Issue 2 2015

HOW TO SLEEP
LIKE A BABY
Taming the risks that
keep you awake
Page 26

6 categories of KPIs
Page 41

Redesigning decision-making
Page 46

Driving innovation in management accounting

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CONTENTS
26 Taking comfort in a well-fortified
risk-management system

Innovation
is all about
creating value
by reducing risk
and exploiting
opportunity.
PAGE 10

Lines of defence
US Bancorp tasked internal auditors with evaluating whether the
companys enterprise risk management approach was functioning as
intended. Find out how they did it.

10

9 ways to reduce risk by embracing innovation

14

How to gather risk intelligence

26

Focusing on unexpected successes and areas of strategic importance

and sometimes ignoring the customer can help organisations survive
competitive risks.

Risk management requires constant assessment of internal and external

information. Heres how its done at Siemens Wind Power in Denmark.

Awareness is your security blanket

CIMA and Airmic have created a framework that aims to paint a
comprehensive picture of an organisations risk universe.

7
6 Guide to
CGMAMagazine.org
See whats available at the
online home of CGMA
Magazine.

On the cover and above: Photos by Goldmund/iStock

December 2015

Right: Photo by roibu/iStock

18

Daring to adapt a brand

22

How to minimise financial statement risk

32

Paths to sustainability

34

A better fit for franchises

45

Resilience: How to perform better under pressure

To successfully tap consumer markets around the world,

companies may have to risk changing their brands. Enterprise
risk management offers tools to help deal with the challenge.

18

The director of accounting at telecom giant AT&T offers ways

organisations can avoid unintended errors in financial statements.

According to a global CGMA survey, management accountants see

the value of reporting on environmental and social factors.

One finance executive centralised finance brainpower at his fitness

company, offering an illustration of how finance transformation can
succeed at small and mid-size businesses.

Learn how to improve performance under pressure whether its in an

interview, board presentation, or delicate negotiation.

46

Redesigning decision-making: Pentland Brands

50

Taming the email beast

34
45

Sportswear manufacturer Pentland Brands is promoting new ways of

informed decision-making, driving performance.

Email can morph into an after-hours monster. Setting digital boundaries

can help minimise stress.

Clockwise from top: Photo by Gurinder Osan/AP Images; photo by Brent Clark/AP Images;
image by Sashkinw/iStock; photo courtesy of Pentland Brands; photo by triloks/iStock

50

46

6 categories of key performance indicators

41

This summary of a recent CGMA guide on KPIs
recommends a series of factors to consider when developing
and implementing a performance indicator model.

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2015 AICPA

AICPA/CIMA
Publishers: Kim Nilsen, Katie Scott-Kurti
Associate Publisher: Karin DeMarco
Managing Editor: Rocky S. Rosen
Assistant Managing Editor: Jeffrey Gilman
Editorial Directors: Jack Hagel, Ken Tysiac
Senior Editors: Neil Amato, Chris Baysden, Jeff
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Tel.: +1 919-402-4500

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Creative Director: Michael Schad Johnstone

Contributors: Mark S. Brooks; Matthew Hurst;
Gillian Lees; Mike Skorupski, CPA, CGMA
Technical Reviewers: Ana Barco; Nancy MarcThrasybule, CPA, CGMA; Rebecca McCaffry,
FCMA, CGMA; Paul Parks, CPA, CGMA; Lori
Sexton, CPA, CGMA; Kenneth W. Witt, CPA,
CGMA
Senior Manager, Business Development:
Shreyas Mecheri
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and Content: Ruth Wallis
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and Global Market
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and Professional Pathways
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Tony Manwaring

LINES OF DEFENCE
US Bancorp tasked internal auditors with
evaluating the design and strength of the
companys enterprise risk management approach.

ssessing an enterprise risk management

(ERM) programme can prove challenging,
Mark Sparano, CPA, CGMA, chief audit
executive at US Bancorp, has learned. But
he also has developed ways to deal with
the challenges.
US Bancorp, the Minnesota-based parent company of the
fifth-largest commercial bank in the United States, formalised
and updated an ERM framework in 2012 and has implemented and refined it ever since. This ERM framework

serves as a guideline to perform ERM internal audits, and

US Bancorps approach shows how companies can keep risk
management relevant as risks emerge over the years.
ERM audits assess how well a businesss enterprise risk
management works and include what the board of directors
and senior management are doing. Auditing has evolved well
beyond control testing alone, Sparano said. Today, the third
line of defence must be equipped and prepared to critically
evaluate and report on the companys ERM approach, which
includes the role of the board and executive management.

December 2015

Photo by roibu/iStock

By Sabine Vollmer

Communication is key to a
strong ERM programme, says
US Bancorps Mark Sparano.

Photo by Stephanie Rau-Barber/AP Images

US Bancorp, which employs about 67,000 people including at least 250 internal auditors and has business lines
in the Americas and Europe, developed its customised ERM
audit framework by consulting established risk-management
principles and key regulatory guidance.
Large financial institutions have dealt with increased
regulations since the 2008 financial crisis sparked a global
economic tailspin with lasting effects. Increased scrutiny
brought about by the US Dodd-Frank Wall Street Reform
and Consumer Protection Act and the US Foreign Account
Tax Compliance Act, as well as reforms developed by the
European Commission and the Basel Committee on Banking
Supervision in the past seven years has caused many banks
to bolster enterprise risk management.
The US Office of the Comptroller of the Currency and
the Federal Reserve Board as well as the Basel committee
were among the regulatory contributors to US Bancorps
ERM audit framework. Key risk-management principles
came from the Institute of Internal Auditors, the Committee
of Sponsoring Organizations of the Treadway Commission,
and public accounting firms.

LESSONS LEARNED
Communicating frequently and across functions has been critical in developing, implementing, and refining the ERM audit
framework at US Bancorp, but the internal audit team also had
to learn other lessons to ensure collaboration across functions
would be successful, according to Sparano. Among them:

CGMAMAGAZINE.ORG

Explain internal
audits role

Talk to external and internal stakeholders, including senior

management, board members, regulators, and independent
public accountants, and tell them what youre trying to do
before you start auditing your companys ERM efforts. Explaining internal audits role in enterprise risk management
can clear up misconceptions and misunderstandings among
key stakeholders and establish why an ERM audit is good
for the business.
At US Bancorp, internal audit visualised the teams role
with a picture of a soccer pitch that shows players in red
uniforms attacking from one half. In the picture, each player
has a ball representing a risk, such as reputational risk,
credit risk, and interest rates. The offence faces three lines
of white-shirted defensive players on the other half of the
pitch. The banks business managers are tackling the risks in
the first line of defence. The chief executive, the boards risk
committee, and the chief risk officer and his team are setting
policy, doing oversight, and monitoring key risk and key
profit indicators in the second line of defence. In the third
line of defence, internal audit is the goalkeeper, catching risks
not appropriately defended by the first and second lines
whether as designed or as operating.
The result of an ERM audit is an opinion that lets the
board of directors know whether the companys risk-management approach is well-designed and functioning as intended,
with recommendations as necessary to address areas needing
improvement. The opinion matters because it affects what
senior management and the board do. So youve really got
to do a lot of communicating upfront, Sparano said.

