Fm23may2013 PDF

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com May 2013
Unilever CFO Jean-Marc Hut: the call for integrated reporting is rising
Mind Candy CFO Divinia Knowles on entering new markets
how to protect your reputation in the face of a scandal
Rogue traders
What does the recent spate of individual fraud cases tell us about companies attitudes to risk and how do you protect your organisation against rogue traders?
Financial Management | May 2013
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Illustration: Masao Yamazaki/Dutch Uncle
Members can provide first-hand examples of how CIMA changes lives
A word from the president
CIMA LinkedIn group: http://tinyurl. com/ahxyoda
ne of the most important facets of CIMAs growth strategy is the development of partnerships. Recently, both I and CIMAs managing director, Andrew Harding, made very successful visits to Southeast Asia. The work we carried out highlighted three important strands of the institutes strategy in attracting a growing number of members and students into the CIMA community.
The first strand is CIMAs partnership with its members. CIMA is committed to supporting chartered global management accountants by promoting their unique skills in helping to develop organisations that are both successful and sustainable. But, by their very nature, our members are experts in the field of management accounting and are the best people to spread the word about the benefits of studying for the CIMA qualification. We know that some members are already doing this, but there are many more who are in a good position to provide first-hand examples of how CIMA changes lives for the better. At the CIMA presidents dinner held in Malaysia and Singapore, I reminded members that they are powerful role models who can change other peoples lives for the better, as well as their own. This is true at both an individual and national level. I think I hit the right note. A number of members spoke to me later about how proud they are of being part of the global CIMA community and how they would make a concerted effort to be more vocal about this pride in the future. Meanwhile, Andrew Harding has been working on another strand of CIMAs growth strategy: moving into new markets. One of the most exciting developments to come out of the Southeast Asia region recently is CIMAs arrival in Myanmar. During his recent visit to this opening economy, Andrew secured agreements with the British Council and local colleges to promote and teach CIMA programmes. It is an ideal time for Myanmar to benefit from the prudent hand of management accounting. Andrew reports that there is great enthusiasm for our qualification there and a particular passion for promoting the qualification among members, some of whom studied for CIMA back in the 1960s. A third strand of CIMAs growth strategy is developing relationships with first-class academic bodies. At the end of last year we had a total of 17 research projects funded by CIMA at universities around the world. This approach
ensures that the quality of our syllabus is maintained wherever it is taught. It also allows us to forge research agreements that will further the science of management accounting. While in the region, Andrew signed a new agreement with the Centre for Governance, Institutions and Organisations (CGIO) at the National University of Singapore. The new agreement commits CIMA to partner the CGIO in its research and publish annual reports on state-owned enterprises in Asia over the next three years. This work will provide an important road map for countries in Southeast Asia and mainland China, where state-owned organisations play an important role in developing regional economies. As my presidential tenure draws to a close, I feel a great deal of pride in the work that CIMAs members, students and staff are doing around the world. Before I left the Sri Lankan leg of my Southeast Asian tour, I joined the finals of the CIMA Spellmaster competition. It was a joy to see so many young faces eager to learn and improve their potential. I am delighted that CIMA is helping to develop the skills of a future generation, among whom Im sure there will be a healthy number of management accountants.
Gulzari Babber, FCMA, CGMA CIMA president
at a glance
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Inform
A word from the president Gulzari Babber p3 Inform p915 Digest of the latest developments in management accountancy and beyond: Hot potato Ethical dilemmas resolved. Gen Y High-performance environments. Must read The Pirate Organization: Lessons from the Fringes of Capitalism
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Editors note
Financial Management has a fresh feel to it. Weve added some extra elements, including a regular big-name interview, and revamped the design in order to bring you as much stimulating and valuable information as possible in a visually exciting format. Our cover story looks at rogue traders. We examine the weakness of organisations and the psychology of rogue traders, even asking Nick Leeson who brought down Barings bank if it could happen again. In a world of ever-increasing risk we consider the approach to innovation at Unilever in an interview with the consumer giants CFO Jean-Marc Hut. Still on innovation, Divinia Knowles, COO and CFO of Mind Candy the games giant that has brought Moshi Monsters to 200 countries reveals how the CIMA qualification equipped her with the tools to create new business processes in one of the worlds most exciting companies. New features also include Led by finance, an insightful guide to how the finance function delivers change in major organisations. The insider view launches with India this month and Watercooler opens with a sideways look at that perennial bugbear the failure of IT projects to hit deadlines. We hope you enjoy the new-look FM.
I work on... Guiding sales teams to improve performance in South Africa p6 Thinking and opinion Diversification risk, plus Chris Giles of the Financial Times on devaluing currency p15 Led by finance Swee Leng Ng on driving gross margins at Kraft Foods China p17 The insider view India p18 The data Biggest rogue traders p21
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Study notes Why E3 candidates should practise IT-based questions, and the key to splitting a total variance p45 Tech notes Due diligence and bias, and the role of the treasury in risk and governance p55 CIMA events The calendar of CIMA events, including a summary of past events p61 What you learn on... The key performance indicators and Balanced Scorecard Mastercourses p62 The Institute Integrated reporting and a View from Professional Standards p63
Features
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Back
65-66
Rogue traders The biggest losses and what can be done to stop them p22 Jean-Marc Het Unilevers CFO on finances role in innovation p28 Avoid an identity crisis How companies are managing reputational risk in a digital world p34 Divinia Knowles The COO and CFO of Mind Candy talks Moshi Monsters p38 8 ways to... Improve corporate governance p42
CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com President Gulzari Babber, FCMA, CGMA Deputy president Malcolm Furber, FCMA, CGMA Vice president Keith Luck, FCMA, CGMA Chief executive Charles Tilley, FCMA, CGMA Head of media and communications Katie Scott-Kurti Financial Management is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ Group editor Jon Watkins Editor Lawrie Holmes Group art director Simon Campbell Junior designer Josh Farley Creative director Michael Booth Editorial director Peter Dean Chief sub editor Steve McCubbin Senior sub editor Graeme Allen
Lawrie Holmes
Please send your comments and ideas to editor@fm-magazine.com or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups
Account director Lisa Mills Group publishing director Rachael Stilwell Global sales director Hilton Young Advertising manager Philippa Mathers Email: Philippa. Mathers@seven.co.uk Tel: 020 7775 5717 Managing director Jessica Gibson Chief executive Sean King Chairman Tim Trotter Seven
The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/Seven. All rights reserved. Origination by Altaimage London. Printed in the UK by Wyndeham Press Group. Subscriptions: subscribe@fm-magazine.com Tel: 01580 883841 45 (UK), 54 (Europe), 72 (rest of world). Back issues: 7.50 (UK) 10 (rest of world) including postage, subject to availability. All payments should be in sterling drawn on a UK bank.
CIMA CEO column Charles Tilley p65 Watercooler p66

Head of pictures Martha Gittens Acting picture editor Louise Fenerci Picture researcher Alex Ridley Production manager Michael Doukanaris
www.cimaglobal.com
[HP by numbers]
$126.4bn
Name: Ian Smulders, ACMA, CGMA Company: HP Role: Enterprise business finance manager Industry: IT and professional services Location: Durban, South Africa Start date 2010 End date Ongoing Location Durban, South Africa (pictured) CIMA qualified: 2006
2012 revenue
$11bn
Goodwill and intangible asset impairment associated with acquisition of Autonomy
2012 loss
$8.8bn
Global workforce
350,000
compile high-quality information from clients. Part of the work involved making sure sales professionals understood that this information would be used not only to improve overall intelligence on the market, but to give them the means to close more and better deals. It gave sales teams the chance to construct their own P&Ls and showed them how and where they needed to improve their efforts. As a result, salespeople began asking me if I could attend customer meetings for a number of reasons. For example, I could talk to the finance director of the client if they were present, or help with contract negotiations. My role has changed to become increasingly more customer-facing as a result of my ability to translate detailed financial information into effective sales material and demonstrate and articulate the benefits of doing business with HP in a way that makes sense to other senior finance leaders. The impact of this has been a dramatic fall in bad debts and a drastic increase in returns on large deals in hardware infrastructure and professional services. My CIMA qualification has helped me all the way in this process. It has given me the confidence to make key decisions and better understand the broad range of financial implications that each decision brings. This understanding also means I can clearly explain the reason behind decisions to finance and non-finance people alike.
I work on... Guiding sales teams to improve performance
Having worked in sales for a number of years I moved into a role between finance and sales at computer hardware provider Compaq (acquired by HewlettPackard (HP) in 2002), which gave me a real interest in how the finance function works. I then home-studied for my qualification while based in the UK and settled into a series of roles in finance my last pure finance role was looking at the balance sheet and forecasting for the EMEA region.
I then began a business practice finance role, which coincided with a move back to South Africa in 2010. It was at a time when HP was going through a huge amount of change. In this role I started to look more closely at the approach of the sales force to achieve better returns at a lower cost. A small core management team put together the structure for the plan, which set out to not only empower the sales team, but also encourage it to
Alamy
INFORM
Bonds analysis reveals full impact of financial crisis
he global pool of government bonds with AAA status from the three main rating agencies, the bedrock of the financial system, has shrunk by more than 60 per cent since the financial crisis began. The crisis triggered a wave of downgrades across advanced economies, while the expulsion of the US, the UK and France from the nine-As club has led to a contraction in the stock of government bonds deemed the safest, from almost $11trn at the start of 2007 to just $4trn now, according to analysis by the Financial Times. The shrinkage has resulted in a dramatic redrawing of the world credit ratings map, which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of safe assets. While US and European government downgrades have dominated headlines, the FTs analysis highlights the series of upgrades across much of the rest of the world especially in Latin America. Topping the list in the scale of credit upgrades since January 2007 are Uruguay, Bolivia and Brazil. The biggest downgrades were in crisishit southern Europe, with Greece seeing the steepest drop. Read our recent feature on ratings agencies at: http://tinyurl.com/cd2w3be
news/opinion/comment/insight/analysis
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HOT potato
Women taking more senior roles

growing number of women have been moving into senior roles over the past three years, according to the Grant Thornton International Business Report (IBR). However, progress in the number of women being appointed to senior roles is slower in the G7 group of developed economies (US, UK, France, Germany, Italy, Canada, and Japan), where economic performances have been faltering, than in the high-growth economies of Asia. The IBR data revealed that globally, 24 per cent of senior management roles are now filled by women. This is up from 21 per cent in 2012 and 20 per cent in 2011. However, the G7 economies come bottom of the league table, with just 21 per cent of senior roles occupied by women. This compares to 28 per cent in the BRIC economies (Brazil, Russia, India and China), 32 per cent
This months dilemma

The dilemma I have noticed a large overpayment from a customer on my clients accounts. Although I have pointed this out and advised the client to notify and repay the customer, it seems this action still has not been taken and more than six weeks have now passed. OUR RESPONSE Ensure that you have advised the client in writing and advise them again that a repayment should be made. This would ensure you are upholding integrity (section 110). You may also wish to refer to your contractual terms to ensure that the clients actions (or non-actions) are not a threat to your professional standing (210). If they are not taking any action, you may have to consider disengaging (220.5). Tanya Barman, head of ethics, CIMA For the code and other online ethics resources, visit www.cimaglobal/ethics Disclaimer CIMA does not provide legal, investment, professional or career advice. No responsibility or liability whatsoever is accepted for any error, omission (whether or not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made.
in South East Asia and 40 per cent in the Baltic states. Francesca Lagerberg, incoming global leader of tax at Grant Thornton International, commented: Women are playing a major role in driving the worlds growth economies, bringing balance to the decision-making process and the smooth running of their companies. In comparison, the mature economies of the G7 are now playing catch-up. They need to wake up to gender disparity and add this crucial ingredient to long-term growth and profitability. To download the full report from Grant Thornton, visit: http://tinyurl.com/c3rga7c
Finance managers should enter cloud with caution
he majority of UK finance leaders believe responsibility for the protection of business data placed in cloud data storage rests with the service provider, despite EU law placing accountability for lost or compromised data firmly in the hands of the data owner. Thats according to research carried out by Iron Mountain, which also revealed that more than 35 per cent of finance managers believe it is appropriate to store confidential accounts, invoices, insurance claims and tax records in the cloud, compared with 32 per cent of IT managers. Finance managers are also less likely to worry about data protection than IT professionals (49 per cent compared to 55 per cent), security and compliance issues (45 per cent compared to 49 per cent), and whether or how data might be copied and moved around (23 per cent compared to 25 per cent), the survey found. Christian Toon, head of information risk at Iron Mountain Europe, said the results show
that Europes financial decision-makers could be embracing the cloud without fully grasping the risks and implications. Lose or leak your information in the cloud and your business is ultimately responsible, he said. It is important to note that cloud storage does not replace the need for a comprehensive archive and backup strategy. With financial departments under immense pressure to cut costs and improve efficiencies, the cloud can seem an attractive opportunity. We would encourage businesses to consider the cloud, but not to do so indiscriminately. A lack of understanding of the risks associated with cloud storage can lead to ill-considered strategies that could expose businesses to data breaches and the associated financial and long-term reputational impacts. The survey also revealed that 85 per cent of UK business managers have either moved data into the cloud or plan to do so in the next 12 months.
Ethical culture vital to success
lobal businesses must adapt to a world of fragmented and shifting ethical contexts and have no alternative but to create an ethical business culture, according to Dick Olver, chairman of BAE Systems. Speaking about the decade-long culture change he has embedded at the defence giant, Olver told delegates at a recent CIMA/Tomorrows Company event that it is also essential that businesses obtain buy-in from the top if a culture change is to be successful. To sustain its licence to operate across different markets, a global company must adapt to a world of fragmented and
shifting ethical contexts, while fulfilling its underlying responsibilities wherever it operates. In my view, the only way to achieve this is through shared values that are applied consistently worldwide, and which are continually reinforced and improved over time, he said. All of this boils down to two things. First, an ethical business culture is vital there is no alternative. Second, building that culture is not a single step that can be taken and then forgotten about, but an ongoing voyage where the destination is always just over the horizon. The culture change at BAE Systems recently saw the organisation ranked fourth out of 129 companies in Transparency Internationals defence industry anti-corruption index, and Olver rejected the view that there is a conflict between good business behaviour and strong financial returns. A trusted reputation for principled business conduct delivers hard benefits to the bottom line. There is growing evidence that firms with codes of conduct perform better overall than those without one, he said.
Gallery Stock, Getty Images
We asked... Should external auditors be automatically rotated?

