The CFO Middle East | Issue 17 by The CFO Middle East

Vol. 2 ISSUE 17

Dhofar Global

KPMG CHAIRMAN John Veihmeyer

pg 28

EPM roundtable

pg 12

pg 32

the skill and the will Joe Thomas’ vast experience redeployed at Mohamed Hareb Al Otaiba Group

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The small details… MANAGEMENT Dominic De Sousa (1959-2015) Founder, CPI Media Group Rajashree Rammohan Publishing Director EDITORIAL Group Editor Jeevan Thankappan jeevan.thankappan@cpimediagroup.com +971 4 375 5678 Editor James Dartnell james.dartnell@cpimediagroup.com +971 4 375 5684

Our cover star this month is veteran finance professional Joe Thomas, of Mohamed Hareb Al Otaiba Group. He has had a stellar career in finance jobs across a range of verticals in the UAE, but his role has recently shifted from company CFO to Group internal auditor. Joe presents an interesting case. Throughout his career, he’s proven himself to be an accomplished and game-changing CFO, with transformation projects at Xerox and Avis under his belt. Why would such a seasoned figure take a perceived step backwards? Well, Joe goes to show that while CFOs are tasked with providing strategic direction, precise accounting and risk management can never be neglected.

Online Editor Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 375 5683

If an organisation faces corrosive influences from within, then any ambitious initiatives can be more or less discarded. MHAO Group’s leadership has decided to take a ‘better safe than sorry’ approach – hopefully in time this prudency will bring new freshness and transparency to the company.

ADVERTISING Commercial Director - Business Division Chris Stevenson chris.stevenson@cpimediagroup.com +971 4 375 5674

Bringing a different kind of cleanliness to us this month is the finance chief of hygiene product manufacturer Dhofar Global, Koshal Mundhra.

Group Sales Director Kausar Syed kausar.syed@cpimediagroup.com +971 4 375 1647 DESIGN Neha Kalvani neha.kalvani@cpimediagroup.com Analou Balbero analou.balbero@cpimediagroup.com Photographer Charls Thomas Production Manager James Tharian Data Manager Rajeesh Melath

Koshal has been at the fore of the firm’s growth trajectory since joining the company, and is eager to continue its expansion across the GCC. I also had the pleasure of meeting KPMG’s global chairman and U.S CEO John Veihmeyer. He recently gave a speech at Emirates Aviation College, and was kind enough to take time out of his busy schedule to speak to The CFO Middle East. I have to say, John was an extremely affable and down-to-earth figure, and someone who has clearly given his company’s ventures in the Middle East a great deal of thought. One of his main messages was that any difficulties the GCC is facing with a lower oil price are sure to provide long-term benefits. Joe Thomas’ work stands as testament to this potential. His attention to the finer details is an example of how this region can avoid complacency and ensure success.

James Dartnell Editor

Printed by Printwell Printing Press © Copyright 2016 CPI. All rights reserved. While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.

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tHE CFO MIDDLE EAST

Advisory Panel The CFO Middle East’s Advisory Panel comprises a dynamic group of experts and leaders in various aspects of finance. As industry captains arriving from world-leading organisations and specialising in financial strategies, accounting and management, these key personalities will play a vital role in ensuring the delivery of relevant and accurate analyses of the latest trends and issues in the business community.

Ahmad Darwish Ahmad Darwish is a Board Member and Secretary General of the UAE’s Accountants and Auditors Association (AAA), an organisation tasked with the promotion and development of the accounting profession in the country. He is also the Senior Manager for Financial Accounting at DP World UAE and oversees the management accounting, treasury and asset management divisions of the company. With his extensive financial expertise Darwish is also the first Emirati to chair the UAE Members Advisory Committee of the ACCA. Hanady Khalife Hanady Khalife is the Director of Operations, Middle East and Africa, of the Institute of Management Accountants (IMA). She is responsible for training providers, business partners, universities, governmental entities, amongst others. Khalife is also an expert consultant specialising in assisting clients develop and implement strategic business plans and build partnerships with key industry stakeholders. Michael Armstrong Michael Armstrong, FCA is the Regional Director for the Middle East, Africa and South Asia (MEASA) of ICAEW. He is responsible for the ICAEW’s work across the MEASA region, collaborating with key stakeholders, engaging with businesses across the region, supporting ICAEW members and working with both public and private sectors on raising awareness of the relevance of chartered accountancy catalysing

economic growth. Armstrong has extensive experience advising financial institutions and energy and natural resources companies in addition to having held several leadership and advisory positions in business and government. David Thomasson David Thomasson is the founder and Managing Director of Phoenix Financial Training. David is a fellow of CIMA and worked in the accountancy industry for many years before moving into training in the 1990s. PHOENIX offers courses leading to Professional Finance Qualifications in ACCA, CIMA and ICAEW in Dubai and India. Offering a range of bespoke financial courses in Financial Awareness Building and Corporate Treasury Phoenix’s student body ranges from independent students to practitioners of private companies and sovereign wealth funds. Lindsay Degouve de Nuncques Lindsay Degouve de Nuncques is the UAE Head of the Association of Charted Certified Accountants (ACCA). Her role entails spearheading discussions with regulators, business leaders and important stakeholders to strengthen the ACCA’s network and profile in the region. Degouve de Nuncques has spent more than eight years with ACCA in various senior roles. Geetu Ahuja Geetu Ahuja is the Head of GCC for the Chartered Institute of Management Accountants (CIMA). Responsible for

developing the growth of operations and positioning the global brand of CIMA across the GCC region, Ajuha establishes strategic partnerships with global and regional entities. She is also responsible for overseeing the launch of various region specific CIMA nationalisation programmes in the GCC. Paul Gyles Paul Gyles is the CFO for Meraas, a major real estate development company with a portfolio of investments in various economic sectors including hotels & hospitality, leisure & entertainment, real estate development and asset management. He is responsible for the financial management, reporting and treasury across all of the Meraas Entities. He is a Fellow of the Chartered Institute of Management Accountants (CIMA). He is also on the Steering Committee of the Middle East CFO Alliance (MECA), the largest senior finance networking group in the Middle East. Amer Khansaheb Amer Khansaheb is the president of the CFA Society Emirates. He is the Managing Director of Khansaheb Investments, an investment company with investments in construction, real estate and infrastructure. His expertise includes real estate management, construction management and financial analysis. Amer graduated from the American university in Beirut with a degree in Civil & Environmental Engineering. In 2009, he received his MSc in Project Management from the British University in Dubai. He has been a CFA charterholder since 2009.

CONTENTS 8

News

The latest developments in the local finance indsutry.

Diversity drive John B. Veihmeyer, Global Chairman, KPMG, on what GCC CFOs can learn from their American counterparts.

“It’s commonplace for a manager, or someone in a position of power, to say ‘give my boy a job’. Unfortunately that’s not good enough.”

Joe Thomas, CFO, Mohamed Hareb Al Otaiba Group

18 Eagle eye Mohamed Hareb Al Otaiba Group’s Joe Thomas sheds light on the importance of risk management and how it can enable organisations to make better decisions.

Does IFRS help bank financials’ analysis?

Kurt Ramin, CFA, discusses how International Financial Reporting Standards can impact financial reporting processes.

Clean bill Koshal Mundhra, CFO, Dhofar Global shares how his business acumen became instrumental in contributing to the company’s recent achievements.

32 Pushing performance In partnership with SAP Gold Partner MDS ap, The CFO Middle East hosted a roundtable discussion on the benefits of enterprise performance management solutions for the finance department.

34 Real options theory Affiliate Professor at HEC Paris Patrick Legland gives his take on the benefits of real options theory and why it is not dissimilar from its financial options counterpart.

38 34

Capital returns

Sven Jirgal, VP and COO, Cisco Capital, discusses how the networking firm’s division can assist their partners in delivering maximum ROI.

What the public wants Research from PwC reveals that despite significant IPO offerings in Q1 2016, volatility remains and activity levels stayed low.

42 44

Plan of action

Thomson Reuters recently hosted its ‘MENA Evolving Tax Landscape’ seminar in Dubai. We bring you some of the higlights at the event.

Practice being a leader SomersConsult Managing Director Fintan Somers shares top four steps finance professionals can follow in planning a good career management strategy.