Consider your companys governing

structures in designing audit processes

A companys governing structure influences internal audits

approach because an ERM audit should look beyond standard risk-management practices. What the board does and
what senior management does to manage and monitor risk
and key performance indicators should be within the scope
of an ERM audit.
At US Bancorp, as at other companies, internal audit
must stay away from setting policy to remain independent in
its annual assessment to the board. The annual ERM audit
opinion delivered to the board and its committees includes
internal audits findings of what senior management and the
board do right and what they need to do better in enterprise
risk management. At US Bancorp, several board committees
are interested in the findings, including the risk-management
committee and the audit committee.

Auditing has evolved well

beyond control testing alone.
Mark Sparano, CPA, CGMA

Define the actions and objectives of an ERM

audit and make sure all stakeholders fully
understand and support the definitions

US Bancorp has more than $400 billion in assets, but the

enterprise risk is in the banks daily transactions reflected in
treasury, capital, liquidity, and wire transfers.
Its a view key stakeholders dont necessarily share,
Sparano said, because risk management means different
things for different stakeholders. US Bancorps independent
public accountants, for example, focus on reserves, losses, and
disclosures reflected in the consolidated financial statement.
Regulators, for their part, care less about consolidated financial
statements. To them, processes, corporate governance, and
documentation are more important measures to gauge risk.
The stakeholders dont closely align, Sparano said. So
when you go out and audit enterprise risk management,
youve got to do a lot of definitions and make sure it rings
true with all your stakeholders.

Establish yourself as the third line of defence

in the business

Sparano established a five-member ERM internal audit team.

The ERM auditors, who are within the broader internal
audit team, co-ordinate the work with the second line of
defence. As the head of internal audit, Sparano delivers the
results of the ERM audits to the board of directors, where
he presents to several committees and works closely with the
chief risk officer.
I try to make sure the first line of defence is doing their
job and the second line of defence is doing their job, Sparano
said. The goal is to ensure each line of defence is functioning in a well-co-ordinated manner to maximise the efficiency
and effectiveness of the overall risk-management programme.

Acknowledge that developing, implementing,

and refining an ERM audit framework and
processes will take time

A risk-management audit assesses several elements, such as risk

culture, risk appetite, risk governance and oversight, and risk
reporting and escalation all of which take time, technology,

talent, and training to establish and bolster. As ERM matures

across all business lines, so does the assessment. New regulations
and business expansions may require changes, for example, to
third-party risk-management procedures, which involve refining
the audit design, Sparano said.
Maturation involves more documentation, processes are established and repeated, metrics are increasingly defined to allow
for quality assurance, and management deepens its understanding of ERM. In the most advanced stage, ERM decision-making
and continuous improvement projects are based on data,
metrics, formal quality assurance, and self-assessment feedback.
A few years into refining ERM and the assessment of
ERM at US Bancorp, Sparano said he has found it more
productive to talk about the sustainability of ERM auditing
rather than its maturity.
Sustainability implies an open-ended process that is understood to require improvements as needed to benefit the business. Maturity quickly triggers philosophical questions from
board members, Sparano said, who wonder when maturity
will be reached and whether trying to reach it is cost-beneficial.

Meet frequently with the person in charge of

ERM and encourage ERM auditors to talk to
their colleagues who are managing enterprise risk

Sparano considers US Bancorps chief risk officer his partner.

The two see each other almost daily, meet one-on-one at least
once a month, and frequently talk on weekends. Weve got
to be joined at the hip, Sparano said.
As a result of their close work relationship, the heads of
US Bancorps internal audit and risk-management teams use
the same terminology and concepts when they talk to the
board of directors about risk management.
Sparano encourages his team members to talk daily
to their colleagues in risk management. He said the daily
interactions make it easier to integrate risk management and
risk-management assessment, especially when ERM updates
and changes are introduced and internal audit must recalibrate its processes.

Benchmark your audit results

against your peers

To make sure US Bancorp is in line with the industry, Sparano benchmarks his ERM audit methodology against what
other banks do.
Its a pretty hard audit approach, Sparano said, adding
that he networks with other bank chief audit executives,
participates in various industry round tables, and uses
benchmarking data provided by internal audit and financial
services associations. n

December 2015

CGMAMAGAZINE.ORG

Photos by Vadmary/iStock

Photos by Vadmary/iStock

11

WAYS TO
REDUCE RISK
BY EMBRACING
INNOVATION

Innovation may sometimes seem risky, but ignoring it could

prove fatal. Focusing on unexpected successes and areas of
strategic importance and sometimes ignoring the customer
can steer an organisation away from an early grave.
By Mark S. Brooks

an you recall the first time you were told to

think outside the box? The phrase, which
originated with management consultants in
the 1960s, has since become a clich. But
what it is meant to entice innovation
will never grow tired.
Innovation can sometimes be perceived as the job of
someone else scientists, risk-seeking businesspeople,
youthful tech start-up founders. And those associations can
complicate our understanding of innovation, so much so that
we cling to our old ways. We dont want to make waves.
Were uncomfortable with ambiguity. We cant justify fixing
something that is not visibly broken.
And while innovation may sometimes seem risky, ignoring it could prove fatal. Competitors are pursuing new ways
to create and capture market value and make your business
irrelevant.They are differentiating themselves and trying
to disrupt the market through new business models, new
products, or new services.
Eighty-seven per cent of Fortune 500 companies from 1955
no longer exist today as a result of bankruptcy or M&A activity.The same could be true 60 years hence.But what about
the 13% that still exist?They are making tomorrow, rather
than being subjected to it.

Take IBM, for example. The company once known by

its longhand name, International Business Machines, used to
make everything from cash registers to computers.Now IBM
specialises in software and services.
Reinvention is a constant for those who make tomorrow.
To not innovate is to increase risk.And, at its root, innovation is all about creating value by reducing risk and exploiting opportunity.
Fortunately, there are some tenets you can follow to
reduce risk by innovating:

Focus on areas of
strategic importance

The emergent and adaptive nature of innovation must be

balanced with existing priorities.Innovations that do not directly
apply to the mission and vision of a business often fail due to
lack of market support and alignment.Effective innovations are
focused, specific, and strategically important. Innovations that
do not solve a problem or do not address a customers need
often fail because of lack of relevance. Innovations that try to be
everything to everyone often fail due to lack of specificity.
Nook electronic tablets produced by US bookseller Barnes
& Noble struggled to sell in the face of competition from similar
products made by companies that specialise in technology.

