2007, all Turkish corporate taxpayers having related party transactions (regardless of whether they are domestic or cross-border) are required to complete a “Form Relating to Transfer Pricing, Controlled Foreign Companies, and Thin Capitalization” (hereafter referred to as “Related Party Transaction Form”- “RPTF”) and submit it to their tax office together with their annual corporate tax returns. The RPTF is intended to provide information about the types and volumes of related party transactions as well as the transfer pricing methods utilized. The deadline to submit the RPTF to tax office is normally the same as the deadline for submission of the annual corporation tax return (i.e. by the 25th of April of the following year for those corporate taxpayers having calendar year accounting period). I.2. Annual Transfer Pricing Documentation Report Requirement for Corporate Taxpayers With respect to annual reporting obligation, Turkish corporate taxpayers are divided into

two main categories: 1) Those Large Corporate Taxpayers registered with the Large Taxpayers’ Tax Office. (“LTTO”), 2) Those Corporate Taxpayers registered with the Other Tax Offices. Starting from the fiscal year 2007, all Turkish Corporate taxpayers registered with the LTTO are required to prepare annual transfer pricing (TP) documentation report with respect to their both cross-border and domestic transactions with related parties. Those corporate taxpayers not registered with the LTTO but other tax offices are also required to prepare annual transfer pricing documentation report with respect to only their crossborder transactions with related parties (those


transfer pricing : turkey

however considered outside the Customs borders, where all types of industrial, commercial and certain types of service activities were encouraged through certain tax exemptions until 6 February 2004. As a result of the abolishment of income and corporation tax exemptions in Turkish FTZs with respect to trade activities, companies starting to operate trading activities in Turkish FTZs after 6 February 2004 are now subject to corporation and income taxes. Besides, those corporate taxpayers engaged in trading activities and whose operation license expired after 6 February 2004 are also now subject to corporation tax (the only income/corporation tax exemption available currently in Turkish FTZs is the one granted to those taxpayers whose earnings from Turkish FTZ are derived from exclusively the sales of the goods which are produced within the FTZ). Turkish Transfer Pricing General Communiqué No. 2 which was officially announced on 22 April 2008 has provided explanations and clarifications regarding the documentation obligations for companies operating in Turkish FTZs as well as for FTZ branches of Turkish companies. Accordingly; a) All related party transactions entered into by Turkish corporate taxpayers with; i) their branches in foreign countries, ii) their branches in Turkish FTZs, iii) their related companies in Turkish FTZs shall be included within the scope of annual transfer pricing documentation report with effect from 1 January 2008 (however considering the year 2007, such transactions are still to be declared through the RPTF as related party transactions). © Photo: Raphael Hukai | Dreamstime.com

cross-border related party transactions with foreign branches, branches in Turkish Free Trade Zones and related companies in Turkish Free Trade Zones shall also be included in the scope of annual TP report starting from the year 2008). The deadline for preparation of annual TP reports is normally the same as the deadline for filing of the annual corporation tax return unless the Ministry of Finance announces an extension in the deadline (as done with respect to the fiscal year of 2007). I.3. Annual Transfer Pricing Documentation Obligations for Corporate Taxpayers Operating in Turkish Free Trade Zones Turkish Free Trade Zones (FTZs) are the areas specified by the Council of Ministers of Turkey within the political borders of Turkey,

b) Turkish corporate taxpayers operating in Turkish FTZs shall prepare annual transfer pricing documentation report only for the domestic related party transactions (i.e. for the transactions with the related parties that are located in Turkey) with effect from 1 January 2008. Such transactions shall still be declared on the RPTF for the year 2007, however, it will not be compulsory to include these transactions in the scope of 2007 TP documentation reports. c) There is no obligation to prepare a separate transfer pricing report for a Free Trade Zone Branch or a foreign branch of a Turkish company. The transactions with such branches are to be included in the documentation report to be prepared for the Turkish company.

