Excellence in Leadership - July 2013 by Chartered Institute of Management Accountants

Excellence in Leadership

Issue 2 | 2013 | ÂŁ12

Humphrey Singer, group finance director at Dixons Retail, on introducing a brand-new business model Trevor Dighton, former CFO at G4S, on implementing a crisis management plan

Excellence in Leadership

Sir Charlie Mayfield, chairman of the John Lewis Partnership, on the success of the employee-ownership model Jacek Levernes, VP of Hewlett-Packardâ&#x20AC;&#x2122;s business services in EMEA, on how finance drives strategy in his organisation Andrew Newman, CFO at Huawei, on growing a multi-billion-dollar business

Strategy and implementation

THE

S T RATE GY A N D IMPLEM E N TAT I O N ISSUE

ISSUE 2 2013

Tips from global business leaders on plotting and driving successful strategies

Excellence in Leadership | Issue 2, 2013

FOREWORD

Strategy and implementation

Cover image: Matt Murphy/Handsome Frank . This page, illustration: Masao Yamazaki/Dutch Uncle

t goes without saying that a robust and flexible model that accurately reflects the changing realities faced business model lies at the heart of an organisation’s by the organisation. success. But it is surprising how many different In the retail sector Humphrey Singer, group FD at definitions there are of business models when Dixons Retail, talks to us about how its strategy has companies come to report on them. CIMA recently succeeded where other high-street retailers have failed joined forces with PwC and the International (page 32). Meanwhile, Trevor Dighton, former FD of G4S Federation of Accountants to support greater explains how the company’s finance team helped to reporting consistency by providing a universally restore shareholder confidence after the company’s acceptable definition. This work was done as part of an much-publicised failure to provide sufficient security initiative by the International Integrated Reporting cover at last year’s Olympic Games (page 18). Council (IIRC) to create an integrated reporting The popularity of the well-established business framework – a subject I outlined in the previous issue. model of employee ownership is on the rise. In this issue Early on in the IIRC’s discussion about the framework, I interview Sir Charlie Mayfield, chairman of the John it was agreed that the business model should be one of Lewis Partnership – a highly successful employee-owned three central themes (the others being value creation and business that has stuck to its principles while also moving capitals) that will affect the future direction of reporting. with the times (page 14). He explains how the The emphasis on the business model as a reportable organisation’s finance professionals are essential business element reflects the IIRC’s view partners in helping to develop that one of the main starting strategy, drive growth, support ‘The finance function is playing decision-making and open the points for an investor’s analysis an increasingly influential role company’s eyes to potential risks should be the business model and how it relates to the in shaping, implementing and and opportunities. organisation’s strategy, governance, At a recent CIMA event in validating corporate strategy’ performance and prospects. London I was joined by HSBC’s In this issue we look at how group chief accounting officer, business models are developing in the fast-moving and Russell Picot, and Unilever’s CFO, Jean Marc Huët, to volatile environment of the global economic arena. mark the start of the IIRC’s consultation for its draft We also analyse the ways in which both new and integrated reporting framework. On page 44 we outline established enterprises have weathered economic storms the discussions that took place and why integrated to plan and implement their strategies successfully. reporting is the next step in the development of reporting. What’s clear from the many business leaders we have I very much hope that this issue of Excellence in interviewed is that the finance function is playing an Leadership will stimulate debate on how organisations increasingly influential role in shaping, implementing can develop winning formulas for business models and and validating corporate strategy. To chart this their strategic implementation in an environment where development, we start by talking to three senior finance change is the new normal. professionals from very different sectors – advertising, cloud storage and business consulting – to find out what key strategic challenges they are helping to overcome Charles Tilley, (page 8). Andy Blackstone, FD at M&C Saatchi, discusses chief executive, the constant tension between how much is allocated to CIMA growing the business and how much is booked as profit. Graeme Mackenzie, FD at Pulsant, explains his quest to generate clearer, more concise forecasts. And Kevin Booth, partner at Alexander Sloan, describes how his team is concentrating on pulling data into a business

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

Excellence in Leadership | Issue 2, 2013

CONTENTS

Effective IR How to produce a clear and informative integrated report p40 3 Foreword 6 Vital statistics 8 The new strategy owners Andy Blackstone, FD, M&C Saatchi; Graeme Mackenzie, FD, Pulsant; and Kevin Booth, partner, Alexander Sloan, on the finance function’s role in shaping, implementing and checking the soundness of business strategy. 14 The big interview Charles Tilley, CEO of CIMA, asks Sir Charlie Mayfield, chairman of the John Lewis Partnership, how he has steered the retailer through tough trading conditions. 18 Crisis response Trevor Dighton was CFO of security giant G4S when the business was thrust into the spotlight for failing to meet its

Where the buck stops How the finance function’s new role includes checking the soundness of strategy p8 obligations to provide security staff for the 2012 Olympic Games. He recalls how finance helped to steady the ship. 22 Shared success How the performance of finance shared services is managed and improved at energy giant Shell. 28 Brave new world Neil Hodge identifies a number of businesses that have successfully adopted online business models – and the challenges they’ve faced. 32 High-street success Group FD Humphrey Singer explains how Dixons Retail overhauled its business plan in the wake of the digital revolution – and saw off its rivals in the process.

36 Growing influence VP Jacek Levernes on how finance drives strategy and implementation in HewlettPackard’s global business services across EMEA. 40 How to report it right In light of the publication of the IIRC’s consultation draft of the international IR framework, what are the key ingredients for a successful integrated report? 44 Why IR is important Key messages from a group of senior finance professionals on the value of integrated reporting to businesses around the world. 46 Rapid rise Andrew Newman, CFO of Chinese telecoms giant

Leading the charge How finance drove Dixons Retail’s new business strategy p32 Huawei, explains how the business grew from a $6,000 start-up to a multi-billiondollar concern. 50 Stating its case Huawei defends its security record amid a political row. 52 Employee ownership Why the employee-owned business model is proving so successful – and what global companies can learn from it. 58 Tools of our trade CIMA and the AICPA have produced a resource entitled Essential Tools for Management Accountants. CIMA’s Rebecca McCaffry explains why. 61 Get involved with CIMA 63 CIMA events 65 Next issue 66 CIMA directory

Editorial advisory board Malinga Arsakularatne chief financial officer, Hemas Holdings

Bogi Nils Bogason chief financial officer, Icelandair Group

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

Jeff van der Eems chief financial officer, United Biscuits

David Blackwood group finance director, Yule Catto & Co

Kai Peters chief executive, Ashridge Business School

Arul Sivagananathan managing director, Hayleys BSI

Jennice Zhu finance director, Unilever China

6 Excellence in Leadership | Issue 2, 2013

VITAL STATISTICS Adopting new business models When was the last time that your organisation had to adopt an entirely new business model?

11% 54% 26% 1 to 5 years ago

Longer than 5 years

It’s happening right now

Never

CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com CIMA contact: Learning and development specialist Gillian Butler Email: gillian.butler @cimaglobal.com

Measuring success The proportion of firms that say they make it regular practice to go back and compare their results against the performance forecasts produced for each of their business units in their three- to-five-year strategic plans. Source: Mondaq, 2013.

15%

Integrated reporting Research conducted by CIMA, the International Federation of Accountants (IFAC) and PwC at the request of the International Integrated Reporting Council shows that very few big companies clearly articulate their business models — ie, what they do, what they rely on and what sets them apart from the competition. 77% of the FTSE 350 mention their business models in their accounts

Source: The Build Network, 2013. 40% provide insightful detail about those models

Effective implementation? Strategic planning is crucial to profitable business growth, but companies typically realise only about 63 per cent of their business strategy’s potential financial value because of defects and breakdowns in strategic planning and implementation. Source: Mondaq, 2013.

8% integrate business-model reporting with strategy and business risks 20%

40%

60%

80%

100%

Source: CIMA, IFAC, PwC, 2013.

37%

of potential value lost

The proportion of chief executives who agree that sustainability is an important factor in strategy and operations for their businesses.

Excellence in Leadership is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ Tel: 020 7775 7775 Group editor Jon Watkins Group art director Simon Campbell Junior designer Josh Farley Managing editor Darren Barrett Technical editor Neil Cole Chief sub editor Steve McCubbin Deputy chief sub Christina Ryder Deputy picture editor Louise Fenerci Picture researcher Alex Ridley Editorial director Peter Dean Managing director Jessica Gibson Creative director Michael Booth Production manager Mike Doukanaris Group publishing director Rachael Stilwell Commercial director Hilton Young Advertising manager Lisa Govier Email: lisa.govier @seven.co.uk Tel: 020 7775 5578 Chief executive Sean King Chairman Tim Trotter © Seven © CIMA Cover artwork Matt Murphy

81%

Source: “Drivers of long-term business value”, Deloitte, 2012.

The products and services advertised in Excellence in Leadership are not necessarily endorsed by or connected in any way with CIMA. The editorial opinions expressed in the publication are those of 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 any errors or omissions.

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 Rhapsody. Printed in the UK by Wyndeham Press Group.

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ROLE The finance function is playing an increasingly influential part in shaping, implementing and checking the soundness of corporate strategy in a range of industries. Anthony Harrington asks senior finance professionals at an advertising agency, a cloud storage provider and a business consultancy to explain how they approach the task

10 Excellence in Leadership | Issue 2, 2013

ANDY BLACKSTONE

Andy Blackstone

Finance director, M&C Saatchi The key to the success of a business whose value depends almost entirely on the skills of its people lies in the fundamental philosophy articulated by the board, according to Andy Blackstone. This guides the strategies and policies of his organisation and can be summed up as the belief that individual entrepreneurs are fully motivated only when they can control their own destiny. This means that, when the company acquires a creative team, the policy is to empower that group of creatives to do what they are good at – namely: creating a good business, producing great work and making a profit. M&C Saatchi is unique in that it operates as a federation of agency businesses, ranging from start-ups to long-established teams. The company has 29 offices spread across 22 countries. So what metrics can an FD use to monitor progress – particularly since one of the maxims of the company is that it is “designed to be allergic to bureaucracy”? “The key is to use feedback from clients, as well as measurements such as the win or loss rate of a particular team,” Blackstone says. “For local reasons some companies are going to do very well in a given year and some are not.” The firm’s Japanese offices, for instance, saw a decline in business after the earthquake of March 2011, but less drastic cyclical changes also take effect from region to region. All these factors must be accounted for when evaluating the group’s performance. How does M&C Saatchi seek out new acquisition opportunities and, having found them, how does it model a new team of creatives? “We find our opportunities in two ways. First, you stay in close touch with the market and with your network of contacts, so you have a good understanding of who’s out there. Second, there are plenty of good consultants whom you can ask to do the research and identify good prospects,” says Blackstone, who adds that, once a new office has been lined up, the actual modelling of costs and revenues is relatively straightforward. The executives in the new

team are best placed to make projections of expected revenues, while the office costs incurred by a team of creatives are well understood. “At the group level you know that a new office is going to cost a certain amount and you check that your expenditure forecasts will cover this. There is always a tension between how much money you opt to spend on growing the business and how much you book as profit. That is a difficult strategy decision and a constant challenge for a board to resolve – not only for our firm, but for any growth business,” Blackstone says. “You are trying to work out where the best place to invest is and which people you are going to invest in, because it’s the people who achieve your growth for you.” FDs often get closely involved in determining a reasonable bid for an acquisition target. When the target is a business that depends greatly on the skills of its people, this process is rather different from what it would be with a manufacturing firm, for instance. “Ideally, you are trying to spot people who have been overlooked for reward by the market but who are fantastic. Here you are often looking at the next generation of creative people – those who have yet to make their mark,” he says. “Another part of the process is to monitor the kinds of clients that an office is winning. There is no point in having a great creative team that’s getting bogged down in doing noncreative work for them.” M&C Saatchi does much of its business in the digital space. One whole floor of the group’s sevenstorey London office is full of programmers, rather than people who dream up advertising and branding ideas. Getting the right mix of people doing the right jobs is an operational responsibility, Blackstone says, but it will show up in the numbers if it is not being pursued properly and is one of the factors that an FD working with creative teams must bear in mind. “We run a decentralised finance operation, with monthly reporting into the centre and regular face-to-face conversations with our offices around the world,” he says. “Spreadsheets are fine, but the key is meeting people and keeping in touch. Spreadsheets alone are dangerous, because the assumptions that underpin them may well change in the real world.” »