December 2015

12

Nook failed in part because it was too great a leap for a brickand-mortar retail outlet to start making and selling electronic
tablets. While there was market demand for e-readers, the
Nook tried to be more than an e-reader and lacked support
from third-party developers. It was beaten by Apples iPad and
Amazons Kindle because those products were far better aligned
with market needs and their parent companies mission and
capabilities.
Consider where your business is going, its mission, its
vision, and its strategic priorities. What problems do your
customers have? What jobs do they need to get done? What
are the growth priorities of your business? What does your
business want to be known for? Focus your innovations on
these answers.

Practise purposeful
abandonment

Not all products and services should continue to be offered

or supported despite their profitability.It may be more
profitable to abandon offerings that have low growth and low
market share, in favour of more attractive opportunities.The
freed-up resources can then be used to fund new initiatives
that may yield higher returns.
Abandon customers, products, markets, and channels that
provide marginal or negative growth. Move your resources
to areas of higher value and productivity. Put your best
people and resources on the biggest opportunities for growth
instead of ones that maintain or defend stagnant markets.
To purposefully abandon, ask these questions of every
product and service your business offers:
Is the return on investment positive and growing year
over year?
Does this offering advance the strategic goals of the
business?
Does this offering help achieve the vision and mission of
our business?
Is the market growing?If yes, can we grow our share?
If we did not have this offering, would we go into this
offering, this market, this channel, this business model today?
If the answer is not yes to all of the above, consider
abandoning the offering and moving the resources to new,
higher-potential opportunities.Do it before your competition
forces it upon you (see Redesigning Decision-Making: Pentland Brands, page 46).

Foster
learning

Learning is closely linked to innovation and creativity.As

knowledge is acquired, the brain makes new connections, as-

CGMAMAGAZINE.ORG

sociates disparate concepts, and can produce novel ideas and

insights.This leads to questioning and more knowledge. The
value of learning through questioning cannot be understated.
Research by Paul L. Harris, a professor at the Harvard Graduate School of Education, suggests the average
child asks about 40,000 questions between ages two and
five.Their minds are open to all possibilities with few, if any,
assumptions about the world. As an adult, maintain childlike mental attributes of curiosity and questioning to boost
learning. Read books and articles from unrelated disciplines,
attend conferences, take online courses in unfamiliar subjects,
and encourage colleagues to further their own learning.

Dont rely on
your customers

Your customers have a job to be done.They dont always

have the best idea of how to address it.They need you for
that.Asking them how to solve their problem wont get you
far.Understand your customers needs and pain points, but
mostly ignore their ideas for solutions.
Consider Henry Ford, founder of Ford Motor Co. and
builder of the first mass-produced, petrol-powered car.His
customers wanted to get from one place to another more
quickly. He thought that if he had asked his customers what
they wanted, they would have said, a faster horse. Use
design thinking and observation, and adapt ideas and insights
from other industries and technologies to conjure up novel
ways to solve your customers jobs to be done.

Compete up-market
on performance

Innovative products and services that displace competition

and change customer behaviour often target non-mainstream
needs to compete up-market. To drive innovation, build
something that performs better for non-mainstream customers.Small markets are often underserved, and they are more
likely to demand fewer features and less performance to meet
a non-mainstream need. This enables you to grow into the
mainstream or change it entirely. The evidence in Michael
Raynors book The Three Rules: How Exceptional Companies Think
supports this tenet so well that one of his rules is better before
cheaper (see Following the Rules to Sustained Profitability,
CGMA Magazine, Issue 1, 2014, page 20).
For example, excavators in the early 1900s were operated
through a series of pulleys and cables. Hydraulic excavators
were developed half a century later but were used primarily
for small jobs by non-mainstream customers. Over the next
two decades, manufacturers of hydraulic excavators moved
closer to the mainstream market by maturing the technolo-

13

ated, online email system with iterative steps.

Thomas Watson, the founder of IBM, is believed to have
said that the fastest way to success is to double your failure
rate.So embrace failure through quick, iterative tests, and
apply the learning to the next iteration.

gy and competing on performance.By the 1960s, hydraulic

excavators had matured enough to satisfy mainstream market
needs.Once the performance was equalised, competition shifted to reliability, then to convenience, then to cost.

Constantly communicate
and connect

Frequently engage with your industrys thought leaders, current customers, and aspirational customers.Create a dialogue
of idea sharing.It will enrich your perspective and keep you
attuned to emerging trends. As knowledge is acquired, it
should be shared with your colleagues and business partners.
Connect with non-experts whose minds may be free of
conventional associations. They can help you ask more poignant
questions and freshen your perspective.Host internal lunch-andlearn sessions, chat over coffee with colleagues, attend conferences, and connect with non-experts in other industries for a
fresh perspective.

Iterate and
fail quickly

Traditional project planning calls for meticulous scoping,

documenting, resource allocating, and launching.This
process is slow, and failure can be costly. A better approach
for innovation is to take small, quick, iterative steps to test
the market and the performance of your offering.This can
result in inexpensive failure at low levels of investment with
increased learning.
The minimum viable product (MVP) concept, made popular by Eric Riess book The Lean Startup, is a great framework
for iterating quickly.MVP is a recursive process to build just
enough of an offering to test, measure its performance in the
market, capture the learning, and repeat.The agile methodology in software development is similar. Classic examples of
this approach can be seen with many virtual products such as
Googles Gmail, which has evolved from a basic, yet differenti-

Choose the
right metrics

An old management adage says that what gets measured is

what gets done. Choosing the right metrics is essential to
maintaining focus and measuring success.
Balance your metrics between leading and lagging indicators. Ensure each metric is clear, actionable, and simple.Avoid
vanity metrics, which measure the illusion of progress such
as the number of page views or likes on Facebook. Consider what job your customer is hiring you to do. Focus on
outcomes and impacts. Determine what specifically can be
measured to gauge progress.Limit yourself to three to seven
meaningful metrics.

