1. business and industrial

Issue 2, Dec 08 – Jan 09
Agenda
Insights into growth, performance and governance
Proudly found elsewhere
The slogan that revolutionized
Procter & Gamble
Salvage business
Eight secrets of truly
effective turnarounds
“Cash isn’t king, it’s God”
Infosys CFO V. Balakrishnan on
variable costs, ethics and egos
George Soros
believes the
21st century
belongs to Asia.
Is he right?
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
‘‘
The rebalancing of the global
economy is an opportunity,
a threat and a risk.
Publication name:
Agenda: insights into growth,
performance and governance
Publication no HM 200 - 001
Publication date
December 2008
Printed in the UK by MPG
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Confident that rebalancing is near the top of your
agenda, we explore some of the most crucial aspects
of this transformational economic change. At its
most trivial, this process will see us become overly
familiar with the ancient curse: “May you live in
interesting times.” At its most profound, it could
revolutionize the business models that have made
the West so prosperous for most of the last 50 years
‘‘
The information contained
herein is of a general nature
and is not intended to address
the circumstances of any
particular individual or entity.
Although we endeavor to
provide accurate and timely
information, there can be
no guarantee that such
information is accurate as of
the date it is received or that it
will continue to be accurate in
the future. No one should act
on such information without
appropriate professional advice
after a thorough examination
of the particular situation.The
views and opinions expressed
herein are those of the authors
and interviewees and do not
necessarily represent the
views and opinions of KPMG’s
network of firms. © 2008
KPMG International. KPMG
International is a Swiss
cooperative. Member firms
of the KPMG network of
independent firms are affiliated
with KPMG International.
KPMG International provides
no client services. No member
firm has any authority to
obligate or bind KPMG
International or any other
member firm vis-à-vis third
parties, nor does KPMG
International have any such
authority to obligate or bind
any member firm. All rights
reserved. Printed in the United
Kingdom. KPMG and the KPMG
logo are registered trademarks
of KPMG International, a Swiss
cooperative.
If you take the long view, the last
250 years – when the West’s GDP
per capita has far exceeded the
East’s – are an historical oddity.
This anomaly is now being
corrected. China and India
are re-emerging as economic
superpowers. Although this global rebalancing
started before the financial downturn, the volatile
state of the economy and changes in the world’s
political leadership means the process will affect
business in unexpected and unpredictable ways.
How will your business rise to the challenge?
AlAn Buckle
Global Head of Advisory
02 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
contents
04
Lessons in leadership
06
Keys to success
08
The great debate
12
Learning curve
16
Left field
17
Best practice
18
Known unknowns
22
The big issue
26
Acumen
30
Any other business
31
Strategic intelligence
Internal audit looks outward; Einstein’s genius; Asia’s take on the credit crunch
Five new CEOs and CFOs relying on emerging economies
Infosys CFO V. Balakrishnan’s insights into profitable management
Will George Soros’s ‘new paradigm’ change the way we do business?
What an underrated explorer can tell us about China
The fox, the hedgehog and the secrets of a well-balanced boardroom
Rescuing a business is all about luck, focus and thinking the unthinkable
Ten factors that could change business in the year ahead
Why the real oil crisis isn’t about price, and what you can do to limit the damage
P&G’s Jeff Weedman on how you can profit by collaborating with competitors
Quizzing HP Russia’s Arturo Cornejo; does Hollywood hate accountants?
18
22
08
26
Agenda: Insights into growth, performance and governance is published by Haymarket Network,Teddington Studios, Broom Road,Teddington, Middlesex,
TW11 9BE, UK on behalf of KPMG International. Editor Paul Simpson Managing Editor Robert Jeffery Art Editor Jo Jennings Production Editor Vanessa
Longworth Sub-editor Stephanie Jones Staff writers Laura Bridgestock, Sophie Jenkin Group Production Manager Jane Emmas Production Controller Hannah
Pettifor Board Account Director Kate Law Senior Account Manager Caroline Watson Group Art Director MartinTullett Editorial Director Simon Kanter Managing
Director, Haymarket Network Juliet Slot. Reproduction by Colour Systems, London, UK. Cover photography by Daniel Acker/Landov/PA Photos. No part of this
publication may be copied or reproduced without the prior permission of KPMG International and the publisher. Every care has been taken in the preparation of
this magazine but Haymarket Network cannot be held responsible for the accuracy of the information herein or any consequence arising from it. Views expressed
by contributors may not reflect the views of Haymarket Network or KPMG International or KPMG member firms.
13
Agendamagazine 03
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
strategic
intelligence
Crunch time for internal audit
Can smart investment help IA do more for less?
providing integrated
assurance across risk, control
and compliance. He suggests
that its remit, in an era where
a myriad of new risks have
emerged, could be extended
further to such areas as data
analytics, trend identification,
supply chain, strategic
planning, corporate culture,
69
percent of businesses
source some internal
audit, up 19% since 2005*
new business opportunities
and tax strategy.
But how do businesses fund
IA’s broader role? Nolan says
microtrend
Frugal engineering
In essence, frugal engineering is achieving more with less.The
term was coined by Renault-Nissan CEO Carlos Ghosn who,
on a visit to India, saw companies evolving a new low-cost
business model to create products at a price that many local
consumers could afford to pay (see Great Debate, p12).
Indian business theorist C.K. Prahalad says this approach
works better in start-ups that lack the “legacy mindsets and
legacy costs” of established firms, and believes innovative
‘frugal’ companies have a global opportunity to grow. For
example, Indian mobile phone giant Airtel is hugely profitable
– partly because it outsources many functions to Eriksson and
IBM – yet has some of the cheapest call rates in the world.
outsourcing or
co-sourcing could
meet business
needs while
keeping costs
manageable:
“Forward-looking
companies are
increasing their
use of co-sourcing
arrangements to plug skills
gaps and raise quality.
“Now is the time to beef
up with more sophisticated
IA capabilities, not strip
it down. The need is for
smarter investment, not less
investment. Really good
co-sourcing arrangements
can help businesses pay less
and get higher quality for
the money.”
The outlook for IA is
changeable as risks multiply,
costs are under pressure and
strategic sourcing tempts many
* Source: GAIN 2008 Annual
Benchmarking Study by The Institute
of Internal Auditors
What would Albert do?
Albert Einstein earned US$18m
(€12.1m) in revenue from
merchandising last year – not bad
for someone who died in 1955. In
tough times, surely a genius can
teach business a thing or two.
1. Be flexible
He defined insanity as: “Doing
the same thing over and over
and expecting different results.”
2. Never be satisfied
As he said: “The important thing
is not to stop questioning.”
3. Be a sustainable leader
“Try not to be a person of
success, but rather be a person
of value.” Leadership built on
values lasts longer.
4. Sharpen your focus
Michael Augel, an IBM
programmer, always wears blue
suits at conferences because,
he says: “Einstein had 10 sets
of the same clothes in his closet.
He didn’t want to waste time
choosing what to wear.”
5. Stickability matters
“It’s not that I’m so smart,”
he said once, “I just stay with
problems longer.”
6. Treasure your mavericks
Like some internet visionaries,
Einstein was seen as a maverick.
The most influential scientist of
the 20th century was never given
a lecturer’s post or a doctorate.
Popperfoto/Getty Images. H. Armstrong Roberts/Retro Files/Getty Images
The Sarbanes-Oxley (SOX)
fuelled boom for internal
audit (IA) is over. In the
long run, that could be good
for business, if management
makes the right calls.
Sarbanes-Oxley was so big
it warped the IA function by
focusing it on one complex
piece of regulation. With that
task stabilized and the
economy worsening, Mike
Nolan, KPMG’s Global Head
of Internal Audit, Risk and
Compliance Services, says:
“I fear many management
teams may simply look to
cut cost at a time when the
function needs to be upskilled
not downsized.”
Nolan believes that IA
should return to a broader
role it enjoyed before SOX.
It should play a key role in
04 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Gulf in expectations
A new currency could be born in 2010
Joseph Caley/Shutterstock
Until now the most famous
symbol of the Gulf’s booming
economy has been Dubai’s
Burj Al Arab hotel (below).
But in 2010, six states – Saudi
Arabia, Bahrain, Kuwait,
UAE, Qatar and Oman – plan
to adopt a single currency.
The new currency would
create an economic bloc
owning 45% of OPEC’s oil
reserves, with a GDP of
US$815bn (€551bn).
The Gulf launched its own
common market in 2008
but interregional trade is
still conducted in U.S. dollars.
With inflation across the
region hitting 11% in 2008,
the global slowdown may
help stabilize the economy.
The as-yet-unnamed currency
could replace the dollar as the
reserve currency for Islamic
and Arab banks.
Financier George Soros is
among those who believe the
Gulf currencies would benefit
from being freed from the
dollar, and expects them to
use their cash reserves to
invest in – and dominate –
aluminium, energy and
petrochemicals.
Presidential tonic
Oscar Schnell/Shutterstock
Will Obama’s victory boost U.S. GDP?
% GPD growth
20
Barack Obama’s victory marks the ninth time the White
House has changed political party since 1932. Seven such
shifts increased America’s GDP. But only Richard Nixon and
Ronald Reagan actually boosted growth compared to the year
before.The most inspiring presidential precedent is Franklin
Delano Roosevelt. In 1932, the Democrat inherited an
economy that shrank by 23.3% and, in 1933, managed to
ensure it contracted by just 3.9%. If Obama delivered that
kind of turnaround, he would be a shoo-in for 2012.
Change in U.S.
GDP performance the
year after an election
19.4
10
2.2
0.1
3.3
0
-0.3
-0.4
-0.7
-2.7
-10
-20
1933 1953
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e
o
os
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1961
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1969 1977 1981 1993 2001
n
er
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an
on
to
rt
ix
a
ag
Bu
in
N
C
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Re
John Warburton-Lee Photography/Alamy
leading
g edge
How the U.S. crisis could change Asia
Finance Asia’s North Asia editor, Dan Slater, says the downturn
will lead Asian leaders to re-evaluate economic policies.
The patterns of trade may shift
These economies will switch from growing through exports
to developed economies, to being used by developed
economies for the same purpose. Commodity exporters
such as Russia and Brazil, and manufacturing champions
like China, have the cleanest balance sheets for decades and
bulging foreign currency reserves, so they are well placed to
reduce their trade surpluses as the U.S. and the EU turn to
exports as a source of growth. In the short term, the effect is
likely to be a much-needed rebalancing of the world economy.
The U.S. ideal of an economy turbo-charged by the capital markets
has lost some of its lustre
Asian nations with high savings rates will grow on the back
of savings channelled through their banking systems.
U.S. innovation could slow as capital markets provide less
financing to tech start-ups. We could see a return to high-end
manufacturing. Margins would shrink if trade wars flared.The
worst-case scenario is protectionism and global deflation.
Fast growing economies will still peg currencies against the U.S. dollar
The point of pegging to the dollar was to avoid inflation. Until
the U.S.Treasury switches outright to printing money rather
than issuing bonds, pegs will be maintained or adjusted to
contain inflation. Huge dollar holdings by countries such as
China and India make abrupt changes unlikely.
