Strategic risk management - April 2011

Excellence in leadership

Issue 1 | 2011 | ÂŁ12

Excellence in leadership

Strategic Risk Management

Top finance and business insight in this issue Lewis Booth, CFO of Ford, on scanning the horizon for risks Bogi Nils Bogason, CFO of Icelandair, on handling black swan events Paul Schmidt, CFO of Gold Fields, on prioritising strategic risks Sean Wilkins, FD of Tesco Malaysia, on market idiosyncrasies ISSUE 1 2011

Andy Halford, CFO of Vodafone, on emerging markets M&A John Rogers, CFO of J Sainsbury, on financial flexibility

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s ’t CFO n s e i ask s of er r u ut r. We nce umb f he sie erie g n t n ing y ea r exp owi t c n i r i ed ing a the he g risks r P tt re g t f ge sha gin ty o to ana arie m dv an

3 Excellence in leadership | Issue 1, 2011

FOREWORD

Illustration: Masao Yamazaki/Dutch Uncle

Living with volatility he events following the devastating five years. Hall and Anderson outline the importance of earthquake in Japan and the political aligning business continuity arrangements with an uprisings in the Middle East and north organisation’s key drivers and values.

Africa have brought into sharp focus Looking at how to achieve this, Trevor Partridge, director the need for businesses to have robust of business continuity consultancy 2 b continued and former risk management strategies in place. head of business continuity at Marks & Spencer, describes his Nassim Nicholas Taleb’s “black swan” experiences of handling extreme incidents at the UK retailer, theory is often quoted in discussions such as the IRA bombing in Manchester in 1996 (p39). about sudden events that are rare, In the wake of the economic damage caused by the global extreme and, with hindsight, seem downturn, three leading finance chiefs turn to the subject of more predictable than previously thought. reducing risk in a post-crisis era. Hanno Kirner, CFO at In this issue we highlight ways in which companies can Aston Martin Lagonda, Daniel Fete, senior vice-president identify and manage risks in a way that can create value, as of finance at AT&T Services, and John Rogers, CFO at well as protecting it in the event of a crisis. Lewis Booth, J Sainsbury, agree that in uncertain times financial flexibility CFO of Ford, and Paul Schmidt, CFO of Gold Fields, start is essential. The trio debate how CFOs can source, optimise, the discussion by explaining how invest and manage capital in today’s they prioritise risks at board level and fast-changing financial markets (p44). feed this thinking into the day-to-day Finally, we look at the role of the Effective business continuity running of their businesses (p8). finance professional in helping to management is therefore Then Bogi Nils Bogason, CFO at build smarter, leaner and less critical when a company is Icelandair, gives a candid account risk-prone businesses. J Stewart Black, confronted by black swans of how the airline used its risk professor of organisational behaviour management processes to mitigate at the international graduate business the effects of the volcanic ash cloud that grounded many school INSEAD, details some tips on how to keep your flights in northern Europe last year (p16). Enlarging on the finance team motivated and focused on the corporate vision subject of risk management, Andrew Campbell, a director of when times are tough (p48). Meanwhile, Ana Barco, senior Ashridge Strategic Management Centre, highlights how product specialist at CIMA, charts the transition of the CFOs can reduce poor corporate decision-making through management accountant from adviser to business partner and prudent risk management (p12). Moving on to currency risk, discusses this more strategic role in detail (p54).

John Noonan, head of Asia foreign exchange at IFR Markets, I very much hope that this issue will provide you with looks into what policies and strategies companies can put in some interesting insights into strategic risk management place to hedge their currency exposure (p19). and that the insights from our distinguished contributors When it comes to risk there is no room for complacency. will help to keep your path clear of black swans in the future.

Effective business continuity management is therefore critical when a company is confronted by black swans as well as a wide range of business risks, from fraud and kidnap Charles Tilley to accidents in the workplace.

Chief executive, According to Linda Hall and Stuart Anderson, business CIMA continuity experts at Barclays Global Retail Bank, the number of incidents experienced by global firms is on the increase (p42). A 2008 survey by technology and market research firm Forrester found that more than a quarter of the companies surveyed had declared a disaster in the previous

Excellence in Leadership is the official publication of CIMAplus. For more information visit: www.cimaglobal.com/cimaplus

5 Excellence in leadership | Issue 1, 2011

CONTENTS Iceland’s black swan How Icelandair kept flying through the volcanic ash crisis p16

The smart way to take risks How risk management can create value, not just protect it p25

Prioritising risks From terrorism to floods: what’s on CFOs’ risk radars? p8 3 Foreword 6 Vital statistics

Strategic risk management 8 The matrix The finance chiefs of Ford, Gold Fields and Shell explain how they navigate the complex world of risk.

12 Raising red flags How robust financial analysis

by CFOs can help to banish bad decisions.

16 Staying on course Lessons from Icelandair CFO Bogi Nils Bogason on flying through the volcanic ash crisis.

19 Risky currencies What happens to the foreign exchange market when the flow of cheap dollars is turned off?

22 Oven-ready reporting How BreakTalk CFO Catherine Lee keeps shareholders reassured about risk controls at the Asian bakery business.

35 CIMA events

25 Intelligent risk-taking Malinga Arsakularatne, CFO of Hemas Holdings, on how the right risk strategy can create value.

Business continuity

28 Company insight How uncertain economic conditions placed a renewed focus on cash management.

42 Counting the cost Barclays’ business continuity team make the investment case for crisis management.

Emerging markets

Other topics

32 Pressure points Tesco Malaysia’s FD Sean Wilkins explains when to go for growth and when to put the brakes on.

36 Buying growth Vodafone CFO Andy Halford on the “what ifs” of emerging market acquisitions.

39 Train hard to play easy The secrets of a veteran crisis manager with ten years’ experience at M&S.

44 Flexible finance CFOs explain how financial innovation helped them to keep growing despite turbulent markets.

48 The art of motivation How to energise your team as they face pressure to cut costs and drive efficiency.

50 The power of networks How semiconductor firms are putting rivalries to one side and collaborating on cuttingedge technology research.

53 Get involved with CIMA 54 Finance transformation As finance professionals become more involved in business strategy, how do they protect their independence?

57 Next issue 58 CIMA directory

Editorial advisory board Malinga Arsakularatne chief financial officer, Hemas Holdings

Bogi Nils Bogason chief financial officer, Icelandair Group

Kai Peters chief executive, Ashridge Business School

Jeff van der Eems chief financial officer, United Biscuits

David Blackwood group finance director, Yule Catto & Co

George Riding chief financial officer, Middle East and north Africa, SAP

Arul Sivagananathan managing director, Hayleys BSI

Jennice Zhu finance director, Unilever China

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6 Excellence in leadership | Issue 1, 2011 CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com

VITAL STATISTICS Sustainability: the missing link in risk strategy?

Excellence in Leadership is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ. Tel: 020 7775 7775.

Do you have a formal sustainability strategy?

79% of larger companies said yes

33% of smaller companies said yes

Do you plan to formulate a strategy within the next two years?

23% of smaller companies said yes Source: “Evolution of Corporate Sustainability Practices” (Dec 2010) CIMA/ AICPA/ CICA. Based on a survey of 2,036 industry members in the UK, US and Canada.

17%

the proportion of organisations that have fully integrated environmental considerations into their corporate projects Efforts to manage sustainability performance tend to be tactical rather than strategic; they are often not linked to business performance; and the measurement and tracking of sustainability performance is not as rigorous as that of managing revenues and profitability.

Source: ‘Climate change: the role of the finance professional’, CIMA – The Prince’s Accounting for Sustainability Project (2009)

Finance and organisational performance: Shaping the future

84.8% 75.4% 50.3% 68.5% of global sample do not expect a reduction in finance staff

believe working in management support helps the organisation to achieve its objectives

CIMA contact: Senior product specialist Ana Barco Email: ana.barco @cimaglobal.com

of large firms expect staff time and numbers dedicated to management support to increase to better meet organisation needs

believe professionally qualified people are better suited for management support activities

Launching in May, CIMA’s new report ‘Finance and organisational performance: shaping the future’ is based on the global research undertaken by CIMA’s Centre of Excellence at the University of Bath School of Management. Copies can be ordered from www.cimaglobal.com/transformation Supported by CIMAplus subscribers will receive access to this report and all outputs from this programme from May 2011 The products and service 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 the individual authors and not necessarily those of CIMA or Seven. While every effort has been made to ensure the accuracy of the information in this publication, neither Seven nor CIMA accepts responsibility for errors or omissions.

Editorial director Peter Dean Editor Dawn Cowie Managing editor Jon Watkins Chief sub editor Steve McCubbin Senior sub editor Graeme Allen Creative director Michael Booth Group art director Simon Campbell Picture editor Nicola Duffy Senior picture researcher Alex Kelly Production manager Peta Hatton Account director Jake Cassels Business development director Tina Hanks Advertising manager Matthew Blore Email: Matthew.Blore@ seven.co.uk Tel: 020 7775 5717 Chief executive Sean King Chairman Tim Trotter © Seven Cover illustration Angus Greig The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/Seven.

All rights reserved.

Origination by Wyndeham Pre-Press Ltd. Printed in the UK

by Southernprint Ltd.

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Prioritising risks

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From extreme weather conditions to supplier failure, the number of risks – some known, some not – that companies face every day is enormous. The CFOs of global car manufacturer Ford and South African precious metals producer Gold Fields explain how they scan the horizon for potential threats and, more importantly, how they prioritise and manage the ones they find illustration by paddy mills

How many risks do you have on your radar at any one time and what process do you go through to identify potential threats?

Lewis Booth, Ford: There are a multitude of risks at a company as large and global as Ford. Risk management is everybody’s job – from the plant floor to the treasury’s trading office unit to the purchasing department. Through our consistent Business Plan Review (BPR) and Special Attention Review (SAR) process, the senior leadership group lays out the most significant risks that we face and discusses them on a weekly basis, or even more often when circumstances dictate. During these meetings, the leaders of the regional business units and of the functional skill teams present key risks and opportunities and we discuss our planned reaction or response. This puts the responsibility on all of us to identify and prioritise the risks so that the senior leadership group can put plans in place to manage them.

Paul Schmidt, Gold Fields: We have an executive risk register that contains the top 30 strategic risks.

The number of risks may change depending on the current global risk landscape. Gold Fields has a quarterly process in place where each operation and region reviews their strategic risks and updates progress on the implementation of mitigating strategies in respect of each risk.

The top 10 risk and mitigating strategies are then reviewed as part of the quarterly business meetings, one for the South African region and another for the international region. Every six months the operational and regional risk registers are reviewed for the Gold Fields executive committee risk meeting. All operational and regional risks are ranked in accordance with our severity and probability matrix. The top risks are elevated to the corporate office where they are

contextualised and moderated for inclusion in the executive risk register. Finally, risks from the external environment are scanned and are included in the executive risk register, and risk mitigating strategies are discussed and set at the executive risk meeting.

Our entire risk management process is governed by the Gold Fields risk management charter, policy and annual risk management plan, which is approved by the board.

Which risk topics should be a board-level priority and which should be managed at an operational level?

Lewis Booth, Ford: We use our weekly BPR and SAR meetings to determine which of the risks and opportunities warrant the board’s attention.

Paul Schmidt, Gold Fields: This is an extremely important question in terms of risk priority. Our board is kept informed of the top 25 risks to which Gold Fields is exposed in line with the risk management requirements of the new King III corporate governance code, to which we are fully compliant. [This broadens the scope of corporate governance in South Africa with a focus on leadership, sustainability and corporate citizenship.] The Gold Fields risk matrix system was approved by the board and is part of our risk management charter. The matrix is standard and is used throughout the company to prioritise risks. The correct application of the risk matrix ensures that the appropriate risks are identified, analysed and treated for the board’s attention or dealt with at operational level.

How have you reassessed strategic risks – particularly macroeconomic, regulatory or market risks – since the financial crisis?

Lewis Booth, Ford: We live in a world in which we are

»

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We put our plan in place five years ago and have stuck to it, even in the most difficult conditions during the recent financial crisis seeing increased economic volatility and this requires a steady, consistent approach, which we call the One Ford plan. We put our plan in place five years ago and have stuck to it, even in the most difficult conditions during the recent financial crisis.

Now, as we face issues such as the tightening regulatory environment, or what is currently happening in north Africa and the Middle East, we continue to work that plan on a global basis, and we do so with a growing degree of confidence.

Paul Schmidt, Gold Fields: The financial crisis was seen mostly as an opportunity for Gold Fields.

Gold Fields is an unhedged company and takes advantage of an increasing gold price during such times. Initially we saw a tightening up of the debt markets, but as the debt markets opened up we then took full advantage of the cheap debt that was available – last year we successfully concluded a $1bn corporate debt issue that was the cheapest.

To what extent do you focus time and resources on managing long-term strategic risks relative to short-term threats, such as extreme weather or the failure of a supplier?

Lewis Booth, Ford: In general, very near-term risks are handled within the regional business units so the majority of my time is spent on reviewing the longer-term risks and opportunities; within our process, I serve as the company’s chief risk officer.

But the beauty of our system is the flexibility that we have when it comes to being able to manage significant near-term risks as they arise. For instance, if we have a supplier issue that warrants the attention of senior leadership, our system encourages transparency in the daily operations so that it escalates in the appropriate manner.

Paul Schmidt, Gold Fields: The risks on our executive risk register are realistic and reflect the current risk environment in which Gold Fields operates. Risks are ranked using a severity and probability matrix. The risk ranking process is inclusive and draws on the experience of all our executives and many of our senior managers, who together have many years of experience in managing risk.

The proper application of the matrix reveals the correct priority and level of intensity with which each risk should be dealt with. Tolerance levels and key risk indicators are pre-determined and well understood. Mitigating strategies are then set that are commensurate with the priority level of the risk issue.

Remedial actions required to deal with short-term threats, such as extreme weather, are well understood and addressed by our various technical teams, whereas strategies for long-term strategic risk require more thinking, planning and proper risk mitigation design.

Which risk topics have been top of the boardroom agenda in recent months and why?

Lewis Booth, Ford: We typically don’t comment on the substance of boardroom discussions, but our process is very transparent; all risks are discussed at the senior leadership level and, where appropriate, discussed with the board.

Paul Schmidt, Gold Fields: The safety of our people, production volumes, cost control and staff retention have been identified as our top risk categories, with the latter being an issue experienced by all our operations and the first three very much focused on the South African operations.

To what extent does risk analysis feed into the decision-making process throughout the business?

Lewis Booth, Ford: Some companies differ from us by having standalone risk management processes, but we’ve found it is better to embed the practice of identifying and managing risks into the way we run the business. The key success factor for Ford is the transparency that we have encouraged within the system so risks can be discussed as they emerge and appropriate action taken to mitigate them early on.

Paul Schmidt, Gold Fields: The emphasis in Gold Fields is on the integration of risk into the day-to-day activities of the company. This is a primary requirement of King III. In Gold Fields, strategic risks from the global risk landscape are taken into consideration when strategic and operational issues are implemented by the various corporate, regional and operational management teams. Risk mitigating strategies are aligned with the action plans put in place to achieve strategic and operational plans.

To this end, risk management has become an integral part of the performance review process where top risks and key risk indicators are reflected in the balanced scorecards of all executive and senior managers. n

11 Excellence in leadership | Issue 1, 2011

Simon Henry, CFO of Shell, on risk management challenges The relatively benign global economic environment that companies have enjoyed for decades is over and greater uncertainty and volatility will be the new norm, warned Simon Henry, CFO of Shell, speaking at this year’s Economist CFO Summit in London.

This is already affecting CFOs. “We need to ensure that strategic decisions create lasting value not least in emerging markets,” he said.

“We have to impose the professional rigour of our own finance department and technical background across all areas of business activity.”

Intense competition from emerging-market companies and volatile energy prices will be long-term threats for all companies. “Whether due to demand increases or supply disruptions, energy price volatility will be a risk

that remains with us for a long time to come,” said Henry, noting that the cost of the EU’s oil imports last year were $70bn higher than in 2009.