Look for unexpected

successes

The market will occasionally surprise you.Pay close attention to unexpected successes.Why did a particular offering
sell more units than expected? Why did we get a higher
market share than expected?Why did a market segment that
we didnt think of buy a particular offering?Where could it
lead us? Digging deeper into these questions may reveal opportunities for growth.Perhaps the offering is used in ways
you did not envisage, perhaps it touches a sensitive nerve for
customers that you didnt consider, or maybe a different type
of customer finds it valuable.
Peter Drucker, in his book Innovation and Entrepreneurship,
uses the US department store chain Macys as an example:
When Macys began selling appliances, it saw a rapid and
unexpected increase in sales and profit. Macys was embarrassed that nearly three-fifths of its revenue was from appliance
sales instead of fashion apparel. Instead of capitalising on this
unexpected success, Macys tried to restrict appliance sales.
Bloomingdales, a Macys competitor, saw this as an opportunity and built a new market with its housewares department.
As you identify unexpected successes, consider how to
exploit them for growth.Where could they lead you? Look
at unexpected successes to reveal opportunities to enter new
markets or serve existing customers in new ways. n
Mark S. Brooks is a senior manager of innovation at the AICPA,
where he is focused on member value, growth of the profession, thought
leadership, culture change, and strategic innovation.

December 2015

HOW TO GATHER

Photo courtesy of Siemens AG

RISK INTELLIGENCE
Risk management requires constant collection and assessment of
internal and external information. Heres how risk intelligence is
collected and managed at Siemens Wind Power in Denmark.
By Mike Skorupski, CPA, CGMA
CGMAMAGAZINE.ORG

15

management (ERM) programme, it is essential to draw on

the collective intelligence of the organisation to ensure that a
holistic view of the risk landscape can ultimately be provided
to the board.
To gain a complete view of threats on the horizon, risk
managers have to build their risk community within the organisation. To seek input, it is essential for the risk manager
to establish communication channels and build trust with
stakeholders and influencers throughout the business. These
should include CEOs and CFOs of regions and sub-regions,
sales, production, engineering, project execution, legal, and
strategy, as well as other operation and support functions.
Establishing the right formal and informal networks, and
then keeping those communication channels open, is essential
to creating a well-functioning risk organisation. In addition
to conversations on the phone or via video conferencing,
regular face-to-face meetings help build lasting relationships
and trust.

Step 1: Individual consultation

The first step in the process is to consult the members of the
risk community individually to hear their ideas and opinions.
Once the initial consultation has been conducted, the risk
manager can collate and analyse the findings before presenting and testing them in formal risk workshops.

Steps 2 and 3: Workshops, assessments

iemens Wind Power is one of the worlds

leading suppliers of wind power solutions,
with annual revenues in excess of5.5
billion ($6.9 billion) as of September 30th
2014. The company must maintain a
dynamic risk-management programme that
will capture, assess, respond to, and monitor risks and opportunities in a consistent and sustainable manner.
In addition to commonly known risks such as geopolitical
instability and slowing rates of growth in target markets,
the wind power sector faces additional challenges posed by
changing government policies. Public subsidies for renewable
energy projects are becoming less popular throughout the
world and are being phased out in a number of countries,
and wind turbine producers have had to adjust their business
models accordingly.
Alongside the pre-defined framework of an enterprise risk

The second step includes workshops that bring together all

of the key functions mentioned above to discuss the initial
findings. The sessions serve as a sense check as well as an
opportunity to brainstorm additional risks. Sometimes the
risk manager acts as a moderator and sometimes as a subject
matter expert, depending on his or her background knowledge and the severity of the risk being discussed.
Risk workshops achieve better results when separate
sessions are held for the risk community and the executive
management. Members of the risk community tend to be
more willing to contribute their opinions during brainstorming when their immediate superiors are not present, facilitating a more open and frank discussion.
The first steps help reveal some of the risk concerns
to individual departments. Often, when you are working
within your department or function, a certain degree of silo
thinking is inevitable to maximise the benefit or minimise
the risk for your own area of responsibility. This could lead
to risks or opportunities being identified which relate to a
specific area, rather than the enterprise as a whole, such as
the effect any production delays might have on individual
key performance indicators.

December 2015

16

Ensuring the ERM programme has lasting impact

Here are three factors that ensure that risk awareness is embedded in the Siemens culture.
Vigilance
Employees are urged to be vigilant, and every member of the staff
is encouraged to speak up about any problems they have identified or ideas they have. The challenge is to ensure that input is
received and reflected upon. A number of risk-reporting protocols
are available to employees, including software tools to categorise
and describe risks as well as opportunities and to report the risks
to internal and external third parties including auditors, lawyers,
and various investigative bodies.
However, the most important element is that staff know who
their risk manager is and are able to call or set up a meeting
with that person to discuss any difficult topics. A crossfunctional open-door policy is a prerequisite for fostering an
atmosphere of trust throughout the organisation.
Business acumen
The members of the risk community are the foundation of a successful ERM system. Everyone needs to understand the levers

Step 4: The board provides a holistic view

Once the workshops have been conducted and the third stage
the bottom-up risk-assessment process is complete, the
findings are presented to the board, which will provide a final
reality check. The holistic view provided by executive management and board members helps to eliminate topics identified in
the earlier steps, from the organisational risk assessment.
At this stage, the boards role is to assess whether they
share the same understanding of the severity of each risk, the
likelihood of occurrence, and the likely effectiveness of any
countermeasures which are to be put in place.
You can never be absolutely certain that information
brought forward from the bottom of the organisation to the top
has captured all the important elements decision-makers need.
However, by seeking input from key people embedded in every
layer and function of the organisation, you reduce the possibility of missing something. In other words, the broader the risk
community you have established, the less likely you will paint a
skewed or incomplete risk picture for your management.
Ultimately, it is the responsibility of the executive management and board members to scrutinise and challenge the
outcome of the risk consultation presented to them, drawing on their expertise, industry knowledge, and experience

CGMAMAGAZINE.ORG

which drive profitability and move the company forward.

Without the expertise and business knowledge of those
actively and even passively involved in the programme, the
results would be mediocre.

Ownership and empowerment
A mentality of ownership, empowerment, and accountability throughout the organisation is key to ensuring the ERM
programme has a lasting impact. It is absolutely essential
that people are empowered and held accountable for their
actions down to the lowest level of the organisation.
Goal-setting processes must be realistic and cause and
effect clearly established, with periodic follow-up reviews
in place. Siemens Wind Power has revised its goal-setting
programme to seek better alignment with the strategy
of the wind business. There is still work to be done to
eliminate conflicting goals being set across functions and
inadvertently promoting a silo mentality.

in the job to add valuable insights.

ALIGNING RISK CONSIDERATIONS WITH

STRATEGY
It is vital that any measures taken to mitigate risk support the
organisations overall strategy. Those that do not, such as
over-reached informational campaigns or over-extended internal reporting requirements, should be discontinued.
At Siemens, there is a continuous dialogue between
market units, divisions, and corporate risk managers as well
as members of the executive management team to align all of
the internal and external risk considerations. Of course, in a
technology-driven company such as Siemens Wind Power,
the ERM programme has to be flexible and agile to ensure the
company keeps pace with the evolution of new technologies.
The focus of the business needs to be constantly verified,
and any changes, such as entry into a new geographic market, could cause capacity constraints, or there may be legal
or tax implications, for example. For each change in focus, a
whole new set of risks may need to be assessed. n
Mike Skorupski, CPA, CGMA, is head of finance governance at
Siemens Wind Power in Denmark.