The U.S. needs to reinvent its approach to corporate governance
The idea that shareholder returns are supreme – with equity
loaded up with 30 times leverage to increase shareholder
returns – has been shown to be what the Japanese always
thought it was: greedy and short-termist. Stakeholder
capitalism will take on a new lease of life.
It’s good news for consumers in China, India and the Middle East
For the last 50 years, many emerging economies have relied on
Western consumers to grow. Relying on their own may upset
the U.S., making growth more self-sustaining in the cash-rich
Middle East and Asian markets and obviating the need for them
to finance the U.S. trade deficit. But it would be good in the
long run, especially if they open their markets to U.S. exports.
This crisis could change the way the world views democracy
The free market is theoretically tied to political freedom. But
the U.S. political system has behaved erratically, showing
a striking lack of leadership at times.The first vote for the
US$700bn (€550bn) financial bailout failed, as many members
of Congress pandered to constituents. Many countries may
regard their authoritarian leaders with renewed respect.
07
Agendamagazine 04
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What’s on their
‘to do’ list?
02
01
They’re new in their
roles, reliant on emerging
economies to grow
in difficult times. What
can you learn from the
challenges facing these
CFOs and CEOs?
michAel
mAngAn
President of Black & Decker power tools
OsmAn
shAhenshAh
Chief executive of oil company Afren
West Africa is one of the largest untapped
sources of oil and natural gas,but investors
fret over instability.Afren is convinced its
business model maximizes security and
production and minimizes risk, by being
positioned as an indigenous company in
all areas and partnering with majors.
The story so far Co-founder Osman
Shahenshah oversawAfren’s rapid growth
as CFO. Since becoming CEO in 2007, he
has developed the business strategically
and financially. With investment banking,
oil and a stint at The World Bank on his
CV, he has already initiated an April 2008
share issue that raised US$236m (€186m)
What’s next? Afren relies on know-how,
not wealth. Non-executive chairman Dr
Rilwanu Lukman,once OPEC’s secretary
general,advises the Nigerian government.
By partnering with officials, developing
proven reserves and investing in training
and development, Afren aims to produce
over 20,000 barrels a day in the region by
the end of 2008.
Operating in six countries, Afren has a
portfolio of production, development and
exploration assets. Funding is a key
differentiator for small oil companies.
Shahenshah struck a deal under which
Japanese groupSojitzwillpumpUS$500m
(€393m) into a joint venture. Oil prices
and piracy off Nigeria remain concerns.
He’ll succeed if… The Sojitz deal pays
off, Nigeria asks smaller players to
develop reserves, and Afren’s flagship
Okoro Setu field meets expectations.
The U.S.housing crash hit the construction
industry – and Black & Decker – hard.
With Michael Mangan at the helm, sales
are growing in Asia and Latin America
and shrinking in the U.S. and Europe.
The story so far Black & Decker grew
strongly in the early part of the decade.
But with 60% of its income generated
from the U.S., it has to diversify. Mangan
served as CFO for eight years, improving
cash flow, before becoming president in
September 2008, when second-quarter
earnings of US$96.7m (€71m) fell 18%.
That beat expectations in a tough market
and the group, with no serious debt
maturing until 2011, is rich enough to fund
the right acquisition or six.
What’s next? Diversification is crucial.
Investment in infrastructure in emerging
economies is driving power-tool demand
but competing with local suppliers that
discount heavily is tough. Huge projects
like the Beijing Olympics have driven up
the year-on-year costs of steel – the
company’s main raw material – and other
components. With sales dipping 3.6% in
the third quarter, Mangan must juggle the
drive to grow in Asia, product launches
and the need to cut costs. He has already
overseen a 10% reduction in the global
workforce. Efforts to make the group’s
distribution network more productive are
starting to pay off.
He’ll succeed if… New products maintain
market leadership, he acquires shrewdly,
and more units become as diverse as
Emhart Teknologies, which generates
60% of sales outside North America.
06 Agendamagazine
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04
03
sundAr
rAmAn
CEO of cricket’s Indian Premier League
How do you build a sport from scratch?
Sundar Raman, 36, is tackling this issue
head-onashestrivestoturnthespectacular
first season of India’s Twenty20 cricket
competition into a viable, long-term
concern as a global entity.
The story so far IPL shook cricket to its
core – the first game drew 12.5m viewers
– by applying commercial lessons from
U.S. sports and English soccer. IPL’s
Twenty20 format is perfect for a timepoor age. Sony and WSG paid US$1bn
(€777m) for a 10-year TV deal with IPL’s
owners, the Board of Cricket Control in
India (BCCI). Selling the eight franchises
raised US$724m (€575m).
What’s next? Raman will aim to maximize
revenue from sponsorship, merchandizing
and hospitality.A new Champions League
Twenty20 competition involving South
African and Australian teams is a step in
the right direction. Global expansion
could well test BCCI, not seen as a great
administrator. But Raman, who has run
media agency Mindshare in the region, is
confident: “Cricket viewership is more
than that of soccer, yet its sponsorship
market is much smaller. Why? Because it
hasn’t been exploited to its fullest.”
He’ll succeed if… Cricket grows. India
already attracts 80% of the sport’s global
revenue so he can’t rely on a bigger slice
of the same pie. Raman also needs to
persuade sponsors to spend in a crunch.
jing
ulrich
Chairman of China Equities, JP Morgan
As managing director and chairman of JP
Morgan’s Chinese equities business, Jing
Ulrich is a respected media pundit,advises
the world’s largest institutional investors
and is one of Forbes’ 100 Most Powerful
Women in the World. But the Chinese
stock market – the world’s best performer
in 2007 – has been one of the worst in
2008, so she has a tough job on her hands.
The story so far A Harvard and Stanford
graduate, Ulrich rose swiftly from Credit
Lyonnais to Deutsche Bank before
joining JP Morgan. Ulrich is now leading
the expansion of the company’s China
equities business. In the short term, the
going has been tough but she remains
confident. Ulrich was chosen as ‘Young
Achiever of the Year’ in the Women of
Influence Awards 2005-6, sponsored by
the American Chamber of Commerce
in Hong Kong.
What’s next? Certain sectors – particularly
banking and infrastructure – are still
growing rapidly in China. But investors
are nervous over slowing growth rates.
JP Morgan’s relatively comfortable
financial position insulates it from any
immediate panic.
She’ll succeed if… She keeps offering
valued counsel to institutions investing in
the world’s most dynamic emerging
economy. The state’s US$585bn (€396bn)
stimulus – which she describes as a “New
Deal with Chinese characteristics” – can
maintain sustainable growth. Tax breaks
and looser credit could revive housing.
Longer term performance of Chinese
stocks will be driven, in part, by a revival
of China’s domestic consumption.
“Cricket viewership is more than that of soccer,
yet its sponsorship market is much smaller.Why?
Because it hasn’t been exploited to its fullest”
lessons in leAdershiP
05
jonAs
sAmuelson
CFO of Electrolux
Electrolux’s appliances were once a
staple of every Western home, but the
company faces fierce competition from
price-conscious rivals and needs to
evolve. New CFO Jonas Samuelson is
confident it can flourish, persevering
with the launch of its appliance brand in
North America.
The story so far Samuelson, 40, made his
name at Saab and General Motors, as
executive director of North American
sales, returning home for a spell as CFO
of the thriving Stockholm-based, airtreatment market leader Munters.
What’s next? Electrolux made its fortune
selling refrigerators in post-war Europe.
By the 1990s, recession and competition
forced a wave of plant closures. In 2004,
president Hans Stråberg started to invest
in Eastern Europe and close Western
European and U.S. plants and in 2006,
Electrolux was overtaken as world leader
by Whirlpool, which bought Maytag.
Innovations such as robotic vacuum
cleaners grow the brand, but Samuelson
must cut costs without big divestments
(the outdoor division, including Flymo,
was spun off to shareholders in 2006)
while funding Stråberg’s plans to sell
high-tech ovens in the U.S.
He’ll succeed if… He can beat a projected
2008 income of US$550m (€405m) in 2009
and cut European costs while funding
innovation and new products. In North
America, Electrolux raised prices to boost
revenue. Can it do the same in Europe?
GO FURTHER
Find more about these businesses at:
www.afren.com; www.bdk.com;
www.iplt20.com; www.jpmorgan.com;
and www.electrolux.com
Agendamagazine 07
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03 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
keys to success
‘‘
At Infosys, we say you
can trust in God but you have to base your decisions on the data ‘‘
Infosys CFO V. Balakrishnan says his company owes its
remarkable rise to budgets, simplicity and variable costs
words by paul simpson photography by aashith shetty
Y
ou can tell a lot about a CFO’s state
of mind by asking them to identify
the biggest problem facing their
business. Ask any CFO in the West
that question at the moment and
you’re likely to get a short, bleak and predictable
answer. When I ask V. Balakrishnan, chief financial
officer of technology giant Infosys, he says:“Talent.
That’s the biggest challenge we face. Our total
workforce is now 100,000, we have an attrition rate
of about 13% and we’re hiring 25-30,000 people a
year. We get 1.5 million applications for those jobs,
so we can only take on 2% of those who apply. We
are the employer of choice in India, but managing
change on that scale is a challenge.”
Balakrishnan – or Bala as he is invariably known
– exudes the quiet kind of confidence you might
expect from a man who once described Infosys as
“God’s own company”.But then he does happen to
be CFO of a business that started, with US$250
(€198) of capital, in 1981 and now has revenues of
US$4.8bn (€3.8bn), half that amount in cash sitting
in various bank accounts, and absolutely no debt.A
company that sets out to delight customers, rather
than merely satisfy them, and enchant employees.
This sounds too good to be true in a Disneyfied
kind of way, but Infosys’s revenue-per-client figures
– which soared by 350% between 2003 and 2007 –
suggest it might just be the case.
Balakrishnan also, he believes, happens to be in
the right place at the right time in our economic
history. He is convinced that, as he puts it, “this
century belongs to Asia” and that this continent is
the global economy’s new centre of gravity.
The issues that pepper our conversation reflect
this conviction. Where his peers in the West might
be speculating about credit, interest rates and
recession, he is more preoccupied by retaining
talent, the quality of India’s education system and
whether his country is investing enough in
infrastructure to grow by 7-8% a year.(His concern
isn’t entirely altruistic: lack of investment means
that Infosys invests around US$13,000, or €8,800,
per employee in infrastructure every year.)
But surely, I suggest, he must be a bit worried as
he looks into the future. After all, 90% of the
group’s revenue comes from Europe and North
America.“Confidence is very low,” he admits,“and
Agendamagazine 09
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
that presents challenges.There will be some impact
on IT spending by large companies. At the same
time, there are substantial cost savings associated
with outsourcing – companies can convert their
fixed costs to variable costs, become more
competitive and reduce their time to market – and
we know that companies will spend 30-40% less
with us than with the IBMs of this world.
“The global IT services spend is around
US$800bn (€541bn). India’s share of that market is
only 5%, so we are confident there are enough
opportunities for us to grow.The challenges that we
see are more to do with scaleability, attracting the
right people and the quality of our leadership.”