Excellence in Leadership | Issue 2, 2013

GRAEME MACKENZIE

Graeme Mackenzie

Finance director, Pulsant Any FD lucky (or astute) enough to find themselves in an industry segment that’s growing at between 15 and 20 per cent a year, while the rest of the market grows at 0.05 per cent, will undoubtedly be content with their business strategy. But Graeme Mackenzie, of managed hosting provider Pulsant, stresses that his job still provides plenty of challenges. “Each year we have a large capital expenditure on expanding and fitting out our data centre estate, plus a significant amount of spending on the computer infrastructure that will allow us to increase our capacity and deliver the next generation of cloud services,” he says. “Last year we spent £8m fitting out our data centre estate and £4m on cloud computing infrastructure and customer equipment. This year we are budgeting for a total outlay on data centres and computer equipment of about £8m. All this has to be spent before we generate additional revenues from the extra capacity, so that is a delicate balancing act.” It was a lot more delicate two years ago, when Pulsant’s annual income was £20m. Now that the firm turns over more than twice that amount, such big capex projects are relatively more comfortable. There is some irony in the fact that the operational flexibility that makes cloud computing so attractive to companies – because it allows them to switch from a capex model to an operational expenditure model, which is far more tax efficient – is not available to the owner of the assets. By way of contrast, the FD of an IT services company that rents infrastructure and data centre space from Pulsant to provide cloud-based applications could claim the outlay against tax as an operational expense. When it comes to staffing, Mackenzie’s job is easier. About two-thirds of Pulsant’s employees are the responsibility of the operations director, whose task is to specify how many people he thinks he is going to need when a cloud computing service or a new data centre is under consideration. “It’s not for me to forecast and budget for that side of things, but it is my task to incorporate it into the overall company forecast and ensure that it hangs together with the revenues anticipated from the new service,” Mackenzie says. “The point is that our whole operation flows from the strategy generated by the board down to the individual directors, who turn that into a forecast of revenue and expenditure. We are one of the larger data centre players in the UK – with ten

data centres, including three in Scotland – so it is not a simple exercise to model the business.” Pulsant secured private-equity backing in 2010 and has since taken over three companies. FDs always play a key role in such deals, but Mackenzie stresses that the whole senior team at his company has become skilled at integrating a newly acquired business. “We have our own formalised approach and we pretty much stick to our checklist when we acquire and integrate a company. We bring in an external project manager and all the directors have calls with the project manager to ensure that the whole exercise is carried through with a good deal of rigour,” he says. “We are very much a unitary business – a single operation across multiple data centres – which is one of our core strengths.” The system focuses on forecasts, giving Mackenzie and the board a view 12 months out of what is likely to happen to expenditure and income. “About 95 per cent of our revenues are recurring by the very nature of the service we provide, so I have a very good view of future revenue streams, while our business gears very well indeed,” he says. “A new data centre will take a long time to become profitable, but after that it will generate a good deal of revenue, much of which goes straight to the bottom line. The challenge for the company is to develop new business from the latest data centre investment and to get that operation to where it’s increasing our profitability.” To do this means selling Pulsant’s services on a sufficient scale to generate significant extra revenue. Mackenzie’s team produces monthly management reports for directors and senior managers, showing all the KPIs. But he emphasises that most of the effort in the monthly management reports goes on providing a view of the future. “Part of my team is involved with historic numbers and, of course, you want to be completely rigorous and accurate with those – you don’t want any surprises. But the past is the past, so we put a great deal of our effort into getting the forecasting right.” Mackenzie points out that, when it comes to reporting on the monthly results, how the story is told is almost as important as the story itself. If you bury the directors in detail, they will struggle to see the picture that most concerns them, so highlighting the key figures in a plain and simple way in an executive summary at the start of the report is always important. “When you’ve run your forecast, you want to show the key things that are likely to affect management,” he says. “That’s why I spend a lot of my time thinking about what is going to make things clearer for my readers.”

Excellence in Leadership | Issue 2, 2013

KEVIN BOOTH

Kevin Booth

Partner, Alexander Sloan For Kevin Booth, financial models tend to be about helping a client of his eight-partner firm of consultants to evaluate the implementation of their general business strategy or a particular project. “There are good tools out there that can help you to do this, such as Sage WinForecast, which is an excellent modelling tool for basic forecasts. But, because it runs off a database, it can be a bit inflexible with regard to how you structure some of the what-if analysis. So I tend to prefer to work with Microsoft Excel for more complicated scenarios,” says Booth, although he concedes that setting up a complex model in Excel can take time and, with time being chargeable, this option wouldn’t be cost-effective for a client in many cases. A good financial model should include a cash flow projection, a P&L projection and a balance sheet. “These interact, of course, but they are very different things and you need all three. I often see clients treating a profit forecast as if it were a cash flow statement,” Booth says. “This is a crucial mistake and can be fatal for the business. I have seen firms with a good profit forecast, based on sound assumptions, that still failed because the cash side of the business was not managed closely enough.” The problem with cash, obviously, is that you are at the mercy of your creditors the moment it runs out. But having a grasp of profit is equally important in the medium term, since unless a business is either generating a profit or can see its way to a sustainable profit, it will be going out of business anyway. So any evaluation of business strategy has to consider both

dimensions – cash and profit – while the balance sheet shows at a glance what the business has by way of assets and liabilities. “If you are going to have a comprehensive plan for your business, you need it to cover all of these factors,” Booth says. “The make and break issues are critical, but it is also vital to present a credible model to a potential funder. They want to see sufficient detail to show them that the owner, director or the board has a real grasp of things and has thought through the challenges. The funder will take comfort from seeing that management has a proper view of the issues involved.” He adds that, because costs are often very much easier to predict than sales, managers need to achieve

‘I often see clients treating a profit forecast as if it were a cash flow statement. This is a crucial mistake and can be fatal for a business’ a level of confidence that the sales projections are robust and not too optimistic. “Communication inside the business is key. Any business of any scale has many moving parts, from sales teams to production, all feeding data into the model. The way the finance department pulls everything together and reflects it in the model is vital. If there are surprises and critical changes to assumptions, you need to see that these feed through into the model in a timely fashion. One of the biggest dangers with models is that they fail to reflect the changing realities faced by the business.”

The

PEOPLE BUSINESS THE IN-DEPTH INTERVIEW

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The UK has few medium-sized firms compared with nations such as Germany, whose substantial Mittelstand drives the economy. It’s widely thought that one way to expand Britain’s mid-market is for more companies to adopt an employee-ownership model. CIMA’s chief executive, Charles Tilley, asks Sir Charlie Mayfield, chairman of the John Lewis Partnership – a thriving employee-owned business – to share his recipe for success

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Excellence in Leadership | Issue 2, 2013

he John Lewis Partnership (JLP) is a visionary organisation. It is a great example of how to do business successfully, boldly putting the happiness of employees at the centre of everything it does. All 84,700 workers at the retail powerhouse are partners, jointly owning 39 John Lewis stores, an online and catalogue business, 290 Waitrose supermarkets and even a production unit and farm. JLP, which was named multi-channel retailer of the year at the Oracle Retail Week Awards in March, is arguably the most successful case of an employeeowned partnership – and the employees certainly do share the rewards in a business that posted sales of £9.54bn last year. Customer trust underpins this success. John Lewis’s famous slogan is “never knowingly undersold”, which highlights its commitment to price matching. JLP offers an apprenticeship programme that creates jobs, sustainable career paths and a genuine alternative to university for young people – increasingly important as the costs of higher education continue to spiral. The programme guarantees that all who enter it will secure a job once their training is complete. Sir Charlie Mayfield became JLP’s fifth chairman in the spring of 2007. He’d joined the organisation in 2000 as head of business development and was appointed to the board as development director only a year later, winning plaudits for developing the partnership’s online strategy before becoming managing director of John Lewis stores in January 2005. Mayfield also chairs the UK Commission for Employment and Skills and in June 2011 he became president of the Employee Ownership Association, a body that represents more than 150 employee-owned companies in the UK.

FOUR TO FOLLOW

Mayfield’s tips for long-term success in business include the following: • Value and reward your people. “Employees are the last great source of competitive advantage, so they must be at the centre of everything a business does,” he says. “We at JLP never underestimate the value of relationships, advice and service. That is at the heart of our employee-ownership model. It enables us to build stronger links with high-quality suppliers, such as Heston Blumenthal, as they know that it will be a long-term association benefiting all involved. The employee-ownership model fosters long-term planning and accountability. We believe that the responsibility of ownership is to nurture your resources, rather than to look to sell your assets. Our model ensures that we have committed, motivated people who strive for continuous improvement, and

THE IN-DEPTH INTERVIEW we ensure they are well rewarded. While the fortunes of plcs may fluctuate, JLP’s growth has been steady.” • Understand and take advantage of new technology. “The growth of the web has changed people’s lives and it’s had a massive impact on business models. Like the industrial revolution before it, the IT revolution has dramatically altered how business is done. Traditionally, retailers were constrained by the size of their premises, but now they have more options and can offer consumers an unlimited choice. We have recognised how service is transforming and have put the appropriate emphasis on our online platforms.” • Innovation is the best route to success. “What can you offer that others can’t? This is the key question that all business leaders should ask. Innovation that supports the customer experience is what really adds value. We’re proud of the range of products we bring to market and we consistently review our research and development to keep us ahead of the game.” • Make full use of your finance function. “The best companies will have the most involved finance teams. We’ve seen a steady shift from a department concerned with simply adding up the numbers towards a more engaged finance function that’s helping to develop strategy. Our finance people are essential business partners, driving growth and supporting decisionmaking. A key part of the role is opening people’s eyes to potential risks and opportunities.” Mayfield’s comments are very much in tune with CGMA Magazine’s findings relating to risk and innovation (bit.ly/CGMAriskInnovation), which are two sides of the same coin. The key challenge is for companies to promote a culture of innovation and renewals while bringing ideas to market efficiently and managing the risks associated with innovation. The real impact of technology is rooted in where it disrupts business models. Companies must understand how their models are being affected and what this means for the competition they will face. JLP is a prime example of an organisation that has successfully adapted its business model in order to stay ahead and ensure its success in the long term. When people talk about what influences property values, the adage is that the most important factors are “location, location, location”. When it comes to business, it should be “people, people, people”. CGMA Magazine’s survey on the talent pipeline has shown that, while most companies understand the importance of human capital, they do not have the right systems, processes and information in place to manage talent effectively. This needs to change. Management accountants can support the change by analysing both financial and non-financial data and then putting it to good use – for instance, by looking ahead to identify the skills that will be needed in years to come and ensuring that current recruitment and development programmes are fit for purpose.

CHARLIE MAYFIELD Having served as a captain in the Scots Guards, Mayfield joined SmithKline Beecham in 1992 as a marketing manager for Lucozade. After a four-year stint at the McKinsey consultancy, he joined JLP in 2000 as head of business development. He became managing director of John Lewis stores in 2005 and was appointed chairman of JLP two years later.

How to survive an

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Olympic

-sized corporate crisis

Last July G4S, the worldâ&#x20AC;&#x2122;s biggest security company, failed to supply enough guards for London 2012 â&#x20AC;&#x201C; plunging the firm into the worst crisis in its history. Its CFO at the time, Trevor Dighton, tells Nick Huber how he handled the situation

Excellence in Leadership | Issue 2, 2013

n the reception area of G4S’s headquarters near Gatwick airport, symbols of the company’s association with the 2012 Olympics are emblazoned across the walls. In one frame, Lord Coe, chairman of the organising committee for the games, thanks the firm for its contribution in helping to run the world’s greatest sporting event. Given that G4S’s most notable contribution was its failure to provide enough security guards – forcing the government to call in military and police personnel to meet the shortfall – it seems safe to assume that some of Coe’s private comments about G4S weren’t anything that the company would want to shout about. Its £284m contract, which turned into a loss of £70m, should have been a marketing dream. Instead, it was a public relations disaster that shook the FTSE-100 company to its core.

IN THE EYE OF THE STORM

STATS

£70M

the cost G4S put on its doomed Olympics contract. Source: Ernst & Young.

The story surfaced last July, only two weeks before the start of the 16-day extravaganza. G4S admitted to the organisers that it would be unable to supply the 10,500 or so private security guards agreed under its contract. In the end the company, which employs 657,000 people and operates in more than 125 countries, was able to provide only about 8,500 security personnel. The news of its failure soon went global. Some politicians said that the problematic contract was proof that the government could not always rely on the private sector. G4S’s share price fell by about 20 per cent that month. The company’s chief executive, Nick Buckles, faced calls to quit. But he held on in 2012, although in September two directors did resign. By early this year, G4S’s share price recovered to more than it was before the announcement about its Olympic problems. The longer-term damage to its reputation is harder to gauge, although fears that the London 2012 fiasco would mean that G4S would not win future government contracts don’t seem to have materialised. Trevor Dighton was the company’s CFO at the time of the crisis. In his last major interview before stepping down from the job at the end of April, he explains how it felt to be in the eye of the storm

A career in finance Trevor Dighton’s working life has probably been more varied than those of most of his counterparts working in multinational companies. He left school at 16 and his early jobs included construction work and grave digging. Dighton then took a diploma in business studies at college and began studying for the CIMA qualification. After a stint at an electronic components factory he found a job as an internal auditor with Anglo American in Zambia, where he worked at a copper mine. “You weren’t even told what the job was until you got there,” he recalls. After five years in Papua New Guinea working for KPMG, he returned to the UK to join BET, an industrial group that is now part of Rentokil. Two years after joining Securicor’s vehicle services division in 1995, Dighton was appointed finance director of its security division. He became its deputy group FD in 2001 and was appointed Securicor’s group FD in 2002. In 2004 Securicor merged with Group 4 Falck’s security businesses to form Group 4 Securicor. Dighton was appointed CFO in July of that year.

and the role he played in helping to calm employees, clients and investors. Dighton was in the US on business with Buckles when they were told in a series of phone calls that the company would be unable to fulfil its contract. “In the space of about a week we went from ‘we might have a problem’ to ‘we will definitely have a problem’,” he recalls. Putting aside his initial feelings of puzzlement, anger and disappointment, Dighton put the contingency plan in motion. First he phoned the company’s main investors to reassure them that G4S had the contract problem under control and that this would not affect the wider business. “We contacted the top 20 investors in the first three days,” says Dighton, who has a calm, affable manner.

Excellence in Leadership | Issue 2, 2013

“We told them that we were on the case, the contract was a one-off and [its value] was small compared with that of the total group. “We also took them through our crisis management plan.” During the crisis Buckles and most of the other directors on the executive board were based at Canary Wharf – the main site for the Olympics – but Dighton spent the next few weeks flying around the world, talking to employees and clients, particularly in Europe and America. They needed reassurance that their services would not be affected by G4S’s problems in covering London 2012. Dighton’s main message was that, although the company was extremely disappointed by its failure to fulfil its obligations under the Olympic contract, this one was very different from other security contracts. Clients were understanding and supportive, he recalls. The visits also gave Dighton the chance to correct what he says were “massive amounts of inaccuracies” in the media’s coverage. He was responsible for ensuring that the rest of the business continued as normal, too. As the situation progressed, did he have any sleepless nights? Was he worried about losing his job? “I don’t usually suffer from stress,” he says, but admits that there was a time when he thought the Olympics contract was going to have more of an adverse impact on the brand than it did. Part of the reason why the Olympics went so wrong for G4S was the sheer scale of the project. Organisational challenges included recruiting and training thousands of guards to work shifts at about 100 sites across the country. “We had to make such difficult assumptions about the number of people and timing of people to put in place for an eight-week period,” Dighton says. “We had to create a massive £200m-turnover company that started exactly at the right time and lasted for eight weeks and then finished. It’s just very difficult to get your head round.” People would tell G4S that they wanted to work on the contract and then not turn up, he adds. G4S’s contracts for other sporting events, such as Wimbledon (it supplies security staff for the tennis tournament), are small compared with the Olympics.

