E x c e l l e n c e i n Le a d e r s h i p
issue 13 2009 ÂŁ12
Excellence in Leadership Human capital Star performers CFOs from AstraZeneca, SSP, WNS, BT and Travelex discuss how to build a future finance department based on world-class, worldwide talent
Plus: Volatile times Robert Allen, group treasurer of British American Tobacco, on why businesses with developing country operations already know how to deal with financial highs and lows
Risk review Jones Lang LaSalle’s Steve Cresswell looks at managing risk on a regional and global basis Supported by
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On parade Ever imagine that energy consumption could affect your company image? The Carbon Reduction Commitment (CRC), a new emissions trading scheme says it will. With heavy penalties for non-compliance and a league table of winners and losers made public each year, your conduct becomes a matter of public scrutiny. Simple steps like fitting smart metering could make you a winner. It’s easy when you know how.
Visit edfenergy.com/crc
One or more half hourly meter(s)? You have to register for the Carbon Reduction Commitment. Scheme begins in 2010
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Company insight
Foreword
3
Excellence in leadership Human Capital
Power to the people Welcome to the 13th edition of the CIMA (Chartered Institute of Management Accountants) Excellence in Leadership portfolio which is dedicated to the vital theme of human capital. I have always believed that the most important resource an organisation has is its workforce – this is particularly true as the war for talent continues. In spite of the downturn, employers have had to offer dynamic packages to ensure they attract the very best finance talent to steer them towards the calmer waters we are starting to see on the horizon. This edition begins (page 8) with a focus on finance transformation, business partnering and the skillsets organisations are looking for. This features input from Simon Lowth of AstraZeneca, Morten Sorensen of SSP, Arul Sivagananathan of WNS Systems and Erik ter Horst of BT. The future of the finance function is a critical topic for any organisation and this insightful article puts the spotlight on recent findings from the CIMA Centre of Excellence at the University of Bath School of Management which include 4,500 global viewpoints on the path finance has taken and its likely evolution. Looking at the pressing issue of human capital turnover in organisations, Prabhu Sivabalan from the London School of Economics outlines cutting-edge research on how high staff turnover can hit junior employees the hardest (page 24). This theory takes a sophisticated look at the struggles faced by junior workers when their senior colleagues step into executive roles and they are expected to move up the career ladder with little support or experience.
With the rise of digital media continuing, Aneta Hall, emerging media manager at Pitney Bowes, outlines how she has overseen the use of social media to present a more human face to the organisation’s global network of business customers (page 42). Economist Sylvia Ann Hewlett continues the theme of engagement, this time with internal stakeholders, by emphasising the need to support and sustain your best workers (page 46).
‘In spite of the downturn, employers have had to offer dynamic packages to ensure they attract the very best finance talent to steer them towards the calmer waters.’
management skills are useless unless organisations have the right people in the right place at the right time. With such a range of opinions and practical advice on offer, I do hope you enjoy this edition of Excellence in Leadership and that it assists you in your human capital management. While it is critical to ensure your workforce is engaged and valued, I would emphasise the need for the culture and tone you are aiming for to come from the top. It is an adage that has served me well over the years.
Charles Tilley, CIMA chief executive An important theme, particularly in light of the economic strain we have all witnessed, Christopher Hill from Travelex goes on to discuss the need to invest in staff so that organisations can build a future on worldclass, worldwide talent (page 28). Chris Roebuck, business consultant and former head of global talent at UBS, takes a look at human capital from the CFO’s viewpoint and outlines how its value must be accounted for (page 36). He emphasises that the best financial
Your feedback is important. If you have any thoughts about the articles covered in this issue or suggestions for features that we could address in future editions, please do not hesitate to contact the editor: michaeljones@globaltrademedia.com. To download selected articles published in Excellence in Leadership, please go to www.excellence-leadership.com
Excellence in Leadership
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Contents
8
EXCELLENCE IN LEADERSHIP Human Capital
Take your partners The finance function has evolved to become a major influence on business, says Simon Lowth, CFO AstraZeneca.
66
Mutual strength Steve Cresswell explains how a robust risk management process can see a company through an economic downturn.
28
76
Pick of the crop
In times of recession, a firm’s investment in its people will pay off, says Travelex’s Christopher Hill.
Key to optimal outsourcing BT Group’s Tony Chanmugan knows how to maximise the potential benefits of third-party service providers.
Excellence in Leadership
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EXCELLENCE IN LEADERSHIP
Excellence in leadership Human capital
ISSUE 13 2009 £12
EXCELLENCE IN LEADERSHIP HUMAN CAPITAL Star performers
3 Foreword
Charles Tilley, Chief Executive, CIMA
Vital statistics
7
Talent management
Sylvia Ann Hewlett, Centre for Work-Life Policy, explains to Steve Coomber how to engage and motivate staff during an economic downturn.
Vital statistics
11 Stages of change on the finance function
A new report by the CIMA Centre of Excellence reveals the results of a fiveyear study to determine the nature of the financial function and its likely trajectory.
20 Switched on to energy efficiency
EDF Energy
23 Outsourcing − make it work
NIT Technologies BPO.
Staff turnover
Also in this edition: Technology
50 Multi-tasking
54 Protect and serve
Employee turnover is often viewed as being detrimental to a company. However, the true costs of changing staff may be significantly less than expected, explains Prabhu Sivabalan, London School of Economics and Political Science.
Investing in staff
28 Pick of the crop
While a recession may bring the need for cutbacks and redundancies, it’s also a time when a company’s investment in its staff comes to the fore, says Christopher Hill, Group CFO for Travelex.
Running a company is filled with pressures that can lead to a drop in productivity as well as severe health risks. Josh Sims explains the benefits that meditation can bring to stressed-out executives.
The job of the CFO is to ensure maximum return on investment on all assets, but human capital is one resource that is often overlooked, says Chris Roebuck.
npower
Human capital and social media
42 Click thinking
Forward-thinking organisations are using social media to explore customer relationships and to encourage workforce collaboration, Aneta Hall, Pitney Bowes, tells Jim Banks.
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Excellence in Leadership Issue 13 2009 Editor | Michael Jones michaeljones@globaltrademedia.com Chief Sub-Editor | Elliott Aykroyd Production Manager | Dave Stanford Group Art Director | Henrik Williams Designers | Catherine Douglas, Mehmet Sem Client Services Team Leader | Derek Deschamps Sales Manager | David Chai davidchai@globaltrademedia.com Head of Sales | Richard Jamieson richardjamieson@globaltrademedia.com Circulation Executive | Kam Jannati Publisher | William Crocker Editor-in-Chief | John Lawrence johnlawrence@globaltrademedia.com
60 Volatile times
The recession has brought challenges to many companies. But there are lessons to be learnt from those with operations in developing countries, says Robert Allen, British American Tobacco.
65 Cash management is king
Barclays Bank
Risk
66 Mutual strength
Many markets are sensitive to macroeconomics, which is why a sound risk management methodology can help pull them through rough times, says Steve Cresswell, Jones Lang LaSalle.
71 Worth the risk
AXA Corporate Solutions
Ethics
72 Carrot and stick
A fundamental reappraisal of compensation and reward structures will go a long way to preventing another recession, says Brian Walsh.
Outsourcing
40 Regulate your energy supply
Ricoh UK
Supported by
Cash management
CFOs and human capital
36 Mastermind your people strategy
Danwood
59 A licence to save money
32 Think on this
RSA Security Division, EMC.
56 Documenting efficiencies
24 Breath of fresh air
Luke Savage, Lloyd’s of London, reveals to Christian Doherty how the challenges within the complex world of insurance and risk can be overcome.
Risk review Jones Lang LaSalle’s Steve Cresswell looks at managing risk on a regional and global basis
ISSUE 13 2009
Take your partners
Simon Lowth, CFO AstraZeneca, discusses the finance function and how it has grown to play an important role in every aspect of the business process.
Robert Allen, group treasurer of British American Tobacco, on why businesses with developing country operations already know how to deal with financial highs and lows
Human Capital
Plus: Volatile times
46 An eye for talent
Finance transformation and business partnering
8
CFOs from AstraZeneca, SSP, WNS, BT and Travelex discuss how to build a future finance department based on world-class, worldwide talent
76 The key to optimal outsourcing
Outsourcing can bring many benefits to a business. Tony Chanmugam, BT Group, reveals how he selects his ideal services providers.
80 Next issue 82 Directory
Excellence in Leadership is published by Global Trade Media, a trading division of Cornhill Publications Ltd, and is an official publication of the Chartered Institute of Management Accountants (CIMA). Registered address: Brunel House, 55–57 North Wharf Road, London, W2 1LA, UK T. +44 (0)20 7753 4200 F. +44 (0)20 7724 2089 E. info@globaltrademedia.com W. www.globaltrademedia.com www.excellence-leadership.com Registered in England No. 01564127 Chartered Institute of Management Accountants (CIMA) 26 Chapter Street, London SW1P 4NP, UK T. +44 (0)20 7663 5441 Ana Barco, CIMA, Senior Product Specialist E. ana.barco@cimaglobal.com ISSN 2041-2444 ©2009 CIMA and Global Trade Media Every quarter Excellence in Leadership brings you the latest thinking from top industry practitioners and thought leaders. It is easy to subscribe: Email: circulation@globaltrademedia.com or call Kam Jannati: +44 (0)207 936 6698. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner. The products and services advertised in Excellence in Leadership are not necessarily endorsed by or connected in any way with CIMA. The editorial opinions expressed in the publication are those of individual authors and not necessarily those of CIMA or Global Trade Media. While every effort has been made to ensure the accuracy of the information in this publication, neither Global Trade Media nor CIMA accept responsibility for errors or omissions. Further copies of Excellence in Leadership are available from Global Trade Media at a cost of £12.00, €13.00 or $18.00 per copy. Printed by Warners (Midlands)
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6
Head
Business continuity management
6
Editorial advisory board
David Blackwood
Jeff van der Eems
Bev Hampson
David Blackwood is group FD of Yule Catto & Co plc. Formerly he was the group treasurer at ICI. He qualified as an accountant with Deloitte before joining ICI in 1985. After a spell at EVC in Brussels he joined ICI Films as CFO in Brussels.
Jeff van der Eems was appointed CFO of United Biscuits in 2005 and additionally became COO in 2006. Born in Canada, he joined United Biscuits from PepsiCo, where he worked for 12 years in a series of senior finance and strategy roles in EMEA and the US.
Bev Hampson has been with Volvo for 16 years; in the UK in various finance roles for both the car company and Volvo’s finance company. She also had a twoyear assignment living and working in Sweden at the Volvo Global headquarters in 2004–2005.
Claire Ighodaro
Keith Luck Sriram Kameshwar
Keith Luck
A past president of CIMA, Claire Ighodaro’s board roles include nonexecutive director of Lloyd’s of London, the Banking Code Standards Board and UK Trade & Investment, trustee of the British Council, and council member of the Open University.
Sriram is a graduate in commerce, associate member of the Institute of Cost & Works Accountants of India, qualified Chartered Financial Analyst and an associate member of CIMA. He heads finance operations for Prudential UK’s subsidiary in India.
Keith Luck is director general of finance at the Foreign and Commonwealth Office. His background is in telecommunications, consultancy and banking. He was finance director for two London boroughs before returning to the private sector in a business development role.
Kai Peters
Sara Shipton
Arul Sivagananathan
Kai Peters is chief executive of Ashridge, the business school located in Berkhamsted, near London. Prior to joining Ashridge, Peters was director of MBA programmes and then dean of the Rotterdam School of Management (RSM) at Erasmus University in the Netherlands.
Sara Shipton is a fellow of the Chartered Institute of Management Accountants and has a BA (Hons) in Accounting and Management Control. She runs her own consultancy business based in the East Midlands and is working on a number of projects for CIMA.
As SVP for F&A operations for WNS Global Services, Arul Sivagananathan is responsible for transitioning over 400 full-time accounting workers from the largest insurer in the UK to a green site centre in Colombo. He is responsible for F&A across India and Sri Lanka.
Excellence in Leadership
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Vital Head stats
Vital statistics Sound bites ‘Finance people need good business acumen, and the ability to combine analysis with judgement and intuition. Communication and influence skills are increasingly important if someone is to be an effective business partner’ Simon Lowth, CFO, AstraZeneca (page 8)
‘Increasingly, command and control is being replaced by or intermixed with all kinds of relationships: alliances, joint ventures, minority participations, partnerships, know-how, and marketing agreements – all relationships in which no one controls and no one commands. These relationships have to be based on a common understanding of objectives, policies, and strategies; on teamwork; and on persuasion.’ Peter Drucker, writer and management guru
Keyconcerns
7
Human Capital
And the survey said... 1.4 million Jobs in IT, finance and other areas face elimination by 2010 Nearly 1.4 million back office jobs will be lost at the world’s largest companies between 2008-2010, according to a new study from The Hackett Group. These losses are just part of a longer-term trend that started in 2001 and will result in nearly 3.6 million general and administrative (G&A) jobs being eliminated by 2014.
36% of 100 financial decision-makers from FTSE 250 businesses quizzed on their priorities for the year ahead rated people management (36%) far below that of cost saving (69%) and improving cash flow (66%) as the most influential ways for their organisation to achieve financial objectives over the next 12 months. The research showed that many finance chiefs are now increasingly taking on more tactical responsibilities, with strategic tasks taking a back seat. Source: Dun & Bradstreet’s Cashflow Confidence research
According to Hackett, more than 630,000 G&A jobs are expected to be lost in 2009 alone, over three times the average number of jobs lost annually from 2000 to 2007. This is likely to lead to extended jobless recovery. Hackett’s research found that the increase in job losses is being driven by a number of factors, including: the lack of economic growth, deep cuts in response to budget pressures, improvements in productivity and automation, and the increased use of offshore labour resources. The study included 4,000 global companies in North America and Europe, all with over $1 billion in revenue. Hackett found they have made significant G&A cost reductions since 2000, with a positive impact on bottom line performance, but they have also involved elimination of jobs. Source: The Hackett Group, December 2009
Top business challenges over the last 12 months Revenue growth
56% 53%
Cost control
53%
Managing change Navigating the economic climate
47%
Delivering on the people strategy
34%
Maintaining a healthy cash flow
25%
Innovation
16%
Coping with increased competition
16% 16%
Government policy/targets Working on an international level
12%
Meeting the needs of the local community
7%
Other
5% 5%
10%
20%
30%
40%
50%
60%
Source: Emerging stronger: strategic insights for leading in tough times, Lane4, October 2009. The survey of senior managers, CEOs, directors and partners from organisations ranging from small businesses to large corporations across the globe revealed that their top three challenges were revenue growth (56%), cost control (53%) and managing change (53%).
Forecasting in adversity The ten most common problems with forecasting and planning are: 1. Unclear direction from the centre. It is important that the business explains clearly what it wants to get from the forecasting process. 2. Inconsistent business unit approaches and responses to the centre. The way in which business units communicate information lacks consistency, which makes it difficult to aggregate information and present a clear picture of the current and expected situation. 3. Cash isn’t king. Although ‘cash is king’ in the current environment it is not often understood as well as it could be if companies adopted a more integrated forecasting capability. 4. Understanding key drivers. Planning relies on setting aside time to look at the drivers of customer demand. 5. No capability to answer ‘what if?’: Without an understanding of the underlying drivers, it is impossible to get the answer to “what if?” questions.
6. Poor data quality and consistency. This remains a massive challenge for many companies. Many find that they simply do not have the data, or have inaccurate or inconsistent data, which makes it very difficult for them to make decisions. 7. Excel rules. There has been an explosion in the use of Excel spreadsheets in business. It is a great planning tool, but only up to a point. 8. Unclear roles and accountability. This can have a huge impact on the quality of the planning process. 9. Misaligned incentives. In many companies, bonuses are aligned around certain performance measures, but there is a danger that other measures become ignored because they do not affect employees’ bonuses. 10. People skills. Companies do not take enough account of people and the availability of resources when making planning assumptions. Source: Andrew Tivey, Partner, Ernst & Young, writing in The Economist’s The Performance CFO Conference Summary Paper, October 2009
Excellence in Leadership
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Finance transformation and business partnering
Take your partners In the first part of a detailed look at the CIMA Centre of Excellence at the University of Bath School of Management’s report on finance transformation, key contributor and CFO of AstraZeneca Simon Lowth speaks to Jim Banks about how the finance function has grown beyond its traditional role as holder of the purse strings to become an important partner for every part of the business.
Excellence in Leadership
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Finance transformation and business partnering
Finance teams within large enterprises have grown to encompass a broader range of responsibilities, a trend that has been highlighted in the recent crisis in financial markets and the global economic downturn. The result is that the role of finance has come to the fore and the function demands new skills to accomplish the many tasks with which it is presented.
‘The economic downturn has impacted that, so yes it is certainly a factor. Businesses need to work even harder to create value and identify strategies for growth. Every company is facing increased competition. Finance people have valuable skills to help a company respond to these competitive pressures,’ Lowth believes.
More importantly, however, the view of finance within other business departments has also been in transition. Given the finance function’s objective stance, it is now seen as a partner with and enabler of other parts of a business. Not only does it control the flow of money to invest in specific business plans, but it also offers a unique analytical insight into the viability of those plans.
Finance offers a business not only its technical skills in accounting, reporting and compliance, but also objective analysis and challenge on decisions. As the finance team becomes even more integrated into management teams across different parts of an organisation there is a fear in some quarters that this impartiality might be compromised. Yet, far from being watered down in the role of business partner, Lowth believes the objective viewpoint that finance brings is precisely what gives it great strength as an internal partner to other business disciplines.
In some organisations this trend has gone hand in hand with changes in the structure of the finance team, but even where the structure remains largely the same, perceptions have still altered subtly. ‘Finance as a function is founded on a deep body of professional and technical expertise,’ says Simon Lowth, executive director and CFO of AstraZeneca, ‘but it is increasingly seen as a partner to business teams by supporting the development of strategy and business cases, and the setting of performance objectives. ‘There is a growing recognition that the finance team can add significant value as a partner to the business, but I would not say that this is a new trend. There have always been highly qualified finance people playing that role. It is an acceleration of a trend rather than a radical departure from the past.’ Finance has a strong voice at Anglo-Swedish pharmaceutical company AstraZeneca, which is a world leader in many markets, is active in over 100 countries and employs over 65,000 people. Lowth joined the company in late 2007 from Scottish Power plc, having been part of the team that oversaw the company’s sale to Spain’s Iberdrola. He thinks that the trend towards seeing finance as a partner within the business may have been strengthened during the recent and ongoing period of economic uncertainty. There are a great many factors at play that are influencing this trend, but the most powerful is the greater challenge that companies face from a more intensely competitive environment.
‘Finance people need to bring challenge and objectivity to the management teams they support.’ Crossing boundaries The spread of the finance function’s presence beyond its traditional borders and into business partnering requires that it add new skills to complement its traditional strengths. ‘Finance people need to bring challenge and objectivity to the management teams they support, and then take ownership of the decisions that are taken. Technical finance skills in accounting, controls and compliance, risk management, valuation and analysis are a given. Finance business partners also need to be good problem solvers, with independent, enquiring minds and strong knowledge of business and operations.’ Given the need for finance professionals to have deep knowledge of their businesses, more finance people are seeking experience in other functions as part of their development. They need to have an external orientation in order to benchmark the business against
9
competitors and against performance targets, and be able to communicate the consequences of financial analysis in a meaningful way to the rest of the business. ‘Finance people need good business acumen, and the ability to combine analysis with judgement and intuition. Communication and influence skills are increasingly important if someone is to be an effective business partner,’ believes Lowth. ‘These skills are needed to challenge and test the decisionmaking process, and to maintain effective relationships across the business.’ One corollary of this trend is that there may be more scope for finance people to come to the function from other parts of a business. People may move into the finance function from operations or engineering, for instance, and in many cases they may not have qualified in finance at the start of their careers. ‘People from a scientific, engineering or IT background can often bring the objective, analytical skills required in finance business partners, and the ability to master new technical finance disciplines. Equally, finance people can work in other parts of the business before coming back to finance.’ Finance is a broad church in which many diverse skills are required (see box, below). Lowth himself initially trained as an engineer, having completed his degree at Cambridge University and then pursued
The four roles of finance Simon Lowth identifies four key roles for finance: 1. Partnering with business teams; assisting those teams to formulate and implement business plans and to manage risk. 2. Managing the company’s financial transaction processing and cash conversion cycle to achieve optimal efficiency. 3. Ensuring accurate and timely accounting, external reporting, controls and compliance. 4. Ensuring that the company has sufficient funds to drive the business. ‘The skills required to play to these rules differ, which is why they are increasingly played by separate, more specialised teams,’ says Lowth.
Excellence in Leadership
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Finance transformation and business partnering
an MBA from the London Business School. Following an early career as a design engineer, he became a consultant at McKinsey, where he spent 15 years, latterly as senior director for its UK industrial practice, prior to his move to Scottish Power.
happened. In fact, they have been taking a more central role in many organisations.
The future of finance
‘I suspect that some of these predictions were intended to provoke. The finance function still has the same roles as in 1998, but it has also added new roles such as business partnering. It has evolved over time,’ says Lowth.
With the shift that has taken place in the demands placed on the finance function in recent years it is clear that the trend for change will continue into the future. Finance professionals are no longer seen as just accountants. Their ability to provide objective analysis is now heavily geared towards defining and implementing strategy across the business. Change in the finance department has long been predicted. In fact, back in 1998 leading consultancy KPMG foresaw that ten years into the future the finance function may not exist. Clearly, in 2009 the demise of finance teams has not
‘The specialist roles for example, in statutory reporting, controls, tax and treasury remain absolutely vital, as do core transaction processing roles,’ says Lowth.
‘If the prediction was that the finance function as it was back in 1998 would not continue to exist in its same form, then I would say that the statement is true. Historically, finance functions were heavily integrated, with transaction processing, reporting and management accounting activities in a single team. That is still the case in many companies, but it is changing in many companies to a more specialised model.’ ■
‘The finance function still has the same roles as in 1998, but it has also added new roles such as business partnering.’
Simon Lowth Simon Lowth joined AstraZeneca as an executive director and chief financial officer in November 2007. In this role he is responsible for finance, investor relations and information services. He joined AstraZeneca from Scottish Power PLC where he was finance director following two years as executive director, corporate strategy and development. As finance director, Lowth led Scottish Power’s group-wide performance and risk management processes, and played a critical role in the company’s strategic transformation.
The future of the finance function The CIMA Centre of Excellence at the University of Bath School of Management is tasked with global research and analysis into finance transformation. Further information on this work is available at www.cimaglobal.com/ financetransformation. To get involved email: transformation@cimaglobal.com
Excellence in Leadership
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Stages of change in the finance function The CIMA Centre of Excellence at the University of Bath School of Management has been set up to research, over a five-year period and on a global basis, the future of the finance function and 1.1 Introduction to determine best practice in its further development. What follows is an excerpt from a new report from the centre, Finance Transformation – the evolution of value creation. It is based on substantive global data with input from more than 4,500 finance and senior managers, to give an invaluable, objective view of the nature of the finance function in today’s organisation, the path it has taken over a decade of rapid change – and its likely future trajectory.
To begininto thisand question weother willfunctions organisation’s strategy, decision making involved theanswer operations strategy of as business advisors/partners. Ten years on, CIMAdefine has implemented global researchthen initiative including internationala online survey offrom over 4,500 first ‘businessapartnering’, and an operations, progression look at the changes that have actually the more traditional role of producing taken place in the finance functions of historical financial information from the has actually taken in the 21st century: in particular have we seen a substantial growth in integration and organisations in the last ten years, and accounting records it keeps. business partnering and, if so, what have been its effects? the factors or ‘drivers’ that have caused those changes. Business partnering involves members of the finance function acting as close or ‘drivers’ that have caused those changes. advisors or internal consultants in greater A definition of business partnering collaboration and cross-functional The role of a business partnering finance 1.2 A definition of business working with others in the organisation, function is to actively supportpartnering the so they can understand the business decision making and operations, a progression from the better, more traditional role of the producing historical and provide advice and support that is needed.
‘Business partnering can involve closer links cross-functional working with others in the organisation, so they can understand the business better, and Inbusiness addition business provideor the advice and support that is needed. In addition partnering canpartnering involve evencan closer links, where the finance function professional involve even closer links, whereby the acts as a partner in the decisions to be made.’ finance function or professional acts as take responsibility for its outcome.
At the end of the last century it was clear that the role of the finance function in organisations was embarking on a period of change. It was anticipated that the expertise the finance function offered would be delivered in a different way, in particular that finance professionals would be much more closely involved in the operations and strategy of other functions as business advisors/partners. Ten years on, CIMA has brought together finance professionals together with some non-finance personnel, plus stakeholder consultations via interviews and focus groups, to seek to establish what form the transformation of the finance function has actually taken in the 21st century: in particular have we seen a substantial growth in integration and business partnering and, if so, what have been its effects? Excellence in Leadership
CIM013_028_Finance Transformation_2.indd 11
partner in the decision to be made, not
just advisor. The characteristics set out in Table 1.1 represent those that weas have determined are associated with the business partnering role. Table 1.1 Business partnering characteristics in finance functions Business partnering characteristics 1
Advises on and supports decision making throughout the organisation.
2
Supports the management of risk and complexity.
3
Is valued by other parts of the organisation for the support it gives to their activities.
4
Is usually involved in the development and implementation of strategy.
5
Always advises managers on the business implications of data it produces.
6
Plays an active role in decisions on the business portfolio.
7
Originates cost reduction strategies for the whole organisation.
8 9
Directly communicates with external stakeholders concerning business performance.
10
Is involved in reporting on the organisation’s environmental, social and governance performance.
11
Initiates and leads change.
12 13 14
Doesn’t undertake the transactional accounting work. Excellence in Leadership
skills: traditional technical skills in IT and accounting, but also a variety of business skills.
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Finance transformation and business partnering
12
The effect of this is that the finance function or professional actually has a stake in the decision, and must take responsibility for its outcome. The characteristics set out in Table 1.1 represent those that we have determined are associated with the business partnering role. At the level of the individual finance professional, business partnering requires an extensive portfolio of skills: traditional technical skills in IT and accounting, but also a variety of business skills.
have taken place in the course of the last ten years are shown in the first column of Table 1.2. Their occurrence is widespread; only 3.6% of organisations said there had been none of these changes in their finance function in the period. The vast majority identified at least one change over the last decade and just over 70% said they had experienced between two and 13 such changes. The results are shown in full in Figure 1.1.