Source: www.fm-magazine.com
poll of the month
Yes, frequently (less than every 10 years): 79%
Yes, but infrequently (every 10 years or more): 9%
No forced rotation: 9%
Dont know: 3%
What the poll says... Tendering for audit appointments once every seven years has been voted through by the European Parliaments Economic and Monetary Affairs Committee (Econ). A staggering 79 per cent of respondents to the latest FM online poll agree. The move would define a huge shift in company/auditor relationships. The average tenure for an auditor of a British FTSE 100 company is 48 years.
on cgma. org
For CGMAs, the following content is now available online
Eight ways to get out of a career rut People sometimes feel as if theyre going nowhere at work. This is usually due to a combination of factors, such as inertia, disengagement, a lack of clarity about goals or a dearth of opportunities. But how do you get your career back on track? Rhymer Rigby, author of The Careerist: Over 100 Ways to Get Ahead at Work, offers tips to escape the rut. http://tinyurl.com/cqjkvrg Sound governance needed to get the most out of big data The increase in volume, velocity
and availability of big data can create growth and efficiencies for organisations, but it also presents risks. Strong corporate governance is needed to capitalise on the opportunities and minimise the chances of unintended consequences arising from big data use. http://tinyurl.com/c5zz38n Charles Tilley interviews Jean-Marc Hut CIMA chief executive Charles Tilley writes a regular column for CGMA.org, entitled One-to-one: Top tips from the boardroom. In the latest from this series,
Charles asks the subject of our feature on page 28, Unilever CFO Jean-Marc Hut, for his boardroom views. http://tinyurl.com/cmtfljp UK investors, companies prefer simpler pay disclosures UK investors and company executives favour reporting for director and executive remuneration that is simpler than what UK regulators have proposed, according to a new report by the UK Financial Reporting Council (FRC) financial reporting lab. http://tinyurl.com/bualqot
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High-performance environments
Karl Aherne sets out five critical areas of focus when creating high performance
Success is all about creating the right environment to drive performance. Creating a high-performance environment is crucial, with near-endless choices and decisions. Above all, high performance is about outcomes, not output. If you dont have a measurable outcome then youre doing something wrong. Five critical areas worth focusing on are:
1 The macro environment Its essential to identify the best physical location that will provide your start-up with every advantage possible. 2 Collaborative workspace Your workspace should empower and help you to drive your business forward. The environment should be highly challenging but supportive. Anything else will be either too adversarial, ambivalent or too soft. What youre looking for are critical friends who will tell you when you stink. Get the pain upfront and early. Suck it up, its better in the long run. 3 Peer review Its sometimes said that the best entrepreneurs have some form of attention deficit disorder. This is one reason why many high-growth entrepreneurs set milestones. Often, the entrepreneurs mind is constantly moving onto the next thing so its important to stay focused and deliver. At Wayra Ireland, one of Telefnicas start-up accelerators, weve developed an effective way of helping entrepreneurs drive momentum. At its most basic, we start with a long-term vision, then break it down into smaller milestones based on key challenges. At the fortnightly objectives sprint, Wayras cohort of start-ups each take a turn to present to the group on how they performed against their objectives set two weeks previously. There are usually three or four objectives that are specific and challenging.
Once the start-up founder has explained to the group to what degree they have delivered on their objectives, the other start-ups score them between zero and ten. The scoring is confidential, reducing the risk of friendly voting.
4 Testing your innovation levels As an entrepreneur you should test your level of innovation (and get some talented critical friends to do it with you). First, check whether your product is going with the flow. Figure out what the ideal final result is for your customer. That usually means a product that is available whenever it is needed, does the perfect job and has no cost. Now, is your product moving the current customer experience in that direction? Is it flowing in the right direction or is it going against the customer flow? If your product is in flow with the customers ideal final result, then check it is in flow with the market. Every product/technology has a life cycle often illustrated as an s-curve with five stages: introduction, improvement, growth, optimisation and decline. 5 Measuring your outcomes, not your outputs Who cares how many meetings youve had? The question is: have the outcomes from those meetings impacted your business? If they havent, then you should stop talking and start driving impactful outcomes. When you have impact, then you can communicate it to your team, your customers and your investors. In turn, that will drive more impact and more positive outcomes. The trick is to measure your impact. This will help you to course correct and its been said a million times, but what gets measured, gets done because if you dont measure results then you cant tell success from failure.
By Karl Aherne, executive director at Telefnica, Wayra Ireland
Illustration: Mitch Blunt/Dutch Uncle
must read
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Rethink on piracy
The authors provide a prcis of The Pirate Organization, arguing collaboration with pirates could drive innovation
The Pirate Organization: Lessons from the Fringes of Capitalism Rodolphe Durand (HEC Paris) and Jean-Philippe Vergne 14.99 Harvard Business Review Press
recurring motif in economic history, portrayed in The Pirate Organization. With each great capitalist revolution orchestrated by states that impose their norms on property and exchange in the name of their sovereignty we see a new, corresponding form of organised piracy emerge, whether it be at sea, via radio waves or on the internet. This constitutes a historical motif that is essential to capitalist dynamics and penetrates a whole collection of peripheral, dissenting and innovative organisations at the heart of state-company relations. In effect, the actions of pirate organisations have highlighted the evolution of capitalist societies ever since the discovery of America. Since then, with every industrial revolution, sovereign states have either granted or passively allowed monopolies to bloom in order to control the economic flux generated at the heart of new capitalist territories. Pirate organisations consistently challenge this
Bill Gates, founder of Microsoft @Bill Gates Still work to do, but Im incredibly optimistic when it comes to Africa. Christine Lagarde, managing director of the IMF @lagarde Recovery comes from co-responsibility Ireland and Europe together.
modern-day pirate is back. At the beginning of the year internet entrepreneur Kim Dotcom launched Mega, a file-sharing e-firm, replacing its predecessor Megaupload, which peaked as the internets 13th most popular site and was responsible for four per cent of all online traffic. A year ago, the FBI stepped in to question Dotcom and others in New Zealand. Following an armed raid he was arrested for alleged online piracy, including racketeering, conspiring to commit copyright infringement and conspiring to commit money laundering. Upon being bailed, Kim Dotcom started to mastermind a new version of Megaupload, avoiding the flaws of the first version, with each subscriber becoming responsible for their own data. Among others, this battle over intellectual property (IP) rights signals a
state of affairs and have introduced the very innovations that are most in line with society, but contradict established firms ownership rights. The Kim Dotcom affair highlights the importance of rethinking laws on IP and on the creation and distribution of cultural goods. There can be no capitalism without sovereignty and without rules. But equally, if we allow the regulation of territories and the normalisation of exchanges to continue to surface, then even more spaces will be created for pirate organisations to nestle into. Some pillage and plunder, others radically innovate and some do both. The challenge lies in unearthing and legalising the initiators of radical innovations and in simultaneously fighting the thieves. Perhaps one way of resolving this could be by actually trying to work with the pirates who push the limits of capitalism with their radical innovations that promote new modes of exchange and embody new values.
Ngozi Okonjo-Iweala, finance minister, Nigeria @NOIweala How do you transform the economy? Youve got to provide the basic infrastructure for people to transform their own lives. Richard Branson, entrepreneur @richardbranson It takes initiative, bravery & resourcefulness to become an entrepreneur it takes Gumption.
Twitterati
Getty Images
What business leaders have tweeted recently on the subject of driving innovation and collaborative working
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Thinking
Toronto Rotman School of Management on The Bright Side of Diversification Risk
oncerns over excessive risk-taking in corporate America have become prevalent since the global financial crisis began in 2008. These concerns have led to regulatory attempts to rein in excessive risktaking. However, executives worry that the proposed rule changes may stifle companies ability to grow or, in the case of banks, their ability to maintain liquidity. A worst-case scenario might see the federal government create a better regulatory mousetrap to prevent excessive risk-taking, only to have companies hire lawyers to circumvent the mousetrap, resulting in the same excessive risk-taking behaviour we started with. There may, however, be a more palpable remedy: employee ownership in the form of an equity stake for non-executive employees.
Opinion
Chris Giles, economics editor, Financial Times, says countries are understandably tempted to devalue their currency in a bid to boost exports. The danger, he says, is that nobody wins...
s it a foreign exchange reserves fight? Is it a quantitative easing quarrel? Yes, its the latest instalment of the international currency wars. First coined in 2010 by Guido Mantega, the Brazilian finance minister, the phrase currency wars has no formal definition. Simply stated, however, the danger is that many countries will simultaneously and covertly seek a lower value for their domestic currencies to boost their export industries. Countries on Earth cannot export to Martians, so if one country improves its trading performance, another must be importing more or exporting less. The currency wars threaten destabilising volatility in exchange rates and, ultimately, trade wars and protectionism. That way, everyone would be a loser. Even though long-term economic success is rarely determined by exchange excessively risky strategies, employees with an equity stake in their company are more likely to say, Not on my watch, than those without a claim. A reasonable concern remains over the diversification risk that arises when employees invest in company stock. Nevertheless, given the recent concerns over excessive risk-taking in corporate America, even this lone drawback appears to have a bright side. While various stakeholders continue to debate the merits of new regulation that seeks to curb excessive risk-taking, the most cost-effective solution to corporate Americas appetite for risk may be waiting patiently, unutilised, on the shop floors of America.
Francesco Bova is a Louis O Kelso Fellow and an assistant professor of accounting at the University of Torontos Joseph L Rotman School of Management. Along with Kalin Kolev, Jacob Thomas, and Frank Zhang, all of the Yale School of Management, he has recently written the working paper Non-Executive Employee Ownership and Corporate Risk-Taking.
Decades of research have suggested that when nonexecutive employees have an equity stake, productivity goes up Its possible, however, that some diversification risk has an upside for the economy, given current regulatory concerns over excessive risk-taking. Specifically, as diversification risk increases, so should the incentive for employees to mitigate risk-taking at work. Furthermore, recent research based on survey results from a national sample suggests that employees with an equity stake in their company are more likely to have greater decision rights at various levels throughout the company than their counterparts without an equity stake. Taken together, as equity stakes for employees increase, employees should both become increasingly cautious and have a bigger impact on decisions. Recent evidence supports this claim and finds that larger equity stakes for non-executive employees lead to less subsequent risk-taking by firms. In more practical terms, the results imply that when executives are inclined to suggest
rate weakness, when growth is almost impossible to find in advanced economies, the short-run incentive to seek currency depreciation is irresistible. Faced with households who have borrowed too much and governments imposing austerity to pull their public finances out of the mire, increasing exports or reducing imports is the obvious route to growth. The tools are also easy to define. You dont have to manage your exchange rate and foreign exchange reserves like China to make your exports more competitive. Monetary policy, through lower interest rates, can have the same effect. Quantitative easing the creation of money to pump into an economy through the purchase of assets is a particularly powerful weapon as it releases money into the hands of the private sector, which will often flow into foreign assets, thereby weakening the currency. Depressing your own currency is much easier than propping
Benefits of equity
Research suggests that providing an equity stake to non-executive employees increases productivity, reduces turnover and leads to both workers and owners being better off. However, a key concern with employee ownership is that it leads to an increase in diversification risk for employees. Diversification risk arises because the returns from an employees investment in company stock and an employees human capital (i.e. an employees collective set of skills that he/she uses to generate future employment returns) are closely connected. To understand this tight bond, think of a firm like Southwest Airlines, where employees own a large equity stake in the company and have a lot of firm-specific skills that are not readily transferable. If Southwest goes bankrupt, not only do the workers lose their equity stake, they also lose that portion of their human capital that wasnt portable to another job.
Illustration: Karolin Schnoor /Dutch Uncle
Illustration: Lyndon Hayes/Dutch Uncle
Chris Giles is the economics editor of the Financial Times. He reports on international and UK economics and writes a fortnightly column on the UK economy.
up an exchange rate under attack. It is into this zero-sum game that international diplomacy treads. Countries meet at the International Monetary Fund and the Group of 20 and regularly agree not to target exchange rates for competitive purposes. But these are merely paper commitments and seem never to impede the action of any member or non-member. Although this is likely to be an accurate and depressing portrayal of the importance of the IMF and G20, we also have to answer why the exchange rate skirmishes since 2010 have been so muted if the motives and tools are so clear. It is likely that countries accept that open currency wars would be a disaster for everyone and have therefore limited their own aggressive instincts. The most open acts of aggression Switzerlands cap on the value of the franc in 2011 and Japans occasional currency interventions have come after sustained appreciation when their respective exchange rates appeared too high. Most lesser acts of currency war quantitative easing in the US and the UK, and the cheap refinancing operations for European banks come in the context of domestic action to boost growth, so the currency consequences can be plausibly denied as a leading motivation. Chinas trade surplus is falling rapidly, taking the heat out of the US/Sino tensions. Higher Chinese wages and inflation have led to a rapidly appreciating real exchange rate for the renminbi. And the prevalence of unpredictable market exchange rates has prevented policies always having the expected effects on exchange rates. While the big players realise that they cannot act with impunity on currencies, the global currency war will remain difficult and noisy but disaster will be averted. It is a messy prospect, but peace is not likely any time soon. A full armistice will come only when advanced economies emerge from the mire and lose the motive to act. That is not yet on the horizon.
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Led by finance
Swee Leng Ng, FCMA, CGMA, CFO of Kraft Foods China since 2008, oversaw Project Eagle, which focused on driving gross margins, cost savings and improving productivity in the groups China operation
Background: Just after we finalised our 2012 budget, and before wed even started the financial year, we were hit by a severe external environment. Inflation hit a record high, the price of raw materials such as oil, wheat, coffee beans, sugar and cocoa rose by between 15 and 30 per cent, while the cost of labour increased 20 per cent. As a result, our P&L was at risk and we faced significant pressure on our gross and profit margins. We realised we had to act with a sense of urgency, otherwise profits would be adversely impacted by 20 per cent. Project Eagle was subsequently formed and was tasked with finding opportunities to close the 20 per cent profit gap. A board meeting was called to discuss the issues. Its recommendation was to form a cross-functional project team comprising members from finance, sales, marketing, manufacturing and R&D to tackle the issue.
Rationalisation of stock-keeping units was a major aspect of the action plan
Action: Within a month, the project team came up with the following action plan: 1 Assessment of pricing. Adjust the size of selected products without impacting consumer uptake. 2 Rationalisation of stock-keeping units (SKUs are the main product lines in the business) delisting low-margin and low-volume SKUs to improve the overall portfolio mix. An ongoing process to eliminate wastage and drive productivity was run across the production line at the same time (I put in place a project team to look into this across every line of P&L when I started the role in 2008). The project team then launched the implementation plan. A weekly meeting gauged its impact, monitoring and tracking progress.
Mapping out the process: We started with an assessment, identifying the root causes of the issues. A brainstorming meeting was held to gather ideas and resolutions, and to identify goals and strategies. A set of milestones to achieve those plans were discussed and a clear action plan and timetable drawn up.
The strategy was built around a model of collaborative working
Business segments involved: In my team, the financial planning and analysis manager led the project, while two analysts from finance were also involved. Throughout the project almost every department manager in Kraft China be it marketing, R&D, production or supply chain (all responsible for the P&L of the Chinese business) worked together with the goal of achieving the productivity target.
Illustration: Stuart Daly /Dutch Uncle
A brainstorming session was followed by the setting of milestones to ensure actions were met on time
Completion: The initial project, which had a significant impact on the companys performance, was completed within three months, with another three months to completion. A lot of details needed to be resolved during the second phase, with help from marketing, R&D and manufacturing. The observation from Kraft Foods executives at the Chicago HQ was that the execution was flawless and was achieved in a fast and cost-effective manner. This is in a business that has seen annual revenue in China increase three times between 2008 and 2012.
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The insider view: India

In the first of a series of new features, FM examines how business is carried out in countries around the world, with local experts acting as business guides
From a macro perspective, Indian business culture is a mixed bag of traditional entities and emerging transnational or multinational companies, says Ravindran Balakrishnan, ACMA, CGMA, chief financial officer of medical supplies giant International SOS, India. There are Indian entities that have been in existence for more than 100 years that have slowly but surely crawled along to keep pace with the present-day situation. Yet there are numerous Indian outfits that have either ceased to exist after failing to keeping up with the times, or have disintegrated because of splits in family-run businesses, he says. From a statutory standpoint, the messages are mixed and there is no indication of a clear and long-term policy by the government to woo foreign direct investment inflows, says Balakrishnan. The retrospective implementation of taxation laws has not helped and many international organisations and governments are concerned about the policies and regulations of the Indian government in the long term. Much of Indian business culture extends back to the time of British rule, explaining why English is the common language, says Arati Porwal, chief representative of CIMAs India Liaison Office. Much of Indian business resembles the public sector, she says, as a large part of industry, including insurance and banking, is publicly-owned following a major nationalisation programme in the 1950s. Although large chunks of industry have now been privatised, this only happened quite recently. The result is that India has a very bureaucratic way of doing business, especially in the oil, natural gas, insurance and banking sectors. This is tempered in areas such as IT, where technology has made for a flatter structure, and also in areas such as very large banks, where multinationals are dominant, says Porwal. In this climate, the designation you carry is important, says Murali Sundaram, national head of enterprise relations at CIMA India. Where you are in the hierarchy matters. Because career advancement is considered important, multiple layers are often created to retain people, while status in the form of education plays a significant part in business life, so multiple qualifications can appear on business cards.
business tips for india