If the contract was clearly going to be such a logistical challenge, why did the firm accept it? “We were really the only company that was capable of fulfilling the contract. I’m not saying that we were obliged to do it – we could have said no,” Dighton says. “We should have been able to do it.”

LESSONS LEARNT

Dighton says that before the Olympics the company believed that its risk-assessment procedures were “pretty robust”. After the games G4S commissioned PwC to review the project in an effort to learn from the experience. G4S is recruiting a chief operating officer who will be responsible for ensuring that large contracts go through a “more forensic review”, he says. Life goes on – Dighton and G4S are understandably keen to put London 2012 behind them. Was it at least satisfying to know that he helped to steer a global business through an Olympian crisis? “The self-fulfilment element of work is all about dealing with difficult issues and not sailing along,” says Dighton – before adding with a rueful laugh: “I’m not saying that we ever want to go through that experience again.”

STATS G4S one year on Twelve months after the Olympics, G4S is undergoing a series of changes. CEO Nick Buckles stepped down on 31 May to be replaced by the CFO, Ashley Almanza. Almanza had only been appointed CFO on 1 May. G4S said it had sought someone with the skills to step up to the role of CEO when appointing him.

60% the fall in first-half profits experienced by the firm in 2012. Source: G4S.

Excellence in Leadership | Issue 2, 2013

Driving performance

Corbis

In the latest in a series of articles exploring the role of finance at Shell, the shared-service centre (SSC) research team at Loughborough University ask George Connell, vice-president of strategy, finance operations, at Shell, how the performance of finance shared services is managed and improved How does the company’s finance operation manage its performance? The answer has five perspectives. First, from a conventional, hierarchical perspective, there’s a process that operates throughout Shell. From top to bottom, everyone has financial and non-financial objectives that they agree with their line manager at the start of the fiscal year. These follow through into specific targets and individual development plans (IDPs). These enable staff to identify development needs and training opportunities for the year. Taking myself as an example, I set my deliverables and agree with my line manager how they will be measured. If it’s a new relationship, it’s probably going to mean more of a frequent discussion – maybe monthly. In my case, I’ve been working with my line manager for many years, so regular phone calls and meetings take place to discuss performance. But we also have formal, face-to-face mid-year and year-end reviews. Overall, there’s a very established process for performance reviews. Based on my targets and achievements I’m given an individual performance rating, which is then assessed

as a relative performance factor across a pool of managers with similar grades and skills. The big challenge for Shell is to ensure that the evaluation process discriminates sufficiently – we don’t want to get too many ratings in the middle and hence a bell curve that’s too steep. As with any such scheme, we have to be vigilant against becoming too cosy and ensure that we really challenge the performance measures and targets. On the other hand, if objectives have been set realistically and there is proper support through the IDPs featuring regular discussions of progress (and problems), one wouldn’t expect too many surprises at the end of the year. Again, it’s about challenge and change, but also about good planning and performance. This gives us a level of predictability that’s helpful. It’s about balance. Is there a sense of evolution in both the overall SSC journey and day-to-day operations? Yes, the whole process is intended to be dynamic and we can add to that as we go along. The world doesn’t stand still and neither can the work of Shell »

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‘We have taken the best bits from what tends to be presented as two approaches and fused them into a method that works for us’

finance. Some of my objectives will be consistent from year to year, but some new initiatives will occur. These will need new success criteria to be established – and thus new performance measures. You seem to be describing a mix of management by objectives and the balanced scorecard. Yes, we have taken the best bits from what tend to be presented as two distinct approaches and fused them into a method that works for us. Tell us about the second perspective. We have a framework of behavioural expectations embodied across a number of codes that everyone at the company is expected to follow. First and foremost of these is safety, which is non-negotiable. Then there are the Shell business principles and a code of conduct, which covers aspects of personal behaviour, including business integrity, ethics and general compliance. Next are the five behaviours that SSC staff are expected to show from day to day – namely: external focus, commercial mindset, delivery, speed and simplicity. When everyone is demonstrating these behaviours daily, it allows Shell to drive its business forward in an ethical and sustainable way. We evaluate personal performance on how successfully our employees have enacted these behaviours throughout the year. What about the third perspective? Shell’s ambition is to develop the best leaders. This is enabled by our leadership attributes framework, which includes elements of authenticity, growth, collaboration and performance. And the fourth perspective? We continually benchmark our performance against our competitors and the wider industry peer group. We do this in a number of ways. First, we are benchmarked by external consultants who can come in and assess where we stand. This gives us a helpful

guide to what we need to achieve. Also, the CIMALoughborough Shared Service Centre Forum events have provided a fantastic platform for us to listen in depth to what others in the SSC space are doing and how they have driven their own businesses towards success. The opportunity to ask questions – and thereby get a real insight – has been invaluable. And the fifth? We measure individual processes and component activities at an operational level in lots of different ways – for example, through key performance indicators, targets, project milestones and so on. The first perspective, concerning line management control, sounds straightforward, but then you have these other four perspectives. Although these look rational in themselves, taken all together they seem to create scope for confusion. How do you explain this complexlooking picture to employees? The delivery of hard targets is important – ie, the “what”. But it is also important that we understand how we deliver our performance and that this is done in a safe, sustainable, resilient environment that’s underpinned by our core values, including professional and social behaviours. OK, but do these feed into the strategic key performance indicators? Well, they should and they do, but it’s often difficult to identify a definitive cause-and-effect relationship between activities at the bottom of the organisation and the results at the top of it. But we thought you said that everything flowed from top to bottom. In one sense it does. But that can, at best, deliver a level of performance against only one plan at a certain time – and don’t forget that the budget is already out of date when the company’s fiscal year starts. Our business is changing; new technology

Excellence in Leadership | Issue 2, 2013

‘Giving people the power to make decisions creates a strong sense that they have a stake in what the company is trying to do’

and working practices are evolving; and we continuously need to challenge everything to keep up with our competition. In other words, the performance measures that you’re working to are dynamic. Yes. But, to clarify this: it’s the way that we interpret and react to performance measures that’s dynamic. (That doesn’t mean to say that we don’t create new measures and retire old measures.) Will they necessarily relate to the organisation’s top-down strategic targets? I think the best way to answer this question is to say that, given all the challenges of change and continuous improvement, we use an array of measures in a flexible manner to deliver a coherent strategic response. Remember that a lot of change is conceived and enacted from the bottom – hence our empowered approach. How do you measure the performance of finance processes in the SSC? The first stage is to benchmark our performance externally from perspectives including effectiveness, efficiency, compliance and strategic measures. We then establish our metrics for the processes and functions that we operate. We also have to make conscious choices on where we want to focus – arguably there is no organisation that operates at world-class performance levels in all that it does. So we need to focus selectively, which may include some conscious practical trade-offs. We believe in empowerment and work to make this a part of our people’s working lives. Giving people the power to make decisions creates a strong sense that they have a stake in what the company is trying to do. As a result they are driven to perform better. Again, we encourage the teams not only to focus on the “what” but also to openly discuss the “how”.

This includes conversations about health and safety, resilience and sustainability – all with an element of fun and social interaction. We encourage our colleagues to speak their minds freely – this is one of the key measures for team leaders in our annual people survey. We really do care for our people and I think this will continue to be a strong differentiator in our ambition to attract and retain the best talent. To what extent do you believe that shared services can be applied in Shell? When one evolves to the mature state that we are now in, it’s a question not only of which activities we can transfer to the centres but also of what we should transfer, based on having a sustainable model that incorporates an SSC network and retained finance population in our global environment. Shell uses the phrase “performance management in a dynamic environment”. What exactly do you mean by this? It’s a recognition that we operate in a globally connected and dynamic environment that is substantially different from what it was a few years back. The physical footprint of the finance function has changed and technology has enabled this. I would expect this pace of change to continue, so we need to constantly challenge how we perform and develop as individuals and teams.

Ian Herbert, FCMA, is deputy director of the Centre for Global Sourcing and Services at the School of Business and Economics, Loughborough University, where Lin Fitzgerald, ACMA, is professor of management accounting. This series of articles is supported by CIMA’s general charitable trust.

GEORGE CONNELL

is Shell’s vicepresident of strategy, finance operations, and its Glasgow SSC lead. Connell has been with the energy giant for 15 years. He has an MBA in accounting and finance from the University of Glasgow and holds the CGMA designation.

Gallery Stock, Getty Images

Brave new world

Excellence in Leadership | Issue 2, 2013

Running a profitable internet enterprise is easier said than done for content providers in an arena where users aren’t used to paying for what they consume. Neil Hodge examines a number of firms that are developing successful online business models – and considers how finance is playing a key role

any industries have complained that it’s virtually impossible for them to make money on the internet, because consumers expect web-based content and services to be free. Yet a number of new-tech companies in particular have made providing a free online service a selling point. They have attracted millions of users as a result and have lured some of these into buying extra products. Dylan Smith, co-founder and CFO of Box.com, which launched a web-based data-sharing service in 2006 and is planning a $1bn-plus flotation next year, says that the company uses a “freemium” model, whereby the basic service it provides is free, but users have to pay to use the extra functions or services on offer. It has 15 million users in total, including 140,000 businesses and more than 450 companies in the Fortune 500.

“Our view was that we needed to look at what we did uniquely well, while ensuring that as many people as possible realised that we offered the best service and that they would become regular adopters,” Smith explains. “We have a situation now where 97 per cent of our customers are using our services for free. In effect, the other 3 per cent of users that pay for premium services are funding the business. This has its risks, but the point is that, if you focus on delivering your product the best way you can and make it easy for customers to use, then you’ll retain them and bring in more people who will use it and pay for services.”

THE SHARING ECONOMY

Several organisations have hit on the idea of tying consumers into short-term subscriptions for premium content and services as a way of retaining their custom and increasing the certainty of cash flow. The so-called subscription (or sharing)

economy has spawned a generation of firms that are trying to keep up with a huge influx of new customers and different operating models. Subs-based businesses such as Netflix, WhipCar and Spotify have been leading the charge. Also, a resurgence in the media, led by publishers such as News International and the Financial Times, has been driven by a growing acceptance among consumers of the subscription model. Tien Tzuo, founder and CEO of Zuora – a software-as-a-service company that was set up as an online handler of customer orders and payments for firms that have a subs-based revenue model – says that it should not come as a surprise that more and more media groups are moving much of their content behind a pay-wall after the Wall Street Journal led the way back in 1997. “Good journalism requires money and the advertisement model is not working any more. Advertising revenue from print publishing has not been this low »

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CASE STUDY: PHOTOBOX GROUP Alan Burns is CFO at PhotoBox Group, which owns two distinct online brands. One of them, PhotoBox, is a digital photo service with more than 22 million users. This allows customers to upload pictures to its website to produce a real photo album that’s then posted back to them. The other is Moonpig, the UK’s leading online card and event gift retailer, which the group acquired in 2011. Both brands were launched despite the continuing popularity of the traditional method of buying both cards and photo albums from high-street retailers – and they have since transformed the market. Both businesses are growing, while their bricks-and-mortar counterparts are finding the high street an increasingly tough trading environment. Burns attributes the success of both brands to their ability to embrace new technology. For example, Moonpig has developed a mobile application enabling users to make their own cards and buy gifts. More than one million people have downloaded the app since it was released. “There has been a clear indication from customers that they want to transact online,” he says. “Those businesses that respond to this demand are the ones that are going to be successful.” Yet, despite the success of the brands online, Burns believes that the domestic markets they are based in can be exploited further – and that their business models do not need to be altered with an overseas expansion. (With the exception of a small operation it recently launched in Australia, Moonpig operates exclusively in the UK.) He estimates that the single card market in the UK is worth at least £1.2bn a year and that only about 4 per cent of this is generated online. “It is all about knowing your business and justifying the case for targeting foreign markets,” he says. “At the moment, the figures do not stand up for us to try to launch in countries such as the US. We can more effectively expand here than we could anywhere else.”

since the 1950s, so publishers need other sources of income to fill the gap,” Tzuo says. “Readers have proved they’ll always pay for quality writing. Newspapers must realise that readers are their real customers, not advertisers, and that the only long-term way to dig themselves out of their failing business model is to build and monetise relationships with their readers. Different readers have different needs, which means that the papers need to design bundles that give readers choice.” Tzuo believes that the newspaper industry needs to move beyond simple pay-walls and enter the “pay-wall 2.0” era, which is all about building relationships with customers, encouraging their loyalty and offering them product options, both free and chargeable, that make sense. This entails using flexible, tiered and targeted pricing, while using the right metrics to optimise customer relationships. “The days of filing financial reports describing turnover, assets and debts are over – this is no longer descriptive enough,” he says. “Now we need to know about retention levels and innovation. In the old world you thought of yourself as a product company and the goal was to ship as many units as you could at the lowest cost. In the

new world it really doesn’t matter how many units you ship. It’s about how many customers you have and the average revenue per customer. It’s fundamentally a completely different business model.”