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18

DARING
TO ADAPT A

BRAND

To successfully tap consumer markets around

the world, companies may have to risk changing
their brands. Enterprise risk management offers
tools to help deal with the challenge.
By Sabine Vollmer

arley-Davidson, an iconic US brand that

for decades has built a reputation for heavy
touring and cruising motorcycles with large,
powerful engines, took a chance and introduced in 2014 a line of smaller, lighter-weight
motorcycles.
The Harley-Davidson Street 750 and Street 500 are meant
to appeal to beginning riders and younger, urban riders with
a smaller budget in the US, southern Europe, and emerging
southern Asian markets such as India. Street motorcycles that
are sold overseas are assembled at Harley-Davidsons India
plant, which started operations in 2011 in Bawal, about 100
kilometres southwest of New Delhi.
The Street motorcycles are all about bringing our brand
promise to a new, global generation of young adults, John
Olin, Harley-Davidsons CFO, said in a video announcing
the new product lines. Offering an entry-level product to
young men and women of all ethnic backgrounds is part of

CGMAMAGAZINE.ORG

the companys Fatten the Tails strategy to access new and

emerging markets over the next ten to 20 years.
Its a strategy projected to boost sales and more than
make up for demographic shifts away from white, male US
Baby Boomers, the core of Harley-Davidsons fiercely loyal
fan base. But Harley-Davidson also faces other strategic
risks, said Robert Gould, CPA, the companys director of
internal audit. Emissions and safety regulations are getting
stricter worldwide, and environmentally conscious customers are less accepting of rides they perceive as expensive
gas guzzlers.
We need to be innovative, Gould said. We need to
compete with other companies doing different things. How
do you do that when youre the iconic US heavyweight
motorcycle brand?
Specifically, how do you do that without jeopardising the
Harley-Davidson look, feel, and sound the attributes that
define the brand, which is one of the companys biggest assets?

15

HOW TO ASSESS THE RISK

Multinational food and beverage companies are particularly
likely to encounter this challenge because tastes and preferences are often tied to culture, religious beliefs, or regional
traditions. Cheese-topped pizzas dont go over well in China
because about 90% of Chinese are lactose-intolerant. Alcohol
cannot be legally sold in Saudi Arabia. And anything to do
with meat can be off-putting to the about 30% to 40% of
Indians who in polls identify themselves as vegetarian.
Enterprise risk management (ERM) offers tools to companies facing this challenge, said Jim Traut, CPA, CGMA,
an ERM expert and president of Traut Consulting. He was
previously vice president for reputation, risk management, and
ethics and compliance at food-processing company H.J. Heinz.
An enterprise-wide risk assessment that involves all
functions of the business (strategy, finance, quality, supply
chain, R&D, etc.) and all business units worldwide lets people share their ideas and collect information that can then

be synthesised, Traut said.

This is the strength and the value and the benefit to
[ERM], he added. You have an iconic brand, something
extremely valuable, and you have an organisation that
understands the concept of risk management, of capturing reward, and that then can readily deploy whatever the change
process is.
Traut suggested companies considering introducing a
brand into a new market answer the following five questions
during their risk assessments:
1. Do we want to be in the new market long-term?
2. Do we understand how to serve customers in the new
market, including, for example, maintaining a supply
chain in the face of possible corruption pressures?
3. Do we have the capacity to supply the product?
4. Do we make the product locally build or acquire a local
plant or enter a joint venture with a local partner or are
we shipping it in?

December 2015

Photo by Gurinder Osan/AP Images

Harley-Davidson, known for its powerful,

heavyweight motorcycles, shown here, has
introduced a line of smaller, lighter motorcycles.

20

5. What does all this mean financially over a five- to ten-year

period?

BUSINESSES INCREASINGLY WORRY ABOUT

THEIR REPUTATION
An enterprise-wide risk assessment is important because
strategic missteps can be costly. Strategic risks are on top
of executives and directors minds worldwide, ahead of operational, financial, and compliance risks, according to research
by accounting and consulting firms. Reputational risk, which
is driven by consumers brand experience, product or service
quality, and public perception about a companys ethics, is a
leading strategic risk concern.
Seventy-six per cent of CGMA designation holders said
in a global survey in 2013 that businesses in their industry
focused more on reputational risk than before, and 65% reported their companies always or often consider the financial
implications of reputational risk.
Of about 300 senior executives and board members
Deloitte polled worldwide last year, 87% considered reputational risk to be more important than any other strategic
risk their companies face, and 81% identified customers as
the top stakeholder for reputational risk. Revenue and brand
value are most likely at risk in case of reputational damage,
respondents said.

TAKING ONE STEP AT A TIME

Risk to the brand has been well-considered amidst Nestls
Nespresso strategic change in Japan.
Nespresso started adapting its brand to the Japanese
market about three years ago, 25 years after the Swiss multinational introduced coffee machines that use pressurised
steam and capsules containing a single serving of coffee in a
country known for its tea-drinking culture.
Departing from brand promotions Nespresso uses in the
rest of the world, Nespresso Japan launched a Japan-specific
television advertisement in 2014 that focused on the quality
of the coffee and the convenience of the machine, said
Takayuki Ichikawa, marketing director at Nespresso Japan.
We make the product the hero, Ichikawa said,
because the educational message better fits Japanese consumption needs.
But the company is stopping short of redesigning the
coffee machine to suit Japanese tastes. We can accomplish
a lot with the existing product offering in Japan, said Felix
Langenbach, head of finance at Nespresso Japan.
The biggest mistake would be to do everything at the
same time and then do nothing right, he said. Well take one
step at a time and make the step perfect, because to do some-

CGMAMAGAZINE.ORG

Revenue and brand value are

most likely at risk in case of
reputational damage.
thing thats not perfect would be the biggest risk to the brand.
The Japanese have developed quite a taste for coffee in the
past several decades. Consumption of roasted coffee tripled
from 1980 to 2010. In 2014, Japan ranked third, behind the
US and Germany, in total coffee consumption. In the summer, about two-thirds of the coffee drinks in Japan are consumed cold with large ice cubes a preference that presents
an opportunity for Nespresso in Japan, Langenbach said.
Japanese customers are demanding, he said. They expect
high quality and service a product with even slightly dented
packaging will be returned and they value convenience. In
a country where households are getting smaller, Nespresso
would benefit if it introduced a solution that made hot and
cold coffee by the cup without loss of quality, Langenbach
added. But the financial risks with such a technical redesign
would have to be carefully assessed, especially since Japans
unique power supply requirements would render such a development unsuitable for the rest of the world, Langenbach said.
Some study would have to be done to understand the
additional benefits for the consumer to see if it is a relevant
innovation, Langenbach said.
For now, Nespresso Japans priority is to heighten the
awareness of the brand amongst Japanese consumers, but if
the company were to consider changing the technical design
of its coffee machine, he said, we would pretty much work
backwards by first focussing on the additional value from the
consumer point of view.