The mechanics of doing business in India have been determined, to some extent, by the condition of the countrys infrastructure, says Arati Porwal, chief representative of CIMAs India Liaison Office. As a result, things are quite slow, she says. Meetings do not always start or finish on time. You also have to be prepared for the agenda to be changed at the last minute, while respect for deadlines is not as high as it is in the UK and the US. However, Ramanuj Kankani, head of finance and company secretary at chemical group Solvay Specialities India, says when it comes to meeting deadlines, Indian workers can manage, even if it means working extra hours. In fact, some people only demonstrate their real worth and skills during a crisis, he suggests. As a manager, you need to continuously push the team to be as systematic and organised as possible, and at times you may be required to keep track of important items remaining in to do lists in the team; otherwise, there is every chance that some of these points will go missing. Ravindran Balakrishnan, ACMA, CGMA, chief financial officer of medical supplies giant International SOS, India, says personal contact is regarded as the standard way of doing business. More often than not, it is easier to do business through good contacts, he says. This is because at a high level people are connected through networking, business demands, associations and the like. At the middle level, contacts are also important in getting routine work done without difficulty. Balakrishnan advises developing strong contacts in associations, financial institutions and government organisations, which eases the way in which business is conducted. This is not to construe the prevalence of bribery or corruption, but is more about the contacts business people make in their professional life. Kankani says being too transaction-oriented may not be the right way for India. You need to be relationship-based to be successful in business in India as it is important to find the right partners. In some respects, there is a blurring of personal and private life, especially when it comes to issues such as the marriage season (which runs from September to January), says Porwal. Workers like to be recognised for accomplishments much more so than in other countries and expect their managers to understand that. There is also a strong respect for hierarchy and bosses are often called sir, while junior members of staff are not expected to speak freely. Lastly, there is a natural instinct in Indian workers to say yes rather than no, which is considered very rude, even if appropriate.
Contact
Arati Porwal, chief representative, India liaison office, CIMA Email: india@ cimaglobal.com
[INDIA by numbers]
Management style
Mark Bevan, FCMA, CGMA, assistant vice president of finance at JCB India, says the management information provided in India tends to be data rather than information. Analysis and interpretation are often left for the receiver to make, he says. Performance management is not strongly practised. Management styles are more directional, not discursive, and this is accepted. More organisations are progressing towards a matrix structure, meaning more people are involved in decision-making and running the business. This gives rise to more transparency and sharing of information, which in turn brings efficiencies in the system and makes room for continuous development. Even big organisations are changing their management style to transparency type, which allows middle-level managers to take part in the decision-making process and keeps them in line with the organisational changes and outlook. Managers also feel responsible and connected with this style. Ramanuj Kankani, head of finance and company secretary at chemical group Solvay Specialities India, says: Cost-consciousness is one thing that can be felt in almost all the functions of a business organisation in India. People do appreciate the importance of being cost-efficient. The flip side would be that management has to be very assertive and alert to ensure that safety and quality never get compromised in the process. The variety of cultural norms, languages, religions and beliefs makes it absolutely necessary to customise the product for different segments and different consumers, ensuring at the same time to keep it affordable for the masses in order to reach millions of consumers.
$1.94trn
India is the worlds largest economy Indias growth rate in 2012
GDP for India in 2012
4th
Indias trade deficit for April 2012 to February 2012 was estimated at $182bn, which was higher than the deficit of $170bn during April 2011 to February 2012. Source: Government of India: Ministry of Commerce and Industry
Trade balance
Infrastructure
India has the worlds third largest road network, covering more than 4.3 million km and carrying 60 per cent of freight and 87 per cent of passenger traffic. Indian Railways is the fourth largest rail network in the world, with a track length of 114,500km. India has 13 major ports, handling a cargo volume of 850 million tonnes in 2010.
Sources: CIA, Indian Ministry of Road Transport and Highways, The World Bank
Agriculture
5.3%
Population
main sectors
Service industry 57.2% Industrial 28.6% Agricultural 14.6%
(Source: OECD)
CPI inflation in 2012
1.24 billion
Gallery Stock
10.56%
Industrial
Service industry
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The data
ogue trading is a global phenomenon, with some of the biggest crimes committed in North America, Europe, Asia and Australasia. As far as punishment goes, there appears to be little consistency in relation to the size of the losses. The graphic shows (in US$) rogue trades that have been publicly revealed there may be similar or bigger losses that have either gone undiscovered or kept under wraps. Illustration by Leandro Castelao
Biggest rogue traders
Source: National Association of Insurance Commissioners (Numbers 1,4,5 and 9 converted to US$ as of 26/3/13). * Formerly Daiwa Bank
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rogue traders
T
By Simon Watkins
The Austrian state of Salzburg is investigating whether a rogue trader may have lost 3bn of public money. FM looks at how the terrifying phenomenon of the rogue trader has already led to huge losses at some financial institutions and what can be done to stop them in the future
he financial rogue trader has become almost a legendary figure of the modern world. A lone character, driven by greed, fear or some personal demon, gambles billions and brings down the bank. It is a familiar image one that Hollywood has adopted wholesale. But it may be an example of a type of behaviour that is more common than we think and one that can be found in many walks of life. Andre Spicer, professor in organisational behaviour at Londons Cass Business School, draws an intriguing comparison between the outlaw bank trader and disgraced cyclist Lance Armstrong. There is a huge parallel between bank trading rooms and high-performance cycling, says Spicer. Both have become elite cultures of extreme performance. The people in both fields are addicted to this intensity. So is that the core of the rogue trading issue? If so, can it be eradicated, or at least curtailed? And what about the traders themselves and their bosses are they untrustworthy or fools? The litany of rogues is familiar. Nick Leeson, a derivatives trader in the Singapore offices of Britains Barings bank, racked up losses of 827m. In 1994, that was enough to destroy Barings. Then there is Jrme Kerviel, the French trader for Socit Gnrale who, again trading derivatives, lost 4.9bn (4bn) in the three years to 2008. Kerviel was subsequently sentenced to five years imprisonment. Like Leeson, Kerviel never denied his activities, but he has always insisted that his bosses knew exactly what he was doing. The claim that the bosses knew is a common feature of rogue trading cases, including that of Kweku
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Adoboli. He was sentenced to seven years in prison in November 2012 for rogue-trading activities at the London offices of Swiss bank UBS, which cost the bank 1.4bn. These cases are well known because the losses were so huge and because it became a subject for the authorities. However, traders who exceed their authority are much more common than just these three cases, but it may not always result in big losses. In some cases it may even create a profit. Such traders may or may not be punished. They certainly do not make headlines. Nigel Harman, partner at KPMG, helped UBS in its internal investigation into Adobolis activities. He cannot discuss the case, but he agrees that low-level misdemeanours have been more common in the past. It is certainly true that traders sometimes take positions outside their authority, Harman says. And it is certainly true that if they were found out in the past they may have got just a slap on the wrist as long as they had not lost any money. But that is changing more banks are now moving to a culture where if you do anything you are not supposed to, you just get fired. In most banks, that was not necessarily the case five years ago. Harman is doubtful whether rogue trading-types can be spotted among other traders. I would say not. If you look at Adoboli, he was a gregarious sort. But then you look at Kerviel; he was far more introverted by all accounts, a very private person. So I dont think there is a single type.
Rogue trader Kweku Adoboli, who cheated Swiss bank UBS out of over 1.4bn, was sentenced to seven years imprisonment
In the past they may have just got a slap on the wrist as long as they had not lost any money
And I do not think money is the first and foremost motive. It has more to do with personal issues the desire to look good among your peers. Even so, a lot of traders are narcissistic risk-takers, but they are not all rogue traders, Harman says. Andre Spicer at Cass agrees there is not much that sets the rogue apart. It is often said that these people are simply of a criminal type; morally corrupt people who happen to find themselves in a bank. This is wrong. Their profile is actually very like that of the other people around them in the bank. What about the culpability of the banks? Nick Leeson is clear that the rogue trader is a criminal, but the bank that suffers from a rogue trading loss is still partly to blame. Any example of rogue trading highlights the failings of the organisation and suggests there are considerable flaws in the way business is transacted, he says. But there is a difference between sharing some blame and being knowingly culpable. Harman at KPMG is dismissive of claims by rogues that their bosses knew about or sanctioned their activities. The rogues tend to be very convincing people, that is how they have been operating as a rogue trader. But they all show signs of very deliberate covering up. That shows they did not really think people knew what they were doing. Maybe they convince themselves. Maybe these people really are sitting there thinking, They let me do it, its their fault, and they manage to absolutely deceive themselves. But this does not let banks off the hook. The role that banks play in fostering rogues is to do with corporate culture. Spicer returns to his analogy with cycling and a culture of extreme expectations. The people in trading often work incredibly long hours 80 to 100 hours a week and this is how you get ahead. People can maintain that for a few years, but then it starts to have a very serious effect on mental health. There was a study by the University of Southern California that showed that after about five years of working like this people suffer mental or physical breakdowns and one result of this is very poor judgement. If you look at the Kerviel case, he had not taken a holiday in three or four years. The apparent hard grafter, always in the office working long hours and never taking holidays, arises again and again when looking at rogue trading. It is made worse because the rogue may feel they cannot leave the office or take a holiday, otherwise their fraud will be discovered. Adoboli and Kerviel were both notorious for working long hours. Adoboli was arrested late at night at the UBS offices in London, long after his colleagues had gone home. This pattern is also familiar outside the hothouse environment of investment banking. In Austria, the federal state of Salzburg is currently dealing with its own rogue trader case that emerged just before Christmas.
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It concerns Monika Rathmayer, who was hired in 2001 to make investments for the regional government. It is alleged that in 2006 Rathmayer made huge losses on Icelandic government bonds. She is said to have set up a complex system to cover up the loss, including 253 unauthorised derivatives trades. Total losses are reported to be 3bn. Rathmayer had taken no holiday since the loss in 2006. Rathmayers case notable because it shows that public-sector bodies can also be prone to problems became public in November and is yet to come to trial. Rathmayer insists that her bosses knew about the losses and her efforts to conceal them. What sometimes gives credence to the view that bosses must have been aware of rogue activities is that the scale of losses is so huge. Surely it could not be a secret? Spicer is clear that the explanation for this is the bosses stupidity. He does not mean classic bottom of the class idiocy, but a refined version which he and colleague Mats Alvesson have dubbed functional stupidity. It is not that these people do not have high IQs, but what happens is they see things but then wilfully blind themselves to it.
What might seem like large sums to you and me like $10bn are not automatically noteworthy
Essentially, what we noticed in our studies was some cultures in which very smart people are doing very stupid things and the reason for this is their willingness to turn a blind eye, Spicer says. If you look at many reports about rogue trading you will see there were many people who saw something was wrong, but they turned away from dealing with it, Spicer adds. Leeson explains that this is precisely what happened in his case. If anyone had sat down and thought about it they would have seen the problem. But no one ever put it together. The head of trading would ask me why I had traded so much. I would give him an excuse. Then settlements (the part of bank that ensures payments are made) would call and ask why I needed so much money and I would give another answer. It would have no relevance to the answer I gave the head of trading. It might even have contradicted it. A failure to question lies at the root of almost all rogue trading cases. But it is not simply that individual trades need to be rooted out. That is like looking for the proverbial needle in a haystack. Harman explains: The reason rogue trading happens is that most investment banks have trillions going through their systems. What
Nick Leeson sees parallels in the recent banking scandals with his own case, whereby rule-breaking quickly spirals out of control. Look at Libor, Leeson says, referring to the recent scandal over bank traders at Barclays, UBS, the Royal Bank of Scotland and elsewhere rigging the London Interbank Offered Rate. They did not do all that at the same time. Somebody was the first to try to manipulate the rate. More people got involved until lots of people were doing it. Then people dont think they are doing anything wrong. That breeds a culture. Leeson draws a direct comparison with his own case, where he used a secret trading account (number 88888) to hide his activities. I wasnt the first person at Barings to set up an error account, but it was usually resolved and closed quite quickly. But I remember the very first occasion I put something in the five eights account. The next morning I went to see my boss to tell him. But he did not understand and said I should refer it to the head of trading. Then I thought a bit and there were a couple of instances where errors had
resulted in people losing their jobs. From my perspective it was not worth telling anyone. We see the same sort of thing with Adoboli and with those involved in Libor. Leeson, who has never disputed his guilt, ended up in a Singapore jail for more than three years. He was released in 1999 and now lives in Ireland, working as a consultant and a speaker. He recalls the first time he saw Rogue Trader, the film starring Ewan McGregor that chronicled his downfall. Half my friends were there. Some laughed, some cried, he recalls. Was it accurate? It highlights my inadequacies and those of the business I worked for. On those inadequacies he has strong opinions. His description of the culture at Barings bears a startling resemblance to the language used about some modern investment banks. To me, it is like the modern-day version of the Roman amphitheatre, says Leeson. If there is a winner there has to be a loser, and its all about making money. It was like that at Barings it was always about making money. I was 25 and I thought
I could cope, but I found out to everyones cost that I could not. What you need is someone senior who is approachable and at Barings there was never anyone there like that. Once they have shown some success the future rogue becomes unapproachable. In big organisations there are always pressures not to challenge people. I was supposed to be the star trader so no one challenged me. If you have a culture where people feel uncomfortable doing that challenging, then you have a problem. Does Leeson believe the problem still exists? There are plenty of companies that do not have any problem, but the numbers of rogue traders that have appeared since me is worrying. So the film was quite accurate? There were lots of details that were not right. When they showed me going on the run you saw me drive to the airport in a beaten-up car. But I had a Mercedes, he quips. To book Nick Leeson for speaking engagements: Email live@nmp.co.uk; www.nmplive.co.uk; 44 (0) 01372 361004.
Illustration: Leandro Castelao/Dutch Uncle. Photography: Allstar, Gallery Stock, Wenn
Nick Leeson The man who brought down Barings bank on the culture of the trading floor
might seem like large sums to you and me like $10bn are not automatically noteworthy. A bank may have reconciliation teams looking at individual trades, but they have hundreds of items to look at and you cannot have someone looking over the shoulder of the traders on every deal. Harman believes the solution is not to look for the individual rogue trade: What you need to do to spot rogue trading is to take a step back, look at your central records and see what patterns there are that might be typical of rogue trading. Harman explains that a certain pattern of trading might indicate that a trader is pretending to have hedged risks in the market by taking out a balancing trade, but the hedge is not real. Rogue traders tend to distinguish themselves by very large numbers of trades that are put into the system, but then reversed before they are settled, he says. They will cancel it and rebook another trade, and again cancel that before it settles. The trader is maintaining a false impression of their position in the market. They are making it look like they are hedging positions, but they never let the trade settle, so the hedge is never really in place. Just one reversed trade is not a sign of rogue behaviour. It is not uncommon and may indicate a change in strategy, changing market conditions or an honest mistake. But a series of reversed trades all following the same pattern may indicate that a false picture is deliberately being constructed. Looking for these patterns of which regular trade reversals is just one example is the key to finding rogue trading, according to Harman. In the past, many banks were not doing this. Now banks are much more switched on and a number of them are buying trendspotting software to look for these rogue patterns. An idea that arises in many cases is that the rogue trader has an intimate knowledge or close relationship with support staff or back offices and that this enables them to pull the wool over the eyes of the people who should be checking their work. Harman agrees there could be an element of this in the rogue problem. But far more important, he believes, is the unbalanced hierarchical relationship between back office that carries out administration and the more glamorous front office that carries out the trading. It can be quite a complicated relationship between the back and front office. In most banks, the best thing for you in the back office is if the head trader thinks you are doing a good job. So back-office staff will tend to want to impress people in the front office. They may be more likely to accept explanations from traders and be subservient to them. Another technique to reduce the risk of rogue trading is to address human frailty. This was described by one trader as being a culture of zero tolerance, not of mistakes but of covering up. The culture of high performance or even bullying that exists on many bank trading floors may make it hard for individuals to admit when they have made an error. The incentive is to cover up the error. The result epitomised by Leesons case (see box, facing page) is that the trader might find he can get away with the deceit and that small errors kept secret can easily grow into a crisis below the radar.
Ewan McGregor stars as Nick Leeson in the film Rogue Trader, which dramatised the fall of Barings bank
Banks are reluctant to discuss rogue trading. Those who have had a scandal do not wish to draw attention to it. Those that have not are happy to keep their name unconnected to the phenomenon. But the British Bankers Association, under its new chief executive, Anthony Browne, is attempting to grasp the nettle. Browne points to his proposals for a banking professionals register as a useful step. He put forward these proposals to Parliament in January, which would see bankers become members of a professional body with a code of conduct and a disciplinary procedure, similar to those in the legal or accounting professions. The idea has been dismissed as a gimmick by some, but Casss Spicer believes there may be some merit in this approach because it may actually help change the culture. I have been involved in research on this kind of idea, he says. We found that when faced with a moral dilemma, those who are members of a professional body are more likely to speak out about it. If you have an independent body it puts you in a far stronger position. Many senior people in banks are members of some kind of professional body. Generally speaking, junior bankers are not. Inevitably, public awareness of rogue behaviour focuses on the big cases, but recent events in banking hint that it may be a wider problem. The Libor scandal, as Leeson highlights, was a type of rogue trading. And what about the financial crash itself, caused by banks massively over-trading in debt and deceiving everyone (including themselves) about the risks they were taking. Could it be that the same aggressive, target-driven, hyper-competitive culture lies behind this entire mess? Spicer has a warning. Many of the issues are not just about rogue traders, they are more general. You see banks systematically attracting certain types of personalities and having this no limits culture. The kinds of conditions that have enabled rogue traders have also driven the financial crisis. That crisis has created a window of opportunity to deal with this. It is slipping away.
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jean-marc hut
By Lawrie Holmes
e xc lu s i v e
s CFO of the worlds third largest consumer goods company, Jean-Marc Hut has to be responsive to a continually changing environment. As a result, Unilevers finance department is at the forefront of every area of the groups innovation
Unilever CFO Jean-Marc Hut recently donned a spacesuit, along with his CEO, Paul Polman, for the consumer giants investor conference. Their choice of attire may have seemed remarkably aspirational, but was not surprising when you consider the companys targets it has set a goal of doubling revenues to 80bn and halving its environmental impact over ten years. To what extent the company behind the Flora, Persil and PG Tips brands will successfully deliver on those agendas by the deadline of 2020 will depend on its level of innovation, driven by welldefined resource allocation and discipline. Hut is doing his best to ensure this happens by putting finance in a key place to affect the right decisions. Three years into the plan, the group is on the right trajectory for what is an extraordinary target; turnover reaching 51.3bn for 2012, up 10.5 per cent. In the same 12-month period pre-tax profits rose 7 per cent to 6.68bn, revealing that the returns from large-scale investment in emerging markets are paying off. Hut puts the companys performance down to a combination of drivers, including making sure that the right existing products are in new countries, and innovating new products. The first is incredibly profitable and important as we want to drive the volume of our business, he says. When it comes to the innovation of products there are two types, says the 44-year-old Dutchman. There is the innovation of breakthrough projects generated by R&D, as well as incremental innovation, which is about improving existing products that accounts for the largest chunk of innovation undertaken by the group. Around a third of the groups revenue comes from innovations introduced over the past three years, says Hut. Something we didnt focus so much on in the beginning was how profitable the innovation was. You cant spend too much time on the profitability of the innovation because you need to let the organisation know what innovation is about, driving products through the pipeline, getting the confidence of marketers and making sure it lands properly. It is in the next stage of the ten-year plan that it has increased the emphasis on the profitability of innovation. If an innovation is not margin-accretive I would raise questions as to it really being innovation. There is some innovation youre going to do which is not margin-accretive, but I would say that the lions share needs to be. Finance has an important role to play to drive the profitability, applying the discipline through the pipeline to determine what is and what isnt genuinely marginaccretive, says Hut, who gained an MBA at INSEAD in France and previously worked for Goldman Sachs and Numico, a baby food subsidiary of French consumer giant Danone.
Maxing the mix