Reputational risks are also a major threat as revealed by the Deepwater Horizon oil spill last year. “Events in the Gulf of Mexico showed how reputation damage, from one incident in that case, can have a far greater impact on business than maybe the underlying economic value,” he said.

At the same time, Western governments are introducing swathes of regulation that add costs and reporting challenges.

“Changes to accounting standards add to the complexity of our jobs and widen the gap between financial accounting and the information that we actually use to manage the business to make sound business decisions. We need to spend

Lewis Booth Booth became executive vice-president and chief financial officer in November 2008. He has overall responsibility for the company’s financial operations, including the controller’s office, treasury and investor relations. His career at Ford spans more than 30 years.

even more time explaining those standards not only to investors but to our business colleagues,” said Henry.

Building a competitive and smooth-running finance function is essential to provide “confidence in the integrity of the financial information, controls and transaction processing” as new regulations raise the bar in terms of compliance procedures, said Henry. Since 2005, half of Shell’s finance operations have been consolidated into five operational centres with well-defined targets for business support activities.

This has cut the division’s costs by $800m or 40 per cent.

Governance expectations placed on CFOs are also rising.

“There is significant pressure from sceptical board members and investors to ensure that our growth plans deliver long-term value and capital

Paul Schmidt Schmidt was appointed chief financial officer of Gold Fields in January 2009 and joined the board in November of that year. Before that, he was acting chief financial officer and financial controller.

He has more than 14 years of experience in the mining industry.

efficiency with an appropriate risk profile,” said Henry.

As a result, Henry has responsibility for strategy development across Shell’s businesses. He chairs a strategy and growth forum that assesses “big picture risks and opportunities, and makes trade-offs between them according to strategic priorities,” he said.

He does also have the support of board members who are increasingly risk-aware. “I have seen a significant improvement in the quality of understanding of business risks, revenue streams and the quality of discussion about them over the past decade. This encompasses all aspects of the business, from financial controls, through environmental performance, to CSR,” said Henry.

Simon Henry Henry became chief financial officer and executive director in May 2009. Before that, he was executive vice-president finance for exploration and production.

He was also head of group investor relations between 2001 and 2004. He joined Shell as an engineer in 1982.

12 Excellence in leadership | June 2011

Banishing bad decisions

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Robust financial analysis and detailed business plans help to avoid bad decisions, but they are fallible when faced with poor judgement and bias.

Andrew Campbell of the Ashridge Business School highlights some tactics to enhance a CFO’s armoury

T

he biggest threat faced by most companies is that those in charge make bad decisions. A few wrong steps can easily undermine a company’s trajectory and result in big falls in market value.

Research by management consultancy McKinsey has shown that 70 per cent of the value of a typical company is determined by its future growth prospects and only 30 per cent by current operations. A few bad decisions, even one major error, can cause investors to cut this future value in half, reducing the total market capitalisation by a third or more.

Examples abound. Northern Rock became insolvent because its executives decided to fund expansion with short-term money and then invest it in 100 per cent mortgages. BP lost £50bn in market value because of decisions regarding the Deepwater Horizon rig. Apple nearly collapsed in the late nineties because Michael Spindler, then CEO, decided to license the production of clone products. With hindsight, all of these decisions were either excessively risky, or foolish, or both. So how can managers, in particular finance executives, help to reduce the number of these bad decisions?

Judgement The traditional response is for finance professionals to build more robust financial models, to require more detailed business plans, to get executives to define their assumptions and to test and challenge the figures provided.

This is a reasoned and reasonable response, but it is not sufficient because the types of decisions that go badly wrong are the ones that depend on judgement.

There are uncertainties involved that cannot be resolved through objective analysis or the use of financial modelling.

For example, one of the critical judgements for Northern Rock was about the likelihood of the wholesale markets evaporating. For BP, there was the risk of insufficient care in the design and construction of the well. For Apple, there was the issue of whether consumers would pay more for an Apple-branded product than for a clone.

It’s unlikely that any of these judgements would have been significantly improved by better financial analysis or modelling. Instead, finance executives have to be prepared to step out from behind their models and financial calculations to influence decisions as they are being made.

The first step is to understand how people make judgements in the first place. The latest brain research suggests that our brains recognise the situations we face, identify emotions linked to past memories, weigh up those emotions and look for a plan of action in line with them before the plan surfaces to the conscious part of the brain for review and consideration.

If the conscious part of the brain does not identify any problems, the decision is made. Moreover, if the emotions linked to the plan are strong, concerns raised by the conscious part of the brain will be overruled because we feel too strongly to bother with doubts.

These brain processes can make us into geniuses when we are dealing with situations where our relevant experience and accumulated emotions steer us in the right direction. But, in some situations, they can turn us into fools.

Spotting distortions The second step is for finance executives to learn how to spot the situations where distorted thinking may occur and suggest changes to the decision-making process. The solution might be to change the members of the team or the way they are interacting.

Alternatively, it might mean proposing a stronger governance layer above the decision-makers.

For example, one CFO involved in a major acquisition was worried that his fellow executives were becoming too attached to the deal and were losing objectivity. Rather than try to act as the naysayer himself, he did two things. He brought in a consultant who was sceptical about acquisitions into the discussions. Then each member of the executive team was either asked to lay out all the reasons for doing the deal, or all the reasons against – and they couldn’t choose which side they were on.

Then he stirred things up further. Those in favour were asked to make a list against, and vice versa. The result was a much richer list of pros and cons than had »

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70%

Excellence in leadership | Issue 1, 2011

the typical proportion of a company’s value that is based on its future growth prospects

Finance officers can be quick to spot the conditions that could lead to distorted judgements and reduce the risk of bad decisions

Andrew Campbell Campbell is a director of Ashridge Business School and co-author of ‘Think Again: Why good leaders make bad decisions and how to stop it happening to you’, Harvard Business Publishing. Ashridge runs a one-week programme, “Strategic Decisions”, which examines the analysis and processes needed to make good decisions. For more information, visit www.ashridge.org.uk

been discussed previously and, ultimately, the deal did not go through.

So how can we spot when judgements are becoming distorted? There are four red flag conditions to look out for – previous experiences that may mislead, previous decisions that can anchor our thinking, conflicts of interest and conflicting attachments.

We are all used to spotting conflicts of interest and then excluding the person who is conflicted, or discounting his or her point of view. What finance executives need to become better at is spotting other sources of bias and identifying ways of strengthening the process to safeguard the decision.

For example, an Australian company was launching a financial services product in Europe and needed to decide whether to make use of its own home-based IT infrastructure or outsource this back-office work to a third party in Europe. All the red flags were pointing in favour of using the Australian IT resource. First, the company had previously had a bad experience using an outsource provider. Second, the initial proposal had been to use existing infrastructure, which might influence current thinking.

Third, there was a potential conflict of interest because the head of the product line in Australia wanted to spread his infrastructure costs to improve his profitability. Finally, there was a potential conflicting attachment because the European project leader had previously been the boss of the Australian infrastructure team.

Recognising this risk, the head of finance for Europe suggested some changes to the normal decision-making process. She asked the project leader to provide identical specification requirements to the Australian team and to two external suppliers.

She suggested that an independent third party be included in the evaluation team and she personally sat alongside the project leader to hear the evaluation report.

Finally, she proposed that the project leader should make his recommendation to a project

£50bn

the market value lost by BP owing to the Deepwater Horizon oil spill

board consisting of a balance of European and Australian representatives. The final decision was to outsource rather than invest in upgrading the Australian infrastructure.

Mitigating bias There are four types of safeguard that finance executives can recommend when they are concerned that biased thinking may distort a decision. First, they can propose more analysis or research in order to expose the bias. But if the source of the bias is self-interest or attachments, or if it is because experiences are connected to strong emotions, analysis is normally not enough.

A more powerful safeguard is to change the people making the decision, or to guide their discussions by involving people with offsetting biases. This is one of the strengths of diversity in decision groups. It can slow down the process, but it promotes robust debate.

If you cannot change the people involved, then change their conversations. For example, get those in favour to argue the case against. Another technique is the pre-mortem. Ask the group to imagine that the decision was a disaster, and then write up the background story. This often exposes risks that have not been fully debated.

The third safeguard is stronger governance from a higher authority. This may be provided by a board, an individual or by designing a specific governance layer – as in the IT infrastructure example. Sometimes just warning the governance layer about the red-flag risks can make them pay extra attention.

Where standing committees are involved, a sub-committee can give extra attention to the decision, or a devil’s advocate can present the case against. Warren Buffet has suggested that all acquisition decisions that involve paying with shares should be presented to the board alongside a counter proposal from a consultant, the devil’s advocate, who is paid a success fee if the deal does not go through.

The fourth safeguard is tight monitoring of the outcomes as the decision is being implemented. It is often possible to catch a bad decision quickly and change course early. This is common for new product launches and new hires.

The bottom line is that all humans are fallible under certain conditions. This is not something we can eliminate. It is hard-wired into the way our brains work. However, as one of the more objective members of the executive team, finance officers can be quick to spot the conditions that could lead to distorted judgements and take action to reduce the risk of bad decisions. n

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Iceland’s black swan In April last year the south of Iceland was cloaked in a cloud of black volcanic ash that closed much of Europe’s airspace.

Bogi Nils Bogason, CFO of Icelandair Group, tells Sarah Perrin how the crisis put the airline’s risk management processes to the test

17 Excellence in leadership | Issue 1, 2011

A

s crises go, the eruption of the Eyjafjallajökull volcano in the south of Iceland in April last year was a major event, resulting in an estimated $4.7bn in lost GDP globally. Given Iceland’s volcanic landscape an eruption was bound to be included in Icelandair Group’s risk analysis and planning processes, but theory and practice are never the same.

“Before the Eyjafjallajökull eruption, most of the group’s air travel and services subsidiaries listed volcanic eruption as a big risk and had taken measures before the eruption – that was the main reason why we were quite successful in handling it. We were at least a bit prepared,” says Bogason.

At first, the impact of the eruption was actually less severe for Icelandair, which contributes about 65 per cent of group revenues, than for many international airlines. “In the first few days after the eruption started, Keflavik international airport [Icelandair’s home hub airport] was open – even though most of Europe was closed, so we were able to fly to the US and to open spots in Europe. We were able to fly half of our schedule,” says Bogason.

However, the ash cloud then shifted and forced Keflavik to shut down, at which point Icelandair’s risk planning really kicked in. “We had systems in place so that we were able to move our hub from Keflavik to Glasgow in Scotland. Then we flew our international flights from the US to Glasgow,” says Bogason.

Around 200 staff were moved to Glasgow to run the temporary operations until the hub could be returned to Reykjavik. This lasted ten days, enabling up to 36 flights per day to take off. Iceland was linked into the network via flights between Glasgow and Akureyri, an open airport in northern Iceland, with passengers bussed from there to Reykjavik. “It was a major exercise, but was also a successful one,” he says.

A flexible model The Eyjafjallajökull eruption was the third crisis the airline has successfully faced in the past decade.

“There was, of course, 9/11 in 2001 and then we had

a big economic crisis in Iceland in 2008 when the Icelandic market almost vanished, and then the volcano eruption last year,” says Bogason.

The company’s business model – the route network – has helped it to deal with those crises and to rebuild business after them. Icelandair is the hub in the middle of the Atlantic. “Early in the morning, our aircraft fly to Europe; then early in the afternoon, they fly to Iceland; and at around five o’clock, they fly to the US and back. And so it goes on, 24 hours a day,” says Bogason.

The route network gives Icelandair access to three markets: Icelanders travelling abroad; people from abroad visiting Iceland; and then the transatlantic market, with people from the US travelling to Europe and vice versa. This model has allowed the company to shift its focus depending on market conditions. “After the economic collapse in Iceland in 2008, we shifted the focus from Icelanders travelling abroad to bringing tourists from abroad to Iceland. The weakening of the Icelandic krona helped us a lot. We were successful and 2009 was a good year in our core business,” Bogason says.

In fact, bookings in early 2010 and for the summer were extremely positive. Then after the volcanic eruption bookings to Iceland slowed and there were cancellations. So the company switched its focus to the transatlantic market, which led to its best year ever, even with the eruption. Icelandair increased its passengers by 14 per cent in 2010, flying 1.5 million people. For the year to December 2010, the group recorded total turnover of ISK 88bn, up ten per cent on 2009, while Ebitda increased 56 per cent to ISK 12.6bn.

Of course, there were costs associated with the eruption. “It cost a lot to transfer the hub from Keflavik to Glasgow, and there were lost revenues,” says Bogason. “We took everything into account – our out-of-pocket costs and the lost revenues – and our estimation was that it cost us ISK 1.5bn, which is around $12m.” Even so, 2010 came out way ahead of our initial budget, he says.

There was also a silver lining in terms of the greater awareness of Iceland that the eruption created among foreign tourists. Icelandair has taken steps to encourage this effect. “While the eruption was going on, in cooperation with the government we started a »

18 Excellence in leadership | Issue 1, 2011

worldwide campaign called “Inspired by Iceland”,” says Bogason. It was driven by the government, but Icelandair was pushing behind the scenes. The campaign cost ISK 700m ($6.4m) and its main message was that Iceland was up and running, and more interesting and welcoming than ever.

Testing risk responses During the eruption itself, the main burden fell on frontline staff trying to schedule flights and run the call centre. Finance was very much in supportive mode. “The eruption didn’t have a huge impact on our cash flow: we had strong bookings in the first three months of the year and so we had quite good cash reserves coming into the crisis. So our main task [in finance] was to support the people at the front line, and also to keep all the stakeholders – the banks, financiers and insurance companies – informed as to what was going on. But the people of Icelandair did an unbelievable job – the pilots, cabin crew and people in the call centre – they were just willing to work 24/7,” says Bogason.

Internally, one encouraging lesson from the experience was that the group’s risk assessment and planning process proved to be sound. Every autumn, during the annual budget-setting process, all subsidiaries define their risks and complete SWOT (strengths, weaknesses, opportunities and threats) analyses.

“We have a risk department at group level, but the managing directors and their teams at subsidiary level are responsible for their own risk assessments and actions. We in the finance department at group level have a dialogue and discussions on their risk assessment,” says Bogason.

These assessments are reported first to the boards of the subsidiaries and then to the group board. “We carry out sensitivity analysis regarding the financial risks, such as currency fluctuations, but we do not do any calculations regarding natural disasters. It’s more discussion and taking actions to ensure the right processes are in place,” says Bogason.

Bogi Nils Bogason Bogason joined Icelandair Group as CFO in October 2008 from boutique investment bank Askar Capital, where he was also CFO. Before that he was the CFO of seafood company Icelandic Group between 2004 and 2006. Bogason was also an auditor and partner at KPMG in Iceland from 1993 to 2004.

He holds a Cand Oecon degree in business from the University of Iceland and qualified as a chartered accountant in 1998.

Photography: Getty Images

Our main task was to support the people at the front line, and also to keep all the stakeholders informed as to what was going on

All types of risk are considered – financial, strategic and operational. Their relative importance can vary, depending on current conditions. “If you look at our financial risks, high on the agenda is the fluctuation of oil prices, which goes directly into our p&l and bottom line,” Bogason says.

“There is also currency fluctuation. Even though we are based in Iceland, only around 25 per cent of our business is in Icelandic krona, so currency fluctuation is a risk to us,” he says. There are also ongoing risks following the economic meltdown in 2008, and risks associated with unions and labour contracts.

Bogason feels that the volcanic eruption reaffirmed the importance of all the group’s risk assessment and planning activity. “It was an important learning curve to see that the processes we had in place took us through the crisis,” he says. “When you are doing a risk assessment, you often go through it in your mind: ‘OK, we have to put this on the list, but it will never happen.’ After a crisis, it is no longer just something that you put down on paper.”