I.4. Documentation Obligations for Income Taxpayers Unlike corporate taxpayers, income taxpayers are not obliged to submit a form like the RPTF. Nor are they required to prepare an annual documentation report. Their documentation obligations are relatively more simple as compared to those of corporate taxpayers. Income taxpayers are only required to prepare certain documents and information as specified in Section 7.1. of the Transfer Pricing General Communiqué No. 1 with respect to their both cross-border and domestic transactions with related parties and make them available to be presented to the Tax Authorities upon any official request. The information and documents requested from income taxpayers are as follows: a) Organizational chart and business description of the entity, identification of related parties (tax registration numbers, addresses, telephone numbers, etc.) and ownership relations among them, b) All information relating to the functions undertaken, risks borne and assets used, c) Price lists for the year examined, d) Production costs for the year examined, e) Volume of transactions with related and unrelated parties during the year examined and information about invoices, debit/credit notes and the similar documents, f) Copies of all related party contracts for the transaction year g) Summary financial statements of related parties, h) Internal transfer pricing policies applied among related companies, i) Relevant information in case related parties use different accounting standards and methods (e.g. Turkish subsidiary company using Turkish GAAP while its US parent company is using US GAAP) j) Information related to ownership of intangible property ownership and royalties paid and/or received, k) Justification/reasoning for the selected transfer pricing method and information and documentation regarding its application (internal and/or external comparables, comparability analysis), l) Calculations used to determine the arm’s length price or profit margin and detailed information related to the assumptions used, m) The methods used to determine the arm’s length price range, if applicable, n) Other documents used to determine the arm’s length price.

sustaininggrowth | 65


transfer pricing : turkey It should be noted that the above-mentioned list of information and documents are requested also from corporate taxpayers together with the annual transfer pricing documentation report (starting from the fiscal year 2007). Although the deadline for preparation of the annual TP documentation report and the supporting documents for corporate taxpayers is clearly indicated to be the same as the deadline for submission of annual corporation tax return of the year concerned, there is no specific deadline indicated for income taxpayers to prepare the above-mentioned documents. Accordingly, income taxpayers are required to submit TP documentation whenever they are requested by the Tax Authorities. In any case, taxpayers generally have the right of requesting from the Tax Authorities, a certain period which cannot be shorter than 15 days (as per the Turkish Tax Procedures Code), so as to make the documents requested available to be presented. I.5. Summary of Documentation Obligations by Type of Taxpayer The following Table summarizes transfer pricing documentation obligations by type of taxpayer and related party transaction:

Additional Corporate Tax (CT) = Tax Base Difference x 20% Tax Loss Penalty (TLP) = 100% x CT Delay Charge (DC) = Monthly delay interest (2.5%) x period between the accrual date of the additional CT assessment and the normal due date of payment of CT Total Burden of a TP Adjustment By Turkish Tax Authorities = CT + TLP + DC It should be noted that there is no transfer pricing documentation - specific penalty based on the current rules of the Turkish Tax Procedures Code. General tax procedural and tax loss penalties in the Turkish Tax Procedures Code apply. Although the procedural non-compliance penalties are in very small amounts and therefore can be considered as immaterial, the major consequence of non-compliance with documentation rules would be the start of tax inspection in the company and the assessment of the additional tax base on the ground of disguised profit distribution through transfer pricing. The tax loss penalty is 100% of the additional tax to be assessed. There is a delay interest applied on a monthly basis (2.5% - effective from 21 April 2006) for the period between the normal due date of the additional corporate/income tax

Type of Taxpayer

Type of Related Party Transaction

Subject to declaration in the RPTF

To be included in the TP Documentation Report of 2007 and the following years

To be included in the TP Documentation Report of 2008 and the following years

Documents and information to be required as per TP General Communiqué No.1

Corporate taxpayers registered with LTTO

Domestic (*) and crossborder (foreign) related party transactions

Yes

Yes

Transactions with foreign branches, branches in Turkish FTZs and related companies in Turkish FTZs to be included effective from 1 January 2008.

Yes

Corporate taxpayers registered with other tax offices

Domestic (*) related party transactions

Yes

No

No

Yes

Corporate taxpayers registered with other tax offices

Cross-border (foreign) related party transactions

Yes

Yes

Transactions with foreign branches, branches in Turkish FTZs and related companies in Turkish FTZs to be included effective from 1 January 2008.