Degree of finance function changes The key finance function changes that
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Finance function change 59.0%
Collaboration
48.4%
Reduction in headcount
37.8%
Exposing poor performance
31.7%
SSC routine tasks
28.0%
External benchmarking
24.6%
Product pricing
20.8%
Outsourcing routine tasks
18.6%
Product development
]ZhZ X]Vc\Zh ^c g i]Z aVhi YZXVYZ jaih VgZ h]dlc ^c
15.3%
Future business leaders
15.3%
Product differentiation
9.4%
SSC non-routine tasks
7.0%
Other
6.2%
Outsourcing non-routine tasks
5.5%
The nature and drivers of changes in the finance function 0
10
20
30
40
50
60
Percentage of organisations reporting
Key 59.0%
8dhi Z[ÄX^ZcXn
Degree KVajZ XgZVi^dcof finance function changes 1.3 8aZVgan hdbZ X]Vc\Zh ]VkZ WZZc hZZc bjX] bdgZ [gZfjZcian i]Vc di]Zgh! cdiVWan Xdhi gZYjXi^dc *.
4%
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VcY gZYjXi^dc d[ ]ZVYXdjci (,#- ! Wji Vahd ^cXgZVhZY XdaaVWdgVi^dc )-#) # I]Z Äghi ild X]Vc\Zh gZÅZXi I]Z `Zn ÄcVcXZ [jcXi^dc X]Vc\Zh i]Vi ]VkZ iV`Zc eaVXZ ^c i]Z aVhi iZc nZVgh VgZ h]dlc ^c i]Z Äghi Xdajbc i]Z igZcY idlVgYh higZVba^c^c\ i]Z dg\Vc^hVi^dc Vh V gZhjai d[ ^cXgZVhZY jhZ d[ iZX]cdad\n! l]^aZ i]Z aViiZg d[ IVWaZ &#'# ed^cih jh idlVgYh ^cXgZVhZY Wjh^cZhh eVgicZg^c\# >i ^h Vahd cdiVWaZ i]Vi hdbZ X]Vc\Zh lZgZ gVgZan hZZc! Table 1.2 Key finance function changes 1999 – 2009 hjX] Vh djihdjgX^c\ cdc"gdji^cZ iVh`h ^c dcan *#* d[ dg\Vc^hVi^dch # I]ZgZ VgZ [djg jcYZgan^c\ ineZh d[ ÄcVcXZ [jcXi^dc X]Vc\Z hZZ i]Z hZXdcY Xdajbc d[ IVWaZ &#' / Finance function change Type of change Motive for change Xdhi gZYjXi^dc g Z"Zc\^cZZg^c\ d[ Wjh^cZhh egdXZhhZh 7EG Z^i]Zg Wn jh^c\ h]VgZY hZgk^XZ XZcigZh HH8h dg djihdjgX^c\ & Greater emphasis on cost reduction# Cost reduction V'c ^cXgZVhZY [dXjh dc i]Z dg\Vc^hVi^dc¼h egdYjXih VcY hZgk^XZh Reduction in headcount. V c ^cXgZVhZY [dXjh dc ^ciZgcVa egdXZhhZh ^c i]Z dg\Vc^hVi^dc Vh V l]daZ# ( Increased outsourcing of routine tasks.
50
60
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Clearly some changes have been seen much more frequently than others, notably cost reduction (59%) and reduction of headcount (37.8%), but also increased collaboration (48.4%). The first two changes reflect the trend towards streamlining the organisation as a result of increased use of technology, while the latter points us towards increased business partnering. It is also notable that some changes were rarely seen, such as outsourcing non-routine tasks (in only 5.5% of organisations). There are four underlying types of finance function change (see the second column of Table 1.2): •Keycost reduction • re-engineering of business processes (BPR) 8dhi Z[ÄX^ZcXn KVajZ XgZVi^dc either by using shared service centres (SSCs) Di]Zg or outsourcing • an increased focus on the organisation’s products and services • an increased focus on internal processes in the organisation as a whole.
Figure 1.1 Organisations reporting specific changes – %
Cost reduction
Percentage of organisations reporting
)
Increased outsourcing of non-routine tasks.
*
Increased use of shared service centres (SSCs) for routine tasks.
+
Increased use of shared service centres (SSCs) for non-routine tasks.
,
Increased work on product pricing.
-
Increased work on product development.
Product focus
.
Increased work on product differentiation.
0
&%
Closer collaboration with other parts of the organisation. e.g. cross-functional teams.
&&
Increased emphasis on developing future business leaders from finance personnel.
&'
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&(
Increased external benchmarking of the whole organisation.
Business process re-engineering (BPR)
10
Cost efficiency
20
Value creation Focus on internal processes
‘At the level of the individual finance professional, business partnering requires an extensive portfolio of skills.’ We can classify these types of change on a matrix (Table 1.3, right) based on: • focus – towards the internal or external environment • motivation for change: • cost efficiency: the desire to make efficient use of organisational resources • ‘value creation’: the desire to perform tasks and roles better and in different ways so that the • organisation can increase scope for profitability and thereby create value. 30 40 50
Changes affecting organisations categorised by size and sector
60
Organisation size and sector are potentially highly influential on the number and types of finance function change that have been experienced. With increasing size organisations are likely to experience a greater range of changes. &,
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Finance transformation and business partnering
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‘There is substantial scope for organisations to pursue changes in their finance function that support value creation.’ creation changes are likely to be valid and worthwhile on many measures as they impact on areas outside the finance function, reducing headcount, cutting Nevertheless, the fact that finance The nature and drivers of changes in the finance function costs and removing responsibilities will function change to date has been driven always have a very great impact. so much by cost issues perhaps highlights a mismatch between the organisation’s These BPR-type cost efficiency changes vision for finance function change (to be LZ XVc XaVhh^[n i]ZhZ ineZh d[ X]Vc\Z dc V bVig^m IVWaZ &#( WVhZY dc/ come as a package and are more likely of cost efficiency) and the vision dXjh · idlVgYh i]Z ^ciZgcVa dg ZmiZgcVa Zck^gdcbZci a [driver bthe di^kVi^dc [dg X]Vc\Z/ of to be of greatest impact the bigger transforming finance function itself · Xdhi Z[ÄX^ZcXn/ i]Z YZh^gZ id bV`Z Z[ÄX^Zci jhZ d[ dg\Vc^hVi^dcVa gZhdjgXZh the organisation gets because they as being a ‘value-creator’. We · »kVajZ XgZVi^dc¼/ i]Z YZh^gZ id eZg[dgb iVh`h VcY gdaZh WZiiZg VcY ^c Y^[[ZgZci lVnh hd i]Vi i]Z are implemented together as a major should remember too that, while value their finance function that support value creation.
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While the cost efficiency type changes are dominant for all three types of organisation, in each case there is clear evidence of change oriented more towards improving performance.
Impact of finance function changes The key to understanding changes to the finance function is to look at those that have the biggest impact. Each respondent to the survey reported which single change had had the greatest impact on the finance function. The results are shown in Figure 1.2 and in pink on Table 1.3 (the ‘other’ category is omitted from the table).
Table 1.3 Types of finance function change E^c` iZmi 2 d[ dg\Vc^hVi^dch gZedgi^c\ i]^h ÄcVcXZ [jcXi^dc X]Vc\Z Vh ]Vk^c\ ]VY i]Z \gZViZhi ^beVXi0 dg\Vc^hVi^dch gZedgi^c\ »di]Zg¼ X]Vc\Zh VgZ cdi ^cXajYZY#
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In other words: the bigger an organisation grows, the more changes to its finance function it experiences as it deals with both the opportunities for economies of scale (cost reduction and BPR) that growth offers, and the threats to internal processes that it presents. This is certainly found to be the case as shown in Table 1.4. Large companies and public sector bodies more frequently report specific changes than do SMEs (small/medium-sized companies up to 500 employees). However, there is still remarkable similarity about the top three changes reported: cost reduction, reduced headcount in the finance function and increased collaboration.
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It is very striking that cost efficiency changes rather than value creation changes have generally had the greatest impact on finance functions, which means of course that there is still substantial scope for many organisations to pursue changes in
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CIM013_028_Finance Transformation_2.indd 13
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1.4 Impact of finance function changes I]Z `Zn id jcYZghiVcY^c\ X]Vc\Zh id i]Z ÄcVcXZ [jcXi^dc ^h id add` Vi i]dhZ i]Vi ]VkZ i]Z W^\\Zhi ^beVXi# Finance transformation and business partnering 14 :VX] gZhedcYZci id i]Z hjgkZn gZedgiZY l]^X] h^c\aZ X]Vc\Z ]VY ]VY i]Z \gZViZhi ^beVXi dc i]Z ÄcVcXZ [jcXi^dc# I]Z gZhjaih VgZ h]dlc ^c ;^\jgZ &#' VcY ^c e^c` dc IVWaZ &#( i]Z »di]Zg¼ XViZ\dgn ^h db^iiZY [gdb i]Z iVWaZ #
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Figure 1.2 Greatest impact finance function changes Finance function change Cost reduction
24.5%
Collaboration
16.5%
Reduction in headcount
12.5%
SSC routine tasks
9.6%
Exposing poor performance
7.6%
Other
6.2%
Outsourcing routine tasks
6.2%
Product pricing
4.4%
External benchmarking
The shift to value creation
3.6%
Product development
3.3%
Future business leaders
1.7%
The nature and drivers 1.7% of changes in the finance function Product differentiation Outsourcing non-routine tasks 1.3% SSC non-routine tasks 1.1% 0
5
10
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20
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Note that the five most popular suggested changes are not cost efficiency finance function changes but instead have value creation as their focus: • better integration • more efficiency • better training • better information.
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organisations financial information towards business • those in larger organisations feel the facing roles. When looking across Finance transformation I]Z Zkdaji^dc id kVajZ XgZVi^dc 1.5.1 The shift to value creation need for change more strongly: geographical regions rather than size and • over 70% of those in organisations with sector, the research again finds a high CdiZ i]Vi i]Z ÄkZ bdhi edejaVg hj\\ZhiZY X]Vc\Zh VgZ cdi Xdhi Z[ÄX^ZcXn ÄcVcXZ [jcXi^dc X]Vc\Zh Wji ^chiZVY ]VkZ kVajZ XgZVi^dc Vh i]Z^g [dXjh/ more than 250 employees reported this level of comparability. Finance functions WZiiZg ^ciZ\gVi^dc • those in SMEs with up to 100 employees rate cost reduction as most often having bdgZ Z[ÄX^ZcXn feel it least strongly (just under 52%). the greatest impact. WZiiZg igV^c^c\ WZiiZg ^c[dgbVi^dc#
Of course the key question is: what do The future: what further EZg]Veh lZ XVc WZ ZcXdjgV\ZY i]Vi! ZkZc V[iZg V YZXVYZ d[ X]Vc\Z ^c i]Z ÄcVcXZ [jcXi^dc! VcY ZkZc CFOs and finance directors need to changes are needed? \^kZc i]Z XjggZci ZXdcdb^X Ydlcijgc! dg\Vc^hVi^dch VgZ hi^aa `ZZc id ejghjZ VcY [dXjh dc kVajZ XgZVi^dc#
do now? The answer is not uniform So far we have been looking behind us, at 6aiZgcVi^kZan lZ XdjaY iV`Z i]Z k^Zl i]Vi i]Z [dXjh dc Xdhi gZYjXi^dc X]Vc\Zh ]^hidg^XVaan ]Vh gZYjXZY i]Z across such a wide constituency the finance function changes that have taken hXdeZ [dg [jgi]Zg hjX] X]Vc\Zh! hd ViiZci^dc ijgch id kVajZ XgZVi^dc# >i l^aa WZ ^ciZgZhi^c\ id hZZ l]Zi]Zg i]^h edh^i^kZ k^Zl eZgh^hih \^kZc i]Vi i]Z [jaa Z[[ZXih d[ i]Z XjggZci gZXZhh^dc bVn cdi ]VkZ WZZc XaZVg id of organisations and there are no place in the last ten years. It’s useful now to gZhedcYZcih Vi i]Z i^bZ d[ i]Z gZhZVgX]# LZ XVc ZmeZXi id hZZ i]Z ÄcVcXZ [jcXi^dc VXi^c\ bdgZ [jaan Vh V overwhelming issues shared amongst a look ahead a little and ask: are further changes Wjh^cZhh eVgicZg! ]Zae^c\ i]Z dg\Vc^hVi^dc id YZVa l^i] i]Z X]VaaZc\Zh [VXZY Wn ^i k^V ^begdk^c\ ^ciZgcVa majority of organisations, but Table 1.6 needed in finance functions to maximise their egdXZhhZh VcY [dXjh^c\ dc egdYjXih VcY hZgk^XZh# shows which are top of the agenda, and contribution to the organisation’s goals and, which are bottom of the list. if change is needed, what form should it take – value creation (in which case finance functions The top two items were each reported can achieve their business partnering vision) or by just under 16%, with just under cost efficiency?
effects of the current recession may not have been clear to respondents at the time of the research. We can expect to see the finance function acting more fully as a business partner, helping the organisation to deal with the challenges faced by it via improving internal processes and focusing on products and services.
Drivers of organisational change and finance function change Having looked at the nature of changes in the finance function and how far they have impacted organisations of different types over the last decade – and perhaps will do in the future – we need to consider carefully the external causes or drivers of organisational change that have been important over the same period. This will highlight how events in the external environment may have influenced the finance function and affected its transformation into a business partner, and may continue to do so in the future. While the full extent and impact of drivers of change are unique for each
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Finance transformation I]Z Zkdaji^dc id kVajZ XgZVi^dc
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Finance transformation and business partnering
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Some of the less frequently reported drivers are also noteworthy for their own reasons. The influence of practices adopted by other organisations is reported by 20% of organisations, which is perhaps higher than might be expected.
There are some sectoral differences to note briefly: • Demographics are almost twice as important a driver for the public sector as they are for private sector companies while drivers connected with markets, competition and globalisation are much less important. • Increased risk and uncertainty is the dominant driver in financial services,
This may be down to the process of benchmarking good practice and sharing knowledge among organisations, or it
‘External consultants, often the agents of benchmarking best practice/knowledge sharing, are a cause for change.’
organisation, we can identify certain factors which are known to significantly affect organisations as a whole (and finance functions in particular) in terms of structures, people and processes. These are listed in Figure 1.3 together with the percentage of organisations that experienced them as being a driver of their finance function change, to give us an idea of their relative significance. • Increased competition and advances in IT have been of almost equal importance (reported by 48% of organisations) as the dominant drivers of organisational change and in fact competition was rated as the driver which had had the greatest impact of all by 13% of organisations. tional changeand andfinance finance function change ional change function change • Almost as important are increased risk and uncertainty (45%), then [ X]Vc\Zh ^c i]Z ÄcVcXZ [jcXi^dc VcY ]dl [Vg i]Zn ]VkZ ^beVXiZY X]Vc\Zh ^c i]Z ÄcVcXZ [jcXi^dc VcY ]dl [Vg i]Zn ]VkZ ^beVXiZY Zh dkZg i]Z aVhi YZXVYZ · VcY eZg]Veh l^aa Yd ^c i]Z [jijgZ · lZ cZZY id h dkZg i]Z aVhi YZXVYZ · VcY eZg]Veh l^aa Yd ^c i]Z [jijgZ · lZ cZZY id new markets (40%), external a XVjhZh dg Yg^kZgh d[ dg\Vc^hVi^dcVa X]Vc\Z i]Vi ]VkZ WZZc ^bedgiVci dkZg XVjhZh dg Yg^kZgh d[ dg\Vc^hVi^dcVa X]Vc\Z i]Vi ]VkZ WZZc ^bedgiVci dkZg reporting requirements and regulations ]a^\]i ]dl ZkZcih ^c i]Z ZmiZgcVa Zck^gdcbZci bVn ]VkZ ^cÅjZcXZY i]Z a^\]i ]dl ZkZcih ^c i]Z ZmiZgcVa Zck^gdcbZci bVn ]VkZ ^cÅjZcXZY i]Z (40%) and top level management ^ih igVch[dgbVi^dc ^cid V Wjh^cZhh eVgicZg! VcY bVn Xdci^cjZ id Yd hd ih igVch[dgbVi^dc ^cid V Wjh^cZhh eVgicZg! VcY bVn Xdci^cjZ id Yd hd changes (37%). • Surprisingly these are all more VXi d[ Yg^kZgh d[ X]Vc\Z VgZ jc^fjZ [dg ZVX] dg\Vc^hVi^dc! lZ XVc ^YZci^[n Xi d[ Yg^kZgh d[ X]Vc\Z VgZ jc^fjZ [dg ZVX] dg\Vc^hVi^dc! lZ XVc ^YZci^[n pervasive than globalisation (34%), lc id h^\c^ÄXVcian V[[ZXi dg\Vc^hVi^dch Vh V l]daZ VcY ÄcVcXZ [jcXi^dch ^c lc id h^\c^ÄXVcian V[[ZXi dg\Vc^hVi^dch Vh V l]daZ VcY ÄcVcXZ [jcXi^dch ^c which is often a focus of attention in gZh! eZdeaZ VcY egdXZhhZh# I]ZhZ VgZ a^hiZY ^c ;^\jgZ &#( id\Zi]Zg l^i] i]Z Zh! eZdeaZ VcY egdXZhhZh# I]ZhZ VgZ a^hiZY ^c ;^\jgZ &#( id\Zi]Zg l^i] i]Z discussing drivers of organisational ]Vi ZmeZg^ZcXZY i]Zb Vh WZ^c\ V Yg^kZg d[ i]Z^g ÄcVcXZ [jcXi^dc X]Vc\Z! Vi ZmeZg^ZcXZY i]Zb Vh WZ^c\ V Yg^kZg d[ i]Z^g ÄcVcXZ [jcXi^dc X]Vc\Z! i^kZ h^\c^ÄXVcXZ# kZ h^\c^ÄXVcXZ# change. This highlights that there are specific causes behind market sational changewith withaasubstantial substantial impact onthe the organisation ational change impact on organisation development besides the ‘catchall’ driver of ‘globalisation’; its true complexity has been realised, and its 48.5% 48.5% multiple effects are being felt and acted upon strongly, so globalisation itself is 48.3% 48.3% now being singled out less. 44.9% 44.9%
40.5% 40.5% 40.4% 40.4% 37.1% 37.1%
CIM013_028_Finance Transformation_2.indd 15
may be explained by the ‘herd’ instinct and this sector reports more drivers, which sees organisations adopting the more often than manufacturers, 1.6 Drivers of organisational change and finance function change same management or market principles other service providers and the public =Vk^c\ add`ZY Vi i]Z cVijgZ d[ X]Vc\Zh ^c i]Z ÄcVcXZ [jcXi^dc VcY ]dl [Vg i]Zn ]VkZ ^beVXiZY one after the other, the mimic effect. sector.This is a clear indicator of dg\Vc^hVi^dch d[ Y^[[ZgZci ineZh dkZg i]Z aVhi YZXVYZ · VcY eZg]Veh l^aa Yd ^c i]Z [jijgZ · lZ cZZY id how rapid and deep-seated market Xdch^YZg XVgZ[jaan i]Z ZmiZgcVa XVjhZh dg Yg^kZgh d[ dg\Vc^hVi^dcVa X]Vc\Z i]Vi ]VkZ WZZc ^bedgiVci dkZg Indeed external consultants, who are changes affecting the organisation as i]Z hVbZ eZg^dY# I]^h l^aa ]^\]a^\]i ]dl ZkZcih ^c i]Z ZmiZgcVa Zck^gdcbZci bVn ]VkZ ^cÅjZcXZY i]Z often the agents of benchmarking best a whole, such as those that have ÄcVcXZ [jcXi^dc VcY V[[ZXiZY ^ih igVch[dgbVi^dc ^cid V Wjh^cZhh eVgicZg! VcY bVn Xdci^cjZ id Yd hd ^c i]Z [jijgZ# practice/knowledge sharing, are reported as been seen in financial services in being a cause for change by 15% of the the last decade, greatly impact the L]^aZ i]Z [jaa ZmiZci VcY ^beVXi d[ Yg^kZgh d[ X]Vc\Z VgZ jc^fjZ [dg ZVX] dg\Vc^hVi^dc! lZ XVc ^YZci^[n XZgiV^c [VXidgh l]^X] VgZ `cdlc id h^\c^ÄXVcian V[[ZXi dg\Vc^hVi^dch Vh V l]daZ VcY ÄcVcXZ [jcXi^dch ^c sample. That organisations want to finance function. eVgi^XjaVg ^c iZgbh d[ higjXijgZh! eZdeaZ VcY egdXZhhZh# I]ZhZ VgZ a^hiZY ^c ;^\jgZ &#( id\Zi]Zg l^i] i]Z eZgXZciV\Z d[ dg\Vc^hVi^dch i]Vi ZmeZg^ZcXZY i]Zb Vh WZ^c\ V Yg^kZg d[ i]Z^g ÄcVcXZ [jcXi^dc X]Vc\Z! id \^kZ jh Vc ^YZV d[ i]Z^g gZaVi^kZ h^\c^ÄXVcXZ# Figure 1.3 Drivers of organisational change with a substantial impact on the organisation Drivers of organisational change
Key
Increased competition
48.5%
Advances in information technology
48.3%
Increased risk and uncertainty
KVajZ XgZVi^dc
Di]Zg
44.9%
External reporting requirements and regulations
40.5%
New markets
40.4%
Top level management changes
37.1%
Increased service demands
35.9%
Globalisation
34.3%
Takeovers and mergers
32.0%
Increased stakeholder scrutiny
23.2%
Practices used by similar organisations or competitors
20.4%
Changes in demographics
20.0%
New suppliers
18.3%
Advice from external consultants
14.9%
Shorter product/service lifecycles
13.1%
Other
6.2% 0
Key Key
8dhi Z[ÄX^ZcXn
10
20
30
40
0
50
Percentage of organisations reporting substantial impact on the finance function
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Finance transformation and business partnering
Finance transformation insight Erik ter Horst, vice-president finance, CFO EMEA and Latin America, BT – the leading global provider of communications solutions with operations in over 170 countries and 105,000 direct employees. ‘For me, finance can only be functional if the finance function is a part of the whole organisation. This does mean the people within a finance department do need to understand the business and can act as a sparring partner for this business. As such business partnering is crucial for a finance department to understand the risks and opportunities of a business. I even go a step further by saying finance has to be a business partner otherwise finance is unable to qualify and quantify the risk within the numbers before going on to report the numbers. The economic climate shows the need for understanding the business to be able to report accurate and complete numbers. Finance will always be the gatekeeper for accurate and complete financials and secure efficiencies within an organisation however, in addition, knowing and understanding the business is one of the building stones within a finance department to be able to have an accurate and complete statement on the reported numbers. I fully believe that being a business partner is one of the critical success factors of a finance function. As part of building such a finance function at BT we outsourced or are in the process of outsourcing our main transaction processing activities and created or are in the process of creating a shared service center for the main reporting activities and the first layer
learn from the experiences of others was mentioned by larger companies in stakeholder consultations conducted as part of this research. Organisations need to ensure that, if their change is influenced by the experience of other organisations or input from external consultants, these sources should actually provide valuable insights that are fed into the change process – and not just following others who have changed or have said that they should change.
of analysis. The finance people in each country can completely focus on the deeper analysis and understanding the business, being able to link the numbers to the business and back again. In future, functions like revenue assurance, controlling/business insight, internal audit/SOC, tax and treasury will remain insourced. I do not see a substantial further change in the next ten years to this concept at BT, however countries where work has been outsourced to have
‘It is a fact that finance people cannot rely solely on their financial background going forward.’ seen an increase of the cost. As such, from an economical point of view, it might be true there is no financial trigger anymore to outsource roles. This will result in further shared service centers to optimise the synergies within large companies instead of outsourcing. I believe there is a benefit in progressing further to true partnering. True partnering is something I do see increasingly happening however it is not a part of the standard DNA of a finance department. This is currently something outside the comfort zone of finance. I still believe most finance professionals have difficulties stepping out of their comfort zone, this is one of the reasons finance is often not correctly understood. The
Another risk is of superficially mimicking without substantive changes to processes and mindsets that will properly effect change. For example, improving the business orientation of the finance function is not simply a matter of job titles, making everyone a ‘business partner’ in name but not in practice. Our consultations indicate that, where these external influences have been proven to be an important factor, it has indeed been in suggesting a possible need for change
most important reason for this is lack of understanding the business and the proper communication skills. Finance needs to grow and improve in this role. It is a fact that finance people cannot rely solely on their financial background going forward. We will see a much wider finance role, but the basis will always be the independent person with the proper financial background being a specialist on the finances, governance and compliance around this. What I strongly believe is that these finance professionals will broaden their skills and learn how to interact in the most efficient and effective way with the rest of the organisation. This can be done by appointing the right leaders in the finance organisation and leading by example, creating an environment of trust and training. Finance business partners must start by understanding how other departments communicate, and speak ‘their language’ but this does not mean a loss in being unable to safeguard the financial parameters. The finance organisation always needs to test information on objectivity and independence. I believe being a business partner only increases this objectivity and independence by having more information to test the assumptions and financial outcome and in addition have the possibility of strategic discussions on the same level.’
and also providing a model for change; organisations have not simply imported what others do but sought to learn from those whose businesses they respect. Other comments from stakeholders echo some of the results that we have looked at so far – for instance the importance of top level management commitment to the concept and implementation of change (or lack of it where there has not been change) was seen as critical by several senior finance directors consulted,
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• Consistent with the types of change seen, increased service demands, the significance of top level management, demographics and stakeholder security rank highly for public sector organisations. • Advances in IT and external reporting are common – to almost the same degree – to both large companies and public sector organisations.
How drivers ‘drive’ change When we look at whether we are more or less likely to see a particular change at the same time as a particular driver is reported as being of greatest impact, we see some interesting patterns. Excluding demographics, increased service demands and other organisations (which may have had a substantial impact on the organisation, but the effect of which was not apparent in the finance function). The results can be used by organisations as a benchmark of what changes other organisations have made to their finance functions given the external pressures they have faced.
change process is embedded involvement of the most senior management becomes less critical. It is also clear that the personnel who are expected to change can constitute barriers to change. This is not always a question simply of individuals wishing to avoid the effort of changing; sometimes it represents a positive desire to do the types of technical work associated with the more traditional role of the accountant.
Drivers affecting organisations categorised by size/sector Analysing the data in terms of organisation size and sector gives some further insights into how drivers affect different types of organisation. • As a result of their size, complexity and global reach larger companies are generally more sensitive to drivers of change – that is, more of them report more drivers – than SMEs and public sector bodies. • While SMEs are sensitive to the drivers that affect large companies, but to a lower degree, we can see that their ‘top six’ includes increased service demands and globalisation rather than external reporting and mergers/ acquisitions, which are clearly less of an issue for less high profile companies.