Budgets and egos
Depending on which theory or guru you believe,
success in business is down to thriving on chaos,
seven effective habits or making the most of the
right-side of your brain.
Balakrishnan – who joined Infosys in 1991 from
Amco – mentions none of these factors as he
discusses the group’s rise, but starts with the
mundane business of budgets. “At Infosys, people
take the budget very seriously. If people want to
spend beyond the budget, there is a very clear
approval process. We then use various models to
analyze the impact of the spend in the long term.
And we collect a lot of data on the 10,000 projects
we have. If you have a lot more data, the situation is
a lot more transparent. That’s why 99% of our
projects come in within budget and on time.”
Data isn’t collected for the sake of it. Infosys
reduces the risk of analysis paralysis by only
tracking data that is useful in decision making.
“At Infosys, we always say that you trust in God
but you base your decisions on the data,” says
Balakrishnan. “If you collect data on different
aspects of a company, you get a clearer picture of
the business and you’ll take more sensible decisions
than if egos and emotions get involved. If you don’t
have the data, you don’t know what’s happening.”
This can make Infosys’ decision-making process
sound as dry as the Atacama desert but the group
has made some bold decisions,such as its US$753m
(€508m) purchase of UK IT consultant Axon.
Through experience, Infosys has rewritten some
of its rules. After a traumatic break with General
Electric in 1994, Balakrishnan says: “We decided
no client should account for more than 10% of our
revenue. We want to delight customers but we do
not want a client to run our business.”
12 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
keys to success
Paul Simpson is an editor at Haymarket Network.
5 Innovation.
“Affordability is the
biggest challenge for
India,” Balakrishnan has
said. So the launch of
products likeTata’s Nano
car is good news.
27.82%
27.79%
26.62%
6 Infrastructure. India
has the cash – US$300bn
(€202bn) in reserves – so
all it has to do is improve
execution and delivery.
41.38%
Animated genius
In the Indian business community, Balakrishnan is
cherished for using comic Bollywood animations
to spice up what might have been a rather arid
financial presentation at one of the stylish AGMs
Infosys throws in Bangalore. Shareholders are, of
course, much more likely to savour that kind of
inspiration if your revenue and your operating
margin have both been growing by 30%, as
Infosys’s were in 2008.
Keeping it simple may not make headlines, but
as put into practice by Infosys, it looks akin to
genius. Not that Balakrishnan – or his colleagues –
would be immodest enough to point this out. ●
4 Technology. Reduced
telcommunication
costs and other advance
technologies mean
“geography is history”,
helping India compete.
Infosys’s
net margins
Net profit as
percentage
of revenue,
after
exceptional
items and
excluding
tax reversal
2006
2007
2008
in cash. We are not averse to debt. We would take
on debt if we needed to, but we are in the
technology business and technology is risky
enough in itself. Why should we enhance those
risks by taking on large debt?”
Amassing debt unnecessarily or through wishful
thinking about business conditions would
contradict another of his guiding principles: “You
run your company in good times as you would in
bad times. Keep your organization lean and
organize yourself so that your costs are as variable
as possible.That way you will still profit in the good
times and are better placed to survive the bad.”
And here, once again, his conversation turns to
divine beings.“I was in conversation with someone
the other day and they said to me: ‘Cash is king’. I
told them:‘No it’s not, cash is God.’ If you’re out of
liquidity, you’re dead.”
Even with all that cash in the bank, and the
values of many companies falling, he says Infosys
3 Education. India has
an English-speaking
graduate pool of 2.5
million and more than
500,000 engineering
graduates every year. But
education must remain
a priority for investment.
45.73%
“We have about US$2bn in cash.
We’re not averse to debt but
technology is a risky business, so
why add to that risk with debt?”
2 Demographics.
Close to 67% of the
population is under 30.
44.89%
Cash, debt and risk
A sense of trusteeship has informed Infosys’s fiscal
policies, which are conservative to the point that
some analysts have suggested the group is allergic
to debt. Here, Balakrishnan is happy to set the
record straight: “We have about US$2bn (€1.6bn)
is unlikely to go on an acquisition spree. “We
don’t have to acquire companies to grow. We
only need to buy companies which are a good
strategic fit for the business and are available at
the right price.”
Which, I suppose, brings us back to data again.
Like most CFOs, Balakrishnan is too experienced
to believe in any silver bullet for business success.
If any author distilled Infosys’s story into a how­
to-succeed-in-management-without-trying­
terribly-hard bestseller, simplicity would have to
be in there somewhere. Simplicity in the way
budgets are set and adhered to and the way the
company is run. Indeed, Balakrishnan makes the
point that such simplicity should apply to the
company’s mission statement:“Keep the business
rules simple. If they get too complicated, it’s hard
for everyone to understand them.”
Such simplicity, in his view, must be reinforced
by openness. Some companies routinely boast that
they have an ‘open door’ policy when, in reality, the
door is only open when
the CEO is out the
office. But perhaps
because it was founded
by seven colleagues
rather than a lone
father figure, Infosys
has striven to create a
culture where any
member of staff really
can approach any
manager. But to make this work, he says: “You
have to set the example at the very top. And that
openness is one of our non-negotiable values.”
Infosys’s
return on
capital
Return on
average
capital
employed
2006
2007
2008
Balakrishnan invokes God a lot. With some
leaders, this might suggest arrogance, even a hint of
divine certainty, but the Infosys CFO sounds
humble whenever he mentions the supreme being,
almost as if each allusion is a reminder that no
executive, no matter how powerful, is above
judgement. The same sense of humility prompts
him to suggest that companies might be more
successful if their leaders acted as if they were
trustees of the business, not managers. “It’s
important to have strong ethical values,” he says.
“That makes the business more sustainable. We
have turned away business rather than do
something we knew was wrong.”
INDIAN SUMMER
Why Balakrishnan is
optimistic for India
1 Red tape is being cut.
In some sectors, like
software, there is
almost no government
interference and work is
underway to ease
restrictions on foreign
investment in others.
13
Agendamagazine 11
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Hulton Archive/Getty Images. Yuri Kotchetkov/EPA/Corbis. Jemal Countess/Getty Images. Richard Lewis/AFP/Getty Images
12 Agendamagazine
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GrEat DEbatE
Is this what a
new paradigm
feels like?
In his book, George Soros argues that Asia’s rise marks the birth of
a new economic order.We asked three specialists to discuss his view
By PAUL SIMPSON
F
or any CFO keen to explore the
state we’re in – and what shocks may
lie ahead – one slim volume is
essential reading. George Soros’s
The New Paradigm For Financial
Markets: The Credit Crisis Of 2008 And What It
Means does what the title suggests and more.
The financier believes
what we’re experiencing
isn’t simply a credit crisis
but a permanent shift in
the global economy that
will end the West’s
economic pre-eminence
and establish Asia as the
centre of the world
economy. So is he right? And what does this mean for business?
To explore all these issues, Agenda talked to:
Mark Dampier, head of research at London
stockbrokers Hargreaves Lansdown; Ian Gomes,
chairman of high growth markets at KPMG; and
Herman Yu, CFO of Chinese media group Sina.
To read his views in
detail, see Soros’s book,
The New Paradigm For
Financial Markets: The
Credit Crisis Of 2008 And
What It Means (BBS
Public Affairs)
How should Western business react?
Gomes There is an opportunity here. The West
still has a lead in innovation and technology and
companies, confident of their competitive edge,
could invigorate their business by investing in
POWER PLAYERS
Clockwise from top left:
Vladimir Putin, Deng
Xiaoping, George Soros
and India’s Manmohan
Singh are central figures
in the new paradigm
“What we’re seeing
now is the last
industrial revolution,
affecting 5bn people”
Is Soros right in his central thesis: that
economic power is transferring from
West to East?
Gomes There is a paradigm shift in the way
capital is flowing from West to East. Companies
have seen opportunities in less-developed Eastern
economies and they have changed dramatically.
Look at the accumulation of wealth in the Gulf,
China and India. The Gulf and China have built
sovereign wealth funds that invest in the West and
other emerging countries. We are also seeing
The Soros view
more south-to-south investment flows. There’s
a two-way flow we have never seen before.
Yu The U.S. has a huge debt, a lot of it foreignfunded, so people were looking to diversify their
risk even before the sub-prime collapse. That said,
I believe the dollar will be a primary currency for
international trading for a long time. In the long
run, we may become less
dependent on it, and move
to a basket of currencies.
That would be less risky.
Dampier
Western
developed
economies
have huge deficits while
many of the developing
economies have huge
surpluses. But you can’t
write off the American economy. I’m sure people
made similar predictions after Vietnam. And the
Iraq war now is a huge drain on the U.S. But the
internal dynamics of the U.S. economy make it
resilient. It has a strong entrepreneurial culture
and is one of the few Western economies that isn’t
plagued by the kind of demographics that will
increase healthcare and pension costs. I’m not
denying there is a shift – what we are seeing now is
the final stage of the industrial revolution, affecting
five billion people, only what took 200 years in the
West is being done in 20.
1 The free market
doesn’t automatically
achieve equilibrium.
Without regulation,
markets will lurch from
boom to bust.
2 The sub-prime crisis is
the completion of
a process that has
eroded America’s status
as the sole economic
and political superpower.
3 The U.S. dollar will
lose its status as the
global reserve currency.
4 The sub-prime
collapse will accentuate
a shift of economic
power from the West
to China, India and
the Middle East which,
though not immune to
the effects of recession
in North America and
Europe, will in the long
term perform better than
the West’s economies.
Agendamagazine 13
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Gathering
momentum
the productivity of their staff and use as few
people as possible. In China, where labour is
much cheaper, companies prefer to employ as
many people as they can because they believe it
gives them a strategic advantage as they grow.
Gomes These economies are developing
innovative business models and ways of producing
products of quality at the right price. The best
thing the West can do is partner companies using
these models and learn from them.
Yu I would add a note of caution. Doing business
in these economies isn’t always as straightforward
asintheWest.Companiesshouldn’tunderestimate
the time it takes to understand the complexity of
the business environment, local regulation and
dealing with governments. If you understand that,
you can make a rapid return on your investment.
Thought emerging
economies weren’t
expanding into the
West? Think again…
322
The number of
developed market
companies acquired by
Indian businesses in the
past five years
US$23bn (€18.3bn)
Total value of
acquisitions by
emerging market
businesses since 2003
US$330m (€263m)
The amount paid by
Chinese conglomerate Li
& Fung for U.S. handbag
retailer Van Zeeland,
one of 25 acquisitions
by Chinese companies
in developed economies
over the past five years
53%
Rise in number
of acquisitions in
developed markets by
Brazilian businesses, Q2
2006-Q1 2008, compared
to previous two years
Source: KPMG’s Emerging
Markets International
Acquisition Tracker report
THE OLD REGIME
Clockwise from top left:
The traditional view of
emerging economies
was defined by
Chairman Mao, Mother
Teresa and Vladimir
Lenin. But, as Soros
points out, that is
changing
Chairman Mao image by
Andy Warhol; other images
in this feature have been
digitally manipulated to
resemble Warhol originals
China and India. At the same time, this shift
could challenge the West’s traditional business
model. Most people in China and India are still
at the bottom of the pyramid and many
businesses have to start with a price point, what
people can afford to pay, and work backwards
from there. In the West, we’ve usually done it the
other way around: devised a product, figured out
what it costs to make, added a margin and come
up with a price.