Yes

Corporate taxpayers operat- Related party transactions ing in Turkish FTZs with companies in Turkey

Yes

Yes

Yes

Yes

Corporate taxpayers operat- Cross-border (foreign) related ing in Turkish FTZs party transactions

Yes

No

No

Yes

Income taxpayers

No

No

No

Yes

Domestic and cross-border (foreign) related party transactions

II. Possibility for Advance Pricing Agreements Applications for unilateral, bilateral and multilateral advance pricing agreements (APAs) are possible. The scope of APA applications is only limited to cross-border related party transactions of corporate taxpayers. Those corporate taxpayers registered with the LTTO are eligible to apply for an APA beginning from 1 January 2008. However, all corporate taxpayers shall be eligible to apply for an APA starting from 1 January 2009. The fee of application for an APA has been determined to be YTL 25,000 (about USD 20,000) and the fee for renewal of an APA has been determined as YTL 20,000 (about USD 16,000). Based on Decree No. 2008/13490 announced on 13 April 2008; with effect from 1 January 2009, corporate taxpayers operating in Turkish Free Trade Zones and corporate taxpayers operating within Turkey shall be eligible to apply to the Turkish Revenue Authority for an APA so as to determine the transfer pricing method to be applied for the related party transactions among themselves. III. Penalties The Turkish corporate tax rate is 20%. In case of a tax base difference assessed by the Turkish Tax Authority arising from a transfer pricing adjustment during a possible tax inspection, the total burden including tax loss penalty and delay charge is calculated as follows:

66 | sustaininggrowth

assessed and the date of assessment. The total burden would be calculated as indicated above. IV. Major Limitations With Respect to Satisfaction of TP Documentation Obligations There are a number of limitations in Turkish Legislative environment which adversely affect benchmarking studies/economic analyses and consequently the documentation. “Related Party” Concept Defined Too Broadly: The definitions of “related party” and “related party transactions” are too broad. Article 13 of The Turkish Corporate Tax Code governing “disguised profit distribution through transfer pricing” defines “related parties” as: 1) Companies’ own shareholders, 2) Corporations and individuals related to the companies and their shareholders, 3) Corporations and individuals who are directly or indirectly controlling or controlled by a corporation or its shareholders through management, supervision or share capital, 4) Spouses of the shareholders, 5) Siblings and parents of the shareholders and up to third degree


transfer pricing : turkey

There is no limitation as to the minimum shareholder percentage or profit share required so as to be qualified as “related party”. To give an example; employees of a company are deemed to be “related” to the company (i.e. their employer) except for the employer-employee relationship arising from the employment contract. Moreover, Transfer Pricing General Communiqué No. 2 which was announced on 22 April 2008 has introduced an example for a related party transaction whereby a local Turkish distributor of a foreign motor vehicle company is automatically deemed as “related” to the foreign company although foreign motor vehicle company does not have any shares in the capital of the Turkish distributor. This is a too much expansion in the scope of the “related party” definition according to the Turkish Tax Authorities in an attempt to capture all crossborder transactions on the basis of such concepts as “indirectly related” or “under the influence of..”. If all Turkish distributors of foreign companies are to be “related” based on the approach of the Turkish Tax Authority, this would make it almost impossible to find benchmarks for distributorship transactions. Such broad definitions and interpretations of “related party” in Turkish TP Legislation makes it very difficult to find and evaluate comparables in accordance with the arm’s length principles. Absence of Local Public Databases: Currently, there is no local database providing comparable data for Turkish companies. Public information is available on a very limited basis only for those companies which are subject to the regulations of the Capital Market Board. There is no public database for other closely held companies where the relevant financial information can be accessed on a comparative basis. Although the existing rules do not provide a clear answer as to which database should be acceptable, it can be inferred from the wording of the current TP Communiqués that foreign comparables should be acceptable provided that any differences (geographic, accounting base etc) can be eliminated through certain adjustments and/or analyses. The absence of local public databases certainly makes it difficult to match comparables to the domestic market. Considering that the transfer pricing con-

© Photo: Bram Janssens | Dreamstime.com

(inclusive) natural and in-law relatives of the shareholders, 6) Transactions with parties resident in countries deemed to cause “harmful tax competition” (to be determined by the Council of Ministers) are also considered “related-party transaction”.

cepts and applications within the framework of the OECD Transfer Pricing Guidelines are also very new to the Turkish Tax Authorities, it should be noted that when determining transfer pricing related assessments, the Turkish Tax inspectors would be highly likely to tend to use their own “secret comparables” (as they used to do in the past) to which only they have the access to obtain by virtue of their public authority. Turkish Accounting Standards versus IFRS and U.S. GAAP: Most of the parent companies of the Turkish subsidiaries keep their accounts in the headquarters based on either the International Financial Reporting Standards (IFRS) or US GAAP both of which have different accounting principles as compared to Turkish GAAP. According to the Turkish Tax Procedures Code, corporate tax base is to be determined based on the statutory records which are kept in accordance with the Turkish GAAP in line with the Turkish Tax Procedures Code. Whereas, transfer pricing adjustments at year-ends are most of the time determined by the headquarters on the basis of the accounting principles applied by the parent company. Accordingly, an adjustment calculated on the basis of US GAAP or IFRS is tried to be implemented into an accounting system which is actually reporting its tax base on the basis of Turkish GAAP. These adjustments need to be checked and revised considering the fact that a different accounting basis is used in Turkey.