News

MoF organises workshop on economic diversification in GCC As part of its strategy to support economic diversification and introduce its impact on different economic and development sectors in UAE, the Ministry of Finance (MoF), organised a workshop to discuss the book ‘Breaking the Oil Spell – The Gulf Falcon’s Path to Diversification’, in its premises in Dubai. The book was launched last April on the sidelines of the spring meetings for the International Monetary Fund (IMF) and the World Bank Group (WBG) in Washington DC. The workshop was attended by HE Khalid Ali Al Bustani, Assistant Undersecretary of International Financial Relations Sector at MoF, HE Saeed Rashid Al Yateem, Assistant Undersecretary of Resources and Budget Sector and a number of heads of departments, experts and consultants. It featured presentations from the authors of the

book, Fuad Hasanov, an Economist at the IMF and Adjunct Professor of Economics at Georgetown University, and Reda Cherif, an economist at the IMF Institute for Capacity Development. Cherif said, “Achieving economic diversification requires governments to enhance an institution’s framework, develop infrastructure, reduce regulatory barriers, and change incentives to enhance private and public companies’ ability to overcome limits of domestic markets. All governments should also support exports, and establish development banks that provide funding and support for the business sector.” The workshop discussed the economic situation in which oil is no longer the main source of government financial resources, and the economic outlook witnessed by oil-exporting countries.

Dubai DED launches new platform for idea exchange

The Department of Economic Development (DED) in Dubai has recently launched ‘DEDTalks,’ a knowledge exchange platform for thought leaders and decision-makers from the public and private sectors to meet regularly and share experiences, ideas, analyses and best practices relating to the economy and business. DEDTalks is the latest initiative from DED for continued engagement with the private sector, as it pursues a broad economic agenda centred around productivity, sustainability, innovation and regulatory efficiency and coherence throughout 2016, and beyond. DEDTalks 1, the first in the series, brought together industry leaders, diplomats, senior government executives and high level officials from the IMF to discuss the historic experiences and empirical analyses of how different economies managed to spur long-term growth. The forum also witnessed DED presenting a new IMF book, Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification. “This event has been organised in the wake of the call by His Highness Sheikh Mohammed bin Rashid Al

Maktoum, UAE Vice President and Prime Minister and Ruler of Dubai, to launch appropriate initiatives and programmes to steer the UAE economy away from dependence on oil revenues, and towards a diversified and sustainable knowledge-based economy,” His Excellency Sami Al Qamzi, Director-General of DED, said in his welcome address. HE Al Qamzi added that diversification and sustainability have remained the focal points of Dubai’s growth strategy for more than three decades now. Oil and gas, which in the eighties accounted for up to 55 percent of the emirate’s GDP, contributes less than two per cent today, he said, while the trade, real estate, logistics and financial sectors constitute the pillars of Dubai economy.

40%

of EMEA CFOs see increased competition and the rising cost of doing business as major external drivers of change within an organisation Source: Oracle

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News

FIS hosts FinTech 2020

Wissam Khoury, MD, MEA, FIS

Software and IT services firm FIS recently hosted FinTech 2020, an event which delved into different trends driving the growth of financial services technology (FinTech) in the Middle East. The event looked at how different IT developments are empowering the local

financial services industry as a whole. It also saw FIS preview its latest research into how FinTech in the Middle East will evolve between now and 2020. In a blog post discussing the event, Wissam Khoury, Managing Director, Middle East and Africa, FIS, said, “We all have to keep a close eye on what is happening with new technologies and new players in the market. It’s true that disruptive technology may first be commercialised in emerging or insignificant markets, and – yes – it will start with low financial performance.

Euler Hermes appoints new GCC CEO

Jules Kappeler, Euler Hermes GCC

Euler Hermes has announced the appointment of Jules Kappeler, previously CEO of Euler Hermes Nordic countries since 2013, as the new GCC CEO. He will succeed Mahan Bolourchi. In his new role, Kappeler is responsible for Euler Hermes operations in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. He will be reporting to Luca Burrafato Euler Hermes’ Head for EMEA region.

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As CEO of the Nordic Countries – with local teams in Sweden, Denmark, Norway and Finland, Kappeler worked for Euler Hermes Switzerland for many years in various roles in market management, commercial and distribution areas and was the country CEO from 2010 to 2012. A native of Switzerland, Kappeler holds an executive MBA from HWZ University of Zurich, and completed studies at INSEAD and ESMT. Kappeler’s appointment comes as an assurance of Euler Hermes commitment towards the GCC and Middle East markets, and Euler Hermes long-term strategy and development plans for this region.

But what’s key is that once they’ve kicked off, disruptive technologies and models grow exponentially and displace mainstream businesses very quickly.” During the course of the event, FIS also ran a real-time poll to see how attendees’ plans compare to the global and regional results. More than 70 participants working in financial services, banking, asset management, private equity and other related industries took part in the survey. Nearly 35 percent of respondents said that they aim to increase their investments on

disruptive technologies and companies by 2020, and nearly 10 percent more than the next most popular choice - market expansion. FinTech 2020 also featured speakers including Dr. Nasser H. Saidi, and economist and governance reform advocate. It also saw a panel discussion which included industry experts such as Dr. Jarmo Kotilaine, Chief Economist, Bahrain Economic Development Board. The event, held at Palazzo Versace, also offered the opportunity for attendees to network with some of FIS’s clients.

Exclusive Networks, Gemalto partner to offer authentication solutions Exclusive Networks Middle East has announced a new strategic relationship with Gemalto, to be its valueadded distributor in the United Arab Emirates. According to the two companies, this collaboration will expand Gemalto’s indirect channel in the region and will enable Exclusive Networks to add authentication and encryption solutions to its product portfolio. “We decided to work with Exclusive Networks because it has a strong focus on security and an established base of active partners delivering solutions in the Middle East region,” said Sebastien Pavie, Identity and Data Protection Regional Director, Middle East and Africa, Gemalto. “With the first-class sales, marketing

and technical support Exclusive Networks provides, we are confident that our alliance will enable solution providers to streamline delivery of strong authentication and encryption solutions and accelerate customer adoption of our SafeNet Authentication Service (SAS) in the Middle East market.” According to Gemalto its SafeNet offerings can provide security for sensitive information across various organisations inlcuding government firms, financial institutions and merchants. Currently, its SafeNet solutions support around 3,000 financial institutions globally and secure more than 80 percent of the world’s intra-bank fund transfers.

O F C shes wi 65%

ies

ic activit

Strateg

1 2

Leading

d finan

beyon hin and

wit

26% 7%

ies

l Activit

Tactica

Other ngs

g meeti

Attendin

ding to

espon g and r

Readin

Emails

1% 0%

Additional

$1 million budget:

How would you allocate the spend across departments?

32% All sales

All marketing

All finance

ou y o d a are h c i h ore w m In d n e sp hope to 2016? time in IF YOU HAD AN

to improve the talent at your company

50%

for 2016

Even across all departments

Heavy allocattions to HR anfd finance

Heavy allocations to marketing and sales

allocated to the finance department

How would you spend the money?

44% 24% 20% 10% 2%

Heavy allocattions to recruiting and retaining top talent. Remainder across technology and process improvements

All to improving technology

Launching a comprehensive finance transformation project

All to training and professional development

Heavy allocation to salaries and bonuses for finance staff

If I had $500k to allocate to our marketing department and they had to spend it as per my direction, I would direct them to focus the spend in:

42% 19% 16% 18%

Market research

Business and finance training

Upgrading systems

Upgrading talent

Social media Initiatives

30%

Development of in-house training programmes

25%

$500K

HR Sales Department Department

Training focused on how to acquire the right talent

25%

Upgrading systems

25%

Upgrading HR staff talent

25%

33%

Training focused on better understanding our addressable markets

Business and finance training

32%

Upgrading talent

20%

Training focused on how to leverage our CRM system

Upgrading systems

Business and finance training

Source: The CFO Alliance

INTERVIEW

John Veihmeyer

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diversity drive James Dartnell caught up with KPMG global chairman John Veihmeyer on his recent visit to Dubai. he shared his thoughts on how the Middle East can emerge stronger from the oil price plummet, and what GCC CFOs can learn from their American counterparts.

broad one to start off with – what are KPMG’s main aims for the next five years? Working closely with our clients to help achieve their objectives is a top priority. I think we’re very focused on differentiating the nature of the client experience. In a world where there’s a lot of uncertainty and risk, every company or government organisation needs to look at how they can transform their business operations. We’re certainly focused and will be over the next five years in broadening and deepening our capabilities in addressing all their needs and opportunities. What do you think CFOs in this region can learn from their American counterparts? That’s a loaded question! I think one of the things that US-based companies have been willing to do for a long