TURNING AN ENTERPRISE RISK INTO A

BUSINESS OPPORTUNITY
Changes in consumer demographics, new regulations, and
increased competition from emerging markets continue to
pressure businesses to be more innovative.
Diageo, a multinational alcoholic beverages company
based in the UK, is in the process of introducing a series of
innovative new beers in the very competitive North American market. The first in the series was the Guinness Blonde
American Lager, which is brewed in Latrobe, Pennsylvania,
with American hops and the yeast Guinness has used in
Ireland for 125 years.
Millennial consumers are looking for brands which are
new, interesting, and authentic, Diageos chief executive,

21

Ivan Menezes, told industry analysts in January. They are a

multicultural group, internet-savvy, less category-loyal, and
they are one-third of the US population.
Attracting Millennial consumers was just as important to
Harley-Davidson.
The risk implications of the Street line of motorcycles
were vetted in an exercise that was part of a road map the
company developed in 2010 to improve its strategic risk
management, Gould explained during a risk-management
conference at North Carolina State Universitys Poole College of Management in 2013.
Each step of the exercise consists of a to-do list:
Step 1: Develop templates to identify, assess, and monitor
risks; develop risk-mitigation responses; and agree on risk
appetite levels before an issue is brought to the boards
attention.
Step 2: Close risk-management gaps, communicate
risk-mitigation plans throughout the company, track
risk-mitigation activities, and train risk owners.
Step 3: Integrate new risks into strategic planning, and
provide assurance that the risk-management processes
are adequate and appropriate. This stage includes an
internal audit and benchmarking of the risk-management
programme.
Harley-Davidson refreshes the road map every year,
Gould said. Implementing continuous improvement concepts,

developing contingency planning scenarios, and devising

approaches to manage emerging risks are among the tasks
that were new in the 2014 version of the exercise.
A key goal of the exercise is better management of black
swan risks, significant events that could damage the Harley-Davidson brand to the point that the survival of the
company would be at stake.
Such risks are tricky to identify. In 2010, Harley-Davidson held a workshop in which vice presidents named
business assumptions they believed to be critical to the companys success, Gould said. The assumptions were based on
the companys business strategy, competitive forces, growth
objectives, and resource requirements, among other factors.
The executives also discussed what would threaten their
assumptions and how to prepare for or prevent the threats.
The first workshop initially produced 62 black swan
risks. The participants then whittled the list to the top five,
determined whether they had detected any signals that one
of the black swans was approaching, and considered whether
any of the black swan risks harboured a possible business
opportunity, Gould said.
Harley-Davidsons No. 1 black swan back in 2010? That
regulatory, cultural, and competitive factors would significantly compromise the look, sound, and feel of its motorcycles. The companys responses included innovative new
products such as the Street line of motorcycles. n

December 2015

Photo courtesy of Nespresso

Nespresso Japan is navigating

new territory with coffee machines
for a tea-drinking nation.

22

HOW TO

MINIMISE FINANCIAL
STATEMENT RISK
Telecom giant AT&Ts director of accounting
discusses a few ways organisations can avoid
unintended errors in financial statements.
By Ken Tysiac

and restatement.
Bill Schneider, CPA, CGMA, the director of accounting
for multinational telecommunications giant AT&T, has
insight on these risks after serving on the advisory panel for
the 2013 update of the internal control framework of the
Committee of Sponsoring Organizations of the Treadway
Commission. He also serves on the Professional Accountants
in Business Committee of the International Federation of
Accountants.
Below, in his own words, Schneider shares his perspectives on some of the areas in financial reporting that carry the
most risk:

CGMAMAGAZINE.ORG

REVENUE RECOGNITION
Everybody is starting with inexperience in the new, converged revenue recognition standard, which was developed
jointly by the International Accounting Standards Board and
the Financial Accounting Standards Board to provide principles-based guidance with the goal of enhancing comparability
across jurisdictions and industries. The standard, which
was released in May 2014 but had its effective date delayed
and still is being amended, will create significant changes in
my industry and some others, but fewer changes in other
industries.
Even where there are changes, you can still lean back
on a lot of what you have learned. For example, a promise
is similar to a deliverable, and a performance obligation
is similar to a separate unit of account. There are some
differences arising from the new standard, but at its core,
based on experience, you should have a concept of what a
performance obligation is. But still, the lack of knowledge

Photo by Justin Clemons/AP Images

n a complex world of evolving standards

and technology, there are many risks associated with financial statements.
Fortunately, there are things financial
executives can do to minimise the unintended errors that can lead to a misstatement

Photo by Justin Clemons/AP Images

23

Bill Schneider, CPA, CGMA,

the director of accounting at AT&T

December 2015

24

or experience with the standard is going to cause more errors

and restatements when its in place, and not because anybody
is trying to defraud everybody. Its because no one knows all
the answers yet.
There are some common concepts that a lot of people are
going to have to focus on, and one is deferral of costs, which
is an area that may surprise people in a revenue recognition
standard. You may find yourself wondering, If I defer costs,
I have to figure out, what period do I amortise it over? In
fact, are those costs recoverable in the first place?
Businesses may have to figure out how to adapt their
internal costing systems to this deferral process. Your costing
system and the way you look at costs internally may not
comply with the new standards requirements. Or maybe
because your system has been internal, it has not been set up
with the same rigour and controls that an external reporting
process is required to have. There are a lot of things you
have to look at, and thats going to surprise some companies,
because youre dealing with costs in a revenue standard.

there are constantly errors in spreadsheets. Fortunately, there

are ways to minimise them.
First, you have to make sure spreadsheets dont have errors in them when you set them up. Then, you have to control the spreadsheets after you set them up. This is an access
issue. You have to do something to protect a spreadsheet so
people cant change it. Maybe they can read it, but they cant
change it. There are some simple techniques you can use to
help set up that control and make it less likely that errors will
be created through the process of working on a spreadsheet.
If you have shared drives, everybody in the finance department probably doesnt need access to every spreadsheet.
So divide those up. Create one shared drive for the budget
group, another for the accounts payable group, and another
for the general ledger. If youve got a really small finance
department, you cant do that. Simple password protection
can help instead. As you scale up, start dividing up who has
access to what, and it can be very beneficial.