FINANCE IS KING

Naturally, as the company’s business model is a strategic issue, the CFO is going to be involved – whether signing off the project or getting more hands-on in the change process. Perry Offer, CEO and formerly CFO at Dialogue.net, an SMS aggregator that conducts marketing campaigns via mobile phone networks, believes that the role of the CFO is crucial in determining whether an organisation has chosen the right business model. “There can be a lot of noise in our industry about what the next new big thing is, but we feel that the best way to move forward is to keep things simple,” Offer says. “For example, we don’t think there is any point in developing new products or services when there is still plenty of opportunity for further market penetration using our existing block messaging service. We have limited resources, so it’s the job of the CFO to

Excellence in Leadership | Issue 2, 2013

HOW VIEWSTER WILL PROFIT FROM PROVIDING ‘FREE’ CONTENT

make the management team aware of the costs involved in developing new offerings and question the return on investment that might be achieved compared with that of marketing an existing product to a larger number of potential customers.” Steve O’Neill, regional CFO for strategic operations at global technology company EMC, says that the CFO’s role here is to “be the voice of reason. You always need to ask questions and challenge the company’s strategic thinking to find out whether it is on a firm financial footing or not. You need to find out what the return on investment will be if the company develops another product or service, or if it changes its business model; what kind of due diligence has been done; how the figures have been derived; what the expected benefits and risks are; what the competition is up to; and whether or not there is sufficient customer demand. CFOs might not lead the strategy, but they certainly have a hand in steering it.” Alan Burns, CFO at PhotoBox Group, agrees that the finance chief has a crucial role in determining whether the business model is sound. “We have a responsibility

Many online content providers have struggled to make significant revenue quickly, despite the popularity and cutting-edge capabilities of the services they provide. But there are always exceptions – even when the business recognises that its users will not pay. Helen Biggart, CFO at Switzerlandbased Viewster, a global provider of on-demand internet streaming media, says that in the beginning the company was a content aggregator that syndicated movies and clips to other services and device manufacturers. She says the firm learnt its first big lesson when it launched its apps for web-enabled televisions. “Although our apps were installed on all key manufacturers’ sets in 2011, usage didn’t take off. There is practically no way to market your app on a connected TV; you can only hope to be discovered,” Biggart says. “Many people have not connected their TVs to the web yet and many others struggle to find the apps they want. But we still invest significant resources in these apps because we see a strong strategic position in being there. We believe this will eventually be a meaningful channel for our services.” Viewster sees a clear preference from its audience for free content over the pay-per-view rental model, especially among younger consumers who are used to watching free channels. “Our business model is driven by the huge demand for targeted online video advertising in a brand-safe, premium environment. With our website we’re able to meet this demand. We’re experiencing healthy growth and margins, and we expect that trend to continue. We also invest heavily in making Viewster as engaging for our visitors as possible. We invest in a wide range of content aimed at younger

to challenge the senior management team about their thinking behind any important project and to question the financial impact of such a fundamental change. For instance, they need to ask what the reasons are for change and

people. The depth of our library is expanding week by week and we’re working hard to give users a strong social entertainment experience that makes them want to come back again and again.” Viewster’s users watched more than one billion videos last year and more than 90 per cent of those views were ad-based and free – on all devices, on web, mobile and connected TVs. As a result, the bulk of its revenue comes from advertising. This income, Biggart says, is “shared with the content owners, who are more than happy to participate in our distribution model, since it gives them exposure to markets and target groups that they would normally find difficult to commercialise. As a business we are focusing on audio-video on demand, because that is what our users prefer and it allows us to differentiate ourselves from, and compete with, pay-per-view or subscription-based services.” Biggart has four tips for other companies that are considering a new – and potentially risky – business model: “First, if you have an idea that you are convinced makes commercial sense, try it out, but ensure that you’ve done your homework and you have a good sense about the industry in which you are active,” she says. “Second, be flexible and brave enough to change focus dramatically. Most companies hit bumps in the road and it is important to learn from those experiences and persevere. Third, keep an eye on your spending. Money is a very precious commodity when you are a young company, so it’s important that you spend it wisely. Lastly, listen to the right people: the customers, the competition and the big players in whose back yard you want to trample – and do it better than them.”

whether the proposed new business model will capitalise on it,” he says. “At the end of the day, CFOs will be funding the strategy, so it is up to them to ensure that the business case stands up to scrutiny.”

Leading the charge

Excellence in Leadership | Issue 2, 2013

UK electricals giant Dixons Retail has transformed its business to adapt to technological and market shifts that have proved fatal to several other big high-street players. Humphrey Singer, the group’s FD, tells Rima Evans about his department’s key role in plotting and executing a timely change of strategy

Gallerystock, Getty Images

ritish retail chains have taken a battering over the past few years, as harsh trading conditions have transformed the look and feel of the high street. Household names such as Woolworths, Borders, JJB Sports, MFI and HMV have either disappeared altogether or been rescued as online-only operations. Yet one of the most familiar and recognisable names among consumers – electricals giant Dixons Retail, which owns the Currys and PC World brands and has had a presence on the high street since the 1930s – has weathered the storm. More than that, it has even seen off its arch-rival Comet, which went bust at the end of last year. Dixons Retail, which formerly operated a chain of stores badged with the Dixons name, may now be benefiting from being the only specialist electrical retailer left on the high street. But its prime position has been hard-earned. A wide-ranging turnaround plan has helped the business to swing from net debts of £477.5m in 2009 to a position of £42.1m net cash, announced this June. The strategy at the heart of this shift – known internally as the renewal and transformation plan – was put in place in May 2008, only months after chief executive John Browett (who has since left, to be replaced by Sebastian James)

took the reins of the parent company, which was then called DSG international. But it’s not only the detailed content of that programme, which puts customers at its heart, that’s of great significance. It signalled a new collaborative approach among business functions – one in which the finance team became a more integral part of the organisation, central to both strategy creation and implementation.

FINANCE TO THE FORE

Humphrey Singer, the group’s finance director, explains: “There was a culture shift in which finance became much more commercial. We are now involved in high-level debates and discussions about the direction we are going in and we’re seen as crucial to any of the decisions that are made. Finance directors have a seat at the top table of each of the executive teams of our various business units and it’s important that they are seen as business partners.” Singer was part of the team that created that new vision. Although he took up his present job in 2011, he’d joined the company four years before that as FD of Currys and had held other influential positions, including FD of the UK and Ireland division, before being appointed to the group’s board. He has been a key player in the transformation that Dixons Retail has undergone over the past five years. The first shift in thinking came in 2006, when its UK stores ceased trading under

the Dixons name and were rebranded as Currys.digital. Dixons became an online-only offering (although that too was subsumed by the Currys brand last year) in response to consumers’ increasing preference for shopping on the web. Yet this move didn’t formally mark the start of the turnaround plan. That came two years later when the new management team arrived, and it focused on the company’s customers. “A combination of realising that customers were changing and living through a deep recession prompted a lot of the change,” Singer recalls. “At the heart of it all is the customer. That can be a cliché but it’s genuinely the starting point for everything we do here. In the pre-internet world, Dixons was all about new technology or product trends and its buying relationships with suppliers. That suited the company back then, but it’s not what works these days, when customers are much more in command.” This switch underpinned the five-point renewal and transformation plan, launched in a bid to revive the company’s flagging performance. Its key aims include improving choice, value and service for customers; fulfilling the potential of the firm’s position in the UK market; improving the buying experience in stores; cutting costs by simplifying processes; and offering multi-channel retailing. “Customers want to shop partly online, so we are responding to that,” Singer says. “We’re much less worried about whether »

Excellence in Leadership | Issue 2, 2013

‘Apple are picky about who they partner, so we had to demonstrate to them that we had the right kind of attitude towards how we served our customers’

customers shop specifically with us online or in stores. It’s about ensuring that they shop with us full stop and that those two bits of our business interact seamlessly. Our research shows that customers will typically make four shopping journeys for larger products such as TVs. In the old days these journeys would have always involved going to a store. Today probably one of those trips – usually the first, to conduct research – is online.” The past five years have seen the refitting of stores; the launch of PC World and Currys megastores; and the creation of a new type of superstore that brings both brands under one roof. This was first trialled in late 2008. In 2010 DSG international also changed its name to Dixons Retail. “The most noticeable changes to customers were in stores, particularly in the UK, because of our programme of refitting,” Singer says. “About 80 per cent of our turnover is now through the refitted stores. We will finish that in the next couple of years.” The revamp has gone hand in hand with a plan for a steady reduction in the number of outlets – the target for the UK is about 400. There are currently just under 500, excluding Dixons Travel shops, which are based in airports. Singer admits that there had initially been an intense debate about creating the combined PC World and Currys stores, because some people felt that there was a risk that two well-recognised and powerful brands serving distinct markets – computing and electrical/white goods – would be diluted in the process. But the performance of the new two-in-one format exceeded expectations. The trial store in Surrey generated an uplift to gross profit of 65 per cent compared with the results it achieved before the refit. “In the end, even the advocates were surprised by how well the trial store did,”

Singer says. “It made a very strong offer, providing the best of both worlds. It also attracted a broader range of customers who then shopped in both parts of the store.” The roll-out programme for two-in-one stores has been accelerated as a result – there are now more than 100 such outlets and further ones are planned.

CONTROL AND STEWARDSHIP

For Singer, there are several aspects to the finance function’s involvement in the turnaround plan. He believes it’s about contributing to the strategic debate as it continues to develop; adding value through the business partnering model; and delivering the core tasks of effective control and stewardship, thereby improving the efficiency of the business. On the business partnering side, a key project has been to build more collaborative relationships with suppliers, moving away from what was quite an adversarial approach focused mainly on buyer negotiations. This shift was critical in improving the company’s ability to deliver product ranges that it felt were more in line with the new approach. “The changes we have been through mean that our relationship with Apple, for example, has gone from strength to strength. We’re now the biggest reseller of Apple products in Europe, probably second only to their own stores. Apple are picky about who they partner, so we had to demonstrate to them that we had the right kind of attitude towards how we served our customers and that we were the sort of people they might want to do business with,” Singer says. “A range of suppliers, including other big names such as Samsung, have been very important to us and a critical part of our turnaround. This has enabled us to offer the right kinds of products to our customers.”

Unusually, the finance team itself interacts with key suppliers, forging relationships separate from those established by the procurement function. “We have a finance-to-finance dialogue about how we are doing financially, lines of credit and so forth,” Singer says. “In my experience there hasn’t been as much of that kind of finance-supplier relationship building elsewhere, but it is pretty well developed here at Dixons Retail. Such relationships mean that finance is playing its part in helping other stakeholders, such as suppliers, to get involved in the company’s transformation journey.” Elsewhere, the function has been working collaboratively on a project to evaluate the economics and profitability of its different product categories. Although that work began back in 2008, it has intensified in the past two years. “We wanted to really understand where we make money. That sounds like it should be a straightforward question to answer, but it never is. For example, white goods such as fridges and washing machines occupy a lot of space, so when we think about the profitability of white goods we need to reflect the fact that a lot of the shops’ rentable space is there because we need to display these large bits of kit,” Singer explains. “When a laptop is sold, it’s not only the computer; it’s also the bag and all the accessories that go with it or even the service we offer to set up the computer. So it’s about really understanding the bottom-line contribution that each of those categories make, which is critical. As our analysis has become more sophisticated we have gained more insight.” The findings then link in with commercial buying teams’ decisions about the range of products they get in and the price they pay, Singer adds. “It helps us

Excellence in Leadership | Issue 2, 2013

and our suppliers to work out how to maximise the value from this business.”

MORE THAN MERE NUMBERS

Dixons Retail’s adoption of a more customer-focused strategy has had a profound effect on the way the finance function sees its purpose. It’s about more than saving money; it’s also about reinforcing the importance of the company’s commitment to customers. “We have to be balanced, commercial finance people. So we’re not simply taking the black-and-white view that ‘this will cost a lot of money, so let’s not do it’ and somehow being the blocking agency. Instead, for us it’s about understanding the commercial value of a project and then trying to ensure that it’s also a profitable opportunity that adds value for our shareholders.” This approach is exemplified by the company’s pay policy. Singer explains that an important change was made a couple of years ago in the way in which the company rewards staff to reflect the new focus on consumers. It was agreed that, providing that stores delivered excellent customer-satisfaction scores, partial bonuses would still be paid, even if they failed to hit financial targets. “As a finance person you inevitably start twitching when something like that is suggested,” Singer admits. “You do worry that somehow you will lose some financial edge. But it was brave that we could see beyond the potential shorterterm financial impact.” Finance gave the idea the go-ahead and the investment has been worthwhile. The scores from exit surveys (feedback given by customers as they leave stores to monitor levels of service) and mystery shoppers have rocketed, which Singer credits partly to the change in bonus

structure. Last summer it was reported that 95 per cent of customers were leaving stores satisfied – an increase of 32 percentage points on the previous year. Innovatively, employees in the stores are also rewarded for online sales on their patch to underline the importance of the company’s multi-channel approach and prevent the online channel from competing with the stores. “We genuinely want colleagues to be agnostic about whether the customer they are talking to buys in their shop or goes home and buys online. It’s about promoting a genuine and seamless multi-channel strategy,” Singer says.

DIXONS FACT FILE Dixons Retail, a FTSE-250 company, is one of Europe’s largest specialist electrical retailers. The company employs 36,500 people, operating in 16 countries. Dixons Retail runs the consumer electronics section in Harrods although there is no Currys or PC World branding. Its airport stores still bear the Dixons name because the brand is so well recognised among overseas customers. Dixons Travel is present in all key British airports, as well as those in Dublin, Copenhagen, Rome and Milan.

These sorts of initiatives are undoubtedly reinforcing finance’s role as a business partner and enabling it to add more value. “That’s the journey we are on and collaborative relationships are important,” Singer says, but he adds that this still has to be balanced with the function’s “heartland” responsibilities, which include applying controls, ensuring compliance and improving efficiency in order to maintain profitability. The group is in a two-year programme targeting £90m in cost savings, for example, and is on target to achieve that through measures such as reducing store numbers, increasing energy efficiency and making the head office’s operations leaner. “The classic finance areas also include protecting our assets, by controlling stock properly, and strengthening the balance sheet,” he says. But the finance function’s wider strategic role is undoubtedly a requisite in any high-performing business. “There’s a strong correlation between having a very commercially focused, involved finance team at the centre of things and having a successful business. That’s what we are aspiring to,” Singer says. Despite this, he is clear that the turnaround is far from complete. Challenges remain for its southern European operations, for example, where the group posted an 8 per cent drop in like-for-like sales this year compared with 2011-12. The group maintains that its performance is “robust”, given the difficult markets. The UK and Ireland, meanwhile, saw a 7 per cent rise in year-on-year sales figures and profits increase by 39 per cent to £113.3m. “While profitability is improving substantially in the UK, it still needs to go further. That’s the plan,” he says. “So we are not done yet.”