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time is look not just at their acquiring capabilities through traditional M&A activity, but also, how to partner with other organisations. What kind of alliance strategy does your company need, when one day you could be competing with someone and then the next day teaming up with them? I’ve seen that trend emerge much more rapidly in the US compared to many other jurisdictions, therefore I think CFOs of US-based companies have been challenged in terms of how to build institutional capabilities and team with other companies to maximise opportunities in the marketplace. The SME sector has become a big focus for your local business here in Dubai. Why should SMEs partner with KPMG? A lot of people may not realise this but over 50 percent of our revenues derive from working with small and medium-sized enterprises. A large part

of our culture and history has always been working with small and emerging enterprises. It’s a big part of our strategy in terms of our future success – which will be heavily linked by how well we serve SMEs. We’re investing in tools and solutions that are specifically geared towards those types of companies. They have different needs compared to a global multinational. Over the last five or 10 years – I don’t care how small the company is – there are companies out there who are operating outside of their own borders. They may have subsidiaries located overseas, but almost every single company is looking to sell to consumers outside of their own home countries. Part of their sales channel or supply chain will be global as well. Being a small company doesn’t mean that global expertise won’t be useful to you. Working across borders demands expertise on regulatory and tax environments. If your supply chain has

INTERVIEW

John Veihmeyer

components that are worldwide then that expertise is also important. Our ability to provide traditional audit, accounting and tax services as well as cyber strategy and analytic capabilities, forensic, corporate finance offerings across our portfolio are things that emerging companies need as well. Just because you’re small doesn’t mean that you may not be interested in acquiring another small company somewhere else. Our corporate finance and due diligence expertise can be very valuable in this case. Which of the issues you’ve mentioned is the most important for an SME, particularly in the Middle East? For an SME that is expanding globally, tax is always the thing you run into first. If you’re expanding into an unfamiliar market, the first thing you have to make sure you get right are the compliance related features of that country, and tax and regulatory issues full under that remit. Many SMEs who engage us when moving into another country always look for tax advice. Strategic decisions around how to penetrate a market, and what market to go to, are relevant to SMEs. Technology services are also very relevant. As your business becomes more global and you expand operations, figuring out how to ensure technology keeps up with expanding scale is a challenge for every enterprise. What’s the US – and your – perception of this region? Starting with mine – I don’t know if I’m indicative of a lot of people or not – I believe, as the chairman of KPMG, this is a very important region to us. It has been and I expect it to continue to be one of our fastest growing regions in the world. We’re growing at over 25 percent in Saudi Arabia, have double digit growth in the UAE, and this is a strategically important region because of its growth prospects and in terms of what it offers in terms of talent capabilities. We’re investing heavily in the

“The drop in the oil price may be painful in the short-term for this region, but I think it will eventually be beneficial to have gone through diversification initiatives.” region and will continue to do so. A lot of Americans view this as a region, where, in a world where getting experience is so important, it is a great opportunity to distinguish yourself. Being astute and sensitive to different cultures and working in different parts of the world is important, and I think this is a market that Americans look to as a great opportunity for building out their opportunities and enhancing their prospects. And what about the region’s economic prospects in light of the oil price crash? Obviously the region has been hardhit by the oil situation, but having said

that, a lot of things that are being done in response to that situation are very important in building a sustainable and long-term diverse economy here. It may be painful in the short-term, but I actually think in the end it will be very beneficial to have gone through diversification initiatives. All the ministers that I talk to here in the region are focused on these initiatives. While the region may grow at a rate of around 3.5 percent – I think that’s the latest IMF prediction – that masks the opportunities that a lot of businesses in this region have. As the ministries here look to transform in this environment compared to the one they’ve enjoyed, that creates significant opportunities as they look to achieve their own objectives.

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INTERVIEW

John Veihmeyer

It’s like anything where something negative occurs; governments and businesses figure out how to adapt and change to new circumstances. I’m not saying the drop in the oil price is a good thing, but it will cause a rethink of how to operate, and of future revenue sources, which all creates activity in the marketplace that, if you’re creative, can generate business opportunities. Speaking of creating business opportunities, will you be moving into the Iranian market in light of the lifted sanctions? We’re being cautious about Iran. It obviously has significant opportunities here. In the late seventies it was the UAE’s biggest trading partner, so I know what an important partner Iran can be to the country. As sanctions continue to be reduced, that role can gradually reemerge. We’ll stay close to it and monitor the situation, but we’re taking a measured approach, and will react and respond as the market dictates. The US has restrictions on Iran that many countries don’t, but Iran could nonetheless develop into a very active trading partner for a number of countries that use our practice. Oil aside, what’s the biggest challenge that this region faces moving forward? From KPMG’s standpoint, this is a region where our only constraint on growth and opportunity is our ability to attract and identify opportunities, and finding the talent to capitalise on them. We are actively recruiting and looking to – where it makes sense – shift resources into the region from other parts of KPMG. A big part of our objective is to continue to find local talent that can help us meet the challenges of the customers and governments that we’re trying to serve. Cyber and digital capabilities are tough in terms of finding talent, and in truth we’ve had difficulty in finding enough people with those skills.

Family business Family businesses continue to be among the most common forms of organisation today and a driving force behind the global economy. According to the Family Firm Institute, family-owned companies account for two-thirds of all businesses worldwide, generating more than 70% of global GDP annually. Still, their economic importance is often underestimated. So what do we know about them? Over the next couple of months, KPMG will attempt to tackle the following issues via research released in The CFO Middle East: - The changing face of the family business – what have we recently learned? - What strategic changes are family businesses making? - The role of family businesses in philanthropic activities - Issues inhibiting family business success Keep an eye out for the first part of the research in the next issue of The CFO Middle East.

How quickly is the GCC progressing with IFRS implementation? I think it’ll continue to progress. There are around 100 countries around the world that are on IFRS. It’s clearly the accounting language that is being adopted worldwide. We’ll continue to support every country that is making those changes. I was in Saudi Arabia recently and companies there are worried about their capabilities to build the experience and knowledge that they need to implement IFRS on the timetable they need, but we will help them implement IFRS when required. I don’t see anything that will slow the pace of IFRS adoption outside the US. What impact will the introduction of VAT have on the region? How will it affect your local tax business? Frankly, I think we’ll have to build additional tax capabilities in the region for the collection of VAT, as well as some of the other similar measures being adopted in different countries. Companies we work with will need to appropriately comply with

requirements. As we speak, we are relocating talent with VAT experience from outside of the region to this region, so that we’re ready to assist companies who need our help in that regard. There’s no doubt that we will have a bigger tax practice going forward in the region. To put you on the spot, what are your thoughts on Donald Trump? Without commenting on any of the election candidates, as optimistic as I am about the US economy, most business leaders I meet with in the US believe strongly that there are some policies that need to be looked at that could accelerate the growth of the US economy. They include the regulatory environment, tax policy – we need a competitive tax system in the US, which we don’t have. More important than which candidate is to continue to work with legislators and the administration to deal with policy issues that can make the most of our economic opportunities, including trade, immigration and tax policies.

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INTERVIEW

Joe Thomas

eagle eye Joe Thomas’ keen eye for detail is in demand. Until recently, he was Mohamed Hareb Al Otaiba Group CFO, but a risk-conscious chairman has now made a special request for his attention to fine detail to be deployed as the Group internal auditor.

t’s the little things that make a big difference. Joe Thomas appreciates this as well as than anyone, but is acutely aware that the smallest of numbers are the product of the quality of staff in any given organisation. If the wrong people are in, the wrong numbers come out. “Everyone has agendas,” he says.

“It’s commonplace for a manager, or someone in a position of power, to say ‘give my boy a job’. Unfortunately that’s not good enough, and those kind of unfair advantages mean you end up missing out on rough diamonds and hiring the wrong people. You need the right candidates with appropriate commercial and market knowledge.”

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“It’s commonplace for a manager, or someone in a position of power, to say ‘give my boy a job’. Unfortunately that’s not good enough.” www.thecfome.com

INTERVIEW

Joe Thomas

“As CFO, I was responsible for the oversight which drove the business and its operations, but my role is now about drilling down into details which can make the difference.”

Thomas has acquired a broad range of experience across the Middle East, having worked as car rental firm Avis’ regional CFO and general manager, and in Xerox’s finance department prior to joining Mohamed Hareb Al Otaib Group (MHAOG). For the last two-and-ahalf-years, he has served as chief financial officer for the Group, but his expertise has now been called upon in his new specialist role. Thomas’ work has now shifted to being more focused on controls and risk management, to guarantee that MHAOG is not exposed to fraud and shoddy accounting. “A lot of things can so easily get missed out from day to day,” he says. “Making sure we don’t miss them is absolutely necessary.” Many figures in the industry may ask why a seasoned CFO is taking what could be perceived as a step back by becoming group internal auditor. The answer stems from an MHAO leadership that is conscious of the risks their organisation could always be open to. “Our chairman wanted to hear it from the horse’s mouth, so to speak,” he says. “As CFO, I was responsible for the oversight which drove the business and its operations, but my role is now about drilling down into details which can make the difference.” Flawed recruitment is a prospect that gives Thomas nightmares to this day. He has witnessed the disastrous effects of hiring the wrong people, and knows that it is, unfortunately, easily done. He apportions a fair degree of this to nepotism. In order to combat this practice, Thomas intends to establish a line of reporting to MHAO’s chairman. “I believe that hiring for key positions should have his approval,” he says.