SPREADSHEETS

This can be a challenge for any business with more than

a couple dozen employees. Its important to practise the
concept of providing the minimum access thats necessary
for people. You dont want to have a lot of people with write

We all love our spreadsheets, but once they start getting a little complex, they are prone to errors. You hope that theyre
immaterial. You hope you find them and correct them. But

IT ACCESS

Trouble with fair value

Forensic and valuation accountants surveyed for a 2014 American Institute of CPAs report predicted that valuation of assets carried at fair value would be the most prevalent financial statement representation issue in the next two to five years:

Valuation of assets carried at fair value

Inadequate disclosures of material transactions and fraud
Revenue recognition
Treatment of off-balance-sheet assets and liabilities

0% 5% 10% 15% 20% 25% 30% 35%
n Respondents who said the issue would be the most prevalent financial
statement misrepresentation issue in the next two to five years.
Source: The 2014 AICPA Survey on International Trends in Forensic and Valuation Services.

CGMAMAGAZINE.ORG

25

access to systems when they only need to be able to have

read access and searchability on the systems. You dont want
to give a lot of people the authority to go in and change and
add things to the general ledger. Therefore, you should also
consider limiting access to certain individuals during certain
periods; for example, access to record specific types of entries
may be restricted.
With the constant churn in employment these days, its
difficult enough for businesses of any size just to make sure
that when somebody leaves a business, the IT department
removes them from the systems. The real trick is when somebody changes jobs within the company, you not only give
them access to new systems, but you also may need to cut
off their access to the old systems. Although 99% of employees are not going to do anything bad, you have to have the
controls for that bad apple out there.

VARIANCE ANALYSIS
This is something a lot of businesses do. You compare month
over month, current versus budgeted, and other various
metrics, and it tells you if somethings outside a normal range
and warrants a closer look. It can be a very powerful tool.
But a lot of companies that rely on this control may not use it
as well as they should.
If youre going to use this control, you need to have very
specific thresholds that trigger further investigation. If you
just eyeball it, its hard to identify that as a control. You
have to set a percentage or dollar amount for variance that
calls for a closer look and stick to it.
Another question: Is your variance analysis finding anything? If its never finding anything, maybe your thresholds
are too high. If you never find anything to investigate in a
whole year, that should raise suspicion, because most peoples accounting systems are not that perfect.
When you do find a variance, you need to react properly.
Fixing it is just the first step. The next step is to find out why
the error happened in the first place. Was there a breakdown
in control further up the chain that you need to find?
The final aspect of variance analysis is not relying too
heavily on automatically produced reports. How do you
know those reports are right? Youd better have some
controls around making sure that report is right and
is actually pulling the information you want. If youre
pulling the information through some sort of data query, if
somebody adds a column or changes things in a database,
your report may not work right anymore. So you have
to be careful about the reports themselves and make sure
that theyre still pulling accurate information in the way
that you want.

Is your variance analysis

finding anything? If its never
finding anything, maybe your
thresholds are too high.
VALUATION
This is an area where judgement really comes into play.
While its not your job to be a valuation expert, you at least
need to understand how the valuation experts model works.
You need to know what the critical assumptions are. And
you need to know how sensitive those assumptions are. If
one assumption varies the valuation by 50%, you obviously want to make sure youre really comfortable with that
assumption.
You have to ask the right questions of the valuation
experts and learn in that process. Thats the key, being
willing to ask those questions, not expecting to be the expert
in everything, and being humble enough to say, Explain
this to me, and maybe explain it again. Because you are
responsible for the results of those numbers that are going in
the financial statements.
Finally, valuation is something everybody should have at
least some knowledge of. You need to have an idea of what
the major types of valuation are in your field so when the
valuation expert comes to you, you can know whether the
valuation methods they used make sense for your business.

PERSONAL BIAS
We all have to worry about our own unintentional biases.
Its easy to explain something away to yourself: Oh, Im
doing this for this reason. Im doing that for that reason. It
makes sense. And before you know it, youve crossed the
line, and everybody is saying, How could you possibly
make that decision?
If youre a little humble, you dont think you have the
answer to everything, and you rely on others; a lot of times
that will keep you out of trouble. But dont be so humble
and so reliant that you subvert your judgement to others.
You still have to be smart enough and confident enough to
ultimately make those good judgements, so theres a balancing act there. And keeping that balance throughout your
career is very important. n

December 2015

Photo by Goldmund/iStock

27

AWARENESS

IS YOUR SECURITY BLANKET

CIMA and Airmic have created a risk-identification
framework that can help executives find peace in
preparation and knowledge.
By Gillian Lees

Photo by Goldmund/iStock

rganisations can find all sorts of ways to

trip themselves up. A recent CGMA survey
of 1,300 executives across the world found
that 60% agreed that they faced a wide
array of increasing and complex risk issues.
Quite understandably, there is a desire
to comprehend what goes wrong and, perhaps more importantly, what needs to be done to put things right. During the
past 20 years or so, policymakers have responded on many
levels with legislation, such as the Sarbanes-Oxley Act in
the US, the introduction of corporate governance codes in
many countries across the world, and the development of
risk-management frameworks such as the one created by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
More recently, particular attention is being paid to corporate culture. In the UK, the Financial Reporting Council,
which oversees the corporate governance regime, is leading
a project to provide guidance to boards on setting and embedding the right culture. Its existing guidance on risk and
internal control, published in September 2014, emphasises
the importance of setting the right risk culture in part by ensuring that performance incentives do not trigger excessive
risk-taking.
While culture is important, it seems that failure to understand how the different parts of the business come together
to create value in the context of the external environment
the business model, in other words is also a factor.
In their Roads to Ruin report, researchers from Cass Business School investigated 18 high-profile cases of major risk

events and identified seven key issues that were described

as dangerous underlying risks. These included inadequate
leadership on ethos and culture, but also blindness to inherent risks, such as risks to the business model or reputation.
(Also see Resilience Through Rapid Response, CGMA
Magazine, Issue 2, 2014, page 16.)
Boards appear to lack the right tools and information
to enable them to have an effective risk conversation that
focuses on building resilience and protecting reputation.
A McKinsey survey revealed that directors struggle to
understand and make time to manage business risks one
of several areas where directors indicate room for further
improvement.
What is needed, therefore, is a practical framework to
help boards engage more effectively with the key risks to
their business.
The basic idea is to paint a far more coherent picture
of the organisations risk universe. The two core building
blocks underpinning the framework are the business model
and the risk-management process.

INTRODUCING THE BUSINESS MODEL

The business model is defined in the International Integrated
Reporting Framework as the organisations system of transforming inputs, through its business activities, into outputs
and outcomes that aims to fulfil the organisations strategic
purposes and create value over the short, medium, and long
term.
A thorough understanding of the business model within
the context of the external environment provides a

December 2015

eh

28

sound basis for identifying risks and opportunities.