“It changes your attitude towards exercises such as risk assessments and putting risk processes in place,” he says. “It is not just something you do for corporate governance reasons or for the board. Preparing for something unexpected – for the black swan – becomes something that is taken very seriously.” n

19 Excellence in leadership | Issue 1, 2011

Hot money

The resumption of quantitative easing in the US fuelled a surge in emerging markets and other risky currencies in the latter part of 2010. But the heat will soon go out of those markets when the flow of cheap dollars is turned off. Currency expert John Noonan at Thomson Reuters surveys the horizon for risks Âť

illustration by angus greig

20 Excellence in leadership | Issue 1, 2011

T

he US Federal Reserve’s efforts to stimulate the country’s economy had global implications in 2010, and it should come as no surprise that an end to the second quantitative easing programme, or QE2, will be the focal point for the foreign exchange market in 2011.

When Fed chairman Ben Bernanke hinted in a speech at Jackson Hole in August 2010 that the Fed was considering resuming quantitative easing, the US dollar immediately started to weaken and risk assets started trending higher.

Investors enthusiastically borrowed the cheap dollars printed by the Fed and poured them into equities, commodities, emerging market assets and other currencies at a frightening rate.

Data published by EPFR Global showed that net inflows into emerging market equity funds reached $92.5bn in 2010, of which $48bn came in the last two months of the year following the Fed’s announcement. A record $8.6bn flowed into emerging market bond funds in 2009 and that record was subsequently smashed when $52.5bn was invested in EM bonds in 2010 – more than six times as much.

Risk-seeking investors have enjoyed enormous returns, thanks to the Fed’s QE efforts, but, like all good things, those returns will come to an end.

Wishful-thinking investors are hanging on to the hope that Bernanke will remain true to his word and maintain the Fed’s extraordinarily easy monetary policy for as long as US employment stays relatively

weak, potentially well into 2012.

Unfortunately for them, US employment is only one justification for this radical monetary policy. The Fed has also explained QE2 as a necessary policy to stave off the type of deflationary pressures that led to Japan’s “lost decade” following the eighties asset bubble collapse.

Periodic eruptions of euroscepticism will undermine confidence in the euro – as was the case in 2010 Slim chance of QE3 Recent US inflation data and price moves in the US bond market suggest the Fed will be faced with an inflation fight instead. The inflation it exported through its QE policy is being imported back into the US through higher commodity prices and more expensive foreign imports. While the employment and housing sectors in the US are lagging, manufacturing and retail sectors are starting to bloom again.

The chances of the Fed extending QE2 – or launching QE3 – are diminishing.

The Fed’s decision to end quantitative easing at the end of April will have a significant impact on currency and asset markets. As a result, the US dollar will broadly strengthen – the only question is: how far?

It is only logical to assume that a decent portion of the “hot money” that flowed out of US dollars and into commodities, emerging market assets and “risk” currencies will be unwound. The unwinding of those investments would most definitely underpin the US dollar against free-floating risk currencies such as the Australian and New Zealand dollars, which were major beneficiaries of the QE2-inspired flows.

The depreciation of those risk currencies might indeed be substantial if the end of QE2 coincides with rising geopolitical tensions stemming from the growing unrest across the Arab world and rising oil prices, which are already starting to ignite fears of global stagflation.

Equally, if China’s efforts to cool overheating sectors of its economy fail and it instead slams on the breaks, there is a risk that confidence in emerging markets will disappear.

Any of those factors would result in not only an unwinding of US dollarfunded investments in risk assets, but a switch into “safe-haven” strategies that would inevitably push the US dollar significantly higher.

The war is over One of the major benefits of the end of the Fed’s quantitative easing strategy would be a calming, if not an end, to the “currency war”.

In 2010 the White House tried to rally the G20 into pressurising China and other emerging market countries to cease “currency manipulation” by artificially maintaining a weak currency through intervention. The US argument, however, was watered down by the fact that the

21 Excellence in leadership | Issue 1, 2011

Asset returns since QE2 hints Total returns – per cent (local) Since Bernanke speech at Jackson Hole 27 August 2010 All numbers total return except currencies, gold, copper and oil, which show change in spot rate

S&P GSCI soft commodities 50.8 Brent crude oil 32.5 Copper 32.0 CRB commodities index 29.8 Nasdaq Composite 25.9 S&P 500 19.3 MSCI AC World 17.2 Japan TOPIX 14.9 FTSE EuroFirst 300 14.0 Gold 10.9 BOA ML high-yield bond index 10.2 MSCI emerging markets 9.4 MSCI AC Asia (ex Japan) 8.6 Euro ($ per euro) 5.1 Sterling ($ per UK pound) 4.7 Euro (yen per euro) 3.5 BOA ML corporate bond index 3.5 Greek 10-yr gov bond -1 JPMorgan emerging market bond -1.2 Japanesse 10-yr gov bond -3.6 US dollar (yen per $) UK 10 yr gilt -3.9 US 10 yr treasuries -4.2 German 10-yr Bund -6.1 Dollar (DXY index) -7.3

78.9

Source: Thomson Reuters Datastream = returns to 28/2/11

emerging world – along with developed countries such as Germany – believed the US was equally at fault owing to the ramifications of the Fed’s quantitative easing policies.

An end to QE2 will strengthen the US’s case against China, but it may also make the argument redundant. If indeed the end of US quantitative easing triggers an unwinding of the hot money investments, emerging market central banks will no longer have to intervene to keep their currencies from appreciating.

In fact it is conceivable that at least some of those central banks will intervene to prevent their currencies from weakening too quickly – just as they did in 2008 when the global financial crisis led to a massive deleveraging of hot money investments.

In what would be a strange twist of fate, China and other emerging market central banks may actually seek to strengthen their currencies to partially offset the inflationary effects of rising food and/or oil prices.

The US dollar is also likely to move higher against its G3 counterparts – the yen and euro – and there is a case that the dollar appreciation against those currencies will also be significant.

While the peripheral European debt crisis looks likely to be contained for the remainder of 2011 at least, the eurozone’s sovereign debt and European banking problems will not disappear. Periodic eruptions of euroscepticism will undermine confidence in the euro – as was the case in 2010.

The Fed’s QE2 strategy has helped to prop up the euro against the dollar throughout the European debt crisis – as has the constant diversification of fresh US dollar reserves by emerging central banks through their intervention efforts. It is hard to see the euro maintaining elevated levels once those props are removed.

Predicting the direction of the US dollar against the yen is more difficult, particularly given uncertainty about the long-term impact of the earthquake, tsunami and nuclear crisis on Japan’s economy. In the immediate aftermath of the disaster in March the yen plummeted before recovering sharply, but the currency started to slide again in April. This could reverse if risk assets and risk currencies tumble when the Fed cuts off the air supply for some of the bubbling assets, then the yen could benefit from some temporary safe-haven flows.

If the Fed follows the script and quantitative easing becomes an historical footnote, 2012 just might end up being the year of the greenback. n

John Noonan, bureau chief, FX Watch, Thomson Reuters

22 Excellence in leadership | Issue 1, 2011

No surprises

Institutional investors have developed an appetite for shares in fast-growing bakery and restaurant chain BreadTalk.

Catherine Lee, CFO of the Singaporebased company, tells Peter Bartram how its risk and reporting processes have evolved to cope with growing demand for financial information

23 Excellence in leadership | Issue 1, 2011

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apan’s tragic earthquake in March did not have any significant effect on Singapore-based food multinational BreadTalk, but it was a reminder for the company’s CFO Catherine Lee of the damage that natural disasters can reap.

When the 2008 Sichuan earthquake devastated parts of China – where BreadTalk is growing fast – the company created panda-shaped buns called Ping Chuan Xiong, which it sold in aid of the quake victims.

While Lee’s primary focus is on the financials, some of the potentially most damaging risks for the company lie in the outside world. “We can’t say that one kind of risk is more important than another,” says Lee. Financial, operational, strategic and reputational risks all pose their own kind of problems.

Since the company floated on the Singapore Stock Exchange in 2003, institutional investors have become increasingly significant owners of the company. Lee estimates that they now hold between 15 and 20 per cent of its stock. As institutional investors tend to monitor the performance of their holdings more closely than individual shareholders, risk management is firmly on her agenda.

“I think clear communication and risk reporting are both essential in managing market expectations,” she says. “The confidence and rapport with stakeholders has to be built over time and nobody likes surprises. For example, food prices and food contamination are issues that the public are concerned about. We answer stakeholders’ questions on a case-by-case basis as things happen. When there is public concern, we will try to respond as

soon as possible so that concerns do not translate into speculation.”

Lee points out that share price volatility is more a function of the market than risk management and communication. “We cannot manage price volatility. What we try to do is to manage the flow of information to the market to ensure that the channels have received the relevant information. We leave it to the market to operate,” she says.

The confidence and rapport with stakeholders has to be built over time BreadTalk is still a young company – it was founded in 2000 by serial entrepreneur George Quek, who is now its chairman, but it has been remarkably successful at navigating around the elephant traps. In the financial year 2010, it posted sales of S$303m (£146m), a rise of 22 per cent, with a profit before tax of S$16.7m (£8.1m). The group’s rise has been stellar: it now operates in 13 Asian countries, employs over 4,500 people and owns restaurants and food atriums alongside the original bakery stores.

The flow of the company’s financial information comes through its quarterly results reported to the Singapore Stock Exchange and twice-yearly briefings for analysts and the media. BreadTalk also uses its website to issue a constant stream of market information, such as key

management changes and new business developments. “Risk reporting is something that we do every day on a continuous basis,” says Lee. “We’re communicating the performance of the business and the key risks that we see on the horizon.”

Lee points out that analysts and investors want as much information as possible. “But we will only tell them what is material or significant – things that would affect our performance in the short term or the performance of the entire group. An example would be asset impairment. We would tell the market about that in order to manage expectations. So far, we have not encountered anything like that. We have never had to make a profits warning.”

Risk priorities The financial crisis triggered by the credit crunch could have posed a threat to the business, but the mass-market appeal of its food made it resilient during the downturn.

“In fact, the crisis gave us the opportunity to expand our network,” says Lee. Competition for the best retail outlets poses another strategic risk. “We need to compete with other retailers for good locations so we have developed a framework that ensures that we maintain good landlord relationships in order to secure the best locations,” says Lee. Reputational risk also features high on her agenda because the company is dealing with consumer products, so food safety and quality are critical. “We manage the reputational risk through our operational systems and processes. Every step is screened and handled according to standard operating procedures.” Spot checks and mystery shoppers ensure that the people running the stores – including a large number of franchisees – stay up to »

24 Excellence in leadership | Issue 1, 2011

BreadTalk in figures

2003 22% 7 IPO on the Singapore Stock Exchange

the rise in sales to S$303m (2010)

the mark in terms of the quality of products and service.

Then there are the operational risks, such as the mismatch between demand and supply. This is managed through proper planning procedures and improvements in forecasting. “These supply-demand mismatches don’t happen on a daily basis.

They usually only happen during busy periods such as Christmas, festive seasons or annual sales, when the volume of business multiplies many times over. That is the time when we have to make sure that all our forecasting is good so that we don’t run into supply problems.”

These strategic, operational and reputational risks are all intimately interwoven with financial risk management at BreadTalk. “We have to make sure that there is proper accountability in the system so that we can keep up with the volume of business and make sure that proper controls are in place,” she says.

Then there is the ever-changing practice of financial risk management. “It is becoming more and more complex and is involving more judgement and a lot of projections,” Lee says. “We constantly have to keep up with the data to ensure that our systems and our people are properly equipped to address it.”

Accounting challenges BreadTalk Group’s accounts are produced according to Singapore’s accounting standards, which are based on International Financial Reporting Standards (IFRS). Changes have made risk management and reporting more complex, says Lee. “I wouldn’t say that there’s been one major change but there’s a lot of fair value

4,500 % 13

the rise in profits before tax to S$16.7m (2010)

employees

Asian countries

15-20% owned by institutional investors

work we’ve had to do since the adoption of FRS 39 [relating to financial instruments],” she says. “Then under FRS 1 we have to map our operating segments with the internal management structure.

What it essentially means is that we have to align our external financial reporting with our internal management accountability structure.

“We have to do a lot more detailed analysis and capture more raw data in our systems to be able to do that. We have to constantly educate accountants in our many different locations to keep up with the demand at group level for all the various disclosures and the tracking of key data needed in order to be able to satisfy the Singapore FRS. “We are having to collect financial information at a different level of detail,” says Lee. Previously, the company just made disclosures covering the overall entity. Now, under operating segment disclosure, the company may have make disclosures relating to its business segments and provide information about how different products contribute to the financial performance of those segments.

from our different entities and do a bulk purchase. In that way we are able to obtain better prices and can transfer some of this benefit to the customer.”

Then there is the question of building stability into the supply chain to withstand any business setbacks experienced by suppliers or natural disasters. “We usually have two or three suppliers from different countries for each major product,” says Lee. “This is not just to ensure supply competitiveness, but to avoid the concentration of the supply chain in one particular country.”

As the company continues to grow BreadTalk will need to closely monitor currency movements and hedge positions.

“In the past few years currency movements have worked in our favour.

The US dollar has weakened, but the gain for us has been offset by higher commodity prices,” she says.

It’s a harsh reminder that in business there’s often a downside that takes the shine off the upside, no matter how carefully you manage risk. n

External threats

Catherine Lee Lee is chief financial officer for BreadTalk Group and has a wide range of financial and business expertise, having run businesses and sat on the boards of several early-stage and publicly listed companies.

She is an experienced accountant, banker and investor with a strong corporate finance and private equity background. She is also a member of the ICPAS and Singapore Institute of Directors.

Then there are the risk and reporting challenges relating to the political, economic and natural environment beyond the control of the company, such as the global rise in commodity and food prices. This is an area where the company has already taken action.

“In order to control food inflation, we have shortened our supply chain,” says Lee. “So instead of buying from middlemen, we buy from the manufacturers. We aggregate orders

25 Excellence in leadership | Issue 1, 2011

The smart way to take risks

Risk management techniques are increasingly being used to create value, not just to protect it. Malinga Arsakularatne, CFO of Hemas Holdings in Sri Lanka, explains how companies can gain competitive advantage if they are intelligent about risk-taking Âť

illustration by angus greig

26 Excellence in leadership | Issue 1, 2011

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ne of the most important lessons learned from the recent financial crisis is that risks are interdependent. What began in the US as a crisis in the sub-prime mortgage market turned out to be a global economic meltdown that spread across many countries and industries.

Similarly, in the corporate world, risk management has traditionally been treated as a disconnected set of activities. The risks relating to each particular business area have been analysed and reported separately without considering their interdependencies. As a result, companies have not fully appreciated that risks relating to finance or operations can trigger risks affecting IT or human resources.

This has been changing over the past decade.

Businesses have increasingly realised the importance of taking a portfolio view of their risks and they are also starting to see how effective risk management can create value.

An integrated approach An important step towards better risk management practices began in 2004 with the introduction of an integrated framework for enterprise risk management, known as the COSO ERM Framework.

This is a three-dimensional model created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The framework is designed to help a company to apply different risk management processes to a range of business objectives at various levels of the organisation, with an explicit focus on the interrelationships between different types of risks.

The aim is to help the board of directors, management and other personnel to identify and manage potential events that may affect the business.

This, in turn, should help them to provide reasonable assurance, that the company can meet its strategic objectives in line with its risk appetite. The COSO framework is a well-known and internationally popular model among risk management practitioners, including some Sri Lankan companies.

Another important milestone in risk management thinking was the publication of ISO 31000 in 2009.

This is an internationally agreed standard for the implementation of risk management principles developed by the International Organization for Standardization.

The standard defines risk as “the effect of uncertainty on objectives”. In other words, risk is the probability that the actual outcomes will be better or worse than the expected outcomes.

It also introduces 11 risk management principles (see p27) that have two distinct aims. First, to mitigate risk exposures that are likely to cause actual outcomes to be worse than expected; and second, to take on risk exposures that are likely to cause actual outcomes to be better than expected.

Creating value The emphasis that the standard places on creating value, as well as protecting it, is a break from the traditional approach of focusing solely on protecting value.