“The same goes for contracts that are above a certain value; he must give his say-so and at the very least be informed of the development.” Beyond the risks posed by favouritism, Thomas is also highly mindful of “conmen” who go out of their way to deceive in job applications. “A lot of these CVs could be only 60 percent accurate, riddled with suspect qualifications,” he says. “In my experience, this is often accompanied by a fantastic covering letter, but if you asked these people to write a letter apologising to a customer, or negotiating with a supplier, they’d spout utter nonsense.” If it seems as if Thomas is at pains to stress the importance of recruitment in the finance department, it is for a good reason. If candidates do not have “the skill or will”, they are liable to cause sizeable problems further down the line. “Employing people who appear perfect but then flop is utterly useless,” he says. “If you take somebody on without the skill or honest will, then how on earth can you trust the numbers they are generating? It will be pure garbage in, and garbage out.” The idea of “the skill and the will” is central to Thomas’ philosophy of having the right people on board. One of these traits takes priority, however. “I would always hire someone for their will before their skill,” he says. “If someone can’t handle a situation for one reason or the other, I’d always rather it was due to lack of experience rather than a lack of integrity.” With real-time information becoming increasingly important in the finance department, Thomas believes this propensity for false

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INTERVIEW

Joe Thomas

“If you take somebody on without the skill or honest will, then how on earth can you trust the numbers they are generating? It will be pure garbage in, and garbage out.”

numbers has the potential to cause real difficulties. “You need to act on information quickly,” he says. “Decisions should be influenced around 30-40 percent by numbers, and you need the right facts to make the right call.” In order to facilitate the CFO’s role, Thomas says, it is essential to introduce periodic employee declarations that provide clarity as to their completion of tasks, and their observations of risk. “Have they completed all consolidations, completed their tasks on time and checked the inventory?” Thomas says. “No one is going to get fired for making a mistake or holding their hands up, but it’s important that we’re aware of issues to avoid any nasty surprises.” This desire to avoid last minute shocks is at the core of Thomas’ aims. “If there’s bad news, I need to know about it as soon as possible so I can deal with it,” he says. An admirer of Warren Buffett, Thomas believes the entrepreneur and his companies have set the standard for professional conduct and sound judgement. “Speaking at a US university graduation ceremony, Mr Buffett was asked by an audience member how he could so famously make calls on $1 billion deals in just five minutes,” Thomas says. “He essentially answered that his 60 years of experience and knowledge allowed him to make decisions. What’s also important is that if Berkshire Hathaway is interested in making an acquisition, it does things with high standards of ethics. It keeps any potential deal confidential, and gives the target company a deadline for any decision, which is also well-informed because their numbers are precise.”

Once again, Thomas also links this to the importance of the right staff within a team. “It’s important to find the right people. It’s also better to wait on an important decision like that rather than rushing it and coming to regret it in the future.” Pressure from other departments is yet another hurdle that stands to imbalance the books – and cause worse effects, Thomas says. He recounts his experience of working for a former employer as financial controller, where a saleswoman could not take ‘no’ for an answer. “Just before the financial crisis, this employee had a 1.3 million AED deal lined up,” he says. “The deal had to be cleared by the credit controller, and because she was desperate, she came straight to me.” After running quick checks, Thomas discovered that the customer had made three previous orders with the company, for 20,000 AED, 50,000 AED and 70,000 AED. He immediately smelt the proverbial rat. “I told her ‘The cheque will bounce,’” Thomas says. “The drastic increase in spend was a surefire indicator that the deal would go bad, so I didn’t approve it. She went to the general manager, who supported my stance, and then to the sales director, who backed her. I told them, ‘This deal will go bad. If you sign, it’s your problem.’” The saleswoman in question agreed to forfeit her job were Thomas correct. Within two weeks, the customer in question had absconded, and Thomas had been vindicated. “Salespeople can be driven by pressure to hit their targets and earn commission. They can run you over if you’re not tough. Credit managers need thick skin as well as the skill and will.”

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Insight

IFRS

Does IFRS help bank financials’ analysis? Kurt Ramin, CFA, uses the case study of three international banks – who are filed with the same regulator – to determine how International Financial Reporting Standards has impacted their reporting.

ank financials have their own way to get attention. At the World Economic Forum 2011 in Davos we presented an article in “Trust Meltdown II, Media Tenor” which showed an amazing statistic on Deutsche Bank: its total assets nearly dropped by $1 trillion US dollars from 2008 to 2009. I was standing next to the then-chairman Josef Ackermann when this was shown. Besides a smile on his face, nobody seemed to care about this fact and I couldn’t find many stories

at the time either when Deutsche Bank published their 2009 Annual Report. With most global banks and countries around the world now applying International Financial Reporting Standards (IFRSs) one would think that numbers and presentations are becoming more comparable and easier to understand. Let’s look at a couple of banks from different regions that are filed with the same regulator: Westpac Banking

Corporation (Australia), Deutsche Bank (Germany), and JPMorgan Chase & Co. (USA). As part of earlier US GAAP/IFRS convergence efforts, non-US companies are allowed to file with the SEC on form 20-F using IFRSs. On their filings with the SEC, Westpac filed 306 pages, Deutsche Bank 552 pages and JP Morgan Chase 332 pages. Because of similar formats, it is easier to compare summary data on the income and cash flow statements, but comparisons are more difficult for the balance sheet. IAS 1 does not prescribe the format of the statement of financial position (balance sheet). Assets can be presented current and then non-current, or vice versa, and liabilities and equity can be presented current then noncurrent and equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. This makes it very difficult to compare banks in detail. Netting/offsetting standards (IAS 32) have been improved, but interference with local legal concepts, particularly on derivatives, seem to hinder further convergence. Indicative on netting, the Westpac filing, page 197, clarifies: “Netting risk reduction by way of current account setoff is recognised for exposures to creditworthy customers domiciled in Australia and New Zealand only. Customers are required to enter into formal agreements giving Westpac the unfettered right to set-off gross credit and debit balances in their nominated accounts to determine Westpac’s net exposure within each of these two jurisdictions. Crossborder set-offs are not permitted.” Because of limited netting, total assets in the banking industry are higher than in other sectors. Due to gigantic total asset numbers and

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Key numbers: in USD (Billion)* Westpac (30/9/15)

Deutsche Bank (31/12/15)

AUD

EUR

JPMorgan (31/12/15) USD

Net Income (Loss)

8.0

5.6

6.8

(7.4)

Total Assets

812

594

1629

1773

2352

Equity/Net Assets

248

213

1.82

0.27

0.86

Market Capitalisation at 04/12/2016 (exchange rate as of 4/12/16)

as of year end Equity

* Exchange rates: AUD 0.7020 AT 9/30/15; EUR 1.0887 at 12/31/15; 1.2088 at 1/1/15

Notes: High total assets at Deutsche Bank. Loss at Deutsche Bank due to impairment charges and legal provisions; Deutsche Bank is trading only at one third of book value, compared to Westpac at 1.82

misleading ratios (any percentage of total assets) it is easy to see why perhaps there was less focus on productivity improvements and related measures. For a performance type analysis, I prefer a presentation along the lines of products, people and physical infrastructure (3Ps) reporting, as outlined in my previous CFO Middle East article “Is the balance sheet eliminating itself?” (issue 13). Product and service revenue Lots of fair value here, especially on results reported as other income. Most banks report revenue along three broad product lines: net interest and net commissions/fees and net other transactions/income. Objects can be defined as currency unit, customers, contracts or any other trackable quantitative measure. Net interest income is the easiest line item to compare. Assuming the same consistent cash flow and accrual definitions, it is a very meaningful number on how net lending assets were managed. The huge net surplus on JPMorgan’s interest income is attributable to a

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staggering US consumer debt of an estimated $13 trillion. Net commissions and fees are more difficult to compare; the numbers depend to a large extent on the bank’s business model and related segmentation. How do banks apply the new converged revenue standard IFRS 15 (“Revenue from contracts with customers”) on an industry basis? On some business, are they acting as an agent only? On revenue will the IASB and FASB list the same XBRL elements in their respective taxonomy for this standard? This certainly would make comparisons easier. People expenses Considering the number of people employed, disclosure on people expenses is one of the weakest areas in bank reporting, except for touting and describing their complex incentive schemes. People expenses as a percentage of total assets are only 0.8 % (Deutsche Bank) of total assets, a low ratio compared to most other industries. In the past, has this misleading

ratio led to a neglect of focus to manage people expenses? Based on regulatory requirements, banks report at length on compensation and incentive plans (IFRS 2), benefits (IAS 19) for upper management and oversight. For other employees, banks either report on the number of people employed or compensation numbers only, not a combination of both. It would be interesting to see the number of people employed and their pay in various jurisdictions, gender and the related compensation values and a better presentation of future liabilities. Deutsche Bank reports the number of people for each entity and JPMorgan compensation and number of people by business segment. Missing disclosures make re-structuring estimates difficult to assess as well as shedding more light on human asset values and related intellectual capital. Perhaps

Considering the number of people employed, disclosure on people expenses is one of the weakest areas in bank reporting, except for touting and describing their complex incentive schemes.