Excellence in Leadership | Issue 2, 2013

Getty Images

Sharing the value

Excellence in Leadership | Issue 2, 2013

Jacek Levernes, vice-president of Hewlett-Packard’s business services across EMEA, explains how finance is helping to devise and implement strategy at the technology giant – and how this can drive growth

acek Levernes is the vice-president of Hewlett-Packard’s global business services in Europe, the Middle East and Africa. He is also the co-founder and president of the Association of Business Service Leaders in Poland – an organisation that represents 70,000 jobs and investors, including Arcelor Mittal, Google, IBM, McKinsey, Shell and Sony, as well as UBS, Credit Suisse and Franklin Templeton. He is responsible for the shared-service organisation across EMEA, which serves all HP businesses and functions in the region from two main centres in Poland and Romania, using 26 languages. HP in EMEA has yearly revenues of $40bn and a workforce of 80,000 people in 55 nations and 100 legal entities. What role should the finance function play in devising and implementing the business plan and strategy at a big, multi-faceted organisation such as yours? Finance and accounting is the longeststanding function in shared services and it’s where we deliver the most breadth and value in EMEA, from accounts payable right up to advising on moving into complex territories such as Russia. With all the work we are doing on finance and accounting, we are streamlining, standardising and centralising processes. The next step is to see how we can really drive change in how we do things. In terms of how finance contributes to planning for the business at large, HP controllership has what we call a COE, a centre of excellence. This comprises several hundred people who look at advanced financial decision support for work across HP. This includes US Gaap and reporting various analyses on operational expenditure, for example. »

STATS Poland accounted for 40 per cent of the total head count in eastern European outsourcing centres in 2012. Source: Association of Business Service Leaders in Poland.

40%

Excellence in Leadership | Issue 2, 2013

STATS

Krakow rose one spot to tenth place in the annual “Top 100 outsourcing destinations” ranking published by advisory firm Tholons in January 2013. The other Polish cities that made the chart were Warsaw (ranked 36th) and Wroclaw (75th). The only other non-Asian destinations in the top 20 were Dublin (ninth); San José in Costa Rica (13th); Prague (17th); and São Paulo (18th).

Source: Tholons.

This is a centralised and standardised team that explores how it can add value and drive more proactive analysis, decision support and even analytics in the way it services HP business leaders. Can you share an example of how the centre of excellence has influenced the business? My perception is that there wasn’t enough sharing of best practice across borders. Financial analysts are now supporting deals here by sharing knowledge and advising on how we should approach pricing in those deals. Before, we had deal analysts and pricing experts sitting in different countries and not necessarily talking to each other often enough. Now, we’re getting the best out of the different practices and putting together a team that’s created more of a European standard in deal support and pricing. What challenges have you faced in developing a shared-services centre that’s equipped to build relationships with governments, local authorities and other business partners? The first challenge is recruiting talent. Having launched in 2005, our plan was that we would grow to 1,000 people. After five-and-a-half years we had 2,000 people

and today we have 2,500. We had to find the best talent in the market and then use it to demonstrate our value to the senior teams – showing that we could do what we were doing before, but also more. We also had the challenge of selling this business outside and building our brand.

does that mean you’re a business person too? You need to have the smell and the taste for doing deals – and making that jump is not always easy. It would be interesting to see the statistics for how many CFOs made it to COO and survived in that job for five to ten years.

What are the skills and experiences that make for a modern finance leader? You need to understand the business and drive its performance in a smart way: abiding by the rules, but at the same time finding the right adaptations to make the best things happen for the business. In shared services, the finance guys are the ruling kind. They need to understand how to manage people, clients and contracts – in a sense it’s like being a COO. These are the good business finance leaders.

How is the growth of shared-services centres affecting skills and talent? Does it free up the retained finance staff to develop into a more integral role or does it cause a problem in the talent pipeline? As shared-services centres emerged, transactional processing, admin and small pieces of key financial processing were done in them. Today, much more comes through the centres and in some cases practically the whole of the process takes place in them. Many of the new roles that have resulted from this are much more advanced, where you need people with as much as a decade’s worth of experience. They must understand not only the finance piece, but also how to restructure and re-engineer it, which is not traditional in an HQ, so those are different skills.

How does finance increase its influence on the business? In different vertical industries and in different corporations there are varied career paths. In some companies, there’s a clear path for the marketing person – I would say that three out of four times they would become the CEO. After that, it’s the finance person. I’ve seen both good and bad examples of people making that shift. You may be great at finance, but

Are we seeing a new stream of finance staff coming into the UK, the US and Asia Pacific from the countries that

Excellence in Leadership | Issue 2, 2013

‘From the Polish perspective I think the challenge is how we can convince people in London, Zurich and Frankfurt that we can perform better and actually do what they do’ have been hosting shared-services? When more of the people who look at finance from end to end ask how things can be re-engineered to be more effective as well as more efficient, then we will see that trend developing. It will happen naturally, because the people serving whoever the business leader or controller is in that country are trying to contribute more. This is starting to happen, but I think we are just at the beginning. What are the main challenges for the shared-services sector in Poland and what are its strengths? Poland has come from nowhere a decade ago to being the European leader in offshore/nearshore service delivery. It accounts for more than 100,000 jobs here, with about 40 per cent being from the finance sector, and it is still growing fast. From the Polish perspective I think the challenge is how we can convince people in London, Zurich and Frankfurt that we can perform better and actually do what they do. Now that we have the base and are number one in Europe, the challenge is to convince the people in those western European hubs that we are the right option. There are other challenges too. We are working with the government to explore

whether regulatory changes might allow us to attract even bigger numbers to the region. We think we could accommodate another 100,000 people if that were the case. It would mean we would become a force to be reckoned with, not only in the back office but also in the middle office. Are there any problems concerning talent in Poland with regard to the quality of graduates? I think we need to be more pragmatic and practice-based in our educational system, rather than theoretically based. It’s getting better, but I don’t think that it’s a problem that’s unique to Poland. We are getting there and are already working with universities to address this. What is good for Poland compared with the rest of eastern Europe is that our population is as big as those of Hungary, the Czech Republic, Slovakia and the Baltic states put together. Like ours, their educational systems are pretty good, but we have the critical mass. We also have a pretty strong industrial heritage. Romania, for example, has great people and base operations. But if you want to find 50 general managers there’s going to be an issue because, although Romania has great education, it does not have a big pool of people with broader

managerial and business experience – relatively speaking. Poland has some advantage due to its industrialist heritage over the past four to five decades here – which means more experience. What factors have contributed to HP’s success in your region? It’s been down to taking a strong approach to business, running calculated risks and having good leadership. If you don’t take calculated risks and don’t look at it as a business, you cannot be a leader. I also believe in the internal/external mix that we have adopted. Typically, shared services are very internal. But, if you don’t benchmark – if you don’t engage with your external environment or fail to market and sell yourself – I think you are doing only half the job. That has been the most exciting thing for me: building links in the external world to benefit the internal world and vice versa. That’s why I think HP is a leader and standard-setter in the things we do globally. About the authors Jacek Levernes was speaking to Jakub Bejnarowicz, country manager for CIMA Poland, and Yogi Thakker, strategic client director at CIMA, in Warsaw.

Integrated reporting:

pulling together the pieces Companies will be expected to provide a â&#x20AC;&#x2DC;holistic viewâ&#x20AC;&#x2122; of their business models under the forthcoming integrated reporting requirements, writes Arvind Hickman. But what exactly should that entail in practice â&#x20AC;&#x201C; and what are the likely benefits?

INTEGRATED REPORTING

Excellence in Leadership | Issue 2, 2013

“We felt that we needed to take it further than simply reporting on outputs,” he says. “It’s all well and good providing your products or services, but what investors should be told is the outcome of that, both internally in terms of cash flow and externally in terms of its impact on the other capitals.” “Capitals” is IR-speak for the six classes of input upon which a business depends: financial; manufactured; intellectual; human; social and relationship; and natural. In the case of a car manufacturer, for example, the output is the car. The outcomes to consumers may be mobility, safety, reliability, comfort and status. Outcomes beyond that would include the environmental effects arising from greenhouse gas emissions.

f Primark, Benetton and Mango were asked to describe their business models, their response would naturally focus on the production and selling of clothes – their core output. But discussing these activities would not be enough under the proposed new integrated reporting (IR) framework, whose consultation period has just closed. They would also have to describe the wider outcomes of their operations in their respective value chains. For some companies such an obligation would be problematic. These three retailers were among several Western companies that were supplied by Bangladeshi manufacturers based in Rana Plaza, the building that collapsed in Dhaka in April, killing more than 1,000 factory workers. There is nothing to suggest that these firms were in any way to blame for the disaster – none was aware of the dangers at the building. But, in theory, an outcome of their business in this fiscal year could be the loss of life and the resulting damage to their reputation. Nick Topazio, CIMA’s technical specialist on reporting, explains that the inclusion of “outcomes”, above and beyond “outputs”, in the business model reporting element of the draft IR framework is designed to give investors a clearer understanding of the wider issues facing a company.

FEW AND FAR BETWEEN

The inclusion of outcomes in corporate reporting represents a fundamental change to the way companies are required to communicate with their stakeholders. The aim is to encourage greater transparency, a by-product of which should be improved accountability. Reporting on business models is scarce at present, according to Lisa French, who led the work on this aspect at the International Integrated Reporting Council (IIRC), the organisation that’s developing the IR framework.

“It’s not that companies are reporting on business models incorrectly right now; it’s just that many simply aren’t doing it. That’s our driving force. We are asking investors to evaluate whether or not they should invest in this company,” she says. “We shouldn’t be asking anyone to go in cold and see whether this company is a viable investment opportunity if they don’t see how all the pieces of the puzzle fit together. That’s where the business model discussion comes in. This explains what the company uses, what it depends on, what it does, where it adds value, why the company exists, what it produces and what the outcomes are.” The lack of business model reporting she highlights is supported by research into corporate reporting from Black Sun. The communications consultancy found in 2011 that only 43 of the FTSE 100 discussed their business models in detail – although this was twice as many as in the previous year.

DIVERSE DEFINITIONS

There is confusion among companies about what the term “business model” actually means. The IIRC has defined it as “the organisation’s chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long term”. This is illustrated in the chart, below, »

A BUSINESS’S VALUE-CREATION PROCESS Financial

Mission and vision

Financial

Manufactured

Governance

Manufactured

Organisation

Human

Natural

Business activities

Future outlook

Outputs

Outcomes

Business model Opportunities and risks

Strategy and resource allocation

External environment

Intellectual

Human Social and relationship Natural Source: IIRC.

Society

Inputs

Social and relationship Getty Images

Performance

Organisation

Society

Intellectual

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INTEGRATED REPORTING

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which shows an organisation’s valuecreation process. An IIRC technical collaboration group, led by CIMA, PwC and IFAC, conducted a review of more than 500 business model disclosures globally in the nine months to March 2013. This reinforced the diversity of business model disclosure practices. The study identified five main approaches to business model reporting: • Organisation overview. Providing a map of how the organisation works, describing what an entity does, how it is structured and where it operates. • Business strategy. Focusing on why an organisation is operating and how it intends to achieve its goals. • Value chain. Highlighting where an entity fits in the value chain and its dependencies on key inputs. For example, a PR agency may provide marketing support in the sales phase of a new car. • Financial performance. Focusing on how a business model drives profitability or revenue. It looks at financial outcomes and internal KPIs. • Value creation. Looking at how a firm’s inputs, activities and relationships lead to value and planned outcomes. Elements from each of these approaches were used to establish the business model concept in the IR draft framework. “We took more from the value creation and value chain approaches than we did from business strategy and financial performance,” Topazio explains. “But they all have their place in explaining how an organisation creates value.” The collaboration group’s review has found regional differences in the frequency of business model reporting, largely influenced by variations in regulations and corporate government codes. It has also revealed examples of poor presentation, such as the use of boilerplate text, a lack of clear structure

‘The business model discussion explains what the company uses, what it depends on, what it does, where it adds value, why the company exists, what it produces and what the outcomes are’

and the inadequate labelling of important elements such as inputs and outputs. Other bad practices include “siloed” reporting, in which the business model disclosure is isolated from other elements of corporate reporting, and insular reporting, which focuses on an organisation’s outputs rather than on where it fits into the value chain.

“For many companies this is a leap,” French says. “They do have to change their thinking. But I would contend that the leading companies, the ones that are already successful, are thinking in this way and recognising that looking at outcomes has an impact on the bottom line. It’s good strategic thinking. If it’s not already happening, this business model approach is to get that thinking started.”

GOOD IN PATCHES

Organisations that are providing good business model commentary on some of the elements required include oil company Sasol, consumer goods firm Smithfield and Hyundai Engineering & Construction, according to Black Sun’s database of emerging practices. Hyundai, for example, scored highly on its adherence to IIRC principles such as “strategic focus and future orientation, connectivity of information, materiality and conciseness”. A good business model disclosure should report on inputs, business activity, outputs and outcomes, according to Black Sun’s report, “The business model – the missing link for 21st-century companies?” Inputs include the funding model, infrastructure (such as plant, equipment and man-made infrastructure), people, intellectual property, raw materials, “ecosystem services” and relationships between stakeholders. Business activities, such as the manufacture of products, are what converts inputs into the outputs, which are the end product or service. A description of business activities should include how a company differentiates itself in the market through product differentiation, market segmentation, delivery channels and marketing. It should explore the company’s capacity to adapt to change and initiatives that influence the effectiveness of business activities, such as innovation, training and process improvement. Reported outputs, the key products and services of an organisation, should be material and may also include waste and other by-products. A business model discussion should explain the key outcomes that arise from business activities, outputs and their effect on the six capitals. The commentary on outcomes should take into account the entire value chain of a product or service. It should also connect to other parts of the integrated report.