Here is an example of how this can work in practice. An increase in expected future cash flows without a change in the cost of capital will create value for a company. One way to do this is by reducing the likelihood of suffering from adverse events in a cost-effective way – for example, investing in a business continuity plan or taking out a fire insurance policy could create value.

Similarly, a company can increase its expected cash-flow stream if it can capitalise on favourable opportunities without adding costs – for example, if it uses its R&D capability to respond to competitive pressures.

It is important to note that the purpose of risk management is to create and protect value. Certain risk management strategies are aimed at lossprevention, but may not necessarily result in any value creation. For example, a company can protect value by hedging its exposure to future commodity price volatility, but this may not lead to higher or lower future cash flows.

However, focused risk-taking can lead to better resource allocation and more efficient operations.

This creates higher cash flows without increased costs.

If a company is able to consistently exploit risks better than its competitors it can lead to a prolonged period of higher growth and returns.

Although increased risk-taking is generally considered to raise the cost of capital, this isn’t necessarily the case. By selectively taking risks – focusing on firm-specific risks rather than those that are systematic – a company will minimise the impact on its cost of capital. This maximises the potential to create value.

27 Excellence in leadership | Issue 1, 2011

The competitive edge

Strategic risks

There are five ways in which a company’s approach to risk-taking can help it to gain an advantage over its competitors. The first of these is information advantage – access to better and more timely information about events as they occur and their consequences.

Smart businesses develop “information networks” by drawing on information from their own employees and external contacts who deal with their customers, suppliers, creditors and business partners. Investing in business analytics is also a good way to improve forecasts of the likelihood of future events.

Another way to get ahead of rivals is speed.

A company can turn a threat into an opportunity if it is faster than its competitors at adapting its business model, strategy, processes and reallocating resources.

Early and reliable information is required about the nature of the event in order to make a quick assessment of its short- and long-term impact.

A company also needs a good understanding of its customers to develop a fast response.

Past experience is another important asset that helps companies to respond better and quicker to fast-changing events. In a crisis this works best where people have direct experience of a similar scenario, but it is possible to hire people with relevant experience from outside.

Companies that have access to resources – manpower, capital and land – also have a distinct advantage in coping with unanticipated threats and opportunities. These resources do not necessarily have to be owned – for example, this could mean quick access to capital in the event of an unforeseen investment opportunity.

Finally, flexibility has many advantages. This could involve the adaption of production facilities at short notice or the rapid adoption of new technologies to meet changing customer needs. Alternatively, it could mean reorganising or restructuring operations to ensure business continuity in a crisis.

For example, healthcare company Johnson and Johnson minimised the damage from the Tylenol poisoning scare in the eighties because of its rapid response. It immediately removed the product from the market and launched a campaign to warn consumers about its dangers while reassuring them that the problem was under control. Since the incident, the company has consistently ranked as one of the top firms for corporate reputation.

Strategic risks can be divided into seven classes: industry, technology, brand, competitor, customer, project and stagnation. Many companies have developed a more formal and systematic approach to managing these risks over the past decade as their impact on future growth and value has been realised.

First, it is important to define the roles and responsibilities of the board of directors, audit committee, risk management committee and the business units with respect to strategic risk management. For example, the board must ensure that risk management is embedded into all activities and processes, while the audit committee must provide risk assurance to the board. Meanwhile, all business units are responsible for maintaining an up-to-date register of key strategic risks – these should be monitored and reviewed, and responses should be agreed periodically at board level.

Finally, discussion of strategic risks should be a mandatory item on the board agenda in order to ensure that the directors spend quality time focusing on the issues. If the board is not able to make contributions that are valuable to the business there is a danger that risk management is simply an academic exercise. n

Malinga Arsakularatne Arsakularatne has been the CFO at Hemas Holdings since 2007. He joined the company in 2004 as business strategist and became director of strategy in 2006. Before that he worked in the investment management industry for eight years, managing equity and fixed-income mutual funds and client portfolios at Eagle NDB Fund Management.

Arsakularatne is a fellow of CIMA and a CFA charter-holder. He is also a member of the CIMA Sri Lanka board and president of CFA Sri Lanka.

Risk management principles These are the 11 principles of risk management set out in ISO 31000: 2009.

Risk management should: l Create and protect value. l Be an integral part of all processes. l Be part of your decision-making. l Be used to deal with uncertainty. l Be structured, systematic and timely. l Be based on the best information available. l Be tailored to your environment. l Deal with human and cultural factors. l Be transparent, inclusive and relevant. l Be dynamic, responsive and iterative. l Facilitate continual improvement.

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Company insight Advertorial

Excellence in leadership | Issue 1, 2011

Safety first: protecting cash is top priority As economic conditions continue their fragile recovery, there has been an increasing focus on cash management among corporates of all sizes. Some still aim to maximise the return on their cash deposits and many consider liquidity as vital to their continued survival, but in these uncertain times nearly all see their top priority as protecting the cash they have. As a result they are looking for banking partners that will last the distance

T

Excellence in leadership | Issue 1, 2011

here are many lessons to be learnt from the adverse economic conditions that have prevailed in Europe and the US for the past three years, but one that stands out is the need for corporates to focus more effort on cash management. Now, as the economic environment starts what many expect to be a fragile recovery, cash management remains a high priority.

Three years ago, companies may have thought about cash management primarily as a way to generate extra income by maximising the return on their cash deposits, or they may have been driven largely by the need to maximise tax efficiency across different geographical markets. These concerns remain important, but the decisions that determine what it means to have cash in the right place at the right time are now coloured by a new attitude towards risk.

“There is a massive focus on cash management,” says Stuart Siddall, chief executive of the Association of Corporate Treasurers. “It was once a Cinderella part of the treasury world – transactions were relatively cheap and it was easy to have cash and debt in the right places. Cash management can generate income without using the bank’s balance sheet, which is partly why there is more focus on it from that direction. For corporates, the focus is driven by risk management and the increased cost of grossing up the balance sheet.”

Companies of all sizes are reassessing their balance of cash and debt. For some, bank lending is harder to come by. For others there is a deliberate intent to change the ratio of cash versus debt. Siddall points to instances where companies have drawn down cash to have it ready when needed – as some big companies have done through public debt issues – and notes that shareholders increasingly want more flexibility in the balance sheet, so that cash is available to cope with uncertainties in the market. Whatever their reasons for having more cash, many corporates are in a position where they need to push cash management further up the agenda. This means looking more closely at the risks as well as the potential returns.

“The cost of carry has increased and there is a greater focus on counterparty risk, so more due diligence is being done,” Siddall says. “Today, the world is tougher

Advertorial Company insight

and more expensive. Every company must be clear about its objectives before building a cash management process around that. If cash management is poor, then at the mild end it results in inefficiency, and at the most serious end, a company could have too little funding to execute its strategy.”

These changing needs are not lost on banks.

“It has always been the case that cash is king, so managing cash has always been important,” says Robert Hare, director of specialist sales and liabilities at Lloyds Bank Corporate Markets. “In the second half of 2010 the challenge for many companies was to run down stocks and find effective cash management processes.

This year there are positive signs of a recovery, but it will be bumpy. There are now impressive cash balances in the US and Europe, with many companies waiting to do strategic acquisitions or holding onto cash sensibly to endure different trading conditions. There is a lot of corporate cash around, so businesses are forced to take stock of how to manage cash better.”

When a company has decided what its cash management needs are, it must consider the three key goals of cash management: security, liquidity and yield.

All three elements have their place, but for now there has been a marked shift in focus towards the first of those considerations.

Companies want, first and foremost, to protect their cash.

“Both sides, corporates and banks, are looking at relationships more closely,” notes Siddall. “The security of funding or capital on deposit has risen up the agenda. We saw a lot of local authorities caught out by the collapse of the Icelandic banks, for instance, so the priority now is not necessarily maximising return. Before the financial crisis yield was, for some, ahead of liquidity and security as a concern, but that has changed.

“The integration of treasury and financial management with strategy is very important, or a company could be in

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for a nasty surprise. For banks, too, there has been a change in priority. In the past, some saw cash management as less important than lending, but they are now adding cash management services.”

More banks are certainly pushing cash management to the fore and reviewing their portfolio of products, but some have understood its importance for a long time, and are starting to look beyond the products to a more proactive approach that involves closer understanding of the needs of individual customers.

“Our customers put more and more emphasis on cash management,” says John Ramage, director, head of retail sales in the LIBOR Liabilities Team at Lloyds Bank Corporate Markets. “It is a huge priority because if businesses go under it is often because of a lack of short-term cash. Once they were focused on where the pennies were going in order to maximise yield, largely because of low interest rates.

“Now, the main priority is to protect their cash before looking at liquidity and yield.

They need accurate cash flow forecasts, which could be the difference between survival and going under. There is huge pressure on cash flow. These are tough times, so there is a need to focus on cash flow management. Companies need banking partners with the right history and culture.”

Risks and rewards The focus on protecting cash is certainly the dominant theme for smaller companies. Some larger and more sophisticated companies may be more intent on maximising yield, but they still have a keen eye on risk.

After the financial crisis hit, some companies were left wondering whether their banks would be around if there was another blow to the banking industry. As a result, many are reviewing their banking relationships and setting better-informed counterparty limits to diversify the risk. »

“At the mild end, poor cash management results in inefficiency, and at the most serious end could leave a company too little funding to execute its strategy.”

Stuart Siddall, Association of Corporate Treasurers

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Company insight Advertorial

“For larger companies and public bodies the priorities are still cash protection and liquidity,” says Gavin Stewart, head of liquidity products at Lloyds Bank Corporate Markets. “There has been a review of counterparty policy and credit limits, so they are drawing in their range of banks they want on their list of counterparties.”

Hare continues: “Companies have seen the crises in countries like Spain, Ireland, Greece and Portugal, and in the UK they have heard the talk about possibly splitting up banks, so corporates are looking to find different banking partners. They want to spread their cash. So banks and their customers are becoming more mature about security. Then they are looking at liquidity, and they want creativity in regard to their short, medium and long-term needs.”

Having learnt many lessons about how important it is to get cash management

that creativity can flourish. Finding the right tools to ensure that cash is safe yet accessible requires a close understanding between a corporate and its chosen banking partner.

“Part of what we do is give education and information to customers,” says Stewart. “For instance, since June 2010 new liquidity regulations have been worked through by banks and the Financial Services Authority, and it is important that we give customers an unbiased view of that. We are very open in explaining how those regulations affect banks and their customers because we have to manage expectations. Then we can design products that are efficient for both parties.”

Longer-term deposits provide valuable liquidity for banks, but tie up corporates’ cash for long periods. Yield is higher, but

“Some banks are very keen to flog us sophisticated foreign exchange products, but we just want to make sure we have our cash in the right place at the right time.”

James Davenport, Innocent Drinks right, corporates have certainly become more sophisticated in their approach.

They have developed a much keener understanding of what they can and should expect from their banking partners, and often they want more than just the standard range of products.

“Cash management is a real specialism within the treasury function,” says Siddall.

“Some banks have very highly qualified staff that really understand the market, and their customers need to have people who understand it, too. Both sides need in-depth knowledge and must understand the products, systems and priorities in cash management, as it is an area that is always changing. The Association of Corporate Treasurers’ suite of qualifications includes a fantastic cash management certificate that is studied by those in both banking and the corporate sector.”

To get cash management services right, it seems banks must get closer to their customers. Relationship banking is the answer, and it is often in regard to liquidity

there is less access to cash. Shorter-term deposits generate less yield, but give the corporate customer more liquidity.

Through a close relationship between a bank and a corporate it is possible to find the right blend of different maturities.

“The product basics have not changed much. What’s important is understanding customers’ needs,” Stewart explains. “We explain how much we can reward customers for the liquidity they give us.

“For sophisticated customers, including public bodies and organisations that manage a lot of fiduciary money and for whom liquidity is important, we can offer a better deal beyond the price discussion. You can’t differentiate between banks purely on price.

The products we have play to the regulations and to our customers’ requirements, such as our 95 Day Notice Account,” he adds.

The 95 Day Notice Account from Lloyds Bank Corporate Markets is intended to generate interest income greater than many similar money market products. It pays monthly interest, at a rate that tracks

Excellence in leadership | Issue 1, 2011

LIBOR, but does not keep capital tied up for as long as many fixed-term deposit accounts. There is no maximum time period and funds can be added to suit a corporate’s needs, although 95 days’ notice is required for withdrawals.

The aim of such products is to provide flexibility and choice. The 95 Day Notice Account was developed to suit regulated businesses with lots of client funds, which have short-term liquidity needs. Yet there are similarly creative ideas in the area of long-term deposits. There is a 12-month deposit account that provides some access as it incorporates a collateralised revolving credit facility. It provides higher yield, but funds are available if the customer has to deal with a blip in the market.

“Corporates and fund managers can see that interest rates are historically very low,” says Stewart. “Products that give higher yield as LIBOR rises offer some security. The ultimate goal is to reward customers on average maturity, not for each individual product. It would give our customers a clear view of their return in a flexible and simple way.”

Innocent Drinks One company that has benefited from a closer relationship with its banking partners in the area of cash management is Innocent Drinks, the UK-based company best known as a maker of smoothies. It has emphasised the presence of cash on its balance sheet, and its experience shows how both bank and customer can benefit from a relationship in which cash management solutions are designed to closely reflect a corporate’s needs.

“Cash management has been very important to a lot of companies in the last couple of years, which has shown up the level of reliance on banks,” says James

Advertorial Company insight

Excellence in leadership | Issue 1, 2011

Davenport, finance director of Innocent Drinks. “Focusing on cash gives companies flexibility. Our focus is to generate cash so that we are not relying on bank lending as much.

“We are not interested in yield,” he continues. “There is too much downside risk and the upside is not big enough.

Inflation in the UK is around 5% and the interest rate is 0.5%, so even if you double your yield then you are still underwater.

First of all, we are looking at protection of cash, then at liquidity.”

Last year, Innocent Drinks generated £130m in revenue, and expects this to rise to around £160m this year. Outside the UK, the company has become the leader in the smoothie market, with a business that is larger than the next two largest companies put together, and there is still room for growth.

It trades in US dollar, euro and sterling, and holds its current accounts in all these currencies, though it brings cash back to the UK when necessary. A year ago, the company appointed a treasury manager to ensure that the simplicity inherent in the business was reflected in its financial management.

“We needed a good brain to understand the business and keep things simple,” explains Davenport. “When you look at where cash comes from you see three sources – shareholders, banks and the supply chain. We don’t need an overdraft at the moment, cash in the supply chain is finite because you can’t shift payment terms as your suppliers will suffer and you get a zero sum game. So, you need banks

that are supportive, even if you don’t need a credit facility at the moment.”

This approach required a simple cash management solution.The company puts excess cash on short-term deposit with a rolling cash position. Money goes in on a regular basis and generates some yield, but the rolling three-month cash deposit means that Innocent’s finance director knows that cash is coming back to the company each month.

“The most important thing is that they understand our cash flow and how it changes as the company grows. Some banks are very keen to flog us sophisticated foreign exchange products, but we want banks that understand we just want to make sure we have our cash in the right place at the right time,” says Davenport.

Tracking a moving target The relationship between a bank and its customers is what will differentiate banks in the cash management arena in the years ahead. Regulations affecting liquidity will continue to evolve, so banks will need to explain to customers how this affects cash management services, and customers’ priorities might change if the trading environment continues to improve.

On the regulatory side, Basel III will eventually affect prices for short-term and long-term deposits. Banks that can explain the implications of such changes in an open and transparent way will be appreciated by their corporate customers.

“Cash management can become a commodity, but some banks can still take the lead,” says Hare. “We aim to be a

31

“You can’t differentiate between banks purely on price.

The products we have play to the regulations and to our customers’ requirements” Gavin Stewart, Lloyds Bank Corporate Markets

business partner, helping our customers to understand the impact of new regulations, working with them to create products that meet their needs. The trend for the future is for banks to be closer to their customers.

Relationships evolve over time, and our trusted adviser approach is not common in the UK, so we stand out for creating good quality, sustainable relationships that generate new products.