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• Drivers have a weaker link overall with cost efficiency types of finance function change and a stronger one with value creation types, as a result probably of cost efficiency being the traditional focus of the finance function and therefore not being driven so much by external changes. • Where globalisation has had the greatest impact we are more likely to see changes of all types, most notably BPR (outsourcing and SSCs) but also in internal processes. This indicates first that globalisation creates a broader range of pressures for change, and secondly that it presents opportunities for internal value creation. • Nevertheless one of the impacts of globalisation, new markets, is not apparently associated as strongly with finance function changes: we see opportunities for value creation via increased product focus to a degree, but cost reduction and internal processes – the internal types of change – are comparatively less important.
‘Personnel can constitute barriers to change and sometimes may represent a positive desire to do the types of technical work associated with the more traditional role of the accountant.’ For example, an organisation that feels the driver that has the greatest impact is increased competition should consider what changes it might make to its finance function in the areas of cost reduction and increased product focus. And if the organisation experiences pressures that are associated with value creation changes – such as globalisation, new suppliers, competition, stakeholder scrutiny, increased risk and uncertainty and shortened lifecycles – then the finance function can use these drivers as levers to help them make changes that fulfil their business partnering vision. • Certain changes are associated closely with certain drivers. The clearest example is the case of product focus types of value creation change, which are associated with market-related drivers such as increased competition and shorter lifecycles.
• Similarly, new suppliers are associated with increased likelihood of observing value creation change in relation to the finance function’s product focus, but we emphatically do not see internal process changes. • Where competition has the greatest impact the degree of associated finance function change is surprisingly muted, as is also the case with increased risk and uncertainty. This suggests that the finance function is perhaps more protected from the effects of competition and risk than might be expected and that there is scope for further change in the finance function where these drivers are significant. • Mergers and acquisitions appear to focus the finance function on cost reduction, as there is naturally scope for headcount reduction and Excellence in Leadership
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Finance transformation and business partnering
streamlining when two entities merge. • Increased stakeholder scrutiny is associated with the finance function looking inwardly at value creation via internal process changes but also appears to increase attention to cost efficiency. • Where external consultants have had the greatest impact (which is in less than 1% of cases) this seems to be primarily associated with BPR. This suggests that they have primarily driven cost reduction changes in finance rather than those promoting value added services. This may reflect such consultants being predominantly involved in a ‘fire fighting’ mode, getting costs under control, but also suggests there may be scope for
such consultants to ‘spread their wings’ and encourage and help their clients to look at creating value rather than just cost efficiency via outsourcing and SSCs. • Shorter product/service lifecycles are rarely reported as a ‘greatest impact’ driver, but where they are both cost efficiency and product focus type changes are associated with them. ■ To order and gain further information on this research visit: www.cimaglobal.com/financetransformation
Finance transformation THE EVOLUTION TO VALUE CREATIO
N
To get involved, email: transformation@cimaglobal.com
Finance transformation insight Morten Sorensen, finance director Central Europe, Middle East and Asia Pacific, SSP – the leading dedicated operator of food and beverage brands in travel locations worldwide, with over 60 years’ experience in the industry employing over 26,000 staff across 32 countries. ‘The finance function has experienced an increase in influence on company strategy and decision making. Although part of the activities of finance teams remain firmly ‘back office’, the role of finance has clearly widened. Certainly this is the case within SSP, where finance is integrated as a contributor to the key business processes. All significant decisions, and indeed most strategy discussions, will be supported by input from finance. The role of finance as a partner to management, and more specifically the role of the CFO as a partner to the CEO, is to aid decision making and to help steer the business towards profitable growth rather than just growth. That said, the more traditional area of cost reduction and driving efficiency is still important, and so it should be. The economic downturn has put the emphasis on driving efficiency, a kind of ‘tightening the belt’ exercise. I do not necessarily see this as a reversal of the shift of focus towards value creation though. Given the necessary training, people from other functional areas should be able to address certain problems or tasks. For the most part though, finance business partnering requires a
technical knowledge and understanding, which is outside the scope of what can reasonably be expected from a person with only a limited level of skill or training. I am not sure that business partners should necessarily have to share the responsibility or have a stake in the decisions made by the organisation. What is important is that decision makers properly understand the input and advice being provided by finance. This is where the business partnering skills of the
‘It is my impression that many finance professionals would like to apply themselves as a business partner.’ finance professional become important. Of course, at a more senior level, the finance professional is also likely to be a decision maker or at least have a stake in the decision. One could say that for finance professionals at a senior level ‘true’ business partnering is a part of the day job. Whilst there may be a potential risk to the objectivity of finance professionals from being more integrated in the business I think it is outweighed by the additional value generated. At the end of the day it comes down to the integrity and professionalism of the individual.
Clearly there will continue to be an important role to play for finance professionals with a focus on accounting, financial reporting, treasury, tax etc. However, due to the increased interaction required with other functional departments, operational management, and indeed with top management, the finance professional needs to master interpersonal and communication skills. It is my impression that many finance professionals would like to apply themselves as a business partner, but also that not everyone has the natural ability for doing so. You need the motivation and willingness to sometimes act and challenge yourself outside your comfort zone, otherwise you will not develop. I believe that the training and education within finance will continue to focus on core technical skills. And that is a good thing. The technical skill set of the finance professional is what makes him/ her valuable in the first place. But this value increases significantly when the finance professional is capable of working cross functionally and with people at different levels of the organisation, applying his/ her skills within a commercial and strategic setting.’
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Finance transformation insight Arul Sivagananathan, senior vicepresident, operations, WNS Global Services – the leading global business process outsourcing company with over 21,000 employees across 22 global delivery centres. ‘Finance is a professional function now supporting the organisation to maximise value creation. Finance as a ‘business partner’ needs to view the rest of the organisation as the internal customer. It is about supporting other business units to make their functions more effective and I believe that the current economic climate has made it even more important that the finance function works together with the rest of the organisation to achieve the organisational goals. In light of this supporting role played by finance during the economic turbulence, I would expect that it will be viewed even more as a partner rather than just a cost centre. I don’t think that the finance function can escape the responsibility of providing analysis and input and thus will have to share some responsibility for the decisions taken. In my employment, I have witnessed business partnering at the level where the finance team plays a very active role in providing analysis and advice in key operational and strategic decision making, and share ownership for the decisions taken. As it integrates more with the rest of the business, there is a risk of the
finance function losing its objectivity and independence. However, this does not necessarily follow business partnering. In fact, finance remaining objective and independent would add to the value creation as it would ensure that governance and statutory compliance are not compromised for any operational or strategic gains. In addition, it is my view that it is the senior leadership that should empower finance to remain independent.
In order to provide sound advice and analysis technical skills are required but whether they are acquired from traditional finance professionals or from others is immaterial in my view. Whatever the background, one needs to have a mix of both technical and softer business skills to be able to function successfully across teams, it is a mix. Now there is probably some truth in the fact that some accountants do not want
‘In the coming years I expect to see significant change with less people in general accounting and an increase in the business support and advisory functions.’ Certainly within WNS we are seeing this shift. We have the majority of our finance staff focused on business partnering with about 35% of total staff undertaking these roles. Our specialist finance roles account for about 25% and about 10% in general accounting, the rest of finance are spread over outsourced and other functions.
to move into more business partnering roles. However, with the shift in the market demand the finance professional has little choice but to move into more business facing roles, this is where they can add value after all.’
In the coming years I expect to see significant change with less people in general accounting as more automation is expected to take place and with more personnel shifting into the specialist finance functions as regulatory governance increases. But we also expect an increase in the business support and advisory functions as finance personnel are integrated into cross functional teams.
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Company insight
Switched on to energy efficiency Higher energy prices, a sense of corporate social responsibility and legislation are driving organisations towards lowering CO2 and therefore increasing energy efficiency. Laurent Mineau, head of energy services at EDF Energy, says his company is well placed to help customers with their carbon reduction objectives.
For decades the business model of the large energy suppliers was just to sell greater amounts of energy to increasing numbers of customers. But, in the space of just a few years, this business model has been significantly changed. ‘In the face of global warming and rising energy costs, energy firms are rethinking the way they operate,’ says Laurent Mineau, head of energy services at EDF Energy. ‘In the UK, almost a third of our carbon emissions come from electricity generation. So we recognise we are part of the problem and therefore must also be part of the solution. This is why EDF Energy is now the UK’s largest producer of lowcarbon electricity. It also means moving away from a predominantly transactional relationship with clients towards a more partnership-based approach.’ ‘Our business model, while continuing to sell our customers energy, is to sell them low carbon electricity and to help them reduce their carbon emissions. We want our customers to reduce their carbon emissions, and we are creating new products and services to help them with this,’ says Mineau.
Energy efficiency It is a balanced approach: the ability to sell more electricity to customers going hand-in-hand with the generation of low carbon electricity (EDF Energy has made clear its intention to build four nuclear power plants in the UK by 2025, subject to the right framework being in place) and helping customers to improve energy efficiency. Energy companies are uniquely placed to offer advice, products and services related
to energy efficiency given their business. ‘We have a huge research and development team working on energy efficiency projects, more than 2,000 people based in Germany, France, and the UK, and this gives us unique insight and ability. This is something that sets us apart from the many players in the very crowded energy efficiency business,’ says Mineau. There are three major drivers pushing organisations towards increased energy efficiency. One is market based. Increasingly, customers are displaying a preference for buying from sustainable businesses. Then there is the price of energy; prices have been volatile in recent years, creating a need to reduce energy consumption. The third driver, and probably
‘We want our customers to reduce their carbon emissions, and we are creating new products and services to help them with this.’ the most powerful today, is legislation. The introduction of new legislation and regulations across Europe means that organisations have to reduce their energy consumption and carbon emissions, by law. A good example of the need to change attitudes towards energy use, and the way in which EDF Energy can help, is the Carbon
Reduction Commitment (CRC) Energy Efficiency Scheme, which comes into force in April 2010. Part of the UK Government’s efforts to achieve an 80% reduction in carbon emissions by 2050, the CRC is an emissions trading scheme aimed at ‘large non energy-intensive organisations’ that account for nearly 10% of the UK’s total annual carbon emissions (14 million tonnes of carbon). Organisations with half hourly metering that used above 6GWh (6,000MWh) of electricity in the period January to December 2008 will be covered by the scheme and have to monitor, report and buy allowances for their CO2 emissions from all fuels used on-site each year. It is also worth noting that those organisations with half hourly metering, but that are below the threshold, still have to register for the scheme and show that they do not qualify. Companies will have to declare to the Environment Agency their energy consumption, and then buy allowances to cover their own emissions. This covers all emissions coming from these companies, not just electricity. At the end of each carbon reporting year, the UK Government, through the Environment Agency will check the emissions performance and rank all the companies in a league table. Based on that league table companies will
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Company insight
receive a reimbursement of funds, with the most successful companies receiving more money than they invested. ‘It is very difficult to predict the outcome of the scheme in terms of winners and losers,’ says Mineau. ‘However, those firms that have already communicated publicly about their sustainability performance are at risk of adverse publicity should they appear further down the ranking.’ The CRC will impact EDF Energy in a number of ways. First, as a major consumer of electricity and emitter of CO2, EDF Energy will itself be a participant of the scheme. Secondly, as an energy supplier, EDF Energy is obliged to supply certain data to the Environment Agency as well as to customers.
Switched on ‘It is a great opportunity for us to help our customers with their carbon reduction objectives. The scheme emphasises the benefits of early action and includes a metric that rewards early installation of Automatic Meter Reading (AMR) meters and Carbon Trust Standard (CTS) or equivalent accreditation,’ says Mineau.
EDF Energy can assist customers with their data such as getting their CRC data online and managing emissions on a daily basis. EDF Energy has also run a number of workshops, attended by almost 1,000 customers, on the issues involved in the CRC. Register online for the next CRC masterclass. Not all organisations will be covered by the scheme, but energy efficiency
A free resource that we offer to organisations, whether they are customers or not, is our Energy Efficiency Toolkit (www.edfenergy. com/eetoolkit). It is especially helpful to businesses that are new to energy efficiency, but also for more seasoned energy professionals as it provides tools that will complement existing energy saving initiatives.
Quick wins It is important for organisations just starting out on the energy efficiency journey to have some quick wins. There are a number of technologies that can be easily implemented at relatively low-cost and that can generate savings very quickly. Then once an organisation has achieved some quick wins, it can begin to think about more in-depth transformation, and more substantial investment, such as changing a boiler, or considering renewable energy options. For companies to succeed in maximising energy efficiency, however, it will require a change in attitude from viewing their energy supplier and supply as a purely transactional-based arrangement to something more akin to a partnership.
‘The requirement to produce a report of all their emissions can be difficult for large and complex organisations, so we offer our customers a service, called CRC Bureau, where we can help them create that report. Of course, the ultimate goal of the CRC is to reduce carbon emissions and improve energy efficiency, and we have a portfolio of products and services such as AMR, that can help our customers to do this.’ A lot of the help that EDF Energy can provide with respect to the CRC is aimed at alleviating the considerable administrative burden associated with the scheme. For example, organisations have to register all the different events that can affect their energy consumption.
Energy efficiency resources
and carbon reduction should be on the agenda of all organisations regardless of whether they are part of the CRC or not. Increasingly, energy efficiency measures will become compulsory and this will particularly affect the smalland medium-sized enterprises that are not currently covered by legislation. Beyond that it makes commercial sense to implement energy efficiency measures because they reduce energy consumption, and thus the energy bill. For organisations that have not started their energy efficiency journey yet, it is crucial to understand how they use and consume electricity. ‘The first initiative
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we would advise is to install a Smart Meter or AMR, something that will help monitor energy consumption. Then we would suggest doing an energy survey to help us map out energy saving potential. Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs) may also be relevant,’ says Mineau. ‘Generally speaking, after a Smart Meter we would advise our customers to install a building management system and to have a look at the lighting strategy. Voltage optimisation is also something that can be useful. So there is a range of different solutions.’
‘Fortunately, it is a change of attitude that many organisations appear to be embracing,’ notes Mineau. ‘In a recent survey of senior decision-makers1, more than 75% of respondents indicated that their energy supply relationship was more than transactional, with more than 25% saying that the relationship was like a partnership. Tackling energy efficiency and carbon emissions is going to be a long, challenging journey, but I’m sure it will be a constructive and productive one, for us and our customers.’ ■
The Ipsos MORI survey was conducted between 28 September and 5 October 2009 with 218 UK senior executives in companies with more than 10,000 employees.
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Further information EDF Energy Website: www.edfenergy.com/crc Excellence in Leadership
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Company insight
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Outsourcing – making it work NIIT Technologies Ltd - BPO offers customised back office and contact centre solutions with a focus on financial services, insurance, retail and travel verticals. Here, S Viswanathan, the company’s COO, describes how providing pricing flexibility for its clients has benefits for both parties. Each of us has heard stories of industry colleagues who have affected great changes in their organisation’s performance by leveraging outsourcing. Of course, we have also heard all the tales of how making it work was a rough ride. Naturally, there are times when the process has sailed smoothly with no hitches or stress, but these occasions tend to be fewer.
This change in pricing model meant we took on some of the risk, since we would have to retain the team to deliver the work volumes, despite the probability that they may not all be kept busy all the time. The partnership is now in its fifth year, primarily because both parties are able to estimate the volume of work in advance so that the team composition is maintained accordingly.
What constitutes ‘correct?’ A very big part of making an outsourcing arrangement work is getting the commercial model correct. Like in all business transactions it is important to recognise that both the outsourcer and the service provider have to see financial viability in the arrangement. In itself this is not a big deal, but the challenge emerges when we try to create a pricing model. In one of NIIT Technologies’ earliest customer partnerships with a leading UKbased low-cost airline we started with a Full Time Equivalent (FTE) rate, which we agreed for the period of the contract. However, after two years, economic conditions created significant uncertainty in our customer’s business, and they therefore needed some innovation to help sustain the business. Because we had a fair idea of the volume of work and the effort per transaction (and also the variability in the effort) we could derive a transaction price for the customer, which ensured that they only paid for work they generated and that they did not have any fixed cost.
‘It is essential to track performance and productivity on an ongoing basis so that any corrections can be mutually agreed.’ High-street retailer NIIT Technologies has also initiated a new chat service for a leading European high-street retailer who had no prior experience of this kind of work.
To ensure that the pricing remains ‘correct’ it is essential to track performance and productivity on an ongoing basis so that any corrections can be mutually agreed. The second key dimension of ‘correctness’ is to have a fair performance metric against which the performance is measured and assessed for any bonus or penalties, which makes it meaningful for both parties to strive to improve the performance on a continual basis. Therefore the key issues to get right are: • Pricing model – as per requirements of situation, Fixed Lump Sum, FTE rate, transaction rate • Service Level Agreement – fair performance expectation with service bonus and penalties. ■
The challenge was to determine the value proposition for the client, and the solution was a fixed-term pilot that was for an agreed fixed amount per month, after which we created a transaction-based price that worked for both parties. The two solutions outlined above are not isolated situations. As a company, NIIT Technologies finds that flexibility in the pricing model is key to making a relationship a success.
Further information NIIT Technologies Limited - BPO Website: www.niit-tech.com Excellence in Leadership
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Staff turnover
Breath of fresh air Prabhu Sivabalan, visiting lecturer at the London School of Economics and Political Science, looks at how staff turnover, rather than being unnatural and problematic, can breathe new life into the office environment.
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Staff turnover
Management textbooks have long held the view that employee turnover is undesirable to organisations. Certainly, managers don’t enjoy the prospect of receiving resignation letters. However, to what extent is employee turnover really detrimental to an organisation? Research conducted on management, human resources and accounting show employee turnover costs are lower given certain contingencies, and higher in their absence. Indeed, turnover may even engender new ways of thinking in an organisation. The following is a breakdown of factors that may mitigate or accentuate employee turnover impact.
1. Labour supply
2. Seniority and turnover concern Until recently, human resource management research generally found that the greater the seniority of an individual, the more difficult they are to replace and the higher the turnover cost. However, practitioners are beginning to acknowledge that seniority may not increase turnover concern. A regional director of a UK consumer durables distributor with more than 1,200 employees explained that turnover concern in her organisation was strongly focused on middle management, where key managers responsible for client relationships fundamentally drove business growth, and were not easily replaced. Why? Most junior sales employees who would ordinarily ascend into these roles had a short-term orientation (students paying their way through university), and did not wish to pursue a career in junior sales management. Furthermore, support for new junior sales managers was not as actively managed as for more senior directors, due to the
While the organisation does not welcome the departure of senior managers and directors, their replacement is, surprisingly, easier. This is because existing junior sales managers (many of whom possess a longer-term orientation than junior sales employees), eagerly awaited the opportunity to take on a more senior role in the organisation. Further, their strong hands-on contact with customers made them more than capable of replacing their superiors; learning the new administrative tasks that accompanies more senior management was regarded to be easier. Moreover, newly appointed senior managers/
directors were provided with greater administrative support, owing to their broader administrative responsibilities and place in the organisation. Overall, from an organisation risk perspective, senior managers were clearly more easily replaced than their junior counterparts. The interesting learning from this distributor’s experience is that the ranking for turnover concern was junior sales managers first, senior managers second and sales employees third. In this instance, seniority did not increase turnover concern.
3. Task orientation The nature of tasks conducted by employees strongly affect turnover concern. Employees engaging in standardised, repetitive and predictable tasks that are easily duplicated do not pose a significant risk to organisations in their departure. Assuming a ready supply of labour, the replacement of these employees should be effected easily. ▲
An abundant supply of labour reduces the difficulty of sourcing replacement employees. A director of a top accounting firm explained that her division did not worry about graduate level turnover. While it was not desirable, it did not give her cause for concern because there were hundreds of capable, young graduates seeking employment in firms such as hers. The loss of one member of staff was not necessarily damaging to her division, owing to the ready supply of skilled labour. Certainly, other factors may accentuate or mitigate this relationship, but the basic relationship as explained appears to hold for most graduates employed.
larger volume of junior sales managers. As a result, these new managers struggled to hit the ground running with respect to their management tasks. The organisation worried about the departure of these sales managers and actively took steps to encourage their continuing employment through strong incentive contracts and non-financial perquisites.
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‘Research conducted on management, human resources and accounting show employee turnover costs are lower given certain contingencies.’ Potential positive benefits of staff turnover Employee turnover may present organisations with opportunities to improve performance. 1. New employee inspiration Research shows that new employees entering an organisation may be short on firm-specific knowledge, but are filled with enthusiasm and inspiration to positively impact and impress. This positive energy and willingness to work should be harnessed by managers of new employees, but often is not. Instead, managers under-specify the tasks allocated to new employees, weighting their concern of the lack of firm-specific knowledge by employees over their enthusiasm and inspiration. Ideally, the combination of existing employee firm-specific knowledge and new employee interest in the short term presents organisations with an opportunity for enacting positive change more so than normal.
2. Culture-shaping New employees present organisations with an opportunity to mould their culture. Through strong personnel controls in the form of multiple interviews and psychological profile tests, organisations are able to identify new employees that strongly align to their culture style. 3. New perspectives to established tasks More than any other benefit, the introduction of a new employee brings a fresh perspective to an organisation. Operational inertia causes firms to repeatedly perform established tasks, assuming them to be acceptable. Over time, changing competitive, demand and supply environments causes the same tasks to become sub-optimal. It takes an external individual (new employee) to observe, notice, and critique these tasks, resulting in their improvement/modification.
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Staff turnover
How does employee turnover affect me? To what extent will employee turnover affect your organisation? To best answer this question, consider the following approach. Labour supply analysis The greater the abundance of labour supply, the lower the turnover costs in an organisation. To what extent is each employee in your organisation replaceable? Create a scale from 1-10, 1 being “Not replaceable” and 10 being “Highly replaceable”. Where does each of your employees sit on this spectrum? This task is often more easily conducted if the “New employee inspiration” approach (see box, p23) is completed first.
Re-training costs for employees conducting transaction-oriented tasks are also more successful when tasks are defined and able to be explained objectively, using formal personnel controls such as training sessions supported by specific manuals. A manufacturing conglomerate based in Asia, with a steady supply of available junior manufacturing labour staff in the community will not find it difficult to replace a departing employee. By contrast, the replacement of an employee with a high level of tacit knowledge learned during the course of their employment (difficult to duplicate) poses a greater risk to organisations. These tasks are more difficult to capture and consequently, re-hiring and retraining costs are higher. Re-hiring costs are higher as the employee should
be replaced by another experienced employee, either from within or outside the organisation. This arguably requires a higher salary outlay. If such an experienced employee cannot be found, an inexperienced employee will have to be trained. Re-training costs for developing tacit knowledge are also very expensive, or almost impossible to realise in the short-term. Gaining tacit knowledge on the job may also be a costly exercise, as tacit learning often comes at the expense of errors made on the job.
4. Employees – culture positive or culture negative? Have you ever been happy one of your employees left the company? Perhaps they we not effective or simply a destructive force on team culture. Employees that have such an effect not only make for a costless turnover
‘A director of a US-based investment bank recently admitted that the financial crisis provided an excuse to get rid of bankers who were either not effective or misaligned to their organisation’s culture.’
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but probably create cost-reducing turnover. Indeed, a director of a US-based investment bank recently admitted that the financial crisis provided an excuse to more easily get rid of bankers who were either not effective or misaligned to their organisationâ&#x20AC;&#x2122;s culture. Of course, the reverse must be acknowledged. When an employee that is strongly culturally-aligned to your organisation and is a hub for social and cultural cohesion leaves, there is a hole in your organisation that is difficult to fill, resulting in a very high turnover cost. The departure of such employees not only deprives a firm of their presence, but also the productivity and job satisfaction of other employees. Worryingly, this may increase the likelihood of further turnover.
5. Fixed re-training cost structures A partner of a large professional accounting firm explained to me that the costs of employee turnover were extremely high in his firm, citing a cost of $55,000 for re-training. Upon further questioning, we agreed that the majority
of these costs were allocated fixed/ common costs per new employee trained. For example, the office rent and salaries of full time human resources personnel were bound into this re-training cost. The majority of these costs would probably be incurred by the organisation irrespective of employee turnover. Organisations that calculate a turnover cost per employee find that most of the costs relate to existing fixed or common costs in their costing system. The incremental additional cost of retraining a new employee certainly exists, but is probably significantly less than organisations envisage.
Conclusions Employee turnover in organisations is certainly not welcomed. However, the costs of employee turnover may be significantly less than expected, given the presence of certain contingent factors. To what extent might the factors explained in this article exist in your organisation, and how might you create an environment that mitigates employee
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turnover costs? By focusing on the individual value-add of each employee, the availability of labour supply for the same, and the true incremental costs of replacing employees, turnover costs will be better valued and managed. â&#x2013;
Prabhu Sivabalan Prabhu Sivabalan is a visiting lecturer at the London School of Economics and Political Science, where he lectures in budgeting, control systems and performance measurement. He is senior lecturer in management accounting at the University of Technology, Sydney, and has a PhD in budgeting and management control systems.
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Investing in staff
Pick of the crop It is at times like these that a firmâ&#x20AC;&#x2122;s investment in its people, in nurturing talent and developing skills and knowledge, can really pay off, as Christopher Hill, group CFO of Travelex, explains to Steve Coomber, because itâ&#x20AC;&#x2122;s those same people that will get the company through the downturn and beyond.
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Like most organisations involved in the financial services sector the last two years have been challenging for Travelex, the world’s biggest foreign exchange firm. ‘The recent crisis has provided a number of unique opportunities and challenges for anyone working in finance. We are in uncharted waters and that has placed a lot of pressure on finance people, particularly for us as we are a leveraged business,’ says group CFO Christopher Hill. ‘To be able to manage through this period we’ve needed a strong finance team who can keep the business focused, keep the business disciplined, but at the same time help the business react to the changes and have the commercial focus to position for the upturn.’ As the head of the finance function, Hill has the group finance team reporting into him, with divisional finance directors from each of Travelex’s three business divisions: global business payments, currency services, and card and mobile payments. There are the divisional finance directors and controllers, and then the finance heads out in the various business regions that Travelex operates in. The group has offices in 35 countries and corporate relationships in over 100 countries. All in all there are about 200 people in the finance community, says Hill. ‘In the tough economic environment that we’re in, particularly with Travelex being essentially a service business, what is really important for us is to develop our own people, and deliver the right sort of training to those people to make sure that we can serve our customers in the right way, and that we have got the right skills in-house,’ says Hill. ‘The last year and a half has been tough for everybody including ourselves. But we have really focused on making sure that we develop our people. You try to make sure that you can survive through the tough times, and that you are ready for the turn in the cycle as it comes through, and a key part of that is making sure that you have got your people in the right place.’
positions within the group finance team. Promising candidates, either from outside the organisation, from one of the big professional firms, or from the internal talent pool, are brought in to work in these positions within the group finance team, whether it is focusing on planning and forecasting, liquidity management, group reporting, or other functions. That individual will then be moved out into one of the divisional finance teams. Over the last 15 months or so about ten people have benefited from this process. ‘This works well for a number of reasons,’ says Hill. ‘To start with we get some people who are very strong academically and well-qualified, and by bringing them in at the centre we can give them an understanding and appreciation of what is needed at the group level in order to get all the finance processes running smoothly.’