The process of prioritisation is known internally as maxing the mix in order to drive gross margin. The combination of options available includes the setting of sales volume, bottom-line performance, product pricing and product mix. It can be because one channel is more profitable than another, it could be because a geography is more profitable than another, or it could be because one product has a higher premium than another, says Hut. Throughout that, innovation has to add to your margin, and that discipline resides squarely within finance finance plays a primary role in making sure that we really do max the mix. When it comes to the level of discipline finance can impose, Hut says the issue is as much a mind-set as anything else. I think it is something we can improve on. This is an important year for us to demonstrate that discipline because weve
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1bn
[Unilever by numbers]
51.3bn
2012 pre-tax profits
2012 global sales
2012 sales in emerging markets
[Turnover by geographical area/ operating profit by geographical area (%)]

Asia/AMET/RUB
Its 25 largest brands account for around 70 per cent of total sales; 14 billion-euro brands have annual sales in excess of 1bn
6.7bn
The company owns more than 400 brands, used by two billion people every day
10.6%
40/38
27/27
Europe
33/35
1872: Two companies, Jurgens and Van den Bergh, begin producing margarine. 1894: Lever & Co starts producing Sunlight soap. I887: William Lever buys the site on which he will build Port Sunlight a purpose-built village in Liverpool for workers in the companys large factory. 1894: Lever Brothers becomes a public company. 1929: Lever Brothers and Margarine Unie sign an agreement to create Unilever. 1943: Unilever becomes majority shareholder in Frosted Foods, which owns Birds Eye. It also acquires Batchelors. 1955: Unilever airs the first commercial on UK commercial TV for Gibbs SR toothpaste. Fishfingers introduced into the UK. 1977: Across the European Economic Community, Unilever employs nearly 177,000 people in 200 offices and factories. 1986: Unilever acquires Naarden, doubling its business in fragrances and food flavours. Acquires ChesebroughPonds in the US, which owns Ponds and Vaseline. 1995: Unilever publishes its Code of Business Principles. 2002: Portfolio reshaped through acquisitions and the sale of 87 lowperforming businesses, generating 6.3bn. 2007: Commits to source all tea from sustainable, ethical sources. 2009: Named foods sector leader for the tenth year running in the Dow Jones Sustainability Indexes.
The Americas
kick-started the growth and have shown an improved track record. On different line items within gross margin we can be more disciplined, so there is more to be done. But the challenge is to apply tight discipline without squashing creativity, concedes Hut. Rather than talk about what is not possible, its better to work in everyones interest. To do this finance has moved much closer to various business practices. Weve got no big sticks to do this, so its very much about collaboration. In three years this positioning has improved dramatically by working to understand inherent profitability.
than ever before. Any form of inertia within the business has to be tackled, he insists.
a brief history of unilever
Global presence
The intensive approach to capturing data has certainly paid off in emerging markets, which Hut labels white countries (because they represent a blank canvas) that are responsible for more than half of Unilevers sales. Like-for-like sales surged 10.6 per cent in growing economies in 2012, resulting from increasing demand for personal care products such as Dove soap and Tresemm hair products. But while Brazil, Russia, India and China are exciting new territories for peers, Unilever isnt in a hurry to grow fast in the so-called BRIC countries. Thats because Unilever, in the original entities that formed the Anglo-Dutch giant, has operated in those countries for generations. Weve been in India since the 19th century, in Indonesia since 1933 and China since 1912. Its a reflection of our global
Crunching the data

One of the strongest contributions from Huts team is the compilation of an algorithmic data dashboard from a variety of sources as diverse as Facebook, Google and research giant Nielsen, to analyse trends to improve performance. We have built up an enterprise data warehouse to cut, slice and analyse information from local, regional and global data. Although our industry is quite leading edge at exploiting data, we need to look at a lot of indicators. We must never be complacent about this process and must always be seeking continuous improvement in this area. The result is a set of key performance indicators (KPIs) that are required to be globally relevant, consistent and tangible measurements that can be linked back to P&L reporting and cash flows. We believe it is important to apply the right levers to the business in individual country and category reporting, which should include more capital decisions as well as innovation. We develop these levers by looking through various lenses, such as those of the customer, says Hut. But while he describes Unilever as a data-driven company, Hut is mindful of the limitations of relying too much on raw data. Just having heaps of data is not a panacea, you have to have the right platform to undertake the right action, he says. Using data in the wrong way can sometimes inhibit decisions, especially as the world is so volatile. My view is that an over-reliance on data makes you far less agile. Given that most data is backward looking, Hut believes it is better to seek a balance of good data and experience to achieve useful forward-looking indicators. This is especially the case if traditional forecasting becomes more difficult in a volatile world. He says Unilevers approach to global decision-making, employing forecasting using forward-looking indicators, is reliant on the finance team being operationally closer to areas of the group
Just having heaps of data is not a panacea, you have to have the right platform to undertake the right action
presence, says Hut. We are more diversified and less dependent on one country. Take the situation in India Hindustan Lever is one of the leading companies in the country. Its a very good example of working in a market for a very long time. We have not been as consistent as others in investing in China or Russia, where weve been a long time, but we are now investing cautiously. We are disproportionately investing in other emerging markets where we see opportunities. In recognition that the more widely spread a companys activities are around the world, the greater the threat to its reputation, Unilever is prepared to make substantial investment in staff development. Hut says the key to maintaining a good reputation is training and developing the best people in the areas Unilever specialises in. We are a people business, something we think is critical when trying to build some of the top products globally in the fields we operate in, he says. At the end of the day we are
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Unilever has to be transparent with authorities regarding its activities and be willing to engage with stakeholders to listen, to explain and be ready to explain its position to NGOs, says Hut. We should now understand that the consumer is interested in all aspects of our business in a way that was never the case before. We have two billion consumers so we have to be clear about what our role in society is. We have to have a strong sustainability plan, one that is motivating for employees. Sustainability is now an integral part of our business model. We also work closely with clients such as Marks & Spencer, Wal-Mart and Kingfisher to ensure we are in the vanguard when it comes to sustainability issues, he says.
With public trust in business undermined by scandal after scandal, we would do well to listen and act quickly
Businesses should concentrate on staying close to consumers and serving them well a bunch of brands that can be weakened within 24 hours, so we have to be consistent in strengthening our brands. The strength of our brands is sacrosanct. In this day and age, companies reputations are often determined by their global approach to tax matters. We have a set of tax principles that demonstrate what is important to Unilever, says Hut. We have to demonstrate governance and transparency while recognising that a governments role is to develop the right frameworks. Globally, it is 26.4 per cent, which we believe is a fair rate. Sustainability is an integral part of our business model. It gives credibility to everything we do and offers differentiation between us and others. Some parts of sustainability are about driving costs down driving sustainability also means driving growth because consumers want to deal with responsible companies. With this in mind, integrated reporting has plenty of resonance for Hut a keen advocate. If we want people to properly judge a company on more than its financial performance, integrated reporting is an important step towards bringing this about, he insists. Businesses have, for too long, been run with the shareholder as the prime focus. Businesses certainly those such as Unilever should concentrate on staying close to consumers and serving them well, making it easy for them to make the right choices for the planet at the same time. If they do this well, they will be rewarded by people increasingly choosing their brands over others and ultimately the shareholders will benefit, as will other stakeholders. The call for integrated reporting is beginning to rise in volume. With public trust in business undermined by scandal after scandal, we would do well to listen and act quickly.
Sustainable measures
What of Unilevers sustainability targets another major test of its reputation? In 2010, Unilever set out its Sustainability Living Plan, which established 50 social, economic and environmental targets, including halving greenhouse emissions and water reduction by the company and its suppliers. Of the 50 or so KPIs we think we can achieve a large majority in the near term, while on a few we will have to wait before they are addressed, says Hut. Finance has a very important role here, collating the information that forms the basis of the KPIs.
Photography by Matthew Stylianou
Eyevine
Closing the gap

New research carried out by Vantage Performance Solutions in association with CIMA has set out the finance functions priorities for the coming years. The report sets out some major concerns but help is at hand for those ready to steal a march on their rivals
As businesses face the most challenging economic conditions for decades, combined with an increasingly competitive business environment and a complex regulatory framework, an opportunity has arisen for the finance function to lead organisations to stability and even growth. In many businesses, it is finance that is exploring ways to ensure the research and innovation essential for future growth continue to be funded, that marketing budgets remain viable and that managers make better decisions by having access and insight into both financial and non-financial data. To do this effectively and efficiently, it is essential that the processes and tools for managing performance are up to date and providing fast, accurate and easy-to-understand information.
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they were keen to reduce planning cycles, while more than half thought their company had poor quality non-financial data. Despite these findings, the survey also revealed that, at a time when investments need to deliver demonstrable value in as short a time as possible, almost all respondents said that any plans their organisation does have to improve its performance management and analytic capabilities are scheduled for the next one-to-two years. The problems have been identified and the will exists to fix them, it seems.
Responding to the issues
Finances concerns
Recent research, carried out by Vantage Performance Solutions in association with CIMA, revealed that many finance professionals feel their performance management solutions are in fact past their sell-by date. Respondents to the survey said they feel systems are either too slow, not accurate enough or insufficiently detailed as well as being laboriously time-consuming at a time when finance needs to share some of the pain that other business functions are going through and become much more efficient. The research, provided in a report of the findings entitled Closing the Gap: Priorities for finance in the new normal, revealed finance professionals are concerned by failings in data quality and data integration, which can compromise both productivity and timely decision-making. And it showed the finance function would like to see a rapid move to address these challenges, amid fears that competitors with fit-for-purpose performance management capabilities will take competitive advantage.
Finances priorities
David Werrett, director, Vantage Performance Solutions, says its no surprise CFOs are concerned about the future. The findings suggest ongoing frustration with planning and budgeting; a clear recognition that cost and profitability management is still insufficient to optimise operating margins in todays difficult trading conditions, he says. There is evidence of failings in data quality and data integration that compromise both productivity and timely decision-making. The good news, however, is that there is a willingness and desire to address these challenges quickly. The responses from this research suggest that many working in finance and accounting roles see timely action as imperative in closing the gap between where they are today and where they need to be. There is little time to waste in making performance management fit for purpose in the new normal. We recognise those needs and can leverage our own consulting methodology alongside the SAP Enterprise Performance Management solutions and SAP Business Objects Business Analytic solutions we prefer to work with to deliver projects that rapidly and dramatically benefit the organisations that choose to engage with us.
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Despite the survey respondents having a broad spread of responsibilities, ranging from financial analyst to chairman, there was considerable agreement on which areas of finance are priorities for improvement initiatives. Fifty-four per cent of respondents highlighted linking KPIs to strategic objectives as a priority for improvement. Nearly half said improving cost management and defining, tracking and making KPIs were a priority. In addition to this, 62 per cent of respondents said
Further info
To download the report, visit: www.vantage-ps.com/ cima_survey. The findings of this report were also discussed at a roundtable dinner in London. To read a report of the key messages from the event, visit: http://tinyurl.com/cucqhmx.
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AVOID AN IDENTITY CRISIS
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A fast-changing environment has forced companies to take a fresh look at how they manage reputational risk. A new wave of corporate scandals has accelerated that process
and Starbucks. Although public condemnation was extreme in the short term, the complexity and ambiguity surrounding the issue meant the furore eventually tailed off. But the horsemeat scandal has revealed greater scope for long-term damage, as obvious concerns over the quality of the food supply could continue to be expressed virally. Its significance reflects fundamental and age-old fears brands first came into existence as a means to identify reliable food sellers. In a fast-moving social media environment, even brands not directly affected by issues such as the horsemeat scandal are still vulnerable. To this end, corporate leaders on guard against any impact by extension on their reputation are quick to point out how their practices differ to those that were tainted by the scandal. Paul Pomroy, senior vice president and chief financial officer of McDonalds UK & Northern Europe, which includes responsibility for the supply chain, says: We have a single basket of 3,000 suppliers going into ingredients, but we only use British and Irish beef, and we are always visiting farms and abattoirs to ensure quality. Senior executives in other industries recognised the challenge to reputation created by the horsemeat scandal. Stefan Orlowski, managing director of Heineken UK, who is about to run the drinks giants operations in the Americas, says: The horsemeat issue showed youve only got to screw up once and youve lost trust. This is in a time when peoples trust in institutions and in bigger things has been dented and they want to be reassured.
he arrival of social media was heralded as an exciting addition to a set of channels through which companies could market their products and services effectively. As consumers became a more discerning and increasingly fragmented body, companies recognised the value of this very direct form of marketing. With an eye on the bottom line, corporates relished communicating to end users in such an economical way. But a wave of recent scandals has brought on a wider understanding of the impact of social media. Although consumers may approve of a product or service through social media, it is more likely to be used for expressing a dislike for a companys offering. In this context, powerful and easily identifiable brands, which for generations have been the emblem of corporate success, can become an Achilles heel if a well-defined reputational risk strategy is not put in place. Reputational risk relates to the damage that can be done to a companys profile something that is increasingly important whenever larger elements of corporate value are tied to brands and other intangible assets. Reputation is an incredibly valuable but vulnerable business asset, says Rod de St Croix, a partner of Londonbased PR and communication consultants 3:nine. Today, firms reputations are at risk like never before. Digital channels such as Twitter can be used to spread uncorroborated negative messages quickly. So your reputation must be protected and managed with the utmost care. The most successful firms know this and take reputational management very seriously, says de St Croix. Their ability to weather a crisis can be a good indicator of their reputational strength. Firms riding high on their reputation only need make one ill-judged slip to fall from grace. Recovery is possible, but a scar is invariably left behind and sometimes the wound is fatal. No company is immune and the higher your profile, the greater you are at risk.
Brand equity
In order to measure reputational damage there is a need to measure all aspects of reputation, says Rachel Griffiths, partner of the Reputation Consultancy. These elements include aspects such as trust, visibility, consistency, perceptions around leadership and being a fair employer. All these aspects must be measured across all stakeholder groups, from employees to suppliers, in order to get a complete and accurate profile. When reputation is measured over time, mapped against activities, issues and initiatives, then management teams can gauge the echo and reach of reputational change and its effects over time, says Griffiths. This information provides companies not only with the ability to quantify reputational damage but also provides a context and allows the organisations leaders to distinguish between a storm in a teacup and a growing reputational threat, says Griffiths. In addition, it allows boards to prioritise reputational risk, to understand their risk in relation to the sector and
Food for thought