Insight

IFRS

banks should take sustainablity more seriously and look at the GRI requirements on people reporting and the metrics recommended on the SASB standard for Commercial Banks. Compensation expenses per employee for Westpac are very low compared to the other two banks. Is this product-related or due to a more streamlined regulatory environment? There is a glimpse on these types of expenses on page 15 of JPMorgan’s Annual Report: “Since 2011, our total headcount directly associated with controls has gone from 24,000 people to 43,000 people, and our total annual controls spend has gone from $6 billion to approximately $9 billion annually over that same time period. We have more work to do, but a strong and permanent foundation is in place. Far more is spent on controls if you include the time and effort expended by front-office personnel, committees and reviews, as well as certain technology and operations functions.” Overall, there is weak reporting on breakdowns for the use of professional fees and outside services. Deutsche Bank reports audit fees (KPMG) close to $90 million which catapults them into the highest rank compared to any other Fortune 500 company. Westpac was only charged $17 million for audit services by PwC.

leasing features, depreciation and amortisation reporting is weak as well. The new leasing standard, IFRS 16, might shed more light on it in the future. IAS 16 allows valuing and reporting fixed assets at fair value. Banks own valuable properties in prime locations and any appraisal of these properties would show and release hidden reserves and put these property values on the same footing. The use of fair values on these properties would make this asset section more comparable with valuation for intangibles. This will be more important in the future as banks, as one way of looking at changing business models, will certainly be more interested in buying or collaborating with fast developing Fintech companies, which are shaking up the payment industry and other parts of the banking domain.

Physical infrastructure and weightless assets Infrastructure reporting (both physical and weightless assets) is comparably extensive, but what makes it difficult to assess is the use of different labels in this section (e.g. property and equipment vs. premises and equipment). Due to

Summary IFRS was not designed with a focus on reporting for financial institutions. IAS 30, “Disclosures in financial statements of banks and similar financial institutions”, issued in August 1990, was the first standard dealing with bank reporting. The convergence discussions between the FASB and IASB, with

“Overall, there is weak reporting on breakdowns for the use of professional fees and outside services.” added pressure from the regulators, did improve the reporting standards for the sector. These efforts are nearing completion with an insurance standard being issued soon. All these actions are helping the understanding of financial statements better and making them more comparable on a global basis. Unfortunately, IAS 1 ‘Presentation of financial statements’ does not prescribe a more fixed or industry reporting format and there are no efforts to converge and issue a common global XBRL taxonomy for bank reporting. Top risks as well as proprietory information can still be respected, but improved classifications will make the data more comparable and improve overall risk asessment for the entire banking sector and financial institutions. Banks are at a crossroads: technology advancements are putting pressure on compensation levels and there are currently calls to break up big banks, in particular in the US. If this happens, risk assessment and reporting will be more focused again and performance reporting on the efficient use of various capitals will benefit. Size does matter, but only if communication about it is transparent and understandable.

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INTERVIEW

Dhofar Global Group

clean bill With extensive experience in various industries across India and the Middle East regions, finance is Koshal Mundhra’s passion. The Dhofar Global Group CFO sat down with The CFO Middle East and shared how his acumen became instrumental in contributing to the company’s recent achievements.

ive us a brief overview of Dhofar Global and some of the company’s highlights from the last year. We are a market leader in the hygiene care industry here in the region. We are an Oman-based company, which operates in the MENA market. Established in 2001, we specialise in products such as tissues, soaps, micro fibre cloths, air fresheners and the like. We supply these products to four and 5-star hotels, government offices, private sector organisations and facilities management companies. We’ve set up our business here in the UAE in 2007 and we have been growing multifold since then. The beauty of Dhofar as a company, I believe, is that even during the global economic turbulence of 2008, it has

continued to grow stronger and has managed to progress in its field. In recent years, we have been able to penetrate new industries in various parts of the UAE, Qatar and Oman. We have also managed to diversify and expand our product lines, which now includes cleaning gloves and garbage bags. Last year, we launched our cleaning chemical line. Also, in accordance with our business strategies for this year, we will continue with developing this product line and release new products in the market. This is the strategy that we have built within the management team. While providing tissue and hygienic products is the core of our business, we realised that we mustn’t only focus in those areas alone. That’s why we decided that it’s the right time to keep diversifying and launching new

products, otherwise our market reach will be very limited and we’ll be left behind in the regional market. What differentiates Dhofar Global with your competition? Our attitude. Succeeding in this or any other industry all boils down to your attitude towards your customers. You have to be mindful of the way you engage with your customers. We think that product innovation, coupled with quality customer services and a strategic mindset will keep any organisation ahead of market competition. As the Group CFO of Dhofar Global what is the main focus of your role? My main role is linked to managing the funds within the company. As the finance head, controlling budgets and risks is also

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Develop a passion. Try new things. Donâ&#x20AC;&#x2122;t limit yourself to what a finance role dictates, develop an interest in the different parameters that make a business good and successful.

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INTERVIEW

Dhofar Global Group

a crucial part of my function within the Group. I see to it that both internal and external risks for business are mitigated to make sure that they don’t negatively impact our business in any way. What I normally hear in the market is that the CFO takes over the risk control function, which brings the role to the forefront of the business. To elaborate on the funding side, I am glad to say that the funding within the company is mostly from internal accruals. We have managed to expand our operations in locales like Qatar and Oman without needing any external funding. Can you take us through your journey as a finance professional? When did you first develop your interest in finance? I grew up in a Marwari community in Rajasthan, India. People from there are often regarded as those who have a natural inclination towards finance and trading. So I think that culture influenced me growing up. Back in high school, I chose mathematics as a primary subject and accounting as a secondary subject. From that time onwards I have grown to be more interested in the subjects, which further developed until my time at university. Upon graduation, I did my chartered accountant course. After that, I didn’t really have to decide what I wanted to be, I just kept on developing a passion in the finance field and I built up my career from there. Since then, I have held finance and accounting positions in various industries like manufacturing, retail, shipping, and healthcare, and now at Dhofar Global – in trading and distribution. What has been the biggest turning point of your career? I can say that it’s this one, working at Dhofar Global.

During the five years that I have been with this company, we have managed to grow the company’s turnover by a factor of five, and I am proud to have been a part of that. We utilised business and market intelligence, and strategic planning in achieving this success. As the finance head, I see to it that finance is available at any point in time for Dhofar’s expansion. Even though the market has been through very difficult times, we have managed to move forward without having to face any kind of financial difficulty. In your opinion, what’s the best approach finance heads can take to stay afloat during turbulent times? Today’s market certainly is undergoing several challenges and industry players need to realise how important it is to strengthen their internal systems. Having worked with a variety of industries previously, I have experienced first hand that each sector definitely has its own unique set of problems. So, it is imperative that as the finance head, you understand the fundamental setup of your business’ operations and the market it operates in. Another thing is ensuring that you keep a good relationship between you and your customers and banks. For example, there will be times when your clients won’t be able to stringently comply with your payment terms. So, at some point, you’ll need to give them some sort of leeway or leverage to pay you back. You have to develop a relationship that you can both trust each other. At the same time, you have to build a good rapport with your banks, so you can take the same leverage from them so that your working capital cycle doesn’t get affected. These kinds of relationships result in a certain level of good will. It creates an ecosystem of loyalty. For your customers, they get the impression that

you are the best business partner for them as they can feel how much you support them. They may grow five times and they will still remain loyal to your business, and this has been true in many cases at Dhofar. In your opinion, what qualities make a good CFO? A good CFO is someone who keeps an eye on the future. They can’t be limited to the mindset or strategies of the past. They also can’t be limited to their own KPIs; they should be willing to go beyond what their job description dictates. Someone who is willing to go beyond the finance role and transform themselves into a strategist. One should ensure that risks are managed, and form a good relationship with all the different departments and stakeholders inside and outside the organisation. At the end of the day, not everyone within an organisation will agree on every aspect of the business. But as the person who leads the finance and risk management aspects, you have to be able to create a good synergy between all the moving parts of the organisation. Keep innovating and improving, otherwise you’re going to be left behind by your competition. Also, in doing so, you must ensure that the quality of the products and services that you launch doesn’t suffer. What message would you give young finance professionals who aspire to be CFOs one day? Develop a passion. Try new things. Don’t limit yourself to what a finance role dictates, develop an interest in the different parameters that make a business good and successful. Take the finance role as a challenge. Not because it is difficult, but because it is evolving all the time and so should you.