“It is all about flexibility because of the uncertain times we live in,” he adds.

“Everyone is waiting to see before they believe the recovery is there. So, we are trying to be as flexible as possible.”

When it comes to relationships, Lloyds Bank Corporate Markets feels it has an advantage, especially coupled with its other strengths, says Ramage: “We have an extensive network of local managers, so we offer a good, local support service. We are the biggest bank in the UK, and the diversity of our shareholders means that security of cash is taken care of. We have a sharp set of cash management products, and our operational support for cash management is robust, scalable and simple to understand and use through our online platforms. Our priorities are flexibility, access and security.”

In the constantly evolving arena of cash management there is a growing need for highly skilled people, who can work closely together around clear goals to define the best solutions. Good cash management is vital, and it is only as effective as the relationships between a corporate and its banking partners. n

32 Excellence in leadership | Issue 1, 2011

33 Excellence in leadership | Issue 1, 2011

A blueprint for growth Tesco is often characterised as a UK retailer, but it has quietly expanded into markets around the world over the past decade. Sean Wilkins, FD of Tesco Malaysia, talks to Christian Doherty about setting the right growth path in a developing market

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esco opened its first Malaysian store in Puchong, one of the bigger cities in the Klang Valley, in May 2002. Today it has 38 stores and is the country’s biggest retailer, with one million customers every week and a 30 per cent share of the retail hypermarket segment in 2009, according to the Malaysian Rating Corporation Berhad (MARC). There is no doubt that the company timed its market entry to perfection, tapping into growing consumer demand from an expanding middle class.

“When the business was launched there were 27 million people in Malaysia and the customer base has grown to become reasonably wealthy,” says Sean Wilkins, who has been FD of the Malaysian operation, based in Kuala Lumpur, for 18 months. “General economic growth is still quite healthy, with real GDP growth expected to be six per cent every year for as far as they can forecast. Compare that to one or two per cent in Western Europe and it’s pretty impressive.”

These conditions – a growing, increasingly affluent market – are not new to Wilkins, who was FD for telecoms firm O2 Asia, based in Singapore, before joining Tesco. For Wilkins, Malaysia is not a posting where he can let the bottom line take care of itself. His main challenges are to ensure that Tesco remains on the right path for growth, doesn’t overreach itself in terms of investment, operates within some starkly different trading rules and learns from its mistakes.

So caution and planning are his watchwords. “We think carefully about which locations we go to and about our sales projections: we go into detail about population size, population growth, what the local competition is likely to do and so on,” says Wilkins.

But developing a plan isn’t much good if you don’t

deliver it. “It’s easy to make projections if no one’s ever going to hold you to account. More importantly, we review our sales projections to check that we’ve done what we said we were going to do. We make sure we hold ourselves to account,” he says.

Operational independence As an increasingly global business – 31 per cent of group sales and 22 per cent of group profits come from international operations – Tesco has had to design its expansion strategy in order to keep the right functions within the remit of head office while allowing others to be managed locally.

As it stands, investor relations, tax and some of the more esoteric treasury areas are managed at group level in the UK, with virtually everything else left to the operating board in Kuala Lumpur. This removes some financial processes from Wilkins’ routine and gives him more freedom to focus on understanding the market and making the most of growth opportunities. “It certainly allows me to be more operational and commercial. I get to spend my time thinking about how to make the business work better and make more money out of it, rather than what I’m going to say to the City.”

Being part of an international group also means that Wilkins has been able to see how neighbouring Tesco outposts have approached the challenge of balancing growth and prudence. “I recently went to Thailand and spent some time there trying to understand the structure of their finance department. I thought 80 per cent of it was a good model so I used it to shape the structure of my finance department here,” says Wilkins.

Some of the issues that Wilkins has to deal with are unique to the local market. Consumer behaviour in Malaysia is much like that elsewhere. There is, however, an element of consumer law that presents Wilkins with »

34 Excellence in leadership | Issue 1, 2011

One of the challenges is to develop operational plans based on a keen understanding of the forces shaping the Malaysian market a particular challenge: pricing controls cover key commodities, including flour, sugar, oil and petrol.

Government subsidies mean that Tesco is required to sell these products at a certain price.

However, Wilkins relishes the challenge that these market idiosyncrasies present: “If we can’t compete heavily on those key commodities or the supply of goods where we have to maintain the retail price, then how do we attract customers into our stores? That’s a challenge for us,” he says. That price maintenance is set to end next year, but even then Tesco will find itself in an extremely competitive environment.

Demonstrating a grasp of the internal processes as well as the external factors affecting the Malaysian business is clearly an important aspect of Wilkins’ job, given that he has to report back to UK headquarters.

Tesco’s success in the UK can be attributed to a microscopic focus on market movements and understanding of customer behaviour honed over decades. Transferring that to the sub-tropics isn’t straightforward. As the FD of a branch of an international retailer, Wilkins knows he has to demonstrate his value in slightly different ways.

Market intelligence One of the challenges is to develop operational plans based on a keen understanding of the forces shaping the Malaysian market. “You need to make sure that you prove the model before you roll it out: there’s no point in going hell-for-leather and rolling out something that doesn’t work. If you do that, then four or five years down the line you’re likely to have a fairly hard reckoning so you sometimes have to put the brakes on,” says Wilkins.

“The flipside of that is that it takes critical mass to really make money overall. If you don’t get to critical mass quickly and you’re too cautious, your overheads will kill you. Ultimately, it’s just a question of judging between those two things,” he says.

The need to reach critical mass has led Tesco to open 38 stores across Malaysia since 2002. For the year ending February 2010, Tesco Malaysia’s revenues grew by seven per cent to RM3.53bn (£721m) and profit before tax grew by 35 per cent to RM75.7m (£15.3m) compared with the previous year. Developing an effective planning process to produce ten more years of growth involves tapping into a wide range of economic and market indicators.

At a macroeconomic level, GDP growth forecasts produced by financial analysts and the Economist

Intelligence Unit are fed into Wilkins’ planning model.

Then local intelligence is added to the mix. “I find the local stats quite helpful, particularly the ones that go to a more granular level because there are lots of components to GDP growth. What we’re really interested in is private consumption,” he says. “So if we can find an indicator that can be boiled down to give an indication of private consumption then that’s what we want to use.”

So the quest for better forecasts goes on, but they all have limitations. “Ultimately, we use economic forecasts as a sense check. All of our growth plans are really based on delighting our existing customers, attracting new customers and getting closer to customers that we don’t currently serve by building a store nearer to them. So we focus on growing by developing our like-for-like sales and opening new stores.”

The FD business partner In Wilkins’ view, the FD’s job is at its heart of understanding the different pressure points in the business. “There’s always a retail or operations director able to talk a great game about a particular store or issue,” he says. “If you know your detail, then you’re able to say, ‘I understand that problem, but nonetheless a target is a target’,” says Wilkins.

So forecasting and budgeting must combine scientific rigour with an intuitive feel for consumer dynamics that comes from knowing your market. “There’s really no substitute for making sure that you know the detail so that you understand why your forecast is the right number.

That is what enables me to do a proper job as finance director, which ultimately involves holding everybody on the board to their commitments,” he says. n

Sean Wilkins Wilkins joined Tesco three years ago as finance, strategy and international director of Tesco Telecoms, based in the UK. In December 2009 he became the finance director of Tesco Malaysia. Before that, Wilkins worked for O2, initially as head of wholesale and then as the finance director for O2 Asia, based in Singapore. He has held senior positions in Coopers & Lybrand management consultancy, BT corporate finance and DrKW investment bank. He has lived and worked in Singapore and Hong Kong and completed major assignments in many other parts of the world.

35 Excellence in leadership | Issue 1, 2011

Events CIMA World Conference Theme: Business in tomorrow’s world – a sustainable future

The CIMA World Conference is the global event for professional accountants in business.

The two-day event brings together more than 600 international delegates and a platform of world-class business leaders to offer insight into the future of finance.

The theme of this year’s conference is “Sustainability”. There are many new ideas and theories of what a truly sustainable business model looks like and we firmly believe that chartered management accountants have a key role to play in developing sustainable business models that ensure growth and success.

l Gain an insight into top-line thinking on the future of finance. l Network with global finance leaders. l Find out how world-class organisations are leading the way in the aftermath of the global recession.

Where and when?

CIMA World Conference 24-25 October 2011 Cape Town Convention Centre, South Africa To register for the conference and find out more information about the programme, speakers and early bird booking rate, visit www.cimaglobal.com/worldconference

Green Sustainability Conference Asia 2011

and maintain their profitability.

Sustainability is a vital issue on political and business agendas worldwide.

Yet the business world has many different views regarding what is a truly sustainable business model. Hear about the challenges and issues at the CIMA Green Sustainability Conference Asia 2011.

Book before 24 May and receive an early-bird discount.

12-13 July 2011 InterContinental Hotel, Kuala Lumpur, Malaysia

To find out more about the conference and book your place visit www.cimaglobal.com/ greenconference Alternatively, contact CIMA Malaysia E. greenconference@cimagloal.com T. +603 77 230 230

Going Green – profiting from sustainability Photography: Getty Images

Why should you attend?

Since the recent global economic downturn organisations have faced challenges in order to survive

CIMA CPD Academies

A CIMA CPD Academy is an opportunity for finance professionals to update their CPD in a convenient and cost-effective way. The two-day event covers a variety of different finance and business areas, all of which count towards your annual CPD development. lS ummer Academy: 9-10 June – London lS ummer Academy: 11-12 July – Manchester lE xecutive Academy: 17-18 October – London For more information and to book visit www.cimaglobal.com/conferences E. conferences@cimaglobal.com T. +44 (0) 845 026 4722

36 Excellence in leadership | Issue 1, 2011

The shrewd acquirer Buying companies in fast-growth markets requires careful consideration of all the “what ifs”.

Andy Halford, CFO of Vodafone, shares his experiences of doing telecoms deals with Dawn Cowie

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elecoms giant Vodafone has enjoyed more than ten years of strong growth in Egypt, followed by a period of intense uncertainty and disruption in recent months. That doesn’t mean it is rewriting the history books.

“Just because there are difficulties at a certain point in time it doesn’t mean that a market is not a good place to be invested.

You just have to accept that progress will not always be linear,” says Andy Halford, CFO of Vodafone.

Generally, Vodafone has a good experience of investing in markets such as South Africa, Egypt and Kenya for the long term. “It’s difficult when looking at any business opportunity as an acquirer or potential acquirer to try and work out every potential kind of event that could be detrimental to that business over a longer-term period. If you did, you would probably end up with no M&A being done anywhere,” he says. Instead, you have to make an assessment about the chances of things not going according to plan, although this could be positive, rather than negative.

Growth potential So what are the challenges of assessing growth opportunities and valuations in emerging markets compared with economies that are growing more steadily? At its core, the approach is similar in all markets, says Halford. You look at market size, positioning, distribution, spending patterns and GDP growth.

Wherever the acquisition, it pays to be

37 Excellence in leadership | Issue 1, 2011

particularly thoughtful about periods of the economic cycle that will be more challenging, says Halford.

In fast-expanding economies it is inevitably harder to make accurate forecasts of future growth or expected costs. This calls for more detailed sensitivity analysis. “The ‘what ifs’ tend to need to be given more thought in a market that is growing, where the environment may be a little less tried and tested. In that sense, valuations are trickier to do and a bit more subjective,” says Halford.

When entering a new market, some elements are inevitably harder to predict than others. The easier aspects to work out in the telecoms sector are the future rate of market growth and the rate of telecoms penetration. “Those elements are probably more easily done these days because there is such a bank of comparable information from other markets,” adds Halford.

However, regulatory and political factors make it harder to draw comparisons with other markets. This was the case for Vodafone in India. “We’ve been in India for just over three years and in terms of numbers of customers it has grown hugely, as expected – we have also been constantly gaining market share, which is what we set out to do,” says Halford.

Conversely, India allocated more of the spectrum – the radio frequencies used for communication – for telecoms use than anticipated. This led to more companies entering the market, which resulted in tougher competition on retail pricing than had been expected, he says.

“So some things have gone according to plan; other things have gone slightly off plan. For us the great thing is that we’re the

number two player in one of the largest markets on the planet – we have a huge brand presence and we’re taking market share. We just have to work our way through some of the things that are a little more tricky,” he says.

One of the challenges of doing due diligence on an acquisition is the difficulty of taking a long-term view of political and regulatory factors because it is hard to get good insight beyond the duration of the present regime, says Halford. “It’s a question of making sure that we go to

We’re the number two player in one of the largest markets on the planet market with local partners that are well-connected and have a good understanding of the direction in which the political and regulatory regime is going. Hopefully they will be able to shape that thinking so that it works well for business, the government and regulators.”

Local knowledge A major global company such as Vodafone has a wealth of group expertise that it can draw on when it enters a new market. This is a great advantage as long as it is careful not to quash the dynamism of the local business it is acquiring.

“We will have specialist teams on the

architecture of the networks that have insights from multiple other markets in the world which, in turn, can bring value that might not be available to a single-country operator. We have procurement teams that have price lists for buying equipment for the network and phones that should put us in a more secure position. We have teams that are familiar with rebranding businesses and we would use them selectively,” says Halford.

This also helps to transfer knowledge to the local business. However, it is the local presence and market knowledge that will be important factors in determining success. “Above all else, it is important that the progress and momentum in the local market is not lost and that we don’t subsume the business in lots of group initiatives that could potentially result in it taking its eye off the ball,” says Halford.

So there are certain aspects of group culture, such as ethics, that are adopted by the newly acquired businesses, but there must be clear limits. “It is a question of picking the areas that you really want to be consistent across the group and the areas where you want the local approach to be the dominant feature so you can harvest the market as best you can,” says Halford.

M&A opportunities Vodafone announced last November that it would pursue a growth strategy focused particularly on Europe, Africa and India. However, the emphasis will be on ensuring that its core businesses are performing strongly in these three regions, rather than on growth through M&A activity.

“This has been the focus for many companies and their shareholders over »

38 Excellence in leadership | Issue 1, 2011

Emerging markets telecoms M&A

273

286

294

2002

2003

2004

69

336 2001

*2011

361 2000

378

4,193.1 *2011

2010

101,949.7 2010

373

44,497.5 2009

2009

70,131.0 2008

409

63,530.4 2007

2008

86,623.4 2006

423

55,634.7 2005

2007

24,713.5 2004

398

24,409.8 2003

2006

40,913.1 2002

314

23,617.3 2001

Source: Thomson Reuters, March 2011

2005

105,617.1

Number of deals

2000

Deal value including net debt of target ($m)

(*Data up to March 2011)

the past couple of years. “There are many investors who are more focused, as we are, on getting the most out of the markets that we understand and operate. They expect companies to be quite thoughtful about expansion into other territories at this point in the economic cycle, especially as prices are quite high,” says Halford.

Another factor is that telecoms companies in emerging markets tend to be at a much later stage of maturity compared with ten years ago. They are now in groupings that are more likely to endure for the longer term, says Halford. “The sector has moved on a huge amount. There are fewer new licenses being made available, so when there are ownership transfers they tend to involve more established businesses that have reasonable customer franchises,” he says.

However, a look at M&A figures reveals that a large number of telecoms businesses in emerging markets did change hands last year. There were 378 deals worth $102bn

last year, the highest value of transactions involving emerging markets telecoms firms since 2000, when the value was $105bn, according to data provider Thomson Reuters.

The biggest deal was the $27.5bn merger of Mexican firms Carso Global Telecom and America Movil. In fact, the most active telecoms acquirers last year were based in emerging markets such as Mexico, Russia, India and the United Arab Emirates. Spanish telecoms companies were the most acquisitive in developed markets.

“Some mature market businesses will look at emerging markets as being a good potential counterbalance to slower growth in Europe and they will see the opportunities in terms of telecoms penetration and the quite attractive long-term trend in data revenues,” says Halford.