TIPS FOR BUSINESS MODEL REPORTING 1 Keep it simple. A business model discussion is a simple introduction to a company, providing the context that investors need in order to understand what the business is about. Do not confuse readers with too many facts and figures, which can be included in other parts of the integrated report. Use plain language. 2 Use signposting. It is important to identify key elements of the business model in the discussion. This should include critical stakeholders and dependencies (such as raw materials), value drivers and external factors over which the organisation has no control. 3 Use diagrams. The cliché that a picture is worth 1,000 words may not always ring true, but in a business model discussion it is valuable because it helps readers to visualise how an organisation is structured and how inputs, activities, outputs and outcomes are connected. 4 Demonstrate connectivity. Ask yourself how the business model connects with the company’s strategy, governance structure, opportunities and risks. 5 Take a balanced approach. Integrated reporting is about reporting the good and the bad – it’s a balanced look at a business. This should be reflected in the discussion. 6 Ensure that there is context. Readers should be able to identify easily where the company is in the value chain.

INTEGRATED REPORTING

WHAT DOES AN IR LOOK LIKE?

An integrated report should be a standalone document focused on seven key areas: 1.1 Organisational overview. IRs should describe what the business does and the circumstances it operates under. There should also be data on its workforce, revenue and geographical reach. Factors that affect the external environment, including legal, commercial, social and political, should be covered too. 22. Governance. An IR should give insights into how the organisation’s governance structure supports its ability to create value in the short, medium and long term. This includes its leadership structure, strategic direction and approach to risk management. 33. Opportunities and risks. An IR should explore the opportunities and risks that affect the organisation’s ability to create value in the short, medium and long term. It should specify the source of internal and external

Excellence in Leadership | Issue 2, 2013

The next step in the evolution of reporting April saw the publication of the integrated reporting framework consultation draft. At a CIMA event in London, HSBC’s group chief accounting officer, Russell Picot; Unilever’s CFO, Jean Marc Huët; and CIMA’s CEO, Charles Tilley, discussed the proposal and some of the benefits and challenges of IR. Arvind Hickman reports

INTEGRATED REPORTING

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‘It is incredibly important to demonstrate how sustainability can drive growth and reduce cost’

he publication of the integrated reporting (IR) framework consultation draft heralds a new chapter in corporate reporting. It reveals a blueprint for how businesses might publish financial and non-financial information in a single, concise document. This should provide a more holistic view of an organisation while eliminating countless pages of complex financial disclosures. Fifteen events were held around the world to launch the draft framework, which is subject to stakeholder feedback until 15 July. A final version is due to be published in December. “Corporate reporting hasn’t kept up to date with the changes we have seen in business and society,” said CIMA’s chief executive, Charles Tilley, at the launch event in London. “Twenty-five years ago about 80 per cent of the market value of a business sat on its balance sheet, but today that figure is well under 20 per cent. We see IR as a very significant step forward in addressing those issues.”

A 360-DEGREE VIEW

Corbis

IR is designed to give the providers of financial capital, such as investors and banks, a holistic view of how a business creates and sustains value in the short, medium and long term. At the heart of the IR framework is the concept of “capitals”, which are the inputs and outputs that an organisation depends upon for its success. They fall under the following categories: financial; manufactured; intellectual; human; social and relationship; and natural. The capitals are the stores of value that feed into an organisation’s business model and are increased, decreased or transformed, depending on how the company is run. For example, financial capital is increased when a company makes a profit, while the quality of human capital is improved when employees undergo training. Conversely, a mining company’s natural capital is depleted by its operations, while its human capital may also be adversely affected if its miners have to work in unsafe conditions. The aim of IR is to communicate how an organisation affects these capitals, allowing report users to assess its value to the economy and society – and whether it is a sustainable enterprise.

IMPROVED DECISION-MAKING

Two companies that have been heavily involved in the IR initiative are HSBC and Unilever. They are both

taking part in the International Integrated Reporting Council’s pilot programme, which has involved a group of organisations in testing the principles, content and practical application of IR. Unilever’s CFO, Jean Marc Huët, told attendees at the launch event that the move towards IR had enabled the company’s management team to take a more holistic approach to decision-making on capital expenditure projects, for example. “Internally, it’s helping us to make much better trade-offs,” Huët said. “Let’s say there is a capital expenditure investment that needs be taken into account: it won’t be driven purely by financial key performance indicators. All the way up the chain we will be asking ourselves what the financial and non-financial consequences and uses of that capex programme are.” Another benefit of IR for Unilever is that it has enabled the company to show its internal and external stakeholders that it operates a sustainable business. “If you go to young consumers anywhere in the world today, they will tell you that they care deeply about sustainability,” Huët said. “It is incredibly important to demonstrate how sustainability can drive growth and reduce cost. It’s hugely important to our investors and consumers – and, increasingly, to people who want to work for good companies.”

CLEARING OUT THE CLUTTER

HSBC’s group chief accounting officer, Russell Picot, revealed that the big benefit of IR to his company had been a “decluttering” of information presented both internally and externally. “Banks are quite complex and we’ve got 270,000 people working at HSBC,” he said. “If we can actually manage to describe the essence of what we do, it’s a great benefit to the outside world – and the inside world. It gives our employees clarity about what people do when they come to work and the essence of what they are trying to achieve.” Both Picot and Huët believe that the big challenge posed by the IR model is the task of establishing and reporting non-financial KPIs that are consistent and comparable. “This presents a lot of challenges, because it’s like asking someone who is English to speak French from one day to the next,” Huët said. “It’s a new language and the lack of comparability, combined with the amount of time it takes to give third-party assurance to some of these KPIs, is a difficult challenge. Most of these indicators need to be measured over a long period, whereas financial KPIs are measured by a fiscal year.”

risks, plus an assessment and action plan to mitigate these. 44. Strategy and resource allocation. An IR should identify how the organisation intends to achieve its objectives, including its resourceallocation plans. How the organisation intends to measure outcomes also should be reported. 55. Business model. Reporting should include key inputs and how they relate to the “capitals” from which they were derived. The report should describe key business activities and how the business model has been designed to adapt to change. 66. Performance. An IR should report the extent to which the organisation has achieved its objectives. The state of key stakeholder relationships should be described. 77. Future outlook. Risks and uncertainties that the organisation is likely to face should be described, as should how it is equipped to respond to these.

46 46

Huawei:

the rise of China’s top telecoms firm In an exclusive interview Andrew Newman, ACMA, CGMA, the CFO of the carrier software and core network business at Huawei – one of China’s biggest companies – tells Arvind Hickman how the finance function has helped his firm to grow from a $6,000 start-up to a multi-billion-dollar concern

Excellence in Leadership | Issue 2, 2013

en Zhengfei, a former military technologist for China’s People’s Liberation Army, could never have imagined that the company he founded 25 years ago would one day help to connect nearly half of the world’s population. With an initial outlay of $6,000 Zhengfei formed Huawei Technologies in 1987. It began life as a humble reseller of private branch exchange (PBX) equipment such as phone switchboard hardware to rural areas of the country. From a reseller of PBX equipment to a global telecoms leader, Huawei is one of the great success stories of China’s economic expansion – as well as one of the more controversial. In October last year, a US Congressional report warned that Huawei and its Chinese rival ZTE posed a “threat to US national security interests” and could sell network operators rigged equipment that might give the Chinese government control over US communications networks. The company maintains that it is a victim of its own success and is caught in the middle of the ongoing Sino-American political conflict.

Getty Images

RAPID GROWTH

Huawei-serviced telecoms networks connect about 2.5 billion people. Its main business is to sell networking switches and other hardware to mobile phone carriers, internet service providers and other companies that run communications networks. Huawei also sells HTC smartphones and MediaPad tablet PCs, and provides managed services to communications network operators. In the past 15 years Huawei has increased its annual revenue from $1bn to $32bn, generating 70 per cent of its business outside mainland China. The company has a presence in more than 140 countries and a global workforce of 140,000. Since 2007, its revenues have grown by an average of 22 per cent a year. In 2011 alone the company took on 30,000 employees. Huawei’s success has been built on three pillars: a management transformation plan that was launched in 1997 and continues today; employee ownership, which helps to motivate and retain staff; and huge investments in research and development – believed to be at least 10 per cent of revenue – that has made the company a technology leader. The lack of outside shareholders to satisfy has allowed the company to make a substantial long-term commitment to R&D.

The R&D function employs 62,000 people, of whom 1,300 have PhDs. Huawei officials say that the organisation’s private structure, which gives Chinese employees the chance to have an ownership stake in the company, has helped it to retain its brightest technology experts. Huawei’s R&D focus has led to a large number of technology patents. In 2008, it applied for more patents than any other company in the world and has been among the top five patent applicants ever since. In the past, private ownership has allowed Huawei to focus on a top-line strategy of gaining market share, rather than on short-term profitability. In the late 1990s and early 2000s, for example, it entered high-risk countries that most of its rivals were ignoring, such as Nigeria, Zimbabwe and the Democratic Republic of the Congo. “We sowed the seeds early and initially it was a poor harvest,” recalls Andrew Newman, ACMA, CGMA, vice-president and CFO of Huawei’s carrier software and core network business. “We’ve taken the knocks and sometimes the clients have taken them too, but they’ve appreciated our long-term approach. We’ve stayed the course together through good and bad.” Huawei believes that Western markets such as Europe and the US are “emerging” markets, which is the opposite view to that of most firms of its size. “We started in China and went through Asia Pacific and eastern Europe, starting in the late 1990s and going into the early 2000s,” says Scott Sykes, Huawei’s vice-president of corporate affairs. “We are still new in some Western markets, but those are the markets that are growing the fastest for us right now.”

A GLOBAL TRANSFORMATION

Since Huawei signed its first international agreement with Hong Kong’s Hutchison Telecommunications, the company has rapidly grown its business beyond mainland China. The first international offices were established in the late 1990s in destinations such as Bangalore and Stockholm. This coincided with a transformation in the company’s management culture, including a more prominent role for the finance function, according to Newman. “Finance wasn’t at the top seat in the early days of Huawei. It was not at the core of the business. I’ve been here nearly two and a half years now and I see that finance is becoming more and more at the core of the business. It’s gaining a lot of stature and is maturing pretty quickly,” he says. »

Excellence in Leadership | Issue 2, 2013

‘Finance is becoming more and more at the core of the business. It’s gaining stature and maturing’

In more recent years, Huawei’s finance function has played a leading role in helping the company to shift its focus from gaining market share to achieving more meaningful bottom-line growth. This change has been motivated by several factors, primarily a challenging business climate that has affected the telecoms market and resulted in margin erosion across the industry. In 2009, for instance, telecoms equipment manufacturer Nortel announced it would be winding down, with its bankruptcy protection due to expire in October 2012. Another rival, Alcatel-Lucent, announced in the same month that it was planning to cut 5,500 jobs worldwide. Huawei, which saw its profits fall 22 per cent in the first half of 2012 compared with the same period in 2011, has weathered the storm better than most, but it realised that a change of tack was needed in order to keep its growth sustainable. “The complexity of the business has increased. In addition, we are in a very tough spot,” Newman stresses. “Finance is now playing more of a leadership role in the operational side. As we’ve grown so fast and taken a view on top-line growth, we had maybe taken our eye off the ball on the bottom line. In the past 18 months we have shifted our view to have effective growth. We’ve captured the market and I think it is the right time to hunker down and start looking at the deals and the structure of what we are doing.”

HOW FINANCE HELPS

It is finance that will play a critical role in helping Huawei to adapt to bottom-line performance. Finance is much more embedded in the business than it was 10 years ago and is viewed as a trusted business partner in pricing, product decision-making, risk control, business control, integrity, tax issues, treasury and customer financing. “Customer financing has become a key pillar for how we have grown and the finance team has been spearheading a lot of the growth of the company by putting innovative finance solutions on the table,” Newman says. “On pre-contract, we help to develop the business case. There’s a lot of work and activity

going on to ensure that we understand the deal structure and that we represent the deal’s financial dynamics correctly.” He continues: “Post-contract, we are very engaged in project accounting, ensuring that we are setting the budgets correctly and that we have proper accountability. We are focused on the balanced scorecard approach and are measuring people to make sure they are keeping to their commitments.” Another area in which finance is becoming more involved is budget control. When Newman arrived at the company there wasn’t much of a focus on budget management, but today it is monitored with increased vigour, including variance analysis, gap analysis and KPI analysis. “Finance is right in the thick of that, flagging up issues in the business that may need to be resolved,” Newman says. Huawei’s finance function has a renewed sense of purpose and a corporate mandate to help steer the company through choppy conditions that are causing rivals to either sink or change course. One of the new challenges facing one of China’s most recognisable brands is that, with little sign of the ongoing political tension between China and the US abating, Huawei may be forced to become more open about its affairs if it is to counter the national security alarm in some countries. The company’s private ownership structure, which has served it well up until now, is becoming a hindrance. The perceived lack of transparency associated with a privately owned business is creating hurdles in some of its most promising and untapped markets, such as the US. “We have never done any kind of spying or activity on behalf of the Chinese government,” Sykes stresses. “If we were to do that – or if we were even thought to be doing that – it would in effect be corporate suicide: we would lose 70 per cent of our business over night. I think that we – as a business that’s essentially a private company – have done a great job and disclosed a great deal of information that, frankly, we are not technically obliged to report. So we’ll continue on this journey of doing our very best to be open and transparent.” »

Excellence in Leadership | Issue 2, 2013

THE HUAWEI WAY 1987 Sets up in Shenzhen as a sales agent for a Hong Kong firm producing private branch exchange (PBX) switches. 1990 Begins the commercialisation of PBX technology, targeting hotels and small firms. 1992 Invests in R&D and launches a rural digital switching solution. 1995 Generates sales of RMB1.5bn. 1997 Launches first wireless GSM-based solutions and signs its first deal with a customer based outside mainland China: Hutchison in Hong Kong. 1998 Expands into metropolitan areas of China. 1999 Establishes an R&D centre in Bangalore. 2000 Turns over $100m and sets up an R&D centre in Stockholm. 2001 Sells subsidiary software company Avansys to technology firm Emerson for $750m and establishes four R&D centres in the US. 2002 International sales reach $552m . 2003 Establishes joint venture with 3Com to produce enterprise data networking solutions and hardware. 2004 Enters joint venture with Siemens to develop a radio-based link between the mobile devices and base stations in Chinese networks. Completes $25m deal with Dutch operator Telfort. 2005 International contract orders exceed domestic sales. Selected as preferred telecoms equipment supplier for Vodafone and preferred network supplier to BT.