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EVENT

MDS ap

pushing performance In partnership with SAP Gold Partner MDS ap, The CFO Middle East hosted a roundtable discussion on the benefits of enterprise performance management solutions for the finance department.

easuring success and failure is not as straightforward as it may seem to the untrained eye. With a whole host of KPIs needing to be taken into account, and with streams of information constantly flowing into an organisation, ‘success’ can turn into ‘failure’ within hours – or even minutes. With all this in mind, a selection of the UAE’s top CFOs gathered to discuss what they felt enterprise performance management solutions could do for their organisations. Setting the tone for the roundtable was special guest speaker Pradeep

Kumar, CFO of UAE Exchange. Kumar highlighted his experience in working with MDS ap to deploy SAP’s Business Planning and Consolidation software, which he says will bring tangible results to the remittance firm. “It’s been a great help in terms of tracking and meeting our timelines,” he says. “It’s improved our accuracy, and really enhanced our governance. Beforehand, it wasn’t uncommon to make modifications to our budget via email. Now, any change goes through the system, giving greater transparency to our governance and planning.” He spoke highly of the support

provided by MDS ap in the journey. “They were supportive in terms of meeting our deadlines, which meant they often had to work overtime,” he says. “They did a great job in supporting our domain team for budgeting and accounting and were highly knowledgeable.” Next up was another guest speaker – Dave Jones, chairman of EPM International – who shared his insight on how EPM was a mainstay throughout any economic conditions. “EPM is almost counter-cyclical,” he said. “In a recession, its sales don’t decline, but there’s no time when it particularly booms either. It’s important that EPM software can provide accurate and efficient forecasting, giving you the budget of now, and not one of five months ago. In tough economic times, you need to quickly reflect and plan. I am a firm believer in using rolling forecasts.” Gautam Pradhan, CFO, National Marine Dredging Company,

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highlighted the need for a careful and considered change management process in any EPM project. “Like any project, you have to take into account the internal user base with EPM,” he said. “We have 65-yearolds and 22-year-olds working for us; all ages have to be catered for in EPM’s usability.” Sangeetha Nahar, Senior Manager, Finance Process and Systems, Dubai Properties Group, highlighted concerns surrounding the need for the finance department to be autonomous from IT in getting full benefits from any potential solution. “You need functional consultants in order to make it work,” she said. “IT guys don’t understand the business in the way we would like, but business guys equally don’t have the requisite understanding of systems.” Union Properties’ CFO Murtaza Chevel agreed, saying an internal figure would be necessary for a solution to work. “It’s nice to have

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“It’s important that EPM software can provide accurate and efficient forecasting, giving you the budget of now, and not one of five months ago.” IT consultants who can come in and marry business and IT, but you need someone internally who can oversee this process,” he said. “If there is a problem with IT then you often will only hear excuses, but if there’s an issue with payroll, then they understand very clearly.” Anthony Murphy, CFO of United Arab Bank, believed that the finance industry has reached a turning point in terms of EPM solutions. “It’s clearly a time for

change in this respect,” he said. “Now more than ever, we need enhanced dashboards, new strategies and new annual budget processes. Data is still very finance-heavy; we need tools for financial and nonfinancial information.” Murphy went on to highlight how timely data was a necessity. “Quite often, by the time data is pulled it can be out of date,” he said. “If information is not available by working day five then you cannot act on it.”

Insight

Patrick Legland

Real options theory: a contribution to investment strategies Affiliate Professor at HEC Paris Patrick Legland gives his take on the benefits of real options theory and why it is not dissimilar from its financial options counterpart.

nvestment strategies build up in unknown environments. However, standard valuation approaches are not able to precisely model the uncertainty related to future projects or investments. Indeed, they do not take into account decisions made by corporate managers over time and the associated probability. The development of analytical models evaluating European options has opened the way to new opportunities for corporate strategy. Indeed, Real options theory sets a conceptual analogy between a companyâ&#x20AC;&#x2122;s future investment opportunities and a European financial option. Real options allow making a strategic investment decision relative to a non-financial underlying asset. The underlying can be a project or a real asset such as capital equipment, production plant, R&D, business start-up or growth project, or even intellectual property. The real option added value for business is primarily the consideration of an uncertainty level regarding the realisation of investment projects. It helps focus attention on the importance of the manager to present capitalintensive projects despite its high degree of uncertainty. Finally, it encourages policymakers to clarify the assumptions of their projections. The objective is not to provide a pricing model but rather a decision instrument. Thus, it becomes an excellent tool for communication and formalisation of business strategy. The methodologies applicable to real options correspond to the direct application of financial options theory (i.e. to â&#x20AC;&#x2DC;financialâ&#x20AC;&#x2122; assets) in real assets. By translating financial theory, the holder of a real option has the right:

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1. To carry out or not carry out a future action (investments, projects) 2. To take or not to take a decision on a predetermined date. This shows that the real options definition is relatively close to the financial options definition. Like financial options, they are differentiated according to their specificity: there are call options and put options. Specifically, real options (call) give the holder the right (not the obligation) to initiate an investment, the cost is known in advance (the strike price), on a determined date (maturity). For example, having access to an oil and gas field that is not yet used can be likened to holding a real call option (option to invest or

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The real options definition is relatively close to the financial options definition.

not in the project). The real asset on which the option is exercised is the oil field. The possibility associated with this option is to exploit this deposit or not. This is an option, as the operation permits to appropriate income from real assets. The strike price is actually the cost to start the production. In the same way, and as for financial options, real options are

derivative products (presence of an underlying asset) and asymmetric (limited loss, potentially unlimited gains for its owner). The holder can choose to use or not use their right, and depending on economic conditions, their loss will be limited by the cost of setting up the optional procedure, but its gains â&#x20AC;&#x201C; based on the cash flows that will be generated by the investment â&#x20AC;&#x201C; are potentially unlimited.

Interview

Cisco Capital

capital returns Increasing competition in terms of IT initiatives put additional pressure on any organisation’s budget. With this issue at the fore, Sven Jirgal, VP and COO, Cisco Capital, discusses how the networking firm’s division can assist their partners in delivering maximum ROI.

hat does Cisco Capital do? Cisco is well-known for being one of the biggest technology companies - not only here in the region but also worldwide. The success of the company has led us with a very strong balance sheet, as we have managed to generate a lot of cash through our global operations throughout the years. Cisco Capital is a division within the company that focuses on helping customers and partners accelerate their adoption of Cisco technologies, solutions and architecture. We develop and provide flexible financing solutions for the acquisition of our IT products and solutions. We aim to make it easier for our partners to get the right technology to enable their business growth, especially at a time when organisations are looking at accelerating their digital transformation. The financing helps maximise the value of technology by reducing total cost of ownership, managing cash flow, and conserving capital. How successful has the adoption of Cisco Capital solutions and services been in the Middle East? As a subsidiary of Cisco, we operate in the same areas they do and support the same objectives they have. One of the biggest endeavours the company has in this region is supporting country digitisation. Cisco Capital basically work towards providing services like cash flow management and credit lines to our partners here in the region. We are very active in every sector, however, our

biggest focus areas are telecoms and the public sector. How are you encouraging businesses to further invest into this trend? We take two approaches. First is when a certain customer needs to invest in a particular solution, we draw them a number of financing solutions and programmes based on their needs, which include leases and loans. We provide them with the support they need to spread their investments and manage their cash flows. We also work with our partners who, at times, participate in public sector projects as either a prime contractor or a secondary contractor. These kinds of projects typically have long deployment cycles and are seen in organisations like hospitals, desalination plants and airports. We help Cisco partners bridge the financial gaps they have in participating in these projects, and at the same time, enable them to leverage our products and services to achieve the optimum ROI. There’s always a financial component underneath IT and we are here to help them address that financial aspect. What are you doing to make sure that your partners and customers understand that IT should be a priority in their budgets? We believe that technology is actually a big business differentiator. If you think about the firms operating in the sharing economy like Uber, it’s is a car service company, yet it doesn’t physically own

any cars. We try to make our partners and customers understand that unless they actively invest in technologies that can transform their businesses they will be outshone by entities who are aggressively doing that. IT and IT security are topics featuring in any boardroom, and with the reach that Cisco Capital has in this region we can potentially help drive that adoption. How important do you think it is to have a good synergy between a CFO and CIO when it comes prioritising IT investments? The biggest point I have to mention is that more than half of CIOs around the globe are reporting to CFOs. So, a good relationship between the two of them is crucial. Another important point is that, as technology is becoming the enabler for any business, IT is at the heart of the strategy of any company. So whether it’s the CFO, CIO or CEO, they should be united in taking the IT strategy forward. Where do you see the IT financing industry going forward? IT spending in the Middle East is still strong as compared to the rest of the world. Cisco is committed to the region, and, of course, so is Cisco Capital. We’ve strengthened our presence here and our capabilities across various sectors in the Gulf. We are committed to the economies here and we will continuously support the digitisation efforts of organisations here in this part of the world.