‘The recent crisis has provided a number of unique opportunities and challenges for anyone working in finance. We are in uncharted waters and that has placed a lot of pressure on finance people, particularly for us as we are a leveraged business.’ Then, when these people go down into the divisions, they take a piece of the group finance ethos with them, adds Hill. When they are sat at the group level, they field and ask questions across all three divisions, and are able to see where one division’s performance is stronger than another’s with respect to a particular process.
Nurturing talent One way that Travelex nurtures talent for the future within the finance function is by identifying a number of entry level
‘When these people then go and sit in a particular division they are taking those processes with them. So you are growing
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and nurturing that talent centrally and then moving it out to the division, and disseminating finance best practice through the divisions at the same time.’ Being creative with how you position your people is an excellent way to add both to their development and the development of the organisation overall, says Hill. Another important element of Travelex’s talent strategy in the finance function is moving people across disciplines and units to provide them with a wider exposure to the group’s business. You have to shake teams up and keep them moving if you want to keep them engaged, he adds. That requires management to both recognise the need to do that, and then to set up an environment, where you are able to organise a number of rotations for people. ‘We continue to develop and stimulate people by taking them out of one area and putting them into another. So, for example, the person who runs the group function in Australia used to head up the UK retail business, the person who heads up the group function in Hong Kong used to be a key person in the business payments business in the UK, and we have a person who was previously in internal audit who is now out running the finance team for business payments in the US,’ says Hill. ‘There is no question that the movement of talent around the company helps in several ways. Because you are developing these people, providing them with new challenges, continuing to stimulate them, it means you are more able to retain that talent in the organisation. And, once again, you’re disseminating some of the best practice and the best processes from within the group around the different areas of the business. It may be a gradual process, but you are having a much wider impact than you could do through lectures or seminars.’ Hill makes sure that he keeps close tabs on the talent within the finance function. When he is sat down reviewing the business with his direct reports for example, particularly when he is having conversations with the finance directors, then inevitably ‘people’ will be one of the main issues discussed. As Hill notes, whether it is in relation to improving processes, developing productivity, or Excellence in Leadership
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Assessing the talent can be difficult in organisations with complex hierarchies and management structures. That is not a problem at Travelex, though. ‘We have a fairly flat management structure, and so I always have good visibility of my people, plus I make it a point of wanting to know how they are doing, and where we are developing the people in the team who will be moved around the company next,’ says Hill. The company sponsors a number of finance people further down the organisation to do their accountancy qualifications, and other professional qualifications, including management accountancy, for example. Finding those people within the organisation that are determined to obtain professional qualifications, and that are proactive when it comes to career development, is another useful indication of where people with the potential to take on more senior positions might lie within the company. It is also important to foster the right corporate culture within which talent can develop, and to make sure as a business that management sends out the appropriate signals internally. After all, Hill was an internal promotion. He joined Travelex as group financial controller in January 2007, a couple of years after its acquisition in 2005 by Apax, and was appointed group chief financial officer in January 2009. What better signal that you can make it to the upper echelons of the company if you have the talent?
‘I always make sure that when we do cross divisional moves they are publicised within the finance team, it is important that people understand that there is that sort of mobility.’ maximising profitability, the finance team is a key enabler. It is fundamental for organisations to get the people piece right. ‘We certainly have a process where we talk about who the talented people are at
particular levels of the organisation. It is relatively informal, but also extremely focused, and my reports would have similar discussions, so there is generally an acknowledgement that ‘people’ are very high on the management agenda.
‘There is a talent stream within Travelex. We do promote a lot of people internally, and I’m sure that has a positive impact on the other people in the organisation to see that happening,’ says Hill. ‘So I always make sure that when we do these cross-divisional moves they are publicised within the finance team, because it is important that people understand that there is that sort of mobility.’
A fair exchange Of course the training and development is not confined to the finance department, but extends across the business. While with some businesses the training and development budget is one of the first to get cut in a downturn, at Travelex there is
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an understanding that while training and development benefits employees in terms of their career development it can also be targeted in such a way that it addresses specific issues within the business at a given point in time. So, for example, says Hill, there has been an emphasis recently on training people who deal with currency services. ‘The programme for currency services employees is a good example,’ he says. ‘It is all about equipping the sales associates who sit at the desks at the airport with the ability to deal with customers. If they are sat there with a long queue in front of them, for example, they know to make eye contact every so often with people in the middle and to the back of the queue, because this way people will stay longer and begin to feel some empathy with the person dealing with the queue. ‘The training that we give these people, about dealing with customers, dealing with changing customer flows, and changing customer requirements, helps us to become a lot more sensitive to customer behaviour, and obtain a huge gain in productivity.’ Similar benefits have been obtained in the business payments division, by focusing training on areas of competitive advantage for the business, such as improving vertical sales, where the sales conversation has to be far more solutions-based in order for Travelex to be a winning business in such a tough environment. As well as distributing finance best practice throughout the finance function, it is also important that finance expertise is being disseminated to the rest of the business, says Hill. ‘We have a performance cycle that we go through, where I sit down with the people running their divisions and go through the financials with them,’ says Hill. ‘At that stage you’re tying in all their dayto-day activities, whether with customers, products, or platforms, whatever it is, tying those activities to their financial impact. You need to be able to get the commercial people in the business, the non finance people, to be aware of the effects of their actions on the ultimate results of the business.’
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Leveraging your network Often senior managers do not get much time for continued professional development. But while there may not be the opportunity to attend a twoweek executive education programme at a leading business school, it is worth finding some time to leverage your network to good advantage.
‘Those advisors might be lawyers, accountants, bankers – they have a breadth of experience through a number of businesses – peers, colleagues, and even other CFOs.’
‘If you build a strong team that is focused on the strategy, what they need to execute, and you can hold them to that performance cycle, then you can create some space that provides you with the opportunity to talk things through with your network of advisors,’ says Christopher Hill.
‘You need to be able to get commercial people in the business, the non finance people, to be aware of the effects of their actions on the ultimate results of the business.’ From Hill’s perspective, running the finance function, it is essential to make sure that the finance people are in the mix, involved alongside the rest of the people making the important decisions and running the business. Of course talent management is not just about specialist skills and knowledge it is also about things like employee engagement and providing meaning in the workplace, enabling individuals to fulfil their career ambitions. Organisations that tend to this facet of their employees’ lives are more likely to benefit from higher retention levels. ‘When you meet Travelex people you will find very hardworking, committed, loyal people. One big reason for that is that Travelex has always been a very entrepreneurial business. Our relatively flat management structure means that people can clearly see the impact they have on the business, they can see what they are helping to achieve,’ says Hill. ‘When people are empowered, if you give them that freedom then it helps to retain them, because they appreciate that they are with an organisation that wants
to help them develop; that’s a pretty powerful message.’ ■
Christopher Hill Christopher Hill joined Travelex in January 2007 as group financial controller and was appointed chief financial officer for the group in January 2009. Prior to this he worked for VWR International, the US-based global laboratory supply company, which he joined in 2005 as finance director (UK and Ireland). As head of the finance function for a subsidiary of the group (a private equity investment owned by Clayton, Dubilier and Rice), Hill was responsible for substantially improving working capital and EBITDA performance over his tenure. Before joining VWR International, he worked at General Electric from 2000 to 2005.
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Think on this Leadership is inextricably linked to stress, and can lead to a drop in productivity, not to mention a potential health risk, so one would assume that a scientifically proven holistic remedy would be welcomed by executives everywhere. However, when that remedy is meditation, many executives are blinkered to its potential by suspicion and doubt, writes Josh Sims. Are you one of them? When Mark Thornton was chief operating officer of JPMorgan he was, by his own admission, a ‘caffeine-fuelled adrenaline junkie’ and needed to wear a mouth guard because he started to grind his teeth at night. ‘I simply had no skills to deal with the stress that came with management,’ he says. Then he discovered what some of his colleagues regarded as ‘simply weird, foreign, hippy’: meditation. ‘The dirty secret in the corporate world is that everybody is stressed and executives know it,’ says Thornton. ‘They also know that they won’t produce a better performance from themselves or their staff by piling on the stress. Practical tools such as meditation have been recognised in the fields of psychology and health, and increasingly in business. My performance improved radically.’ Thornton was so impressed he left his job to coach corporate meditation techniques to upper echelon executives, including those at IBM, Banco Frances, Martha Stewart Living Omnimedia, Lazard, the UN and his old employer JPMorgan. And these companies are by no means alone. Google’s Larry Page has also introduced meditation coaches while McKinsey & Co’s Personal Insights workshop programme, one of the preeminent executive training schemes, has recently made meditation part of its offer. Ford, under the leadership of executive chairman and practising Buddhist, William Ford Jr, has converted surplus head office space into meditation rooms.
For former Medtronic CEO William George, the best time to meditate is on a plane. ‘I have to go to Europe a lot,’ he says. ‘If I land at 8am, meditation gives me an opportunity to get deep rest and
‘Practical tools such as meditation have been recognised in the fields of psychology and health, and increasingly in business. My performance improved radically.’ Mark Thornton refocus before my board meeting at 10am. Meditation is the single best thing that happened to me in terms of my leadership.’ He is also on boards of Goldman Sachs and, fittingly, the Center for the Contemplative Mind in Society. The benefits of meditation are being found in other unexpected places. San Quentin prison runs a meditation course for inmates linked to decreased recidivism, while West Point, the elite US military academy, has also taught recruits the techniques.
‘The interest in meditation in business has tended to come from the executive level down but it has typically required peer-level recommendation,’ says Albert Tobler, co-founder of London Meditation, a meditation coaching organisation. ‘There has been a trend for executives to take coaching from top sports people. And then they discover that they owe part of their success to the fact they meditate. Executives who have undergone meditation training see their own style of management change for the better. They are less authoritative and more coaching in style, which in turn fosters loyalty and shared goals.’ There remains, however, widespread misunderstanding about it. Some think the practice is new, although it is mentioned in Hindu texts dating back to 3,000BC. Others think that it is a wacky Eastern art, but Judaism and Christianity have incorporated meditation. Tobler adds: ‘It is also an entirely secular, practical life skill. And, no, as I’m often told, it has nothing to do with Scientology.’ Until 2007 Tobler was under a long-term contract to General Motors’ European operations, where he introduced what he jokily calls ‘ACDC’ – Angry Caller DeCompression – to all customer-facing staff. These were deep breathing meditative techniques to foster calm reactions and reasoned thinking. He recently worked with executives of the Dutch national railways management company ProRail and is currently working with mining giant Rio Tinto, encouraging management to
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take time out to walk and talk, a practice known as ‘walking meditation’. Thorton and Tobler point out that corporate interest in meditation has increased since the recession bit down and stress levels went up. ‘Business has been given a wakeup call that is encouraging it to think about new ways of working,’ says Tobler. Equally persuasive has been meditations acquiring a scientific backing.
during deep relaxation, typically shortly before falling asleep, and deactivate the sensory processing part of the brain). They are also produced during intense times of lucid creativity. Recent MRI scan studies conducted at the University of Wisconsin, US, have shown that meditation shifts activity in the pre-frontal cortex (the brain’s most developed part, responsible for reasoning
‘There’s good data now to suggest that meditation helps with coping with stress and decision-making, and obviously those are important skills for executives to have now.’ Lynn Krage Studies conducted during the late 1960s in the US, which continues to lead studies of meditation’s effects, found that meditators’ heart rates lowered by three beats a minute, that they used some 17% less oxygen and their brains produced more theta waves (these are produced
and self-awareness) from the right to the left hemispheres. Why is this relevant? People who are left-hemisphere oriented have been found to be typically more positive and emotionally-balanced than those who are right-sided. According to a 2006 Massachusetts General Hospital study,
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Meditation – the basics There are many forms of meditation, although one of the most popular is known as ‘counting the breaths’. Sit upright, with your back away from the chair, your shoulders comfortably back and your head tilted gently forward. Close your eyes or leave them slightly open, whichever feels more comfortable. Fold your hands in your lap, palms upwards, one in the other. Now, breathing through the nose, breathe deeply and slowly in and out, concentrating attention on the path of the air as it moves in and out of you. If you find your attention has wandered, bring it back to the breath each time. The intention is not to train your mind to dispel all thoughts but to notice when it has wandered and rein it in to the here and now. It is deceptively simple, but 15 minutes practice daily can be beneficial. increased attention span and improved memory may also be benefits of meditation. ‘There’s good data now to suggest that meditation helps with coping with stress and
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Investing in staff
Three quick tips for fast calm Mark Thornton provides a guide to a stress-free working day. Notice if you are clenching your jaw and actively allow it to relax for five minutes if so. Check ten times throughout the day. Reduced tension in the jaw reduces stress. Place a finger in the middle of your eyebrows and lower your head so your chin is close to your chest. Narrow your eyes and focus on your finger tips for one minute (your eyelids may flutter, this is ok). This action breaks patterns of stressful thoughts. Scan the body’s key sites of stress: the muscles around the eyes, the muscles in the forehead, and the abdominal muscles. Relax these muscles with gentle massage. Check these areas every ten minutes for the next hour to ensure they are relaxed.
Tough at the top decision-making, and obviously those are important skills for executives to have now,’ says Lynn Krage, senior associate director of the leadership programme at Pennsylvania’s Wharton Business School, which includes meditation techniques for its MBA students. ‘We certainly have more demand for the courses than there is supply. There’s
before a meeting, for five minutes in a cab, or 30 seconds by the water-cooler. Executives tend to work at two speeds: fast and crashing. Meditation provides better brakes,’ Dittmar adds. Thornton claims that some industries simply remain institutionally stuck with the stress, and the muddled decisions
‘Executives tend to work at two speeds: fast and crashing. Meditation provides better brakes.’ Hank Dittmar a growing openness to meditation in business. But those graduates who are set to enter business are increasingly exposed to these ideas such that they’re likely to become a greater part of the workplace.’ Unfortunately, for those already overworked, meditation is not an overnight cure; it needs practice and application. Not all organisations have been successful. The Prince’s Foundation introduced staff to meditation during a 2007 project, which led to the creation of a meditation room for staff, but the programme was never repeated. ‘There was just not enough interest to merit it,’ says chief executive Hank Dittmar. While some meditative techniques require an hour a day, certain methods allow that to be a cumulative total. ‘It’s using meditation for ten minutes
that can follow. It is why, he suggests, companies with creative executives and a reputation for inventiveness, such as Apple, have embraced meditation, while those in the financial services sector, above all, are circumspect. ‘Unless the executive is prompted to explore the idea, because they’re inquisitive or interested in non-traditional methods, these kinds of companies tend to remain bastions of a culture that is aggressive, highly competitive – internally and externally – and mitigating against anything that might be considered esoteric,’ he says. ‘And yet every CEO I speak to knows overwork is not a sustainable model and wants solutions. Well, here’s one that I think will be standard within a decade.’ ■
Peak performers have significantly higher degrees of brain and psychological development than average, according to a new study of brain functioning and measures of psychological development. Subjects in the study included world champion athletes, top-level managers, and leaders in a variety of fields, who were compared with average-performing control groups. Harald Harung, associate professor at Oslo University College, was the lead author of the article. ‘There is a growing agreement among researchers that leadership development is, in essence, self-development. The primary dimension in developing leadership is to develop the personality, the consciousness of the potential leader,’ he says. Harung explains that research by co-author of the study Fred Travis found that people who had been practising transcendental meditation for up to seven years had a level of brain integration similar to peak performers, but those who had been practising for over 20 years had higher levels. The study, Higher Development, Brain Integration and Excellence in Leadership, was a collaboration between Oslo University College, the Norwegian School for Sport Sciences and Norwegian Olympic Preparatory Centre, and the US Maharishi University of Management.
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CFOs and human capital
Mastermind your people strategy
The CFOâ&#x20AC;&#x2122;s core task is to ensure that all the assets of the organisation produce the maximum return on investment. Many do this successfully for most assets. However, there is one key asset with which many CFOs seem to have problems â&#x20AC;&#x201C; human capital, as Chris Roebuck explains.
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CFOs and human capital
In a business world dominated by a need to maximise performance, minimise costs and risk and deliver the best customer service even the best financial management tools won’t deliver success without the effective management of human capital. The effective use of an organisation’s human capital isn’t just a problem for CFOs trained in counting complex financial data, it is an issue for everyone on the board. All the top team need to think about how to create an environment in which everyone gives their best and aligns it to what the organisation needs to do. People are the asset that doesn’t sit on the company’s books at night, but goes home and has the option of whether it comes back the next day, and even when it is on the premises it has an option on how well it performs. Many organisations leave the strategic management of human capital to HR departments. Often the presence of a few visible strategic HR initiatives lulls the CEO to assume, incorrectly, that the business is maximising the human capital return. In many cases the strategy may be in place but the delivery doesn’t happen effectively. There needs to be a proactive human capital strategy to turn the potential into bottom line results. That begins with the CEO, CFO and the rest of top management, supported by the HR director. HR as a whole is only there to provide technical advice and support; not to take action. The objective of a human capital strategy is the maximisation of the return-oninvestment on the human capital of the organisation to impact the bottom line in the best way possible.
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Six essential elements for an effective HC strategy • Find cost efficiencies. Costs are minimised by employees constantly thinking about helping the organisation save cost. Recent studies point out that over two-thirds of highly engaged employees think they can make a positive impact on their organisation’s costs and efficiencies, while just 19% of disengaged staff felt the same. • Minimise risk. Ensure that potential regulatory, legal or financial risk is minimised together with the loss of key personnel and damage to reputation. Increasing engagement can reduce the risk of the loss of key staff by up to 87%. Reputational risk management can be delivered through an effective “moral compass” as part of the organisation’s culture.
deliver more at better quality in the same time. Good leadership by line managers can increase discretionary performance by up to 30% and increase staff engagement. • Deliver best customer service. Activity should be aligned with delivering the best possible service to customers. All teams, irrespective of their position, identify how they can contribute to delivering this. Where possible, customers are involved in the organisations decisions about products and services and give feedback on performance. • Innovate constantly. Always be looking for opportunities in the market for new or disruptive offerings.
• Align performance. Ensure that the effort given by people is aligned to a small number of critical deliverables rather than effort to deliver a wide range of general outputs. Lack of clarity about how everyone can focus on enabling the organisation to achieve key objectives is a common reason for poor delivery. • Improve performance. Ensure that people perform at their best to
‘No CFO can afford to neglect this area because today the business case for driving the people agenda is beyond dispute.’
You achieve that by making sure that all your people are better motivated, more engaged, supported, skilled, customer focused and qualified than your competitors’ people. This requires the CEO, CFO, other senior management and HR, all acting as hands-on, proactive champions to make it happen, driving and communicating down to the line managers who will then make it happen through their people.
to focus on numbers than people. Sadly that professional training will probably not have included understanding the potential of the human capital returns and how to realise them. An Accenture study found that 46% of CFOs felt they had had little understanding of the benefits of human capital management, 30% rated themselves as having a modest understanding and 16% a good understanding. As a consequence of this, many CFOs feel that it is not their place to get involved with the human capital side of the business.
CFOs have not traditionally been involved in the development of human capital primarily because their early professional training tends to make them more likely
Furthermore, because human capital investment and the associated time lag to deliver a return is often not in line with the traditional cycles of annual financial
and corporate planning processes it is often perceived as a distraction to real business activity. Additionally, visible, concrete benefits from human capital initiatives are difficult to link to specific financial results using traditional financial measures, so they seem to fall outside the comfort zone. So in reality it’s not surprising that most CFOs feel it’s safer to leave these ‘soft and cuddly’ projects to the HR director. No true professional CFO can afford to neglect this area because today the business case for driving the people agenda is beyond dispute; it links directly to share price and other key financial measures. Indeed, some corporate Excellence in Leadership
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CFOs and human capital
researchers estimate that up to 70% of a share price is now derived from intangibles. Key elements of this are made up of brand, strategy, current and future leadership capability, the success of which is determined by the quality of human capital management. A senior management team that shows true, on-the-ground, day-today leadership creates the potential to improve employee engagement and productivity significantly. According to a Towers Perrin study of major companies, the 50 with the highest levels of employee engagement (defined as those where 70% of staff say they are engaged) showed operating income improvements of up to 20% over a year. Conversely, in firms with low engagement (under 70%), operating income fell by a third. In terms of other benefits, studies reveal: • Top-tier leadership development organisations outperform their peers in total shareholder return (TSR) by 10% over a three-year period. This means the average organisation (£2 billion market cap) increases market capitalisation by approximately £200 million due to development and talent. • Low leadership quality organisations lose about 6% on TSR and about £110 million on market capitalisation. • Top quartile performing companies have a higher focus on developing leadership than bottom quartile companies. • Companies with stronger leadership development systems have ROE and profit up to 7% higher than competitors. • 85% of top performing companies hold their leaders accountable for developing talent. • There is a direct link between good succession planning and shareholder return. (Sources: CLC, Hewitt, McKinsey, DDI) But such financial success will only come if the CEO, CFO and other senior managers lead this process and drive it forward as a key, non-negotiable business requirement. This means CFOs setting an example in their own areas with their own teams. The strategy should focus on six key areas of organisational performance (see box). But is everyone doing something about it? The answer is no, hence the opportunity to beat the competition. One study by the Corporate Leadership Council showed that 54% of those questioned thought that it was vital for
‘It is only by ensuring human capital is aligned with overall objectives that ongoing corporate performance can be realised.’ managers to develop people on the job, but only 24% said that senior managers do this well. However, they emphasised something more important: ‘the example senior management sets influences everyone else’. Where organisations get these six factors (or even two or three of them) wrong, the consequences can be extremely costly in terms of lost potential profit. Everything, from the content of initiatives to communication from senior management and what people are rewarded on, must align to deliver on the six key areas and be directly linked to the corporate objectives, vision and values.
It is only by ensuring that the human capital in the business is aligned with the overall objectives that real, ongoing corporate performance can be realised. Study after study shows that getting these basics right leads to ongoing world-class performance. But if this agenda is treated as an HR issue and not a strategic business issue then everyone below senior management level will draw the conclusion that it’s not important and the benefits will never be realised. In all this, the CFO can play a crucial role, linking with human resources to develop and review the critical areas and create a strategy and objectives to deliver improvement, making a business case for the CEO to champion the
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HC strategy into the business as the “people and performance strategy.”
ways that even the most “technical” CFO can become a competent leader.
Also the CFO should also ensure that the HR department has sufficient resources to facilitate the human capital strategy programme – particularly in having enough business-facing relationship managers per employee to facilitate the required changes. HR needs to step up and deliver transformational support as well as transactional services. This will, of course, depend on the degree to which a business has outsourced its HR transactional services.
As far as seeing a return on this type of investment, and using some or all the activities suggested, there could be a measureable benefit within six months of implementation - others will take longer. For example a mentoring program for a key group of people or good leadership
The CFO’s role in providing management data to the senior management in conjunction with the HRD to monitor and fine tune the implementation of the human capital strategy is also vital. Indeed, the CFOs involvement underscores both the viability and the legitimacy of the process. The CFO is also likely to have experts who maybe able to help HR deliver more effective metrics on human capital performance. A CFO is also the leader of the financial community in the organisation. However, often CFOs who have followed a traditional career path haven’t had much opportunity, or need, to develop people skills and leadership skills. But in creating, championing and being an active part of the process, CFOs need to develop excellent leadership skills. To do this, CFOs need to devise a personal strategy to enable them to develop their leadership skills further. There are many quick, simple and effective
‘Often CFOs haven’t had much opportunity, or need, to develop people skills and leadership skills.’ development programs for line managers, certainly should produce positive data within six months and then ongoing from there. Some of this return may not be demonstrated by specific, measurable financial data, but by data that will indicate a business performance improvement has occurred. New business initiatives or cost savings often rapidly come to the surface.
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employee engagement figures, and employee focus groups, all targeted at finding cost savings or innovations, attitude surveys, brand perceptions from customers, clients and potential employees. In the final analysis, if your organisation wants to be the best you have to release the full potential of your human capital. There is no way to achieve this without everyone, from the top down, being determined to make it happen. The CFO must play a crucial role, working with the HR director and the CEO, leading the finance function, and providing a positive example from senior management in the organisation. It will take hard work, it will take some time but the returns on the organisation’s human capital will be seen on the bottom line. More than that, the CFO will have made a real difference to the organisation and grown not only as a finance professional but as a business leader as well. ■
Chris Roebuck Chris Roebuck is visiting professor of leadership at Cass Business School, London, former global head of talent for UBS and a leading expert on improving the bottom line through leadership.
Examples of data that could be useful are key group retention figures, promotion rates of developed groups versus controls groups not yet developed, 360-degree feedback, level of new business ideas and their outcomes,
Give finance a voice The CFO has a vital role to play in defining a company’s HR strategy, so it pays to allow the finance function to ask the tough questions in the good times. This will help a company remain resilient through economic instability, according to Judy Romano of McKesson Corporation. ‘We guide management on what is likely to happen and also on what the situation will be if everything goes wrong,’ says Romano. ‘These processes have not changed because of the economic downturn. They have been tested by it and they have fared well, although it is true that we spend more time in discussion with management now. In the three and a half years that I have been here our processes have proven to be solid. We
know what to expect in terms of cashflow and we constantly monitor it,’ she adds. As well as having the ear of management, Romano’s finance team is also embedded in the operational teams across business lines and geographies, where it is allowed to ask the difficult questions that ensure a transparent, careful and rigorous approach to important decisions. ‘We have good visibility of things like counterparty risk and we always believe that you should hope for the best but prepare for the worst. Finance has a seat at the table when decisions are made, and that is critical. I know about all the things that impact on the firm’s financial position. I am always asked my opinion,’ she says.
Importantly, the opinions of finance people about goals, metrics and analysis are expressed in ways that are understood by the rest of the business. Romano explains: ‘Analytics is where our team adds value. I pair up my finance people with management team members in every country. They work together on prices, bookings and financial issues, so everyone is empowered. The better the quality of our forecasts, the better our assessment of risks and opportunities. Finance is objective, so can ask the tough questions. The culture of this company ensures that there is strong financial leadership across the whole organisation.’ Excellence in Leadership
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Company insight
Regulate your energy supply Growing cost and legislative demands mean that energy purchasing and use must be managed strategically to deliver rewards, explains npower’s head of business energy services Dave Lewis.
