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Financial Management

www.fm-magazine.com March 2013

How effective analysis of your data can help your organisation make better decisions and drive strategies for growth

The value of data

Prince Kofi Amoabeng, CEO of UT Bank, on Africas challenge Coca-Cola Enterprises CEO John Brock on global sustainability The FTs Jonathan Guthrie on the integrity of company accounts

Plus: Where do the worlds richest people live? p14 8 ways to... manage the cost of IT projects p36

Financial Management | March 2013

A word from the president

The more we all put into our membership the more we take out

uring my recent trip to India, I had the privilege of attending the 54th annual conference of the Institute of Cost Accountants of India (ICAI). This was a first for me, but CIMAs relationship with the ICAI is well established.The ICAI president, Shri Rakesh Singh, declared that CIMA is its sister institute, its big sister, and would like us to share our knowledge with it and its colleagues in Pakistan and Bangladesh. This sentiment was underlined by the fact that CIMA was given top billing as knowledge partners and we were fted as honoured guests. It was a humbling experience. The conference had some excellent speakers, but what I enjoyed most was the sense of community and mutual support. As I know all too well, this goes a long way when you are struggling to get your career going. My journey to become CIMA president was far from easy and without the support of my family, the institute and fellow members, it would have been impossible. During my ICAI conference speech I wanted to inspire those who are feeling the pressure of work and their CIMA studies by using myself as an example. Like many others, I had to work hard on a meagre wage to feed a young family. I studied the CIMA syllabus in the small hours of the morning and, on more than one occasion, had to re-sit exams. This determination evidently struck a chord with the audience. But the point I would like to make is that we can all inspire each other. The input of CIMA members is absolutely vital in making the institute even better than it is already. Our research and thought leadership material supports CIMAs position as the leading body for management accountancy. The ICAI is keen to have access to this material, but there is much we can learn from our friends

in India. Its members enormous enthusiasm for knowledge and learning was inspiring. Despite the expense and vast distances, more than 500 people travelled many miles to attend the twoday conference. I was fortunate to be involved in a vibrant ICAI event and the pleasure that its members took from it was clear. CIMA aims to provide as much support to its members and students as possible. But one of the best motivations for career development comes from members sharing their insights and experiences together. CIMA branches, where fresh ideas and knowledge-sharing are always welcome, exist across the world. Thanks to modern technology, member networking can also be done on a worldwide scale through the community discussions on the CGMA website, while students and members can network together on CIMAsphere and the CIMA LinkedIn group. These are hugely valuable resources and are vibrant sources of discussion and debate. I would also like to encourage our members to become involved in CIMA activities. This can be done in many different ways: through virtual networks, attending CIMA events and taking part in its surveys and roundtable discussions. Members should also consider participating in the institutes thought leadership development and governance activities. CIMA is currently researching two topics: management accountants in leadership and how management accountants are gaining insights from data. If you would like to learn more about how to participate in this research, email research@ cimaglobal.com Our members often look to us for guidance and career development, but it must not be forgotten that the institute itself can gain much value from its community of members and students. Working together will take management accountants to ever-greater heights. Gulzari Babber, FCMA, CGMA CIMA president

CIMA LinkedIn group: http:// tinyurl.com/ ahxyoda

Illustration: Masao Yamazaki/Dutch Uncle

Financial Management | March 2013

Financial Management | March 2013

At a glance
Front 3-18

A word from the president Gulzari Babber p3 Update p913 Digest of the latest developments in management accountancy and beyond. Hot potato Your ethical dilemmas resolved. Book in brief Makers: The New Industrial Revolution Gen Y Gamification.

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Study notesC39-49

Editors note
An organisations biggest asset is its data, is a statement that is being increasingly heard. As the means to mine valuable information from data become available, so too do the strategic opportunities. But the degree to which organisations can exploit that information is determined by a management teams know-how and the tools available. With this in mind, the significance of big data is considered in this months cover story. When it comes to the information that corporates give out, there is a growing debate about how you can ensure that they are correct. Jonathan Guthrie, city editor of the Financial Times, says that a rotation of auditors is not required, but that a fundamental search for the truth in corporate numbers should be a priority. Were also adding a new feature Gen Y in which exponents of leading-edge management philosophies from generation Y discuss ideas that are beginning to filter into the mainstream corporate lexicon. This month were featuring gamification, which looks at video games and the influence they have in shaping everyday interactions, an idea that may well determine future corporate decision-making. Lawrie Holmes
Please send your comments and ideas to editor@fm-magazine.com or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups
Email: Philippa. Mathers@seven.co.uk Tel: 020 7775 5717 Managing director Jessica Gibson Chief executive Sean King Chairman Tim Trotter Seven
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. Subscriptions: subscribe@fm-magazine.com Tel: 01580 883841 45 (UK), 54 (Europe), 72 (rest of world). Back issues: 7.50 (UK) 10 (rest of world) including postage, subject to availability. All payments should be in sterling drawn on a UK bank.

Getting to grips with the adjusted value method of appraising investments and ratio analysis

I worked on... Delivering a humanitarian project in India p6 The data The worlds billionaires in 2012 p14 Forum Blogs, polls and discussion p16 Opinion Jonathan Guthrie of the Financial Times on market reforms p18

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Technical

50-56

The fast track to better, more profitable IT and how to make the most of patent opportunities

Back

57-66

Features

20-37

Prince Kofi Amoabeng The chief executive of UT Bank, Ghana on his hopes for Africa p20 The value of data How technology can drive strategies and growth p26 A bright idea Coca-Cola Enterprises CEO John Brock on sustainability p32 Prime number Top 10 global M&A deals from 2001 to 2012 p35 8 ways to... Manage the cost of IT projects p36
CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com Cover illustration Rob Pybus

A look at the... Strategic cost optimisation Mastercourse p57 CIMA events The calendar of CIMA events p61 The Institute The view from Professional Standards and the 2013 Council results p63 CIMA CEO column Charles Tilley p65 CIMA versus... p66
Director of profile and communications Victor Smart Financial Management is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ. Group editor Jon Watkins Editor Lawrie Holmes Group art director Simon Campbell Junior designer Josh Farley Creative director Michael Booth Editorial director Peter Dean Chief sub editor Steve McCubbin Senior sub editor Graeme Allen Head of pictures Martha Gittens Acting picture editor Louise Fenerci Picture researcher Alex Ridley Production manager Michael Doukanaris Account manager David Kershook Group publishing director Rachael Stillwell Commercial account director Hilton Young Advertising manager Philippa Mathers

President Gulzari Babber, FCMA, CGMA Deputy president Malcolm Furber, FCMA, CGMA Vice president Keith Luck, FCMA, CGMA Chief executive Charles Tilley, FCMA, CGMA

www.cimaglobal.com

Financial Management | March 2013

Financial Management | March 2013

I worked on A humanitarian project in India


Start date August 2009 End date November 2011

I studied for my CIMA exams when I worked for local government in Wexford, Ireland, as I thought this would be ideal for working overseas in the development sector. I began working for the Irish humanitarian organisation GOAL in 2003 in Kosovo, followed by roles in Ethiopia and the Horn of Africa. In 35 years, GOAL has spent more than 720m on humanitarian programmes across more than 50 countries, employing more than 2,800 international staff and thousands of local staff. In 2009, I was offered the role of country director, India, working in Kolkata, where the organisation was formed in 1977 in response to a major

famine. GOAL has since expanded into West Bengal, working with local organisations in rural and urban relief, rehabilitation and development. GOAL has an integrated programme to improve access to education, healthcare and livelihoods, with a strong focus on children, and to improve empowerment and protection. The Indian government has many schemes for the poor, but access is a key problem. GOAL, in liaison with local authorities, creates awareness and helps communities to access their entitlements, such as schooling. It provides infrastructure as part of its support, including the rehabilitation of rural schools and the provision of water

and sanitation facilities with a focus on girls schools in Kolkata. It also provides guidance on how to raise hygiene standards, and builds health and education centres for children and adolescents in the notorious brick kilns and municipal dumps. Children get the opportunity to learn how to read and write, as well as other skills that may give them better work opportunities. We also help vulnerable families in North and West Bengal who rely on forestry and tea estates for their income. Many of these estates are closing down, leaving the families struggling to survive. As a result, these families are often targeted by labour traffickers, who claim to offer work in the city for their children,

but force them into prostitution or domestic positions where they can be abused and exploited. Many are never seen or heard from by their families again. Just before I arrived, GOAL in Kolkata had carried out a baseline survey on the geographical locations we worked in, to make sure the integrated programme was based on a needs assessment. A mid-term evaluation was conducted after 18 months, which included an area where we didnt work, to ascertain the success or otherwise of the programme and to take key findings on board for the remainder of the five-year strategic plan. The evaluation showed a marked improvement in the health and education status of communities. It also

showed that the design of our livelihood programme required more attention. Ongoing monitoring and evaluation are crucial to ensure that the programme design and delivery meet the needs of the target communities and achieve the desired results. We also instigated the Community-led Total Sanitation project to address the considerable improvements needed in the areas where we worked. One of the biggest benefits of gaining the CIMA qualification was the strong emphasis it has on overall management, which enabled me to coordinate budgeting and programme planning with my team and partner organisations. Organisations in the development sector

are not always good at the coordination angle of the finance and programme components. This can result in poor decision-making or delays in taking corrective action, leading to overspends. It can also lead to underspends, which mean returning money to donors. This is equally problematic and undesirable. See also: www.cgma.org/innovation

Role: Country director Industry: NGO Location: Kolkata, India CIMA qualified: 2000 Corbis

Name: Louise ORourke

Financial Management | March 2013

Update
Global firms must be more resilient to volatility
Global businesses are too easily spooked by short-term economic uncertainty and must make themselves less susceptible to macro-economic volatility. Those were the key findings of a recent CIMA and AICPA survey of business leaders who hold the CGMA designation. According to the research, less than a third (31 per cent) of business leaders believe the ongoing US debt crisis will ultimately push the global economy towards recession. Despite this, more than half (53 per cent) expect higher US interest rates, while 70 per cent anticipate a weaker dollar going forward. In other findings, 60 per cent of respondents said that business is too sensitive to economic crises, while a similar proportion (57 per cent) agreed that their organisation must seek new ways to be resilient and less susceptible to macro-economic volatility. CIMA chief executive Charles Tilley, FCMA, CGMA, said of the findings of the survey: There will always be another US debt crisis, Arab Spring or eurozone disaster just

around the corner. This uncertainty simply cannot drive business strategy. These grey swans, as some business commentators have termed them, are prompting organisations to cut spending and investment at a time when innovation is absolutely vital to our economic health. Indeed, the seizing of opportunities is key to long-term survival and so we must all plot a suitable course between risk and innovation, managing the approach and mitigations put in place to address these uncertainties.

Gallery Stock

Financial Management | March 2013

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Update Now on CGMA.org


For those who hold the CGMA designation, the following content is available online:
l Five CEO myths and what

cut-throat job market, working effectively with a head-hunter could prove critical in securing your next senior finance role. Find out what a head-hunter looks for in a candidate. Visit http://tinyurl.com/ bdq5sjl (login required)
l Companies invest in

Our guide to the best online tools

every manager can learn from them: Have you seen a new CEO excel immediately? What kind of things did a new CEO do well? A Boston Consulting Group report takes a look at some of the myths around how CEOs should act in their first 100 days. Visit http://tinyurl.com/ atgeboj

employee training to reduce global skills gaps effects: Spending on employee learning and development is rising as companies attempt to hire and train new workers and leaders alike to combat a global skills gap, according to Bersin by Deloitte research. Read about some of the best practices in L&D, as well as mistakes to avoid. Visit http://tinyurl.com/ a8v5ylf

FTP On The Go Pro Accessing all the documents you need while working remotely can be a challenge. This app allows you to view and edit documents from your companys server. You can also use it to move files saved on your iPad (photos, videos, etc) to the server while on the go.
i
Cost: $9.99 Category: business Updated: 31 January 2013 Current version: 3.1.3 Size: 16.6Mb Language: English Developer: Headlight Software Inc Compatible devices: iPhone, iPod touch and iPad. Requires iOS 4.3 or later. This app is optimised for iPhone 5

l Mervyn King its business

as unusual if you want to survive: International Integrated Reporting Council chairman Mervyn King discusses what makes a top-notch integrated report. Visit http://tinyurl.com/ aamkkre (login required)

l Four lessons to learn from

l Inside the head of a

head-hunter: In todays

high-performing companies: Ernst & Young research has identified four areas in which high-performing companies did a better job handling the challenges of the harsh global economic conditions. Find out what lessons can be learned from high performers worldwide. Visit http://tinyurl.com/ a5j6685

Makers: The New Industrial Revolution By Chris Anderson Random House 20


Illustration: Lucas Varela/Dutch Uncle

Book in brief

1. The collective potential of a million garage tinkerers and enthusiasts is about to be unleashed, driving a resurgence in American manufacturing. 2. The creation of physical commercial products will benefit from network effects where a user of a service or goods hands on the value to others. 3. Hot tech start-ups can get their manufacturing done cheaply using 3D printers and robots:

what Anderson calls the maker movement will create new jobs. 4. The maker entrepreneur should aim upmarket as mainstream commodity products will continue to be mass-produced in the old way, taking advantage of economies of scale. 5. Some companies cant exhibit the rapid growth of a maker start-up, as theyre just not innovative enough.