tions with regard to disguised profit distribution through transfer pricing are still not clear. The Ministry of Finance still keeps silent as to whether profit adjustments should be subject to VAT or not. This uncertainty has led taxpayers so far to avoid any transfer pricing adjustments at year-end. V. Conclusion As 2007 is the first fiscal year in Turkey for which transfer pricing documentation rules have been introduced and started to be implemented, the concepts and applications are very new to not only the taxpayers in Turkey but also to the Turkish Revenue Authority. Further explanations and clarifications are expected for the new rules and documentation obligations to be applied more in line with the OECD principles and international applications. Foreign investors planning to invest into Turkey are advised to continuously and closely follow-up the developments in the Turkish Transfer Pricing documentation rules in order not to face unnecessary TP adjustments which might arise due to the limitations mentioned in Section IV. Guler Hulya Yilmaz is a member of the Istanbul Chamber of Sworn Certified Consultants and Tax Partner in Deloitte, Istanbul/TURKEY. She may be contacted at: Phone:+90 212 366 60 72 e-mail: hyilmaz@deloitte.com

Uncertainty as to VAT Treatment of Profit Adjustments: Value Added Tax (VAT) implica-

sustaininggrowth | 67


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© Indos82 | Dreamstime.com

The best place in the world to conduct business Four years in a row, Denmark has been awarded the best place to do business by the EIU business environment ranking of 82 countries. This makes the small country in the heart of the Nordics the most attractive place in the world to do business, locate and operate during the forecast period 2008-2012.

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or companies setting up in Northern Europe the reasons are clear. Denmark has a stable macroeconomic environment, excellent infrastructure, flexible labour regulation and good financing opportunities. These factors make Denmark a logical choice when investing in the northern hemisphere. The choice is supported by a competitive corporate tax rate, high level of skills and outstanding technology and innovation in a number of sectors. Flexicurity Denmark allows companies to attain objectives that are normally contradictory. Some will ask how Denmark can host some of the most satisfied, optimistic and high-performing employees in the Nordics whilst at the same time have some of the world’s most

flexible employment and redundancy rules? The answer is partly to be found in the Danish flexicurity-model which makes it easy for businesses to adapt to changing market conditions. The security dimension is highly linked to the ability of getting a new job if you loose or quit your old one. Besides, some of the phenomenon can be explained by the Danish management style which is widely characterised by short distances between leaders and employees. The non-hierarchical structure in Danish business is sometimes highlighted as an ingredient for creating engaged, independent and innovative employees. Bridging Scandinavia and Europe Denmark is among the most open economies in the world. This applies both when it comes to government, business and public

mentality. According to the IMD, Denmark ranks in the world’s top-10 when it comes to cultural openness whilst Denmark e.g. ranks 1 when it comes to efficient custom authorities. Recent growth of the EU and the opening of new emerging markets have enhanced Denmark’s already strong position as a business bridge to Russia and the Baltics whilst at the same time being the ideal distribution and marketing centre for Scandinavia, the Nordics and Northern Europe. World class knowledge and productivity Danish companies prove competitive despite the fact that a number of emerging markets enjoy considerably lower cost levels than Denmark. Thus, Danish companies have partly compensated for their high cost levels by being productive. However, the phenom-

sustaininggrowth | 69


inward investment

enon also proves that competitiveness is not just a question of production price but certainly has a quality aspect, e.g. by integrating more knowledge into products through commitment to design, branding, service, customisation and constant innovation and renewal of products. This strategy is only possible due to a high knowledge level. Denmark’s expenditures on research and development are in the world’s top-10. Secondly, Denmark is about to implement a national globalisation strategy recently introduced by the Danish Government which, among other things, has introduced a new green-card agreement for foreign skilled labour, enhanced a special tax-discount for foreign scientists and aims at doubling the number of Ph.D-students in Denmark within the coming years. These initiatives together with the Danes’ excellent English skills make Denmark worth serious considerations when looking for good locations to invest in Northern Europe. A leader in global growth sectors The Danish business landscape is characterised by both variety and specialisation. Companies operate in strong sectors within healthcare and pharmaceuticals, IT, manufacturing, industrial automation, banking and finance. Besides, Denmark has a strong position in the clean-tech sector and holds world-leading positions within a number of areas linking to environment including high