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research

Q1 IPOs

What the public wants…

Research from PwC reveals that despite significant IPO offerings in Q1 2016, volatility remains and activity levels stayed low.

PO performance in the GCC in the first quarter of 2016 remained relatively sluggish in terms of their number, as volatility in oil prices and the slowdown in the global economic environment impacted capital markets activity, according to PwC research. However, the value of the only offering in the quarter improved significantly, going some way to display investor appetite exists for companies that have the right equity and growth record and operate in defensive sectors such as healthcare and education. The Kingdom of Saudi Arabia was the only active IPO market in Q1 2016 with one offering in March. Middle East Healthcare Company, (MEAHCO) which owns and operates

the Saudi German hospitals offered 27.61 million shares to the public (amounting to 30 percent of the company’s share capital) and raised proceeds of $471 million. The company is now listed on the Saudi Stock Exchange, Tadawul. Period on period performance Looking at IPO performance in Q1 2016 compared to the same period in the prior year, although there was just one IPO, the total value raised in Q1 2016 was 2.5 times higher than the same period in 2015. Furthermore, looking at performance in the previous quarter, the one IPO in Q4 2015, also listing on Tadawul, raised $101 million, representing 21 percent of the amount raised in Q1 2016.

Tadawul has been the most active market during the past five quarters, and is expected to remain the market with the highest activity in the GCC, taking into account the forthcoming IPOs currently in the pipeline. Steve Drake, head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East, said, “The key elements characterising the 2015 capital markets performance related to uncertainty over oil prices and the geopolitical developments in the GCC region, which continued during the first part of 2016. However, the GCC pipeline for the remainder of 2016 looks promising. IPOs put on hold in 2015 due to regional instability are expected to come back in 2016 as lower oil prices become the norm and are factored into the market.

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“Over the longer term, we expect to see positive impacts on the Saudi Arabian equity markets, mainly as a result of the recently announced government reforms, although it is difficult to predict exactly when that might be. Similarly, the Capital Market Authority (CMA) desire to increase the number of Saudi Arabian listed entities on the Saudi exchange is expected to have a positive impact on IPO volumes in the medium term.’’ Bond and Sukuk Markets The GCC bond and Sukuk markets improved in Q1 2016 compared to Q4 2015, irrespective of overall activity remaining muted. PwC saw some positive sentiment towards the end of the quarter. However,

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“IPOs put on hold in 2015 due to regional instability are expected to come back in 2016, as lower oil prices become the norm and are factored into the market.”

investors remain price sensitive and susceptible to challenging market conditions. Consequently, bond and Sukuk pricing was higher, generating additional challenges when pricing and closing transactions. Several companies put on hold or delayed their Sukuk or bond raising aspirations for pricing reasons.

Bond Issuances In sovereign issuances, the Central Bank of Kuwait and the Central Bank of Bahrain were the most active players during this quarter. The Central Bank of Bahrain issued 10 treasury bills each worth $184 million (BD 70 million) with maturities of three months, three treasury bills

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each worth $92 million (BD 35 million) with maturities of six months and one treasury bill worth $526 million (BD200 million) with a maturity of one year. The issuances with three month maturities from the Central Bank of Kuwait amounted to $2.6 billion (KWD 775 million), while issuances with six month maturities amounted to $1.4 billion (KWD 425 million). ICICI Bank (UAE Branch) was amongst the most prominent issuances in terms of corporate bonds together with Burgan Bank (Kuwait). ICICI Bank issued its $700 million 10-year bond with a coupon rate of 4 percent, while Burgan Bank issued its bond in two tranches: subordinated notes of $100 million (KD30.1 million) with a fixed interest rate of 6 percent maturing in 10 years, and subordinated notes of $233 million (KD 69.9 million) with a floating interest rate of 3.95 percent above the Kuwait Central Bank rate maturing in 10 years. Sukuk Issuances Dubai Islamic Bank successfully issued a $500 million 5-year Sukuk, attracting geographically diversified investors from Europe, Asia and the MENA region. The offering was 2.4 times oversubscribed. On the sovereign front, the Central Bank of Bahrain was one of the most

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“The structural reforms announced by several GCC governments are anticipated to diversify public revenues from oil dependence and to restrict public expenditure.”

active players in the region, issuing three Sukuk Al Salam, each worth $113 million (BD 43 million) and three short-term leasing type Sukuk each worth $68 million (BD 26 million). Drake said, “Bond and Sukuk markets were relatively quiet in the first quarter of 2016, although activity improved compared to the last quarter of 2015, and are expected to pick up further in the next quarter. However, uncertain market conditions for the remainder of 2016

continue to cause uncertainty within the investor community and the debt market in general. “In February 2016, Standard & Poor’s downgraded Saudi Arabia, Oman and Bahrain due to the prolonged decline of oil prices, which emphasises the need for action from those governments to reduce their high dependence on oil exports. The structural reforms announced by several GCC governments are anticipated to diversify public revenues from oil dependence and to restrict public expenditure. If these reforms achieve their stated goals, we will then hopefully see future reratings having a positive effect on the regional debt markets.’’ Global IPOs Global IPO issuance experienced a significant slowdown in Q1 2016. The first quarter of the year is usually a quiet period, which, coupled with high levels of volatility, resulted in a weaker global growth outlook with a drop in oil prices, and overall diverging central bank policies taking their toll on equity markets. The amount of financing raised through global IPOs fell by 66 percent in Q1 2016 compared to Q1 2015, making it the slowest first quarter since the eruption of the financial crisis. Global IPO money raised stood at $14.2 billion from 141 deals in Q1 2016, compared to $42.3 billion from 252 deals in Q1 2015 and $50.7 billion from 240 deals in Q1 2014. Despite increasing worries about banking profitability in an environment of negative interest rates, financial services issuers proved the most active in Q1 2016. They raised $6.3 billion from 23 IPOs, followed by companies within consumer goods issuers which raised $2.2 billion from 20 IPOs. Healthcare completed the top three, raising $1.8 billion from 24 IPOs.

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event

Thomson Reuters

plan of action

Thomson Reuters recently hosted its ‘MENA Evolving Tax Landscape’ seminar in Dubai, drawing a collection of esteemed international speakers who gave their take on the necessary next steps for the GCC in dealing with VAT.

he seminar follows the recent announcements by GCC governments that they will introduce VAT legislation in the next few years, along with drastic changes to Saudi Arabia’s long-term economic strategy. Against a backdrop where organisations are under pressure to initiate digital transformation programmes, Pierre Arman, Market Development Lead, Tax Accounting, Thomson Reuters, underlined the importance of IT solutions as part of any change management strategy. “Technology always plays a key role in any tax regime around the world, both on government and corporate sides,” he said. “For the GCC region and the introduction of VAT in 2018, it appears clear that businesses have to get their core accounting systems ready for tax as a first phase.” Echoing this sentiment was Ernst & Young Middle East partner Finbarr Sexton, “VAT is the first step in the right direction,” he said. “It is important that good IT systems are in place to introduce taxation. The exchange of tax information will help create opportunities. The VAT guidelines will have a special focus on services given that taxation on services is more complex as opposed to goods.” Discussing the impact of budget deficits following the sharp decline in oil prices, Nasser Saidi, President,

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Nasser Saidi & Associates, pointed out that custom tax can be replaced with other goods-related taxes. “Newly introduced fees in Bahrain and Saudi Arabia can be migrated away from custom-based to a specific excise tax,” he said. “New tax structures should be harmonised, coordinated and synchronised across the GCC in line with requirements of the GCC customs union.” “The implementation of taxes needs to be accompanied by revenue protection and anti-smuggling measures. There is a need to establish a GCC-wide track and trace system through implementing open standards which will enable information sharing across the GCC.” Dr. Ehtisham Ahmad, senior fellow, University of Bonn and London School of Economics, noted that basic custom tariffs have been debated in the past few years by regional governments. He underlined how the United Arab Emirates would be a special case due its political system. “The issue of cross-border