Financial controllers need little reminding of the volatility in the energy markets in recent years. Energy has become an outgoing that has demanded closer attention not only due to its importance to company operations, but also because of its potential impact on the bottom line. As a result, many businesses have looked at more strategic ways to manage their energy purchasing, made more important by the economic downturn. For many large energy consumers flexible purchasing arrangements have been the ideal solution. This strategy puts a business in control of the timing and amount of energy it purchases, allowing it to spread price risk over a number of purchasing decisions throughout the year. This, however, is only half the solution. Flexible purchasing requires careful management in order to reduce risk and provide financial reward. All too often businesses feel pressured into making purchasing decisions based on time factors or anxiety in the market, rather than assessing their decision against the financial needs of their business or with accurate market insight. The pressure is understandable – for businesses spending substantial sums on energy, the consequences of delaying a purchasing decision could be significant. That said, pressure should not be the driving factor in decision making; knowledge should. Making informed decisions can only be achieved if energy purchasing is managed within a framework based on what a business is prepared to pay for energy and when – essentially, what constitutes a purchasing risk.
Risk management We have been working closely with businesses to help them do this and give them a strategic view of their risk in energy procurement. This focuses on eliminating the guesswork when buying energy, and getting the tools in place to better manage purchasing. This has led to the development of a suite of products titled ‘r3’ (risk, review, respond). Among these is ‘Policy Shaper’, a service to help companies understand their risk profile in order to choose the most appropriate purchasing strategy. This incorporates value at risk reporting which shows businesses their exposure to energy price risk and measures financial rewards according to the risks they take.
‘It is becoming important not to manage procurement in isolation, but to consider energy in a broader context.’
a bottom line concern is becoming a triplebottom-line issue: financial accountability, yes, but also environmental and social accountability. Moreover, as a result of changing legislation these lines are becoming blurred, further emphasising the need for careful energy management. Primary among these legislative changes is the Carbon Reduction Commitment Energy Efficiency Scheme (CRC). For those that don’t yet know, the CRC will involve organisations who had a minimum 6,000MWh electricity consumption through at least one half hourly meter during 2008. Participants will be required to buy allowances to cover their carbon emissions for each year – one allowance per tonne of CO2 at a price initially fixed at £12 per tonne.
A further tool, ‘Risk Navigator’, provides businesses with detailed and timely market news as it breaks; monitors wholesale price movement at any time of the day; and provides up-to-date detail on customers’ own hedging positions to support more informed energy buying decisions.
At the end of each year, the revenue from purchases will be recycled according to each participant’s contribution to the overall CRC baseline emissions. A league table will also be published so the best and worst performers in terms of emissions reductions will be known. Those at the top will be paid a bonus payment; those at the bottom will face a penalty.
A combined effort
Energy action
Increasingly, however, it is becoming important not to manage procurement in isolation, but to consider energy in a broader context. What was once solely
The government hopes this will create the incentive for businesses to take action to improve energy efficiency and reduce carbon. Energy therefore becomes an issue
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Company insight
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Smart meters: measures that count
smartmetering
Providing the data you need to track consumption
encompass
Helping you analyse and understand your energy consumption
with not only further financial implications (through having to purchase emission allowances), but also environmental and social implications (through the reputational impact of high emissions and league table position). Put simply, it’s never been more important to manage your energy consumption. Let’s not forget, however, that while energy requires more careful management, the rewards for getting it right are that much greater. Aside from the financial benefits of reducing energy purchasing risk, under the CRC, any improvements made in energy efficiency become more attractive. Whereas previously businesses would have enjoyed only a reduction in energy costs, they now stand to benefit from reduced carbon allowance payments and the reputational benefit of an improved league table position. For many organisations this could be just as important as the financial implications.
A new approach For many businesses, a strategy to manage multiple energy demands will require a new approach and the bringing together of various roles to achieve the best outcome. Energy procurement and energy management often sit apart at the moment, for example. If improvement measures are to be funded and a business case made for these, there’s also a strong case for having a financial controller involved. Businesses will also need to have detailed plans in place in order to record and report on their emissions, and then reduce them. Smart meters should feature as a priority in these plans. These will capture detailed data for your non half-hourly sites on energy use which can then be analysed to make more informed decisions on energy efficiency. After all,
springboard
academy
capitalise
horizons
An energy review and action plan for your business
Equipping you and your staff to cut consumption
Fine tuning your energy equipment and systems
Looking forward to fully sustainable energy
how can you be expected to report on and reduce energy if you don’t even know how much you’re using? Installing smart meters will also help league table position under the CRC as, in the first three years of the scheme, positioning will also be influenced by an early action metric that takes into account certain measures taken to improve efficiency, with installation of smart meters among the measures that count. To help companies achieve this, npower is providing smart meters to meet the timescales of the CRC. The ability to forecast allowance requirements, risk exposure and cash flow related to allowance purchases will also be crucial. In short, it’s about creating a data-rich environment in which your organisation can plan how it will manage its CRC obligations. As in risk management, we have developed tools to help businesses achieve this. Among these is ‘encompass professional’. ‘encompass’ is a monitoring tool that analyses energy use in detail, and combines this historic data on company production levels and energy usage with 20-year weather patterns to forecast future energy use. This information is then used to help improve energy management, and aid in the creation of strategies for reducing consumption, costs and carbon. ‘Encompass Professional’ is the latest addition to npower’s ‘m3’ portfolio, a range of energy management tools and services, which includes energy monitoring and targeting together with guidance on implementing carbon and energy reduction strategies.
The energy management journey The final part of the jigsaw is bringing this all together so that energy use and
procurement work in harmony. With this in mind, our m3 and r3 products have been designed to work together, guiding businesses through a series of improvement measures – an energy management journey, if you like. For many, a starting point on this journey could be CRC. So while m3 helps businesses devise plans to reduce energy consumption, r3 helps better manage the procurement of this energy. Importantly, this gives businesses a more holistic view of energy use. Actions that reduce demand can be considered in the procurement strategy; savings made in energy costs can be fed back into the energy management programme to achieve ongoing improvement measures, and therefore continued cost and carbon reductions There has never been a better time to improve energy management – the business benefits for taking action are compelling and should be enough to convince any organisation to get on board. npower has the tools available to assist companies in making informed decisions, making the process simpler and measureable. This is not to say it won’t require hard work, but the rewards on offer make it hard work that is very much worth undertaking. For those not yet convinced of the need to take action, npower is holding a briefing with CIMA on 10 February to give businesses more detail on the CRC and what they can do to prepare for the scheme. ■
Further information npower www.npower.com Excellence in Leadership
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Human capital and social media
Click thinking The rapidly evolving world of social media is more than a tool in the marketing department’s armoury. Forward-thinking organisations are using it to explore the future of customer relationships and become closer to the end users of their products and services. Moreover, it can facilitate greater collaboration among the workforce, as Pitney Bowes’ Aneta Hall explains to Jim Banks.
‘Social media is still in its infancy. The technology will be a major business issue in 2010 and beyond. The question now is how companies can tap into that interaction and be safe in that space.’ Excellence in Leadership
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Human capital and social media
We may not all have used social networking websites like Facebook and Twitter, but there can be few people who have not at least heard mention of them. These sites are the most recognisable names in the world of social media, about which some businesses have become very excited in recent years. But are these sites a generational fad, or are they truly a phenomenon that will shape the world of business in the years ahead? Given the growing online real estate devoted to social media, including the online communities of many corporates, it seems that the Web 2.0 and Enterprise 2.0 software underpinning them has succeeded in creating an incredible opportunity for companies to become immersed conversations with customers – and between customers – which should lead to tangible business value somewhere along the line. But can any large organisation make good use of social media? Aneta Hall, emerging media manager for Pitney Bowes, certainly believes so.
A brief glossary for Enterprise 2.0 • Wikis: A website using ‘wiki’ software that enables interlinked pages to be quickly and easily created, which makes them ideal components of collaborative websites, corporate intranets and knowledge management systems; Wikis are usually created to serve a highly specific purpose or address a precise topic, and are suited to the simple and rapid sharing of information by subject matter experts. • Blogs: The common name by which ‘weblogs’ have become known, blogs are websites that contain frequently updated opinions or information on a given subject. Often combining multimedia elements, blogs are a common means by which information from one or many subject matter experts can be disseminated.
extensively involved in social media, not only to foster external relationships from which it can glean new business ideas, but also internally to facilitate greater collaboration among its vast
‘Social media is not just associated with customer behaviour. It is also about collaboration and information gathering in the business world and for decision-making.’ ‘Clearly, we know that one third of Americans between the ages of 12 and 24 are active on social networks. By that I mean not just Twitter or other well-known social networking sites, but also niche forums like the Pitney Bowes user forum,’ says Hall. At first glance, Pitney Bowes, which deals in business solutions such as postage meters, document management and mailstream software, may not seem like the kind of company that would spearhead the move of corporates into the realm of social technology. Yet it is a company that is rapidly evolving, having made no fewer than 83 acquisitions in recent years, and as a market leader in around 130 countries it prioritises in-depth understanding of its customers in diverse markets.
international workforce. The use of social media has become a key element in its efforts to present a more human face to its global client base, and also to bring out the best in its subject matter experts. Hall, who often refers to herself as an ‘agent of change’ and freely admits to being a social media evangelist, is the driving force behind the company’s social media initiative, and she is in no doubt that the technology is becoming a vital business tool in many ways. ‘Social media is not just associated with customer behaviour. It is also about collaboration and information gathering in the business world and for decisionmaking. Forrester Research has found that 7% of business-to-business decision makers already use social media to help them make those decisions,’ she remarks. ‘That is remarkable, given that social
• Microblog: A type of blog that users often update with brief text additions, photo or audio clips; microblogs can be open to all or restricted to a defined user group; the brevity of the microblog form enables it to be updated more frequently by subject matter experts. • IdeaNet: Pitney Bowes’ idea capture capability, which enables the company’s entire employee base to become involved in generating innovative concepts; it provides an outlet for ideas from people in any part of the company, drawing on their interactions with customers or simply their in-depth knowledge of their appointed task within the organisation.
media is still in its infancy. The technology will be a major business issue in 2010 and beyond. The question now is how companies can tap into that interaction and be safe in that space.’
Opening the door to customers Large organisations that have not yet made the effort to consolidate their thoughts around the social media may well find, as Pitney Bowes did, that they already have a greater presence in that arena than they think. This presence may have many profound implications for a business, as social media allows customers further into an organisation than ever before. Being present in the social media space can have a significant impact on brand image, marketing messages and customer service. The question many companies must ask themselves is how to ensure that this impact is positive. The goal is to maximise the opportunities and minimise the risks as organisations become more porous. ‘When I started working here we found that the company had many pockets of social media, and that was a very important discovery. There needs to be an overarching brand message. We are a large, global company, and we must have a presence in social media in many different regions, where we must enable conversations,’ comments Hall. ‘We have to know what we can discuss, and what topics are off limits,’ she stresses. ▲
As part of its effort to stay close to customers, Pitney Bowes has become
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Hall believes that a cohesive and comprehensive approach needs commitment and resolve from any organisation, as well as an understanding of how the social media space functions. ‘Now, we are in the early adoption phase and we want to make sure that we are safe in that space, that we have consistent messages, and that our use of social media is sustainable. We need the resources to be involved in all those conversations. You can’t have deep engagement if just marketing is involved,’ says Hall. ‘We teach all Pitney Bowes employees to be involved and to be safe. They must protect the brand, which is why we are about to release a social media policy. It will be a ‘yes if’ policy, as we want to be present in those spaces, but we don’t want to overstep the mark.’ Putting the right safeguards in place enables companies to draw customers into their organisation, where their views can help the business refine its product and service offering to better meet customers’ needs, while maintaining consistency of message and quality of service.
‘We want to direct customers to subject matter experts.’
‘We want to direct customers to subject matter experts. We want them to have person-to-person conversations, but we want our people to be trained to represent the brand,’ Hall explains. The company has, for instance, a ‘@PBCares’ handle on Twitter, which enables customers to post and discuss issues with each other. The discussion threads enable Pitney Bowes to listen to what customers think about its
products, and are useful tools to direct people to the company’s own user forum. ‘Externally, the value proposition starts with customer loyalty, and that has worked very well for us. The Pitney Bowes user forum is an online space that connects customers to us and to each other. It started as a pilot for the 2008 rate change and it generated great cost savings in the region of $300,000,’ says Hall.
‘Customers can use it to talk to each other, which gives us a lot of knowledge about their pain points and what they want from future product development. It is a never-ending focus group.’ With two million customers worldwide, Pitney Bowes not only must harness every means available to keep such a large client base happy, but must also use the best tools to ensure that it has a keen understanding of
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Human capital and social media
what that huge and diverse focus group thinks of its products and services.
Finance must bet on the future Of course, social media is just as important as an internal tool, particularly if a company is growing and changing, perhaps through acquisitions as Pitney Bowes has. The company has invested heavily in Enterprise 2.0 using tools like wikis, microblogs and idea capture networks to bring employees together (see box, p43). ‘We have an internal collaborative knowledge forum called IdeaNet, which helps connect people within the organisation. We use it to generate and refine ideas, and to make connections between people in different locations,’ notes Hall. This not only ensures consistent brand messages pervade the company, but also fosters innovation from a rapidly growing workforce. Bringing such a large body of people together internally and reaching out across different regions to reach a diverse and demanding customer base brings great complexity to the social media space. Using the technology effectively for innovation and enhanced customer relationships demands, therefore, great commitment and a willingness to invest. ‘We understand that we are still in the exploration phase. The challenge is to get value from a lot of data, but we have the tools in place. We have a proprietary tool from our vendor to analyse social media data. We need to know who we are having the conversations with, who is influencing them and we need to do the right analysis for product development,’ remarks Hall. For the finance team there is often a need to place a figure on how much value will be derived from a given project in order to sanction investment. With social media, however, such figures are not readily available. Social media touches so many parts of an organisation and often benefits a business and its consumers in ways that are hard to measure precisely. So, should finance teams take a leap of faith and invest in the use of social media? Hall would say yes, provided that a clear plan is in place, because it is an area that will only be more important in the future. For Pitney Bowes, it is too early to say how social media has directly influenced product development or profit, but Hall is certain that the value will soon become clear for all involved.
‘Leaders like IBM have taken the use of social media to a new level, and we are learning from them, but few companies truly understand it. I truly believe in social media, but we have only scratched the surface in terms of metrics and how to measure the value in it. We need strategists to work on that,’ says Hall.
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seen that customers might just ignore another advertisement,’ Hall believes. ‘Reality is changing. Now, we need to partner with our customers and collaborate with them. That requires total commitment across the entire company.’ ■
‘To the finance people I would say that I don’t do this for fun. We are trying to tie social media measures to our business, but traditional methods like click rates can’t be used.’ ‘To the finance people I would say that I don’t do this for fun. We are trying to tie social media measures to our business, but traditional measures like click rates can’t be used. We need to measure things like interactions, engagement and collaboration. That schema of measures is still evolving, but we need them to optimise our processes and to ensure that we use our social media resources properly.’ The time will come when it is possible to measure the impact on the bottom line of investing in the right architecture to bring social media activity within a company together and focus it on maximising innovation and improving communication with customers. ‘There needs to be one tool that all people have access to in order to keep costs down and ensure clear governance,’ Hall adds. A lot of companies have realised that they cannot afford not to have a presence in the social media world, but many are not entirely sure why they need to be there. There is often uncertainty over what to do with their presence, and while Hall sees the value of social media she counsels against rushing in without a clear strategy. ‘Many companies are jumping on the bandwagon, often by developing profiles on Facebook and similar social networking sites, but often they have no plan. Having a clear plan is priority number one,’ stresses Hall.
Aneta Hall Aneta Hall is emerging media manager for Pitney Bowes. She currently leads the organisation’s social media strategy and has worked on governance initiatives, channel strategy development and social media word-of-mouth campaigns. In her role, she acts as an agent of change, teaching others how to engage in social media in a responsible way and driving adoption of social media channels for brand awareness and conversational marketing. In 2009, Aneta’s work in social media at Pitney Bowes was profiled in Shel Israel’s book ‘Twitterville’ that focused on how businesses are using the micro-blogging service Twitter. Follow Aneta on Twitter: @anetah. Read her blog: anetahall.com. Visit her facebook page: www.facebook.com/ anetahall
Not only do the goals need to be clear, but a social media plan also needs to be flexible enough to adapt as the market changes.
A recent CIMA report examines 20 cases of organisational use of social media and concludes their most important role is to encourage collaboration within and across organisational boundaries. It also discusses measurement issues and how to make the business case for using social media.
‘Social media are still evolving, which is both a challenge and an opportunity. We’ve been in the traditional push marketing arena for a while and we have
For your free copy of “Beyond Enthusiasm: Making the business case for your organisation’s use of Web 2.0” please visit www.cimaglobal.com/web2.0” Excellence in Leadership
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Talent management
An eye for talent How do you motivate and engage your talented employees when throwing more money and bigger bonuses at them simply isnâ&#x20AC;&#x2122;t an option? Sylvia Ann Hewlett of the Centre for Work-Life policy has been trying to answer this in her new book Top Talent. She speaks to Steve Coomber.
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In an economic downturn it is essential to hold on to your top talent. There may be pressure to cut costs and downsize, but these are the people who are likely to galvanise performance and get the business back on track. ‘There is a tremendous lack of awareness among businesses that you need to be a very proactive talent manager at the moment,’ explains economist and founding president of the Center for Work-Life Policy Sylvia Ann Hewlett. ‘I think that the assumption is among a lot of business leaders, that since unemployment rates are so high, and it is such a bad economy, that workers are just grateful to be employed, and that they are willing to sit tight and deliver 110%, because they are both fearful of unemployment and grateful to have a job. ‘But that turns out not to be true, particularly in troubled sectors, such as the financial sectors, the media industry, perhaps pharmaceuticals; there are several sectors out there which are in particular trouble.’
Demoralised talent Hewlett drew on detailed research findings from the Centre for Work-Life Policy’s Hidden Brain Drain Task Force, which is made up of 50 of the world’s most powerful corporations including many household names including Johnson & Johnson, Intel and Goldman Sachs. She paints a worrying picture of a disaffected cadre of talent. ‘We’re finding in the data we have collected that the levels of engagement have really plummeted over the last two years. High echelon workers in particular feel very ignored and neglected. Their bosses are focusing on other things. Everyone is taking these people for granted,’ says Hewlett.
Secondly, those that stay on the job are not working to their full potential. If a large percentage of the workforce is spending a significant proportion of its time looking for the next job, then that is not going to be particularly good for productivity or the bottom line. ‘There are a lot of distracted, paralysed workers out there, and a lot of churning, with employees seeking a better option because they feel that no one is paying attention to them. There are issues both in terms of a flight risk, and in terms of disengagement,’ says Hewlett.
‘The assumption among a lot of business leaders is that, because unemployment rates are so high and it is such a bad economy, workers are just grateful to be employed. That turns out not to be true.’
Quitting voluntarily Firms do not just need to worry about the employees that they are likely to make redundant. They need to focus on making sure that the people they want to keep do not follow of their own volition shortly afterwards. A Centre for Work-life Policy survey of workforce layoffs between June 2008 and January 2009 revealed that while 14% of graduates lost their job. Of these, while 32% were fired, a much higher proportion – 68% – left their job voluntarily.
so that other firms could learn and benefit from this, particularly in the current climate.
Ideal interventions Effective and open communication is essential during difficult times, says Hewlett. Firms should look to create a no-spin zone in their organisations. ‘You need to be honest, transparent, and very pro-active in your communications with your employees,’ she says. ‘Silence and mystery can easily create demoralised employees. If they do not know where the firm is heading, or how the organisation is going to fix its broken business model, employees can get particularly disaffected and likely to move on somewhere else.’ Hewlett suggests creating a ‘no-spin zone’, making sure that people are told what is happening , even if it is not necessarily always good news, and involving them in re-envisaging where the company is heading. Another thing organisations should do is to focus on the people who really make a difference to employee engagement.
Personnel plan So what should companies do? In terms of best practice Hewlett has identified eight interventions that really work in this climate that allow you to motivate people in ways that do not involve money. Research by the Centre for Work-Life Policy revealed that the firms employed a variety of methods to motivate, incentivise and engage their employees that do not involve increasing their compensation. Hewlett then compiled a list of best practices from these various methods
‘You need to understand that most people’s inspiration is not derived from the leadership of the company, but from their team leader,’ says Hewlett. ‘So firms need to think local, and focus on team leaders. There are all kinds of strategies that the team leader can use to heighten motivation.’ This might, for example, involve activities that are designed to build team camaraderie, a very powerful force of motivation in difficult times.
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‘They are also feeling underpaid, their bonuses have been slashed, maybe they have been asked to take a 5% cut, as is increasingly happening. They are also working with depleted teams because a lot of people have been fired. Then they are working harder, a quarter are working on average more than nine hours more per week than they were two years ago. There has been a huge increase in the workload.’
As a result a lot of talented individuals are voluntarily leaving their organisations. Top performers will always find alternative employment even in tough times, and the rates of people quitting voluntarily are high, says Hewlett, particularly among the really impressive workers.
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Talent management
So just getting teams together, sharing learning from the recession, and sharing activities whether it is ten pin bowling on a Saturday night, having a workout in the park together, or ordering a takeaway’. If companies are not able to increase monetary compensation, or even if they are, they can also look at alternative non-monetary forms of reward to provide value to employees. A powerful strategy is to use time as currency, says Hewlett, providing part-time or flexi-time options, for example. ‘When KPMG in the UK needed to cut back on payroll charges, instead of firing people, it gave 11,000 professionals a choice, go to a four-day week and take a 20% pay cut, take a four- to twelve-week sabbatical at 30% base pay; they can opt for either or do both or stay precisely as they were,’ says Hewlett. ‘It was a tremendously popular move. 85% of people who were offered the choice, selected one of the flexible possibilities.’
Justice for all In difficult times concepts such as equity and justice become even more important to employees. Organisations would do well to develop a fair restructuring
Company action points Waiting to see what happens is not a good strategy when it comes to talent retention and management. The jobs market may seem in the favour of the employer, but there is always a market for top talent, even in tough times. Research by the Centre for Work-Life policy suggests that the following best practice interventions may help keep talented employee in situ, says the Centre’s founding director Sylvia Ann Hewlett: • Create a ‘non-spin zone’. • Focus on team leaders. • Provide non-monetary rewards that employees value. • Develop a fair restructuring process. • Hold onto the talented women. • Re-create pride, purpose and direction. • Senior management – don’t forget to look after yourself.
process, to spell out in advance all of the steps that they would do before they eventually reached the layoffs stage. What can the employees do to help themselves? What proactive steps can be taken to avoid dismissals? Women are often particularly nervous in an economic downturn, and a particular flight risk, says Hewlett.
‘If you create strategies where you use time as currency through flexible working arrangements, for example, then many more women are going to go to stick with a programme.’ Consequently, it is important for companies to give special attention to retaining talented women in the workforce. ‘[Women] are having a very hard time creating meaning and purpose in work, particularly in the financial sector, for example,’ says Hewlett. ‘The reputational knocks that this sector has taken are particularly hard for women - who need to believe in the products that they produce and the customers that they serve.’
So, for example, Jeffrey Bewkes the CEO at Time Warner has been holding very informal lunches called skip-level lunches, says Hewlett. At each of these lunches he gets together with about ten to twelve high performing but much more junior people, three to four levels lower than him in the organisation, who generally never get to meet the leader. ‘He is using these lunches to listen to them, to figure out what their ideas are in terms of where the company should go, and to involve them again in action going forward,’ says Hewlett.
Take pride in your work When employees are demoralised it is a good idea to try and recreate pride, purpose and direction. Pfizer is a company that has suffered a few reputational knocks recently, but judging by some of its internal programmes its heart is in the right place. ‘It has created a new business called Global Access,’ says Hewlett. ‘It is about low-cost health-care solutions for the working poor in developing countries.’ Pfizer’s credo is ‘working for a healthier world.’ The company launched its Global Access programme in September 2008, which looks at ways of increasing access to medicines for the working poor. The project has proved very popular with people within Pfizer. ‘It is very powerfully motivating, in a year where a lot of people are dealing with a lot of bad news,’ says Hewlett. Finally, says Hewlett, employees must build personal resilience. People must take steps to look after themselves.
Holding on to talented women may involve measures such as increasing flexible working arrangements, fostering women’s networks, and providing meaning and purpose in the workplace through various activities such as those that might commonly come under the heading of Corporate Social Responsibility.
‘You have to see it as a very important thing to get to the gym, or to actually take advantage of the ‘giving up smoking’ policy that your company might have, or building your own personal board of directors which help you deal with a range of pressures during these tough times,’ she says. ‘These are strategies to enhance your own resilience.’
The support for introducing innovative measures to attract and retain top talent must come from the highest levels in organisations. It is important that the top leadership shows that it cares.
Meeting the challenge These measures are not just designed to increase motivation but they can also play a role with talent management and development, says Hewlett. So recreating
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‘You have to see it as a very important thing to get to the gym, or to actually take advantage of the ‘giving up smoking’ policy that your company might have, or building your own personal board of directors, which help you deal with a range of pressures during tough times.’ pride, purpose and direction is about steep learning curves, about global assignments, and figuring out how to turbo charge a career, taking advantage of some of the new business possibilities.
Moving to a set of incentives and giving pride of place to things like time, fairness, meaning and purpose, away from just compensation and title, is a real and profound shift for a lot of companies.
‘If you create strategies where you use time as currency through flexible working arrangements, for example, then many more women are going to go to stick with a programme in the decade of their thirties and move up the organisation,’ says Hewlett.
Because many of these things are not central to incentive structures, it requires a kind of retooling of how you see motivation and the construction of the incentive scheme, and it is hard to achieve that overnight, especially in a large organisation.
‘It is a huge career enhancer for women otherwise they have to quit for a while, and that does an enormous amount of harm.’
Companies are being forced to think hard about non monetary rewards. They are willing to rethink their reward systems, to crack the code and include some of these things as rewards for high-performers, because you need to keep your top performers, they are going to drive growth.
For many organisations implementing these measures may prove a challenge to begin with. It will certainly require senior management buy-in and commitment. However, companies must take steps to address talent retention, engagement and motivation rather than ignoring how employees feel and just relying market conditions to prevent staff from moving.
Sylvia Ann Hewlett Sylvia Ann Hewlett is an economist and the founding president of the Center for Work-Life Policy (CWLP), a non-profit think tank, where she chairs the ‘Hidden Brain Drain,’ a task force of 50 global companies and organisations committed to fully realising female and multicultural talent. In addition she directs the Gender and Policy Program at the School of International and Public Affairs, Columbia University. She is a member of the World Economic Forum’s Global Agenda Council on the Gender Gap.
