Are you satisfied with your post tax performance of your operating model…? March 13, 2012 Victor Bartels Partner, Tax Effective Supply Chain Mgt The value chain is under pressure… ► Country based operations with missed opportunities for Regional and Global synergies and scale? ► Duplication of functions in countries and business units? ► Proliferation of legal entities, customer management and invoicing centres leading to complication, high transaction costs and poor customer service? ► Operational underperformance due to silo functions, immaturity across geographies and silo-based KPIs? ► Poor customer service, high supply chain costs and under utilization of resources due to lack of pan-regional or global supply chain management, planning and control? ► Lack of process and organization standardization and harmonization? ► Tensions between managerial and statutory transfer pricing set-ups? ► Competition operates at lower cost and pays less tax? The world is not flat… Typical focus areas of multinationals in today‟s environment to deal with these pressures… ► Focus on core business and growth areas ► ► ► More strategic control and alignment „above markets‟ ► ► ► ► ► Centralized (global-regional) operating model – for relevant functions Above market sourcing, supply chain and manufacturing mgt (visibility) Global and regional functions Shared services (from Admin to R&D) Manage and control cost ► ► ► ► ► ► Organic growth and acquisitions Disposal of non core businesses Break even point reduction, creating scale and leverage Consolidation of sites (people, plants, warehouses, subsidiaries) Consolidation and harmonization of processes & transactions Legal entity simplification Alternative flows and routings Tax alignment of a single international operating model ► ► Tax planning integrated in changing operational model Transfer Pricing aligned with management control “There is a tendency towards more central guidance and control (speed, consistency) – without crippling local entrepreneurial spirit” More centrally guided operating models can remove sub-optimization and bring real value… Holistic operating model design Process • “ Lif t ” high value-adding business processes out of count ries and co-locat e t hem cent rally t o provide t he right end-t o-end visibilit y Stakeholder expectations • Focus local operat ing unit s on core processes • Harmonize and simplif y business processes t o build ef f ect ive cent ral-local connect ions – eliminat ing duplicat ion Organizat ion & Geography • Creat e new roles t o manage cent ralized business process (cross market / f unct ion) • Align organizat ional and st ruct ure and KPI syst em t o drive t he new st ruct ure • Host processes in a Cent ral Management Company, locat ed in t ax ef f ect ive jurisdict ion Transact ions • Simplif y and st andardize all t ransact ion t ypes Mar ket pr essur es A „collect ion‟ of independent markets and operat ing unit s wit h duplicat ed funct ions and limit ed alignment • Revise t he t ransact ional model t o include t he Cent ral Mgt Co as t he cent ral buy-sell ent it y An int egrat ed business wit h a consistent set of operat ing policies and processes, st rong local execut ion, compet itive cost base and reduced effect ive t ax rat e. • Cent ralize invent ory ownership Typical scope choices: • Global • Regional (e.g., Asia only) • BU (e.g., consumer product s only) • Funct ional (e.g., sourcing only) • Opt imize t ransact ions f or VAT and Cust oms Tax & Transfer Pricing • Adjust t ransf er pricing t o dist ribut e prof it s t o t he value-adding, low t axed Cent ral Mgt Co Legal • Rat ionalize and simplif y int er-co cont ract s t o regulat e roles, f unct ions and rewards Effective Global Operating Models embrace the opportunities and challenges of globalization… Six Pillars for Global Operating Model effectiveness (Electronics Industry example) Effect of size of operational units on cost/unit Cost / unit Scale & Utilization Consolidating business processes execution (for example in a Shared Services form) allows companies to operate few, larger scale service centres that run higher utilization than multiple small operations Size of Operations Utilize different labor cost and skill sets to allocate work to the most suitable location. Global labor cost differential can be up to a factor 10 for comparable standards of work Labor cost differentials between nations Cost / hour Global Labor Pool Differences W-EU US Process standardization & Technology Structure & Talent Business process standardisation and open information technology standards are critical to integrate internal and external (partner or outsourced) business processes, and provide management information Global and regional organisational design reduces layers, limits duplication, reduces complexity and increases decisions making speed. Global Operating Models require a mix of exceptional local talent as well as Internationally mobile talent Fiscal environment International Tax, Intellectual property, Treaties & Incentives Global Operating Model design includes tax-legal model with optimised global transfer pricing to ensure companies improve Profit After Tax from tax rate differentials, government incentives and treaty availability Company culture and values A company’s ability and desire to change its operating model is a fundamental basis for establishing a Global operating Model. Changes will affect authorities, measures, reporting lines, legal structures and physical locations. E-EU India China Common standards, open architecture single platforms and internal and external collaboration Flatter structure combined with international organisation and talent management Tax incentives and treaties have a major impact on GOM design and net profit …and recognize different type of roles and functions – a balanced approach is fundamental Groups Local value creators Location Sensitivity High Repeatability & Standardization Medium Resource intensity Medium Medium e.g. Sales Cost effective repeaters Low High High Low e.g. Accounts Payable Cost effective operators Medium High Medium Medium e.g. Planning Team International value creators e.g. Senior & Business Management, Global account managers Medium Low Low Generic Approach Value-add High • Locate „locally‟ • Implement standardized support tools and centralized support organization (cost effective repeaters) • Rewarded with Operating Margin target • • • • • • Standardization, automation and consolidation Organize in Shared Service format Locate in low-cost location Locate near medium skilled, large labor pools Reward with cost+ Consider outsourcing opportunities • • • • • Organize to achieve Scale & Utilization Implement standardization and automation Balance location between low-cost and low-tax Implement excellent communication facilities Reward with cost+ (depending on location) • • • • • • Exceptional information and communication tools Focus on speed of decision making Locate in Global or Regional Centers Locate in tax-advantageous location Talent focus (attract, retain, develop) Reward with residual-profit flows GOM design is all about de-composing these groups and organizing them based on the six-pillar concept Companies are aligning business models with tax/legal structures to enable large, sustainable benefits Example alignment dr iver s Cat egory and brand management Types of oper ating models companies ar e adopting High • Closer alignment bet ween cust omer and cat egory t eams Full Principal with IP (Central Operating Model) • Cent rally manage innovat ion pipeline in conjunct ion wit h S&OP • Cross f unct ional product development t eams • Manage cat egories/ brands across market s Sales & Marketing Principal Value Potential Supply Chain Management Co. Cust omer management and sales • Cent ralized account management Import / Export Co. • Focused business models f or emerging and mat ure market s • Cent ral cont rol over pricing – f ormat ion of analyt ics cent er of excellence Supply chain management • Cent ral dist ribut ion and warehousing mgt • Regional net work opt imizat ion • Forecast ing and planning cent er of excellence aligned t o cross-f unct ional S&OP • Supplier rat ionalisat ion and innovat ion management Sourcing Co. Service Company Low Potential Business impact Low The optimal model, or growth path, depends on a company’s existing business and organizational model and its readiness for change Typical benefits Revenue/ profit increases via: Cost decreases via: - Improved forecast efficiencies - Bet t er pricing decisions - Improved service and invent ory levels - One face t o t he cust omer - Bet t er sourcing - Eliminat ion of duplicat e funct ions - Shared services - Account s receivable clust ering - IT service cent ralizat ion - Logist ics net work opt imizat ion Finance ► Great er cont rol & management of indirect spend areas ► Cent ralizat ion of t ransact ional processing cent ers in low cost locat ions High Value of an integrated operating model design strategy… Process Organization & Geography Transactions Tax & Transfer Pricing Legal Added value Added value Added value Added value Added value • Better and faster decision making (end-to-end view) • Process standardization and removed cost of duplication • Enable supply chain and sourcing benefits • Service performance • Forecasting & planning • Working capital • Sourcing cost • Operating cost • Effective and empowered central management, able to make fully-informed decisions • Fewer transaction types • Reduced Effective Tax Rate • Eliminated random intercompany transactions • VAT cash-flow optimization • Clarity and consistency in roles, responsibilities and KPIs • Central entity has full visibility of all transactions and all inventory – part of the transaction chain • Each operating unit focused on its core role in the value chain – cost & performance • Cross-fertilization effects of co-located central business functions • Duties cost reduction • Improved Transfer Pricing defense/robustness • Inter-company contracts aligned to operating model • Improved compliance • Legal entity rationalization • Simplified audit due to highly centralized transaction nature and reduced transaction complexity • Single performance management framework • Speed The benefit of TESCM lies in the integrated way that value is created across the business Numerous multinationals across various industries adopted their operating models generating significant benefits… • A global CP company realized $480m in operational benefits over 3 years and $140m in tax benefits by harmonizing its regional supply chain operations Industry maturity of TESCM models Industry • A global FMCG company increased after tax profit US$185m and gained US$125m in operational benefits through supply chain restructuring • A global chemical company realized $100m per year in operational benefits and $300m annually in tax savings by aligning its European business and tax operating models • A global confectionary company saved $95m in operational expenses and gained $30m in tax savings by aligning its regional business and tax operating models, and driving the creation of global and regional categories and regional supply chain organizations Low High Parent location Consumer goods US, Europe Healthcare US, Europe, Japan Chemical, Oil & Gas US, Europe, ME Techology, Electronics US, Europe, Japan, AsiaPac Industrial products US Financial institutions US, Europe In most maturing markets, sales growth cannot outweigh the benefits of aligning business and tax operating models What is the situation amongst Finnish multinationals? ► Awareness and appetite for these models is growing ► Focus on transactional simplicity: direct sales models ► Preference for home country principals ► Sourcing is attractive – at least as entry point ► Some risk adverseness, regulatory and perception challenges Transforming your operating model impacts many aspects of a business – our experience highlights a few critical „get rights‟ Success Factor Areas of impact considered when moving to Tax Effective models 1 Shared vision & case for change Description • Alignment with wider business strategy • Senior leadership sponsorship – including: Supply Chain, Finance, Commercial, R&D • Clear strategic & operational business case 2 • Clearly defined interfaces – avoid disruption & Wider business alignment • Define the „win-win‟– foundation for driving 3 • Integrated approach – Multi country, function & technical – People, process & technology • Balance time to value & operational risk Effective programme delivery 4 Change Management reverting to functional silo mindset step-change in end to end performance • Complex change to comprehend – invest in thorough wider business education • Visible leadership throughout at all levels • Physical relocation – right people, retention & motivation