However, the economic crisis has not dented the price expectations of

sellers to a great extent. “Generally, you get the impression that sellers are still looking for reasonably high valuations,” says Halford. It comes down to a question of how much a company is willing to pay for higher growth, he says, and balancing that with the need to be thoughtful about the elements of risk that it takes on. n

Andy Halford Halford has been chief financial officer and a board director of Vodafone since 2005. He joined the company in 1999 as financial director of Vodafone Limited, the UK operating company and became financial director for Vodafone’s northern Europe, Middle East and Africa region in 2001.

He was also chief financial officer of Verizon Wireless in the US between 2002 and 2005. Before joining Vodafone he was group finance director at East Midlands Electricity.

39 Excellence in leadership | Issue 1, 2011

Survival of the fittest

Acts of God, terrorist attacks and accidents are an unavoidable and costly part of business life.

Trevor Partridge, former head of business continuity at Marks & Spencer, explains how to ensure that when crisis hits, you’re prepared 

40 Excellence in leadership | Issue 1, 2011

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he immortal words of Billy Joel, “We didn’t start the fire”, encompass perfectly the life and times of business continuity management (BCM). “It’s not our fault, but we have to pick up the pieces”; a role that can be exciting and challenging at the best of times, and frustrating at worst. So, as CFO, please try to help and support the poor individual who is developing your business continuity plans. Don’t let them become a figure to be avoided like the Grim Reaper.

There is an understandable wariness of the subject of BCM, so for the sake of this article let’s simply call it business interruption. At some point in your career, you will inevitably experience an interruption to your business, and sadly, this is becoming more regular. So what is the best way to get the board’s attention?

Identifying risks There are three main categories of threat to think about. First, there are acts of God, such as severe weather, earthquakes, volcanic eruptions, pandemics and epidemics. Second, there are acts of terrorism or extremism, including bombs, demonstrations, fraud, kidnap and extortion. Finally, there are accidents, which can result from poor maintenance, poor instalment of machinery and human error.

It’s worth remembering that you’re not planning what to do if something goes wrong; it’s a question of when. I regrettably faced many and varied threats in my ten years as head of BCM at UK retailer Marks & Spencer. These included the Manchester IRA bomb in 1996, the London bombings in 2005, the terrorist attacks on 11 September 2001, a major fire at the Buncefield oil storage depot in 2005, demonstrations, the Mumbai shootings in 2008, fires, floods, snow and a kidnap situation. These all resulted in significant business interruption and could only be managed effectively with a degree of pre-planning. They were also valuable learning experiences.

At the time of the IRA bomb in Manchester we had some planning in place at M&S, but it was not fully thought through and

tested. We quickly discovered the need to put our people first. With hundreds of employees’ possessions – car keys, home keys and wallets – under a pile of rubble, how were we going to get them back to the comfort and safety of their homes? Significant sums of money also had to be allocated to get the business back up and running.

When the major fire started at Buncefield in December 2005 I received a call at around 6am.

M&S had a food depot nearby that was packed with produce and there were only a few weeks until Christmas. Again, a number of issues had to be addressed. First, how badly was the depot affected?

If it had to close, how would we manage deliveries and what would be the consequences for our customers and the financial impact on the business?

What continuity arrangements did we have in place?

By this time we had a tried and tested plan so the entire situation could be managed with hardly any impact on the paying customer.

Building foundations Industry experience shows that 80 per cent of the businesses that encounter a disaster, and do not have a business continuity plan, cease trading within 18 months of the incident. This was the case for Townsend Thoresen after one of its ferries capsized in 1987 and for US airline Pan Am after the Lockerbie bombing in 1988.

Lost revenues and disruption to operations are inevitable after any significant incident – it is likely to take up to a week or more to gain control and return to some sort of normality, and several months or more to recover completely. There is hardly ever a quick fix.

The business will require a level of investment in resources – people, time, money and commitment at all levels – commensurate to the risk.

Convincing any board to invest in a continuity and recovery plan is hard. When the topic makes it on to the agenda there is usually 15 minutes at most to demonstrate in a simple and succinct way the challenges the business could face. So the BCM team should report the facts accurately and without a sugar coating. Use plain language; no jargon.

Then the BCM programme can begin. A “gap” analysis comes first, where a company analyses its current position and where it wants to get to, then more detailed risk assessments are needed.

41 Excellence in leadership | Issue 1, 2011

80%

the proportion of businesses with no business continuity plan that fail within 18 months of a major incident

The development of solutions and timescales comes next, then analysis of the business benefits should be conducted. Finally you need to reach agreement about who is accountable for the plan and who is responsible for carrying out the various actions.

Strong incident management procedures are vital in order to swiftly mobilise a predetermined crisis team, no matter how big your business. I call this the “Bat Phone”. It’s a programmed software tool that allows you to contact and mobilise everyone needed in a major incident with one button, regardless of the situation.

Exercise, exercise, exercise A colleague of mine used to say, “You train hard to play easy” – in other words, the more you exercise the plan, the easier it will be when you have to do it for real. The commitment and involvement of the senior team is vital. Exercises can be seen as an unnecessary distraction at worst, but anyone who is fully committed to taking part will discover many benefits.

One advantage is that people gain confidence about what they have to do and when they have to do it. They also get experience of working under Four types of BCM exercise Sandwich Lunch – this only takes one hour over lunch where you discuss the business continuity plan, the content and how it looks.

Desktop – this takes up to two hours and involves walking through the plan, picking out the pinch points and discussing aspects of it using several scenarios.

Departmental – this takes up to four hours and involves one department working together on one scenario. It is primarily a paper-driven exercise with maybe one or two people phoning in and some role-playing.

Inter-departmental – this takes a minimum of four hours and involves all departments. It is a totally interactive exercise with people phoning in, detailed role-playing and contact with external people, such as the real emergency services and the press.

15

15 minutes – the time available to convince the board to invest in a business continuity plan

It is important to keep players “entertained” at all times during an exercise so they appreciate the significance of their role unusual and sometimes stressful circumstances.

It also helps to work with many colleagues who the senior team have little interaction with in their day-to-day business lives.

The finance groups have an important role to play in BCM and exercising the plans. The insurance, risk and audit teams, where they exist, will be required to carry out specific duties to manage an incident such as providing significant funding to fix the problem.

And if the exercise is handled badly there should be repercussions. I would simulate a drop in the company’s share price, requiring careful handling from a brand and investor relations perspective.

The types of scenario that work best vary from business to business. A few that have worked well in my experience include fraud and extortion in credit card processes, the loss of a warehouse, IT failure, and asbestos contamination stretching over many years resulting in compensation for employees.

It is important to keep players “entertained” at all times during an exercise so they appreciate the significance of their role in the management of an incident. On one occasion during a challenging exercise I found a senior executive reading the daily newspaper. I took him to one side and reminded him of the effect he was having on the team and my ability to conduct an effective exercise.

Developing a BCM programme and thoroughly testing it takes more than days or even months, but if the board and senior team show the necessary commitment, it doesn’t need to be an arduous process.

And once it is part of your business culture – no different from health and safety – it should be included in all your business management routines, decisions and strategies. Then you can banish Billy Joel from your mind and take reassurance from Gloria Gaynor’s “I will survive”. n

trevor partridge Partridge is director of 2 b continued, a company that he set up in 2010 to provide continuity and security management consultancy.

Before that, he spent ten years as head of business continuity at Marks & Spencer, where he turned a back-room function into a flourishing department. He has more than 31 years of business experience at M&S in various management roles across the retailer’s stores, divisions and head office.

42 Excellence in leadership | Issue 1, 2011

Counting the cost

When company boards underestimate the importance of crisis management, they tend to regret it later. Linda Hall and Stuart Anderson of Barclays Global Retail Bank explain how to make a cast-iron case for investment in business continuity, even at a time of cost-cutting

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he number of “disaster” incidents experienced by global firms is on the rise. More than a quarter of companies surveyed by market research firm Forrester in 2008 had declared a disaster in the past five years.

What’s more, studies have found that companies that did not have effective business continuity management (BCM) during a crisis saw their stock price drop an average of ten per cent in the three weeks after a crisis, and ended the following year an average of 15 per cent below the pre-crisis price.

Despite this evidence, getting budget approval for business continuity programmes and initiatives is an ongoing challenge for many businesses continuity leaders because senior executives want to know what the return on investment will be.

Unfortunately, there is no predictable return on investment – in fact, BCM is often perceived as a cost overhead, and as a result can be vulnerable to cost-cutting initiatives. So, before the board agrees to invest in an effective BCM programme, they will want evidence that it will add value to the organisation.

Aligning strategy First, it is essential to ensure that your business continuity programme is strategically aligned with the key drivers and values of your organisation. This may

seem obvious, but programmes are often developed in isolation from business strategy, usually because they take a bottom-up approach.

This can lead to a disconnect where BCM is expressed in language that the board doesn’t understand and, as a consequence, it can be difficult to persuade the board to sign off expenditure. To help justify investment in BCM, the programme needs to be closely aligned with the needs and expectations of the business and expressed in their language.

At Barclays Global Retail Banking (GRB), we take a top-down, risk-based approach to BCM. The high-level business activities of Barclaycard and the retail bank are defined in a way that allows senior management to assess the business impact of those activities not being available for any reason.

By taking a top-down view of business priorities we ensure that our BCM efforts and expenditure are focused on what is most critical or appropriate to the business – making it much easier to justify the investment.

Devolving responsibility It is also important to go beyond the usual approach of scenario planning for predicted and predictable events. Barclays GRB has adopted a simple, yet robust, crisis management structure where authority for BCM activities is devolved across our global operations.

Crisis management within Barclays GRB is founded on the principle of subsidiarity, so incidents and crises

43 Excellence in leadership | Issue 1, 2011

how many times have you had to declare a “disaster” and BEGIN operations at your recovery site in the past five years Five 2% Three 3% Twice 6%

More than five declarations 2%

Once 14%

No declarations 73% Base: 250 disaster recovery decision-makers and influencers at businesses globally Source: Forrester/Disaster Recovery Journal October 2007 Global Recovery Preparedness Online Survey

are handled by the lowest appropriate authority. This means that our businesses are expected to take control. Crises are rare events but, when they do occur, it is vital that the response is rapid and effective. The importance of maintaining the capability of crisis teams cannot be overstated and the bank has a policy of putting these teams through regular exercises to ensure they are prepared.

This was demonstrated with the recent events in Egypt. The country’s crisis leadership team had undertaken a training exercise in November 2010, which was based on a scenario of civil unrest. The value of this experience was clearly highlighted by the smooth operation of the Egyptian crisis team’s response to events.

Barclays Bank of Egypt was the first bank in the country to invoke its business continuity arrangements. This early reaction not only helped with the quick resumption of business operations, such as contact centres, it also aided the overall recovery of the bank. The recent exercise equipped key decision-makers and employees to act quickly and have confidence in the procedures that were in place and the decisions they were making.

Demonstrating value One way to demonstrate the value of your business continuity programme is to show how it can have wider benefits for performance of the organisation. A good example of this at Barclays has been the way in

which an initiative led by the BCM team has helped to improve the bank’s ability to contact its employees.

Our first objective was to ensure that during and after an incident all GRB colleagues are contacted (not just those with a recovery role). This means that employees can be redirected quickly to an alternative site, where necessary, or managers can pass on important information that will make their teams’ lives much easier and ensure continuity of service for customers.

Our second objective was to raise awareness across GRB of employee contactability so that it could be used for business purposes other than incident response, which would in turn raise awareness about business continuity.

At the start of the exercise, the bank’s employee contactability met the industry average, but by the end of 2010 we had proven our ability to contact more than 90 per cent of our colleagues globally when required.

This enhanced capability is now being used for other purposes, including the removal of redundant contact mechanisms, that were prevalent in the business.

Other uses include advising staff to come into work on a non-working day to finish individual projects; sending Christmas messages to staff; encouraging staff to buy dinner tickets for a fundraising event to support a children’s cancer charity; and informing staff of imminent business or technology changes, such as the roll-out of new IT systems.

The development and implementation of this initiative has not only raised awareness of business continuity across GRB, but has also improved our ability to contact staff, adding value to normal business, and even social, operations.

Principles for success Justifying investment in BCM is an ongoing challenge for business continuity leaders. To help the board make the decision, business continuity leaders should first align their programmes with the key drivers and values of the organisation – this makes it easier for senior management to understand and approve.

They should then ensure that responsibility for implementing the programme is devolved to crisis teams throughout the business so it is adaptive and agile – this will lead to a faster and more controlled response to incidents.

Finally, it is important to demonstrate that the business continuity programme has wider business benefits – this can reduce business costs by removing duplication and eliminating redundant activities. n

Linda Hall Hall is global head of business continuity management at Barclays Global Retail Bank. She is also responsible for the strategic direction and management oversight of the Control Environment Centre of Excellence, a unit in India that is responsible for offshoring risk and control processes for onshore customers.

She has been at Barclays since 2005. She was previously the head of support for trading floors and IT services and led large-scale IT projects at investment banks Merrill Lynch, UBS and Barclays Capital.

Stuart Anderson Anderson is head of the Control Environment Centre of Excellence for Barclays Global Retail Bank and is responsible for its onshore and offshore activities. Before joining Barclays, he was a managing consultant in PA Consulting Group’s financial services practice, leading large and complex risk and control projects, and has previously worked for Siemens.

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45 Excellence in leadership | Issue 1, 2011

Flexible finance

Most large global companies had easy access to capital throughout the financial crisis, but they still faced challenges managing their cash, remaining flexible and finding the most efficient ways to fund growth. John Rogers, CFO of J Sainsbury, Hanno Kirner, CFO of Aston Martin Lagonda, and Daniel Fete, senior vice-president for finance at AT&T Services, share their experiences

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illustration by paddy mills

urviving the recent global financial crisis was a major achievement for many firms in the US and Europe, but some went a step further and emerged stronger for the experience. This was only possible through a combination of financial discipline and an unswerving focus on long-term growth strategy, according to the finance chiefs at food retailer J Sainsbury, luxury car maker Aston Martin Lagonda and AT&T Services, which provides telecoms services.

This is not to say that the financial crisis did not have an impact on the three businesses. Speaking at The Economist CFO Summit earlier this year, Hanno Kirner of Aston Martin Lagonda explained how the luxury car segment took a nosedive after 2007. Sales of the company’s cars plummeted from 7,500 in 2007 to 3,000 in 2009. Despite this drop, the private equity-owned company still managed to turn a small profit.

Unlike many businesses, it continued to invest through the economic downturn. This is critical in the car industry because it takes four to five years of investment to develop a new product, which will be on the market for six to seven years, said Kirner. “We cannot cut off investment in the pipeline because we depend on it for strong growth,” he said.

How did it manage to perform so well?

“We had very robust management of cost structures, which started with making sure that we didn’t lose any money,” said Kirner. This helped the company to recover in 2010, when it managed to achieve 40 per cent growth year on year compared with 2009. “That was from a low base, but it is also because we have been working hard on the mix – the average transaction price of the products sold,” he said.

The company’s average transaction price per unit was 50 per cent higher in 2010 compared with 2007 because it was positioning products at the higher end and bringing products to market that sat at a higher price point. “Our core financial focus is not on volumes or cost – it’s about quality of earnings.

The main driver is revenue so we spend a lot of time optimising revenue and making sure that we generate the maximum out of our position,” said Kirner.

Given the loss in sales that the company experienced during the crisis, the top priority was effective cash management. Everyone at an operational level, as well as across the production and sales divisions, was completely focused on cash and there were weekly cash management meetings across the value chain and throughout all levels of the hierarchy, said Kirner. “Some of our commercial and technical people are as cash-focused as you will find in »

46 Excellence in leadership | Issue 1, 2011

One of the most important ways that the finance organisation can provide support is by helping the business to grow a finance organisation. That wouldn’t have been the case four years ago, but a crisis sometimes does help,” he said.

Coming out of the crisis, the company is now slightly adjusting its focus away from operational finance towards strategic matters. “When you manage cash on a daily basis you can lose sight of ROCE optimisations [return on capital employed] and some other measures of optimal capital deployment,” said Kirner. These are the areas where there is now work to be done.