STUCK IN THE MIDDLE: HUAWEI DEFENDS ITS SECURITY RECORD A US government report alleging that Huawei’s equipment poses a threat to national security has forced the company to declare that the claims are baseless and that it’s the victim of a broader Sino-American political battle. The company has also called on governments to consider the international nature of an information and communications technology industry in which most global IT

companies, including American firms, manufacture many of their products in China. Huawei was responding to a US Congressional document claiming that the company and its fellow Chinese firm, ZTE, are a “threat to US national security interests” and could sell companies rigged equipment that might be used by the Chinese government to control American communications networks.

Excellence in Leadership | Issue 2, 2013

An ‘inadequate’ defence? The allegations that have been levelled against Huawei are based on what the report has described as “inadequate and unclear” responses to questions concerning the Chinese government’s control of the company, rather than on clear evidence pointing to Beijing’s involvement. The document, entitled “Investigative report on the US national security issues posed by Chinese telecommunications companies Huawei and ZTE”, does acknowledge that “understanding the level and means of state influence and control of economic entities in China remains difficult”. Scott Sykes, Huawei’s vice-president of corporate communications, insists that the company has never conducted any espionage for the Chinese or indeed any other government, since this would amount to “corporate suicide” because 70 per cent of the company’s business is with telecoms firms based outside China. “We like to think that our record speaks for itself. We’ve been in business for 25 years and we are a $32bn company working with 500 of the world’s top operators,” Sykes says. “For any such allegation – ie, one that’s based on other allegations – there’s no proof of any kind. The facts are completely opposite and prove our point, but you have some political tension between the US and China and we’re caught in the middle of that.” The problem with privacy Sykes believes part of Huawei’s problem is that it’s a private company and is therefore not legally required to disclose the same level of corporate information as that which public companies have to report. “When that happens you have other people who jump in to tell your story for you – and that never turns out well. They have their own biases and motivations for telling it in a certain way. So some of it is, frankly, our competitors spreading this information.” Another factor working against Huawei is that Chinese corporate culture is vastly different from that of the US and other Western countries. For example, China doesn’t have “rock-star CEOs” – bullish business announcements are frowned upon – and it is rare for Chinese business leaders to engage with the media. Chinese businesses rely upon constructive working relations with the Chinese government, which does take a more handson approach than authorities in the West

tend to do. This situation opens the door to allegations of state interference. A series of claims This is not the first time that Huawei has faced claims of espionage. In 2011, for instance, the US Commerce Department blocked the firm from bidding to build a new wireless network for first responders, while in 2012 the Australian government barred Huawei from bidding for A$38bn in contracts to create its new national broadband network. Huawei believes that both decisions were made for political, rather than security, reasons. The company has pointed out that it is building similar broadband networks in the UK, New Zealand, Singapore and Malaysia, among other nations. A global industry While Australia and the US have both voiced security concerns about Huawei’s equipment, 45 of the world’s top 50 telecoms operators are Huawei customers. Most of the remaining five are based in the US. “A fact completely ignored by the US community when looking at this issue is the transnational nature of our industry,” Sykes observes. “On Huawei’s part, two-thirds of the parts in our equipment actually come from outside China – from places such as the US, where we spent $6.6bn last year with US companies to procure components to build our kit. Last year we spent $3.75bn in Europe, $1bn in Japan and a bunch of money in Taiwan.” Sykes adds that many multinational IT companies manufacture “anywhere between 25 per cent and 33 per cent” of their equipment in China. Some even supply the Chinese government. For example, in 2011 US company Cisco Systems sold networking equipment that is believed to be part of a surveillance system in Chongqing. “The US should have tried to settle this through diplomatic channels directly with the Chinese government, but has instead chosen to single out a certain country, China, and one company, Huawei,” he says. “But, by singling out Huawei the US government has actually created a false sense of security because it has done absolutely nothing to address the broader problem and concern.” Sykes adds that the US impasse has not yet affected Huawei’s bottom line. The company remains committed to entering the US market in the long term. And after years of relative silence, Huawei will now fight its corner and take a more active role in the ongoing security debate.

2006 Sells its 49 per cent stake in H3C (the 3Com joint venture) for $880m. Establishes Shanghaibased R&D centre jointly with Motorola. 2007 Finalises partnerships with all the top telecoms operators in Europe. Establishes joint venture with Symantec to develop storage and security appliances, as well as a joint venture with Global Marine to provide submarine network solutions. 2008 Becomes the most prolific applicant for global patents, with 1,737 applications. Ranks at number three in worldwide market share of mobile network equipment and number one in mobile broadband devices. 2009 Ranks second in global market share of radio access equipment. Delivers the first ever LTE/EPC commercial network for TeliaSonera in Norway. Launches first end-to-end 100G solution from routers to transmission system. 2010 Deploys more than 80 SingleRAN networks and establishes a cybersecurity evaluation centre in the UK. Joins the United Nations broadband commission for digital development. 2011 Revenue hits $32bn. Recruits 30,000 employees; builds 20 cloud computing data centres; ships 20 million smart phones; acquires Symantec’s shares in Huawei Symantec at $530m; and launches the Huawei SmartCare service solution. 2012 Builds the world’s largest desktop cloud, which is used by about 70,000 employees every day.

The rise of employee ownership

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The benefits of moving to an employeeowned structure are considerable for both companies and their staff. Arvind Hickman examines the models available and considers how a business can make a successful transition to one

rom large corporations to small businesses, buyouts are back. The lending environment has loosened since the 2007-08 financial crisis and deals are once again being made now that more money is flowing. The amount that businesses are worth is on the rise and their owners – many of whom struggled to find buyers during the downturn – have at last found an exit ramp. “Business owners can now obtain more than they would have got last year,” says Loren Rodgers, executive director of the not-for-profit National Center for Employee Ownership (NCEO) in the US, which has fielded an increasing number of enquiries over the past six months. “Owners also feel as though their companies have survived the crisis, so they can start thinking again about their exit from the business.” A growing number of these deals are inside buyouts, whereby a business is sold to its employees. Inside buyouts provide many benefits to an organisation, »

Excellence in Leadership | Issue 2, 2013

such as increased staff loyalty and the ability to take a long-term view on growth and innovation. British retailer the John Lewis Partnership (JLP) and Chinese telecoms equipment manufacturer Huawei Technologies are prime examples. While this model can pose a number of challenges, such as how to communicate success to employees who aren’t part of the ownership community, an increasing number of US and UK firms are becoming employee-owned. Employee ownership is also being lauded as a contributing factor to Huawei’s success.

GROWING DEMAND

In the US last year demand for employeeowned businesses – particularly through employee stock ownership plans (Esops), under which a portion of the workforce owns a stake but does not necessarily have voting rights – was being driven by fears concerning the fiscal cliff. Some Esop transactions require the seller to pay capital gains tax, which would have risen had Congress not agreed to a last-minute deal at the end of the year to renew tax cuts that had been introduced during George W Bush’s administration. In the UK there has been a 10 per cent annual growth in the number of employee-owned businesses, according to the Employee Ownership Association. This has been boosted by the government’s pledge to implement many of the recommendations made by Graeme Nuttall, its independent adviser on employee ownership. The Nuttall review, published in July 2012 to encourage employee ownership, set out a series of measures to remove some of the legal and tax complexities surrounding it. Nuttall, who is a partner at law firm Field Fisher Waterhouse, says that the government views employee ownership as a means of providing a fairer and more sustainable economy. “I believe that it strikes a chord with the government’s growth agenda,” he said in a recent interview. “It’s a winning combination of increased business performance and happier staff.”

THE CO-OP

The most egalitarian form of employee ownership is the co-operative. The JLP, a poster child of the co-operative movement, is one of the UK’s most successful department store chains. It reported a 15.8 per cent increase in group operating profit in 2012, which was a tough year for most UK retailers – according to a Deloitte study, the number of retailers that fell into administration was up 6 per cent on 2011. Each of the JLP’s 81,000 employees are known internally as partners. They all own a stake in the business and have voting rights, which is typical of the model. Its chairman, Sir Charlie Mayfield, says that one of the main benefits of employee ownership is that it encourages the business to take a long-term view of the relationships it has with suppliers, because it is not subject to pressure from outside shareholders to achieve fast profits. An example of this can be found in the meat aisle of Waitrose, the supermarket arm of the JLP. Despite taking only 5 per cent of the UK’s pork supply, it stocks 70 per cent of the nation’s pork derived from outdoor pigs, which is considered better in quality than pork from pigs reared indoors. This is because Waitrose has been able to nurture a 30-year relationship with its pork supplier, which in turn has been able to make a long-term investment and innovate in the way it farms pigs outside. Traditionally, suppliers have reared pigs in controlled indoor conditions because much of the stock is lost when a sow rolls on to her piglets when she is asleep. But Waitrose’s supplier has bred pigs that will sleep on one side, improving piglet mortality rates to match those typically found in indoor breeding. “We’ve been able to achieve this authentic product only because we have an ownership structure that means we are in this business for the long term,” Mayfield says. “We’re not interested in how much profit we make today; we’re interested in how much profit we make tomorrow. There is no exit to our business. Nobody has the incentive to talk up profits this year

just because we might be able to sell the business on 1 January for a high multiple.” Lisa Jack, professor of accounting and financial management at Portsmouth University, has studied the relationships between supermarkets, intermediaries and suppliers. She says that employee ownership is not the sole factor behind the long-term relationships established between retailers and suppliers, but agrees that it is a key contributor. “I don’t think it is cause and effect, but employee ownership does give retailers more opportunities. Waitrose has the conditions to make developing these relationships worth its while,” she says.

THE ESOP

Esops are the most common type of employee-owned business, with more than 11,000 operating in the US alone. “Esop arrangements provide better outcomes for companies in terms of their sales growth, employment growth, productivity and longevity; and better outcomes for employees in terms of wealth accumulation and job satisfaction,” says the NCEO’s Loren Rodgers. Huawei, which is owned by 65,000 employees through an Esop, believes that the scheme has allowed it to retain its brightest talent. “The reason that employee ownership has been a great contributor to our position as a leading telecommunications innovator is that it keeps our R&D staff focused on innovating for our customers,” says Scott Sykes, vice-president of corporate communications. “They receive direct financial benefits as a result of continuing to innovate and this keeps them loyal to their company.” Esop can also pose challenges, particularly for companies that have a small proportion of the workforce as owners. It is clear that the employee-owned model offers substantial benefits to companies that can successfully negotiate a path to it. However, it is also clear that it is a complex journey – and careful consideration should be given to the method used to become employee-owned. »

Excellence in Leadership | Issue 2, 2013

MOVING TO EMPLOYEE OWNERSHIP: HOW TO DO IT RIGHT

usinesses thinking about adopting an employee-ownership model should consider the following tips for a successful transition, according to Scott Miller, president of Enterprise Services Incorporated, which advises businesses seeking inside buyouts. • Lead by example. Employees need to understand and support the company’s philosophy, so the tone from the top is vital. It is important that senior managers support the initiative enthusiastically. Typically, senior managers have to make the connection between superior financial results and buy-in from employees. Often the senior team has already made this connection from experience at other successful companies (or previous employers). Employees will know whether the senior team is supporting the communications or merely paying lip service. Does the senior team practise what it preaches, and does it lead by example? If it is autocratic and believes only in the importance of its contribution, then problems will certainly follow. If the compensation package for the most senior managers is an embarrassment because of excessive amounts (as in some publicly listed companies), there will be credibility problems. Developing a programme in which the interests of the company and its employees are in alignment with equity sharing and effective communications is likely to result in greatly enhanced financial performance. • Qualify the company. The companies that work the best are financially successful and well established. Good candidates include service companies and professional firms where growth is organic. Bad candidates are turnaround companies in struggling industries or “die-cast” companies. Some of manufacturing companies are becoming like dinosaurs – and the idea that employees are going to make salary concessions for the privilege of owning this tired old dog is not going to work. Employee ownership will often work well where there is a higher incidence of education (professional service firms), or where there is significant direct customer contact. Associates talk to customers and will sense when they are pleased with the service. • Communicate effectively. There should be regular communication with employees on operating results and indices of activity. Employees need the appropriate tools to get the job done. Communication does not have to include a detailed discussion of actual P&L results (which may be confidential information). Effective communication involves getting across indices of activity, such as on-time delivery. That data may

then be benchmarked against industry norms or other statistics so that the employees know whether they are making progress or falling behind. The intent is to build a culture of ownership. Getting the employees to think like owners through effective and ongoing communications is worth the effort. • Foster a collaborative culture. It is important for company leaders to embrace a collaborative – not autocratic – management style. Team-building is a desirable goal in most situations, as the business world is often so complex as to be beyond the skills of any one person. • Celebrate success. A lot of companies want to hide the fact that they have made money, but sharing success with employees can act as a motivator and build a sense of community. In cases where companies are not 100 per cent owned, there needs to be a balance about the type of information that is passed on to employees. The board should weigh up the right balance. If the employees are acting like owners, solving problems and creating value, it is important to share the success (and communicate the process of sharing). It is often best to have more frequent and smaller celebrations (monthly or quarterly) as opposed to one big celebration after the end of the fiscal year. Often, a once-a-year celebration is long after the results of the first quarter are known. There are ways to have more current celebrations, with “holdbacks” as a hedge should the financial results decline later in the year. • Think long term. It is appropriate to take a longer-term, sustainable view of the business. Employee-owned models do not suit companies that are structured for short-term planning and goal-setting. There is a place for short-term incentives, but, after an initial “pop” and some excitement, the impact of such programmes may diminish quickly if there is no longer-term element. Commitment on the part of employees to make ongoing significant contributions will be far greater if the company develops a culture of sharing success over a longer period. The long-term horizon is an integral part of developing a culture of ownership (and such a culture is often a substantial competitive advantage). • Seek help. Talk to advisers and other businesses that understand the challenges of setting up an employee-owned business. They can help to guide you and smooth out the transition period. There is no need to follow a trial-and-error process in trying to develop programmes that work well – there are experienced professionals and advisers who can shorten the learning curve so that measurable results can be realised quickly.