So companies must self-consciously and proactively nurture their talent right now, because there is this destructive assumption that they are all safe. That given a high unemployment rate no one is going to be thinking of leaving. And that is just not true.’ ■ Excellence in Leadership
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Technology
Multi-tasking As the man in charge of finance, risk and IT at Lloydâ&#x20AC;&#x2122;s, the worldâ&#x20AC;&#x2122;s largest insurance syndicate, Luke Savage is in the perfect position to combine all three disciplines. He tells Christian Doherty how to select the right tools for the task in hand.
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Luke Savage is at the heart of a complex web. As director of finance, risk management and operations for Lloyd’s of London, he oversees the world’s oldest and best-known insurance market. Lloyd’s, since its foundation in the seventeenth century, has been a bastion of private insurance, covering the ships that captured the world for British trade. From its base on Lime Street in the City, it retains its pre-eminent position as the leading syndicate insuring shipping and other freight across the world. Alongside that, the syndicate takes on risk others steer clear of. From swine flu forcing the cancellation of Wimbledon tennis fortnight to Britney Spears’ knee caps, Lloyd’s insures where other insurers can’t or won’t write. And the system works: Lloyd’s has a turnover of £16 billion and reported £3.8 billion profits in 2007. For Savage, the challenge is multi-layered. The structure of Lloyd’s means that the CFO is responsible not only for the internal workings of his own company but also has to take into account the needs of the traders that make up Lloyd’s. They run to over 50. However, there are only 700 people directly employed by the Lloyd’s market – but over 10,000 working in the 50 independent affiliates that make up the syndicate. These affiliates ‘use our brand, they use our credit rating and they use our license network but ultimately if one of them goes bust there is a mutual fund there in order to protect the brand,’ Savage explains. Since each business is a separate entity, Lloyd’s cannot simply tell them what business to accept and how to judge their exposure to various risks. But despite its diffuse structure, Lloyd’s does in fact operate a central risk management function, within which technology plays a fundamental part. And top of the list for Savage in 2010 is dealing with the new Solvency II directive that comes into full effect in 2012. Designed to improve capital adequacy among the largest insurance firms, the directive will test Savage’s IT infrastructure to the limit. ‘From the middle of next year, firms are going to be expected to start doing the
dry run for that,’ he explains. ‘And in preparation for that there will be a fair bit of pressure on technology on a number of fronts, both in terms of modelling and models we use, as well as the way we use modelling to manage our risk.’ Solvency II requires insurers to beef up their data warehousing and management systems to feed into providing the right levels of balance sheet visibility. ‘I think that our systems might need to evolve quite significantly under Solvency II,’ says Savage. ‘And certainly in terms of reporting, I think the amount of information disclosure that will be required will go up quite significantly, testing our systems. So, in combination, those two dimensions to it mean that we have a lot of work going on, not just in Lloyd’s per se, but across the industry as a whole.’
Boxing clever In order to meet that challenge, the danger for the CFO seeking to invest in technology in order to respond to regulatory changes is clear: it becomes simply a box ticking exercise with little added value. It’s a risk Savage is well aware of.
‘The expectation is that the UK insurance industry as a whole is spending hundreds of millions of pounds preparing for Solvency II.’ ‘I think if we were to treat it as a compliance exercise, it would be a huge wasted opportunity. The expectation is that the UK insurance industry as a whole is spending hundreds of millions of pounds preparing for Solvency II. If people spend that kind of money to get a regulatory tick in the box, I think it’ll be a wasted opportunity on a massive scale. Across the Lloyd’s market we and the 50 businesses that trade out of the Lloyd’s name, we’re keen to see that we will derive some genuine commercial advantage from all the work we’re doing.’
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Data overload
The new Lloyd’s data centre is set to come on-stream next year, and is at the heart of Luke Savage’s drive towards embedding operational efficiencies into the business for the future. ‘The space is a brand new, state-of-the-art facility, a flexible space, so that we can expand it or shrink it as necessary. So that should keep us going for hopefully the rest of my time at Lloyd’s,’ he says. ‘We spent about nine months trying to find a suitable site to create a data centre, the main constraints being finding someone who’s got the power and finding someone that’s out of the flood zone. And I think we looked at probably 50 properties and narrowed it down to only two or three that met our criteria. ‘We’re doing that alongside programmes doing server virtualisation, applications, rationalisation, consolidation and so on. A quick example: I think we had 50 different web-based platforms that we were running here and we’re now about three-quarters of the way to collapsing them all down into one, which should give us a much more efficient, stable platform to go forwards and one from which we can deploy new applications far more quickly and effectively.’
It’s the classic answer for a commerciallydriven FD charged with ensuring technology compliance. Under Savage, Lloyd’s technology investment is driven both by the need to stay abreast of the numerous regulatory changes and also by the company’s need to react to the needs of its syndicate members. It also needs to allow for flexibility across a number of different markets, as the CFO explains. ‘When it comes to deciding the level of IT spend, and where those resources go, it depends which part of the insurance industry you’re looking at. If you look at retail Excellence in Leadership
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Technology
From micro-technology to microinsurance Microinsurance, insurance for low income individuals, can play an important role in helping communities in developing countries mitigate and adapt to climate change, and in providing the security needed to develop long term sustainability projects, according to Lloyd’s. In a new report produced by Lloyd’s 360 Risk Insight and the Microinsurance Centre, ‘Insurance in developing countries: exploring microinsurance and other commercial opportunities’, the size of the potential market is estimated to be between 1.5 and 3 billion policies, with significant demand for a range of products, including health, life, agricultural and property insurance. Over 135 million people are currently covered with microinsurance which represents around 5 % of the potential market. Annual growth rates are currently over 10%. Launching the report, Savage said: ‘Bringing insurance to three billion low income individuals is a real opportunity to reduce poverty and give individuals the ability to invest in sustainable projects without the fear of loss from natural catastrophes or other destructive forces. But it is not a one way trade. There are benefits for commercial insurers too, which include larger and diversified risk pools, first mover advantage into new markets, market intelligence and innovations that can be applied to other business activities,’ he said. The demand for microinsurance is set to rise on the back of the global recession, with 50-90 million people predicted to be plunged back in to poverty over 2009. While recessionary pressures will influence the amount seeking microinsurance, the policies and business itself will be further shaped by numerous variables, including: economic growth; urbanisation; financial sector development; climate change; and information technology. Savage pointed out that the partnership between business and government in this field is not new, highlighting the success of government subsidised schemes.
insurance, I suspect most people would now go and buy their car insurance and house insurance online via a web-based site which is entirely technology driven, whereas if you look at the non-life market that we’re largely involved in, insuring oil rigs or aircraft or construction or whatever it might be, on a liability basis, it’s different,’ he says.
‘With one hat on I’m responsible for technology; with the other hat on I’m responsible for finance.’ ‘At that low volume, highly specialised end of the market, a lot of the business is still conducted face-to-face without a great deal of technology support. So if you take banks as another example, the high volume trading people do via their internet accounts, people who are doing the highly complex structured deal with the bank, that’s still a bunch of specialists sitting round tables discussing the details. So insurance technology is in the role it plays historically; it varies tremendously according to which part of the market you’re in.
I would use is that it’s a bit like dealing with the doctors. If you think that a new project is plastic surgery, you can defer that at the end of the day; what you can’t and shouldn’t defer is the basic healthcare.’ To that end, Savage has a daily challenge to ensure Lloyd’s doesn’t fall behind the industry standard while maintaining the technical infrastructure that allows the network to function smoothly. As the downturn continues, allocating IT spend – and defending it from cuts – is an even more important skill. ‘It’s very easy to cut back on spending on the ongoing infrastructure and to think that it will be business as usual,’ Savage says. ‘And I think, certainly in some issues in the past, Lloyd’s has learnt that if it is not prepared to invest in the infrastructure it comes back to haunt you down the road in a big way.’ Savage’s priority now is to balance staying on the cutting edge of technology with keeping an eye on costs. ‘Certainly here, the emphasis has been on making sure
Multi-tasking For Savage, more than many FDs, the role straddles several disciplines. While the traditional CFO’s role in most businesses would involve discussing technology spend with the IT director, Savage’s broader brief means he has a foot in both camps. Can this lead to confusion when it comes to allocating IT investment? ‘Let’s be clear. With one hat on I’m responsible for technology; with the other hat on I’m responsible for finance. But now a whole bunch of other areas around Lloyd’s also place demands on technology and so this is not as if I’m just competing against myself. And we’ve got a fairly well involved process that we run each year to make sure that we are focusing our scarce IT dollars to deliver the maximum benefit, be that within the finance function or indeed any other part of the business.’
Data-centric
He sees his role as being crucial in prioritising not just how much, but when IT investment comes on stream. ‘The analogy
The most obvious manifestation of that is Lloyd’s new data centre (see box, p73). Designed to rationalise and slim down the company’s storage facilities, the centre
that the infrastructure doesn’t start to fall behind, because there’s pressure on spending. So we are investing and continuing to invest in our infrastructure.’
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represents a commitment to developing long term in-house technical capability. It’s an interesting riposte to the outsourcing movement that dominated many corporate strategies over the past decade. ‘Yes. If you looked exclusively at Lloyd’s back at the beginning of this decade, we did outsource some of our IT infrastructure and whilst I wouldn’t suggest that outsourcing can’t work, it certainly brings a different set of material challenges that certainly Lloyd’s struggle to deal with,’ says Savage. ‘And so since we’ve brought it back in, it’s got much better for us, a much better shape,’ he explains. ‘Thankfully, constructing a data centre, in terms of ongoing running costs, will be just a little over half what it would cost us if we were commercially leasing facilities from someone else.’ Savage also believes that adapting the company’s existing IT architecture will bring long-term benefits. It has
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How Lloyd’s is structured ‘Lloyd’s is not a company, it is a marketplace,’ explains Luke Savage. ‘There are only 700 of us employed to run the Lloyd’s market, so what we then have is 50 independent businesses that we affect as managing agents. Each of them uses our facilities, creating a trading floor in the city. ‘But all of that we do from a perspective of not having the kind of mandate that a normal head office risk management function would have. As a result that
provides a unique set of challenges to us which means that we probably had to invest more time and effort in thinking about ERM for example than perhaps a lot of companies. ‘And where in the past you might use the rod of iron to make the group behave, we are not allowed to do that. So on that basis we had to work that much harder to make sure we can understand and manage those risks.’
‘Constructing a data centre, in terms of ongoing running costs, will be just over half what it would cost us if we were commercially leasing facilities from someone else.’ worked with a major software company on setting up a messaging system, modelled on the SWIFT network designed to improve communication between syndicate
members. ‘It’s a messaging hub that the software company has already successfully deployed in other industries,’ Savage says. ‘So although the technology’s not new, the deployment in the insurance industry is.’ This is further proof that, while the downturn may bring its challenges, necessity may well be the mother of invention. ■
Luke Savage Luke Savage was appointed finance director in September 2004 and is responsible for finance, risk management, and operations. He is also an executive member of Lloyd’s Franchise Board. Since joining Lloyd’s, key projects he has undertaken include overseeing a complete change in the capital framework of the market, Lloyd’s first ever foray into debt capital markets and a credit rating upgrade. Previously Savage worked in banking for 17 years, spending time at Lloyd’s Bank, Morgan Stanley and, most recently, at Deutsche Bank as the global CFO for its equity business.
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Company insight
Protect and serve In a world awash with information, companies and individuals are vulnerable to rising incidences of electronic data loss. Protecting sensitive data is a challenge, but it’s one that can be met by implementing an effective policy, says Rashmi Tarbatt of RSA, The Security Division of EMC.
Data loss, costly and damaging for organisations and in many cases customers, clients, and citizens, is on the increase. The Identity Theft Resource Center in the US reports that 220 million personal records containing data such as social security numbers and credit card information, were hacked in 2009, up from 35 million in 2008.
We live in a world increasingly awash with information and protecting sensitive data is a challenge. Typically an organisation will have data stored in a local database, and then replicated elsewhere. There may be copies of that database sitting on a file server, and on a laptop, a desktop or offsite on back-up tapes. And the data is changing all the time as it is worked on.
Government departments misplace and lose data on a frequent basis it seems. It is only two years since HM Revenue and Customs (HMRC) lost 25 million child benefit records stored on a disk. Since then, more than 200 hospitals and 200 companies in the UK have reported breaches of the Data Protection Act.
‘Another challenge is the number of people who have access to the data,’ says Tarbatt. ‘Not only are there the internal employees with access, but increasingly you have organisations with contracted access; customers that come into the network; suppliers who can access various environments, plus privileged users who can access everything within the system, including sensitive information. So you have lots of different types of users.’
Data loss can happen in several ways, but most is external and accidental. ‘When you look at data loss prevention, it’s really designed to stop accidental loss. Around 80% of data loss is accidental, that’s what we try and mitigate,’ says Rashmi Tarbatt, senior manager of technical marketing EMEA at RSA, The Security Division of EMC. ‘The other 20% could be malicious.’
The data loss challenge Organisations need to take steps to prevent the loss of data, particularly sensitive information. Beyond possible regulatory and legal implications there are commercial and operating issues associated with data loss, plus the risk of considerable damage to reputation and brand. There are business benefits obtainable from preventing data loss too. ‘There is business enablement, improving customer services, embracing new technologies in terms of being able to order products online, giving access to multiple partners, improving productivity, improving collaboration with partners and customers, and much more,’ says Tarbatt.
‘There are commercial and operating issues associated with data loss, plus the risk of considerable damage to reputation and brand.’ Greater mobility is a third challenge. People want to access information from a wide range of locations. Whether it is using a BlackBerry or some other mobile device from a beach or a business centre, mobility adds another potential obstacle to keeping data secure. Combining the data loss risks inherent in all three challenges above presents
multiple risks across an organisation’s value chain. And, although expenditure on security is increasing, the incidence of data loss breaches continues to rise. One of the problems with the existing approach to data loss prevention, says Tarbatt, is that organisations tend to deploy different solutions for different risks, resulting in a fragmented, inconsistent infrastructure. ‘It doesn’t matter if you spend millions on security, without a good security policy your investment is not going to be effective,’ says Tarbatt. ‘You need to make sure your overall policy is right to start with, then you get some consistency in terms of how that is implemented within your organisation.’
Six best practice steps Tarbatt advocates the adoption of six best practice steps in order to implement an effective data loss protection policy. ‘The first step is to understand what data is most sensitive to your business. Sensitive data can be placed in three categories: company data – anything from company financials, mergers and acquisitions data, to customer or patient information; business or government regulatory control – the standards the organisation is required to comply with; and intellectual property – whether a diagram of a building platform in the North Sea or a patent for a drug. Most
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organisations classify their information; a lot tend to go for high, medium and low business impact data.’ Once you know what data you want to protect, the next step is understanding where that data resides within the organisation. Is it offsite on tape drives, on databases, on file servers, on the employee’s desktop or laptop? Only once you know where the data is and what that sensitive information is, can you protect by creating a security policy. Depending on where the information is within your organisation and the form it takes, the policy will detail how you want to protect that information. So it might stipulate customer information is going to be encrypted, but only while it’s on laptops. Organisations must assess what level of risk they are prepared to take themselves, says Tarbatt: ‘You must really understand the origin and nature of your risk – where is the biggest risk within your organisation? – and then make sure that’s factored into the policy you’re creating. A lot of companies accept a level of risk; if you compromise ten customer records, for example, maybe it doesn’t matter, but if 1,000 are compromised then the organisation needs to know.’ At this point enforcement controls can be applied based on the policy that has already been determined. Organisations will probably want to protect the highand medium-level business impact data, and not worry about the low. If we return to the customer information on laptops example, then you would apply encryption at the enforcement control stage. ‘Control could be something very simple – it doesn’t necessarily have to be a technology,’ says Tarbatt. ‘So we found, for example, with one of our customers, that while some of their employees needed access to credit card numbers to do certain transactions, and although they were deleting the details once they’d done the transactions, you could fetch the credit card numbers from the waste bin function. So the enforcement control there was simply to make sure the files in the waste bin were eradicated at the end of the day – you could even write a script that automatically erased them when you shut down the laptop.’ As Tarbatt points out, the enforcement control could be anything from a change
‘You must really understand the origin and nature of your risk – where is the biggest risk within your organisation?’ in the business process to applying technology such as encryption or information rights management.
Continuous monitoring and management Security is not a one-time process but something that must be attended to continuously. Organisations need to continually monitor where they are from a security perspective. If you centralise your policy, says Tarbatt, then it ensures all the control points consistently enforce your security rules. The easier you can make it, the fewer policies you have within an organisation and the easier data loss security is to implement. ‘With our solutions we make sure that we are consistently educating our users as well,’ says Tarbatt. ‘If they do something wrong that doesn’t meet the security policy, it will pop up a memo onto their laptop, which tells them that they have done something that’s violating security policy. If they then click through they can learn more: it will say why it popped the window up, and provide some suggestions as to how the problem can be rectified.’ Organisations that fail to manage security centrally can get misaligned policy because they will have lots of policies and lots of different products with different solutions. It is difficult to implement a
level of consistency in that environment. The organisation will also have high management costs because of the multiple tools used to manage security. Finally, once the system is in place the organisation needs to audit the security implementation, and do that centrally. To make the process as easy as possible RSA’s data loss prevention suite is designed to deal with each of the six best practice steps, says Tarbatt. RSA can also apply its longstanding experience in the field to help with data discovery, create the policy and implement the solution. From the enforcement perspective, it also has encryption solutions it can provide. Perhaps the most important thing for organisations, though, says Tarbatt, is recognising the need to implement a data loss prevention system in the first place. It is easy to fall into the trap of thinking that significant data loss is something that always happens to other companies, but, as many major organisations have found in recent years, it only takes one careless mishap to incur significant costs and tarnish a business’s reputation for years. ■ Further information RSA, The Security Division of EMC www.rsa.com Excellence in Leadership
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Company insight
Documenting efficiencies A recent Hewlett Packard survey of C-level executives identified two overriding priorities – improving business processes and driving out costs. Andy Brown, group marketing director of Danwood, Europe’s largest document processing company, explains how both can be achieved.
It has been estimated that more data has been generated in the past five years than in previous millennia, says Andy Brown, group marketing director of Danwood: ‘In 1990, the life cycle of a document was about six years; now it is about six minutes. We get an email, we print it, we act on it and then we bin it.’ Brown believes the paperless office was always a fallacy and that the growth of data is fast outstripping the ability of ‘knowledge workers’ to deal with it electronically. They still need to see hard copies of information. However, many organisations continue to own and operate large, inefficient and costly patchworks of legacy documentprocessing systems. They do not know how much these cost them, often because the costs are spread around departments. But, at some point, the business is having to pay for these inefficiencies.
consultancy exercise. Rather, its people help the customer establish the real price being paid for all document processing and then offer a more efficient, easily audit-able solution, which will come in at markedly lower cost. Moreover, because Danwood’s solution means its customers no longer own and maintain their own document processing systems, there is no front-loaded capex and the ROI is immediate. ‘Customers simply should not be purchasing this equipment for themselves,’ says Brown. ‘It is the equivalent of buying a car, driving off the forecourt and losing 30% of the value straight away. Rather, they should be buying a service because this is what these pieces of technology provide, a service, typically to an organisation’s users, to its knowledge workers and sometimes also to its own customers.’
Insatsu Chosa The solution that consultants from Danwood bring as part of its longproven Insatsu Chosa (Japanese for ‘print investigation’) process is a combination of both technology and approach. ‘We deliver some 5,000 man days of cost consultancy a year,’ says Brown. ‘If you apply the right technology with the right process you can achieve quite comfortably a 30% cost saving; and we have customers who have returned cash to their business way in excess of that. ‘If I go to a manufacturing business and say they can save £1 million in hard cash on their document processing, I ask how many of their products they would need to sell to make a £1 million net profit. The number is generally huge. But I cannot emphasise enough: it is not just the technology, it is also the approach. And there are no one-size-fits-all answers.’ Brown stresses that Danwood’s approach is not a typically negative ‘finger-wagging’
‘Customers simply should not be purchasing this equipment for themselves. It is the equivalent of buying a car, driving off the forecourt and losing 30% of the value straight away.’ So organisations have to change their methodology in acquiring these services. Brown explains that after the Insatsu Chosa consultation, which will have established precisely what document processing is really costing a business, Danwood will typically
take over the ownership, maintenance and running of the whole existing infrastructure. ‘in an ideal engagement we take over all the equipment, be it printers, copiers, scanners, faxes and sometimes also people. Then, over a period of time, we manage redundant cost out and improve processes going forward, so that we can get to the point where we have refined and enhanced our customer’s document processing solution and are producing real and substantive savings. From the minute we take over the organisation’s document processing they know they can get on with their core business without worrying any further about the document side.’ Danwood can do this because it is completely brand agnostic and has a substantial service infrastructure. One in 13 of every new copier/MFP installed each month in the UK and Ireland comes from Danwood. ‘Our contractual periods are highly flexible,’ says Brown. ‘Some customers prefer a three-year deal with yearly rolling thereafter. Others are happy to enter into long-term engagements. The common element to every contract is our Service Level Agreement, which promises flexible and proactive support. ‘For all our lage clients, we have dedicated account managers who will review how the contract is working on a quarterly basis. We are constantly working with them to see what their expanding business needs look like.’
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Company insight
Danwood customers find themselves dealing with the same Danwood personnel, year in, year out. ‘This is because we are unashamedly a fairly old-fashioned employer,’ explains Brown. ‘We believe in empowering our people to do the best job they can. Typically, our staff have been with us for a very long time. That has many benefits, not least to our customers, who will be seeing the same faces all the time. It is for this reason that we quickly get to trusted advisor status with our customers. We work with them all the time to refine and enhance the solutions we are providing.’ A concomitant of Danwood’s cost-saving services is a reduced environmental impact. At the most basic level customers can agree that default print quality be set to ‘draft’, not least because, as Brown points out, printing technology has improved so much it is generally hard to spot any difference between a ‘draft’ and ‘best’ document. More sophisticated solutions include software and hardware that will oblige someone wishing to print a document to go to any printer in the building, swipe a personal card and then have the document run off. This matters because surveys show that up to 10% of all documents are uncollected from printers because, for one reason or another, they are forgotten.
‘Printers can automatically send engineers performance information, even including warnings when toner is running low and when to book a service call.’ Staying independent Lincoln-based Danwood, remains an independent company, which according to Brown means it is committed to finding the right solution for its customers whatever the technology need may be. Established 38 years ago, it now has 35 regionally offices with support engineers throughout the UK and Ireland currently looking after 80,000 installed machines. ‘Many big IT companies have centralised their support operations,’ says Brown. ‘We have done precisely the opposite because we think our local people understand their local markets best. We may be a document processing company, but we are still a people business. We put a human face to
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ISO 9001 standards, which we regard not as some rigid rule but as an excellent boundary within which we can work with our clients to establish best practice.’ More than half of Danwood’s business in 2009 was with public sector organisations, where Government has been driving cost efficiencies through outsourcing and lean practices. Says Brown: ‘An NHS trust for instance should be focusing its resources on its core purpose of medical care. It should not be running its document processing as well.’ Unlike businesses in North America and Japan as well as the rest of Europe, UK organisations remain concerned about linking their devices to the outside world. Nevertheless, explains Brown, 17% of Danwood’s customers are now supported and resolved remotely via secure internet links. Printers can automatically send engineers performance information, even including warnings when toner is running low and when to book a service call. According to Brown the added value in increased uptime (typically 99.9%) and cost savings are very real. As customers become convinced of the inherent security built into Danwood’s remote support solutions, he believes the take-up will increase rapidly. ■ Further information Danwood Website: www.danwood.co.uk Excellence in Leadership
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Company insight
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A licence to save money Total printing solutions provider Ricoh describes how the company used its Managed Document Services solution to reduce document production costs by more than 20% for Unilever’s European operation. Unilever is one of the world’s leading suppliers of fast-moving consumer goods with a strong presence in more than 100 countries and global leadership in many of the categories in which it operates. The company has 179,000 employees worldwide and generated annual sales of €40 billion in 2007. Its portfolio includes the likes of Knorr, Hellmann’s, Lipton, Blue Band, Flora/Becel, Bertolli, Dove, Lux, Pond’s, Axe/Lynx, Rexona/Sure, Skip/Persil, Cif and Domestos. Following the adoption of an aggressive strategic plan the company recognised opportunities for cost savings across its European operation, and document production was identified as a major area where streamlining was possible. Unilever was faced with an unwieldy printer and copier fleet from several different suppliers. Many of these devices were underutilised or inefficient and needed to be replaced or upgraded. Within this structure, Unilever also had little purchasing visibility and no central control of costs.
Delivering the solution Our experience at Ricoh shows that many large organisations could reduce their costs and raise productivity with a more efficiently designed document environment. Ricoh significantly reduced the Total Cost of Ownership (TCO) of Unilever’s fleet through Managed Document Services (MDS), consisting of a full audit of their document environment, followed by optimisation proposals, implementation and ongoing management. MDS provides a rationalised and optimised fleet, while ensuring continued cost savings through centralised ongoing monitoring and fleet management. As an ongoing management solution, MDS ensures that targets are met for key performance indicators (KPIs) such as cost, fleet size, maintenance and service, enabling Unilever to focus on its core business. Under Ricoh’s service
agreement, Unilever is guaranteed a device uptime of 98%. In addition to its own devices, Ricoh manages a number of third-party machines for Unilever, enabling a fade-in, fade-out implementation approach to avoid unacceptable disruption to end-users and protect existing investment in infrastructure. Ricoh also conducted full on-site surveys to gather detailed usage and financial information. This provided accurate information on costs and insight into how their print and document device fleet could be improved in order to reduce costs and boost efficiency.
‘Our experience at Ricoh shows that many large organisations could reduce their costs and raise productivity with a more efficiently designed document environment.’
long-term relationship with Unilever, Ricoh has helped with a number of document production challenges. In the UK, for example, the company has run campaigns on behalf of Unilever to educate its users about important reprographic issues such as the appropriate use of colour. ‘Transparency of the fleet’s performance and costs has allowed us to gain control at site, country and European levels,’ says Myles Gilbertson, Unilever’s European supply manager. ‘Ricoh has deployed leading-edge technology, allowing us to reduce the size of our printer and copier fleet across the European Unilever business and enabling us to achieve substantial cost savings. The ongoing management provided by Ricoh allows us to focus on the key areas of our business.’
Consulting experts In addition the services it provides for Unilever, Ricoh also offers a consulting service, which is focused on bringing a better quality of service to customers. Through it, the company delivers longterm business value, with speed and efficiency, by gaining essential insight into an organisation. Ricoh works together with Unilever to develop a thorough understanding of their business using proven methodologies, and shares its expertise of market-leading technology through its proprietary tools and consultative approach.