The role of finance Resilience has also characterised the past few years for AT&T Services, which contributes about half of the $60bn total revenues of telecoms group AT&T. “From a total corporate perspective we were able to continue to generate significant cash flows, which went towards paying down debt and were invested back into the business. What 2009 and 2010 showed is that we will be more robust as a result of the decline,” said Daniel Fete, the company’s senior vice-president for finance, speaking at The Economist CFO Summit.

Fete freely admits that he did not foresee the scale of financial and economic turbulence that has rocked the business world in recent years. However, the finance team was able to jump into action and provide rapid support to the business. In part, the company’s close relationship with its business customers helped to provide market intelligence about how they were feeling and therefore how the crisis was likely to affect AT&T. “Did I anticipate where we would be in 2009 six months earlier? No. But you have to see it quick and offer key recommendations to your partners – whether that’s the CEO or business unit leaders – and give them viable alternatives to help them react to the new trend,” said Fete.

And one of the most important ways that the finance organisation can provide support is by helping the business to grow, whatever the economic environment. “If you want to help the business to grow you have to have your capital objectives

aligned with your business growth plans and your customers’ needs,” said Fete.

Over the past two years the core needs of the company’s customers have not changed significantly.

“They need security, speed and efficiency across the network – those things were probably more acutely needed in the past few years as customers tried to work through the uncertainties in the markets.

It was important for us to enable that growth and to continue to invest in the business,” he said.

However, it was also clear that the business had to be more prudent with how it spent its cash.

“We cut back in areas that were not going to affect our strategic business and therefore our customers’ needs. We had to cut back with the decline in sales, but we were still able to maintain and even grow margins in one year,” he said.

The ongoing challenge for the finance team is to continue to provide forecasts about the economic outlook and trends in customers’ activities that will affect business strategy. In addition, Fete and his team must ensure the company takes a disciplined approach to growth to protect its strong balance sheet. This attracts investors and acts as a differentiator for customers: “It allows us to maintain flexibility and pump cash into the business in good times or bad,” he said.

47 Excellence in leadership | Issue 1, 2011

Outlook for the US economy For a company with its finger on the pulse of US corporates, AT&T Services is not particularly optimistic about the likelihood of a strong US recovery this year.

“When things went south the board spent a lot of time trying to correlate past economic events and looked at how that might help predict what the future might look like,” said Daniel Fete, the company’s senior vice-president for finance. This is not something the company focused on five or ten years ago, but it is now an important part of the company’s forecasting activity.

At the peak of the crisis the company predicted that there would be a better recovery in the latter part of 2010 and 2011 although it didn’t expect a strong rebound. Today there are two factors that Fete regards as the bellwethers of the domestic performance of AT&T Services: employment and business start-ups.

“If you’re adding jobs and branches to your business then you need our services. While the US is adding people to the labour force it is still not happening in a robust manner,” said Fete.

The figures for business start-ups are also disappointing. “There has to be an environment in the US where new businesses are created, grow and create new branches in order to drive the economy, but we have not seen strong new business growth,” said Fete.

Rebuilding in a crisis A strong funding position has also been a critical factor for retailer J Sainsbury as the business pursued an ambitious growth strategy in the eye of the financial storm. The company began a period of recovery in 2005 having lost ground to rivals on price and availability of products in the early part of the last decade. It had just turned the corner when the financial crisis hit.

“We came out of the recovery period about two years ago and were making quite ambitious plans to grow our business just as the economy was slumping. We had a five-year plan to invest about £1.2bn a year in growing the business on the back of depreciation in the company’s value of £400m,” said John Rogers, CFO of J Sainsbury.

One of the keys to achieving this growth was the strategy of using its vast property portfolio as a stable long-term source of funding. The company owns about 65 per cent of its stores, which have a property

valuation of about £10.2bn, making it one of the largest owners of property in the UK. “We made a decision four or five years ago to use that strong asset backing as a basis for funding our business. We moved out of unsecured bonds and in 2006 we did a commercial mortgage-backed securitisation deal worth £1.2bn. In hindsight, that turned out to be a great move for us. It was at a point in the market when the pricing was keen and it gave us really long-term debt – the average maturity of that debt is about 12 years and some of the bonds go out to 2031,” said Rogers.

This has given the company a solid funding base on which to grow the business over the past two and a half years. The company has been adding new stores and increasing its retail space by about 1.5 million square feet per year. It has also extended its stores by growing its non-food ranges and created a bank. Today it handles about 20 million customer transactions a week and the turnover of the business is about £20bn.

Although the debt markets weren’t closed to relatively large businesses, such as J Sainsbury, even at the peak of the crisis it was quite an expensive way to raise capital. As an alternative the company issued some equity and convertible debt, which Rogers said was the most efficient way of funding growth at the time. It also refinanced many of its revolving credit facilities with its relationship banks and widened its pool of lending banks due to strong support for its growth and funding strategy.

That said, the company’s debt-to-equity capital base has been remarkably consistent and there has not been a shift in its gearing. “We need to be conscious of how geared we are relative to the competition because that drives the dynamics of the p&l and our ability to compete in the market.

We don’t see the need to change our debt-to-equity capital structure,” said Rogers.

However, the company feels so confident that its future funding lies in secured funding through its property portfolio, rather than debt capital markets, that last year it took the unusual decision to remove its corporate credit rating. “We reaffirmed our AAA3 rating to assure the markets that the rating was still valid and then withdrew it, which is an unusual thing for a listed business to do,” said Rogers.

Instead, the company expects additional revenues generated by its expanded operations to provide growth capital. “As the investments that we made two or three years ago start to mature and throw off cash this will help to fund future growth, so we are fully funded for five years unless something unusual comes along,” said Rogers. n

John rogers Rogers was appointed chief financial officer last July and is also a member of the board of Sainsbury’s Bank. He joined J Sainsbury in 2005 as director of corporate finance before becoming director of group finance from March 2007 to June 2008 and then property director of J Sainsbury’s operating board for two years. His previous roles include group finance director for the diversified group Hanover Acceptances, senior manager at Monitor Company and a manager at Arthur Andersen.

hanno kirner Kirner was appointed to the newly created position of chief financial officer at Aston Martin Lagonda in November 2010. He is based at the independent luxury car maker’s global headquarters in the UK and is a member of its executive board of management. Kirner has extensive experience of the automotive industry, joining Aston Martin from Rolls-Royce where he served as director for finance and IT for the previous five years. He has also held a number of senior positions at BMW Group.

daniel fete Fete joined AT&T in 1993 and has held numerous finance positions before becoming chief financial officer of AT&T Business Solutions, which develops and markets telecoms equipment and services to over 250,000 customers.

He participates in the company’s customer relationship programme and is a member of the AT&T University Advisory Board. Before joining the business, Fete worked for Ernst & Young for a decade. He earned his BSc in accounting from the University of Missouri Columbia.

48 Excellence in leadership | Issue 1, 2011

The art of motivation When times are tough, the finance team has the thankless task of ensuring the business cuts costs or increases efficiency, which can make people distracted and demotivated. INSEAD Dean J Stewart Black identifies some tactics that can help to keep this negativity in check

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ver the past two years, wherever in the world I’ve been, leaders have consistently asked me: “How can I keep everyone focused on our strategic goals and motivated when things are in such flux, turmoil, and times are so tough?” This can be especially challenging for CFOs who are responsible in tough times for chopping budgets and reducing head counts. While this is a thankless job, it is further complicated by the need for CFOs to keep their own team focused and motivated as they carry out the unpleasant task.

First, let me describe one principle that can help with this challenge. It is as simple as it could be counterintuitive: when times are turbulent and tough, simply accept that the work of squeezing budgets, cutting benefits and laying off employees is no fun.

It simply is not realistic to expect that there is some magic formula that will transform the work of squeezing, pinching and

pushing that gets people to spring out of bed each morning.

That is not to say that all is lost and you should give up and throw in the towel – not at all. Rather, the CFOs who are the most successful at getting the job done are simply realistic in their expectations. They recognise that it is not possible to have people in the finance department whistle while they work as budgets are being cut and people are being laid off. However, they also know that what they can and must to do is to keep the discontent, distress and disenchantment from going too far and becoming part of a vicious, downward cycle.

Keep your cool So how do you do this? I have observed two key tactics that make this principle work. First, the best financial leaders

recognise that their personal behaviour in general, and particularly with their direct reports, is at a premium during tough times. In other words, they understand that what they say, how they say it and how they treat others is always being observed and has an impact, but in turbulent and tough times the consequences are magnified.

When I was explaining this at a seminar recently, one manager countered: “Yes, but if you lose your cool under pressure, people understand and they will forgive you.” This is true. People are likely to forgive you if you lose your cool under pressure. However, being able to count on your team’s tolerance and forgiveness is much less valuable than the respect, commitment and loyalty that they will give you if you maintain your cool and continue to act professionally.

Photography: Getty Images

People management

49 Excellence in leadership | Issue 1, 2011

In tough times, if you maintain or even improve how you treat those who work for you, it has two effects. First, it works as something of an antidote against all the discontent, distress and disenchantment your people experience as they squeeze, pinch, and push. It keeps these emotions in check.

Second, keeping your cool and elevating the quality of your interaction with your team increases the odds that they will, in turn, keep their composure with others.

This helps to keep the natural negativity of tough times contained across the firm.

Refining the business Another tactic, what I call the call “the refiner’s fire message”, has worked for some savvy senior financial executives.

The refining of metals dates back to about 550BC when the first coins were minted.

CFOs who are the most successful at getting the job done are simply realistic in their expectations In the case of silver coins, the refiner would heat the fire to some 1,700 degrees, thereby melting the silver. He would then pour the molten metal into clay jars; the impurities would float to the top and stick to the edges of the pots.

Similarly, tough times provide a refining and improving opportunity that is simply unavailable when times are good. However, I have only seen this tactic used with credibility and impact under three conditions.

First, the improvement message has to be delivered in one-on-one meetings or in small group conversations where the person taking the lead could look the others squarely in the eye and make a personal connection. As a result, I have never seen this work effectively when a company’s leaders have tried to galvanise a large group of staff into action – either 100,000 employees by email or even 100 employees by video-conference.

In addition, this type of message only has a positive impact when you first talk about the personal refinements that you are making in these tough times. Those who said, “These lean times are a good opportunity for you to lose weight” while munching on a Big Mac did not fare so well. Turning the heat of tough times into a refiner’s fire is only credible when you lead by example.

Finally, when discussing the refinement opportunities created for the organisation as a result of the tough times, you must listen more than you speak. Your team will be the ones stoking the coals to heat the refining fire in the organisation, so they must have a voice in the process.

At the end of the day, we have lived through and continue to struggle with some of the most turbulent and tough times in more than three-quarters of a century. It isn’t fun; don’t expect it to be.

But as a leader you can and must keep the negative emotions from building to a point at which they might implode.

To do this you should first maintain your cool and elevate the quality of your interactions, even as the waves break over the bow. Second, you need to personally put into practice the principle of the refiner’s fire and then communicate this to a small and select group of colleagues.

None of this will eliminate the pain of the tough times, but as Lance Armstrong once put it: “Pain is inevitable. Suffering is optional.” n J Stewart Black, PhD, associate dean, INSEAD Dr Black is a leading instructor and scholar in strategy, change management, globalisation and leadership. As a result, he has consulted with and run seminars for a variety of international firms. He is the co-author of a top-selling textbook, Management: Meeting New Challenges, and ten other highly regarded books, including Leading Strategic Change: Breaking through the Brain Barrier.

50 Excellence in leadership | Issue 1, 2011

Research and development

The power of networks Semiconductor companies have found ways to put their rivalries to one side and their expertise together in order to develop cutting-edge manufacturing technology. There are still no guarantees of success but there should be fewer and less costly failures along the way.

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omplex technologies often take years, if not decades, to develop. It’s a process that typically involves long-term investment in research and development by networks of legally separate and formally independent firms. As a result, a company’s return on investment depends on how effectively its capital commitments can be coordinated with those of other firms.

Despite the importance of technology innovation as an investment category, we know remarkably little about how coordination is achieved, or how it affects investment appraisal and management accounting practices. We aim to redress that imbalance and deal specifically with the processes used to coordinate R&D investments in the semiconductor industry.

We use the term mediating instruments to refer collectively to the investment coordination practices used in the semiconductor sector. Mediating implies that, in an inter-firm context, coordination entails mutual influence and persuasion in order to align investment strategies. However some firms may carry significantly more weight in a network than others.

This is quite separate from the familiar accounting idea of designing control systems.

The reference to instruments is to emphasise specific means of coordination. This involves information sharing in a network, industry modelling of R&D and effective intervention to influence

technology development pathways. Taken together, this set of practices has important implications for management accounting and investment appraisal.

Information sharing Coordinating R&D investments depends on organising appropriate forums for the exchange of pre-competitive information. This is where global semiconductor producers come together to establish, for suppliers, the generic attributes they expect to see in future manufacturing technologies.

Individual chip makers can then have the technologies customised by suppliers for the integration into proprietary semiconductor production processes. As a former CEO and chairman of one of the world’s largest chip makers explained: “[Our] intellectual property, or trade secrets in this case, comes from the integration. We’re very able to work with our competitors in creating the standalone pieces.” Chip producers make their demands on suppliers as common as possible to reduce investment levels in a sector marked by increasingly expensive innovation.

The process works through a variety of industrywide forums including one known as ITRS (International Technology Roadmap for Semiconductors). At ITRS meetings more than 1,000 scientists and engineers from semiconductor producers, suppliers, universities and government bodies meet in working groups. They meet several times a year under the guidance of the International Roadmap Committee (IRC), through which executives from global chip makers set expectations and review results.

The Committee and technology working groups monitor the progress of industry research and rank technology alternatives by likelihood of success based on data that has typically been presented at open symposia and scientific forums throughout the industry. The idea is to establish an innovation race between the incumbent and a set of new technologies.

Industry modelling Central to making semiconductors more powerful is to make the electronic features they contain smaller and smaller. This means pushing the boundaries of innovations in several areas. Take the case of lithography, a key technology for making advanced chips.

51 Excellence in leadership | Issue 1, 2011

Industry modelling provides data on the expected rates of reduction in the size of electronic features over the next 15 years. It also provides data on the attributes required of new manufacturing technologies, such as lithography, to enable those reductions.

The intent is to influence, but not to determine, the decisions of suppliers, research agencies and financiers as they commit R&D spending to technology alternatives. Industry modelling helps suppliers to sequence their capital spending by indicating when research phases should be expected to end and when options should be narrowed. This is to allow time for more intense development of fewer, and eventually one, new lithographic technology.

The models are based on detailed data from experiments and expert opinion about the prospects for each technology and its core components. There is particular emphasis on identifying the “red brick walls” – design issues for which there are no known solutions.

These can be regarded as either barriers to investment or as high-risk opportunities to be pursued more

aggressively with the injection of venture capital funding.

For example, it is expected that today’s industry standard – known as 193nm lithography – can be modified to remain current until 2016, at which time a new technology must be ready for introduction. There are several possible systems that might meet future industry requirements. However there is a high level of technical uncertainty and some difference of opinion across suppliers as to which approach will succeed. This means that the supplier base tends to conduct R&D in parallel on multiple alternatives.

The prize in the case of lithography is that one system will normally be adopted for worldwide application. The downside is the potential for significant capital misallocation and loss to suppliers unless the status of alternatives can be monitored effectively. Industry modelling is intended as a means of achieving such monitoring. The models currently point to extreme ultra violet lithography (EUV, a technology under development) as the one most likely to succeed on technical and cost grounds. »

52 Excellence in leadership | Issue 1, 2011

Effective intervention But appraisal of investment in complex new technologies involves more than modelling, and the building of forecasts and simulations, in order to compute net present values. It depends, crucially, on practical interventions that identify scientific, engineering or cost barriers to devising and integrating the core modules of a new system and making it operational for high-volume use.