70 | sustaininggrowth

level of know-how renewables such as biogasol, energy efficiency, and wind. This also explains that Denmark today hosts the world’s leading wind energy cluster. As one result Copenhagen is to be the host city of the fifteenth World Climate Summit, COP15, in 2009. In Copenhagen you can have both Copenhagen is the capital of Denmark and with 1.8mil. inhabitants the largest city in Scandinavia. Furthermore, with Copenhagen Airport, Northern Europe’s largest, the city is the natural gateway to Scandinavia. Copenhagen is placed in the centre of the most densely populated areas in Northern Europe and in one of the most affluent and dynamic regions. 9 million people live and work within a radius of 300 kilometres from Copenhagen, and the city has developed into the economic centre of the region. Thus, Copenhagen has become an important growth centre for international companies. Today, more than 3,000 foreign companies are located in Copenhagen and a high number of those have chosen Copenhagen as their entry to the Scandinavian market. Copenhagen is a city where productivity is redefined in a way that supports both technology and style, decisions and creativity, happy employees and high performance, industry and ecology, and career and family. This is why we believe “In Copenhagen – you can have both”.

Copenhagen Capacity – your key to success in Denmark and Northern Europe Copenhagen Capacity is the official inward investment agency of the capital region of Denmark. We are dedicated to provide services, information and personal assistance to foreign investors who are seeking partners and considering Greater Copenhagen as a possible location for future activities. Our services cover the various phases of an establishment from general investigation, more detailed analysis and network building through setting up and further expansion of activities. We assist free of charge and in full confidentiality. See more about Denmark, Copenhagen and Copenhagen Capacity at www.copcap.com or contact us at info@copcap.com


© Photo: Yuriy Poznukhov | Dreamstime.com

Invest in Bulgaria now Why Bulgaria?

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• • • • • • • • •

Macroeconomic data on Bulgaria Legal advice Data on operational costs Regional information: industrial zones and infrastructure, data on unemployment, skilled labour force and level of education Recommendation of investment project sites Identification of potential suppliers, contract manufacturers and joint-venture partners Personalised administrative servicing Liaison with central and local governments Liaison with branch chambers and NGOs

INVEST BULGARIA AGENCY 31 Aksakov Street, 1000, Sofia, Bulgaria Tel: +359 2/9855500 • Fax: +359 2/9801320 Email: iba@investbg.government.bg Web: www.investbg.government.bg


inward investment

Bulgaria An attractive place for investment

With the proximity to new, unsaturated markets, and the country’s logistically strategic location in South Eastern Europe, Bulgaria continues to attract a number of new investors. Dr. Stoyan Stalev, CEO of InvestBulgaria Agency highlights the reasons for this expanding interest.

B

membership has enhanced the overall perception of the country, has facilitated trade relations and, moreover, has paved the road for potential investors to safe and lucrative investments in Bulgaria, where favorable business environment and reliable partners are easy to find.

More and more foreign businessmen and investors are targeting Bulgaria as a very attractive destination. Our country is among the youngest members of the European Union having joined in January 2007. EU

Preferred place for investment Bulgaria’s geographic location, EU membership, macroeconomic and financial stability and predictable business environment, together with state support for investment projects − these are the advantages that make Bulgaria a preferred place for investment. The Bulgarian economy has strong development potential. Macroeconomic and political stability are already in place. The legislation has been harmonized with EU’s.

ulgaria is one of the oldest European countries, with a history of twenty centuries and long-lasting traditions. Modern Bulgaria is perceived as a stable and rapidly advancing Eastern European country. It is strategically located at the crossroads of four European transport corridors, connecting Western and Northern Europe with the Eastern and Southern part of the continent. Bulgaria is also famous for its picturesque nature and rich cultural heritage.