Yu What the West
shouldn’t do is just apply
its model to Asia. In
China, we’ve seen many
multi-nationals come in
and fail, especially in the
technology and internet
sectors, because they
haven’t adapted their
product or business model. Instead, many
Chinese companies have reinvented a Western
model and succeeded.
Dampier The big danger is arrogance. The lesson
every Western business should take from this is
that competition is fierce, it’s going to get fiercer,
and they are kidding themselves if they believe
being in a high-end market makes them immune.
Yu To give you a small example of what I mean,
many U.S. high-tech companies want to improve
It is often suggested that China and India
can only compete on cost, not quality,
and are not as innovative as the West.
Are these criticisms fair?
Gomes The innovation gap isn’t as big as the
West would like to believe. China isn’t all about
copying, reverse engineering and manufacturing.
Huawei, the telecoms company, spends US$1bn
(€670m) on R&D which, given local labour costs,
it says is equivalent to four times the same R&D
spend in America. The success of Indian IT may
originally have been down to cost but it has
moved high up the quality curve. Also, Chinese
and Indian components are widely used in
Western manufactured goods. So it is unfair to
suggest they only compete on cost, not quality.
Dampier Developing economies start by
copying best practice to
bring it up to standard.
Look at Japan. And the
industrial revolution is
happening very quickly
in China and India. We
tend to forget that.
Yu I don’t think this is a
cultural issue. A lot of this
has to do with the size of the market and
consumer spend. If you’re in a small market, you
don’t need to innovate. As the economy grows –
and consumers spend more – you will see more
innovation. The internet sector has grown at
about 50% a year in China and a lot of Chinese
IT companies have floated on Nasdaq this year.
The quality issue isn’t as simple as it’s portrayed
in the Western media, when it covers a product
recall by a Chinese supplier. Many multi-
“China and India
accounted for around
45% of the world’s
growth last year”
Mao (acrylic silkscreen print) © The Andy Warhol Foundation for the Visual Arts/ARS/DACS 2008/Bridgeman. Times Newspapers/Rex Features. Sipa Press/Rex Features. Joel Saget/AFP/Getty Images.
GREAT DEBATE
14 Agendamagazine
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nationals who make products in China focus
only on cost. Companies that consider quality
control too haven’t suffered as much.
If we are seeing a paradigm shift, why
haven’t these countries developed more
global brands?
Gomes It takes a lot of time, money and trouble
to build a brand. It’s easier and cheaper to buy
one than build one – as Lenovo did when it
acquired IBM’s PC business – and I expect more
Chinese and Indian companies to do that. But
there have been some spectacular successes: look
at Samsung in mobile phones and Embraer, the
Brazilian airline manufacturer that has pretty
much conquered the
small-plane market.
Yu The absence of global
brands reflects the stage
China’s economy is at. It’s
been growing by 8-9% a
year for 10 years. In some
sectors, growth has been
greater. I was talking to the
boss of a toilet paper company, and their sales have
been growing 40% a year. When domestic growth
is that fast, it’s hard to think about expanding into
foreign markets. But that day will come as Chinese
companies gain scale and experience.
Dampier If you think of the really famous
brands, like Coca-Cola, they took ages to build.
When I visited Russia, it struck me that the
middle class was very keen on its own brands. It
was just the upper class that was into foreign
brands like Mercedes and Rolls-Royce. If you
look at what happened in Japan, brands like
Sony and Toyota took 20 years to emerge. In the
next 20 years, I expect to see China, India and
Russia all developing more global brands.
Yu There will be speed bumps – China is not
immune to the downturn – but the government
is trying to incentivize consumer demand. The
stimulus package does help exporters, but the
long-term shift is still towards a more consumerdriven economy. The big worry is inequality,
especially between rural and urban China. But
the government has recognized this threat and is
trying to spread the wealth more equally.
Dampier That would be my worry in many of
these economies. In Russia and the Gulf, for
example, too much of the wealth is held by a few
billionaires. It needs to trickle down.
Gomes The West has a much better system of
providing venture capital than China and India.
There are some concerns
over transparency and
intellectual property, and
the perception is that both
governments have become
a little less open to foreign
investment. Look at the
Indian retail industry. The
Reliance
group
is
expanding into that sector in a very big way,
opening 1,000 stores a year and moving to capture
the whole supply chain.Will that be fully opened to
foreign investment? The jury is still out on that.
Yu To me, China seems more open to foreign
investment than two years ago. Banking, for
example, was opened to foreign investors last year.
Dampier Economies growing as fast as China’s
and India’s will hit bottlenecks. But there are
three other factors that need to be considered.
In different nations, to different degrees, the
green lobby could have an impact. The
unfortunate truth is that these countries are also
more likely to suffer natural disasters.
In China, the demographics aren’t very good.
India’s are superb – the average age there is 25.
Young people are usually more mobile, more
flexible, more willing to take risks. And the older
the population, the greater the cost.
Yu The Chinese government’s strict fiscal policies
should limit damage. Even after the stimulus
package, you still need a 20% deposit to buy a
house, which is very conservative. If the U.S. had
that kind of policy, the economy wouldn’t be
suffering from the sub-prime collapse.
As long as China and India support free trade,
they present an opportunity for business to
expand into countries with a rich resource – at a
very cheap rate – which accounted for around
45% of the world’s growth last year. ●
“China isn’t all
reverse engineering.
Huawei spends
US$1bn on R&D”
What could threaten these economies?
Dampier Politicians. Look at Russia, although its
disputes have often been misreported by Western
media. Russia is desperate for foreign investment
to develop its oil fields – where output is actually
falling – but the perception is such that they’ll
struggle to find partners.They’ll crack it eventually.
Gomes For China and India, the big challenge is
to bring millions out of poverty and into the
consuming class. Investing in quality education and
relevant skills is a very high priority if demographic
advantages are not to become a liability. For India,
insufficient investment in infrastructure is already
adversely impacting growth.
Haier points the
way upwards
One innovative,
yet regimented
manufacturer has
proved that brands
from emerging
economies can
become global players.
Haier is now the
world’s fourth-largest
white goods maker, a
remarkable reinvention
inspired by charismatic
CEO Zhang Ruimin.
When he bought the
ailing state-owned
refrigerator business in
the mid-1980s, Zhang
made his standards
dramatically clear.
In one celebrated
incident, he joined
staff in smashing
defective refrigerators
with a sledgehammer.
“If it can be done,
he will make every
employee a strategic
business unit,”
says Professor Marshall
Meyer of Singapore
Management
University. “That’s
the degree of
accountability for
results and mistakes
he expects.”
Such methods work.
Haier now boasts
global revenue of
US$16.2bn (€12.5bn),
is very profitable,
operates in more than
100 countries and has
almost 50% market
share in some U.S.
market segments.
Haier’s aggressive
product development
– such as a climatecontrolled wine cellar
and fridges for shared
homes – reflects
Zhang’s strategy
for goods to be
“Innovated in China”
not just made there.
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
LEARNING CURVE
Lessons from a eunuch
What the story of China’s greatest explorer can tell us about this economic giant
BY SHAUN CAMPBELL
its massive manufacturing output, China is
surprisingly weak in innovation. A full 57% of
exports are from foreign-invested factories. . .
China’s big, state-run R&D institutes are close
to the cutting edge at the theoretical level, but
have yet to yield many commercial
breakthroughs.” Although the number of
Chinese patents granted in Europe, the U.S. and
Japan soared by 37% between 1995 and 2005, its
overall share of patents is smaller than Sweden’s.
No wonder premier Wen Jiabao plans to make
“indigenous innovation” drive the economy by
investing in science and technology.
Global horizons The sheer size of Zheng’s fleets
persuaded 30 states to pay homage to China, as
this emerging superpower flexed its muscles. Now,
China’s economic musclepower is changing the
world: it was the second largest exporter in 2007
(behind Germany). Millions of entrepreneurs
GO FURTHER
Zheng He’s adventures
are explored in When
China Ruled the Seas
by Louis Levathes
(Oxford University
Press). For more on
China’s economic
expansion, try Jagdish
Sheth’s Chindia Rising:
How China and India
Will Benefit Your
Business (McGraw Hill),
Pete Engardio’s Chindia:
How China and India Are
Revolutionizing Global
Business (McGraw Hill)
and Will Hutton’s The
Writing On The Wall
(Little, Brown).
Zheng He upset Confucian mandarins
by pioneering technology, exploring
the world and opening new markets
now look outward like Zheng. China has 35
companies in the 2008 Fortune 500. Groups such
as Lenovo and Haier are world famous, but more
Chinese businesses will acquire a global presence,
especially in the booming internet sector.
Confucian wisdom After Emperor Zhu Di’s death,
China reverted to Confucianism. Change was
stability
y revered. Building a ship with
feared, stabilit
offence. The
more than two sails was a capital offence.The
between
ween modernization and
tension bet
conservatism persists. Private firms thrive
authorr Will Hutton says, “the state
but, autho
sector
or is less productive than under
sect
Mao.”
ao.” If China is to prosper, its
M
leaders
aders need to balance change
le
nd stability more shrewdly than
aand
he mandarins who ignored
tthe
Zheng’s legacy and turned
their backs on the world. ●
Goh Chai Hin/AFP/Getty Images
Western business leaders perplexed by their
inability to ‘get’ China could do worse than
consider the giant, long-haired eunuch who
became the country’s greatest explorer. The fact
that Zheng He (1371-1433) is hardly celebrated in
his homeland offers clues to China’s relationship
with the rest of the world, its struggle to innovate
and its attitude to science and technology.
Captured by a Ming army that invaded Yunnan
when he was 11, Zheng was castrated and made
a servant of the imperial court. After this
inauspicious start, the 7ft (2.1m) eunuch became
one of Emperor Zhu Di’s shrewdest advisors. As
admiral, he explored most of southern Asia,
Europe and Africa, reaching the Cape of Good
Hope, within spitting distance of the Atlantic.
After his death – he was tossed into the sea and
not, as was usual for influential eunuchs, reunited
with his testicles to enjoy the afterlife –
conservative bureaucrats torched records of his
heroic voyages.
Scientific edge Zheng oversaw construction of
300 wooden ships, the largest of which was
around 400ft (130m) long: Columbus’s largest, in
comparison, was 85ft (25m) in length. Even today,
we don’t know how frameworks made without
iron supported the weight of Zheng’s ships. As a
technological pioneer, Zheng harked back to
Chinese inventors of old. But only now, 600 years
later, are science and technology again a national
priority. In 2006, China announced plans to make
its students more scientifically literate than those
in the West by 2020.
Exceptional innovation Zheng thought big.