The former editor-in-chief of Wired magazine takes you to the front line of a new industrial revolution as todays entrepreneurs, using open-source design and 3D printing, bring manufacturing to the desktop. Anderson argues that a generation of makers using the internets innovation model will help drive the next big wave in the global economy. Here is a synopsis :

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Financial Management | March 2013

Financial Management | March 2013

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Update

Many areas of global finance remain vulnerable

In the first of a new column identifying emerging business practices, Cristina Luminea explores how businesses can learn from video gaming
Gamification is the next big thing in marketing. Combining the increasing adoption of video games across society and the influence they have in shaping our everyday life and interactions, its recognition that they can produce a desirable experience and motivate users to remain engaged in an activity. Put together, gamification can be defined as the use of game-like mechanics in non-game scenarios to increase influence and encourage engagement in an activity. At its heart is the idea that introducing play to customers and employees will help companies achieve desirable results. The term gamification has been kicking around since 2004, but it was not until late 2010 that we heard it in the mainstream. At ThoughtBox we believe that learning can be fun. We aim to inspire children to achieve their true potential by unleashing their curiosity and challenging them to question the world and its rules. And what better way to do this than through games? Subjects such as maths and science are very important in our day-to-day lives: they foster strategic and critical thinking, while games unleash creativity and teach their players how to question and not take everything for granted. Children learn through play and experimentation. However, when they start school they are expected to trust, learn and apply rules and facts that other people teach them. Gameful learning places players back in the driving seat, allowing them to progress at their own pace and discover information and rules by themselves. At ThoughtBox we believe that maths itself is structured as a game because it is challenging, it places obstacles and increasingly difficult problems in front of us, and it has rules and levels. All of these are main characteristics of games. However, the main traits that make games fun are immediate feedback and discovery. With the help of technology, dry subjects such as maths and science have equal capabilities of engaging kids in the same way that games do. Technology helps us provide real-time feedback to players and allows them to discover all the rules of maths and science by themselves, rather than spoon-feeding them information. We believe that gameful learning shouldnt be about sugar-coating broccoli, it should be about trust and respect. We dont try to trick players into learning by using games. Our products are about maths and science, which are tough, but we trust our players to figure them out and we are helping them by using game mechanics. How does it work? In an external community, contests and rewards could be used to encourage customers to help answer each others questions and become product champions. This concept is something that has been widely used for years in the traditional gaming world what were seeing now is that businesses are using external gamification to best engage with their clients and future customers. In an internal employee community, product development groups could be challenged to help answer questions from the sales team. Sales staff could take part in a competition to see who can complete training materials first. Where next? We have all seen colleagues bringing their own mobile device to work, from smartphones to tablets. The new technologies available extend the ability to get more people involved in an engaging and rewarding way those same principles that have made social media and gaming so successful. Cristina Luminea is founder and CEO of technology innovation company ThoughtBox

Gamification

Hot potato This months dilemma:

I have just starting working for a plc and my colleagues have warned me that my predecessor was asked to inflate the value of products, as well as to overvalue stock, when reporting. This, I understand, was to benefit the directors bonus. To date I have not been asked to do anything untoward, but wonder how best I can approach the issue should I be put in this position. Our response: At present what you have been told is hearsay, so you need to be sure of any facts. Being new to a post sets you

in a stronger position to professionally guide future action should a similar request be made of you. Consider threats and safeguards within the company (see section 100.12-100.16 of the code) as well as options for resolution (100.17-18). Misleading reporting is a clear breach of overall integrity (110) and in particular principles for preparation and reporting of information (320). Remember that once you have breached an ethical line, it is harder the next time to push back.

For the code and other online ethics resources, visit www.cimaglobal/ethics Tanya Barman, head of ethics, CIMA Disclaimer CIMA does not provide legal, investment, professional or career advice. No responsibility or liability whatsoever is accepted for any error, omission (whether or not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made.

Illustration: Denis Carrier/Dutch Uncle, Dave Murray/Dutch Uncle. Photography: Gallery Stock

The Financial Stability Board (FSB) has warned that many areas of global finance remain vulnerable and has called for prompt action. The FSB was established in April 2009 to coordinate the work of national financial authorities and international standard-setting bodies at international level and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.

It brings together national authorities responsible for financial stability in 24 countries and jurisdictions. In a statement issued at its annual meeting, the FSB said financial markets have improved in recent months, but that medium-term risks remain due to weak growth prospects and high levels of sovereign debt in many countries. Accommodative monetary policy by central banks poses challenges for institutional investors and the FSB said that national supervisors would need to

enhance their monitoring of credit and interest rate risk. The FSB also used its statement to announce that it has received updates from the heads of the International Accounting Standards Board and the US Financial Accounting Standards Board on their work on convergence of accounting standards. The FSB said it has asked the two standard-setters to set out by the end of 2013 their plans for achieving convergence on high-quality standards.

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Financial Financial Management Management | July/August | March 2012 2013

Financial Management | July/August March 2013 2012

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The Data The worlds billionaires in 2012


Norway 5 billionaires   Finland 1 billionaire  Austria 6 billionaires Canada 26 billionaires UK 36 billionaires Ireland 5 billionaires  Belguim 2 billionaires Switzerland 9 billionaires France 15 billionaires USA 424 billionaires Mexico 11 billionaires  Belize 1 billionaire  St Kitts & Nevis 1 billionaire  Venezuela 2 billionaires Spain 16 billionaires Portugal 3 billionaires Monaco 2 billionaires Sweden 11 billionaires  Czech Republic 3 billionaires Italy 16 billionaires  Romania 1 billionaire  Georgia 1 billionaire  Cyprus 2 billionaires  Lebanon 6 billionaires Israel 13 billionaires China 95 billionaires  Hong Kong 38 billionaires 

Netherlands 6 billionaires

Germany 55 billionaires

Denmark 3 billionaires

Russia 96 billionaires

 Poland 4 billionaires

Ukraine 8 billionaires Kazakhstan 3 billionaires Japan 24 billionaires

Key 10 Billionaires

Morocco 3 billionaires

UAE 4 billionaires Egypt 7 billionaires Turkey 34 billionaires Saudi Arabia 8 billionaires

South Korea 20 billionaires Taiwan 24 billionaires Philippines 6 billionaires

5 Billionaires 1 Billionaire

Greece 3 billionaires Nigeria 2 billionaires 

India 48 billionaires Kuwait 5 billionaires

Thailand 5 billionaires

Colombia 3 billionaires

Peru 2 billionaires

Malaysia 9 billionaires Brazil 37 billionaires Singapore 5 billionaires Indonesia 17 billionaires

Fall and rise of the worlds richest


The number of American and Russian billionaires fell sharply in 2008 as a result of the value of property and other investments falling sharply in the wake of the financial crisis. The numbers of billionaires in those countries have recovered since, but not at the same pace as the growth of Chinese billionaires, according to Forbes figures. The result of the sharp increase of Chinas wealthiest has been reflected in an unrelenting appetite for luxury goods. In 2007, Chinese purchases of luxury goods represented a mere 5 per cent of global luxury sales, but by 2012 accounted for a quarter of all sales, according to a recent report by HSBC China. It said that only one-tenth of sales of luxury goods sold to Chinese nationals are actually made in mainland China.

Chile 5 billionaires  Argentina 4 billionaires

South Africa 4 billionaires

 ustralia A 18 billionaires

New Zealand 3 billionaires

Source: Forbes

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Financial Management | March 2013

Forum From the blogs


Bringing the economy to heel
When I flew from snowy North Carolina to even snowier London recently the news was full of doom and gloom stories about the cold weather sending the UK into a triple-dip recession. While waiting for my inevitably delayed flight I got into a conversation with a fellow passenger about recession indicators, such as the lipstick effect, where sales of cheaper luxury items, such as high-end cosmetics, rise. Our budgets might not stretch to Chanel shoes, but the nail varnish? Thats another story... Lets not ignore the shoes, though I learned that back in 2011 IBM used social media analysis to test the theory that the height of womens heels rises in a recession. Leading shoe bloggers were discussing shoes with a median height of seven inches at the height of the 2009 recession, but by 2011 this had fallen to two inches. Have you ever tried to go shopping in seven-inch heels? Its a lot easier these days online retailers such as ASOS are booming, with year-onyear sales rising by 41 per cent in December. And in this weather, whats a girl to do except stay indoors and shop on the internet?
Rebecca McCaffry, ACMA, CGMA, innovation specialist at CIMA. More blogs can be found at http://community.cimaglobal. com/blogs

Poll of the month We asked

Can trade agreements resolve disputes on trade between individual countries and blocs?
Yes: 35%

Only to a point (there are too many other issues to consider): 48%

No: 9%

Dont know: 9%
Source: Survey on fm-magazine.com, 2013. Total equals 101% due to rounding

CIMA news
The latest pass masters
The latest round of CIMA exam results reveal the increasingly global influence of the institute, according to Noel Tagoe, executive director, education, at CIMA. It is extremely pleasing to see that there are, once again, some excellent student performances from around the world, he said. These results show that the CIMA qualification is increasingly

seen as a global passport to success and the proportion of students sitting the CIMA exams outside the UK continues to increase. Pass rates in the latest round of exams, held in November, were in line with recent examination sessions, Tagoe added. Prizewinners and commendations in individual papers included students employed by De La Rue International, Deloitte, Morrison Supermarkets, the UK NHS Institute for Innovation and Improvement, and the Department of Business, Innovation and Skills.

You asked

Please explain to me TQM and its relationship with JIT and lean management.

Total means everything and everybody in the organisation and extends to suppliers. It puts the onus on each individual and group to take responsibility for quality. Quality has five basic tenets: right first time, zero defects, customer satisfaction, continuous improvement and fit for purpose. Management is about planning, control and decision-making.

If an organisation uses these principles as a basis for planning and control then it is lean in the sense that it eradicates waste from all operations and systems. In applying this to JIT the eradication of inventory is a waste-saving lean aspect of manufacturing. Inventory costs money to store and ties up working capital that may be used elsewhere. This applies at both the input and output

stage of the process as JIT is a pull-through system triggered by a customer order. Everyone in that system must take responsibility for fulfilling that customer order on time and at the specification required. Send in your own queries to questions@ fm-magazine.com. We will ask a specialist or tutor to provide a response.

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Financial Management | March 2013

Opinion

Jonathan Guthrie
City editor, Financial Times

Reforms could be introduced as authorities look to restore confidence in the financial accounts of companies worldwide

rust in the published numbers of businesses can sometimes switch off like an electric light. In 2011, the results of Autonomy looked solid enough for Hewlett-Packard to pay $11.3bn for the UK software champion. But the new leadership of the struggling US computer hardware group concluded last year that Autonomy was terrible, necessitating an $8.8bn write-down, $5.7bn of which related to alleged accounting irregularities. Autonomy founder and former chief executive Mike Lynch is adamant that there was no impropriety, accusing HP of having destroyed value at its UK subsidiary through its own management failings. The row is emblematic of a broader lack of confidence in the statistical underpinnings of capitalism. This has its roots in the fraudulent accounting of WorldCom and Enron, followed by the financial crisis. And, with regulators part-way through exposing a conspiracy to rig Libor rates, it will make it harder for the accounting industry to fend off reform such as auditor rotation. In this context, are our views on the reliability of the numbers too coloured by self-interest? Under its former chief executive, Leo Apotheker, HP believed that Autonomy was worth a lot of money because it needed to. It saw the acquisition as a way of diversifying out of the competitive hardware industry and raising its lowly share rating. At an exit multiple of 34 times, as calculated by brokerage Peel Hunt, little change was needed in Autonomys modest bottom line to change its valuation radically. This change came with the ousting of the earnest Apotheker in September 2011. Under HPs new broom, Meg Whitman, the investment was written down, partly because 10 to 15 per cent of Autonomys sales were allegedly less profitable than it had claimed. Lynch denies this. The reputational reasons for the positions held by Whitman and Lynch are self-evident. But bystanders may well feel that the value represented by a 34 times earnings multiple for a boffin-ish software business may be fading. The modest multiple

accorded to a mature, cash-generative business doing something that everyone understands, such as catering, is robust in comparison.

Some businesses publish critiques of target companies accounts with the aim of driving down share prices

he accounts that justify the prices paid to acquire quoted companies are rarely challenged publicly after the event. Boards of public groups are more used to dealing with criticism of their numbers from analysts and short-sellers. Some investment businesses combine analysis and short-selling. They publish critiques of target companies accounts with the aim of driving down their share prices, thereby making money from their own short positions. One of these, US firm Muddy Waters, recently took on Singaporean commodities trader Olam, reporting it was close to failing. Among its criticisms was the allegation that the company had inflated its reported profits by booking non-cash gains on the revaluation of acquired businesses. Muddy Waters pronouncements have carried weight since its attack on the Sino-Forest Corporation in June 2011 led the Toronto-listed Chinese timber firm to seek protection from creditors. The interpretation of a companys numbers by a short-seller is as distorted by negative bias as the CEOs spin on the same figures is by professional optimism. The credibility of bear raiders is also damaged by their unwillingness to quantify their short positions. They advocate transparency on the part of their targets, but rarely practise it themselves. But critical analysis has a useful balancing function. The main purpose of the wholesale financial services industry is to talk up the value of investments rather than challenge them. The objectivity of the equity research of a big investment bank is, for example, compromised by its enthusiasm for doing corporate finance work for issuers. That damages price discovery and contributes to speculative bubbles. The intelligent curmudgeon will add two further questions to how big? when weighing up a financial statistic. They are how certain? and how susceptible to bias?

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Financial Management | March 2013

Financial Management | March 2013

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Q&A

Prince Kofi Amoabeng, FCMA, CGMA, founder and chief executive of UT Bank, Ghana
Interview by Lawrie Holmes What is UT Bank? It started out as non-bank financial lender Unique Trust Financial Services in 1997, lending to the informal and SME sectors. It served companies that dont prepare full accounts, which made it harder for banks to agree to finance them. We were able to deliver a fast service to borrowers that banks normally shy away from. If it takes between three and six months for companies to raise capital it is often too late we committed ourselves to delivering cash in a faster time. We said wed deliver in 48 hours. It required monitoring, advice, partnering and making sure we were there for our customers. We changed the system of banking in Ghana by tailoring lending to individual needs. We started with $20,000 in 1997 and in 2008 went public with a market cap of $84m because we believed we could compete with the banks raising $27m in return for around 30 per cent of the equity in order to buy a foreign bank. You led one of Africas first reverse takeovers when UT Bank acquired BPI Bank in 2010. How difficult was that to achieve? We were the first non-bank to buy a bank in Ghana and the first Ghanaian bank to buy a foreign institution when we acquired BPI Bank from its Malaysian owners. We wanted to keep the bank separate and keep UT operating as it was. But the Bank of Ghana wanted us to recapitalise the combined bank to the amount of $60m when at the time its banks ability to capitalise was only $10m. So we had to bring together two very different institutions to form UT Bank. We had the challenge of bringing together two cultures and developing a new institution. Staff at BPI were not motivated, there were accusations that some took bribes, and many had inflexible working arrangements as a result of membership of a union that we were able to mediate with. I became managing director of the bank, introduced new software and wrote off some toxic assets on the balance sheet. It has taken a couple of years to get to where we are now, which I would say is at the bottom of the leading group of banks in Ghana. We listed the new entity on the Ghana Stock Exchange. Roll on three years and the most recent bank to be formed in Ghana was named Bank of the Year in 2011.