Customer benefits By rationalising Unilever’s device fleet by 50%, maximising the use of existing devices and implementing more efficient technology, Ricoh delivered substantial cost savings of more than 20% for Unilever. Ricoh also liaises with Unilever to provide ongoing tailored advice, ensuring any needs or issues arising from organisational changes at Unilever are solved. Possible solutions include: re-shuffling the fleet to improve utilisation, removing devices, or implementing a re-routing solution to more efficient machines. Moreover, as part of its
Managed Document Services empower businesses to make smart decisions based on the best information and advice available. The result is a total document solution, more productive and secure than ever before, achieving tangible cost benefits and allowing companies to focus on their core business. ■
Further information Ricoh Website: www.ricoh.co.uk Excellence in Leadership
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Cash management
Volatile times The challenge of working capital management has been an acute issue for virtually every treasurer in the past 18 months. However, as Robert Allen, group treasurer of British American Tobacco, tells Nigel Ash, businesses with developing country operations already knew about financial distress.
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Cash management
The volatility that treasuries have been experiencing has always been there in the statistical models, according to Robert Allen, group treasurer of British American Tobacco (BAT). ‘It just came as a shock because that level of volatility felt so remote,’ he says. ‘People had simply become more accustomed to a stable financial and economic environment that common sense would have told them they could not expect to see that consistently over a longer term period.’ He instances investment grade defaults: ‘You would absolutely expect some of these, but over a very long space of time. If they all get compressed into a narrow time frame of financial distress, then it feels like the world is falling on your head, but actually what you’re having is what a model would tell you is a once in a 50year event or something similar.’ BAT is present in more than 180 markets, so is one of the businesses whose financial managers have seen dramatic financial impacts in some of its markets, says Allen. ‘Financial distress, if you want to call it that, in many developed economies is actually nothing like the world that you would have seen if you were working in Argentina some years ago or parts of Eastern Europe 15 or 20 years ago. ‘One of the interesting things about working in a diverse global group is that while it feels challenging for us today, actually parts of the world have gone through similar or worse and indeed businesses like ourselves will have people working in them who have experienced many elements of the economic conditions that we are seeing today.’
Bank relationships Businesses that have placed too much reliance on bank money for working capital have had a rude awakening, says Robert Allen. Lenders have stopped rolling facilities and begun applying altogether more rigourous credit risk analyses, while they themselves have been wrestling to strengthen their own balance sheets. ‘If you have always managed your balance sheet exposure to banks, and not tried to be overly reliant on them, I think for many such businesses the banks have been pretty good. There are particular areas that are more difficult than they have been and things take longer. As the banks go through the process of re-engineering their balance sheets and reviewing their risk categories, maturing facilities, which companies once always counted on being there, are not going to be renewed.’ Allen does not foresee challenges for good corporate credits, which are in any event substantially institutionally funded. Less well-positioned companies face expanding
‘I understand what they are trying to do but I think unfortunately they’re lumping everyone together,’ he says, adding that
This has led regulators toward overreaction, for example in the over-thecounter (OTC) market where, he argues, EU proposals could actually increase the risk, something that corporate OTC trades are designed to mitigate.
their banking groups to seek capital, he says, while he is ambivalent as to whether a few core banking relationships have been better for raising working capital than a widespread club of banks.
‘Certainly, if you are a business of our size, you have had a better chance if your credit is spread around and the people providing your balance sheets are spread around. But it is an economic decision as well. There has to be enough in the relationship for the banks to want to continue to provide the credit. I suspect, therefore, that the other thing that has helped has been the increased margins in what was once a tight and kind of loss-leading business. Banks with stronger balance sheets are now making better returns on their lending for working capital.’
something may end up generating regulations that cause more problems than they solve.
‘‘In terms of the regulatory environment there is not currently a cohesive framework that is being put forward. People are picking things that are politically expedient.’ at the heart of the concerns are financial institutions/funds, and their potential to amplify risk.
Perception of risk Allen is a treasurer who subscribes to the view that, while there are clearly some fundamental issues to address, it is the perception of risk rather than the underlying risks themselves that has predominated.
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‘The regulators should not be focusing on corporates, which have an underlying reason for an OTC trade and a transaction that matches it. It seems pretty crazy for us to be posting collateral when we’re actually using the instrument to de-risk elements of our business.’ He believes that proposed limitations on corporate OTC trades potentially represent common sense being elbowed aside by a political agenda. He fears the desire to simply be seen to be doing
‘I think in terms of the regulatory environment there is not currently a cohesive framework that is being put forward. At some point it has to start boiling down into things that are more tangible, that people can take views on, and then start to coalesce towards some form of consensus one way or another. But in my view it is still very early days.’ Another key issue that concerns Allen is the impact of fiscal and monetary policies of governments worldwide and the likely rise in the corporate tax take or inflation for that matter. ‘It’s well known that they need more money and they can’t just continue to Excellence in Leadership
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Cash management
‘The structure is always pretty simple. I think people are talking more about convertibles than they have been for some while. But typically you pay for the ‘optionality’, so why would you give the value away if you didn’t need to? Certainly, at BAT we have no need for convertibles.’
Cashflow forecasting in organisations with diverse multinational structures is always inherently complex says Allen. ‘At BAT, where we have intermediate holding companies, there are lots of different types of cashflows: dividends through holding companies, royalty flows,
Strong cash generation overlaid with 65% of earnings distributed as dividends
Outstanding bank lending to corporates 35 30 25 20 15 10 5
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BAT, he adds, is a business that generates a huge amount of cash and distributes large chunks of it back to its investors. Its £10bn of bonds have an average tenure of five years and, says Allen, there are no plans to seek to change that maturity.
Difficulty forecasting
2008
‘We issue when we need the capital; I think we always have done. Once you have bitten the bullet and made the decision to be substantially funded in the bond market, you build a portfolio and it gives a sort of natural rhythm to your financing. And with any luck over the course of the medium term, you will average into what are relatively attractive market rates.’
Cash pooling is mainly handled via Citibank, predominantly in Western Europe and Asia. ‘That pooled liquidity is then accessible by the central financing companies to be redistributed around the globe. The pool is managed on a daily basis and topped up centrally from our structural financing,’ he explains.
2007
As a source of working capital, the bond markets are back to plain vanilla, in both structure and approach. Robert Allen sees no virtue in issuing just to keep a corporate name before the market.
‘If you are in a restricted exchangecontrolled environment where liquidity of a business is run day-to-day by the operation, what you do centrally for that market is to work with them to structure their balance sheet and the core elements of their funding to enable them to operate through the next 12, 18, 24 months.’
2006
Tapping the bond markets
In cash management terms, the core of BAT is funded via its long-term capital market issuance. Says Allen: ‘In places where we have a potential acquisition but there is a limited institutional market for debt, Turkey for example, that is when we would typically introduce structural banking facilities.’
2005
Source: REL 2009 Europe Working Capital Survey
Allen sees the challenge as being the price that must be paid by every company with a global footprint.
2004
€38 billion
strongest growth but where cash is less accessible because of poor convertibility or local regulations.
cash are pretty short. Most of our profit gets turned into cash within the year, so our cash conversion ratios are high; last year it was over 100%, but typically it’s in the 90% range.’
2003
REL’s survey on working capital performance for the largest 1,000 European headquartered public companies (ranked by revenue) reveals, for 2008, DWC (Days Working Capital) improved in comparison to 2007, liberating €38 billion of working capital.
‘The regulators should not be focusing on corporates, which have an underlying reason for an OTC trade and a transaction that matches it.’
2002
Numbers crunch
‘We are also a cash-generative business so you tend to find the cycle times for the
2001
‘As you can imagine, we have seen a bit of short term volatility in our working capital as some governments have looked to recover revenue through excise tax. The variety of rules and regulations in
create some cyclicality in cash flows. This means, says Allen, that there are some very large peak outflows around the final dividend in May and at the September interims. Further complications arise from the markets where BAT is building its
different markets mean it makes more sense for the finance teams in market to run it rather than run it centrally’.
2000
print it. I think they are only starting to face the stark reality of it and some of them appear reluctant to take the tough decisions early.’
% change, year-on-year
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Euro area
Borrowing by corporates is highly cyclical, with recessions driving corporates to repay bank loans. Bank lending to UK and US corporates is now contracting after a period of strong growth. Source: Datastream
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Cash management
‘Our cash conversion ratios are high; last year it was over 100%, but typically it’s in the 90%-plus range.’ products moving between markets and funds passing through different currencies and jurisdictions.’ In Allen’s view, cashflow forecasting works and does provide an element of visibility, but does not yet provide the accuracy and complete transparency of flows that he wants. He is working on an improved system. ‘If I’m honest, one of the bugbears for us is that as a relatively cash generative business, the focus of people tends to be much more on their cash conversion for the year rather than their liquidity. ‘They can take their liquidity a little bit for granted sometimes. Also, because many of the end markets are inter-company financed, they can make the assumption that there is always more money from where the last lot came, whereas clearly in treasury we have the responsibility for the wash-up for the whole group.’ ‘We need to be working strategically to position our future liquidity, looking at
some fairly sizeable decisions around the profile of the funding portfolio, maturities and how we structure the group’s medium-term requirements.’
challenging but I think it’s one of those things that comes with the turf and we have a strong track record of managing our way through it,’ says Allen. ■
Foreign exchange Allen believes FX has become a more complex issue with the development of integrated global supply chains. ‘In the world of 25-30 years ago you had a business in a market. It had a factory, it had a local cost base, it maybe had bought a bit of tobacco leaf from a few other parts of the world but a lot of the other components were sourced locally. You had a much simpler picture of the world, whereas now I think in striving for operational efficiency and the factory footprint rationalisation, actually the economic profile of your risk changes.’ The other shift in BAT’s business has been driven by considerable success in emerging markets. ‘Your risk profile moves from stable liquid currencies increasingly into more restricted and relatively illiquid currencies. So it’s pretty
Robert Allen Robert Allen was appointed group treasurer of British American Tobacco effective June 2008. Based in London and working with a team of 20 professional treasurers across the BAT group, he is responsible for all aspects of global treasury management, encompassing capital markets and debt, financial risk management, M&A, insurance, cash management, banking and treasury execution. Allen joined BAT in 1997 and has worked in a number of roles across the group including global liquidity and reporting manager, European finance manager, head of finance UK & Ireland Operations, and finance director Korea.
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Cash management is king The recent crisis in the global economy has led large corporates to rethink how to make best use of their cash. Their search for security, liquidity and yield is prompting them to increase the focus on their cash management practices, as Richard Martin of Barclays explains to Jim Banks.
In a radically changed economic climate there is a growing desire among companies to have a clearer view of their cash position, and to temper the search for maximum yield from their cash with an increased sensitivity to risk. Their cash management priorities are changing, not least because of changing attitudes towards counterparty risk. Banks must adapt to provide a range of complementary services for corporate clients. ‘Cash management priorities have evolved on a number of fronts. There is more focus on the availability of working capital finance. The downturn has reduced available credit, so treasurers have focused more on managing their own working capital and liquidity position effectively,’ says Richard Martin, deputy head of cash and trade at Barclays. ‘Treasurers are increasingly looking at counterparty risk, given the problems that some institutions have faced. There is a renewed focus on updating and confirming treasury policies, and many companies have reduced counterparty limits because of their view on the financial standing of some institutions. But the priority is liquidity management, with companies looking to ensure the availability of cash in the right place, at the right time and in the right currency,’ he adds. Cash pooling techniques to offset credit and debit balances are a key tool in corporates’ efforts to optimise use of cash. Recognising this, Barclays has developed new and enhanced services, including cross-currency notional pooling and cross-border, crosscurrency cash concentration facilities, in which cash in accounts in different jurisdictions, including those not held with Barclays, can be automatically swept into a single account. Barclays is also seeing an upswing of interest in services designed to help corporate clients find alternative sources of finance, rather than traditional debt solutions. Supply chain
finance is prominent amongst these, not only to ease the flow of funds between buyers and suppliers to make the supply chain more robust at a challenging time, but also as an enabler to allow buyers to negotiate improved terms whilst providing suppliers access to potentially cheaper funding.
A preference for partnerships Companies are rethinking how they engage with providers of financial services, which makes it increasingly important for banks to get closer to their corporate clients. Because primary lenders are now more likely to be chosen as providers of ancillary services, the willingness to engage in partnerships is vital.
‘The management of relationships with banks has been re-evaluated, with companies focusing on their main providers of finance.’ ‘The management of relationships with banks has been re-evaluated, with companies focusing on their main providers of finance. Cash management is more intrinsically linked to the provision of debt. Barclays has always been very strong on relationship management and we are very close to our corporate clients. The first step is to fully understand customers’ needs, which allows us to design and deliver cash management solutions to help them through difficult times,’ remarks Martin. This mirrors the trend among many firms of forming closer relationships with suppliers to support the physical supply chain. With counterparty risk in the spotlight, they are pursuing closer relationships with their banks.
‘In physical and financial supply chain arrangements there is much more of a partnership approach between buyers, suppliers and their banks. In balancing the different needs of trading partners, banks must have a good understanding of the priorities of each party. Large buyers are increasingly focusing on maintaining good relationships with their suppliers and with financial supply chain solutions, banks can offer their suppliers an alternative financing option. With regard to liquidity management, there is a greater need for banks to understand their clients’ priorities and to balance their needs for security, liquidity and yield from the investment of surplus cash. There is always a risk/return trade off, but to develop the right approach you must truly understand what a company wants to achieve. Then you can advise on the investment options that support the company’s strategy,’ comments Martin. Barclays’ “Turning the Corner” initiative is a support designed to demonstrate that the best banks can give useful, relevant advice to their clients on how to make it through the recession, whether it is on the management of Day Sales Outstanding, or the order-tocash cycle. It is impartial advice, willingness to partner with corporate clients, and its range of new services show that Barclays has been listening closely to what customers want. ■ Further information Barclays Website: www.barclays.com Excellence in Leadership
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Mutual strength Even in property, a market very sensitive to macroeconomics, a robust risk management methodology can win through, especially when the disciplines of finance and operations work well together, as Jones Lang LaSalleâ&#x20AC;&#x2122;s Steve Creswell explains to Jim Banks.
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The global recession has been a stern test for risk management processes in every industry, but the property market has been buffetted more than most by the winds of change. Booming investment in development evaporated in many regions, property values fell and what had been a consistently expanding market abruptly changed direction. For large companies in the property sector the dramatic shift in the market presented a complex and worrying challenge, but some have proven that a clear, robust and consistent set of risk management processes can provide shelter from the global economic storm.
to risk doesn’t change. The risk heat map changes, but not the process of risk management,’ notes Cresswell.. The same principle underlies its analysis and management of every other kind of risk, too. ‘For example, the investment market in the UK is improving, so now we have to look at emerging retention risk. We have had to tweak our risk management processes, but we have shown that we have a good framework. We have been able to cope with the problems that have emerged, although we are certainly not complacent.’
Thorough analysis, tough decisions ‘We are not a risk averse business, but we are risk aware. Our culture is all about risk awareness. We will take on risk, but only in an informed way,’ says Steve Cresswell, chief operating and finance officer for Jones Lang LaSalle in EMEA. Jones Lang LaSalle is a financial and professional services firm that specialises in real estate services and investment management, and employs over 30,000 people in 60 countries to serve the local, regional and global real estate needs of its clients. It is a large and complex business that relies on in-depth market analysis and local knowledge to support its services and anticipate market trends. Cresswell, whose role overseeing the finance function in EMEA – a region where the fortunes of the property market have changed greatly in the last two years – knows first hand that the risk profile of such an organisation can shift rapidly. He also knows, however, that his own company’s methodology for risk management was strong enough to deal with that shift. Whereas some companies have had to tear down and rebuild their risk management processes, Jones Lang LaSalle have made do with the odd tweak because its processes are built on the assumption that the nature and extent of risk is dynamic. This shows through in its approach to credit risk. ‘We work in 24 countries in EMEA and in some, such as Russia, credit risk is very hard to manage. So, we have taken a closer look at credit risk and tightened up our approach to contracting, due diligence and credit control. Our overall approach
Forecasting can be a nightmare in turbulent markets, and recent trends in the global economy have made the extremely hard to predict with any great degree of accuracy. This does not mean, however, that models of the future have no value. Fruitful forecasting is still possible, providing that one builds a range of probabilities into
‘The value of our business is in our people and we don’t want to lose them. We must think more carefully about resourcing decisions in the current climate.’ the model, and this is exactly the kind of ‘tweak’ that Cresswell has seen his organisation use to good effect. ‘The days of markets being consistently on the up have gone, so now we talk about ranges and assumptions. Our company has a powerful research function, so we can see the trends early, but the world is still highly unpredictable. Our research gives us an informed estimate on which we can decide whether we have the right sise and shape to the business based on those assumptions.’ To shape the business for the future Cresswell and his colleagues have faced
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many tough decisions. Like any other property advisor, his company has had to accept that the market has been through a period of reduced investment activity, which presents problems in regard to the sise of the workforce. Decisions informed by prescient analysis, however, are likely to be more to the benefit of the company, its clients and its employees than those that some organisations have had to make suddenly and with uncertainty. ‘A rising market is a challenge of a different sort, but in the last two years we have been clear about what our assumptions meant for costs, for instance. The value of our business is in our people and we don’t want to lose them. We want to keep the shape of the business, but we must think more carefully about resourcing decisions in the current climate. The challenge now is to gauge when to start investing again ahead of the curve,’ Cresswell remarks. ‘In many ways it is a more interesting environment to be forecasting in, and like any other organisation we have not always got it right. In the last two years, we have had to make some difficult decisions on staffing. The number of staff in Europe has fallen, as it has for any other property advisor in this market. Some good people have left the company because there wasn’t the market activity to support them but we have also moved people across disciplines and geographies to keep the best people we have.’ Although staff numbers have been cut in certain regions, it is in response to almost unprecedented decline in some markets. Furthermore, those cuts have been minimised by the forethought of the finance team. ‘Investment volumes have fallen across Europe. In Ireland, for instance, the market is 10% of what it was a couple of years ago. As a result, we have sized ourselves for the markets we anticipate and are well positioned to take market share in the year ahead,’ says Cresswell ‘Each year we go to the regions to talk about the main risks in each country, then we plot the main risk themes for the business. Each region looks at financial, people, complexity and maturity risks, among others, so the aggregated view of risk across the company emerges. That goes into our risk management plan for the next twelve months, which is based on common themes.’ Excellence in Leadership
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Finance at the forefront of strategy The firm’s ability to rely on the strength of its forecasting and risk management processes stems from a strong bond between the finance team and the rest of the business. Cresswell’s own role in the organisation epitomises this. Having come to the company nine years ago as finance director he then took on an operational role, which sees him take on the duties of regional CFO and COO [see boxout]. This is a common theme across global markets. ‘The roles of COO and CFO in each market are often combined. In finance, we are very close to the board. We have a global approach to risk management, but it straddles regional and national markets. The global operating committee meets regularly to discuss risks and compare approaches across different regions and countries, whether it is swine flu or limits of liability in each market,’ Cresswell observes. The perspective on risk at Jones Lang LaSalle is grounded in an understanding both of financial analysis and operational need. The evolution of the combined role in which Cresswell and other find themselves is symptomatic of the broadening brief of finance across many industries, which requires CFOs in particular to have more in their toolbox than traditional finance skills. Indeed, the ever more diverse range of tasks that finance directors are asked to perform could see the combined finance and operations role become far more common in the world of business.
‘It is easier to be COO when you have a finance background. Similarly, the finance role is easier when you have an understanding of operations,’ explains Cresswell. ‘The CFO must understand the responsibilities of control and stewardship, and must manage the unexpected. The demands on the finance function are much broader now. They go far beyond accounting and stewardship. The world of finance is more complex that it was five or ten years ago, and there is a much greater variety of tasks
‘Finance has to be involved in strategic decisions, finance people have a lot to add. Now finance is seen as something that can really add value to the business.’ that the finance team must take on. I’m involved in accounting, but I might find myself handling pension fund matters one minute, then advising on acquisitions or being involved in major outsourcing negotiations the next.’ Cresswell’s dual role is testament to the high regard in which the finance function
Stay risk-aware, not risk-averse The reporting structure of Jones Lang LaSalle is designed to ensure that operational and financial perspectives on risk are combined to inform its risk management strategy: • Steve Cresswell, as CFO and COO of EMEA, reports to the European CEO, Christian Ulbrirch, for regular operational reviews • Along with four other members, Cresswell occupies a seat on the EMEA board • The regional boards report to Lauralee Martin, Global CFO and COO
• The global operating committee brings together the global COO & CFO, legal counsel and the regional COO/CFOs to regularly discuss best practice in risk management. • Annual discussions take place with CFO/COOs in each regional and national market to identify major risks, market by market • The main risk themes for the global business are plotted from in-depth discussions with the experts in each national market
is held within the business. As well as risk management, reporting, accounting, compliance and the other, more familiar tasks a finance team is asked to fulfil, the department also plays an important part in determining strategy. ‘The CFO role is meant to help colleagues in different territories to do business. Finance is about making helping them to make informed decisions. We work collaboratively with the rest of the business to help it deliver. The trend is set from the top of the organisation,’ he remarks. ‘Our global CFO is a real inspiration to both the finance and business people in the company. Finance is recognised throughout the business, and the regional businesses have come to appreciate the importance of finance people.’ The trust that is put in the finance team derives in no small part from the fact that it can express its analysis and objectives in a form that the rest of the business can easily interpret. This is crucial in many ways to the smooth delivery of strategy, not least when an organisation is expanding through acquisition. ‘Prior to the downturn, we were in a very rapid growth phase. We have made 15 acquisitions in 18 months and we needed to integrate them all well. So, we need to communicate our goals well across the organisation, although with the acquisitions we were clear that there needed to be a good strategic and cultural fit. We were very precious about that, and we did reject some acquisitions on that basis.’ For Cresswell, the evolution of the role of finance is an ongoing process, one that he believes has gathered pace in recent years and that has been given further impetus by the recent economic turmoil and squeesed liquidity in financial markets. ‘Finance has to be involved in strategic decisions. Finance people have a lot to add. The view of finance directors has changed dramatically in recent years, in this company and in business generally. When I joined Jones Lang LaSalle in 2000, the world still had some very old views of finance, which was seen as a bunch of accountants sat in a dark corner. Now, it is seen as something that can really add value to the business,’ he believes.
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‘The CFO must understand the responsibilities of control and stewardship, and must manage the unexpected. The demands on the finance function are much broader now. They go far beyond accounting and stewardship.’ The last two years have not been easy for his company, although the same could be said of most businesses, especially in the property sector. But with finance embedded in the heart of the organisation and able to communicate clearly how it can add value, Jones Lang LaSalle has been able to manage a challenging market with great success. Therein lies the lesson for other organisations. ‘Finance directors must be business people. Our CFOs are not only smart and
tough, but also good communicators, so they have earnt the respect of the rest of the business. Here, we have made great strides and we are listened to,’ believes Cresswell.
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Steve Cresswell Steve Cresswell is EMEA CFO & COO for Jones Lang LaSalle. He joined the company in 2000 and has been UK finance director, responsible for all aspect of financial reporting, planning and forecasting and providing decision support to the business, UK finance and operations director, responsible for strategic planning, risk management and support functions, and EMEA CFO.
‘If you can’t communicate with the rest of the rest of the business then you won’t be heard or trusted. You have to explain your goals in terms that the business can relate to. Rapport with the business is key. Once you have that, business people will come to you and ask for your help.’ ■ Excellence in Leadership
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Worth the risk At AXA Corporate Solutions’ UK Client Forum that took place in November, various speakers, including technology experts, brokers and even a former professional poker player, offered different perspectives on the attitude to taking risks. Phin Foster attended the event.
AXA Corporate Solutions may have had to move its UK Client Forum from Bath to Bristol due to a 70% increase in attendance on the previous year’s event, but at least it was not Dublin. Held the day after a controversial piece of opportunism just a few kilometres from the organisation’s corporate HQ in France had ended Ireland’s hopes of making it to next year’s soccer World Cup, events in Paris were a hot topic of conversation among delegates and organisers alike. UK Branch CEO Emmanuel Nivet did not duck the issue in his opening remarks, but viewed it through the prism of a theme running through this year’s forum: perspectives. ‘There was a risk for Thierry Henry to be booked,’ he conceded, ‘an opportunity for Gallas to score, and now another risk to Henry’s public reputation. And there was a human factor: the referee. We see risk management and the issues that surround it everywhere.’ This observation crystallised how risk is perceived at AXA Corporate Solutions and provided further recognition of its omnipresence. Nivet and his team clearly recognise the need to look at the subject from a number of viewpoints and insist that a more nuanced approach is required in order to meet the needs of clients. AXA Corporate Solutions provides products and services to European corporations with an annual revenue of more than €600 million, also extending its speciality insurances and risk consulting services to smaller companies. With its headquarters in Paris, the company has established centres of expertise in the UK, Germany, Switzerland, Spain, Italy and the Benelux countries as well as others in Asia, the Middle East and the Americas. These centres of expertise are supported by a substantial international network of AXA subsidiaries, affiliates and external partners, to ensure a global service capability for clients.
The disciplines involved in the catch-all term ‘risk management’ can be staggering and seem to grow exponentially as the role of the modern risk manager evolves apace. One had only to look at the agenda on offer in Bristol to appreciate the scope of the undertaking. Among talks from technology experts, brokers and AXA Corporate Solutions specialists, attendees heard from former professional poker players, media executives and a former
‘The disciplines involved in the catch-all term “risk management” can be staggering and seem to grow exponentially as the role of the modern risk manager evolves apace.’ Coca Cola worker blinded in an industrial accident. Nivet said he was excited by the opportunity to view the industry afresh, and the variety of perspectives on offer made this more than possible.
Fear of failure Casper Berry, who, aged 25, decided to move to Las Vegas and become a professional card shark, spoke about the need to overcome fear of failure, see it as a natural phenomenon in pursuit of longterm success and embrace calculated risk. Of course, one must always be aware of the dangers associated with any decision, and Berry recalled an old signpost erected by a pond near his childhood home: ‘Boating is fun until death occurs.’ The room nodded sagely in agreement.