During development processes that can take a decade or more, capital spending may stall if there is undue pessimism about the chances for success.

Equally, investment in some elements of a system may continue because there is no awareness that the creation of other elements of the system face insurmountable odds.

Intervention can resolve these difficulties by encouraging or discouraging particular patterns of resource allocation and mediating between the interests of diverse organisations. If a particular semiconductor manufacturing technology can be shown to work, even on a small scale in a laboratory setting, that may improve its ranking in industry models. This, in turn, can encourage more substantive investment.

One example of effective intervention was when a group of semiconductor firms got together in 1997 to form a company or funding vehicle, EUV LLC, through which they contributed venture capital to accelerate research into EUV lithography technology.

The research was conducted at US Virtual National Laboratories and involved the successful integration of all the components needed to build an EUV prototype.

This was only possible because of a framework for technology and information sharing between suppliers, manufacturers, the EUV LLC, and the Laboratories in a controlled environment that protected contributors’ intellectual property.

The new intellectual property created by the Laboratories was transferred to the EUV LLC, allowing it to license the technology to lithography assemblers and preserve competition between them. By 2001, wafers were being printed in the laboratory at the

Broader research While our ongoing research focuses on the semiconductor industry, it has ramifications far beyond this particular sector. Other industries linked to semiconductors, such as the electronics manufacturing, nanotechnology and optoelectronics sectors, have begun to devise mediating instruments similar to those described here.

These practices and instruments might also be particularly useful where firms are highly specialised, costs of R&D are high, and where there are large benefits to bringing products to market earlier. So, for instance, there have recently been some moves on the part of large competing firms in the pharmaceuticals sector to find common pre-competitive grounds for sharing R&D data. Subsequent research will no doubt be able to explore the diffusion of the processes we are examining in the current project, as well as learning from contexts in which collaboration has proved to be elusive in the past. n Professor Peter Miller, Professor of Accounting, London School of Economics and Political Science; Dr Jodie Moll, lecturer in accounting at the University of Manchester; and Professor Ted O’Leary, professor of accounting at the University of Manchester.

Photography: Gallery Stock

During development processes that can take a decade or more, capital spending may stall if there is undue pessimism

required specification, albeit in a mode that was still far from capable of high-volume semiconductor production. However, this breakthrough led to the unfreezing of investment in EUV. The intervention had been funded by some of the largest semiconductor firms in the industry. Their combined market share was a strong indication of the potential for industry-wide adoption of the technology, which was a positive sign for lithography equipment manufacturers and component suppliers.

By showing that EUV lithography faced no technical “show-stoppers”, the intervention lowered investment risk and shifted the focus to commercialisation. Significant venture capital activity was to follow. For instance, Intel Capital took stakes in several firms in order to increase competition and accelerate the development of key EUV components. This is not to suggest that the path to commercialisation has been straightforward.

Timelines have been missed repeatedly owing to the economic downturn and technical delays. Yet progress has continued. In April last year ASML announced the successful printing of wafers by a system operating at significantly increased levels of source power and throughput.

EUV is ranked currently as the top lithography technology because of continued technical advances and cost-of-ownership appraisals, which suggest that it will supplant the incumbent technology.

53 Excellence in leadership | Issue 1, 2011

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Would you like to contribute articles and blogs to Insight, CIMA’s e-magazine for members and students? Insight reaches a global audience of 140,000 CIMA members and students. See our latest editions at www.cimaglobal.com/ insight and contact us at web@cimaglobal.com to find out how to get involved.

We are also looking for members who are interested in sharing their expertise by blogging and engaging directly with their readership at our online community CIMAsphere.

To find out about blogging options, email us at sphereinfo@cimaglobal. com

CIMA produces a number of reports each year on a range of issues in finance and business. These can be found by visiting the thought leadership section of www.cimaglobal.com

From efficiency to effectiveness: transforming the finance delivery mix Coming soon (May 2011), a programme of activities looking at how financial services will be delivered in the future. It will examine the role of external delivery via shared service centres and outsourcing with the aim of identifying best practice.

To take part in the debate and get involved in CIMA’s work on the future of the finance function, contact transformation@cimaglobal.com.

CIMAplus subscribers will receive access to all the output from this programme from May 2011.

Supported by

Business intelligence CIMA would welcome your insights into how management accountants are using business intelligence tools to better inform decision-making in their organisations.

We need to understand the impact on your role for syllabus development purposes.

We also need case studies to update the 2008 “Unlocking business intelligence” report and help members to make their careers future proof.

If you can help, contact peter.simons@cimaglobal.com.

Creating and popularising a global management accounting idea: the balanced scorecard This study focuses on the success of the “balanced scorecard” and demonstrates how it can be made practical through the process of customisation.

The report can be read here: www.cimaglobal.com/balanced

Formal and informal feedback in management accounting This study explores how formal and informal feedback plays a key part in influencing how effectively organisations are managed. www.cimaglobal.com/feedbackreport

Using management accounting to lengthen the time frame of managers This research study starts with the ambition of the managing director of Van den Udenhout (VdU), a large Dutch car dealer, to lengthen the time horizon of his managers. In this research project an academic researcher and the managers of the dealership worked together to investigate how the time frame of the company’s managers could be lengthened, and how management accounting could help to achieve this. www.cimaglobal.com/timeframe

Tomorrow’s balance sheet Following on from CIMA’s successful and ongoing relationship with Tomorrow’s Company, “Tomorrow’s balance sheet” summarises the key discussion points from a high-level, round-table discussion, where senior business decision-makers met with experts in sustainability to discuss the integration of strategies for corporate

responsibility and evaluating their impact, both socially and environmentally. www.cimaglobal.com/balancesheet

UK Bribery Act and what it means for members CIMA members and students worldwide have a responsibility to be fully aware of the implications of the UK Bribery Act, its main requirements and what the law will mean in practice for CIMA members working for UK businesses and their subsidiaries overseas. This was passed in April 2011, read how the Act could influence the way you work: www.cimaglobal.com/briberyact

New products from CIMA CIMA on demand On 14 February, CIMA launched a brand new online professional development solution, specifically designed for CIMA members – CIMA on demand – www.cimaondemand.com

What is CIMA on demand?

CIMA on demand offers a range of online courses covering a variety of topics, giving the flexibility and control to learn anywhere and at any time.

More details Each course currently has a running time of between 60 and 75 minutes and includes knowledge checks to ensure full understanding. Completion certificates are also offered so a record of successful completion of the course can be kept.

Course slides can also be printed off and retained. Courses cost £30 + VAT for 60 minutes and £45 + VAT for 75 minutes.

We also have special offers available l 10-course pack option l 20-course pack option Check out the website for further details www.cimaondemand.com Remember, CIMAplus subscribers can select two free online courses from CIMA on demand.

54 Excellence in leadership | Issue 1, 2011

Finance transformation

Breaking the mould For decades the finance team has been characterised as an independent unit with a single-minded focus on numbers and financial data.

CIMA’s Ana Barco highlights how the reality couldn’t be more different

F

inance professionals are breaking out of the straitjacket that has restricted their role to the gathering and reporting of financial information, and are extending their influence over business strategy and high-level decision-making.

This emerging role for financial professionals as business partners is good news for accountants and their employers, according to senior finance executives at CIMA’s recent round-table debate. It will create a wealth of opportunities in terms of career development and progression for accountants, while companies will be able to gain real value as their finance teams provide greater input.

Although accountants are ready for this new challenge, they will have to exercise a degree of caution. As the finance team becomes more integrated with the business and more involved in driving value, it must be careful not to sacrifice its cherished independence.

Business benefits There are many reasons why it makes sense for finance professionals to make a greater contribution to business decisions and share accountability for the outcomes. For a start, they have a holistic view of the company and can see how a decision in one part of the business can affect the rest of the organisation.

They can also help non-finance executives navigate through the numbers, risks and regulations, and bring an independent voice to the debate. These skills are critical when the long-term sustainability of the business is at stake.

CIMA’s debate clearly pointed to other benefits that finance can bring when working in partnership with other business units. For example, this collaborative approach can increase the confidence and credibility of other departments when they are showcasing their results. There are also signs that senior management are starting to view the business plans and presentations made by the marketing or CSR departments with greater confidence and they are starting to carry more weight as a direct result of input from the finance team.

Although it is good news that the finance team is able to add value, the new role can bring challenges. High among these is the fear that accountants will lose their reputation for taking an independent view as they “go native”.

There is concern that the finance team will no longer be capable of offering unbiased and, at times, even unpopular assessments of new investment plans, sales targets, bonus payments or international expansion plans.

Preserving independence Interestingly, CIMA’s research shows that while accountants are confident that they would not lose their objectivity, they admit there is a risk that others

might perceive them to be compromised.

The challenge for CIMA, employers and finance professionals is how best to manage this transformation. Finance people must be able to deliver the greatest value to the business while retaining their independence and, perhaps most critically, holding on to the confidence of the rest of the business.

The starting point is to accept that accountants’ independence and objectivity is an asset and must be protected. They bring an organisation-wide view and professional status, and their professional standing demands objectivity.

They are one of the few groups of people who can – and are often expected to – ask blunt questions of the organisation at all levels, regardless of rank, and provide a “sense-checking” role within the business.

Second, the structure of the organisation, at times, must adapt to accommodate this new role. This could include rotating business partners within the organisation to prevent them becoming too embedded within any one team. This helps the finance professional to gain wider access to the business and more diverse experience, which improves understanding. Maintaining a reporting line back to the finance function can also help to support the partners, should there be a conflict of interest. Other measures could include providing a finance mentor to also help with this.

Third, the debate focused on rewards.

The participants believed that rewards must be based on, and linked to, the quality of the advice and contribution that finance provides. It is all too easy to link rewards to the short-term performance of a particular business or product unit, while the finance professional may have lost sight of the bigger picture.

Finally, there needs to be a marked change in the skills and personal attributes needed to be a high-performing business »

55 Excellence in leadership | Issue 1, 2011

56 Excellence in leadership | Issue 1, 2011

partner. Technical accounting skills remain the top recruitment criteria for finance professionals. However, there has been an increase in demand for the commercial and softer skill-sets required for these roles.

The ability to communicate, influence, negotiate, inspire confidence and act as a leader are all essential in today’s corporate world. Organisations will need to determine how to increase these skills via training, selection and recruitment strategies as they are fundamental to the future success of the finance business role.

Not for everyone These more collaborative roles are not for everyone. The traditional accountancy function is still important and there will be some who lack the skills and experience to perform well in these new roles. In addition, some accountants may simply lack the ambition to make the transformation. They may prefer to remain in the more technical accounting roles, which a full finance service still requires as part of the mix.

The crux of the matter for senior management is to ensure that the people earmarked or recruited into these collaborative and partner roles have the right skills, relevant experience and confidence to fulfil expectations. It is crucial that these finance business partners have support to ensure that they can perform at their best while dealing with any pressures or threats to their objectivity.

Nigel Lynn, managing director at professional staffing recruitment consultancy Barclay Meade, says: “Rather than just hiring someone for a partner role, firms should look at the purpose behind it

Fact of fiction? The independent business partner is a CIMA programme that looks at the risks to the independence of the finance function. It seeks to identify best practice and aid organisations and accountants to deal with the challenges that are thrown at them by this transforming landscape.

It is supported by Barclay Meade – www.barclaymeade.com

– questioning and defining what will be expected of the person once on board and ensuring the candidate’s expectations are in line with the company’s needs.

Firms need to ask themselves questions such as ‘What do I really need from this hire?’ and ‘What is the long-term, strategic need for the business from the prospective team member?’

“At the heart of this transformation is a shift from being an adviser to having a level of responsibility to input into business decisions in an accountable manner – rather than restricting finance to the collation, recording and reporting of financial information. Finance professionals are increasingly expected to apply their expertise to high-end analysis in support of the decision-making process and to help define and implement strategy across the business.

“As a recruiter for 25 years in finance, I’ve seen an awful lot of people who have been put into the wrong role and promoted into the wrong role, and who want to go in a certain direction but clearly do not have the skill-set to go in that direction.”

qualified accountants to handle conflicts of interest or those difficult discussions that may be required with more senior colleagues? When placing this added accountability on their shoulders, the organisation has a responsibility to ensure the right skills, experience and support mechanisms are available to them.

Management accountants have always been able to provide independent, objective advice based on financial data.

As business partners they have an essential role in ensuring the sustainability of organisations. This involves making the right long-term decisions rather than selecting the most profitable short-term outcome.

Business partners can earn the trust of the decision-making team by using their analytical financial skills to filter out bad business ideas and draw up successful long-term solutions. However, their objectivity must be preserved. That will require the right structures, reward systems and training to be put in place.

All these ingredients will be essential if the transformation of the finance role is to work. n

What’s expected?

For more information about CIMA’s work on finance transformation visit www.cimaglobal.com/ transformation. CIMA’s resources and support material on ethics is available via www.cimaglobal.com/ethics

Recently, a finance recruitment organisation confirmed to CIMA that it was being asked to find newly qualified accountants for new business partner roles. Their clients expected these candidates to be quick learners, ambitious, more flexible to change and often have better communication skills than recruits for more traditional finance roles.

While these criteria would tick many of the boxes required of a good business partner, how prepared are these newly

Ana Barco Barco is a senior product specialist from CIMA and heads the development of various continuing professional development and research projects.

Photography: Getty Images

Finance professionals are increasingly expected to apply their expertise to high-end analysis and to help implement strategy across the business

finance transformation

57 Excellence in leadership | Issue 1, 2011

IN THE NEXT ISSUE..

Human capital development Valuing talent Generation Y How the next generation of finance talent views issues of pay, work-life balance, training and corporate reputation.

Future leaders We assess how the role of CFO is evolving from finance leadership to business leadership and expanding in more strategic directions.

The human side of M&A How should human capital be valued as part of an acquisition process?

The modern finance function How building a diverse team can help the finance function to fulfil its new roles and responsibilities, and meet corporate objectives.

Return on investment We examine whether investing in people improves customer satisfaction, boosts profits, drives innovation and aids product development. What are the costs and benefits of investing in people?

India’s war for talent Starting with low-cost contact centres, India’s outsourcing industry has taken over a huge range of core operations for global companies. How has it developed a pool of employees with the right skills?

Women in the boardroom Spain has had quotas for female board directors since 2007. UK companies have been set a voluntary target to achieve 25 per cent female representation on their boards by 2015. Are quotas the best solution?

Finance matters Locating in London Do the attractions of London outweigh the costs and challenges of setting up in the capital?

Outsourcing finance A look at the transformation of the finance service delivery mix to better meet organisational objectives.

University tie-ups How companies can collaborate with higher education institutions to attract talent and benefit from cutting-edge research.

Forensic forecasting What are the dos and don’ts of forecasting in an increasingly volatile world?

58 Excellence in leadership | Issue 1, 2011

DIRECTORY

Global contacts CIMA UK 26 Chapter Street, London SW1P 4NP Tel: +44 (0) 20 8849 2251 Email: cima.contact @cimaglobal.com www.cimaglobal.com

CIMA Australia Paul Turner: national manager Justine Mills: customer service manager Suite 1305, 109 Pitt Street, Sydney NSW 2000, Australia Tel: +61 (0)2 9376 9900 Email: sydney@cimaglobal.com CIMA Canada 36 Toronto Street, Suite 850 Toronto, Ontario M5C 2CS Tel: +1 905 553 0346 Email: members @cimacanada.org CIMA China 1508A Azia Center 1233 Lujiazui Ring Road P.R. China Tel: +86 (0) 21 61601558 Email: infochina @cimaglobal.com

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CIMA New Zealand 111 Cuba Mall, Wellington, New Zealand, 0800 CIMA NZ Tel: 00 64 (0) 48017132 Email: cima@cima.org.nz CIMA Pakistan No.201, 2nd Floor, Business Arcade, Plot No. 27-A, Block-6 PECHS, Shahra-e-faisal, Karachi, Pakistan Tel: +92 (0)21 34322387/89 Email: pakistan @cimaglobal.com

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