African ambitions

It has taken a couple of years to get where we are, which I would say is at the bottom of the leading group of banks in Ghana
How is UT Bank trading at the moment and what are your plans, particularly regarding expansion, in the medium and long term? The two largest investors IFC and DEG invested $20m in the bank in the first half of 2012 to strengthen credit lines and the long-term credit we can offer clients. In the medium term we expect to be able to offer more and cheaper credit to SMEs and trade lines for imports. Many of our clients are in the manufacturing sector so they need longer term lines. We are looking to grow the bank from its current size of 26 branches and expect that, in time, it will become pan-African. It will then be possible to target countries in West Africa, such as Sierra

Photography by Nyani Quarmyne

Financial Management | May 2012

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Q&A

Leone and Liberia. We are developing a banking presence in Nigeria and South Africa through the banks holding company. We have two banks in Lagos, Nigeria, and intend to open a third in Abuja by the middle of the year. In South Africa, we have a branch in Johannesburg and are opening another in Pretoria. Once we are able to grow in those two countries the largest economies in Africa it will be easier to roll out to other countries. Zambia, which is surrounded by eight other countries, is being looked at as a location in which to open another branch later this year. A foothold in the Zambian economy will help us set up other branches on the other side of its borders. What have been the challenges for banks to grow in Ghana and Africa as a whole? There is plenty of opportunity for UT Bank to grow because, on the whole, there has been a lack of appetite for risk. Many African banks have moved away from lending. Theyll only offer banking to reputable corporates, governments and respectable institutions. There is little enthusiasm for lending to the informal sector. Even if an SME is 100 years old it will find it almost impossible to raise $1m in a week. Some institutions, such as Ecobank (initially backed by the Federation of West African Chambers of Commerce and now in 32 countries), have established a pan-African presence quite rapidly. But I think the problem is that the banking sector in Africa is dominated by foreign banks. Banking is a conservative industry and there is not a lot of demand to change banks. In South Africa, banks such as Standard and Barclays have dominated for the past 150 years. In Ghana, most banks are state-owned and because they are controlled by politicians they do not have what it takes to change. There is also the issue that banks need a lot of capital to set up. In Ghana, they require $60m, whereas in Nigeria they need around $250m. This is partly because institutions such as the IMF and the World Bank want banks to be more robust. But the consequence is that it becomes difficult for Africans to set up a bank. What are your expectations for Africa in the next few years, given the enormous potential of the continent? I pray for the day when African countries can realise their potential, but I am not optimistic.

I often ask myself: Why is it that Africa is always able to get it wrong? I think there is too much corruption in government, because we dont respect ourselves and are not doing enough to raise the living standards of our own people. Instead of building institutions we are actually knocking them down. The one African country that isnt beset with these issues is South Africa, but its institutions werent developed by Africans. What are the roadblocks to building strong governance structures across African government, finance and corporates in achieving that development? Despite the legal structures in place across Africa, too many people seem to operate above the law. They act as though they are untouchables. We need a government that will say that were all equal under the law. That ethos must encompass the law and the police, with the result that everyone pays tax and those that transgress should pay fines. We have all these ideas when people come into power, but it costs so much to win elections that they have to make deals. By the time they come

I pray for the day when African countries can realise their potential

24

Q&A

Career Ladder
2010: Became chief executive of UT Bank (following takeover of BPI Bank). 1997: Launched Unique Trust Financial Services. 1992-2003: Lectured at Ghanaian Stock Exchange. 1982-1992: Financial director, Jamhaus, Opeyesco Wood Processing Ltd; local rep at Elf Aquitaine of France; investment consultant at KK Power; financial director at Schiewe Ltd. 1982: Left the army having achieved the rank of captain after the return of the country to military rule. 1975: Commissioned as a lieutenant in Ghanian army. While in the army, won a scholarship from the Ministry of Defence to study the Royal Army Pay Corps course in cost and management accountancy at Winchester in the UK. 1975: Graduated from the University of Ghana Business School with a BSc admin (accounting).

into power they have to look after these vested interests, rather than the people who elected them. If you want to do the right thing you are in the minority. In Ghana, we have Kofi Annan, but he cant do anything about national politics. We have the third-fastest growing country [in the world] but we are always missing out on the opportunities that are available. Foreigners who see the opportunity come in, make money and get out again. One of the problems is that in many places here there are no street names or house numbers, so how do you collect taxes from people? Ghanaian institutions are worse now than they were when the country gained independence 55 years ago. With what I am doing I can put money into the hands of people who wouldnt have it otherwise. By doing this we can create employment and ensure people can put food on the table for their families. Can CIMA play an important role in developing a cadre across Africa capable of implementing those governance structures? CIMA is a great qualification. We have plenty of CIMA-qualified people in Ghana. But how effective they can be depends on where they work. If you take the CIMA qualification and go into government you cant tell politicians what to do. The qualification is great, but its effectiveness also depends on how you apply it. There is a strong possibility that CIMA people in government are not really raising their voices as they are afraid of losing their jobs. They keep quiet or they quit. In business, conditions are also different in Africa compared to elsewhere. You have to be pragmatic. We have had to create structures to be able to grow our company into a bank. In this respect CIMA helps you to be quite realistic and to see what applies best, rather than just taking the methodology of the Western world. Advanced country solutions do not necessarily apply. For example, we do not have structures and systems that are as well developed as they are in the

West. It calls for more ingenuity and better management of risk. I think that CIMA really helps in this environment in understanding the issues. The growth of UT Bank had been achieved, in part, by the recruitment of CIMA graduates to key positions in the bank.

We have the third fastest-growing country but we are always missing out on the opportunities that are available
Why was CIMA the right choice for you? I chose to study CIMA simply because it was the only accountancy qualification then available in the capital, Accra, and qualified in 1977. Unlike the post-mortem type of work that you have with other accounting bodies, with CIMA you actually make things happen before the results are captured. I didnt want to be a number-crunching accountant at the end of the year, I wanted to be in a management position, where the figures are the means of informing me what to do. CIMA training has stood me in good stead throughout my professional life. The CFO position is generally a sound qualification for the CEO slot, where the final decisions are made. Running a business means that you should be on top of the computations that have gone into the options on which you have to decide. This is where CIMA comes into its own, because it enables you to understand the options and the choices that you have to make. So I think CIMA should be bringing out a lot more CEOs than other accountancy qualifications.

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Technology

e h T lue a a t v da f o

Big data is now one of businesses most important assets. Peter Bartram sets out how technology can analyse your data to drive strategies for growth and more importantly measure its financial return...
hen the UK arm of the global bank Citi set out to investigate the return on investment (ROI) from its credit card sales campaigns, it improved future marketing ROI by 15 per cent. With the help of market research company Acxiom, it divided its database of prospective customers into 52 clusters, defined by their characteristics. Next, it analysed the kind of TV, radio, newspapers and magazines each cluster was most likely to see. It then pulled together every marketing message it sent out through each media channel. So when new credit card customers signed up, Citi matched each one against the media that would have encouraged their application. It helped it to gain an insight into which media were working best and found that local radio ads, which it previously thought were a poor investment, were actually showing good results. The Citi experience is one of dozens of stories coming out of companies that are finding ways to use data to win more business value. But there are also many companies that dont value their data and that have no plans to harness the opportunity that big data the latest buzzword provides. When information management company Iron Mountain surveyed 760 European information managers, it found that half had no idea how to make the most of big data, while one in five said they werent even going to try. That defeatist attitude wont enable companies

Illustration by Rob Pybus

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to harvest true value from their information assets, believes Steve ONeill, CFO of EMEA North at EMC, which provides enterprise information software and services. I think more companies should try to put a financial value on their data, ONeill says. I envisage the concept of return on data becoming a key performance indicator in the same way ROI is, he says. Its about people understanding the value of the data and, more importantly, the information they can glean from it and the impact that can have on their business. Some companies are already moving in that direction. Research by Dynamic Markets discovered that 20 per cent of large companies already quantify data as an asset on their balance sheet. For companies with more than 10,000 employees, the figure rises to 30 per cent. Companies that quantify data on the balance sheet appear to have a better grasp and understanding of it, its potential to improve their companys performance and how to manage it well, says Keith

Companies that quantify data on the balance sheet appear to have a better grasp and understanding of it

Valder, CFO at SAS UK & Ireland, the business analytics software and services company that commissioned the research. They are also more confident about the quality of their companys data. Four out of five CFOs in the companies that put a data value on the balance sheet monitor regular KPIs on data quality. That compares to fewer than three out of five in the companies that dont give data a financial value. Similarly, the companies that value data are much more likely to have a dedicated data management division than those that dont. Whats driving the data issue up corporate agendas is the growth of big data. But CFOs need to understand that big data is not just about having more of it. Its about looking at data in a completely new way. The key to the new concept are the three Vs volume, velocity and variety originally defined by Gartner research vice president Doug Laney. The problem the three Vs pose for CFOs is that its not just the volume of data thats growing so fast by 59

THUMBS UP...

Jim Manzi believes big data is an idea whose time has come
Financial directors and CFOs could be using big data to make better decisions. Thats because the value of big data lies not in the size of a database or its contents, but in the way a company can use the insights hidden in the raw figures to make smarter decisions and increase profits. The companies that invest in the technologies and skills to tease those new insights out of the data will be the ones that drive sustained competitive advantage. Big data is definitely an idea whose time has come. It exists because data storage costs are now falling faster than processing costs. Storage productivity doubles every year, while processing productivity doubles every 18 months. The cumulative effect of this difference creates huge pools of data that companies dont use because they cant work out how to process and analyse it at a feasible cost. So CFOs must find ways to speed up the time it takes to put the new pools of data to work. If they can do this, they will drive better decisions, de-risk innovation and convert big data into shareholder value. And one of the best ways to use big data is to answer questions about how business decisions change customer behaviour. For example, if we change the price of a product, will customers Tweet about it and encourage more people to buy? To understand cause-and-effect relationships such as this CFOs should try new ideas in a small part of the business. They can make predictions based on the results they get from the tests. Experimenting like this reduces the pool of data not being used to build profits. It converts big data into manageable and analysable data. And the robust decisions that result quickly create a competitive advantage and build lasting shareholder value. Jim Manzi is founder and chairman of Applied Predictive Technologies. He is the author of Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics and Society.

Much of the value from big data comes from a companys ability to identify what was previously unavailable
per cent a year according to one estimate but that it comes at ever faster speeds (the velocity) from a new range of different sources (the variety). Much of the value from big data comes from a companys ability to identify what was previously unavailable, such as social media content, and harvest value from it before it becomes outdated. Consider, for example, a CFO monitoring movements in the companys own share price and those of its rivals. Until now, that would have meant keeping an eye on market movements as they happened in real time. But in January, DCM Capital launched a trading platform that incorporates a social media sentiment feed. It enables traders to see what Twitter and Facebook users feel about shares, indices, foreign exchange and commodities. The new platform draws on research from the US, which shows that opinions about shares expressed on Twitter precede a price movement on the Dow Jones by three days. Paul Hawtin,

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31

Technology

founder and chief executive of DCM Capital, explains: Our sentiment signal is derived from real-time social media data. We search through billions of messages for key words that are relevant to the asset we are tracking some key words have more weighting than others and their weighting diminishes over time. All of the scores are then compiled to create an average score of between zero and 100. The higher the score, the more positive the sentiment. The problem CFOs face as they try to find ways of winning more value and business advantage from big data is what to do first. In the burgeoning databases that exist within an organisation there is likely to be information that could deliver answers to a bewildering array of business problems. The difficulty is formulating the right questions. One way to get ideas about how to use big data is to look at what some of the pioneers are doing. Tesco, for example, processes information from two-thirds of the transactions at its tills to learn

I was a little surprised when I came into the business how subjective it was

more about its customers buying patterns in different stores and at different times of the day. It wasnt always the case when Sir Terry Leahy, who pioneered the use of big data in large-scale retail during his 14-year tenure as CEO of Tesco, arrived at the group. He found little in the way of sophisticated research. His introduction of the Clubcard a reward card for customers gave Tesco a high level of information on its customers and saw the group grow from being the third biggest retailer in the UK to the third biggest in the world. I was a little surprised when I came into the business how subjective it was how people would make decisions on the basis of no information whatsoever, says Sir Terry. The bar code came along in the 1980s and that revolutionised a lot of things. You were getting the beginnings of a database then on products, and then the big breakthrough was when you had enough computing power to gather customer information as well as product. It really did make a difference.

all the way along its supply chain so that it can improve its environmental credentials and cut costs. Sustainability data will ultimately develop into a new currency, whereby businesses can measure their worth through how well they are managing their energy and carbon emissions, says Peter Bragg, head of environment and energy at the company. Man Trucks uses data collected from the driving cabs of the trucks it sells to glean information about how those vehicles can be driven more safely and efficiently. Trucknology has provided it with a competitive customer proposition that puts it ahead of its rivals. The way to harness more value from data, says Bernard Marr, chief executive of the Advanced Performance Institute, is to look closely at your business objectives and decide what big questions you need to answer in order to achieve them. Start with a hypothesis and then use the data to see whether it is validated, he advises.

Start with a hypothesis and then use the data to see if it is validated

rather than the traditional naysayer. CFOs are traditionally guardians of the budget and of the data in the companys ERP system so they understand the levers that drive the business. Were ideally placed to break down silo mentalities and challenge the status quo by asking outsidein questions rather than inside-out questions. And it is worth keeping JM Keynes aphorism in mind it is better to be roughly right than precisely wrong. Everything is changing so rapidly that trying to find the perfect solution that addresses every eventuality will prove impossible, warns Patrick Keddy, a senior vice president at Iron Mountain. Decide on the information of the greatest potential or risk to your business and focus your time and resources on harnessing that. Peter Bartram is the author of The Perfect Project Manager (Random House Business Books)

THUMBS DOWN...

Davin Yap says its better to understand small data


Instead of big data, companies should focus on using big context to understand small data. Thats because big data describes the what of a business situation, but big context describes the how and why. Big data is not new, yet many companies seem to be using it as a prediction tool. But the ability to predict behaviour doesnt necessarily lead to better business decisions because big data cannot tell you why something is happening, just that it is and will. Businesses should not be looking to track patterns, but to see the wider context around those patterns. The brilliance about having access to so much information is using it to understand why something is happening, how it is happening and what it means for the business. Ultimately, every business only succeeds by serving the needs of its end customer, but many companies are losing sight of this by pushing all their resources into big data warehousing. Unfortunately, big data often neglects individuals. Massive volumes of information are pulled together to create trends that then drive a companys business strategy. At a time when customers are demanding more personalised services, this approach gives them the exact opposite grouping them into a type rather than treating them as an individual. One chief executive called the big data explosion crippling sometimes when you have too much information youre unable to make a decision. The problem is that you need a PhD in mathematics to read the entrails of big data. In many instances, more data rarely results in a more focused and proactive business strategy because people get too bogged down in the analysis. So what is the solution? Start small and work up. By focusing on a specific challenge and the associated small data set, you can capture the most important bits of knowledge available the know-how and disregard unnecessary pieces of information that do not add value for the company or end-user. Dr Davin Yap is chief executive of Transversal, a company that provides knowledge management solutions. He has a PhD in engineering from Cambridge University.