His voyages were equivalent to seven and
a half circumnavigations of the globe. He
introduced an astonished Chinese public
to the giraffe and launched Chinese goods,
especially pottery and glassware,
glassware, in new
markets.
Such
remarkable
innovation has, until recently,
recently,
been the exception – not the
rule. Pete Engardio, editor of
Chindia: How China and India
Are Revolutionizing Global
Business, says: “Considering
16 Agendamagazine
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left field
How to avoid a fine mess
Ancient wisdom about woodland creatures, coupled with the character traits
of two great comedians, could improve the way you manage and take decisions
By paul simpson
Everett collection/Rex Features
A
re you a hedgehog or a fox? It’s a
simple question with no easy
answer. In the seventh century BC,
Archilochus, the Greek warriorpoet, wrote 10 words that still provoke debate
about the nature of leadership: “The fox knows
many things, the hedgehog one great thing.”
In fable, the fox’s versatile intelligence is
powerless when faced with the hedgehog’s singlemindedness, depth of knowledge and ability to
turn itself into a prickly ball. Ergo, hedgehogs
rule. Jim Collins, who analyzed the traits of
outstanding companies in his book Good To
Great, believes most top CEOs are hedgehog-ish
in their clarity of purpose: “To a hedgehog,
anything that does not somehow relate to the
hedgehog idea holds no relevance.”
Yet if you explore the philosophy behind the
debate, the hedgehog’s superiority is less emphatic.
Hedgehogs tend to believe, as the thinker Isaiah
Berlin noted, that “every genuine question has one
true answer”. Foxes instinctively feel that just
because ideas clash, one idea isn’t necessarily true
and the other false.Political and corporate dictators
tend to be hedgehogs; William Shakespeare and
Leonardo da Vinci were foxes.
As a role model, the ultimate renaissance man
seems vastly preferable to, say, Saddam Hussein.
And business writer John Kay questions whether
knowing one big thing is as useful as Archilochus
suggests. As Kay notes, American psychologist
Philip Tetlock tested 30,000 expert predictions
about world events against 300 outcomes over
20 years. Tetlock found that the ‘experts’ were
“scarcely better at predictions than chimps” and
worse than if they had used simple forecasting
rules based on extrapolation.
Donald R. Keough, former president of CocaCola, would not be astonished by Tetlock’s
research. He lists “put all your faith in experts” as
one of the commandments for business failure.
Keough speaks from bitter experience.
Consultants and experts persuaded him in 1985
that launching ‘New Coke’ was a masterstroke.
After 400,000 complaints, people filling up their
pick-up trucks with old Coke and a class action
law suit from a group calling itself ‘Old Cola
Drinkers of America’, Keough was advised by
experts to hold firm. Luckily, he ignored them,
believing they had underestimated the brand’s
emotional resonance with the public. If Keough
had been more hedgehog-ish, Coke would have
lost millions more. Summing up this sorry episode,
he quoted James Thurber: “It is better to know
some of the questions than all the answers.”
The current economic turbulence suggests that
all kinds of data – think sub-prime mortgages –
that might seem irrelevant to a hedgehog can
become very painfully, and expensively, relevant.
It also suggests that knowing all the answers is
impossible anyway. So should we all be foxes?
As is so often the case, Laurel and Hardy can
enlighten us. Oliver Hardy was a hedgehog who
knew how to act funny as a polite southern gent
who does the wrong thing for the right reasons.
Stan Laurel orchestrated their comedy, had the
flexibility to learn from – and not be crushed by
– the genius of Charlie Chaplin, and the vision to
realise that if the act didn’t adapt to talking
pictures it would die.
That balance, Kay suggests, defines “effective
management teams, which is why the modern
tendency to appoint hedgehogs and allow them to
surround themselves with other hedgehogs is so
dangerous.” At the next board meeting, categorize
directors by their species. If you have the balance
wrong, your board could be as useful as a comedy
double act with two straight men. ●
HEDGEHOGS AND
FOXES MADE EASY
Isaiah Berlin attributed
different characteristics
to foxes and hedgehogs
Foxes
• Are serial entrepreneurs
• Are highly social
• Constantly re-assess
strategies based on
latest information
• May masquerade as
hedgehogs – or turn
into one
• Can seem too flexible
• May lack strategic
clarity
Hedgehogs
• Work to ‘unwavering’
rules and keep a single
focus throughout
• Acquire great
knowledge in one field
• Make up their minds
quickly and decisively
• Don’t like giving up on
ideas – good or bad
• Can be too singleminded and define
issues too narrowly
Agendamagazine 17
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03 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
best prActice
The subtle
art of
turning
round your
business
in a storm
Rescuing a troubled company means coming out of
denial, finding cash – and thinking the unthinkable
by RhymeR Rigby
1 What state are you in?
“The first thing any CEO or CFO needs to do in a turnaround is to
understand why they’re there,” says Philip Davidson, KPMG’s Head of
Restructuring Advisory. “They need to take stock of their customers,
suppliers and other stakeholders.Where do they stand vis-à-vis employees?
What’s the market doing? Is the turnaround needed because the market’s
contracting? They need to be crystal clear about the position they’re in.”
Buyenlarge/Time Life Pictures/Getty Images
A
lbert Einstein famously noted that: “In the middle of every
difficulty lies opportunity.” The good news is that if you
turn your underperforming business around, in probably
the most uncertain business environment for 70 years, your
reputation will be made. American company doctor Greg
Brenneman says: “If you have a chance of working for a healthy company
and a sick company, choose the sick one. The sickest ones need the best
doctors and it’s a lot easier to stand out in a company that needs help.” The
bad news is that such transformations are a lot harder to effect than they
were. Not as tough as devising the theory of relativity – but close enough.
The turnaround industry has changed beyond recognition in the last 15
years. In the popular imagination, it’s still associated with charismatic,
larger-than-life characters, such as former ICI chief Sir John Harvey-Jones,
who would enter a business all guns blazing, troubleshoot here, slash and
burn there to create a lean, mean organization. But the era when you could
turn a business around by confiscating the checkbooks is over. A more
considered, multi-pronged and collaborative approach is required. Just as
Alcoholics Anonymous offers 12 steps to help drinkers come back from
the brink, so corporate turnaround has a few guiding principles.
Agendamagazine 19
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
best prActice
A good example of the clarity and honesty
required is Balfour Beatty chairman Steven
Marshall’s pert assessment of the troubled Torex
Retail, which he was asked to rescue in 2007: “It
required extremely urgent change because,
financially and reputationally, it was looking over
the edge of a cliff.” This examination should tell
you which areas are hemorrhaging money. When
Brenneman saved Continental Airlines in 1994,
he swiftly identified the 18% of its flights that
were bleeding cash, cut them and stabilized the
airline.Sometimes,savings can start with initiatives
that sound mundane. In 2001, Cisco Systems cut
admin costs by shrinking the number of key
suppliers from 1,300 to 420 and earned volume
discounts worth hundreds of millions.
2 Do you need your CEO?
The shift in turnaround thinking is perhaps best
illustrated by the role of the existing CEO, says
Davidson. “When I started in turnarounds 20
years ago, it was almost inevitable the CEO would
go and a company doctor would take control.”
That person would be a situational expert and, in
the still comparatively localized companies of
yesteryear, that was often what was required.
Now, those trying to turn around businesses
may see existing managers as a pool of specialist
knowledge worth keeping. Managers may have
been part of the problem, but can be part of the
solution, commanding staff loyalty – especially if
the turnaround is largely due to externalities. A
rescue may involve a chief restructuring officer
working with managers. The trick, as Mark Hurd
showed when he rescued NCR in 2003 by cutting
jobs, costs and underperforming executives, is
not to suffer fools gladly.
3 Hunt for buried treasure
Examining a business’s balance sheet thoroughly can unearth undervalued
assets. During the turnaround of drinks firm Robinsons, it was discovered that
by drilling bore holes deeper, and bringing them within EU nitrate levels, their
value multiplied 20-fold to US$34m (€27m). These hidden assets needn’t be
as concrete as springs – CAD software supplier Autodesk revived its fortunes
by focusing on an underperforming customer segment. This treasure-in-the­
attic approach should not be counted on: only a minority of failing businesses
have significant assets that are undiscovered or unleveraged.
4 Sort out your priorities
Once you understand your situation, you need to take control with a wellthought-through plan that makes it absolutely clear which parts of the
“To proactively manage the crisis
you must have a good fix on where
you are and understand the risk
factors that could affect you”
business need direct attention and which don’t. Brenneman emphasizes the
need to stick to a clear strategy. That sounds obvious, but in many
underperforming firms, dispirited managers may lurch from one disaster to
the next. Sometimes, it’s not all about cost: resuming profitable growth can
be vital.After Michael Eisner had been ousted as Disney CEO in 2005, with
shareholders in open revolt after a run of box-office failures, his replacement
Bob Iger bought Pixar. The merger made Disney attractive to Hollywood
creatives, made the studio’s model of developing animated films and TV
series more collaborative and developed product to appeal to ‘tweens’ (10­
14-year-olds) with synergistic successes like High School Musical.
That focus can work in surprising ways. In 1987, with sales of electronic
components and computer products flat, U.S. firm Arrow Electronics, second
in the market, bought the third biggest supplier and became market leader,
a position it still holds.
Great turnarounds
1617
Gustavus
Adolphus
Turned a decaying
Sweden into the third
largest empire in Europe
– and also created the
world’s first central bank,
to secure prosperity.
1969
2005
Rupert Murdoch
Andrea Jung
The Australian media baron turned ailing British tabloid The Sun into the UK’s best seller within
a decade by embracing
populism and changing
senior management.
With Avon struggling, Jung
acted as if she’d been hired
to turn it around. She cut
staff, changed marketing
plans and reversed some
deals to cut the right costs
and save her job.
AKG Images. Sipa Press/Rex Features. Brad Barket/Getty Images
} }} }} }
Three leaders who made the transformation
20 Agendamagazine
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6 Take back control
Many modern companies are fairly decentralized.This is great while times are
good. But when the going gets tough, democracy and consensus can be
ineffectual. Command and control may work better. In 1991, with Bang &
Olufsen in deep trouble, new CEO Anders Knutsen did all the usual things:
laid off staff,de-layered management and streamlined operations.But,through
a strategic plan called Break Point 1993, he also dealt with many of the
problems caused by an earlier decentralization, making the business more
centralized and responsive to customer needs. The shift must be handled
sensitively, with respect for people and their autonomy. It’s a short step from
pragmatic centralization to meddling micromanagement. And you need
people on side: if staff don’t believe in the turnaround, it won’t happen.
7 Understand your costs
“It’s not enough just to cut costs across the board. A more sophisticated
approach is needed,” says Davidson. Costs need to be analyzed so it is clear
which relate directly to sales, and over what period of time they generate
returns.Cost should be viewed as ongoing investment and,like any investment,
challenged by reference to the business’s objectives. If the business’s mediumterm future is in jeopardy, costs that only benefit the longer term are an
obvious cut. Likewise,“if you look at taking out cost and the effect on sales is
neutral, then it goes. But if it is negative, you go to the next level of analysis.”