No issue could have had a greater impact on consumer behaviour than the recognition that horsemeat had entered the food chain across Europe earlier this year. Such was the danger to reputation that those supermarket and restaurant groups affected were swift to address the issue, knowing full well the online carnage that would have ensued, followed by share price collapses, a management rout and business implodes. There have been plenty of other major issues that have damaged companies reputations in recent months, such as the revelation of how little corporation tax has been paid by global giants such as Google, Amazon
By Lawrie Holmes
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competitors, to learn from previous poor or best practice in the market and even begin to predict and prevent reputational risk. The organisations that are the most effective at minimising their reputational risk are those that value their reputation the most, says Griffiths. Committed to the long term, they already have in place continuous tracking, are likely to have predicted and prevented the risk, or have more time to prepare a response, she says. In some respects the best defence against reputational crises is to conduct a business that is at heart productive, legal, ethical, consistent with its objectives and transparent, says Peter Curtain, managing director of Allerton Communications, a London-based corporate and financial PR firm. Customers, staff, investors and regulators require utter clarity on why a business exists. Values and culture are important, and the tone should be set by the board to ensure consistency. Reputations are hard won and, in the digital age, easily lost. So, effective managers will respond fast to any threat in order to minimise harm and, if possible, emerge with the brand unscathed, or even it can happen enhanced, he says. If crises were easily identified they wouldnt exist, so the best advice is to plan for the worst examine risk factors, including those with little or no apparent connection to your business, and work through different scenarios, says Curtain. This may not seem a high priority until the need becomes apparent and you find yourself unprepared. Directors should build structures to provide reliable information on reputation and risk, tackling any blind spots. If possible, they should identify the problem and defuse the story before the media become involved.
Directors should identify the problem and defuse the story before the media become involved
Fighting back
Its when a crisis breaks that an organisation needs to have the best understanding of its brands equity, says Stuart Whitwell, joint managing director at consultancy Intangible Business. Through brand checks and tracking studies, the reaction to a key piece of damaging news, such as the horsemeat scandal on Tescos brand value, or the BP oil spill in the Gulf of Mexico, can be measured, tracked and understood. If there has been a negative impact on the brand, focus groups could be considered to get a deeper understanding of the issues and negative feelings toward it, he says. When it comes to response, the Reputation Consultancys Griffiths says speed is key when social media and online channels can amplify and speed up any communication and speculation, whether accurate or not. Many of the damage limitation practices refer to both the reactive behaviours of leaders and actions that address digital and social communications. The difficulty is this. Operational risk is understood and firmly owned by the risk department. Reputational risk has always been a poor relation to operational risk, until now when the speed of reputational impact has increased. Risk depart-
ments, unfamiliar with the intangible concept of reputation, turn to the communications and corporate affairs department, many of whom are not only unfamiliar with the tangible concept and narrative around reputation, but do not have measurements in place that provide meaningful analysis. When bad news breaks, companies should get on the front foot and produce a controlled, effective response, says Allertons Curtain. Ensure communications reflect and underpin the wider corporate story. And avoid keeping quiet, lest people assume the worst. Communication channels should stay open and messages should express concern for those affected and a commitment to fix the problem. Have the best possible information to hand. Be confident, credible and comfortable in your position. Tell your story not anyone elses, and dont get involved in arguments. The message should ideally come from the CEO, but if you employ a spokesperson make sure they understand the media. The next stage rebuilding reputation can be a long, hard process and can be dependent on the level of reputational equity that exists in the organisation at the time it is tarnished, warns Griffiths. It is also highly dependent on how skilled the organisation is in exercising its reputational capability, i.e. the level of its responsiveness, the transparency of its operations, the accountability of its leadership and the quality of its relationships with staff and stakeholders, she says. Companies generally seek to repair damage to their reputation through designing and deploying an effective communications strategy to acknowledge and deal with the crisis, says Intangible Businesss Whitwell. After the Gulf oil spill, BP issued several public apologies and dedicated a whole section of its website and a lot of money to animal conservation and supporting the community and ecosystems affected by its mistake. Similarly, Tesco has undertaken extensive PR since the horsemeat scandal, apologising profusely and honestly for the mistake and educating the public about the steps it will take to improve the reliability of its food sources, including a strategy to reduce food miles. For consumables, the issue is often complex, especially if there is a risk to human health, and internal protocol will have to consider costly measures, such as product recall, suggests Whitwell. In the case of most scandals, an investigation will have to be made into the cause of the mistakes made, then blame has to be assigned and communicated frankly to stakeholders, he says. In the long run, companies will have to recognise that social channels, as well as traditional broadcast and print channels, can be their ally and foe in equal measure, says de St Croix. Understanding and monitoring the communication channels that could compromise your firms reputation, as well as implementing best practice and seeking best advice to prepare your firm for traditional and digital crisis scenarios, is now a must, he says.
Illustration: Hey Studio/Dutch Uncle
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Divinia Knowles has seen Moshi Monsters grow from an idea into a worldwide phenomenon. Here, she talks about her role in its success and the plans to expand the brand into new markets
Mind Candy, creator of the Moshi Monsters game played by millions of children in more than 200 countries, has grown into a successful global organisation. How did you end up there? I was set on being an archaeologist and studied at the University of Wales, Lampeter. However, towards the end of my degree I realised that it was a difficult field to succeed in. I have always had an affinity for antiques and all things vintage so I took a job at the London Silver Vaults, helping run an antique silverware business called I Franks. After just over a year I joined HOWE, an antiques and bespoke furniture design company run by Christopher Howe in Chelsea, who also had a bespoke upholstery fabrics and leathers business. I ran both businesses for five years working with famous interior designers such as Colefax and Fowler and Candy & Candy, and a celebrity client list that included Sting, Madonna and Mick Jagger, many of whom I ended up meeting. I worked really well with Christopher because I was much more on the operational side and he was the creative side. When our bookkeeper left I took over the financial side of things and took some bookkeeping courses to give me some foundation knowledge to help me. How did you arrive at Mind Candy? Mind Candy were looking for somebody who could be studio manager as well as a PA to founder Michael Acton Smith. Id already read a bit about Michael and knew he was incredibly creative and inspiring. I was drawn to the fact that it was partly a PA role as I could work closely with him. When I joined in 2006 he let me run the whole operations side of the business as he wanted to be more involved in the creative and product strategy, taking the business forward. Before I joined I had looked at the financials of the company and knew it was a venture capitalistbacked business (Accel Partners and Index Ventures) and non-revenue generating. Taking any job is a risk taking that job at that time was more of a risk, but when I met Michael I had a strong feeling that he would take it forward and be successful. Moshi Monsters is a huge global success, but what was Mind Candy doing in 2006? When I joined there were only 15 people, so it was a much smaller business. We were working on a game called Perplex City and Moshi was merely an idea. Then, when we were about to launch season two of Perplex City we realised it wasnt going to be the biggest commercial success in the world as it only appealed to a very niche audience, although we really loved working on it. It was quite a difficult decision because our venture capitalists had invested a lot of money in the project and we had built the business around it, but we went back to them to explain to them our desire to pivot and create Moshi Monsters. How did Moshi Monsters happen? Michael had always been fascinated by virtual pet experiences, such as the Japanese Tamagotchi and Furby. We got really excited about the idea and just got started working on the project. The product took a long time to develop. It was much smaller than it is today, with the core of the gameplay around the monsters themselves and childrens interactions with them the rest has grown over time. When it went live and we watched the first players start to register, we realised the concept worked as kids really wanted to play it. At what point did Moshi start becoming a success? In the first phase of the closed beta launch we tested the gameplay, talked to kids, got their feedback and figured out what it was with the product that really resonated. We then optimised it over a period of time, opened the game up to the general public so that anyone could sign up for free and started getting really good feedback. To launch the membership element of the game and make the business profitable we had to raise a further small round of capital (after burning through our Series A cash developing Perplex City), which we achieved when a private investor jumped in, based on his childrens enthusiasm for Moshi. We were getting desperate because we were worried we wouldnt be able to pay peoples salaries at that point. We launched monetisation in January 2009 and it went incredibly well. It was an incredibly humbling feeling that there were loads of kids and parents that wanted to pay for it. It was fascinating how quickly it took off and the business was cash flow-positive really quickly. Shortly after that we added some more social features into the game, which helped it grow virally. Our registration numbers took off at that point, producing one of those hockey stick graphs that you dont often see. How do you measure the data available? We set up event tags in the game whereby you could see what kids were doing on the site. I had to do a lot of modelling in the early days and sensitivity analysis around our projected revenue from subscriptions. Its obviously a really healthy business model. If the membership side is sticky enough you have an exponential membership uptick that allows you to build up a big cash buffer over a period of time. I would take all the information from the game to
Divinia Knowles,FCMA, CGMA, COO and CFO, Mind Candy
minding moshi
By Lawrie Holmes
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Divinia Knowles
2013: Joined Mind Candys board of directors. 2010: COO & CFO at Mind Candy. 2008: Head of operations and finance at Mind Candy. 2006: Studio manager, PA and accounts management at Mind Candy. 2001: Joined HOWE, retail management and accounts. 2000: Joined I Franks, retail management and accounts. 2000: Graduated from University Of Wales, Lampeter, with a degree in archaeology.
help with forecasting and plan out the funnel for the entire website, e.g. how many registrations we would get in a day, how many players went on to fully adopt a monster, how many players then converted through to becoming a member, how many players churned out and over what time period. We looked at how long players stayed for, and taking all that interesting information put it into a model of how the website actually worked. We have always come really close to our forecast, even in the early days when we didnt have any historic information and it was a bit of an estimate. The model we built has proved really quite accurate to how the site actually performs. How did you end up studying CIMA? When I became head of operations and finance I felt I was doing some really interesting financial stuff, but was worried as I had no formal qualifications. Alison Sakai, financial controller of Firebox.com, Michaels sister company, recommended CIMA. I did all 15 exams between 2007 and 2010 after studying at home and absolutely loved it. It was really difficult, but it gave me a massive insight into what I needed to do more of at Mind Candy, the processes and systems I would need to set up, including compliance, tax and more complex forecasting. I also enjoyed learning about performance management. I still relate to my CIMA books, occasionally dipping into things I remember from my study days it has really helped me. I have recommended CIMA to other people as well. How does finance support the development process? We are very rigorous about budgets and have P&L owners across the company. We keep costs to a minimum and make sure that products are profitable in their different streams. For example, the Moshi Monsters website, mobile game and magazine are looked at individually in terms of how profitable they are. Moshimonsters.com is incredibly profitable because its a digital business and overheads are low. The magazine is less profitable, but it helps bring players back to Moshimonsters.com. Through Accel I gained a mentor, who is a non-executive CFO who works with lots of different startups. Although I built the models myself I talked a lot to him about how he would approach it in terms of the KPIs I should be looking at and how granular I should go in building models from metrics and information. I tried to model what was happening on the site using the information available while being diligent and careful about it. Some of it was assumptionbased, but because I was doing a sensitivity analysis
best case, medium case, worst case I could then chat to Michael about where I thought the opportunities were. How do you innovate? You have to be very strict about when you launch products. Ultimately, it is about making the very best product you can for your audience. You know what data you are looking to track, you know how to optimise the game for retention and monetisation. We can develop new products quickly for very low expenditure. We are currently expanding into new products so we built a small team of three people a product manager, a developer and an artist. They prototype and come up with ideas, and in practically no time at all we can understand if an idea is viable or not. In product discovery, teams can test products really easily by soft launching on the app stores to a small group of users. For our new products, some are Moshi related and some are new intellectual
We believe we can build Mind Candy into a multibillion-dollar business and create evergreen brands that will endure
properties, building for mobile and tablet. We will soft launch with a very low level of customer acquisition through online advertising channels, bringing a small group of people into the game to test it. We need enough users to have a decent data set we dont want to hard launch the products until they are thoroughly tested and we believe they are good enough. We will seek to optimise over a period of time, soft launching first in one geographical territory. Whats next? The Moshi Monsters tablet experience is coming out this year and will give us access to a truly global audience, helping us build on the English-speaking markets where we currently do well. A film is also out at the end of this year, which should help us grow as an entertainment company. We believe we can build Mind Candy into a multi-billion-dollar business and create evergreen brands that will endure, delight and stand the test of time.
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Professor Colin Coulson-Thomas believes there is a link between good governance and good financial results. Conscientious boards try to get everything right the right products, the right pricing and so on and the better results are a consequence of making more right decisions, rather than merely following a governance code, says Coulson-Thomas, who has advised more than 100 boards and is the author of Developing Directors.
have a full understanding of the companys strengths, weaknesses, opportunities and threats. They must be able to contribute in an informed way from the outset, says Tamlyn.
Adopt strong anti-bribery measures
Adopt an effective information policy
Focus on the medium and long term
It is short-termism the rush to get results too quickly that often causes problems. Boards that cut corners encounter difficulties. Strive for a medium and long-term view of a business, rather than the quick fix of short-term results, says Alex Tamlyn, partner and head of the EMEA international securities group at the law firm DLA Piper. Even in businesses such as certain hedge funds where the cutting edge of the business tool is about short-term changes and arbitrage, it is not necessary or desirable that the infrastructure of the business is treated in the same way. Short-termism at an organisational or human capital level, or in relation to investor return, is unpredictable and, eventually, uncontrollable, Tamlyn warns.
Governance failures often result from the absence of critical information, or from the misuse of information that does exist. So it is vital for the board to have a clear grasp of the kind of information the business holds. It is important that the board adopt a defensible information policy, says Nick Patience, an executive at Recommind, a company that provides information management software. Appreciate the importance of only retaining information that is relevant, says Patience. But make sure youre compliant with regulations and legal standards when destroying unwanted data. Automated information management systems can capture and index information and keep information that is still required for legal or other reasons, but destroy that for which there is no longer any need.
Companies need to think globally but act locally, especially the way in which they prepare their accounts, says David Lawler, a partner at Forensic Risk Alliance, which specialises in forensic accounting. Directors and finance professionals need to be aware of provisions in the UK Bribery Act and Companies Act, and the USs Foreign Corrupt Practices Act. Lawler advises: Maintain a chart of accounts which is sufficiently detailed to allow identification of transactions by their economic nature. Costs should be detailed and not amalgamated under headings such as cost of goods sold or sales and marketing. Identify higher-risk activities for potential bribery transactions beyond entertainment, gifts and travel expenses, and ensure that these transactions have their own discrete ledger accounts such as commissions, entertainment, consultancy and agent costs.
Develop the role of women in corporate leadership
Watch out for the British standard on corporate governance
Appoint effective non-executive directors
It is the NEDs who should be bringing an independent view to the quality of the companys governance. And it is not just about having a certain number of NEDs on the board, says Tamlyn. The key to the right dynamic in the boardroom is having the correct representation around the table, he says. And that is all about finding NEDs with the correct skill sets, character and absence of conflicting interests. Good NEDs should demonstrate that they can listen, challenge and debate with each other, says Tamlyn. But it is also important for full-time executives to devote the time to make sure the NEDs
That means more than just appointing token women to the board. A company that wants to develop the role of women needs to start by researching what helps and hinders their career progression, says Dr Ines Wichert, from the Kenexa High Performance Institute. Then a company should make sure that its policy for developing women leaders is comprehensive and integrated. Explains Wichert: For example, a stand-alone training course to increase skills or confidence will not yield lasting results unless followed up with mentoring from a well-connected sponsor and access to high-visibility assignments. Companies making noticeable progress on gender diversity have specified clear targets, assigned accountability for their achievement and secured strong commitment from the top team.
The British Standards Institution (BSI) is currently working on a standard on corporate governance. At the moment, it is looking for financial services firms that can trial the standard. The standard is seeking to develop a code of practice based on four principles system, direction, control and accountability. The BSI says its work is a response to the fact that existing governance guidelines are failing to alter the cultures of businesses. The BSI wants governance to be more than something boards just talk about. Instead, it wants governance to provide a framework to ensure principles are acted on in the way a company works. For example, a governance principle to avoid excessive risk has little effect if employees are rewarded to get results whatever it takes. Peter Bartram is the author of The Perfect Project Manager (Random House Business Books)
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RESOURCE
study notes
Paper E3 Enterprise Strategy
STudy & tech notes/the institute/events