Tesco processes information from twothirds of the transactions at its tills to learn more about its customers
The year the Clubcard was launched was the year we overtook Sainsburys to second place in the UK. Other retailers, such as online fashion house ASOS.com, which has quickly grown to a market cap of 1.4bn, are reaping the rewards from using big data. Ive had every scrap of information about my customers since day one, says ASOS. com chief executive Nick Robertson. There was no bigger evidence of that than when we got caught up in the Buncefield fire at an oil depot in 2005. I had the names and addresses of every single customer who had placed orders so we were able to contact them to explain the situation. Once we were back I emailed all the same customers again to say we had a bit of stock we needed to clear now because its a fire sale, come and shop. We got back on our growth trajectory as a result of having all that data. Eurostar International, which has 10,000 suppliers, is collecting information about energy use

The big thing the CFO can do is become the disruptive enabler rather than the traditional naysayer
He suggests this is better than looking for random trends in the data in the hope that something interesting will turn up. Marr points out that there is already a wealth of open-source software for a company that wants to experiment with big data applications without incurring heavy costs. The software includes Google Trends, which provides data on commonly used search terms; Social Mention, a search engine that explores social media such as blogs, comments, news and videos; and Hadoop, open-source software that supports data-intensive distributed applications. It is a myth that big data is only for big companies with big IT budgets, says Marr. ONeill believes that the CFO has an important role to play in delivering big data business benefits in a company. But it will mean CFOs adopting a new role. For me, the big thing that the CFO can do to help the big data agenda in their company is become the disruptive enabler

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33

Sustainability
es for everyone, but ensuring that our business can operate efficiently. It is definitely the right thing to do, but it is also the right thing to do for business. Effectively managing the risks associated with climate change, resource scarcity and commodity volatility are all part of running a successful business, but the leaders will be those who are able to turn risk into opportunity and set the path for others. For example, several years ago we introduced a monitoring and targeting system in each of our plants that allows us to measure the way we use energy and water. As a result, our plants in GB and France are some of the most efficient CocaCola production plants in the world we have reduced the water we use by 15 per cent over the past six years, while increasing our production by 6 per cent. Another great example is the development of PlantBottle, which aims to reduce our reliance on polyethylene terephthalate (PET) as a raw material for our bottles. PlantBottle is the first-ever fully recyclable PET plastic beverage bottle made partially from plants, which allows us to make up to 30 per cent of a regular plastic bottle from plant-based materials. We rolled this technology out across our Coca-Cola Enterprises (CCE) territories in 2011 and theres no doubt it is a great differentiator for our business, as well as answering our need to manage the risk associated with PET. Some areas, such as technological advancement, will drive efficiency and offer both shortterm commercial benefit and competitor differentiation. Other challenging topics, such as changing consumer attitudes to recycling, will require us to set aside our competitive instincts and focus on creating a unified partnership solution. How important is it that companies are able to communicate effective leadership in this area and what form should this leadership take? JB: I believe that our ability to provide leadership along the sustainability journey is based, at heart, on great collaboration. From its very inception, our sustainability plan has been based on strong communication between us and our stakeholders. We asked them how businesses such as CCE can contribute to finding solutions and invited them to work with us to find ways to advance innovation and overcome challenges together. Only this powerful partnership could have produced the roadmap for our sustainable future. Sharing what we are doing in the sustainability space is also important to help inspire others, and to ensure we continue stakeholder dialogue. This is a part of how we do business every day from the formal publication of our annual corporate responsibility and sustainability report We are working hard to drive collaboration throughout our value chain, from the way we source raw materials to engaging with consumers around recycling to the daily conversations we have with our suppliers and customers, and the presentations we make to investors. Great collaboration can deliver ambitious aims. Through partnerships with our suppliers, we were able to support LOCOGs goal of making the London 2012 Olympic Games the greenest in history. All of our coolers were energy-efficient, while our drinks were delivered in biogas trucks from our environmentally friendly local warehouse. This cut the carbon footprint of our distribution system by one-third. We provided recycling bins around the park and used fun, engaging ways to encourage the recycling of every product consumed at the Olympics. These bottles were then reprocessed at our recycling facility in Lincolnshire and turned into new bottles that will be on the shelves in less than six weeks.

John Brock, chairman and CEO of Coca-Cola Enterprises, says the key to a successful sustainability model is collaboration. He tells FM how the global drinks giant has seen the light on an environmentally friendly future
Do you think that corporates the world over can take the lead on sustainability, ahead of governments and consumers? John Brock: Sustainability is at the heart of everything we do as a business we want to grow our business while using less. We firmly believe that business is moving beyond the traditional concept of sustainability as a niche focus and shifting to be right at the heart of what is required to run a business in the 21st century. A more sustainable tomorrow is not a destination, but a journey, and one that demands that we make transformative changes to the way we live and the way we do business. Companies such as ours have a responsibility to lead the way. One key tenet of our sustainability vision is to inspire and lead change through the example of what we achieve in our business and how we work with our stakeholders. However, nobody can make the sustainability journey alone. The scale of change required means that collaboration between corporations, governments, NGOs and consumers is critical. When we made the commitment to reduce the carbon footprint of the drink in your hand by a third by 2020, we knew it was a huge challenge that we could not achieve without the help of our customers, suppliers and consumers themselves. This is why we are working hard to drive collaboration throughout our value chain, from the way we source raw materials right through to engaging with consumers around recycling. For instance, we recently challenged our suppliers to measure their own carbon footprints and to work in partnership with us to develop carbon reduction plans. Governments will play a key role by creating consistency and continuity in regulatory frameworks that support sustainability efforts, such as introducing policies that enable companies to continue to invest in low-carbon technologies and transport efficiency solutions. Do you believe there is significant firstmover advantage to be had? JB: We certainly believe that building a sustainable business will protect our collective future, not only protecting our planet and our resourc-

A bright idea

I believe our ability to provide leadership along the sustainability journey is based, at heart, on great collaboration
We have many success stories, but we are also committed to being as open and transparent as possible when communicating our sustainability progress this means sharing our challenges as well as our successes. We know that we dont have all the answers to be able to deliver our vision. The solutions to todays challenges may not have been invented yet. It is only by being honest about where we need help and input from stakeholders that we can respond to these challenges. Is integrated reporting going to become increasingly important? JB: Over time, sustainability will become increasingly integrated into every area of business, including the way that businesses report. Being able to quantify the value that sustainability contributes to business, and the contribution the business makes to the wider world and society, is critical. As sustainability becomes truly core to business operations, so integrated reporting will become more of a reality. Interview by Lawrie Holmes, editor, Financial Management

Getty Images

Financial Management | March 2013

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Prime number
Top 10 global M&A deals from 1 January 2001 to 31 December 2012

Target company Philip Morris International Inc

Bidder company Altria Group Inc (Shareholders)

$106,884m
Completion Date: 31-Mar-08 ABN AMRO RFS Holdings BV Suez SA GDF Suez SA

Value

$95,637m
05-Oct-07 BellSouth Corporation AT&T Inc Aventis SA

$89,964m
22-Jul-08 SanofiSynthlabo SA

Wyeth

Pfizer Inc

$89,437m
29-Dec-06 Pharmacia Corporation Pfizer Inc Mondelez International Inc

$71,843m
31-Dec-04 Altria Group Inc (Shareholders) AnheuserBusch Companies Inc

$65,016m
15-Oct-09 AnheuserBusch InBev NV Bank One Corporation JPMorgan Chase & Co

$60,935m 16-Apr-03

$60,930m 30-Mar-07

$58,563m 18-Nov-08

$57,874m 01-Jul-04

Hit-and-miss deals
Getty Images The number of Chinese (including Hong Kong) outbound developed market deals in 2012 was... The amount that China spent on outbound developed market deals in 2012 was...

106

$53.9bn

Sources: Mergermarket, Ernst & Young

The biggest deal between 2001 and 2012 was the $106,884m deal between Philip Morris International and the Altria Group. The total cost of the top ten deals since 2001 amounts to $757,083m. However, not all deals go to plan. AOLs $164bn acquisition of Time Warner at the height of the dotcom boom in 2000 turned sour and Time Warner realised the deal was not in its best interests. AOL posted a $98.7bn loss for 2002 the largest in US corporate history at the time. The two companies de-merged in 2009.

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Financial Management | March 2013

Financial Management | March 2013

37

The list

Focus IT spend where it delivers the most

More than a quarter (26 per cent) of managers responsible for IT investment say their biggest barrier is an inability to show how the investment will meet the companys objectives and provide return on investment, according to a survey by KCom, a managed services communication provider that numbers BA and Specsavers among its clients. Lack of board buy-in to IT spending is another problem identified in the survey. More positively, the survey reveals that companies are most enthusiastic about higher IT spending in areas such as sales and marketing or R&D, which can help drive top-line revenue growth. Sally Fuller, KComs director of strategic propositions, says: This economic climate is putting pressure on business to justify IT spend.

The biggest reason for scope creep is that stakeholders who can influence the project are not clearly identified and, therefore, might request last-minute changes, says Thomas Janzen, technology development consultant at Vendigital, which runs performance improvement programmes. When a project goes off the rails, dont be afraid to close it down or review what needs to be done to bring it back on track, says Peter Chadha, named as one of the top 50 IT commentators in Britain. Sometimes its not the project thats failing but the needs of the business that have changed, he adds.

the ability to virus scan and preserve data for up to 100 years. This is significantly cheaper than in-house or other outsourced services. You could also save around 70 per cent on antivirus spam management while allowing your IT manager to do something more useful for the business.

Audit use of software licences

Control your high-cost areas

3
Illustration by Borja Bonaque

Think intelligently about outsourcing

Identify a clear role for the IT budget

ways to... manage the cost of IT projects Finance professionals can easily fall into a number of traps when it comes to managing the cost of IT projects. Therefore, it pays to be diligent during every step of the process, says Peter Bartram

Too many organisations allow IT costs to spiral out of control because senior managers havent agreed on a clear role for IT. Conflict between todays management accountants and IT directors is commonplace, says Colin Rowland, a vice president at Apptio, which uses its technology business management expertise to help companies control IT costs. Rowland says conflict arises because accountants are constantly looking to cut IT costs, while IT professionals puzzle over how to meet increased demands with fewer resources. When considering the IT budget, Rowland says accountants should consider three key questions: Am I balancing IT costs with the expected demand for resources? Am I delivering a service that matches or beats those on the open market? Is this project going to enable long-term growth?

Outsourcing to countries with lower wages is still popular and I expect it to grow, notes Dr Lineke Sneller, professor of accounting information systems, IT value, at Nyenrode Business University in the Netherlands. The current technical opportunities for connectivity enable reliable and cost-effective outsourcing, she adds. Dont be afraid to renegotiate outsourcing deals to improve commercial terms, says Rick Simmonds, managing partner at Alsbridge, an independent sourcing advisory firm. Conduct a rapid due diligence review across the whole IT service portfolio to establish whether there is a benefits case for expanding current levels of outsourcing, shared services or offshoring arrangements, he adds.

In my view, cost pressures on IT are very much related to the proportion of the budget spent on maintenance, says Sneller. If a company spends 30 per cent of its IT budget on maintenance and 70 per cent on renewal, it can innovate very quickly in good years and do a bit less renewal in difficult economic times without harming the business-as-usual. If, on the other hand, it spends 70 per cent on maintenance and 30 per cent on renewal, it becomes inflexible. It is not unusual for organisations to have over 85 per cent of the total spend locked up in maintenance. In these organisations, innovation may come to a stop and saving costs in IT will go at the expense of the maintenance budget, which will harm the business-as-usual. My advice is, therefore, to always manage the maintenance budget actively and control the maintenancerenewal proportions.

In many companies, taking on new licences is spread around the company so nobody has an overview. Richard Blanford, managing director of IT integrator Fordway, says: One 5,000-user organisation we worked with had purchased more than 9,000 copies of MS Office during the previous six years. They had nearly twice as many licences for a key business application than they needed. Another organisation was still paying software maintenance for business applications it had replaced three years earlier. Blanfords remedies: look at your total needs, rationalise applications, standardise, centralise control of PC desktops, implement effective control and release processes.

Measure IT costs realistically

Float into the cloud

Exercise firm control over IT projects

Scope creep is one of the worst causes of burgeoning costs in an IT project.

Cloud email can save as much as 70 per cent of costs, says Chadha. Even more when you consider all of the hassle and botheration of looking after things like email servers handling spam and malware protection, he says. He advises: Review public cloud email, such as Gmail, with a large in-box capacity, universal user interfaces and

Traditional ways of measuring IT costs and value include acquisition and implementation, break-even point, return on investment and total cost of ownership, notes Tony Tarquini, director of strategy, financial services, at Pegasystems, which provides business process management software. But Tarquini says CFOs need to look at other measures that reflect the needs of fast-moving business change. These measures include cost of change and time to value. He adds: Thinking big, starting small and delivering fast not only creates value earlier by securing the break-even and return on investment, it also helps to reduce the risk of failure of an IT project. Peter Bartram is the author of The Perfect Project Manager (Random House Business Books)

Study notes

In association with

39

Notes
Study

Paper F2 Financial Management p46

Paper F3 Financial Strategy


The adjusted present value method of appraising investments is not easy to learn, but any question involving a project thats subject to significant financing issues is likely to require you to use it By William Parrott Freelance tutor
ost past F3 questions requiring candidates to take the adjusted present value (APV) approach to investment appraisal have indicated when it is called for and I would expect this trend to continue. But the presence in a scenario of subsidised borrowing, issue costs on new financing or an increase in debt capacity caused by a project are all signs that APV cal culations are likely to be needed. Unfortunately, many students struggle with questions concerning the weighted-average cost of capital (WACC), never mind more complex matters such as APV. The APV method suggests that the investment appraisal process can be split into two distinct parts. First, the project should be discounted at a suitable ungeared cost of equity. The base-case net present value (NPV) that arises ignores the benefit of tax relief on debt finance and other financing aspects. These are calculated separately as the present value (PV) of the financing sideeffects. The sum of the base-case NPV and the PV of the financing side effects is the APV. This is then used in the same way as an NPV. The base-case NPV calculation, which assumes that only equity finance is used to fund the project,