This was a theme carried through by Paul Hopkin, technical director at the Association of Insurance and Risk Managers (AIRMIC), who observed that risk and risk management had become particularly hot topics over the past 18 months. ‘Organisations cannot be saved by risk management once they’ve already got themselves into trouble,’ he commented. ‘It is something that must be observed at all times.’ The concept of risk management being about understanding and managing risks taken as well as the short-term prevention of mistakes is a point AXA Corporate Solutions has been pushing for some time now. Success demands high levels of collaboration between multiple parties, something made extremely clear during a roundtable discussion that included brokers, clients and the group’s chief underwriting officer, Philippe Jouvelot. He spoke at length about the need to make the process ‘more human’ and increase the transparency among all stakeholders. ‘The more clients talk to us and promote the requirements and nuances of their company,’ said Jouvelot, ‘the better we can develop a portfolio and vision that addresses the long-term.’ To address this requirement and cultivate stronger relationships, AXA Corporate Solutions rolled out its three-pronged vision of service – a commitment to reliability, availability and attentiveness – in the spring of 2008. It was emphasised time and again in Bristol that risk awareness does not equate to risk aversion – Thierry Henry will vouch for that – and through creating a platform for all stakeholders to exchange ideas and experience, AXA Corporate Solutions continues to lead this charge from the front. ■ Further information AXA Corporate Solutions www.axa-corporatesolutions.com Excellence in Leadership
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Ethics
Carrot and stick To prevent some of the causes of the worldwide recession recurring, Brian Walsh believes that, rather than focusing primarily on ethics, a more fundamental reappraisal of the issue of compensation and reward structures is required, as he explains to Steve Coomber.
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There has been much talk about the role that ethical standards have played in the recent financial crisis. Some have suggested that the unethical behaviour of certain individuals in the pursuit of profits fuelled the crisis, and that, cyclically, perverse rewards and bonus structures encouraged unethical behaviour. Brian Walsh, former deputy chairman of Nationwide, believes a broad examination of corporate culture is needed. ‘In order to get results, and I think results are needed badly, there needs to be a logical, structured debate about compensation and reward, hopefully with some end product,’ says Walsh. ‘That is a debate, however, that is better conducted within a business, management and economic framework. It would be more useful to come up with specific actions for addressing the issues not on the basis of ethics, which can become emotional, but rather on the basis of hardnosed management and economic structures.’
Money as a motivator Few would disagree that compensation was one of the problems that arose in 2008. The real issue, though, says Walsh, is whether steps can be taken to prevent compensation systems from triggering similar events in the future.
to self-actualisation – morality, creativity, spontaneity, problem solving – at its apex.
The right management approach
‘What seems to have happened over the years is that the principles of what motivates people, first in investment banking and then throughout financial services, didn’t pay due respect to the principles laid out in Maslow’s hierarchy of what people work for,’ says Walsh. ‘What motivates people is not just money; it’s also to do with achievement and self respect. A good manager and management system will recognise that and lead the organisation towards fulfilling all those things that people want out of working life.’ Of course this places greater demand on management’s ability than simply holding up the carrot of large incentive compensation.
Management should recognise that people will respond and do their job well if they’re managed properly, says Brian Walsh, and that does not just mean ensuring that they are paid in the upper quartile and that bonuses are maximised.
Instead, says Walsh, what has happened is that all of those various aspects of motivation were concertinaed into one element: compensation. Throughout financial services, revenue generation was linked directly to compensation. The product of this was financial engineering, and the development of financial products that provided volume and therefore income, but ultimately provided a level of risk that led to a near complete collapse of the global financial system.
Fair dues A big part of the problem, says Walsh, is the increasing emphasis on money as the motivating factor. ‘In a management context,
Walsh believes that there should be a fairer distribution of risk and reward across the whole system, incorporating the owners
‘What motivates people is not just money; it’s also to do with achievement and self respect. A good manager and management system will recognise that.’ leadership is exercised through motivation. If motivation is geared solely to compensation, you’re going to get people behaving in ways that have unintended consequences. Particularly in the investment banking arena, compensation played an almost exclusive role in motivating the senior workforce.’ From his London Business School days, Walsh recalls the behavioural science movement and Abraham Maslow’s hierarchy of needs published in his 1943 paper ‘A Theory of Human Motivation’. The hierarchy of needs sets out a progression of motivating needs and wants, from basic physiological and safety needs at the bottom of a pyramid,
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‘There is clear evidence that if people are motivated properly and get something more out of their work than concern about the level of their bonus, you will find they do a good job,’ says Walsh. ‘And if you have reached a point where the financial services only attracted people that are motivated by money, that probably means you haven’t got the best people in terms of making risk/reward judgements; if it means that management has developed teams through the dominant motivational factor of money, there is probably an opportunity to tap a wider, and perhaps better, talent pool by changing your management style.’
seen benefits which bear no relation to the scale of reward in the banks. In fact it could be argued that the average customer of the banking system, in all of its elements, has not benefited a great deal from the money generated within financial services. At the moment there is very high unemployment, people who rely on fixed incomes are getting virtually nothing on their savings accounts, and final salary pension plans are almost a thing of the past. Financial services firms, however, perpetuate a culture in which they continue to pay extremely high salaries and huge total compensation to management and some staff.
of companies, including banks, the employees, including management, the customers or clients, and the community at large.
‘The way to look at the issue of compensation is to ask whether the distribution of risk and reward across the business system is in balance. And it’s not,’ says Walsh.
As he points out, with companies, the majority of ownership is held through institutional investors: pension funds, insurance and mutual funds and so on. In most instances these institutions are stewards of funds provided ultimately by individuals. In recent years these individuals have achieved a far lower return than those people applying their investments in the financial markets. Equally, the many corporate clients and public entities employing financial services firms for advisory and structural services have themselves
‘The question of bonuses is an important issue to address, and not simply the form, shares or cash, or phasing - 3-5 years. But the issue of absolute or total compensation needs more open consideration. Influenced by the rewards available in financial services, private equity and hedge funds, all boardroom compensation has increased at several times the rate of the average salary. It has been argued over the years that there should be at least some recognition of an acceptable relationship between the total compensation Excellence in Leadership
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Changing attitudes in the downturn Cognitive errors can lead even the most talented executives to deny clear evidence that times have changed. For example, several key members of a global semiconductor company’s senior team reported to the CEO that the present downturn was little different from other recessions they had experienced throughout their careers in this highly cyclical industry. A revenue drop of more than 50% over two quarters did not change their conviction. Some of their comments could populate a textbook list of cognitive errors underlying denial: 1. ‘We just got an order last week, so things are turning’ – an example of the availability heuristic. 2. ‘This feels just like the last downturn; we’ll come back eventually’ – an anchoring error. 3. ‘My team agrees this will resolve itself’ – the bandwagon effect. 4. ‘I found three different studies that support my view that this is a temporary downturn’ – the confirmation bias. 5. ‘We need to study this more before we act irrationally’ – the information bias. 6. ‘If we do the things we usually do in a downturn, everything will be OK’ – the optimism bias. Source: McKinsey’s A CEO’s guide to reenergising the senior team.
of the upper tiers of management and lower tier employees, again raising considerations of balance, and the distribution of the pot throughout the system across those participants that contribute to it.’
Fixing the system Addressing the excessive pay issue has to start with an understanding of how it can be that financial services generate the high earnings to support it such compensation. The mystique of the capital markets tends to obscure this.
and whether real value is being created or destroyed. Of course maintaining secondary markets are is an essential feature of the capital market process. However in equities, the company being traded and its employees get no direct benefit from speculative trading, unlike someone like Bill Gates, for example, who created a business and a product that benefited a great many people; most people might conclude that he deserves the wealth he gets. ‘So, if massive profits are made from such activities, I think it is an area in which
‘It has been argued that there should be at least some recognition of a relationship between the salaries of the upper tiers of management and lower tier employees.’ With such an appreciation the tools to address compensation and its role and position within a management system come down to three or four areas, says Walsh.
governments could well consider a transaction tax approach,’ says Walsh.
‘First of all, you’ve got the tax system,’ he says. ‘The recently announced 50% tax on bonus pools shows one way that tax can be applied to the issue. Until now the government has not shown much inclination so far to apply a windfall tax or any other form of permanent direct taxation that would limit distribution to management, and then effectively transmit the proceeds to the community.’
Secondly there is the regulatory side. If capital requirements are raised to reflect risk, banks and institutions have to provide more income to create more reserves. Instead of being distributed, those profits go into reserves rather than being paid out in bonuses or compensation because that would reduce the available profit. In this way increased capital requirements put pressure on organisations themselves to make the choice and perhaps find other motivational approaches.
After all, notes Walsh, the enormous gains made out of proprietary trading in the secondary market do not leave a legacy of any wealth other than the gain that it creates for a small number of people (even if you believe in trickle-down). Indeed, traders can make money whether the price moves up or down
‘Capital requirements are a critical aspect,’ says Walsh. ‘If you go back over time the exposure to exotic derivative based debt products has carried high risk. If you deal in those, then you need more reserves, and to get more reserves you cannot distribute your income in bonuses. So I think
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this is another part of the answer to the rebalancing of the reward.’
invested in and declare their position on compensation issues.
The regulator should also perhaps use the ‘Approved Person’ qualification requirement for bank directors to assess the competence and attitude to risk/reward of the current board membership in the major banks, particularly those most affected by the credit crunch, and not just their future additions as now proposed.
‘The institutional investors should challenge the behaviour of company management and boards in terms of the value that they pass to financial services,’ says Walsh, ‘with more open dialogue with the banks in which they invest regarding their policies on risk management and compensation. It’s for people like pension fund trustees to apply pressure to get this done.
A third aspect of any rebalancing solution must be more attention on the role of boards and institutional investors, says Walsh. ‘The role of the boards is critical to this problem,’ he says. ‘It is boards first of all that agree to pay their financial service providers,
‘There are big numbers involved in total bank compensation, and that money would otherwise flow to the other stakeholders. Through such changes benefits should increasefor the person in the street, through pension funds, unit trusts, or insurance
‘It would perhaps have taken a hard man or woman to step up and say that managing people is multidimensional, and that pinning motivation on compensation is wrong.’ the advisory fees, underwriting fees, debt issuance fees, bank arrangement fees and so on and so forth, or to accept the fees that are put to them. There is absolutely no question that the level of these fees is currently an important generator of the enormous profits for the banks and in particular the investment banks.’ These revenue sources fund directly the big bonuses, as for example 1–3% fees on a major acquisition contributes to a massive bonus pot tied to relatively few people. The overriding question for boards is whether the fee levels are justified and how they relate to the work and value provided. Boards should be encouraged to challenge, lower and then justify the fees they approve, particularly the non-executive directors. At present we have unitary board approach where boards discuss such matters on a collegiate whole board basis. There may be a case, though, suggests Walsh, for a two-tiered board where you separate the non-executives from the executive directors, as with some other EU countries. In fact this may well have helped avoid some of the excesses in the banks themselves where dominant executives seem to have held sway over the non-executives. As for institutional investors, Walsh believes that they should take a far more active role in the companies (including banks) they’re
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Driving change While boards have an important role to play in driving change, perhaps it is institutional investors than can make the most impact, argues Brian Walsh. ‘The impetus for change has to come from boards having courage, and from institutional investors standing up for the long-term interests of the people whose funds they manage,’ says Walsh. ‘The two may go together as nobody wants a difficult time with a major shareholder.’
no position to resist the introduction of the Glass-Steagall Act separating so called ‘casino’ activities from retail banking. Introducing meaningful change is going to require strong leadership, says Walsh.
Strong leadership required
‘You need people that have strong leadership qualities and a strong sense of purpose. I come back to the principle that what motivates people is more than money, so the argument about major skill defections is overplayed. In the bubble of recent years it would perhaps have taken a hard man or woman to step up and say that managing people is multidimensional, and that pinning motivation on compensation is demonstrably wrong,’ says Walsh.
So does Walsh think we will we actually get any action on these points? He recalls his early days working in investment banking in the US, and in a particular the words of one experienced colleague. ‘When I was in investment banking there used to be a saying: the market has a memory of 18 months.’
‘Overall it’s a culture change that is needed. My own view is that it won’t change immediately, but that we need action on all of these aspects or some combination to alter behaviour, and then change will come over time.’ ■
payouts, with a more equitable balance of gain across the system between providers of financial services and their users.
It is remarkable the speed with which people forget how close the world came to financial meltdown. Pump in some government money, facilitate some consolidation, remove some toxic debt, and before you know it, for some people in the industry it is almost as if it never happened, with a number of banks reporting bumper profits. Banks have big PR budgets, are a powerful lobbying force, and have been sent a message that it is possible to be ‘too big to fail,’ none of which encourages the kinds of radical change or action that might be called upon to prevent a similar situation recurring in the future. In the 1930s there was no hiding from the Great Depression in post-Wall Street crash America. The banks were in a weaker position, thousands of them failed, and so were in
Brian Walsh Since 1972 Brian Walsh has pursued a broad career in financial management, covering industry and financial services all with major international dimensions. He stepped down from full-time executive responsibilities for family reasons in 1999, becoming a non-executive director and advisor for a number of businesses. He has been a main board director of two FTSE-100 companies and three FTSE-350 companies, an executive director of investment banking with Credit Suisse First Boston and deputy chairman of Nationwide. Excellence in Leadership
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Outsourcing
The key to optimal outsourcing
Tony Chanmugam, CFO of BT Group, understands better than most the challenges of maximising the potential benefits of outsourcing, having been involved both as a provider and buyer. Here, he speaks to Steve Coomber about how he selects the ideal service provider.
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In the midst of one of the severest economic downturns for decades, many senior executives are casting a slide rule over their business, looking to reduce costs wherever possible. One proven way of obtaining cost reductions is to outsource non-core parts of the business to a third-party service provider. If implemented correctly outsourcing offers both cost and performance benefits, with improved customer service, greater competitiveness, and increased profitability. But not all outsourcing contracts run smoothly or deliver expected gains. So how do you ensure you maximise the potential benefits of an outsourcing arrangement? It is a challenge Tony Chanmugam, CFO of BT Group, has grappled with for some time now. As Chanmugam, a keen cricketer, knows all too well, outsourcing can bowl you the occasional googly. So it helps that he is well placed to understand the outsourcing process and how to get the best out if it, having been involved both as a provider and buyer of outsourcing services. Prior to his appointment as CFO, Chanmugam was CFO and COO of BT’s Global Solutions business, which provides IT and ICT outsourcing services. Now, any deal that BT does to outsource part of its business has to go through Chanmugam. ‘It certainly helps when you’re choosing whether you want to outsource and who you outsource to. Having stood on both sides of the table gives you a different perspective on things,’ he says. As part of the outsourcing process it is essential to choose the right service provider, but, before you get to the outsourcing stage, you have to decide whether the activity concerned is an integral part of the business and a key differentiator in the external market place. If it is, you should not outsource. In terms of ICT, for example, there is no way I would ever look to outsource contract management capability. At the other extreme, back-office administration services is something that you would outsource. Everything else is somewhere in-between.’ At BT the initial requirement to outsource comes from the lines of business, and is based on a combination of operational,
service and financial reasons. However outsourcing something just because it is causing problems, or appears to be difficult to deal with, is not necessarily a good idea, either. ‘If you’ve got a major problem, do you outsource (assuming it’s not part of your key IPR) or do you try and do something with it yourself and then outsource it?’ asks Chanmugam. ‘My preference has always been to take it on, run, control and manage it in the most effective way possible, get it to a situation where you think this is the best you can do, and then pass it to an expert, because that way you’ve taken the low hanging fruit out. Why should I be paying a premium to someone else to do something I could do myself?’
‘In terms of ICT, for example, there is no way I would ever look to outsource contract management capability. At the other extreme, backoffice admin services is something that you would outsource.’ Once the decision to outsource a particular activity has been made, though, it is time to select a service provider. Chanmugam advocates a tender process that only includes prospective partners that would be both a good cultural and intellectual fit. After all, no-one wants to be in a long-term contract with a supplier that is looking to exploit you.
The right KPIs Careful consideration must be given to choosing the appropriate key performance indicators (KPIs), to ensure that a contract is drawn up with tight terms and conditions. This requires having a good operational understanding of the business, says Chanmugam, because
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Outsourcing: one, two, three When you’re buying outsourcing, you’re doing it in three layers, says Tony Chanmugam. ‘Step one is where you want the cost improvement for the KPIs currently being delivered,’ says Chanmugam. ‘The second level is that you’d expect some improvement in terms of your KPIs, and the question is what degree of improvement you want. Thirdly, what you look for is something transformational, over and above that, which takes you to a completely different place.’ successful outsourcing is based on delivering the right KPIs, not simply price. ‘Make certain that when you’re setting up the terms and conditions that you’re in a position where you understand operationally what you need in order to manage the business. You ensure that the key performance indicators are absolutely what you need and that the supplier is managed on the basis of those key KPIs,’ says Chanmugam. ‘So, for example, if you’ve outsourced some call centre activities, you would want to be in a situation whereby, not only do you have good terms and conditions associated with the standard activities that you would measure – time to answer a call, abandoned calls, and so on – but you’d also be more specific in terms of performance indicators such as, for example, ‘right first time’ – is the call resolved in the first time of answering?’ In terms of performance, the ideal situation with outsourcing is that it will provide not just cost savings but will be transformational in terms of improving the performance of the business and so add value in this way too. The transformational aspect may sound a bit nebulous but Chanmugam says that is not the case in practice. ‘Let’s go back to the call centre environment. You might ask a third party to take over billing calls, and help resolve those. They would charge you on a time and materials basis of X number of people to handle Y number of calls,’ says Chanmugam. ‘The transformational piece would be to materially change the quality of the Excellence in Leadership
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Outsourcing
A matter of timing If you have a piece of business that you’re thinking of outsourcing, then how long does the process take before you get to a position where you’re satisfied and you make that commitment? ‘The time period to making a decision can vary based on the complexity of what you’re doing. So with something very simple like backoffice service activities, you can do that in a few months. If you’re doing something that is major in nature and transformational, however, it can take you near enough a year to get to where you need to get to,’ says Tony Chanmugam. ‘You’ve got to remember the outsourcing contracts last for between five and seven years. So, they’re fairly lengthy contracts. In an ideal world you should be in a situation where from the start of tender to making the decision is about six months maximum. But sometimes these things drag on.’ service offering at a lower cost, so instead of being charged on the basis of the number of calls generated, to say this is the service we expect, these are the key KPIs associated with that service, and there will just be a flat charge. So you are moving an element of the organisation to the third party, getting them to run, control and manage it for you, and give you an output price, which is a single lump sum, with further premiums for better quality service.
‘They would be measured on, at a simplistic level, a score card consisting of five to six key KPIs, and you would expect them to be at a better level to where you are currently. That’s in an ideal world. Do I have many contracts where that works ideally for me in BT? The answer is ‘no’ but we are getting there.
companies with complex outsourcing contracts there are a number of points of interface on operational, financial, commercial and procurement issues. According to Chanmugam, BT is in the process of trialling a centralised vendor management function, the idea being that
‘I would not take on any outsource contract that resulted in a short-term increase in my cost base. I’d expect to see reductions.’ While it is possible to ensure the success of the outsourcing contract in terms of the service level agreement and KPIs, it is also important to be able to quantify the financial benefit obtained. The base point from which to measure is the existing total cost of ownership, prior to outsourcing. The phasing of benefits causes difficulty ‘Quite often there’s the cost of transition, which means in many instances your initial costs may increase. Most customers will want a reduction in their cost base, so the supplier has to cover the cost of transition. From a customer perspective, I would not take on any outsource contract that resulted in a short-term increase in my cost base. I’d expect to see immediate reductions,’ says Chanmugam. A major factor in making sure that the contract works according to plan is the approach to vendor management. In large
the supplier contracts are managed in a consistent, coordinated manner with a single point of interface in much the same way as would happen on the outsourcing supplier’s side in term of its portfolio of outsourcing contracts. The system has just been set up as a trial at BT, being run with one of the company’s biggest supplier. It is a centralised resource run from within the group finance function.
Dealing with difficulties Despite best intentions and careful planning, the course of an outsourcing contract may still not run smoothly. If a company is dissatisfied with the outsourcing service it is receiving, there are a number of options available. The first step is usually to try and deal with the problems informally within the contract management community without resorting to the terms and conditions. The next step would be for
Emerging outsourcing Emerging market suppliers are gaining traction with organisations as they seek to mitigate risks through expanded global sourcing networks, it has been revealed. These six emerging markets are Brazil, Central and Eastern Europe, Israel, Mexico, Philippines and South Africa. The news comes from Everest, a global consulting and research firm, which has completed a new study examining key emerging market suppliers that have achieved meaningful operating scale
Suppliers profiled in the study are CPM Braxis (Brazil), EPAM Systems (Central and Eastern Europe), Ness Technologies (Israel), Softtek (Mexico), SPi Global Solutions (Philippines) and Merchants (South Africa).
events, supplier scandals and other factors have prompted organisations to take more sophisticated approaches to risk management that go beyond performance management of their engagements. Now, they are considering the entire sourcing ecosystem, as well as a collective portfolio of suppliers, to not only diversify locations but also meet increased demands for global services delivery networks.’
Amneet Singh, Vice President,Global Sourcing Everest, said: ‘Recent world
Source: Everest, National Outsourcing Association (NOA), December 2009.
and, through investments in delivery capabilities and adopting industry best practices, are successfully serving Global 1000 corporations.
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‘The customer has to really understand the processes they are outsourcing and know exactly what good looks like operationally, financially and commercially, so that when you come to outsource you know what good looks like.’ the contract management team to try and address any issues via the terms and conditions associated with the contract. Only then, in BT at least, is the matter likely to reach the CFO or CEO. ‘Effectively, if you’re in a situation where you are not happy with the service, you have got two options. You can either look to run the contract as it is now and continue to be unhappy, or look to change the contract,’ says Chanmugam. ‘So if we’re looking to change the contract, the question is: ‘Can we do that?’ If the terms and conditions don’t allow it, you’ve got to convince the supplier it is in their interest to look at some form of contract extension. ‘And if they want to be with us for longer than the terms of this particular contract, they would need to do something differently. If they decide not to, we have a further choice: do we stay with the
contract, or do we cease the contract via court or by paying the necessary penalties associated with that?’ Given his extensive outsourcing experience then, if Chanmugam had to pick out the key top-line factors that organisations need to attend to if they want to improve the odds of enjoying a successful outsourcing arrangement, what would they be? ‘The customer has to really understand the processes they are outsourcing and know exactly what good looks like operationally, financially and commercially, so that when you come to outsource you know what good looks like. ‘At a detailed level’ he says, ‘any potential supplier has to be a partner and really understand the business both operationally and culturally and be prepared to deliver added value quickly. If this happens the outsource is likely to succeed.’ ■
Tony Chanmugam Tony Chanmugam was appointed group finance director of BT Group and also joined the board in December 2008. In his career at BT Chanmugam has established a strong reputation for cost transformation, most recently holding two senior positions in BT Retail, as CFO and as MD of BT Enterprise. Prior to joining BT Retail, Chanmugam was CFO for BT Global Solutions, a business serving multinational organisations in more than 100 countries. In 2004 BT Global Solutions was integrated into BT Global Services. Outside work he is a sports enthusiast.
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Next issue
EXCELLENCE IN LEADERSHIP March 2010
Innovation ‘Prediction is very difficult, especially if it’s about the future.’ Nils Bohr, Nobel laureate
In our next edition Technology With particular reference to the difficult financial climate and environmental regulations being seen on the business horizon, can smarter use of technology result in cost savings? What are the big technology challenges that finance departments will be facing in 2010? Ramnath Sundaresan, chief executive, finance, IT & logistics, BASF India Innovative accountants ‘Innovation: strategy or terror’ is an analysis of CIMA funded research that looks at the importance of including the accountant/finance people at the earliest stages of product innovation, including casestudy research from Bentley. William Nixon, professor of law and accounting, University of Dundee Innovation in the downturn Recessions always historically provide an opportunity for great periods of innovation, so what should business leaders learn from organisations that flourished in the last economic downturn, and what’s different about this time? Syl Saller, global head of innovation, Diageo New directions in management accounting Many companies are in the process of changing their current business ideas, practices, strategies, structures, processes, systems, and information. What are the challenging objects of measurement and control that have recently emerged, how will they affect intellectual capital and what is the future of innovation in accounting? Antonio Davila, IESE Business School, Spain
Entrepreneurial accounting Strategic human resource management, entrepreneurship and the innovative accountant. Travis Perera, CIMA Sri Lanka Corporate innovation It is well documented that a recession is fertile ground for growing innovation, with Apple and Google being prime examples of companies which were born into prominence during a downturn. Indeed, latest research from Accenture, who interviewed over 630 US and UK executives, shows that nearly nine out of ten of respondents (89%) said that innovation is as important, if not more important, than cost reduction to their company’s ability to achieve future growth. So what flaws are to be found in the corporate management of innovation? Leslie Kossoff, executive advisor Competitive advantage Innovation is the secret of any company’s success, but being innovative means much more than it did just a few years ago. Every process, function or system within a company may need to change in order to achieve a competitive advantage, and as such, innovation may lead to an entirely different business model. So what are the challenges facing the modern corporation and how can companies remain innovative and competitive both now and in the future? Michael Traem illustrates seven mega trends that companies cannot afford to ignore if they are to thrive in the current global market. Michael Traem, CEO, Arthur D Little and author of Innovate your company Is R&D spending worth it? Although national governments and the EC are trying
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to get companies to spend more on R&D, there is very little evidence that this spending has any effect on firm growth. In fact in many cases it can even lead to negative growth. Understanding which conditions businesses must put into place in order for this spending to be fruitful should be the focus of innovation policy. Instead what we hear is: spend spend spend. Mariana Mazzucato, professor of economics at the Open University Are we witnessing the decline of Western innovation? The findings of the recent NEWSWEEK-Intel Global Innovation Survey, has begged the question ‘what it will take for Americans to once again believe they are at the forefront of technological innovation?’ Funded by Intel, the online questionnaire administered to 4,800 adults in the United States, China, Germany, and the United Kingdom—set out to compare their views about the innovation race. Here, acclaimed writer, business strategist and author of The game-changer: how you can drive revenue and profit growth with innovation, Ram Charan, analyses the findings. Ram Charan, writer, business consultant A comparison between innovation in the East and West Traditionally, innovation from companies in the East has been incremental (ie tiny innovations and/or improvements to chips, to automotive parts etc very rapidly) whereas in the West innovation has been longer term, radical and big scale (wind farms etc). So which is best for long-term regional growth? Are there merits and risks of each or do they have to be mutually exclusive and can one organisation adopt both types of innovation strategy? Mark Dutz, senior economist, South Asia Finance and private sector development, The World Bank
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Also in the next edition: Risk Reputational risk and its implications for business reporting Robert van der Zalm, CFO, BHP Billiton International Services Outsourcing Elevating the value of your SSO to a global commercial asset Joachim Jaeckle, corporate senior vice-president financial operations, Henkel Group
EXCELLENCE IN LEADERSHIP Excellence in Leadership is a series of official quarterly publications specifically designed to address the CPD needs of the top tier of CIMA members. Excellence in Leadership is a must-read for this elite audience of CIMA members, helping to manage their career development while maintaining professional competence and employability. Visit www.excellence-leadership.com
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