In this issue: Paper P1: Performance Operations(also relevant topaper P2) p49
E3 candidates tend to fare poorly on IT-based questions, but these often come up in the exam. Your best bet for scoring a good mark on them is to keep practising past questions using the ASAP approach By Adrian Sims
ow much would you pay me for telling you the winning numbers for last weeks lottery? Not alot, I suspect. Thats because knowing last weeks winning numbers wont help you to land next weeks jackpot. Passing E3 is not a lottery. Studying previous papers can help you to pass the next exam. By understanding and practising the process of answering past questions, rather than simply reading the answers, you can establish a method that should significantly improve your chances of passing first time. In an article for Velocity in June 2011 I introduced the ASAP method of answering exam questions (bit.ly/VelocityASAP). This applies the following steps: l Analyse the requirements. l Source the syllabus knowledge. l Analyse the scenario and data given. l Plan your answer. Lets apply this approach to question 3 in section B of March 2013s E3 paper (bit.ly/E3Mar2013). This question, concerning an IT implementation project,
was doubtless inspired by the UKs hapless National Health Service patient record and booking system, which was abandoned in 2011 having cost 12.7bn. Candidates generally struggled with it historically, anything involving IT hasnot been popular. Also, they had previously studied project management for E2 and who remembers anything from a paper they have already passed, right? The E3 examiner knows all this. This question was a warning shot to remind students that they will face questions on IT and that they are expec t ed to recall knowledge gained in studying for previous E nterprise papers. Question 3 requires candidates to do the following: (a) Evaluate how the features of the information system can assist in improving the services of the medical centres and hospitals in country Q (eight marks). (b) Discuss the potential project management problems that might arise by allowing each medical centre and hospital to discuss its own usage directly with the project team (nine marks). (c) Recommend, with reasons, four performance measures that could be
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used to assess whether the project objectives, as set by the government of Q, are being met (eight marks).
l Try
A: analyse the requirements
In requirement (a), the key words are evaluate how, features and improve services. The meaning of evaluate is defined on page 23 of the question paper as appraise or assess the value of. Itdoes not mean: l List the features of the system. l Explain these features. l Evaluate the system. Note that the question is asking you to evaluate how its features can improve services i.e. its not asking for negative comments. The examiner wants candidates to read the scenario; identify the features of the new system; take note of any problems in service provision; and write an answer explaining how its features could resolve these problems. Eight marks are available for this. So you might conclude that the examiner probably intends candidates to evaluate four features at two marks each. In requirement (b) the key words are discuss, potential, project management problems, and by allowing to discuss directly. The verb discuss is defined as examine in detail by argument. It does not mean: l List the stages of project management. l Write an essay on the iron triangle (scope, cost, time) of project management. l Write an essay on PRINCE2. l Identify all the problems that have happened with the projects management. The examiner wants candidates to read the scenario; identify what is being discussed by the hospitals, medical centres and project management team; and identify the potential project man agement problems that this might cause. Nine marks are available, so you might assume the examiner probably expects candidates to suggest at least three possible problems and explain how each would be the result of the widespread discussions among so many hospitals and medical centres. In requirement (c) the key words are recommend, four performance mea sures and project objectives set by government. The verb recommend is defined as advise on a course of action. It does not mean: l Write an essay on Smart objectives. l Write one on the Balanced Scorecard.
to develop a performance measure related to each dimension of the Balanced Scorecard. The examiner wants candidates to read the scenario; identify the project objectives; and invent four performance measures that would measure these. Eight marks are available for four performance measures, so you can assume that a mark is available for each measure suggested, plus a further mark per measure for an explanation of which objective each would measure and how.
Performance measures can be strategic, managerial or operational. l Performance measures must be Smart i.e. specific, measurable, attainable, relevant and time-bound. l Performance measures are not targets i.e. they dont specify actual levels of planned attainment.
l
Before you get to the scenario, recall the technical knowledge associated with each area covered by the questions requirements. This will help you to spot relevant issues as you read the scenario. But dont let this become an excuse to write all you know about the topic or about some trigger terms in the question. You have to ask yourself: How might this knowledge relate to the requirements of the question? Requirement (a) brings to mind know ledge about issues of business process re-engineering and e-commerce such as: l Communication speed (time can be a matter of life or death in medicine). l Ease of access to information in one place (doctors, hospitals, paramedics and visiting nurses all need information on a patient). l Processing in parallel, not in sequence (enabling several medical functions to access the same notes simultaneously). l Accuracy in transmission. l Virtual (network) organisations. l Supply-chain management and supplychain integration. Requirement (b) concerns project management problems, including human issues such as a lack of leadership, a loss of key team members and stakeholder discontent. These may be reflected in elements of the iron triangle: l Project creep stemming from an unclear or changing scope. l Cost overruns. l Failures to hit crucial deadlines. There should also be a development method e.g. PRINCE2 in place, with signed off stages and documentation. For requirement (c), your choice of performance measures will depend on the governments objectives for the project. But the syllabus teaches us the following things about objectives:
S: source the syllabus knowledge
Read the scenario to find the key issues from your analysis of the requirements. For this question they are as follows: l Features of the new system. l Problems of existing services. l What is being discussed by the medical centres, the hospitals and the project management team. l Any signs of project management problems (unlikely to appear in scenario, since the question says potential problems and the examiner wants candidates to suggest these). l Government objectives for the project. l Performance measures for these ob jectives (also unlikely to appear in the scenario, since candidates are required to suggest these). Here is what I found on each key issue from the scenario. Features of new system: l Access to email facilities. l Booking facilities for appointments with medical centres and hospitals. l Electronic transmission of patients records between medical centres and hospitals (from locally held databases). l Automatic re-ordering facilities for medical supplies from external providers. l Online access for authorised staff to test results from hospital lab databases. l Access to a centrally maintained medical diagnosis system. Problems of existing services: l Most information is held in manual paper-based systems. l All information is exchanged by telephone, post or fax. What is being discussed: l Hardware and software requirements. l The aspects of the information system used by hospitals and medical centres. l The timing of connection. Project management problems: l None stated. Government objectives for project: l Establish the technical requirements for each hospital and medical centre. l Ensure that local users have access to technical guidance and training.
A: analyse the scenario
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Have 80 per cent of medical centres and 90 per cent of hospitals connected to the information system and fully operational by July 2014. l Monitor how the medical centres and hospitals use the system. l Monitor costs to stay on budget. Performance measures: l None stated (but note that the third government objective is actually a target).
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Sample answer plan and notes

Requirement (a)
This offers eight marks. The information system has six features. Theres not enough timeto discuss each of these individually and it would be r epetitive. So its easier to use problems of the current system and benefits of the new system as pegs. Problems of the current system (use this as a heading in the answer): 1. Phone, post and fax communication: slow; inaccurate; poor data security; labourintensive; high risk of data loss. 2. Paper-based system: data available only in one place; high risk of loss. Key point: both limitations can cost lives in a medical environment. Benefits of the new system (use as heading): 1. Quicker: email; electronic record transmission; online data availability; reduced administration time; better patient care; lower costs. 2. More secure: probably encrypted with password protection and other access controls; back-ups ensure that records cant get lost; increases users confidence in data integrity. 3. Less labour-intensive: automated bookings; automatic reordering; greater staff efficiency; medicines are in stock when needed. 4. Higher quality: expert systems for d iagnosis; medical staff have the information they need in a timely fashion; improved patient care. Key point: this will help to save lives.
Paper P1 (also relevant to P2) Performance Operations
and material usage variance Actual output did use 35,000kg Actual output should have used: 9,000 units x 4kg 36,000kg Operational usage variance 1,000kg (F) Material usage variance: 1,000kg x $25/kg $25,000 (F) But the question scenario adds that the general market price at the time of purchase for ingredient A was $23 per kg. In other words, the original standard was incorrect. The correct approach, therefore, is first to calculate the dif ference between the original and revised standard costs and report that as the planning variance; and then to calculate the o perational variances based upon the revised standard cost as follows: Total planning variance for ingredient A Original standard cost: 9,000 units x 4kg x $25/kg $900,000 Revised standard cost: 9,000 units x 4kg x $23/kg $828,000 Planning variance $72,000 (F) Note that this is a favourable variance because there has been a reduction in the e xpected cost of the ingredient. We now calculate the operational variances based on the new standard as follows: Material price variance for ingredient A Actual cost of 35,000kg: 35,000kg x $26/kg $910,000 Standard cost of 35,000kg: 35,000kg x $23/kg $805,000 Material price variance $105,000 (A) Material usage variance for ingredient A Actual output did use 35,000kg Actual output should have used: 9,000 units x 4kg 36,000kg Operational usage variance 1,000kg (F) Material usage variance: 1,000kg x $23/kg $23,000 (F) Note also that the three variances combined ($105,000 adverse $23,000 favourable $72,000 favourable) reconcile back to the original total material cost variance of $10,000 adverse for ingredient A. The important point is that we can distinguish between variances that have arisen at the planning stage and those that have arisen as a result of operational performance. For example, here we
P: plan your answer
When planning your answers structure, try to remember two things: l The mark allocation, since it suggests how long you should spend writing and the number of points you need to make. l The pegs in the requirements for example, performance measures related to objectives in requirement (c). Dont write an elaborate plan in your script. Only a few words are needed to remind you of the structure and the key points you want to make. Keep relating back to the case to i llustrate your points using the mnemonic Pert (make point, explain it and relate it to the case in the time available). My plan for the answer is in the panel on the right. To be more helpful to you, its more complete than what I would actually write in an exam and the parts in italics show my thinking. I didnt mark the March exam this time and I have yet to read the examiners model solution on the CIMA website. I anticipate that my answer will differ from it, but thats OK. For example, if my performance measures are different from those of the examiner, then markers would have the discretion to award marks, providing that my suggested measures relate to the objectives and are sensible. Ill let you go and see whether or not my approach would have passed. Adrian Sims is a freelance tutor, author and CIMA exam specialist. He is a member of the marking panel for the E3 paper and teaches the subject forIndependent Colleges Dublin and elsewhere. Email elena.martin@ independentcolleges.ie for details of the revision courses Adrian runs in Dublin. Further reading CIMA Official Study Text E3 Enterprise Strategy, CIMA Publishing, 2012.
The key to splitting a total variance into its planning and operational components a crucial P1 skill is to find the planning variance first and then base your operational calculation on the revised standard By Ian Janes
he application of standard costing methods isa core area of the syllabus in which P1 candidates should be highly prepared. One topic in this area that often causes problems is that of planning and operational variances. The splitting of a total variance into its planning and operational elements recognises that: l Variances can arise from changes in factors external to the business, which may not have been known or acknow ledged by standard-setters at the time of planning. These are known as planning variances. l Other variances can arise through factors that are almost entirely within the control of operational managers. These are known as operational variances. CIMAs official terminology refers to these more formally as: l Planning variances: A classification ofvariances caused by ex-ante budget allowances being changed to an ex-post basis. Also known as a revision variance. l Operational variances: A classification of variances in which non-standard performance is defined as being that which differs from an ex-post standard. Operational variances can relate to any element of the standard product specification. (I tend not to use the terms ex-ante and ex-post and will instead use original and revised respectively.) Managers will want to draw a distinction between these variances to gain a realistic measure of operational effici ency. Planning variances may arise from faulty standard-setting, but the responsibility for this lies with senior, rather than operational, managers. It should be noted that all deviations between actual and budgeted costs can be subdivided and attributed to either planning or operational causes. Lets revisit some basics of standard costing, remembering that P1 candidates are assumed to have brought forward all of their knowledge from their C01 studies. (P2 candidates are assumed to have brought forward all of their knowledge from C01 and P1 so standard costing remains examinable in the P2 paper.) November 2011s P1 paper (which can be downloaded from the CIMA website at bit.ly/P1Nov2011) contains a question featuring a wedding-cake company called TP and I shall use some of the information from its scenario here. The standard direct material cost of cake ingredient A is given as 4kg at $25 per kg = $100. The actual results obtained for the period include the following: l Production: 9,000 units. l Direct material cost of ingredient A: 35,000kg at $26 per kg = $910,000. TP uses just-in-time purchasing and production systems, which means that there is no opening or closing inventory during the period. In the absence of any further information, we would calculate the variances as follows: Total material cost variance for ingredient A Standard cost: 9,000 units x 4kg x $25/kg $900,000 Actual cost: 35,000kg x $26/kg $910,000 Material cost variance $10,000 (A) Divided into material price variance Actual cost: 35,000kg x $26/kg $910,000 Standard cost: 35,000kg x $25/kg $875,000 Material price variance $35,000 (A)
Requirement (b)
This offers nine marks. Three things are being discussed. Use these as the three pegs andrelate back to the iron triangle ofproject management. Introduction (use as heading): state the iron triangle of scope, time and cost. The approach to project management in introducing the new system has failed on all three. Key point: the project may fail to achieve most of the governments objectives. 1. Hardware and software requirements (use as heading): centres can dictate budgets forhardware, software and training; will affect compatibility of system; slows down development time and increases initial costs and maintenance burden; breaks government budget objective. 2. Aspects of the information system that will be used (use as heading): affects the availability of information in the system and so the attainment of project objectives; challenges the core concept of an integrated system. 3. Timing of connection (use as heading): assume this means when they will implement; system wont be ready until all have connected; affects the completion date of the overallproject; breaks government goal of 80 per cent / 90 per cent online by July 2014.
Requirement (c)
This offers eight marks. Four measures are needed, but there are five government objectives, so there cant be one measure for each objective. But eliminating the target will leave four objectives: 1. Establish the technical requirements for each hospital and medical centre. l Measure: number of centres that have signed off their systems specification. l Justification: this will show that they have been consulted and are happy. 2. Ensure that local users have access to technical guidance and training. l Measure: number of centres with dates set for in-house courses. l Justification: there will be a need for bespoke training because each centre may have a slightly different system. 3. Monitor how the medical centres and hospitals use the information system. l Measure: percentage of users satisfied with system in monthly electronic survey. l Justification: a greater percentage of satisfied users will indicate that more people are using the information system. 4. Monitor costs in order to stay within thebudget. l Measure: monthly variances against thebudget. l Justification: these are standard measures that should be available from the project management system.
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As before Actual cost of 35,000kg: 35,000kg x $26/kg $910,000 Standard cost of 35,000kg: 35,000kg x $23/kg $805,000 Material price variance $105,000 (A) But now Actual output did use 35,000kg Actual output should have used: 9,000 units x 4.5kg 40,500kg Operational usage variance 5,500kg (F) Material usage variance: 5,500kg x $23/kg $126,500 (F) Note once again that the three variances together ($105,000 adverse + $31,500 adverse $126,500 favourable) reconcile back to the original total material cost variance for ingredient A of $10,000 adverse. This says something quite different from the results in the original scenario. In fact, the new operational usage variance shows that we have achieved a much better usage of the ingredient than we hadinitially thought. The actual usage is 3.89kg per unit (35,000kg 9,000 units) compared with the new expectation of 4.5kg per unit. Exam questions often ask you not only to calculate planning and operational
variances but also to explain why they are n ecessary. The reasons can be placed into the following three categories: l Responsibility accounting. Managers should be held responsible only for v ariances in costs (and revenues) over which they have a degree of control. It can be demotivating for an operational mana g er to be held accountable for errors made at the planning stage. It also works the other way: in the original scenario, once we revised the standard cost of i ngredient A per kg, the operational price variance actually came out worse than we had first thought. l Planning effectiveness. By first calculating the planning variance and therefore isolating it, we can measure the degree to which the original plan was erroneous. This may be because of poor planning and intelligence-gathering, but could also be because new information has come to light that couldnt possibly have been known when the budget was set. This new information can then be used when setting standards in future. l Operational efficiency. By isolating the planning variance, we can calculate operational variances, which are a truer reflection of the efficiency with which operational managers have performed
their roles. Their actual performance is then being rated against fairer standards that better reflect the prevailing conditions when they were doing the work. Its essential for P1 candidates to build a thorough knowledge of planning and operational variances, which they must take forward through their P2 studies. When calculating these, you must first deal with the planning variance(s) and only then calculate the operational variances based on the new standards. Lastly, make sure that you are fully aware of therationale underpinning their separate determination. Ian Janes is CIMA course leader at Newport Business School. Further reading CIMA Official Study Text P1 Performance Operations, CIMA Publishing, 2012. CIMA Official Study Text C01 Fundamentals of Management Accounting, CIMA Publishing, 2012. Colin Drury, Management and Cost Accounting (eighth edition), Cengage Learning, 2012.
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overestimated the cost of ingredient Arequired by $2 per kg, resulting in thefavourable planning variance of 36,000kg x $2 per kg = $72,000. This reveals the extent of the error made at the planning stage, which may have arisen through a lack of market research or a poor appreciation of changes that had occurred in the market. Perhaps more significantly, the operational price variance for ingredient A is much worse than it was originally. The actual purchase price of $26 per kg is $3 per kg above the new general market price, which for 35,000kg is costing the company $105,000 rather than $35,000 as before. The wisdom of the purchasing managers decision to buy the ingredient at $26 per kg can, therefore, be evaluated more accurately. Note that the operational usage variance for ingredient A is also costed at the revised standard cost of $23 per kg, which values it more appropriately. We can add to the original scenario used in the exam question by looking at what would happen if, in addition
toour new knowledge about the general market price of ingredient A, we were to discover that the expected usage of ingredient A in a unit is more accu rately stated as 4.5kg per unit rather than 4kg per unit. We now need to calculate the dif ference between the original and new revised standard costs and report that as the new planning variance. Then weneed to calculate the operational v ariances based on the new revised standard cost. So first we have: Total planning variance for ingredient A Original standard cost: 9,000 units x 4kg x $25/kg $900,000 Revised standard cost: 9,000 units x 4.5kg x $23/kg $931,500 Planning variance $31,500 (A) Note that this is an adverse variance, since there is an increase in the expec ted cost of the ingredient. While it is possible to split the planning variance into its price and usage components, it is advisable to report the
planning variance as a whole unless you are specifically required by the question to split it. There are two alternative methods that could be used to split the planning variance. These are as follows: Splitting the planning variance: method 1 Price planning variance: 9,000 x 4kg x ($25 $23) 72,000 (F) Usage planning variance: 9,000 x (4kg 4.5kg) x $23 103,500 (A) Reconciling: $103,500 adverse $72,000 favourable = $31,500 adverse. Splitting the planning variance: method 2 Price planning variance: 9,000 x 4.5kg x ($25 $23) 81,000 (F) Usage planning variance: 9,000 x (4kg 4.5kg) x $25 112,500 (A) Reconciling: $112,500 adverse $81,000 favourable = $31,500 adverse. Now we are able to calculate the operational variances based on the revised standard cost as follows:
Global contact details

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Exam notice
May 2013 exams
Visit www.cimaglobal.com regularly for updates