You have to get the balance right. Survival depends on your stakeholders
having belief in your future. Cutting costs that adversely affect the core of
the business can have disastrous consequences. On the other hand, Davidson
says, if survival is a matter of months, cutting a cost that relates to next year
can make sense:“It’s all about allocating a scarce resource.”To be able to do
this with confidence, it is vital to have accurate, up-to-date information. If, as
one turnaround specialist noted of a stressed business, your accounts could
have been written by a novelist, your task will be considerably harder.
8 Think the unthinkable
“You need contingency plans,” says Davidson. “You have this great plan in
place, but what if you lose a major customer or supplier? I met with a
transport business recently. Great turnaround plan, really focused on
liquidity. But I asked how many of their top 20 customers would have to fail
to put the plan at risk and the answer was one. One question about
contingencies got to the heart of what that company needed to do next. Most
companies go bust because they run out of cash. If you’re not proactively
managing your situation, you increase the risk that you will go bust.”
The two places you don’t want to be as a manager, says Davidson, are
hope and denial. Managers often believe they can trade their way out of
difficulty, forgetting they traded into it in the first place. To find the cash
you need to keep going, you need to abandon the Micawberish hope that
something will turn up and face reality and come out of denial to confront
the uncomfortable issues that threaten your business.
As Davidson says: “You need a really good fix on where you are, where
you need to get to over whatever period of time and understand all the risk
factors that might affect their performance.” If you do all that – and enjoy
a little luck – you’re most of the way there.●
Warner Bros./Getty Images
5 Who needs to know?
The flow of information to employees and other stakeholders is almost as
important as the flow of cash. If people are in the dark, rumors will spread.
Show employees you respect them enough to keep them informed and
they’re much more likely to stand behind you. Even if all you have is bad
news, it’s best coming from you and managed by you.
What not to do when business turns infernal
“If stupidity got us into this mess,”
the humorist Will Rogers wanted to
know, “why can’t it get us out of it?”
Rogers’ point has been amply
proved
throughout
corporate
history. In 1957, with the Hollywood
studio system fading, MGM bosses
shut their animation operations,
believing reissues would yield as
much revenue as new projects.
Ousted cartoonists formed HannaBarbera, who dominated the
animation world.
Cash looks even more alluring in a
recession. And in 1973, with Elvis
Presley and his maverick manager
Colonel Tom Parker both strapped
for money, Parker sold the rights to
royalties on Elvis’s material for
US$5.4m (€4.3m) to RCA. Artist and
manager split the money 50/50. It
seemed a strange deal then, but with
Elvis’s record sales passing the billion
mark in 2007, it looks like the biggest
bargain since native Americans sold
what we now call Manhattan to the
Dutch in 1626 for a few trinkets.
The best firms use a downturn as a
reality check. But the same year as
RCA bought out Elvis, dime-store
chain W.T. Grant insisted on paying
its quarterly dividend to shareholders,
even borrowing to do so, though it
was making losses. To stimulate
sales, cashiers were ordered to offer
credit cards to “anyone that
breathed”. Staff who didn’t issue
enough credit cards were humiliated
– some had to push peanuts across
the floor with their noses – and in
1976, the chain went bust, with
US$800m (€509m) of bad debt.
Sometimes, the errors are much
more understandable. In the urge to
fix problems, managers can forget
their core business. In the 1990s, fastgrowing aerospace group Loral
focused so much on its troubled
Globalstar satellite investment, it
didn’t notice its core business was
losing market share. Loral ended the
1990s as a company in trouble.
Agendamagazine 21
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Known
unKnowns
Predicting is always difficult, especially where the future is concerned, but here are 10 trends that may shape your business
03 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
ON THE HORIZON
2
Plane truth
Many boards have recently
looked as alert to peril as
the dinosaurs just before
a meteor smashed into
Mexico 65 million years ago.
CFOs believe such crises
prove that risk management
should be a strategic partner
in a business, but how do
they convince managers?
Programs to align risk
controls to business needs –
and software to aggregate,
measure and assess risks –
will help. But René Stulz,
professor at Ohio State
University in the U.S., says
risk managers must change
tack. He says firms misjudge
known risks (by relying
on past data or not sensing
the correlation between
different risks), don’t realize
how fast risk can change,
and don’t communicate risks
properly to management.
Stulz says “scenario
analysis focusing on possible
financial crises” modelled on
economic analysis, not past
crises, is essential in the
finance sector.
Creating a culture where
risk is factored in, not by
bureaucrats wielding fancy
software but managers on
the front line, won’t be easy
or quick. But it’s better than
the alternative.
10
5
Aviation industry net profits
Source: International Air
Transport Association
0
-5
-10
Year
-13
2000 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09
3
Developing
Bransons
Where is the Brazilian
Richard Branson? If
developing economies are to
create the next Virgins, they
need the support networks
that made Silicon Valley an
engine of innovation.
An American non-profit
organization called Endeavor
is trying to rectify that. CEO
Linda Rottenberg believes
the best way to fight poverty
is to select and mentor
entrepreneurs in developing
nations. Since 1997, Endeavor
has put 409 entrepreneurs in
touch with CEOs, ministers
and investors in their own
markets and elsewhere.
This is good news.A Fulton
School of Engineering study
found a 5% drop in new
ventures equated to
a 3% fall in GDP growth.
Each Endeavor entrepreneur
typically creates 118 jobs and
their combined sales now
stand at US$2.51bn (€1.93bn).
Brazilian wind-turbine-blade
maker Tecsis, mentored by
Endeavor, has won a US$1bn
(€670m) deal to supply GE.
Only 44 Fortune 500 firms
are based in developing
economies. Some pro bono
advice from business leaders
may help improve that tally.
Ritu Manoj Jethani/Shutterstock. James Leynse/Corbis.
Risky
Risky
business
Profits (US$bn)
1
When Boeing’s Dreamliner
787 takes to the skies in
2010, it could do for airlines
what Intel did for PCs.
John Quelch, professor of
business administration at
Harvard Business School,
says: “The ‘Dreamliner’
brand will be as prominent
on fuselages as ‘Intel Inside’
on PCs.” He says Dreamliner
may have a bigger influence
on passengers’ choice of
flight than the airline.
Despite delays, Boeing
has already sold 900
Dreamliners. Airlines have
been tempted by low fuel
consumption (20% less on
long haul than 767s), higher
cabin pressure (the journey
should feel nicer) and gust
suppression technology to
reduce motion sickness.
With Dreamliner, Boeing
is pioneering a collaborative
development process in
which its partners share
the risk, design burden and
virtual development. If it
works, this process could
save Boeing money and
time developing the heirs
to Dreamliner and may give
it an edge over Airbus.
Agendamagazine 23
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
Shipping
Inflation nearly hit 30%
this year, but foreign direct
investment in Vietnam
will still soar by 37% to
a record US$11bn (€7.4bn)
in 2008. For companies
with stickability and a longterm view, this could be the
time to invest. Prices are
relatively low and GDP
growth – expected to reach
5% in 2009 – is still strong.
Vietnam has stability, an
increasingly well-educated
workforce, labor costs about
half those in China’s coastal
industrial zone and
booming agribusiness, gas,
oil and tourism industries.
Mobile phone use is set to
double by 2010. As a nation,
Vietnam has renewed
entrepreneurial zeal, with
private start-ups abounding
The state, which controls
38% of GDP, plans to sell
1,500 more state enterprises
by 2010. Bureaucracy,
corruption, poor regulation,
and a creaking infrastructure
will deter some, but GE
began making turbines here
in the spring. The risks are
large but so, GE believes, is
the opportunity.
Using shipping to ‘green’
your global distribution
channels will be much
harder than you might have
assumed. If shipping were
a country, it would be the
sixth largest emitter of CO2
in the world. UN research
says emissions from
shipping are almost double
that for aviation – three
times higher than thought.
Shipping emissions are
expected to double by 2020.
A ‘green gauge’ for ship
designers, new targets for
ship recycling and tighter
rules for sulfur and nitrogenoxide emissions will hardly
placate eco-warriors.
Mandatory EU emissions
standards caps, which are
likely over the next few years,
will be a more positive step.
What can the industry
do? New water resistance
technology could cut fuel
usage. Under California’s
new rules, ships must use
diesel – not highly polluting
bunker fuel – to power
auxiliary engines in port.
The U.S. Navy is developing
kite-powered cargo ships
that could use 30% less
fuel. If progress isn’t
rapid, shipping miles could
eventually become as
controversial as air miles.
Foreign direct
investment in
Vietnam (US$m)
Source: Vietnam Ministry of Industry
As the joke goes, Silicon
Valley wasn’t founded on ICs
(integrated circuits), but on
ICs (Indians and Chinese)
who started one fifth of
America’s high-tech firms.
U.S. IT is reeling from
tough H1B visa quotas
for highly skilled foreign
workers, the credit crunch
and fewer new arrivals from
Asia. In 2003, 195,000 H1B
visas were issued; 2008’s
quota (65,000) was reached
after a day. Bangalore’s
‘Silicon Ghat’ and Hetel,
the boom city at the heart
of China’s new Silicon
Valley, look increasingly
attractive to skilled workers.
There are now 253 million
Chinese online, compared
to 190 million Americans.
In 2007, American investors
pumped US$616m (€416m)
into Chinese IT start-ups,
suggesting China could use
U.S. finance to grow an Intel
or Google. In contrast,
Silicon Valley venture
capitalist Sequoia recently
held a summit to suggest
U.S. start-ups cut costs.
Wannabe IT tycoons were
greeted with a tasteful slide
of a gravestone bearing the
words: “RIP good times”.
Vietnam
11,000
Ovidiu Lordachi/Shutterstock. Corey Hendrickson/Getty Images. Hero Lang/AFP/Getty Images.
Silicon
Valley blues
7
2008
6,739
2007
2,360
2006
2005 2,021
2004 1,610
4
5
6
Head count
What does your head office
cost? A simple question, but
in Maxxim Consulting’s 2008
survey of 20 large British
firms, only four CEOs knew
the running costs of – or the
staff numbers at – their HQs.
In good times, head
offices grow organically.
Typically, doubling a
company’s size increases
head office staff by 75%.
Scrutinising head office
costs could save money and
improve morale but there
are risks to be weighed.
A 2004 study of 600
global corporations found no
strong evidence that smaller
HQs improved financial
performance. If too many
functions are dispersed,
managers may miss
a strategic opportunity.
Savings may offset some
risks associated with a loss of
control. Just by deciding its
HQ would only support core
businesses, one multi-national
cut head office costs by 50%.
Having halved its head
office staff since 2007, UK
technology company Smiths
Group now publishes its
HQ costs. Such transparency
may help morale. Financially
trivial expenses can have
a large symbolic value, and
hiding them fuels suspicion.