The fiscal policy is one of the most attractive in the Union. Corporate income tax rate is at 10% – the lowest in the EU, together with Cyprus. 10% flat personal income tax rate was introduced in the beginning of 2008. The Bulgarian currency is pegged to the Euro (EUR 1 : BGN 1.95583) and businesses face no currency risk. Since 2000, Bulgaria’s country credit rating has been raised over 25 times, and now we enjoy investment grade rating by world-renowned agencies, such as Fitch Ratings, Japan Credit Rating, Standard & Poor’s and Moody’s. Qualified labour force Labour force in Bulgaria is highly-qualified and multilingual, well-motivated, flexible and loyal to the employer. 22% of our population hold university degrees and a high per-

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inward investment

centage of the rest have completed general secondary or vocational education. Many Bulgarians have a strong background in IT, engineering, medicine or economics. Workers’ aptitude and reasonable labour cost play a significant role in attracting foreign investors in Bulgaria. Along with qualified labour force, Bulgaria boasts the lowest operational costs in Europe. First among CEE countries Bulgaria has attracted 20% of all FDI in Southeastern Europe, and ranks first in FDI as percent of GDP among Central and Eastern European countries. EUR 5.96 billion, (or 23.6% of GDP), were invested in 2006 – 89% growth compared to 2005. In 2007, Bulgaria attracted a record high EUR 6.1 billion of FDI, or 21.1% of GDP. The majority of FDI in 2007 were greenfield investments. Thanks to EU entry and economic stability since 1997, FDI inflows during the last two years exceeded the FDI investments for the whole period of 1990-2005. In the first six months of 2008, continuous foreign interest was registered – the Bulgarian National Bank estimated FDI at EUR 2,079 million in the first half of the year, which is very close to the amount for the same period last year. We expect foreign direct investments in 2008 to be at a level of 2007 at least, despite of the global financial crisis.

real estate – private state or private municipal property, as well as financial support for vocational training of employees up to 29 years of age for the needs of the investment project. Class “A” investment projects enjoy

From top to bottom: Commercial building for home furniture in Sofia The Old School in the historic village Koprivshtitsa Emerald resort - Ravda The Rila monastery Previous page: The Rila Mountain

New investment encouragement law InvestBulgaria Agency has accepted more than 30 greenfield investment applications for class “A” and class “B” certification under the new Investment Encouragement Law, enforced in August 2007. A number of amendments and supplements were introduced, drawing on the enforcement experience of the last three years, and aiming at harmonisation with EU legislation. Our government now fosters high-value-added investments with export potential, in three areas – manufacturing, production of electricity from renewable energy sources, and in the field of services - high-tech activities in computer technologies, research and development, education and human healthcare. Investment encouragement measures General measures for encouragement of entrepreneurs apply to all class “A” and class “B” investments, certified under the new Investment Encouragement Law. These general incentives comprise faster administrative servicing, preferential treatment for obtaining ownership or limited property rights over

74 | sustaininggrowth

personalised administrative servicing and financial support for infrastructure to the borders of the investment project site. Investors also benefit from certain provisions in the Corporate Income Tax Law, the Value Added Tax Law and from the Law on Encourage-

ment of Employment, provided they meet certain criteria. In addition, investors may use EU Structural Funds to further support their investment projects in Bulgaria. Potential sectors There are many new business opportunities in Bulgaria. Most investors are driven by common interests, like maintaining or increasing market share, delivering new products, reducing costs, expanding R&D budget, and, last but not least, developing knowledge-based industry and finding new talents. The chemical industry, electrical and mechanical engineering, electronics and manufacturing of auto parts are all areas with strong traditions in Bulgaria, boasting skilful workers at reasonable costs. Greenfield operations, acquisition of existing companies, joint-ventures and contract manufacturing in these business fields are considered highly profitable. In the power engineering sector there are investment opportunities in segments such developing a new nuclear power plant, modernization and construction of new thermal power plants and construction of hydropower plants, wind parks or solar plants. Modernization and development in this sector is a governmental priority. During the last three years, BPO operations, mainly in IT support and administrative and financial services, have been rapidly expanding in Bulgaria, thanks to our talent pool with good language skills and competitive real estate prices. The country’s financial stability, the well-developed banking system and the expanding array of banking services – all these factors will soon make our country a financial center of the region.

InvestBulgaria Agency InvestBugaria Agency is a government agency, whose mission is to attract investments and to assist companies with the successful execution of their investment projects resulting in new job creation, increased exports of goods and services as well as inflow of know-how, ultimately aiming at boosting Bulgaria’s economy. Explore the possibilities of doing business in Bulgaria at: www.investbg.government.bg Invest in Bulgaria – your business partner in New Europe!


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