The next exams will be held on 21, 22 and 23 May. The deadline for entries has passed. Full information about entering andsitting the exams can be found at www.cimaglobal.com/students/exams. administrative reviews. If you feel that the conditions in your exam centre have severely affected your performance, follow the guidelines under the Illness and indisposition subheading in the Instructions for exam entry document, which can be found on the CIMA website. and examinable standards for the F1 and F2 papers is available to download from the Study resources page for each paper on CIMAs website. There have been recent updates to the examinable legislations, so make sure that you are familiar with these changes.
CIMA does not accept cancellations and will not refund fees. The deadline for changing papers or exam centres has passed, but the institute may accept later changes under exceptional cir cumstances if places are available. Email exam.changes@cimaglobal.com for f urther information.
Cancellations and changes
May exam results
The results of the May T4 on PC exam will be released on 13 June. All other May exam results will be released on 11 July. Log into your My CIMA account to register to receive your results by email.
Index of technical articles
Admission advice
Pre-seen material for papers at Strategic level and T4 part B
You must download your admission advice online by logging into your My CIMA and print it out. The admission advice shows the exact details of your exam centre and the exams you have entered. You must take it with you to each exam and keep it safely afterwards, as it contains your candidate numbers. You must also download and read theexam rules and regulations from the institutes website when you download your admission advice.
The pre-seen material for Mays T4 partB Case Study is available to download from www.cimaglobal.com/t4preseen. The pre-seen material for Mays E3, F3 and P3 exams is available to download from www.cimaglobal.com/strategicpreseen. Its your responsibility to download this material and familiarise yourself with it. A clean copy of the p re-seen material and further unseen material will be provided in the exams. Youcannot take any notes with you into the exam hall.
For your reference, and to help you prepare for the exams, see the index of all CIMA technical articles published last year. This includes articles published in Financial Management, in Velocity and on the CIMA website. It is available in the February 2013 issue of Velocity at www.cimaglobal.com/velocity.
Past question papers and modelanswers
Past question papers and model answers (except those for the March 2013 sitting of the T4 part B Case Study) are available to download free from the relevant Studyresources pages of CIMAs website at www.cimaglobal.com/students/ 2010-professional-qualification/.
Post-exam guides
Going to the exam
As well as your admission advice, you will need to take another iden tification document to the exam hall a passport or driving licence, for e xample showing your photo, name and signature.
Absence from the Strategic level exams
Feedback after the exams
CIMA welcomes your views on the exam papers, exam centres or any other aspect of the process. It runs a feedback inbox (exams.talkback@cimaglobal.com) during and immediately after each sitting, which is open for two weeks from the start of each exam period. This email address is not the forum for requests or appeals for special consideration or
You should apply to the examinations and assessment oversight panel if you have, because of illness or any other m itigating circumstances, missed one or more of your Strategic level exams on the first sitting. For full information visit www.cimaglobal.com/Students/ Exam-information/After-the-exams/. It is essential that you follow the correct procedure. Otherwise, a void will be placed on any results you receive for papers sat at Strategic level.
Post-exam guides are available to download from the relevant Study resources pages of CIMAs website. These are essential reading for unsuccessful candidates and those studying a new subject.
CIMAsphere
Visit www.cimaglobal.com/sphere, the institutes online community, to ask ques tions, find a study buddy, share information and seek expertise and support among students, members and alumni. You can also read blogs on studying and the exams.
Queries
Tax rules and examinable standards for papers F1 and F2
Information on the relevant tax rules
Visit www.cimaglobal.com/students/ exams or get in touch with CIMA Contact (cima.contact@cimaglobal.com) or your local office (see panel, page 51).
Code of ethics CIMA members and students are required to comply with the CIMA code of ethics. Ensure that you are familiar with the code and how to apply it. Further resources are available at www.cimaglobal.com/ethics. Also see this months Hot Potato, page 10.
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technical notes
Due diligence and bias: Dealing with the unintended consequences of a concepts success
By Professor Patrick Reinmoeller, Cranfield School of Management
n rapidly changing environments a companys superior capabilities in strategic decision-making lead to competitive advantage. Strategic decisions about acquisitions or major investments require careful consideration, often under the most severe constraints. Decisions that can make or break the future of a company often have to be made within days, yet information is scarce and deals are complex. Remember how the Royal Bank of Scotland (RBS) was leading an international consortium in the acquisition of the Dutch bank ABN/AMRO at a time when the global financial crisis had just begun? Barclays had emerged as a powerful competitor with its rival bid for the same assets, aiming to make, at the time, the biggest acquisition in banking history. How could RBS achieve rapid growth through this acquisition without falling behind? Like RBS, many companies have a solution: due diligence. With due diligence, companies seek to identify and select those projects and programmes that will deliver real value to the organisation; they use due diligence as a condition sine qua non. Without a neutral or positive result of due diligence, investment decisions are
In this issue: Treasury risk, p57
not to be made. Certainly, there may be instances in which even this most basic rule is not adhered to, yet such bad management practice is not what we focus on. The top management team will want due diligence to be done. Simply defined as an investors analysis of a potential investment opportunity, due diligence is a concept that has found widespread acceptance. It has found its way into business jargon in most industries around the world and captures much attention, as a search for due diligence on Google reveals. The term generated 41 million hits in 0.23 seconds, which compares strongly to the attention paid to competitive advantage (69 million hits in 0.27 seconds). In fact, due diligence and services related to it belong to the portfolio of many consultancies and advisers. This widespread diffusion of a concept has clear advantages, but it also leads to some unintended consequences. Clearly advantageous is the shared focus of attention on something that is critical for success. This mutual understanding that careful analysis is essential to reduce risk and to make good deals makes it easier for investors and the owner of assets to agree on exchanging information and support. Also, if acquir-
ers, target companies, consultants and bankers speak the same language when it comes to vetting investment opportunities, this can increase efficiency of the process and help to focus on what matters most. However, mere diffusion of a label such as due diligence does not necessarily imply that practices related to it are adopted and implemented. Some have, in a similar context, talked about management fashions. In fact, the practices that each party to an investment decision associates with due diligence can vary widely. This conceptual blur can lead to miscommunication. When the top management team want due diligence to be carried out, their views of what this entails may differ, or even conflict. Compare a top management team that mainly consists of scientists, as frequently found in the pharmaceutical industry, to one in the financial industry, where executives with a finance background dominate. For the scientists, due diligence will emphasise the legal due diligence related to intellectual property rights, while the financiers due diligence will be mainly financial. Will both kinds of top management teams pay sufficient attention to cultural due diligence? How well will they be able to request a due diligence needed from external consultants that come with their own perspective and bias? As part of an ongoing research project, conducted together with colleagues at the Cranfield School of Management and Erasmus University in the Netherlands, we surveyed the literature and have found: i) A broad consensus on the view that due diligence is pivotal for making better decisions. ii) M a n y a c h e c k l i s t t o c o n d u c t due diligence.
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Yet we have found no convergence on what the practice of due diligence is and how this process of making sense of an investment target in a moving context can best be managed. To sum up, due diligence is pivotal, but it is not childs play. Business practice offers plenty of cases that illustrate this point. Did Hewlett-Packard (HP) forget due diligence when it acquired Compaq, EDS and Palm? Was due diligence carried out when HP topped the list of ill-fated acquisitions by paying $10bn for Autonomy in 2011? Many companies fall for the seemingly simple label of due diligence and then fall with it. Higher awareness is needed about the promise and pitfalls of due diligence.
to these, the unintended consequences of due diligences success and a lack of integration lead to two pitfalls. It is often unclear how to answer a simple question: How much is enough? Where due diligence means to check and corroborate what is known about a target to satisfy oneself of accuracy, it remains unspecified what a proper examination of information and analysis is. In other words, it depends what your definition of due is. While in the legal context there may be precedents, in the broader context
The promise
Strategic decision-making requires capabilities to engage in research under constraints such as due diligence which, in most of its different variants, emphasises pragmatism and speed in generating satisfactory answers. The promise of due diligence is that of delivering reliable support for strategic decisionmaking by creating knowledge that can prevent mistakes or support a strategic move. Keeping this promise of justifying a decision or rejecting it, due diligence relies on in-depth analysis. Related to an acquisition, financial due diligence, for example, seeks to examine a target companys accounts to understand the financial underpinnings and associated risks. In an increasingly complex world, narrow in-depth analysis of only financial accounts and current and future earnings power are no longer enough. Robust knowledge also requires considerable breadth of analysis. The examination of a target needs to include legal, commercial, technological, cultural, environmental and social aspects of a companys operations. Each of these areas requires considerable levels of expertise to conduct appropriate ana lyses. Fortunately, specialist experts are widely available as agents. This increasing division of labour is a consequence of the concepts diffusion.
adviser remain unbiased if he depends on business from clients? Due diligence is frequently meant to check whether to proceed with a strategic option, e.g. an acquisition that top management has spent considerable time developing. Bringing such a process to a sudden halt can turn advisers with good advice into messengers with bad news. Even if the messenger is not killed in the process, top management may refrain from retaining the adviser. The second question arising when due diligence is outsourced is: Will the adviser do whatever it takes to get to the truth? Monitoring the advisers efforts will need supervision. Alternatively, by performing due diligence themselves, client companies face similar questions and need to stay self-critical enough not to fall victim to self-confirmation bias, and conduct in-depth research, only to rubber-stamp strategic decisions that have already been made.
Role of the treasury in risk and governance

By Ben Stollard, vice president of sales Northern Europe at Kyriba
Future due diligence

In hearings with senior executives, we are exploring such promises and pitfalls to better understand to what extent due diligence is just part of managements rhetoric, or whether it can become a strategic capability that allows companies to excel in the long run. In these dialogues, we have found that due diligence routines are invaluable in supporting strategic implementation, and we were able to identify three insights, as well as major areas where a deeper understanding is needed. First, the input of specialists into due diligence is needed more than ever, yet the missing link of how to integrate the different insights is not yet clear. Beyond cross-boundary teams, what are the best practices of integrative due diligence? Second, checklists are useful. Yet, similar to recipes, they do not enable novices to reproduce unique dishes easily. Seeking enablers that go beyond accumulating experience through practice, we ask: What are the most critical, often tacit, skills needed for successful due diligence? Third, finding that due diligence, though less comprehensive, often strongly resembles strategic analysis. We seek management innovations that increase the quality of strategic analysis so that top management can develop better judgement and get the process right first time.
Many companies fall for the seemingly simple label of due diligence and then fall with it
of managerial decision-making what needs to be done to avoid mistakes can often not be reduced to a prior ruling. How much to invest in due diligence is not trivial; too much is waste, too little is hazardous. Even if definitive rulings were available for companies, an executive career can end faster than courts can deliver verdicts. Often, it seems easier to entrust advisers with the task of carrying out unbiased due diligence. While this can be a solution, two questions need to be addressed by top management. How can the
Pitfalls
The origins of due diligence, outside of management practice and the cross-disciplinary diffusion, lead to variegated meanings that can cause considerable confusion and misunderstanding. Next
orporate treasurers have a key role to play in managing risk and supporting corporate governance within their organisations. Different types of risk require different mitigation techniques, but whatever the risk, gaining visibility and control over the companys exposures is a crucial first step. A dedicated Treasury Management System (TMS) mitigates operational risk by reducing the risk of error and fraud, while also providing the tools needed to manage other types of risk. Managing risk is one of the core responsibilities of a corporate treasurer. While this has long been the case, effective risk management has never been a higher priority than it is today. Since 2008, treasurers have focused on a far wider range of risks than in the past most notably in the area of counterparty risk. Meanwhile, volatility in exchange rates and commodity prices has contributed to a more risk-aware mind-set, underlining the importance of measuring and managing exposures as accurately as possible.
Risk concerns
Todays corporate treasurers are required to manage a multitude of risks, includ-
ing interest rate risk, commodity price risk, regulatory risk and business continuity risk. While most corporations will experience all of these to some degree or another, for many the three types of risk that pose the greatest challenge are foreign exchange (FX) risk, counterparty risk and operational risk. Managing FX risk is a central concern for treasurers of multinational companies. Such companies typically face three different types of FX exposure: transaction exposure, translation exposure and economic exposure. Transaction exposure relates to transactions carried out in foreign currencies; if the exchange rate moves unfavourably the company may receive less cash than expected. Translation exposure is the risk that the companys balance sheet may be affected by currency moves and applies if the company holds assets or liabilities in foreign currencies. Economic exposure arises if the value of the companys cash flow is affected by exchange rate moves. Counterparty risk is another major concern and can be defined as the risk that a counterparty fails to meet its contractual obligations. The way in which counterparty risk is managed has undergone a significant transformation since 2008. Companies did, of course, manage counterparty risk before the financial
crisis, but in many cases they did so by focusing mainly, if not exclusively, on mitigating the risks associated with the companys investments. This changed following the collapse of Lehman Brothers and other institutions at the height of the crisis. Companies came to realise that their counterparty exposures stretched far beyond the area of investments. Today, treasurers include exposures relating to the companys suppliers, customers and banks when they look at counterparty risk. If a customer fails to pay, the company loses money. If an important supplier goes bankrupt, the companys ability to manufacture, deliver and therefore sell its own products may be disrupted. If a bank fails, a company may lose its deposits or if those deposits are covered by government insurance, recovering the funds may be time-consuming and slow. A third major category is operational risk, which is the risk that losses can arise as a result of errors, or indeed deliberate unauthorised actions, originating from within the company. The treasury is responsible for ensuring that adequate controls are in place around the flow of cash, which are robust enough to prevent errors and fraudulent activity from taking place. Failure to manage operational risk appropriately can have severe consequences for individuals, as well as for the company. For example, under the Sarbanes-Oxley Act, the CFO and CEO of American companies are required to confirm in their financial statements that they can attest to the companys controls being adequate to protect its workflow and information process.
Visibility and control

Companies face a diverse range of risks, but when it comes to managing them there is a common denominator: the
59
need to obtain visibility and control over the relevant exposures. Managing counterparty risk has become a significantly greater task since the scope of counterparty risk expanded. In order to manage it, the treasurer must first identify which counterparties the company is exposed to and the nature of them. In the past few years, many companies have introduced counterparty limits into the treasury policy, or made their limits stricter. Such limits may identify the institutions the company may bank with and cap the amount the company is prepared to deposit with a particular bank. Managing FX risk is an essential part of the treasurers role, but how can treasurers do this accurately and effectively? Treasurers are not FX traders and the ability to predict exchange rate movements is not usually part of their skill set. Managing FX risk does not involve anticipating market movements; the object of the exercise is to reduce the impact of FX risk on the companys financial assets. As with counterparty risk management, treasurers need to have the best possible visibility over the companys FX exposures in order to understand them fully. From that understanding the treasurer has the information needed to manage the risks, typically by undertaking a hedging programme. The actions taken to hedge FX risks can include the use of financial instruments, but can also involve identifying natural hedges within the organisation.
Companies came to realise that their counterparty exposures stretched beyond investments
Managing risk with a treasury management system