24 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
on the horizon
8
Software is the new
weapon of choice
African
agriculture
Militaries will always use sophisticated
machinery, but software is starting to
take over. Even the traditional bigticket items — aircraft, ships and
submarines — rely on software for
their effectiveness. Take the Joint Strike Fighter, a
multi-role stealth aircraft under development for U.S.
and other forces, at a cost of US$300bn (€233bn). The
aircraft looks impressive, but as the project matures,
block upgrades to its software package will make its
sensors and weapons much more effective.
If the software doesn’t work as designed, billions of
dollars worth of equipment might not do the basic job
it was bought for. Australia’s Collins-class submarines
couldn’t use their weapons properly for years after
a series of software failures. Of course, that sort of
problem can – and frequently does – afflict hardware
development. But changing hardware is more costly
and time-consuming than changing software, so the
Joint Strike Fighter is likely to be the first of many
similar developments
Software is much more important because
intelligence analysis is so fiendishly complex. Finding
and tracking terrorist groups, drug cartels and peopletraffickers involves sifting through vast amounts
of data – most of it innocuous and irrelevant. Only
cleverly designed software (running on large, fast
computers) can do the job.
None of this comes cheap. Software bugs on your
home PC are one thing. On a battlefield, where the
outcome might be life or death, they are a different
matter. The level of redundancy and reliability
mandated for such systems ratchets up cost. And
the military often wants it all and wants it now. The
‘spiral development’ model – in which supplier and
customer consult to evaluate early results and identify
trouble spots – has been accepted by the Pentagon,
but is hardly universally understood.
Economics dictate that software will eat into
defence budgets once reserved for hardware. As U.S.
defence expert Norman Augustine says: “Software
is difficult to grasp, weighs nothing and obeys the
second law of thermodynamics – it always increases.”
Like Danish author Karen
Blixen, Daewoo Logistics
Corp now has a farm
in Africa.The Korean
conglomerate has long had
a profitable commodities
division which trades in crops
like cereal and rice.Worried
by volatile prices and security
of supply, it aims to grow
5.5 million tonnes of corn on
a million-acre plantation in
Madagascar by 2023.
Other companies and
countries will follow suit.
China, whose trade with
Africa will reach US$100bn
(€67.5bn) in 2008, is poised
to invest, as are Kuwait and
Saudi Arabia, both as short of
arable land as South Korea.
Some African leaders,
frustrated by 20 years of
slow manufacturing growth,
now look to agriculture,
seeking investment to
improve infrastructure and
supply chains.Angola offers
farmland for development,
while Ethiopia is open to
foreign investors.
African agriculture
may not be an obvious
priority, but Daewoo’s deal
could be the catalyst for more
foreign firms to work with the
continent’s economies.
Andrew Davies is director of the Operations and Capability
program at the Australian Strategy Policy Institute
9
Structural
defects
Gridlocked roads cost the
U.S. economy US$78bn
(€61.3bn) a year in wasted
fuel. India’s straining
infrastructure, which hasn’t
grown as fast as its economy,
costs the nation at least
1.5% of GDP a year.
These are just two
examples of a global crisis.
A report estimates that the
world must spend US$40
trillion (€27 trillion) on
infrastructure over the
next 25 years if cities –
now home to over half of
humanity – are to maintain
power, water and transport.
Public investment is now
being resumed as treasurers
prime the economic pump.
The row over who runs
projects – state or business –
is a false dichotomy.A more
fruitful tack might be to
analyze good private-public
relationships.The state could
lead more lightly and make
better decisions, while
companies should realize
that current incentives can
encourage cost overruns.
Infrastructure can offer
five-year returns of 8-13%
if projects run well. If they
don’t, gridlock could spread
from roads to economies.
Bettmann/Corbis. Dave Hamman/Gallo Images/Getty Images.
10
Agendamagazine 25
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03 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
the big issue
the real oil
crisis Volatile oil prices,environmental pressures and the credit crunch
should act as a powerful wake-up call to rethink your company
By Walter Hale aND HeNry HariNgtoN
Toby Adamson/Getty Images. Shutterstock
S
ometimes, attention to detail pays off
spectacularly. Last year, just by using
routing software to eliminate left-hand
turns from drivers’ schedules, delivery
firm UPS saved three million gallons
of fuel, cut 28.5m miles from its delivery routes
and reduced CO2 emissions by 31,000 tons. As
big a difference as that small, simple change
made to UPS, CFOs will have to be far more
creative to flourish in an era when the volatility
of oil prices and pressure to be environmentally
responsible will reach unprecedented levels.
The era when CFOs could rely on cheap oil is
long gone. Once so cheap that transport was a
negligible consideration on cost sheets, oil spurred
globalization, encouraging investment in low-cost
factories abroad. Cheap oil laid the basis of the low
inflation economy.Though estimates of when/if oil
production peaks vary immensely,the International
Energy Agency (IEA) predicts the world will
struggle to produce enough to make up for steep
declines in existing fields. By 2030, the world is
expected to use 50% more oil than today. In less
than seven years, the IEA says: “A supply-side
crunch, involving an abrupt escalation in oil prices,
cannot be ruled out”.
One explanation for this is that the extraction
and distribution of oil will be subject to a host of
unpredictable actions and inactions that may
constrict supply. Finding oil oozing out of the
desert sands in a state ruled by a benign autocrat
is a thing of the past.The areas where oil is found
have become harsher, more remote, climatically
challenging and subject to environmental
scrutiny or the vagaries of corruption. And
security of supply remains a worry.
The paradox is that recent record oil prices have
made large profits for international oil companies,
some of whom have seemed reluctant or unable to
invest.That could be the memory of a US$10 barrel
of oil deterring investment or the prospect of a
US$200 barrel making a delay worthwhile.Margins
in the refinery industry are vapour thin, deterring
investment in new capacity.
Standard & Poor’s maintains that while the
major international oil companies (IOCs) have
considerable cash, there are fewer opportunities
for investment because they lack access to large
oil reserves. IOCs face tougher competition from
state-owned national oil companies (NOCs)
which now account for 72% of the market and
spend a bigger percentage of their revenue on
research than the oil majors.
state security
Such uncertainties are shaping government policy.
Wayne Chodzicki, Global Oil and Gas Sector Lead
for KPMG, says: “Countries like China, India and
Korea are seeking joint ventures beyond their
borders with both national and independent oil
companies to secure future oil supplies.” Such
eagerness is understandable. By 2030, the net oil
cliMate
busiNess
Global warming
is a high risk for three
industries
oil and gas
Predicted falling
demand after 2016
could see values of
firms slip 5-15%.
automotive
Unpredictable new
technologies which
may be commercially
viable by 2015, new
competitive dynamics
and new rules mean
corporate value could
rise or – if regulators
get tough – fall by as
much as 65%.
aluminium
Margins will become
volatile if aluminium
comes under EU
emissions trading
regulations, energy
costs rise, and
recycling increases.
Source: McKinsey
Agendamagazine 27
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ThE bIg ISSUE
imports of China and India will exceed today’s
combined imports of the United States and Japan.
The pressure to alleviate what Shell calls “supply/
demand climate stresses” – and stop Earth frying
– will fall hardest on business. In the U.S. election
campaign, for example, the closest either candidate
came to a plan for energy security was the cry of
“Drill baby drill,” at the Republican convention.
Somepoliticianshavebeenlessevasive.California
governor Arnold Schwarzenegger says America
has allowed oil price to dictate energy policy:“We’re
96% dependent on oil for transportation fuel; just
8% of our national grid is powered by renewable
sources. That’s shameful. To remain the world’s
leading economic power, we must strive to be the
leading energy power. Denmark gets nearly 20% of
its power from wind.The Danes set a goal and stuck
with it, even when it wasn’t popular and oil prices
were low. The same is true of Germany, with solar
energy.And Brazil, with ethanol.”
Sweden aims to “break oil dependency” by 2020.
Despite rising industrial output, the use of oil has
already fallen from more than 70% of energy
supply in 1970 to 30% today. The government
commission plan targets a 25-40% cut in oil
consumption by industry, achieved by greener cars,
energy-efficient plants, use of IT alternatives to
business travel and telecommuting. As an
environmental trendsetter, Sweden’s thinking may
set the regulatory context business operates in.
The challenge for business
With the IEA’s predicted oil price crunch only
seven years away, Chodzicki says businesses
should look at energy “in the whole portfolio of
what they do”. The first step is to review your
business’s exposure to changes in regulations,
new technology and consumer behavior.
Energetic world
Saudi oil is in demand
now, but bio-energy is
becoming popular in
Europe and Arnold
Schwarzenegger isn’t the
only American intrigued
by the energy-saving
potential of electric cars
Freza/National Geographic
Getty Images
Sean Gallup/Getty Images
Ric Francis/AP/PA Photos
Controlling energy costs isn’t easy. Ideally, large companies would buy
energy on long-term contracts, insulating their business against short-term
price fluctuations. But the energy futures market can’t take the strain over
the longer term, making hedging costly. Instead, businesses might have to
invest – effectively bet on – energy-efficient technologies. Sugar giant Tate
& Lyle has done just that, installing a biomass boiler to generate 70% of
power for its London cane refinery and cut CO2 emissions by 70%.
Packaging giant Tetra Pak has wagered on renewable energy. Though
production will increase, it aims to cut CO2 emissions by 10% by 2010,
using savings from such initiatives as ‘eco driving’ – teaching hauliers to
conserve fuel – to fund a switch to ‘green’ electricity at its plants.
The financial, political and market-driven case for using less oil will force
CFOs to reconsider every aspect of their business. They could start with that
most basic tool: the budget.Tim Lodge, director of investor relations at Tate &
97.8
60.0
80.0
Libya
101.5
Russia
115.0
Nigeria
136.3
United Arab
Emirates
179.2
Kuwait
262.3
Iraq
Iran
Canada
Saudi
Arabia
Source: Energy Information Administration
Venezuela
“Firms need to re-evaluate supply
chains and factor in higher oil costs
– or the need to use less of it”
Proven oil reserves 2007
(billions of barrels)
41.5 36.2
28 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
The power
Number
politics
you
crunching
can’t ignore
World oil prices
(US$ per barrel)
80
Source: Energy Information Administration
60
40
20
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1993
1994
1992
1991
1990
0
Lyle, says:“Energy is a major direct cost for us in manufacturing and transport,
and also an indirect cost through fuel for farm machinery and fertilizer”. But
in many companies, on a plant-by-plant basis, energy costs can seem small so
local managers don’t worry about them. Investment in energy-saving is often
seen as optional – behind glamorous spending on extra capacity in good times
and being trimmed in bad times – and companies look for a payback in five
years when 10 would better reflect the lower risk inherent in such projects.
“CFOs need to re-evaluate every aspect of their supply chain, factoring
higher oil cost – or the need to use less of it – into the price of their output,”
says Chodzicki. “When extra transport costs are considered, CFOs may
want to bring manufacturing closer to markets”. And reassess distribution
networks too: direct-to-customer distribution might be greener and more
efficient than sending goods to a distribution centre first.