The presence ofsubsidised borrowing, issue costs on new financing or an increase in debt capacity caused by a project are all signs that APV calculations are likely

can also be split into two steps. The first is to calculate a cost of equity for a suitable ungeared company (keu). If the project carries the same business risk as that of the company, the firms existing keu can be used. If the project represents a move into a new area with a different business risk from that of the rest of the company, a keu can be found using information from a suitable proxy company thats already operating in that field. You could do this in numerous ways using the tools at your disposal, some of which I will show in a worked example. In the exam youll have to decide which to apply according to the scenario. This is a key skill that you will hone only by practising questions. The second step of the base-case NPV calculation is a normal NPV calculation in which the keu obtained in the first step is used as the discount rate. In the exam this tends to be a fairly straightforward process otherwise, the whole question would be at risk of becoming too big. When it comes to the financing side effects calculation, the main side effect is the tax relief on interest paid, but many factors may be included, most of which are shown in the following pro forma: Note $$ 1. Issue costs: 1 Equity (X) Debt (X) Tax relief Xi (X) 2. PV of tax relief on interest paid: 2 Normal-rate loan  X Cheap loan X

3. Cheap loan: 3 PV of interest saved Xi PV of tax relief lost (X)  X Total PV of financing side effects 4 X Notes 1. Any issue costs on debt and equity should be accounted for. Debt issue costs are usually tax

Study notes

41

Paper F3 Financial Strategy


allowable, in which case the tax relief should be calculated. Unless you are told otherwise in the exam, assume that any debt issue costs are tax allowable and that any equity issue costs are not. 2. The PV of tax relief on interest paid should be calculated both for any normal or commercialrate loan and for any cheap or subsidised loan that may be provided by a government or the supplier of the asset, for instance. 3. If there is a cheap loan, the PV of the interest saved compared with the normal commercial rate must be calculated. This benefit is then reduced, because paying a lower rate of interest results in the loss of some tax relief. 4. In order to determine the PV in all of the calculations shown in the pro forma, a discount rate is required. The issue of which discount rate to apply remains the subject of much discussion and past exam questions and other practice questions have involved a number of different rates. My advice would be to use the pre-tax cost of debt unless the question indicates otherwise, because this best reflects the systematic risk associated with these cash flows. But do not use the keu, because this would not be acceptable. The change in debt capacity caused by a project is the extra debt finance that a company can borrow as a result of the project. If the change in debt capacity differs from the loan actually taken, the total loan on which tax relief is calculated should reflect the total change in debt capacity, so the normal-rate loan to be used in the calculations would be deemed to be the total change in debt capacity less any cheap loan. You should assume that the issue costs would be incurred on the total amount deemed to be the normal-rate loan. These would be on top of issue costs associated with any cheap loan. The reason for this is that a project should be credited with the benefit of the tax relief on debt finance to the extent that the project allows the company to raise more debt. For example, where the change in debt capacity exceeds the total debt actually raised, the assumption is that the company will soon utilise any debt capacity that is not immediately used because of the tax-relief benefit it brings. The project that allows the extra borrowing and benefit to arise should be credited with its value. If a question does not mention the change in debt capacity caused by a project, you should assume that the change in debt capacity is the same as the actual debt raised. The APV calculation is simply the sum of the base case NPV and the total PV of the financing side effects. This figure is then appraised in the same way as an NPV: if its positive, the project is acceptable, because it can be expected to add to the wealth of the companys shareholders.

If the change indebt capacity differs from theloan actuallytaken, the totalloan on which tax relief is calculated should reflect the total change in debt capacity

For the following example to be comprehensive, it probably covers more ground than any one question you are likely to encounter in the exam, but each of the elements in it could appear. Matu is a well-diversified risk-seeking plc. It has a gearing (debt:equity) ratio of 1:3, an equity beta of 2.25 and a pre-tax cost of debt of 5 per cent. The company is considering the purchase of a new machine costing $120m, which would enable it to diversify into a new line of business. The machine would have a three-year life, after which it would have no residual value. The machine would generate estimated net cash inflows of $52m a year. The supplier of the machine is willing to lend Matu half of the machines capital cost at a rate of 3 per cent. The remainder will be financed equally by debt and equity. The issue costs on the commercial debt will be 1 per cent and the equity issue will incur costs of 3 per cent. A firm thats already in the trade of the new project has a gearing ratio of 1:4 and a cost of equity of 18.1 per cent. Its corporate debt is risk free. A government grant of 10 per cent of the initial capital cost of the machine is available. Matu anti cipates that this would be received after one year. Corporation tax is 30 per cent, payable a year in arrears. Straight-line depreciation on the net cost of the machine (after deducting the grant) is tax allowable. The risk-free rate is 4 per cent and the market risk premium is 7 per cent. You are required to estimate the APV of the proposed project. The first stage is to calculate a cost of equity for a suitable ungeared company. Because the project is a new line of business, we need to use the information given for a suitable proxy company. The following three methods are available to us: l Using betas. Because we know the geared cost of equity for the proxy company only, we need to use the formula of the capital asset pricing

Worked example

42

Study notes

Paper F3 Financial Strategy


model that is, ke = Rf + (Rm Rf), where Rm Rf is the market risk premium to calculate the geared beta (g) of the proxy company as follows: 18.1% = 4% + (7% x g) Using algebra, we find that g = 2.014. Next we use the ungear formula and assume that the corporate debt is risk free ( d = 0) to calculate the geared beta of the proxy company (if a question provides a geared beta for the proxy company, you can jump straight to this part): u = g (Ve [Ve + Vd {1 t}]) u = 2.014 (4 [4 + 1 {1 0.3}]) = 1.714. Now we can put this ungeared beta into the capital asset pricing model formula to calculate a suitable cost of equity ungeared: keu = 4% + (7% x 1.714) = 16%. l Using the cost of ordinary share capital in a geared entity formula. Because the geared cost of equity and all other inputs into the formula are known, the cost of equity for the ungeared company can be calculated. The gross cost of debt is the risk-free rate, as the question states that the corporate debt of the proxy company is risk free: keg = keu + (keu kd) (Vd [1 t] Ve) 18.1% = keu + (keu 4%) (1 [1 0.3] 4) Using algebra, we arrive at keu = 16%. l Using the formula for the adjusted cost of capital: kadj = keu (1 tL), where Kadj is the WACC and L is the leverage or Vd (Ve + Vd). The WACC for the proxy company can be calculated as normal: 18.1% x (4 5) + (4% x [1 0.3] x [1 5]) = 15.04%. Hence 15.04% = keu (1 0.3 [1 {4 + 1}]) Using algebra again, we come to keu = 16%. You will probably be given only enough information in the exam to use one of the above methods, but youll need to be able to identify which to use and apply it successfully. Now that we have an ungeared cost of equity of 16 per cent, the next stage is to calculate the basecase NPV as follows: $m T0 T1 T2 T3T4 Net revenue 52.00 52.00 52.00 Tax @ 30% paid in arrears (15.60) (15.60) (15.60) Initial investment (120.00) Grant @ 10% paid after 1 year 12.00 Tax savings XXXXXX XXXX 10.80 10.80 10.80 Net cash flows (120.00) 64.00 47.20 47.20 (4.80) 16% discount factors 1 0.862 0.743 0.641 0.552 Present values (120.00) 55.17 35.07 30.26 (2.65) Net present value (2.15) The tax savings are calculated by taking the net cost of $108m ($120m $12m) and spreading it over the projects three-year life. This gives an annual allowable depreciation of $108m 3 = $36m. The annual tax saving is $36m x 30% = $10.8m. Assuming that Matu bought the asset at the start of a tax year, the first saving will be calculated at the end of year one (T 1), but, since tax is paid a year in arrears, it will become a cash flow a year later (T2). The fact that a negative base-case NPV has arisen is not unusual, as the benefit of cheaper debt finance has been ignored in the calculations so far. Before starting the side effects calculation, its worth ensuring that you understand the financing package. From the question we can identify: l Debt finance from the machine supplier at 3 per cent a year: $120m x 50% = $60m. l Commercial debt finance at 5 per cent a year: $120m x 25% = $30m. l Equity finance: $120m x 25% = $30m. The commercial debt finance and the equity finance will both incur issue costs. Because $30m must be provided from both commercial debt and equity to buy the machine, we need to gross up to find the actual amount that must be raised to pay the issue costs and then fund the machine. Because the issue costs on the commercial debt are 1 per cent, the total raised needs to be $30m x 100 99 = $30.30m. And, because the issue costs on the equity are 3 per cent, the total raised needs to be $30m x 100 97 = $30.93m. Using our pro forma, we obtain the following: Note $m$m 1. Issue costs: 1 Equity (30.93 x 3%)  (0.93) Debt (30.30 x 1%) (0.30) Tax relief (0.30 x 30% x 0.952) 2 0.09i (0.21) 2. PV of tax relief on interest paid: Normal-rate loan (30.30 x 5% x 30% x 2.723 x 0.952) 3  1.18 Cheap loan (60 x 3% x 30% x 2.723 x 0.952) 1.40

3. Cheap loan: PV of interest saved (60 x 2% x 2.723) 4 3.27i PV of tax relief lost (60 x 2% x 30% x 2.723 x 0.952) (0.93)  2.34 Total PV of financing side effects  3.78

Further reading Andrew Howarth, Financial Strategy, Financial Management, April 2011 (bit.ly/F3APVApril2011).

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Study notes

Paper F3 Financial Strategy


The total PV of the financing side effects is usually positive, as the biggest element tends to be the evaluation of the tax benefit on debt finance. Notes 1. The 3 per cent issue costs come to $0.93m. I hope you can see that, once this is paid out of the total equity raised, the $30m needed to help fund the machine purchase remains. The same is true with the debt issue costs. In some answers you may see the issue costs calculated simplistically as 3% x $30m = $0.90m. This is slightly rough and ready, but makes little difference. 2. As I suggested earlier, its assumed that debt issue costs are tax allowable. Tax relief has been calculated by multiplying the cost by the tax rate. Its assumed that the issue costs will be incurred in the year before the project starts and, as a result, the tax relief will be calculated at T0. But, as tax is paid a year in arrears, it will not become a cash flow until T 1. Hence the saving has been multiplied by the one-year discount factor at 5 per cent (pre-tax debt cost). 3. The annual tax relief on the commercial-rate loan is calculated by multiplying the total amount borrowed by the interest charge and the tax rate. Assuming that the loan period will match the project period, this tax relief will be received for three years. But, while the interest will be paid from year one, the tax relief will not be received until T2, as tax is paid a year in arrears. Hence the annual tax relief is a three-year annuity starting at T 2. Inorder to calculate its present value we multiply it by the three-year annuity factor at 5per cent and the one-year discount factor at 5 per cent. The present value of the tax relief on the cheap loan is calculated the same way. 4. The annual interest saved on the cheap loan is calculated by multiplying the amount of the debt by the 2 per cent interest saving compared with the commercial interest rate (5 per cent 3 per cent). In order to calculate the present value of this annual saving we multiply it by the three-year annuity factor, as the first interest saving will arise at T1. The present value of the tax relief lost on the interest saved is worked out as for the other calculations concerning tax relief on interest. The APV is the sum of the base-case NPV and the PV of the financing side effects, so the final APV in this example is $3.78m $2.15m = $1.63m. Because this result is positive, the project should be accepted, but its worth noting that the APV is fairly marginal given the large scale of the investment under consideration.

The rationale behind APV

The M&M theories take noaccount offinancial distress when gearing is high, so APV should be applied only at reasonable gearing levels

The APV approach relies on the Modigliani and Miller (M&M) theories of capital structure. The M&M no tax theory states that, as the gearing of a firm changes, its WACC stays constant. If its gearing rises, its financial risk rises, as does its cost of equity. While the rising cost of equity tries to push the WACC up, the increased proportion of cheaper debt finance tries to push the WACC down. These effects are equal and opposite, leaving the WACC unchanged. The lowest level of gearing is where the firm has no debt, so the WACC is the same as the cost of equity at this point: the keu. As the WACC stays constant, it is the keu at all levels of gearing. Under the M&M with tax theory, the WACC falls as gearing rises. This is because the debt is cheaper than in the no tax theory because of the tax relief on the interest paid. Under the APV method, the base-case NPV is calculated using keu. This is the appropriate WACC if there were no tax. In the financing side effects calculation, the key element is the calculation of the benefit of tax relief on interest paid. This benefit, which in the M&M with tax theory causes the WACC to fall, is evaluated in absolute terms and added to the base-case NPV to create the APV. Hence the final APV calculated reflects the with tax theory. This explanation should help you to understand why the actual interest paid on the debt is not included in the calculations. The M&M theories take no account of the impact of financial distress when gearing is high, so APV should be applied only at reasonable gearing levels. Financial distress is caused by real-world factors that are ignored by the M&M theories e.g., the increased danger of bankruptcy, extra agency costs and the risk of tax exhaustion that may arise when gearing is high. At higher gearing levels corporate debt is definitely not risk free. Further problems arise with the M&M theories failure to account for different investors tax positions and their assumption that markets are perfect. Where the capital asset pricing model is used to derive k eu , all of the assumptions and limitations of that model are relevant, too.

Further reading CIMA Official Study Text Financial Strategy (2012-13 edition), Kaplan Publishing, 2012.

46

Study notes

Study notes

47

Paper F2 Financial Management


F2 students know that their grasp of ratio analysis issure to be examined, yet many still let marks go begging for the want of proper calculations. Heres a top-five countdown of the worst-understood ratios By Jayne Howson Freelance lecturer specialising in financial management, reporting and tax, and a marker for paper F2

Meaning: how confident the market is in the business. The larger the figure, the more that shareholders are prepared to pay for a share in that company compared with the firms historic earnings. The P/E ratio is a relatively new entry to the chart.
l

4. Non-current-asset (NCA) turnover


l

hose students preparing to sit the F2 paper will know that question 7 has always been a 25-mark analysis and interpretation question. The examiner expects candidates to include some ratio calculations in their answers, followed by a report explaining how the company concerned has been performing. The number of marks available for the ratio calculations will be indicated in the question. This gives an idea of the number of ratios that need to be calculated. Traditionally, this has been between six and eight. The examiner therefore expects six to eight ratios to be calculated correctly for the two accounting periods under consideration. It is up to you to choose the ratios, but you should take these from under each of the headings profitability, solvency and liquidity. One mark will be awarded for each correct ratio, based on the financial statements in the question, calculated for both periods. So your answer will be either right or wrong its all or nothing. Over the past few F2 sittings its become clear that there are some ratios that candidates keep getting wrong. So here I will count down the top five most incorrectly calculated ratios and offer some advice on how to get them right in future. Its widely agreed that if you know the formulas you will be able to interpret them more meaningfully.

Calculation: the NCA turnover (a number) is derived by dividing the revenue shown on the companys income statement by the total figure for non- current assets on its statement of financial position. This ratio is rarely calculated correctly. The figure for non-current assets should not include Investments in associate, because the revenue figure doesnt include revenue generated from that investment (it appears further down the income statement). l Meaning: how the use of NCAs generates revenue. In theory, a large number is better for the company, but remember that the figure can be distorted by the policy of revaluations as well as by the age of these assets.

problem ratios for several sittings. Operating profit is also described as profit before interest and tax (PBIT) and is found on the income statement. This figure should not include any profit/loss from Investments in associate. The finance charge is the interest payable shown on the income statement. l Meaning: how comfortably the company can cover its interest payments from profits. A high number suggests there should be few problems. Its nothing to do with cash and ability to pay.