Unlike FX risk and counterparty risk, operational risk arises from within the business rather than as a result of external factors. It is the treasurys responsibility to put in place controls around the flow of cash that are robust enough to prevent errors and fraudulent activity from taking place. Technology plays an important role in mitigating operational risk. Many corporate treasuries continue to rely on spreadsheets, but it is widely acknowledged that this practice brings a significant risk of errors occurring in the companys financial data. While spreadsheets offer a cheap and flexible way of managing information, they are also notoriously error prone. From broken formulae to inaccurate input of
reducing the risk of error. A TMS also enables treasurers to establish controls in order to comply with external requirements, such as Sarbanes-Oxley in the US, or with internal governance requirements. For example, a TMS mitigates the risk of fraud by employees by enforcing the segregation of duties in other words, stipulating that the user or users authorised to initiate payments are different to the user or users who approve those payments. Other limits can also be integrated into the approval process. For example, treasury staff at a certain level may be authorised to approve low-value payments, but a more senior member of staff may be required to approve a transaction exceeding 10m. TMSs have a clear role in mitigating operational risk, but they also play an important role in helping treasurers manage other types of risk. In order to manage FX risk, the treasurer needs to have the right processes, information flows and technology, and it is the treasurers responsibility to optimise all three of these areas in order to gain as much visibility as possible over the companys FX exposures. Likewise, a TMS supports treasurers in managing counterparty risk by providing visibility over the companys exposures. For companies that do not have an integrated TMS, it is difficult to manage such risks effectively. If information is held in a range of disparate systems, the treasurer may be able to see pieces of the picture individually, but they will not be in a position to collate the information into a single dashboard or report that allows them to access, analyse and make decisions on the data quickly and accurately.
Conclusion
The object of risk management is to protect the value of a companys financial assets, which includes everything from investments and cash to accounts receivable and liabilities. Without visibility and control, treasurers cannot fulfil their responsibilities, which include protecting a companys financial assets from undue risk and providing proper corporate governance in managing these risks. A TMS can help treasurers meet these objectives, thereby enabling treasurers to fulfil their role in supporting corporate governance.
Getty Images, SuperStock
data, the use of this type of technology in treasury can, and does, lead to errors and inaccuracies in the companys core financial data can have serious and far-reaching implications. A dedicated TMS is designed to provide and support the controls needed to minimise operational risk. Processes and formulae are automated wherever possible, thereby significantly
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Your guide to recent and forthcoming CIMA events
Events
Past events
26 March, Shell Centre, Waterloo, London, UK
Andy Longden, EVP, treasury, and Tim Morrison, EVP, finance downstream, at Shell recently sponsored an event on the DNA of a leader. The event saw Charles Tilley, CEO of CIMA, chair a debate between Tony Chanmugam, CFO of BT, and Simon Henry, CFO of Shell, on what makes a finance leader. Watched by 150 Shell employees, the panel discussed their personal views on leadership and how finance can best partner with the business. They also addressed the role of diversity in the modern workplace.
Evening roundtable with L&D heads 22 March, The Leela Kempinski, Gurgaon, India CIMA hosted a roundtable discussion entitled L&D: Building efficiency, impacting business, in partnership with People Matters, recently. Led by Kedar Vashi, national head, learning and development, Hindustan Coca-Cola Beverages, and Ester Martinez, editor-inchief, People Matters Media, the aim of the event was to help L&D and HR professionals recognise that looking at learning interventions in isolation is not enough, and that this alone cannot deliver desired business outcomes. The session
heard that there is a clear need to look at the integration of learning initiatives and to keep them at the centre of business. The discussion allowed attendees to exchange ideas and best practice, while the debate also covered issues including: l The current focus of L&D in organisations. To what extent does it contribute to improving business efficiency? l Are businesses prepared to change the focus of L&D in the new landscape of business? l The business case to reposition L&D as a strategic agenda. l Tools to measure the business impact of learning. l The role of different stakeholders in an organisation in bringing about change in the business approach to learning and development? The roundtable was attended by L&D heads and other HR leaders.
Coming events
UK Finance partnering workshop 13-14 May, 9am to 5pm CIMA, 26 Chapter Street, London SW1P 4NP Cost: 749 +VAT This two-day workshop builds on the skills and techniques that are essential for effective collaborative and businesspartnering finance roles. Contact conferences@ cimaglobal.com or visit www.cimaglobal.com/ financepartnering Management accounting update adding value beyond the numbers 15 May, 9.30am to 5pm London Cost: 599 +VAT (539 +VAT for CIMA members) Get up to speed with the latest trends and thinking in budgeting, planning, analysis and decision support. Contact mastercourses@ cimaglobal.com or visit www.cimamastercourses. com/MAUA Charity accounting 20 May, 10am to 6pm Bristol Hotel, Prince Street, Bristol BS1 4QF Cost: 30 The voluntary sector in the UK is complex and dynamic, constantly changing to meet the needs of society and growing at a significant rate as an employer and a provider of services. Contact Suzanne Allen on +44 (0)11 7960 9734, email region.two@cimaglobal.com or visit www.cimaglobal.com/ southwestenglandand southwales The accountant and strategic influencer and advisor 21 May, 9.30am to 5pm Manchester Cost: 599 +VAT (539 +VAT for CIMA members) Gain insight into the changing role of the accountant. Contact mastercourses@ cimaglobal.com or visit www.cimamastercourses. com/ASAI CPD Summer Academy 5-6 June, 9am to 5pm CIMA, 26 Chapter Street, London, SW1P 4NP Cost: 799 +VAT (early booker rate of 699 +VAT on all bookings received by 20 May 2013) This two-day event will cover a wide variety of topics. It also incorporates a case study and time for networking. Contact conferences@ cimaglobal.com or visit www.cimaglobal.com/ summer
Visit www.cimaglobal.com/events for updates and a full list of events, which are free unless otherwise stated. CIMA Mastercourses your catalyst for business change: visit www.cimamastercourses.com or call 0845 026 4722. To submit an event for this page, email ben.jackson@cimaglobal.com
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63
The key performance indicators and the Balanced Scorecard Mastercourses
What you learn on
Latest CIMA developments and a message from Professional Standards
The Institute
ernard Marr is an internationally recognised expert on organisational performance and business success. He offers some insight into the KPIs and Balanced Scorecard Mastercourses...
showing the results of efforts in the past. The latter are forward-looking areas, such as satisfying customers, getting the right customers and hiring the right talent, which should help to point to financial performance in the future. Looking ahead, I explore the use of innovative measures that tap into the ever-increasing and ever-changing amounts of data available. Performance indicators have to be updated and changed over time to reflect the changing business challenges a company faces.
The key performance indicators (KPIs) course considers how you develop a small number of relevant and meaningful KPIs that will provide real business insights and help drive performance improvements. It is aimed at anyone who wants an up-to-date overview of how to measure and monitor business performance. It should be of particular interest to anyone responsible for developing or using KPIs. The course looks at the breadth of information available in any organisation and the recognition that only a fraction (around ten per cent) is actually used, while often the wrong information is used to inform strategic decision-making. The analogy used is that of a boat journey for which the correct navigation instruments must be used to guide the vessel along a successful voyage, in the same way that businesses which dont use these tend to be rudderless. I will outline how to ensure that the KPIs are providing you with the answers to your most important business questions, how to develop both leading and lagging indicators and how to set KPI targets that are both stretching and achievable by asking the right key performance questions. Often, companies only use KPIs that are easy to collect and measure. Using case studies I will demonstrate how leading companies are developing KPIs to gain meaningful management insights. They include Tesco and Google, which have identified a small number of strategic questions they seek answers to using KPIs. Another issue to consider is the balance between financial and non-financial KPIs. The first are backward-looking measures,
simply want to upscale or refresh their skills. The course includes a complete and practical introduction, as well as step-bystep guidance and practical templates on how to use the BSC, and will look at how leading companies, such as Carlsberg, as well as governments, use the BSC. Elements covered include an overview of how to clearly articulate your strategic objectives in simple one-page strategy maps and practical ways of cascading and implementing the BSC throughout an organisation. We also look at best practice BSC design and implementation principles, and how to monitor and manage the execution of this strategy to deliver real performance improvements.
Report puts business models at the heart of integrated reporting
The key areas covered are:

l The Balanced Scorecard (BSC) a l The four BSC perspectives and their l Defining strategic objectives and
strategic performance management tool. relationships.
The key areas covered are:

l Using KPIs as vital navigation tools for l How to identify and select the relevant l The different reasons for measuring l How not to develop KPIs and the
your business.
key metrics for your business.
performance and why they matter.
common traps to avoid. l How to use key performance questions (KPQs) to guide your KPI development. l The key financial and non-financial KPIs in use today. l Innovative ways to measure, e.g. financial, customer, operations and people performance. l Best practice KPI development through the use of a KPI design template. l How to test your KPIs to ensure they are good KPIs. l Target-setting and benchmarking KPIs. In a related course I look at Balanced Scorecards (BSC). This course is aimed at directors or managers in a performance improvement and strategy execution function, as well as accountants, controllers, performance managers or analysts who
critical success factors in the four BSC perspectives. l How to customise the BSC to ensure it is relevant to your firm, be it large or small, public or private sector, for profit or not. l Creating strategy maps and cause-andeffect diagrams to visualise your strategic objectives on a single page. l Translating a strategy map into a relevant set of performance indicators. l Best practice BSC design principles and common traps and mistakes to avoid. l Principles of how to align the BSC with other key business processes, such as budgeting, risk management, project and programme management, analytics and performance reporting. l Implementing and cascading the BSC into the organisation. About the author Marr is also the founder and CEO of the Advanced Performance Institute and has previously held positions at the University of Cambridge and at the Cranfield School of Management. His most recent book is Key Performance Indicators: The 75 Measures Every Manager Needs to Know.
nvestors and other stakeholders want to know what makes companies tick, while at the same time regulators are increasingly requiring companies to report clearly on their business models. In response to this conundrum CIMA, the International Federation of Accountants (IFAC), and PwC have at the request of the International Integrated Reporting Council (IIRC) published a background paper highlighting the need for the business model to be at the heart of integrated reporting (IR). The background paper is entitled Business Model. Currently, there is wide variation in how organisations define their business models and their approach to disclosure, and the report says this highlights the need for a clear, universally applicable, international definition of a business model. The proposed definition and discussion in the paper aim to bridge the varied interpretations by highlighting common areas and ensuring a consistent application across industries and sectors, said a statement from the bodies involved. Charles Tilley, chief executive of CIMA, said: Corporate reporting plays an essential role in the effective functioning of the market economy. Corporate reports have become more complex, yet provide less insight to investors on how value is created or destroyed. IR will involve a change in mind-set for many organisations as they think about how to better communicate strategy, performance and prospects. High-quality business-model reporting is critical to helping investors better understand
performance in terms of the impact external factors have on an organisation, and how organisations create value that is sustainable over time. Mark OSullivan, a director at PwC, commented: A previous review of narrative reporting practices, which are summarised in this background paper, shows that very few companies clearly articulate their business model what they do, what they rely on and what sets them apart from the competitors. PwC research found that 77 per cent of the FTSE 350 companies mention business models in their accounts but only 40 per cent provide insightful detail about those models. And only 8 per cent integrate business model reporting with strategy and business risks. This information is critical if investors are going to form a view of how they create and sustain value. The pace of technological change and the growing complexity of business relationships will only increase the demand for insights into strategy and business models. It will also challenge the relevance, reliability and timeliness of the information businesses use to back up reporting of their performance and prospects, adds OSullivan. The business model background paper and a video of CIMA chief executive Charles Tilley speaking on IR is available at: www.cimaglobal. com/integratedreporting
View from Professional Standards

o draw the line under something is a phrase that has come to mean lets just forget about it and lets move on. Used in the context of a family quarrel over whose turn it is to wash up, its fine. But when used to sidestep real issues, such as ethical behaviour, its worrying. Being ethical is a core part of being a professional, whether you are a chartered management accountant in the UK or in another profession globally a doctor, lawyer or engineer. The ethical aspect of the CIMA qualification, CIMA membership and the CGMA designation is what sets professionally qualified individuals apart. To be ethical you need a framework and guidance a Code, and CIMAs Code of Ethics is enshrined within the Laws of the Institute. They are your obligations to yourself, your profession and the public. As a CIMA member, you are committed to upholding the highest ethical and professional standards and to maintaining public confidence in management accounting. So even if the line under unethical behaviour was drawn in pencil, it is people like you that can help stop it getting rubbed out. Visit: www.cimaglobal.com/ethics
Weve got to draw the line on unethical behaviour. But draw it in pencil.
Copyright by Randy Glasbergen www.randyglasbergen.com
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Illustration: Masao Yamazaki/Dutch Uncle
Its likely you are aware of how energised I am about integrated reporting
the institute in a more integrated way. Part of the fine-tuning of the framework has involved bringing together collaboration groups to develop the key themes. CIMA, PwC and the International Federation of Accountants have been working together to look at the topic of business models and how to develop unified definition. Our findings were recently published in a background paper and provide an insight into how organisations differ in their view of which components make up the business model. As chairman of the IIRCs Technical Task Force, I am looking forward to receiving the responses from the consultation and refining the framework in preparation for the launch of Version 1.0 at the end of this year. But my most important work is underlining the frameworks importance to CIMA members. The IIRC initiative provides an opportunity for all CGMA-designated finance professionals to take on the role of global communicators of this pioneering approach to business reporting. IR requires integrated thinking and management. CIMA members are uniquely equipped to provide organisations with the right information in the right context to turn IR into the game-changing influence it has the potential to be.
CIMA CEO column
ext month, representatives from CIMA will be travelling to Germany to hear from the organisations taking part in a pilot programme initiated by the International Integrated Reporting Council (IIRC). More than 80 entities, including Coca-Cola, Unilever, CIMA and the UKs National Health Service, are currently testing the IIRCs prototype framework for integrated reporting (IR).
preservation of value. And by encouraging a different way of thinking, IR will contribute towards the advancement of a more sustainable global economy. In terms of producing the framework for this evolution, the IIRC is nearly there. CIMAs recent media roundtable in London introduced the concept of IR and announced the launch of the IIRCs 90-day consultation draft period. At the event, two companies taking part in the pilot scheme, HSBC and Unilever, shared some of their insights into the benefits of this new approach, as Unilever CFO Jean-Marc Hut discusses in this issue (p28). I urge all our members to consider what the organisations they work for need to do to make themselves ready for participation in the pilot scheme. Obviously, such a step requires a shift in mind-set and careful planning. But those who join the scheme early will get the most out of it. CIMA has been incorporating the latest guidance on IR into its 2012 annual review. The focus is centred on the frameworks key themes: materiality, capitals, connectivity, value, business model and future outlook. The framework is already becoming an invaluable tool for managing
Its likely that you are already aware of how energised I am about IR. There are several reasons why the concept will provide a major leap forward in corporate reporting. Traditional annual reports generally provide a one-dimensional view of a companys identity an overview of its financial performance. In contrast, IR provides a more three-dimensional view, with a clear line of sight to an organisations business model and how it creates value in the long term. Besides being a powerful vehicle for communication, IR can be used as an effective governance tool for performanceorientated management. If it becomes accepted globally as the corporate reporting norm it will benefit organisations, their investors and other stakeholders by enabling informed decision-making that leads to efficient capital allocation and the creation and More information on integrated reporting can be found at: Cimaglobal. com/integratedreporting Applications to join the IIRCs business network pilot programme can be made via its website: theIIRC.org
Charles Tilley, fcma, cgma Chief executive, CIMA
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Watercooler: Why do IT projects never complete on time? By Julia Streets

What, never? Never on time? Yet the 80:20 rule fits every other aspect of business life these days. Surely it must apply. Not for want of looking I have yet to find a helpful statistic*, but have heard wails of 90 per cent delay tales too often to ignore. (*credible data welcome)
Its the creep, you see. Everyone dreads being stuck with one. No project is immune. Functionality. Feature. Mission. Scope. It is extraordinary that projects are completed at all. Variables, personalities and pathways must unite at the perfect, pre-determined moment. Some will stray from the path, distracted by their surroundings. Others skip along merrily, only to be tripped by a glitch. Many head off blindly, little idea of where they will end up, by when and why. I tapped some technology experts for their thoughts about project delivery and deadlines. This is what they had to offer: Whose project is it anyway? The person in the driving seat is a driving factor for the avoidance of drivel and distraction. Everyone needs to know who is in charge, including the person in charge (I know, youd be surprised). They need to know where the project fits into the corporate world domination plan and articulate the project requirements, confirming back to the commissioning authorities seated on high. They need the authority to challenge both above and below their corporate rung and have the skills and support to plan, schedule and set deadlines. Which way are we going? Some managers gush about waterfall approaches, a period of detailed consideration and contemplation followed by a torrent of activity in the quest for the pre-determined goal. Others are alert to the benefits of an agile approach, a more loosely defined outcome taking a less rigid delivery approach, allowing the team to explore, develop and adapt to any unforeseen factors. At any given moment, is everyone clear whether to paddle furiously or duck and dive? A phase were going through Whatever the approach, setting clear phases with corresponding deadlines is vital. Yet contrary to popular belief, experience does not necessarily deliver accuracy. Given the frequency of late projects, managers appear to be terrible at setting deadlines. Perhaps they respond to pressure from on high to deliver sooner by setting unrealistic deadlines? Perhaps the project has too many requirements can some of the bells and whistles be left in the music box for a later phase? No matter how sensible the deadlines perhaps we return to a student default, leaving work to the last minute only to hit unanticipated obstacles and delay? Besides, why deliver early? It only increases the pressure for the next project. Contingency is this your number? As the managerial magician, think of a contingency number. Double it. Double it again and someone you dont know will ask you to divide it into two. Now watch it disappear before your very eyes. Contingency is a vital element. Unanticipated hurdles are as inevitable as death and taxes. If nothing else, contingency can also offer a leeway of negotiation in sticky circumstances, useful to have in the back pocket, along with a magic wand. Test, test, test, test, test Thoroughly. Regularly. Rigorously. There is never enough testing time, not least at the integration phase overruns will have eaten up these vital hours. Integration can be the most public element of any project and caution is advised. Messy implementation can feed a rumour mill capable of grinding away at confidence, results and reputation. Factor in the human resource Personality and ego management cannot be underestimated. Debate can distract. Whose role is more important, those who play in the sandbox or those who test the acceptance of users? This advice is all well and good. The perfect project may be driven by the best manager, working with great talent and excelling as a team. Managers may shine at objective, phase and deadlinesetting, communicate clearly, manage upwards, outwards, inwards and downwards; yet the odds may be stacked against them. They may fall foul of a whole new form of creep: team creep. Cutbacks, restructures, rightsizing, upsidedownsizing. Project resources now you see them, now you dont.
Julia Streets is the founder and director of Streets Consulting, a business development, marketing and communications consultancy specialising in supporting international financial services and B2B technology firms. www.streetsconsulting.com Julias book, The Lingua Franca of the Corporate Banker, offers an explanation and exploration of the idiosyncracies of business and includes a 500+ expression glossary to explain, assist and soothe any executives frustrated by the use and meaning of corporate jargon.
Illustration: Dmitry Litvin/Dutch Uncle

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