Sweatshops and supply chains
The supply chain shouldn’t be re-evaluated purely on cost. Just as Western
labour unions monitor working conditions in ‘sweatshops’ abroad, businesses
will be accountable for their supply chain’s carbon footprint and may have to
do a ‘carbon audit’ on businesses they outsource to.Wal-Mart has taken a step
towards this by introducing a ‘packaging scorecard’ – to reduce packaging
across its global supply chain by 5% by 2013 – which rates suppliers on, among
other issues, their transport policy and renewable energy use.
On top of that, Chodzicki says, they should not ignore the environmental
aspect of oil security.There is talk of the U.S. restricting imports of oil that isn’t
‘green’, putting a question mark over oil derived from Canada’s oil sands.
Importing refined products, environmentally preferable to transporting
unrefined crude, could leave importers hostage to countries that refine. Even
home-grown energy security – ethanol produced from corn – has proved
controversial because of the environmental damage caused by its water use.
Believing demand will be restrained by higher prices and environmental
costs, Lodge is sanguine about supply bottlenecks. He says maintaining the
economy will be a priority so farming and railways will be given preferential
access to oil: rail is Tate & Lyle’s preferred mode of transport in the U.S.
The credit crunch will not,as some have hoped, miraculously ease supply
and demand. The shrinking economies are significantly more energy
efficient than those whose growth will slow. In North America, a 1% rise
in GDP raises industrial energy use by 0.3%; in China, a 1% rise boosts
industrial energy use by 0.7%.
Chodzicki warns, business can’t use the credit crunch as an excuse to delay
acting on the environment. “The credit crunch has pushed the environment
off front pages but it will resurface.The question then is: how much will extra
taxes and other government involvement in environmental protection add
to business’s energy bills?” ●
If you want to know more about the energy industry, go to KPMG’s energy
portal at kpmgglobalenergyinstitute.com
Every CFO is primed for the
question “How big’s your carbon
footprint?” But as alternative
energy becomes a marketable
reality, just knowing how much
your company contributes to
climate change isn't enough.
Understanding how you can
use new forms of energy – and
investment methods – to cut cost
and meet regulations will be
essential as the U.S. studies
mandatory carbon reduction
legislation and the EU aims for
renewable energy to make up
20% of consumption by 2020.
“Not knowing how your
carbon footprint breaks down
is risky,” says Richard Sharman,
Head of KPMG’s Carbon
Advisory Group. “In the past,
CFOs haven’t had to understand
the numbers associated with
electricity or energy use. But
these are crucial numbers.
Governments will mandate that
energy data sits in board reports,
and executive committees will
want to know about it.”
Managing this challenge
proactively means understanding
the potential of alternative forms
of energy, such as wind, solar
and geo-thermal power. Auditing
your energy use and buying
renewable energy is a good start,
says Sharman: “At the simplest
level, CFOs need to understand
the options, from building a wind
turbine on the roof of a factory to
looking at alternative energy as
an investment opportunity.”
“Businesses have a great
opportunity to act now,” says
Sharman. This might seem like
an unnecessary distraction, as
the credit crunch bites, but it's an
issue CFOs can't afford to duck.
New global investment
in renewable energy (US$bn)
9.8
7.1
9.8
19
79.2
23.4
Asset financing US$79.2bn
Public markets US$23.4bn
Small projects US$19bn
Corporate R&D US$9.8bn
VC & PE US$9.8bn
Government R&D US$7.1bn
Source: New Energy Finance
Source: Nasscom
100
21
Agendamagazine 29
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
c
acumen
Inventive innovation
Finding it hard to sustain growth in tough times? Jeff Weedman of Procter &
Gamble says smart businesses can work with rivals to ramp up product development
By paul simpson
Y
ou can read books about the virtues
of open innovation but for Jeff
Weedman, Procter & Gamble’s
plain-speaking vice president of
external business development, it boils down to
maths. “P&G employs some 9,000 researchers.
That sounds like a lot of knowledge. But there
are one and a half million scientists and
researchers in our subject areas. What would you
rather do – rely on the 9,000 or tap into the one
and a half million?”
This might sound easy, but Weedman says it’s
a huge corporate journey. “It’s going from ‘Not
Invented Here’ to ‘Proudly Found Elsewhere’,”
he says. “You can’t do that without leadership
from the top, a flexible approach to intellectual
property (especially from your lawyers) and
changing the corporate culture.”
But, Weedman says, it’s definitely worth the
effort. “It’s hard to create 4-6% organic growth,
year in, year out using the we-invent-it-all model.
But if you set a target, as our CEO A.G. Lafley
did, to source half your innovation externally,
you change the business model and you don’t
face the problem of spending more and more on
R&D with diminishing returns.”
When Lafley announced that target in 2000,
10% of innovation was external. Weedman jokes
that P&G’s Cincinnati head office was once so
open-minded it was dubbed ‘the Kremlin’. But
inspired by Lafley’s goal, that has changed. What
started in 1996 as a small intellectual asset
management group has morphed into a larger
external business development strategy unit that
has helped P&G double sales in the last decade
and achieve a 15% margin in 2008. P&G defines
success not by counting patents but by monitoring
how many ideas reach the market. More than
half its innovations are now ‘Proudly Found
Elsewhere’. To open up P&G, rules had to be
rewritten. All P&G patents can now be licensed
out either five years after they are awarded or
three years after they are first used in a P&G
product. Money raised from licensing flows back
to the units where the patent originated.
Weedman says: “Getting people to do things
they didn’t directly benefit from was tough.”
And P&G will explore any kind of innovation:
“It’s not just about technology. If someone has a
new idea about reaching consumers, that’s
innovation too.”
R&D spend is still high – around US$2.2bn
(€1.7bn) – but investment is more effective
under a model P&G calls ‘connect and develop’.
Weedman applies a few key criteria to each
new deal: “Does it work? Is it robust? Is it
proprietary? If I can figure out how to get around
someone’s intellectual property then someone
else probably will. Is it cost effective? Some cool
technologies can’t be turned into something the
customer will pay for. Is this a one-off? Or are
there other ideas in the inventor’s pipeline?” On
occasions,notably with homewares manufacturer
Clorox, P&G has struck up a partnership with a
company traditionally considered a rival.
He warns CFOs not to get too excited about
earning revenue from patents they don’t use (“If
you don’t want them, the chances are no one else
will”). But you may make money from a patent
you have a limited use for. For example, P&G’s
formula that helps the body more easily absorb
calcium, developed for Sunny Delight, has been
licensed to Tropicana.
For Weedman, the beauty of this model is that
such partnerships enhance both parties’ R&D.
He also found that ‘connect and develop’ has an
unexpected consequence: “Selling off old ideas
forces everyone to develop new ideas faster.” ●
“It’s hard to
create 4-6%
organic growth
year in, year out
using the weinvent-it-all
model. Open
innovation helps
you avoid
diminishing
returns in R&D”
Open sesame
P&G has its own
Connect and Develop
website at www.
pgconnectdevelop.com
where you can register
quickly and find out
which needs are driving
its development.
30 Agendamagazine
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
ANY OTHER BUSINESS
From Moscow to Hollywood, insights into the global business agenda
Q&A
What do you like most in a CEO?
Vision, someone who looks outward and isn’t
always focused on one element – like the numbers
– and who listens before making a decision.
Arturo Cornejo, CFO
of Hewlett-Packard
Russia, on CEOs,
surfing and the
grandeur of nature
And what do you like least in a CEO?
Impulsive changes of direction, without
consultation. It’s hard to reach your objectives if
you know they could change in two weeks time.
Tell us something nobody else at work knows
about you
I grew up in Lima, Peru, not far from the beach.
What do other managers not understand about
the finance function?
Fortunately, my colleagues at Hewlett-Packard
understand finance pretty well but in training we
discovered that some managers struggled with the
cost of capital concept – for example, the cost of
giving customers extra time to pay their debts.
What would you be if you weren’t a CFO?
A professional surfer.
2008
I n s i g h t s i n t o p r o g r e s s i v e i n t e r n a t i o n a l m a r ke t s
World Building Blocks
Focus Infrastructure
Hitting Headlines and
Bottom lines
Fighting Fraud and Corruption
in High Grow th Markets
Disengaging from Entrapment
“Next Eleven” Series – Part 6: Korea
What do you do to relax?
Scuba diving, surfing, skiing. I don’t get to do them
as often as I’d like but I find the grandeur of
nature helps to put things in perspective.
What do you like most about your job?
Having a visible sense of what’s going on in the
company, the country, and worldwide, evaluating
how this may impact our business and mitigating
the risks. I also like the fact that as a CFO, the
metrics of success are fairly clear.
Real Progress
Investments in Brazil
The importance of
preserving cash in
a downturn
Research into cash
and working capital
management
C AS H M A N A G E M E NT
The importance of preserving
cash in a downturn
Insights from 2008 research into cash and
working capital management
What do you listen to in the car?
Classical music mostly, I like Latin music and
progressive rock. My wife buys most of the CDs
and I’ve been listening to Andrea Bocelli a lot.
What has surprised you about Moscow?
The number of Mercedes and Rolls-Royces I see.
What advice would you give to someone at the
start of their career?
You’re going to spend most of your life working,
so do what you want to do. Don’t worry too much
about money at first. If you enjoy what you do,
work hard and are good at it, that will come later.
To receive a copy
of either of these
publications, please
send an email to
[email protected]
To find out how
KPMG firms can help
your organisation, visit
kpmg.com/succeeding
And finally...
The percentages
What’s on European CFOs’ agendas for the next six months? CFO Europe
Research Services’ report, The Strategic CFO, asked 117 of them:
Source: The Strategic CFO report, by CFO Europe Research Services, part
of CFO Publishing Corporation, in collaboration with KPMG in the UK
Are likely to
negotiate lower
prices with suppliers
High Growth
Markets 02
73%
32%
41%
See the Far East
as the biggest
regional threat
Of those expecting to expand in emerging markets are more
interested in gaining
access to those markets
than cheap labor
Heroic figures
Has Hollywood got it in for
accountants? A study by two
Ontario universities has found
that 61% of on-screen
accountants behave
unethically, and most are
just plain dull. The best the
profession can hope for, according to the survey
of more than 100 movies, is sweet-but-drab,
like Renée Zellweger’s Dorothy in Jerry Maguire
(above). Time for an all-action thriller starring
Colin Farrell as a wise-cracking, take-no-prisoners
number cruncher who faces down creditors and
proves that his shifty sales director’s revenue
forecasts are wildly optimistic?
Frank Gaglione/Getty Images. Everett Collection/Rex Features.
How long is a typical working week?
Probably 55 hours, sometimes more. But I also
regularly check emails on my mobile outside work.
Aren’t likely to use
bond issues to raise
capital, with up to 85%
likely to reject other
creative techniques
High Growth Markets
magazine
Insights into progressive
international markets
A DV I S O RY
Which book has influenced you in your work?
This is going to sound corny, but I have found The
Hewlett-Packard Way, written by our founders
Bill Hewlett and Dave Packard, inspiring. When
they grew the company in the 1950s, management
was still about automation and hierarchies and
they pioneered the open-door style – there were
no cubicles at Hewlett-Packard – and teamwork.
80%
Find out more
Agendamagazine 31
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. All rights reserved.