Excellence in Leadership | Issue 2, 2013

Tools of our trade In an effort to help financial managers identify the most valuable tools and techniques at their disposal, CIMA and the AICPA have produced Essential Tools for Management Accountants. CIMA’s technical specialist in performance management, Rebecca McCaffry, reports

anagers today are faced with a huge array of frameworks, practices, tools and techniques that all promise to help define and manage their strategy, resources, customers and costs – and ultimately improve a business’s performance. The sheer number of options available means that managers often struggle to evaluate and identify the most suitable tools for their organisations, let alone apply them effectively. CIMA and the AICPA have sought to pick the most valuable and effective tools out from the crowd. Together, the two institutes have produced a resource entitled Essential Tools for Management Accountants as part of an ongoing project on management accounting tools. In this context, tools are defined as “a framework, model, technique or process that enables management accountants to: improve performance; facilitate decision-making;

support strategic goals and objectives; and otherwise add value”. The project focuses initially on the main tools and techniques used by management accountants and business leaders to support sustainable success. Although the content is likely to be most relevant to “coalface” managers, management accountants and students,

we hope that senior-level leaders will lend their expertise to help us build upon this important resource. There are two aspects to the project, the first of which is a book summarising more than 20 of the most established tools, relevant to all types of organisation and sector (see table, opposite). For each tool we have looked at the value it can bring to

Excellence in Leadership | Issue 2, 2013

ESSENTIAL TOOLS FOR MANAGEMENT ACCOUNTANTS Management accounting category

Tool

Governance and risk management

CIMA Strategic Scorecard Risk heat maps Enterprise risk management CGMA ethical management reflection checklist

Strategic planning and execution

Strategic planning process tools, including mission statements, Swot and Pest analysis, goals and objectives The balanced scorecard, including operational dashboards Strategy mapping Porter’s five forces KPIs – financial and non-financial Benchmarking The Performance Prism

Planning and forecasting

Rolling plans and forecasts Activity-based budgeting Scenario and contingency planning Cash flow modelling

Product and service delivery

Activity-based costing

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Lean

an organisation and the actions that management accountants should consider – or avoid – in order to maximise its potential. We have also included summary case studies to demonstrate how each has been used in practice. The book is supported by more detailed online materials, including reviews and case studies – and this is where we invite your

input. Visit www.cgma.org/essentialtools to rate the effectiveness of existing tools, vote for the techniques you have found most effective and share your experiences of using them, or suggest new tools and resources to include in the online toolkit. Ultimately, our aim is to develop the most comprehensive and up-to-date management accounting tools resource.

Quality management tools – including TQM, Six Sigma, cost of quality and EFQM Value recognition

Value-chain analysis Customer relationship management

Harvard ManageMentor® Harvard ManageMentor® webcasts are a CIMA business skills resource providing information and advice on over 35 key management topics. This powerful resource will help you develop your skills in addressing work based challenges. • Free for CIMA members. • Comprehensive list of topics ranging from marketing essentials to strategic thinking, with expert advice from world renowned business leaders. • Available online via your ‘My CIMA’ account anytime, anywhere.

www.cimaglobal.com/harvardmanagementor

Excellence in Leadership | Issue 2, 2013

Get involved with CIMA Sustainability seminar CIMA hosted a forum at the Singapore Stock Exchange in March on “Managing responsible business – harnessing the value”. Tanya Barman, CIMA’s head of ethics, presented the results of research conducted by CIMA and the AICPA, as well as other key global findings highlighting new business challenges and the critical role of the management accountant. The panellists at the seminar, which was facilitated by media expert Mark Laudi, also included Lawrence Loh, associate professor of the National University of Singapore Business School; Erin Lyon, executive director at CSR Asia; and Paul Prendergast, partner at Accenture. Footage from the event can be viewed at www.cimaglobal.com/SGXsustainability

Resilient business models

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While your business strategy provides a road map for decision-making, your business model defines your vehicle.

Understanding your business model helps you to stay on course and make the right decisions to ensure success in the long term. It can help you to: mitigate risks; find and eliminate inefficiencies; ensure that you are investing in activities that create value for the future; and avoid activities that destroy value. A collection of resources highlighting the latest thinking on business-model analysis is available to view at www.cgma.org/business-models

Now on CGMA.org • Building world-class businesses for the long term. This report discusses how to manage the interplay between short- and long-term thinking; the role of government and regulation; and whether long-term approaches by companies best serve the public interest. It also examines the practical considerations of pushing forward a long-term view and the good

organisational practice that will help a business to navigate the present without compromising the future, including case studies, practical tools and advice. • Introduction to integrated reporting. Integrated reporting is a new approach to corporate reporting that: demonstrates how organisations really create value; enables more effective decision-making; and, ultimately, builds more resilient and successful businesses. Watch Nick Topazio, CIMA’s technical specialist in external reporting, give an overview of the concepts behind integrated reporting. • Managing innovation: harnessing the power of finance. Innovation is the key to sustainable business success in today’s fast-paced, volatile and uncertain world. This report showcases insights from management accountants from around the globe, as well as identifying five areas that affect how companies commercialise innovative ideas. For more information visit www.cgma.org

CIMA Europe is holding its frst CGMAÂŽ conference for members and employers. London â&#x20AC;&#x201C; 13 and 14 November 2013

BEYOND THE FINANCIALS

The two day conference brings together the latest thought leadership, leading-edge research outputs, industry best practice, tools and techniques and strategic insights on key issues facing businesses.

For more information visit:

cgma.org/europeanconference

Excellence in Leadership | Issue 2, 2013

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EVENTS CPD technical update: KPIs and performance management

How to win CIMA CPD support and make autumn academy change happen

5 September Glasgow

11 September Coventry

23-24 September London

Is your organisation using performance measurement as a key tool that contributes to business success? Chances are your performance management system has grown over time and as a result it might not be adding the value that you want. This half-day practical event can help you to move from target overload to a system of performance management that focuses on those measures that matter most to business success.

Challenging times are requiring many organisations to rethink what they are doing and, in many cases, make changes. The challenges many organisations are facing are that change initiatives often fail to deliver the benefits they desire. This event will cover the main areas to be aware of when looking at change within an organisation.

This two-day event will cover a variety of topics that are relevant to your role and count towards your annual CPD requirements. Designed to be relaxed, interactive and informative, the event provides an opportunity to network with fellow finance professionals.

www.cimaglobal.com/scotland

www.cimaglobal.com/westmidlands

www.cimaglobal.com/autumn

2012 AnnuAl Review

Our jOurney

of enlightenment Integrated reporting is a new approach to corporate reporting which is gaining international recognition. It demonstrates the links between an organisationâ&#x20AC;&#x2122;s strategy, governance and fnancial performance and its social, environmental and economic context.

CIMA is playing a leading role in developing a framework for integrated reporting. The 2012 Annual review is our frst integrated report and you can read by visiting

www.cimaglobal.com/enlightenment

200x266_fp AD_CIMA ANNUAL REVIEW 2013.indd 1

07/05/2013 13:56

Excellence in Leadership | Issue 2, 2013

NEXT TIME THE

S K I L LS A N D TAL E N T ISSUE

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As the finance function becomes increasingly influential, serving as a genuine business partner and playing an integral role in developing and implementing strategy, we examine the skills required to be a finance leader of tomorrow â&#x20AC;&#x201C; and how to bridge the talent gap

Excellence in Leadership | Issue 2, 2013

CIMA offices CIMA corporate centre 26 Chapter Street, London SW1P 4NP Tel: +44 (0) 20 8849 2251 Email: cima.contact @cimaglobal.com www.cimaglobal.com CIMA Australia Paul Turner: country manager 5 Hunter Street, Sydney, NSW 2000, Australia Tel: +61 (0)2 9376 9902 Email: sydney@cimaglobal.com CIMA Bangladesh Zareef Tamanna Matin: manager Suite-309, RM Center (3rd Floor), 101 Gulshan Avenue, Dhaka-1212, Bangladesh Tel: +8802 8815724 +8802 8816306 Email: zareef.matin @cimaglobal.com CIMA Botswana Plot 50374, Block 3 1st Floor, Southern Wing, Fairgrounds Financial Centre, Gaborone, Botswana Tel: +267 395 2362 Email: gaborone @cimaglobal.com CIMA China: head office Li Ying Vicky: regional director Unit 1508A 15th Floor, AZIA Center, 1233 Lujiazui Ring Road, Pudong, Shanghai 200120, PR China Tel: +86 (0)21 6160 1558 Email: infochina @cimaglobal.com CIMA China: Beijing Xina Zhang: manager Room 605, 6/F Guangming Hotel, 42 Liangmaqiao Road, Chaoyang District, Beijing 100004, PR China Tel: +86 (0)10 8441 8811 Email: beijing@ cimaglobal.com CIMA China: Chengdu Steven Zhang: manager Unit 1705B, 17th Floor, Tower A, Times Square, 2 Zongfu Road, Chengdu 610016 Tel: +86 (0)28 86656792 Email: infochina @cimaglobal.com CIMA China: Chongqing Flora Hu: manager Room 2107, Tower 4, Chongqing Tiandi, No. 56, Ruitian Road, Hua Long Qiao,

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CIMA Hong Kong Damian Yip: director Suite 2005, 20th Floor, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong Tel: +852 (0)2511 2003 Email: hongkong @cimaglobal.com CIMA India Arati Porwal: chief representative Unit 1-A-1, 3rd Floor, Vibgyor Towers, C-62, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051, India Tel: +91 22 42370100 Email: india@ cimaglobal.com CIMA Ireland Denis McCarthy: director 5th Floor, Block E, Iveagh Court, Harcourt Road, Dublin 2, Ireland Tel: +353 (0)1 6430400 Email: cima.ireland @cimaglobal.com CIMA Malaysia: head office Irene Teng: regional director Venkkat Ramanan: head of CIMA Malaysia Lots 1.05, Level 1, KPMG Tower, 8 First Avenue, Bandar Utama, 47800 Petaling Jaya, Selangor Darul Ehsan, Malaysia Tel: +60 (0)3 77 230 230/232 Email: cimasea @cimaglobal.com

CIMA contacts: Kenya Email: gmathesh@ yahoo.com

New Zealand Tel: +64(0)48017132 Email: cima@cima.org.nz

CIMA Pakistan Javaria Hassan: country manager No.201, 2nd Floor, Business Arcade, Plot No.27-A, Block-6 PECHS, Shahra-e-faisal, Karachi, Pakistan Tel: +92 21 3432 2387/89 Email: pakistan @cimaglobal.com CIMA Pakistan: Islamabad Zunaira Riaz: manager 1st Floor, Rehman Chambers, Fazal-e-Haq Road, Blue Area, Islamabad, Pakistan Tel: + 92 51 2605701-6 CIMA Pakistan: Lahore Sahar Saqiq: manager Flat No 1,2-1st Floor, Front Block-3, Awami Complex at 1-4, Usman Block, New Garden Town, Lahore, Pakistan Tel: +92 42 35940311-16 CIMA Poland Jakub Bejnarowicz: country manager Warsaw Financial Centre, 11th Floor, ul Emilii Plater 53, 00-113 Warsaw, Poland Tel: +48 22 528 6651 Email: poland @cimaglobal.com

CIMA Russia Fiona Harvey: regional director Office 4009, 4th Floor, Moscow 105064, Russian Federation Email: russia @cimaglobal.com CIMA Singapore Shavonne Sim: country manager 3 Phillip Street, Commerce Point, Level 19, Singapore 048693 Tel: +65 68248252 Email: singapore @cimaglobal.com CIMA South Africa Zahra Cassim: country head 1st Floor, 198 Oxford Road, Illovo 2196, South Africa Tel: +27 11 788 8723 Email: johannesburg @cimaglobal.com CIMA Sri Lanka Bradley Emerson: regional director Radley Stephen: country head 356 Elvitigala, Mawatha, Colombo 05, Sri Lanka Tel: +94 (0) 11 250 3880 Email: colombo @cimaglobal.com CIMA Sri Lanka: Kandy Roshini Wirasinghe: manager 229 Peradeniya Road, Kandy, Sri Lanka Tel: +94 (0) 81 222 7883 Email: kandy @cimaglobal.com CIMA UK David Rowsby: regional director 26 Chapter Street, London SW1P 4NP Tel: +44 (0) 20 8849 2251 Email: cima.contact @cimaglobal.com CIMA Zambia Kennedy Msusa: country manager 6053 Sibweni Road, Northmead, Lusaka, Zambia Tel: +260 (211) 290 219 Email: lusaka @cimaglobal.com CIMA Zimbabwe Moses Sikiwila: country manager 6th Floor, Michael House, 62 Nelson Mandela Avenue, Harare, Zimbabwe Tel: +263 (0) 4702617 Email: harare@cimaglobal.com