1. Return on capital employed (ROCE)


l Calculation: the

ROCE (a percentage) is derived by dividing the companys operating profit by the capital employed. This has been top of the chart for umpteen consecutive sittings. Students often get the top and bottom lines of the formula wrong. The operating profit is the same figure as that used for the interest cover ratio i.e. its found on the income statement and is also known as the PBIT.

Capital employed is the total funds used to generate the profit i.e. total equity plus non-current liabilities in the statement of financial position. As with the gearing ratio, the overdraft should be included in this figure if the company is using it as a long-term source of finance, but not if its only a short-term measure. Investments in associate should be deducted from the figure. l Meaning: how efficiently the company is generating profits from the financial resources available to it. A large percentage is a good result, but this ratio can be distorted by revaluation policies and the age of assets. Students often believe that the calculation of accounting ratios is not important as long as they interpret them correctly. That may be true in practice, but in the world of the F2 paper it is certainly not true. To maximise your chances of success in the exam, calculate ratios in the traditional way the examiner expects it.

3. Gearing
l

Global contact details


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5. Price/earnings (P/E) ratio


l

Calculation: the P/E ratio (a number) is derived by dividing a firms share price by its earnings per share (EPS). The share price will be given. EPS is earnings divided by the number of ordinary shares. The earnings figure is the profit available to ordinary shareholders i.e. profit after tax and dividends due to irredeemable-preference shareholders.

Gearing is an old favourite onthe chart. Usewhichever method you liketo calculate it unless theexaminer specifies the oneto apply

Calculation: the gearing ratio is derived either by dividing the companys debt by its equity (giving a number) or by dividing the debt by the sum of the debt and the equity (giving a percentage). Gearing is an old favourite on the chart. Use whichever method you like to calculate it unless the examiner specifies the one to apply. Equity is the figure for total equity on the statement of fin ancial position. Debt is the figure for long-term debt on the statement of financial position. This includes pension liabilities. An overdraft should also be included in the debt figure if its being used as a long-term source of finance, but not if its a very short-term measure. If in doubt, your answer should set out your reasons for including or exclu ding the overdraft. l Meaning: how the organisation is financed. A high number suggests that the company relies on long-term debt to fund its activities rather than relying on funds provided by shareholders.

2. Interest cover

l Calculation: interest cover (a number) is derived

by dividing the companys operating profit by the finance charge. This has been in the top three of

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Further reading CIMA Official Study Text Financial Management (2012-13 edition), Kaplan Publishing, 2012.

Study Study notes notes

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Technical notes

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Delivering new IT projects can be fraught with danger as many take too long to deliver or fail to meet expectations. Fast track is a new, agile way of introducing business change through IT in a fraction of the time in order to maximise the benefits

By Matthew Wood and Suzanne Brown, Equifax

n the past few years, IT has increasingly been reporting under the finance umbrella, so to provide effective leadership CFOs need to keep up with disruptive changes in the IT industry. A recent survey of 536 C-level executives by the Economist Intelligence Unit found that 57 per cent of CFOs expect IT departments to change significantly over the next three years, while 12 per cent predict a complete overhaul. Leading the IT function isnt easy multiple competing pressures and the high risks associated with IT delivery projects can make it a daunting task. Author and consultant Scott Amblers IT Development Project Success survey in 2011 reported that only 49 per cent of IT development projects delivered using a traditional methodology were successful. More than a third of projects were either significantly under the target return on investment (ROI), late, or of poor quality, while 13 per cent were a complete failure. Far too many companies spend up to 80 per cent of their IT budgets just running and maintaining what they already have, leaving only 20 per cent for innovation. The accelerated pace and scale of global business creates huge pressure on IT to

deliver new capabilities, adding further demands to already overstretched IT functions. The status quo is not sustainable. CFOs may argue that these are the CIOs responsibilities and not see the point in gaining specialist IT knowledge, but that mind-set can have expensive consequences. IT strategy and project delivery materially impact everything in the CFOs world: mergers and acquisitions; product innovation and timeto-market; getting employees to buy in to business; transformation programmes; and the time it takes to react to regulatory changes, to name but a few. These competing pressures call for a new way of managing business change; what we call a fast track approach. The traditional approach to IT delivery is to spend weeks defining the requirements and designing a solution, followed by months of development and testing. When end-users finally get to see the system, typically nine months or more have elapsed. Not surprisingly, IT systems often fail to meet stakeholders expectations. Agile and iterative delivery approaches have made inroads into improving project success rates, but more can be done. Fast track enables systems to be built in weeks, using new technologies for rapid development and integration, stripping out unnecessary requirements and mitigating risk. This approach has a number of benefits compared to traditional IT project approaches: It substantially reduces IT project delivery risk. It optimises ROI by delivering benefits early.  It improves the relationship between the business and IT. When and why should I use fast track? Most first notice the benefits of fast track when there is a pressing need to demonstrate fast results. For example, an executive new to their role may need to score a quick win to establish trust, such as saving on an operational cost or scaling a business process with little additional funding. In our experience,

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Technical notes

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Figure 1 3,500 3,000 2,500 Cumulative Cash Flow (k) 2,000 1,500 1,000 500 0 -500

focus on getting it right rather than cutting corners. This is often a significant issue for IT departments. Also, morale was high within the project team because they were seen as innovators within the organisation. Lastly, the customer and user experience of the full-scale project was significantly improved by incorporating feedback from the fast-track project into the final solution. In summary, the fast-track approach enabled a very successful project delivery with low fiscal risk.

we have seen many other scenarios in which fast track is highly advantageous: Long-term change programmes These often take a long time to deliver returns from an ever-growing investment. By using fast track from the outset, it is easier to establish confidence with executives, but it can also be implemented at a later stage to re-establish lost credibility caused by programme delays. Operational troubleshooting Fast track is ideal for unexpected operational problems that arise within business units due to its ability to deliver solutions quickly. External events Certain events call for a rapid response from IT, such as a company merger or acquisition (where IT is typically an afterthought), when a new competitor enters the market and the company needs to react quickly, or changes to compliance, regulatory guidelines and laws. Product/service innovation Fast track is perfect for situations in which product improvements need to be made quickly in order to support early market testing. It also benefits internal company innovation, such as improving the customer experience in a call centre. So whats the return on the fast track? To illustrate the financial benefits of the fast-track approach we have constructed a model based on a

real project, with minor amendments introduced to reduce complexity and highlight the differences, in contrast to traditional approaches (Figure 1). The projects aim is to automate a manual process so that it can be scaled with minimal labour costs. A comparison of the traditional method to the fast-track method is shown below: Option 1 Traditional method Requires an upfront investment of 1m and takes 12 months to implement. Business benefits start to accrue once the full solution has been implemented. Full scalability is available when the solution is implemented. Option 2 Fast-track method Includes two phases: a fast-track solution (phase 1) followed by the full traditional project (phase 2). Phase 1 costs 150k and takes three months to implement, has limited scalability and a maximum capacity of half of the full project. Phase 2 has a reduced cost (900k) and timescale (11 months) due to the knowledge acquired during Phase 1.

Fast track is perfect for situations in which product improvements need to be made quickly

Should your company adopt a fast-track approach? -1,500 X You can rest assured that many large, highly 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 innovative organisations are using fast track IT approaches today with great success. Google is Months Opinion 1 Opinion 2 probably the most renowned example of a comtraditional method fast track pany that regularly uses a fast track-type approach for developing, launching and iterating new prodThe figure above presents a comparison of the two approaches; cumulative cash flow is shown on the ucts. Closer to home, Vodafone used a fast-track x axis and time on the y axis. approach to improve its call centre efficiency and It shows that the fast-track approach has signifiimplement a more effective telesales solution. The authors have used a fast-track approach for cantly reduced the financial risk for this initiative. a number of projects, including: The initial 150k investment is the only time the 1. Business operations process automation. project is in negative cash flow. This is because the 2. Contact centre process improvements. cost savings from the initial automated solution 3. New product innovation. continue to accrue while the full solution is being implemented. The traditional approach requires The Fast Track Architecture blog http://fast1m of exposure before delivering any returns a large sum to put at risk before knowing that the trackarch.wordpress.com/ contains further case project is going to work. studies from organisations using the approach. A faster payback is also achieved using the fastThe increasing pace of change, turbulent economic environment and increasing demands track approach; seven months versus 19 months on IT departments demand that technology is using the traditional approach. The financial benefit of the traditional project eventually catches delivered using new and innovative approaches up, due to the scalability, and the overall benefit that avoid the high-risk stakes and failure rates of the two approaches is similar in the long term. of traditional methods. Fast track presents an opportunity to achieve IT change delivery at A number of soft benefits were also achieved considerably lower risk, with better financial benfrom this project. There was mutual respect and common ground between IT and the business. IT efits and improved staff morale. demonstrated that it understood the pressure the Can you imagine the impact of these benefits executive team was under and created an innovain your organisation? tive approach and solution to the problem. The executive accountable for the department also Matthew Wood is head of architecture and design won personal kudos for delivering an automated at Equifax Ltd (NYSE:EFX) and has led the design of business process in three months a previously After the major change programmes for FTSE 100 companies in unheard of timescale for an IT project of this type. project was finance, telecoms and government sectors. The fast-track approach project created a lower implemented, Suzanne Brown, ACMA, CGMA, is head of financial stress environment for both IT and the business there was less planning and commercial finance at Equifax Ltd and people involved. After the project was imple- pressure to has a strong commercial background in financial mented, there was less pressure to deliver the deliver the full modelling and business partnering. full project on time (or early) so the team could project on time
-1,000

Super Stock

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Notes
Te c h n i c a l

Dont miss out on patent opportunity

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The fast track to better, more profitable IT


Delivering new IT projects can be fraught with danger as many take too long to deliver or fail to meet expectations. Fast track is a new, agile way of introducing business change through IT in a fraction of the time in order to maximise the benefits

By Matthew Wood and Suzanne Brown, Equifax

n the past few years, IT has increasingly been reporting under the finance umbrella, so to provide effective leadership CFOs need to keep up with disruptive changes in the IT industry. A recent survey of 536 C-level executives by the Economist Intelligence Unit found that 57 per cent of CFOs expect IT departments to change significantly over the next three years, while 12 per cent predict a complete overhaul. Leading the IT function isnt easy multiple competing pressures and the high risks associated with IT delivery projects can make it a daunting task. Author and consultant Scott Amblers IT Development Project Success survey in 2011 reported that only 49 per cent of IT development projects delivered using a traditional methodology were successful. More than a third of projects were either significantly under the target return on investment (ROI), late, or of poor quality, while 13 per cent were a complete failure. Far too many companies spend up to 80 per cent of their IT budgets just running and maintaining what they already have, leaving only 20 per cent for innovation. The accelerated pace and scale of global business creates huge pressure on IT to

deliver new capabilities, adding further demands to already overstretched IT functions. The status quo is not sustainable. CFOs may argue that these are the CIOs responsibilities and not see the point in gaining specialist IT knowledge, but that mind-set can have expensive consequences. IT strategy and project delivery materially impact everything in the CFOs world: mergers and acquisitions; product innovation and timeto-market; getting employees to buy in to business; transformation programmes; and the time it takes to react to regulatory changes, to name but a few. These competing pressures call for a new way of managing business change; what we call a fast track approach. The traditional approach to IT delivery is to spend weeks defining the requirements and designing a solution, followed by months of development and testing. When end-users finally get to see the system, typically nine months or more have elapsed. Not surprisingly, IT systems often fail to meet stakeholders expectations. Agile and iterative delivery approaches have made inroads into improving project success rates, but more can be done. Fast track enables systems to be built in weeks, using new technologies for rapid development and integration, stripping out unnecessary requirements and mitigating risk. This approach has a number of benefits compared to traditional IT project approaches: It substantially reduces IT project delivery risk. It optimises ROI by delivering benefits early.  It improves the relationship between the business and IT. When and why should I use fast track? Most first notice the benefits of fast track when there is a pressing need to demonstrate fast results. For example, an executive new to their role may need to score a quick win to establish trust, such as saving on an operational cost or scaling a business process with little additional funding. In our experience,

52

Technical notes

Technical notes

53

Figure 1 3,500 3,000 2,500 Cumulative Cash Flow (k) 2,000 1,500 1,000 500 0 -500

focus on getting it right rather than cutting corners. This is often a significant issue for IT departments. Also, morale was high within the project team because they were seen as innovators within the organisation. Lastly, the customer and user experience of the full-scale project was significantly improved by incorporating feedback from the fast-track project into the final solution. In summary, the fast-track approach enabled a very successful project delivery with low fiscal risk.

we have seen many other scenarios in which fast track is highly advantageous: Long-term change programmes These often take a long time to deliver returns from an ever-growing investment. By using fast track from the outset, it is easier to establish confidence with executives, but it can also be implemented at a later stage to re-establish lost credibility caused by programme delays. Operational troubleshooting Fast track is ideal for unexpected operational problems that arise within business units due to its ability to deliver solutions quickly. External events Certain events call for a rapid response from IT, such as a company merger or acquisition (where IT is typically an afterthought), when a new competitor enters the market and the company needs to react quickly, or changes to compliance, regulatory guidelines and laws. Product/service innovation Fast track is perfect for situations in which product improvements need to be made quickly in order to support early market testing. It also benefits internal company innovation, such as improving the customer experience in a call centre. So whats the return on the fast track? To illustrate the financial benefits of the fast-track approach we have constructed a model based on a

real project, with minor amendments introduced to reduce complexity and highlight the differences, in contrast to traditional approaches (Figure 1). The projects aim is to automate a manual process so that it can be scaled with minimal labour costs. A comparison of the traditional method to the fast-track method is shown below: Option 1 Traditional method Requires an upfront investment of 1m and takes 12 months to implement. Business benefits start to accrue once the full solution has been implemented. Full scalability is available when the solution is implemented. Option 2 Fast-track method Includes two phases: a fast-track solution (phase 1) followed by the full traditional project (phase 2). Phase 1 costs 150k and takes three months to implement, has limited scalability and a maximum capacity of half of the full project. Phase 2 has a reduced cost (900k) and timescale (11 months) due to the knowledge acquired during Phase 1.