“Coordinating the introduction of broad-base taxes with non-tax sources and customs duties is key to successful reforms.”

transactions was one of the challenges that emerged when this was first discussed,” he said. “In regard to the UAE, customs could be introduced on a federal level. There are special conditions on how taxation will function in the UAE as the country is the only federation in the GCC.” Dr. Ahmad explained that the effect of taxes will be far-reaching, with average citizens needing to be considered. “Therefore, we will have greater measurement on the impact of tax on households in the future. Furthermore, the linkage between a tax package and a country growth strategy is a key aspect that governments should consider. The challenge in the Arab region is creating jobs for the young population and maintaining sustainable development. This raises a question on the potential impact on the private sector’s role in creating jobs,” he said. Mario Mansour, deputy chief, Tax Policy Division, International Monetary Fund, said, “The decline in commodity prices had little impact on revenue in non-resource MENA oil importers. Furthermore, revenue loss in MENA is estimated at 12 percent of 2015 GDP, which totals $330 billion, of which $175 billion has come from the GCC. Tax revenues are negligible in the GCC, lower than non-tax revenue. Coordinating the introduction of broad-base taxes with non-tax sources and customs duties is key to successful reforms.” He went on the highlight the difficulties that surrounded the taxation of public sector organisations. “How do we treat governments as consumers? We don’t want to see VAT impacting the oil sector, and each country will have to decide on how to deal with the introduction of taxation in the oil sector. Most international companies in the region are already familiar with VAT implementation. The challenge is really for the mid-size local companies across GCC states.”

research

Unplanned growth

Growing pains

New research from MORAR Consulting highlights how a significant proportion of CFOs are relying on gut instinct, and are falling victim to inaccurate data in terms of their decision-making.

lot of businesses are not prepared for the results that a growth surge can bring. Research recently conducted by MORAR Consulting showed that only 11 percent of those who had experienced growth in 2015 said that this growth had gone totally according to plan. The survey identified the pitfalls of growth, the dangers to unplanned growth, where the growing pains show up, the key barriers to growth the stimulants for further growth. More than half of the CFOs (54 percent) interviewed agreed that business growth may put excessive pressure on operations, damaging quality and customer satisfaction. This was higher than any of the other C-level executives. Also, 55 percent of the CFOs agreed that senior executivees may not be fully prepared for the challenges of managing a larger more diverse business. Meanwhile, 45 percent of business leaders fear that senior executives may not be fully prepared for managing a larger, more diverse business. Business leaders also expressed concerns about losing intimacy with customers (39 percent), a lack of management control (36 percent) and a lack of visibility (31 percent). Dilution of the brand and a loss of focus on product direction are also cited as negative consequences of growth (27 percent and 31 percent). Different organisations have different priorities when it comes to growth but overall, nearly three quarters of all companies surveyed focus on one

Emerging markets

More than half of the CFOs interviewed agreed that business growth may put excessive pressure on operations, damaging quality and customer satisfaction.

of three priorities in growing their businesses: 1. Turnover and sales (27 percent) 2. Profits (24 percent) 3. Expansion into new industries/ product areas (21 percent) Overall, 2015 saw 58 percent of surveyed businesses reporting growth and only 17 percent reporting any decline. The future outlook is also optimistic. Nearly 70 percent of respondents expect growth in 2016, and 79 percent believe that an effective and integrated IT infrastructure is essential for business performance. Growth was most likely to be reported in: • India (77 percent) • USA (70 percent) • China (69 percent) …and least likely to be reported in…. • Sweden (43 percent) • France (40 percent) • Hong Kong (37 percent)

The survey also revealed that companies in emerging markets are more concerned about the negative impact of growth and how outgrowing existing technology and skill sets will damage customer satisfaction and affect financial performance. They are more likely to use technology as a stimulant (54 percent for emerging markets compared to 36 percent for developing markets), and more likely to move quickly to gain or maintain the advantage it gives them. This puts them in a prime position for future growth.

Barriers to growth The top three main obstacles to growth included ‘economic uncertainty’ (41 percent), ‘regulations and bureaucracy’ (39 percent), and ‘international competitors’ (34 percent). One third of the survey sample experienced unplanned growth, underscoring the need for organisations to prepare for the unexpected so as to opportunistically take advantage of whatever the future brings.

Mid-market growing pains The survey showed that significant levels of unplanned growth was more likely to be a feature of mid-sized businesses (100-999 staff) where 37 percent experience it, than in the larger businesses (1000+ staff) where the figure dropped to 29 percent. Nearly 60 percent of these businesses reported that they were fairly or very concerned that business growth may put excessive pressure on operations, damaging quality and customer satisfaction.

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Vol. 2 ISSUE 13

A tribute to Dominic De Sousa, Founder and Chairman, CPI Media Group

Vol. 2 ISSUE 13

TGS KOYa charTered accOunTanTS page 26 A tribute to Dominic De Sousa, Founder and Chairman, CPI Media Group

readY fOr TaKe-Off TGS KOYa charTered accOunTanTS page 26

Saudi Arabian Airlines’ CFo & CIo Muhammad Ali Albakri on the firm’s ambitious five-year roadmap

readY fOr TaKe-Off Saudi Arabian Airlines’ CFo & CIo Muhammad Ali Albakri on the firm’s ambitious five-year roadmap

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column

SomersConsult

Practice being a leader I f you want to become a CFO, then you need to accumulate the experience and training to be considered for the job. This may seem self-evident. But, over the years, I have been struck by the number of young and mid-level finance professionals who aspire to become CFO, yet struggle to develop and maintain a career trajectory that qualifies them for the role. Whether your ambition is to be a CFO or something else, career management will improve the odds of achieving your career goals. Over the past few months, I have met individually with over 200 executives of one of the larger businesses in the UAE. The theme of this program was career planning and management. The participants ranged from very senior and late-career executives to more junior and early-career managers and staff, with a broad range of ages, nationalities and professional backgrounds. Now, I’m not talking about planning for the next year or two; I’m talking about planning the next 10 to 15 years of your professional life. This can seem like a very long time. But, as I pointed out to participants on the programme, 10 to 15 years is about three to four jobs, if we assume three to four years per job. So it makes sense to make these steps the right ones towards an outcome we desire, than to hope that the randomness of life or the random generosity of the boss will achieve the same result. I see career planning as a fourstep process. First, we need to define our objective. This may seem straightforward. It isn’t. And one of the reasons it isn’t is that in a 10 to 15 year timeframe, many people, particularly

those in the early stages of their career, struggle with understanding the qualifications required for more senior jobs. I have come across many people who think that defining the objective is simply a case of ‘naming the job’. This doesn’t work. We need to validate the objective, the second step of the process. What does this mean? Put simply, a validated objective is an objective that we have a reasonable probability of achieving if we follow a course of action. It means that we understand what is required to be a contender for the job and that the gap between where we are now, and where we need to be, is likely to be bridgeable given our current age, level and experience. The third step in the process is to do a gap analysis to identify the development needs to be a serious contender. This requires that we have a pretty good understanding of the gaps between the target job competencies and our current capabilities. Finally, we need to develop the plan to fill the identified gaps. And this plan will comprise two elements: three to four future jobs, plus some training courses and self-study. Too often, finance professionals place too much focus on the technicalities of the profession and too little focus on developing the people skills to qualify for the top job. Chief executives spend the vast majority of their time on human stuff: negotiating, influencing, communicating, teambuilding, hiring, firing… the job is all about human interaction. They need people around them to share this load, whilst also bringing specialist skills to the table.

“Finance professionals place too much focus on the technicalities of the profession and too little focus on developing the people skills to qualify for the top job.” Fintan Somers, MD, SomersConsult

Training courses, while important, are more important earlier in our careers. As we get more senior, more and more of our professional development will be on-thejob. I would say, maybe, 80 percent for a mid-level and senior executive. Which is why the three to four jobs we plan to do are so important. Get one wrong and you may lose several years of development. And you don’t get those years back. Many people underestimate the importance of self-study. I see it as a lifetime endeavour to achieve professional credibility at the most senior levels. If you speak and act like an accountant and not as a business leader, you will not be credible. Career planning and management is an iterative process; as we execute the plan and obtain more information and feedback, we need to re-evaluate the objective, the gap and the plan. But the most important thing about career management is action and movement. If we want a leadership role in the future then the best way of beginning this journey is to start acting like a leader now, in your current role. So, if you have defined your current role as being to manage “what is”, ask yourself “what could be improved?”, and negotiate and implement this change. That is leadership.

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