Fast track is perfect for situations in which product improvements need to be made quickly

Should your company adopt a fast-track approach? -1,500 X You can rest assured that many large, highly 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 innovative organisations are using fast track IT approaches today with great success. Google is Months Opinion 1 Opinion 2 probably the most renowned example of a comtraditional method fast track pany that regularly uses a fast track-type approach for developing, launching and iterating new prodThe figure above presents a comparison of the two approaches; cumulative cash flow is shown on the ucts. Closer to home, Vodafone used a fast-track x axis and time on the y axis. approach to improve its call centre efficiency and It shows that the fast-track approach has signifiimplement a more effective telesales solution. The authors have used a fast-track approach for cantly reduced the financial risk for this initiative. a number of projects, including: The initial 150k investment is the only time the 1. Business operations process automation. project is in negative cash flow. This is because the 2. Contact centre process improvements. cost savings from the initial automated solution 3. New product innovation. continue to accrue while the full solution is being implemented. The traditional approach requires The Fast Track Architecture blog http://fast1m of exposure before delivering any returns a large sum to put at risk before knowing that the trackarch.wordpress.com/ contains further case project is going to work. studies from organisations using the approach. A faster payback is also achieved using the fastThe increasing pace of change, turbulent economic environment and increasing demands track approach; seven months versus 19 months on IT departments demand that technology is using the traditional approach. The financial benefit of the traditional project eventually catches delivered using new and innovative approaches up, due to the scalability, and the overall benefit that avoid the high-risk stakes and failure rates of the two approaches is similar in the long term. of traditional methods. Fast track presents an opportunity to achieve IT change delivery at A number of soft benefits were also achieved considerably lower risk, with better financial benfrom this project. There was mutual respect and common ground between IT and the business. IT efits and improved staff morale. demonstrated that it understood the pressure the Can you imagine the impact of these benefits executive team was under and created an innovain your organisation? tive approach and solution to the problem. The executive accountable for the department also Matthew Wood is head of architecture and design won personal kudos for delivering an automated at Equifax Ltd (NYSE:EFX) and has led the design of business process in three months a previously After the major change programmes for FTSE 100 companies in unheard of timescale for an IT project of this type. project was finance, telecoms and government sectors. The fast-track approach project created a lower implemented, Suzanne Brown, ACMA, CGMA, is head of financial stress environment for both IT and the business there was less planning and commercial finance at Equifax Ltd and people involved. After the project was imple- pressure to has a strong commercial background in financial mented, there was less pressure to deliver the deliver the full modelling and business partnering. full project on time (or early) so the team could project on time
-1,000

Super Stock

54

Technical notes

Technical notes

55

Dont miss out on patent opportunity


April will see the introduction of lower corporation tax on profits from patented products and services

By Nick Wallin, partner and patent attorney at Withers & Rogers LLP

he incoming UK Patent Box legislation represents an opportunity for banks and other financial services companies to benefit from a potentially lucrative form of tax relief by gaining patent protection for their back-office systems. When the legislation takes effect in April, it is not just the profits from patented products that will qualify for the lower corporation tax rate of 10 per cent, it will be the profits from the use of patented services too. Despite this, relatively few banks and financial services companies have considered seeking patent protection for their systems and they could miss out on a significant reduction in their tax liability as a result. With significant budgets set aside to develop their IT, many companies have invested heavily in refining their back-office systems over a number of years. However, remarkably few have opted to seek patent protection for their work to date, preferring to keep them a secret instead. The introduction of the Patent Box could be about to change this, as profits from patentable services will qualify for tax relief for the first time. To benefit, companies in the financial services sector will need to start by identifying which technical aspects of their back-office systems are patentable, and in most cases it would be worthwhile applying for as many patents as possible. The types of technical improvements that are most likely to be patentable include high-speed processing techniques, high-speed networks or other communications-related systems, large-scale data storage systems, encryption and other security aspects, to name but a few. A good rule of thumb as to whether a technical invention might be patentable or not is to

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consider whether it might be applied in another field of technology. Clearly, all of the above examples could potentially find some use in another area. On the other hand, business-specific ideas, such as trading models and systems used for calculating derivatives, are unlikely to be patentable because they are regarded as business methods and are likely to be excluded from protection under UK patent law. Once the patents are secured, a company has a number of choices to make that could affect the amount of profits that qualify for tax relief. In order to optimise the financial benefit for the business, it will be necessary for IT development and tax teams to work closely together, drawing in specialist support from professional advisers where appropriate. In particular, careful consideration should be given to how the qualifying profits are calculated. In the case of patented products, this is relatively simple because all the profits generated from the manufacture and sale of each product will qualify. For patented systems or methods, the calculation is more complicated and can be undertaken in several ways. First, it is necessary to determine how much profit can be considered to be within the box as qualifying profit to which the lower rate of corporation tax applies. In the case of profits generated from the use of patented systems, such as back-end data systems, a notional arms-length royalty is set for using the system, and the value generated by this can then be considered as qualifying profit for Patent Box purposes. The issue then becomes one of calculating the amount of this arms-length royalty. One of the most popular ways to calculate a notional royalty is to regard it as a fixed licence fee. Using this model, a companys accountant would need to quantify the notional amount that the company would be expected to pay if it was paying a fixed arms-length licence fee to a third-party organisation for use of the patented service. This cost could then be added to the qualifying profits, thus enhancing the tax relief available to a company. If one considers how much software and system licence fees already cost then it would not be unusual for this fixed licence fee model to add potentially several hundreds of thousands of pounds per patented service to the qualifying profit pot. It is therefore easy to appreciate the extent of the financial benefit at stake. Alternatively, companies may choose to apply an accounting model for calculating the qualifying profits, based on a percentage of the profits generated. For example, for accounting purposes, it could be assumed that a company has agreed to pay 5 per

Patents can take between 18 and 36 months to secure, so it is worth starting early in order to start benefiting from the reduced tax liability as soon as possible

cent of the profits generated by use of the patented system in royalties per patent. While 5 per cent may sound like a relatively small proportion of the profits generated, it is usually possible to secure more than one patent for each system, and therefore the qualifying profit pot can quickly add up. For example, lets assume there is an automated back-end trading system using high-frequency trading, generating profits in the hundreds of millions of pounds. The trading system uses a proprietary, grid-processing architecture that is patented and stores data in a proprietary fast-to-access system that is also patented (hence at least two patents cover the system). Using this model, the more patents that have been acquired, the more tax can be saved, as the armslength, per-use-based royalties that apply to each patent can stack on top of each other. It is as though whats been proposed is to license each patent that covers the system separately, for a reasonable royalty. Given that reasonable patent royalties can easily be 5 per cent, with say ten patents covering different aspects of a system, then 50 per cent of the profit generated by a whole system would represent qualifying profit for Patent Box purposes. However, patents can take between 18 and 36 months to secure, so it is worth starting early in order to start benefiting from the reduced tax liability as soon as possible. In some cases, patent applications can be fast-tracked, so it may be necessary to take advice on whether this would be financially beneficial. A recent survey of accountants conducted by Withers & Rogers has revealed that almost half (43 per cent) believe that a significant number of businesses have yet to make any preparation for the Patent Box legislation and may not be ready to take advantage of the reduced tax rate. They were also concerned that the complexity of the calculations could deter some from seeking the tax relief. Complexity is no reason not to act. By encouraging IT and accounting teams to work closer together and plan ahead for the new legislation, financial services companies stand to gain. As well as seeking patent protection now, they should ask their accountants to start to track their patented and non-patented profits separately from the beginning of April 2013. Nick Wallin is a partner and patent attorney at Withers & Rogers LLP, one of the UKs leading firms of patent and trade mark experts. Wallin is part of the firms electronics, computing and physics group.

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What you learn on the

Philip Thew, FCMA, CGMA, has more than 30 years experience, guiding national and international organisations in matters of strategy, cost reduction, process engineering, performance improvement and corporate governance. He is the CEO and founder of Risk Avert and was previously a finance director and managing consultant at PwC

Strategic cost optimisation Mastercourse

his intermediate to advanced course aims to give an extensive view of effective techniques and methodologies used to achieve significant improvements in organisational performance. The one-day course helps executives make important decisions relating to strategy, processes, resourcing, mergers and acquisitions, and technology. It also explains how organisations can maximise stakeholder benefits by adopting approaches that will more rigorously: l Prioritise expenditure towards strategic priorities. l Introduce greater challenges in the budgetary control and risk management process. l Expose and quantify process, activity and functional efficiency opportunities. l Establish external and internal service levels by function. l Establish the relationship between services, processes and functional departments. l Prioritise funding and establish contingency plans. Given that organisations need to prepare their senior managers to undertake significant change initiatives involving multiple functions, the course appeals to a broad spectrum of personnel. Staff from very large to medium-sized organisations will benefit the most from participation, including those from government services and healthcare. Cost optimisation increases profitability and stakeholder value it also releases scarce resources that can be reinvested into new strategic initiatives. Many organisations find the pace of delivering strategic objectives slow, hampered by

 ocused in allocating budgets and F project funding. l Transparent and auditable.


l

Visit www.cimamaster courses.com for more details about this and all CIMA Mastercourses.

resource shortages, conflicting priorities and the complexity of existing structures, processes and systems. The larger and more sophisticated an organisation is, the greater the potential drag on implementing change. Evidence shows that significant cost reductions normally occur through exploiting new technologies, processes and business practices. However, most organisations focus the majority of their resources into maintaining and improving their current business model and related support infrastructure. In such circumstances, opportunities will always exist to reduce costs and accelerate strategic initiatives, and the key challenge is to optimise resources and productivity, and establish an effective mechanism to identify and exploit strategic opportunities. The primary aim of this interactive course is to provide practical skills, techniques and greater confidence to enable you to plan, manage and deliver strategic cost optimisation programmes. It will also refresh and improve your understanding of core cost and performance improvement techniques that will help your organisation to become more: l Agile to change and aligned to strategic objectives. l  Cost effective, with leaner service levels, processes, functions and supply chains. l Manageable by service levels, both internally and externally. l Accountable, with greater visibility of management performance.

With these objectives in mind the course offers attendees guidance on how to address issues through a holistic approach. It also includes the following components: l P art 1: Strategic cost management challenges. l Part 2: Overview of cost management structures, processes and systems. l Part 3: Cost optimisation methodologies. l Part 4: Specific cost reduction initiatives. l Part 5: Conclusions. Using examples and case studies the course initially provides an overview of techniques frequently used for performance management and financial control, highlighting their strengths and reasons why they can provide sub-optimal results and failures. It then explains a structured methodology that should lead to optimal resource allocation and substantial efficiencies, highlighting how this has harnessed significant improvements in a range of industries, including media, financial services and retail distribution. The course also examines how organisations can re-prioritise spending and effort towards the services that are of most strategic benefit, while ensuring that all costs are optimised. In order to understand this idea we consider service levels if they are fully understood and appropriate to each function of the business. The setting of service levels is often undertaken in isolation in individual silos, rather than as a coherent strategy. Learning outcomes will include: An enhanced capability to: l Control and optimise costs. l Lead cost optimisation initiatives. l  Maximise the benefits from mergers and acquisitions. l Inspire change within your organisation.

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Financial Management | March 2013

Financial Management | March 2013

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Advertorial

Advertorial
the way are large employers and they therefore have resources that perhaps smaller organisations dont have. But that also means theyve been the ones which have been first to address all the challenges cost and legislation and although this legislation is not without complexity, the good news is that having faced those challenges the message is that it can be done relatively smoothly, and it works. They have managed to bring together all of the parties they needed to the finance and HR departments, the IT team, external partners, and pension and software providers, including payroll and it worked, he added. What that has created is a model that the smaller firms can use as a template and for guidance. Never too early While organisations with fewer than 250 employees will begin staging from March 2014, Andrew Fleming, industry liaison manager at The Pensions Regulator, stressed they should already be considering what autoenrolment means to them. This is a really good time to be having this conversation because we believe from the experience weve seen so far that it is right to look 12-18 months ahead and to begin planning for implementation, he told attendees. Thats really critical. It may not take every employer 18 months because some employers, particularly as you get smaller, will be less complex. But having time to get everything in place is the key and thats when we would urge businesses to begin engaging with us. One attendee, from a London-based housing organisation that has already gone through roll-out of auto-enrolment, agreed, adding that early consideration brought other benefits rather than simply getting systems, technologies and processes ready. You have to be proactive because if youre going to offer a benefit to employees they need time to understand it and to be persuaded of what that benefit means to them, he said. Theres a mind-set change, which takes time. Systems and processes The discussion also heard that early engagement around auto-enrolment will give organisations time to ensure their pensions and payroll systems are suitable for their autoenrolment needs. One delegate with experience of managing the autoenrolment process in a major organisation said: We had a number of different HR systems one was the payroll, one was time and attendance, one general personnel. We were thinking we probably needed a system that brings all that into one place to make it easier for ourselves, so including our auto-enrolment needs in that was sensible. It is about working with our suppliers so they can tell us what sort of changes we need to be considering to make this doable when we come to that staging date. The Pensions Regulators Andrew Fleming agreed, adding that his organisation has also been working with pensions providers to ensure they are prepared for their clients needs. Weve done a significant amount of work with payroll providers to get them to enhance their systems ready for auto-enrolment, which is going to help all the employers that are staging in 2013 down into 2014 and beyond, he said. Another participant agreed that pensions providers should be involved early, and added that, from his experience, they had been keen to do so in order to protect their client relationship: We have had support from the pension provider of the existing defined contribution scheme because theyve got that scheme with us and they want to ensure that they get continuity of their relationship with us. Partnership working is key There was a general consensus within the discussion group that auto-enrolment should not be owned solely by HR or finance, but through a partnership between the two. A leading HR director from a major member organisation stated: In our organisation, HR and finance work very well together. In HR, we are mindful that our job is to look at the situation and come up with some proposals as to how were going to do this so that what we present to finance makes sense and so we can have a discussion about whether that works for all. Another delegate agreed, adding: This legislation requires, like no other legislation has before it, employers to tie all of their HR, finance, IT and payroll together. Whereas before, companies payroll teams simply spoke to their pensions providers, it now needs to be a lot more joined up, because the issue is around recruitment, retention, HR, payroll, finance and IT. Help is at hand While the discussion heard about many of the challenges faced by organisations as they move towards autoenrolment and look for advice on how to meet those challenges, The Pensions Regulators executive director Charles Counsell said his organisation was also working to help businesses. We write directly to all employers ahead of their staging date, he said. For smaller employers, it will probably be 12 months because we think that will give them time. Weve got a lot of material available on our website and elsewhere, and theres a lot of material out there, helpfully, from other organisations. But the key message is: plan early, start planning early, he added. We would also urge businesses to automate as much as they can and to make sure that their existing scheme is a good-quality scheme. For that, weve published a set of principles on which you can judge whether a scheme is good quality. And, of course, more than anything, I would say that if you are struggling, and you need help, contact us.  Further information: To find out more about the help available and for a host of resource material, visit www. thepensionsregulator.gov.uk

Auto-enrolment: now is the time


With some UK firms already required to automatically enrol their staff in workplace pensions and all businesses required to do the same over the coming years a recent roundtable discussion held in partnership with The Pensions Regulator set out the challenges and how to meet them

tart early, engage all relevant stakeholders and seek guidance where necessary. Those were the key messages from a recent CIMA roundtable discussion, in partnership with The Pensions Regulator, which tackled the issue of automatic enrolment. New legislation introduced by the UK government requires all employers to enrol their workers into a qualifying workplace pension scheme if they are not already in one. At present, many fail to take up pension benefits because they do not make an application to join their employers scheme. Auto-enrolment is intended to overcome this. Auto-enrolment in the UK is being staggered, with the largest organisations (in terms of employee numbers) having already passed their staging date the date at which they must have auto-enrolment in place but many smaller organisations are still to come on board. The roundtable discussion, which was attended by representatives of The Pensions Regulator as well as a number of leading HR and finance professionals,

explored the challenges facing those that are still to come on board, and the help and guidance available to them. The discussion heard that many of those organisations still to come on board with auto-enrolment from the smallest family-owned businesses up to those with around 800 employees face perhaps the most complex challenges. Those, participants heard, are the companies most likely to have fewer resources, less expertise and knowledge around pensions processes and systems and less sophisticated systems. Challenges ahead Charles Counsell, executive director of The Pensions Regulator, agreed that smaller firms faced distinct challenges, but added that roll-out of the legislation had been designed in a way that would allow larger firms to act first and then share their expertise with the smaller businesses. Its fair to say that those still to come on board have distinct challenges, he said. Those that have had to lead

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Coming events
UK What is happening at CIMA? And space centre tour with the CIMA president 7 March, 6pm National Space Centre, Exploration Drive, Leicester LE4 5NS Access to the Rocket Tower exhibition from 4pm. To book a place at this event and for full details of all local events go to www.cimaglobal. com/eastmidlands andeastanglia Using PAYE in real time joint with AAT 13 March, 6.30pm Holiday Inn, Lakeview Bridge Road, Cambridge CB24 9PH To book a place go to www.cimaglobal.com/ eastmidlandsandeastanglia Human capital an unmeasureable asset 13 March, 6pm Edinburgh Business School EH8 9JS CIMA immediate past president Harold Baird FCMA, CGMA, and Wendy Loretto, professor of organisational behaviour and director of research at the University of Edinburgh Business School, will discuss the value of the human dimension in business. To book a place(s) at this event and for full details of all local events go to www. cimaglobal.com/scotland CFO of the future strategic management 13 March, 9am London Cost: 599 +VAT (539 +VAT for CIMA members) Part of a series of workshops that will enable you to supplement your knowledge with all the latest tools, techniques and best practices and to drive positive growth and change inside your organisation. To book a place(s) at this event call 0845 026 4722, email mastercourses@ cimaglobal.com or go to www.cimamastercourses. com/STMG Leadership and management mastery for management accountants 14 March, 6.30pm Holiday Inn, Lakeview Bridge Road, Cambridge CB24 9PH To book a place go to www.cimaglobal.com/ eastmidlandsandeastanglia Members in Practice area meeting South West England and South Wales Area 17 March, 9.30am Doubletree by Hilton Bristol South, Cadbury House, Frost Hill, Congresbury, Bristol BS49 5AD. Cost: 25 An opportunity for members in practice (MiPs), and those interested in becoming a MiP, to share ideas and discuss current issues. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com Measuring marketing effectiveness joint event with CIMA 19 March, 6.30pm The Great National Hotel, Clayton Road, Newcastleunder-Lyme, Staffs ST5 4AF In this seminar, attendees will be made aware of key marketing metrics that maximise an organisations return on marketing investment and best opportunities for profit. Contact Julie Witts at region. four@cimaglobal.com or go to www.cimaglobal.com/ westmidlands How to encourage team building and leadership 20 March, 6.30pm Holiday Inn, Jct 7 M6, Chapel Lane, Great Barr, Birmingham B43 7BG This interactive presentation will look at employee re-engagement through team building and how employers can make it work for them. The talk will also look at techniques on how to draw out leadership skills from a group. Contact Julie Witts at region. four@cimaglobal.com or go to www.cimaglobal.com/ westmidlands Budget breakfast: The Budget and its impact 21 March 2013, 7.30pm Hallmark Hotel, Ferriby High Road, North Ferriby, Yorkshire HU14 3LG Join Tony Bullock FCA, FCCA, senior partner at Dutton Moore, for an overview of any key points arising from the chancellors Budget, together with a question and answer session with Dutton Moores tax team. Date subject to change, dependent on the date of the Budget. To book a place(s) at this event and for full details of all local events go to www.cimaglobal.com/ northeastengland Probate management (joint event with AAT) 23 March, 9am Future Inn Cabot Circus Hotel, Bond Street, Bristol BS1 3EN John Penley OBE will discuss wills, trusts and probate management. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com Budget update (joint event with AAT) 6 April, 9.30am Lydiard House, Lydiard Tregoze, Swindon SN5 3PA This event will summarise the key points in the Budget. Contact Suzanne Allen on +44 (0)11 7960 9734 or email region.two@cimaglobal.com CPD Spring Academy 29-30 April, 9am CIMA, 26 Chapter Street, London, SW1P 4NP Cost: 799 +VAT (early booker rate of 699 +VAT on all bookings received by 8 April). To book a place(s) at this event call 0845 026 4722, email conferences@ cimaglobal.com or visit www.cimaglobal.com/spring

Visit www.cimaglobal.com/events for updates and a full list of events, which are free unless otherwise stated. CIMA Mastercourses your catalyst for business change: visit www.cimamastercourses.com or call 0845 026 4722. To submit an event for this page, email ben.jackson@cimaglobal.com

Financial Management | March 2013

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The Institute
View from Professional Standards
here is a stereotypical view of accountants that is illustrated in cartoons such as this one (right). Yes, we all get the joke, but in reality its no laughing matter as the cartoon raises serious issues around unprofessional and unethical behaviour, technical incompetence and pressure in the workplace, all of which can lead to a lack of public confidence in the profession. This is where CIMA and you as a management accountant come in. As a CIMA member you are different and this is seen through your ethical and professional commitment. From the moment you join CIMA you are guided and supported by CIMAs Professional Standards Department and the products and services they provide the CIMA code of ethics, CPD monitoring, ethics and global guidance helplines, to name but a few. Unfortunately, situations depicted in the cartoon do happen and all too often they are much more serious, headline-grabbing and accompanied with huge fines. Then theres the question of career... or end of it. So the cartoons will never go away. But as a CIMA professional you would be credited with a different punchline: Our books are balanced, the numbers are robust and Im helping the business succeed. Not so funny, but a welcome message for all. Find out more at: www.cimaglobal.com/professionalism www.cimaglobal.com/ethics www.cimaglobal.com/membershand book

Copyright 2003 by Randy Glasbergen www.randyglasbergen.com

CIMA recognised as professional body in South Africa


IMA South Africa has been recognised by the South African Qualifications Authority (SAQA) as the professional body for management accountants in South Africa. SAQA has an initiative called Policy and Criteria for the Recognition of Professional Bodies and Registration of Professional Designations on the National Qualifications Framework (NQF). Part of its mandate is to develop and implement the NQF and to recognise professional bodies and their designations. As part of this process, the first 40 professional bodies to be recognised in terms of the National Qualifications Framework Act (2008) have now been acknowledged with CIMA recognised as the management accountancy body. It means CIMA will be the professional body that contributes to the development and implementation of the education and training system and career paths of chartered management accountants in South Africa.

NOTICE OF ELECTION RESULTS 2013 - Elections to Council 2013


The following have been re-elected to serve for another term on Council from the close of the Annual General Meeting (AGM) on 15 June 2013 until the close of the AGM in 2016: S B Parsons electoral constituency 2 (South West England and South Wales). G M Makepeace electoral constituency 3 (East Midlands and East Anglia). D Barnes electoral constituency 4 (West Midlands). D Stanford electoral constituency 6 (North West England and North Wales). S McCue electoral constituency 8 (Northern Ireland). T OConnor electoral constituency 9 (Republic of Ireland). H Parker electoral constituency 17 (Europe, North Africa and Middle East). The following have been elected for their first term, to serve from the close of the AGM on 15 June 2013 until the close of the AGM in 2016: L C Taylor electoral constituency 12 (South East England). A N Ratnayake electoral constituency 18 (The Americas).

Presidential engagements
11-15 March Sri Lanka regional visit 23-28 March Hong Kong/Malaysia regional visit

Financial Management | March 2013

65

CIMA CEO column

We must keep a steady eye on our long-term destination


A total of 57 per cent agreed that their organisation must find new ways to be less susceptible to macro-economic volatility. The theme at the Davos gathering was resilient dynamism. Some interpreted this along the lines of: Lets hope for the best and prepare for the worst. But the business world could benefit from large doses of both resilience and dynamism. Following on from our survey, CIMA and the AICPA outlined five pointers to help business leaders build up their resilience. I think it is well worth repeating them here: 1 Understand your business model. What creates and could potentially destroy value in your business? 2 Harness the power of transparency. Create a line of sight between the source of capital and how it will be invested in the sustained success of the business beyond the short term. 3 Ensure robust information flows. Build confidence in the right information that drives investment and risk mitigation decisions. 4 Go beyond defining a risk appetite. Have a risk attitude that empowers everyone in the business to take appropriate risks that drive growth and opportunity. 5 Be clear on the skills and talents you need now for tomorrow. Identify and close potential skills gaps you may have when considering your future business model, markets and innovation agenda. Above all, organisations need accurate management information that can support effective investment and risk mitigation decisions. I dont have to point out that management accountants are ideally skilled to turn economic malaise into recovery by gathering the right information and presenting the right kind of analysis to help organisations fully understand their business model and the drivers that can create, and destroy, value. Charles Tilley, fcma, cgma Chief executive, CIMA In this foggy economic climate we must be prepared to feel our way and negotiate the ups and downs

t the recent World Economic Forum in Davos, references were made to Thomas Manns famous novel, The Magic Mountain. Davos was the inspiration and the setting for Manns book and it was easy to draw parallels between the state of the worlds economy and Manns main character, who finds himself in a mountain sanitarium suffering from tuberculosis. The question on many peoples lips as world leaders gathered in the rarified air of this snow-covered resort was: Is the global economy making a recovery, or is it in fact suffering from an incurable malaise? The answer is by no means clear. But a positive and focused attitude by business leaders would go a long way towards finding a cure. In Manns novel, the protagonist becomes lost in a snow storm in which contours, slopes and sky become indistinguishable. This is a useful image to illustrate our current situation. In this foggy economic climate, we must be prepared to feel our way and to negotiate the ups and downs with determination and care. Above all, we must keep a steady eye on our long-term destination. There will always be grey swans such as the US debt crisis, but uncertainty cannot be allowed to drive business strategy. An obsessive interest in volatility is a feature of speculative markets, not good business management. As our survey results on page 9 show, this view was recently reinforced by the management accounting community. Our research found that 60 per cent believe the business world is too sensitive to economic crises. Meanwhile, despite widespread doom and gloom during the run-up to the US fiscal cliff crisis in January, only 31 per cent of our surveys respondents thought that the ongoing debt crisis would ultimately push the global economy towards recession; suggesting that fears were overplayed.

i
Charles Tilley writes a regular column for CGMA Magazine, entitled Oneto-one: Top tips from the boardroom. For his latest column, visit http://tinyurl. com/d4xtq4n

Illustration: Masao Yamazaki/Dutch Uncle

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Financial Management | March 2013

CIMA and an entrepreneur answer your questions This month...


Companies such as Google and Samsung invest a lot in research. But mid-sized firms like ours want to be certain that our research will return the investment. How can we balance the need to innovate with a need to generate revenue?

CIMA versus Peter Hopton


A. CIMA
Todays competitive, fast-moving and globally connected world means that companies dont have the luxury of playing safe; constant reinvention is the key to long-term success. Innovation has traditionally been associated with the development of new technologies, requiring specialists in R&D departments and the registration of patents. The good news is that there are other, more accessible, cost-effective approaches to innovation. Perhaps the best known is Open Innovation. This recognises that the best ideas might come from outside the company and a number of well-known organisations, such as Procter & Gamble and Kimberly Clark, are achieving impressive results through this approach. For example, more than half of P&Gs new product innovations are sourced through collaboration with smaller companies and individual inventors, and even competitors. With most growth opportunities coming from emerging markets, another major approach is reverse, or frugal, innovation. It can start from creating a more basic, affordable version of an existing product to meet the needs of a developing nation, which is then repackaged into a low-cost product for Western markets. GE and Tata Motors are examples of companies that have taken this route. You might find a valuable new market by selling a stripped down version of one of your current premium products. Indeed, the work of Harvards Clayton Christensen on the Innovators Solution reveals that some of the most disruptive innovations have come from offering simpler products to new customers. So innovating is not just about spending more on research; you can achieve some impressive results by rethinking your innovation process. Gillian Lees is a senior innovation manager at CIMA Do you have a question youd like to pose to CIMA and a top entrepreneur? Tell us at questions@ fm-magazine.com

A. Peter
Mid-sized firms shouldnt be afraid to innovate, despite the need to keep an eye on ROI. Until we reach the size of a Google or the like, were inevitably not going to have the resources to invest as heavily in research, but it doesnt mean we should ignore it. For me, the key is to look at research and development separately. Development typically yields patents without strong innovative steps, and having so many people developing concurrently makes the patent landscape very competitive. Research, meanwhile, tends to yield tougher and more unique patents, thus creating a stronger position in terms of competitive advantage. If

Peter Hopton is founder & chief technology officer Iceotope, which uses a novel liquidcooling technique to replace fans on computer servers

Illustration: Dmitry Litvin/Dutch Uncle

you have a great concept, and can establish true competitive advantage, then your research will be worth every penny when you bring your product to market. Of course, its not all about what you do in-house as a company. In the UK, were lucky to have great research universities, which can be really valuable. Here at Iceotope, we understand the worth of working closely with the University of Leeds for our future technology research. Collaboration of this sort can be very cost effective and yield impressive results for both parties. In fact, we have direct access to the universitys brand new lab facility inside the universitys New Energy Building. Ongoing research and extensive testing is conducted at the lab on an ongoing basis for all Iceotope prototypes, new blue sky products and theories for future viability. Theres some great innovation happening right here in Britain sometimes we need to shout about it more so that the smaller companies can get the recognition they deserve and we can all appreciate that great new technology ideas are not just for the major players.