The inputs and outputs of the business model are expressed in terms of the six capitals the organisations key
resources and relationships: financial, manufactured, intellectual, human, natural, and social and relationship. This ensures a broad, integrated view of value creation, which takes
intangibles as well as externalities into consideration. A chart
of the business model showing the value-creation process in
the context of the external environment is available with the
online version of this article at tinyurl.com/q95euc9.

THE RISK-MANAGEMENT PROCESS

Setting the risk context
The business model needs to be applied to a robust
risk-management process. This is illustrated in Figures 1
and 2, which show an iterative cycle of setting the context
against which risks can be assessed, treated, and subsequently monitored and reported on.

Risk assessment
An essential element of the risk-management process is risk
assessment. Typically, a risk register or inventory is developed, identifying a series of possible risk events. The benefit
of using the business model as the basis for risk identification is to ensure that risks are viewed in an integrated way
over the short, medium, and long term.
This should help the board better understand cause and
effect, giving it greater assurance that it has line of sight
over all the principal risks. Understanding the quality of
key inputs, such as people or relationships, may help the
board assess whether the organisation is setting up potential
problems for the future, such as poor customer/patient care
or industrial accidents. An events-based risk register or inventory might not pick up such broad-based risks that may
play out over the longer term.
A more systematic approach is to use the four components of the business model (inputs, business activities, out-

Figure 1: The risk context

n Purpose
n Values
n Behaviours

n Controls
n Key risk indicators
n Change programmes
n Strategies

CGMAMAGAZINE.ORG

n Activities involved
n Stakeholders

involved

Culture

Process

Actions

Content

n Registers
n Reports
n Mapping
n Assessment

29

puts, and outcomes) as a basis for identifying risks within the

context of the external environment, as shown in Figure 3.
This process of identification creates the basis for an
integrated risk analysis and evaluation, which informs how
the risks need to be managed.
Figure 3 shows that risks need to be identified for each
component of the value-creation process. For example, in
relation to inputs, each of the six capitals needs to be considered in terms of cost availability and quality. The outcome of
this process is a systematic identification of all the risks related
to inputs, business activities, outputs, and outcomes. Figure 3
shows the key considerations relating to each category.
These key considerations can then be integrated and
analysed to create a principal risk narrative. For example, an
organisation may identify a risk that it is not able to access
talent in sufficient numbers with the required skills to deliver
its services effectively (a risk to an input). It can track this

risk through the business model by connecting it to the risk

of process failure (risk to business activity), resulting in poor
service delivery (risk to output) and, ultimately, damaged
reputation (risk to outcome).
This process should also flush out risks that have been
missed. It enables risks arising from the different capitals to
be integrated. For example, poorly trained people combined
with inadequate equipment may result in poor customer
experience and, at worst, a serious accident.
This process of integration enables a richer risk assessment by:
Identifying recurring or particularly strong risk themes,
such as safety.
Developing a more comprehensive understanding of
causes, effects, and consequences, leading to more complete risk responses. For instance, an organisation may
address the risks of poor service delivery by investing

Figure 2: The risk-management process including the risk context

Establishing the context

Risk assessment

Communication

Risk identification

and

and
consultation

Monitoring

Risk analysis

review

Risk evaluation

Risk treatment

December 2015

30

Figure 3: Managing risk through the business model

Inputs

Business
activities

Outputs

Outcomes

n Financial

n Strategy

n Products

n Manufactured

n Processes

n Services

n Market share
n Reputation

n Intellectual

n Projects

n Finances

n Profitability

n Human

n Incentives

n Infrastructure

n Social and

n Distribution

n Intellectual

n Share price
n Customer

relationships

property

n Natural

Consider:
n Supply and
demand
n Cost
n Availability
n Quality

Consider:
n Changes to
activities
n Process
n People
n Technology

About the framework and a call for

feedback
The Chartered Institute of Management Accountants (CIMA)
has been working with the UK-based risk-management association Airmic to develop the framework described in this article.
The project builds on Airmics sponsorship of two seminal
reports, Roads to Ruin and the follow-up report Roads to Resilience, with its eight cases of risk-management successes.
CIMA is refining its initial thinking to develop a practical framework. The organisation is seeking input on what
readers think is the most useful way of looking at a business
to identify risk. Send feedback to Gillian Lees at gillian.lees@
cimaglobal.com.
More risk-management resources, tools, and case studies
are available at cgma.org/risklandscape. More information
about Airmic is available at airmic.com.

CGMAMAGAZINE.ORG

satisfaction

n Brands

n Sustainability

Consider:
n Supply and
demand
n Quality
n Consistency
n Distribution
n Distinctiveness

Consider:
n Stakeholders
n Risk and
reward
n Long-term
viability

in staff training, which may prevent short-term problems.

However, in the longer term, it may be necessary to
address the talent issue at a deeper level by collaborating
with education providers, automating processes, and/or
outsourcing some activities.
Based on this risk analysis, therefore, the organisation can
determine appropriate risk responses over different timescales and at three levels: strategic, tactical, and operational.
Some risks will be relatively simple, demanding a relatively straightforward operational response. Others, such
as the example above of poorly trained people combined
with inadequate equipment, will benefit from being viewed
through the lenses of the different capitals across all components of the business model to generate appropriate risk
responses at the strategic, tactical, and operational levels. n
Gillian Lees is head of research and development at CIMA, where she
develops thought leadership on governance and risk. She also teaches
risk management at the London School of Economics.

31

The board risk conversation

Based on the risk-management process, management should be able to determine what risk information is material for the
board report as follows:

The risk-management
process, including the risk
context.

Conversation points:
Setting the context and tone from the top.
Is the risk-management process effective?
Are we picking up all the principal risks?

Report on the recurring

and dominant risk themes,
eg, safety.

Conversation points:
Would we expect these to be dominant themes for
our business?
Are there other dominant themes we should reasonably expect to see? What are we missing?
Are the risk responses consistent with our risk
appetite and risk culture?
Is our risk culture giving rise to these risks? Are we
getting people to do the right thing?

Report on key business

model risks.

Each headline risk would be supported by a strong narrative, which explains detailed causes and consequences, integrating all aspects of the business model and
indicating a range of risk responses at the strategic,
tactical, and operational levels. These risks would form
the main part of the board risk conversation and would
need in-depth discussion, relating the risks to risk
culture and appetite as well as changes in the external
environment.
Conversation points:
In view of these risks, is our business model
fundamentally sustainable?
Are we comfortable that we are not risking
catastrophic loss?
What metrics do we need to monitor these risks?
Are these risks and proposed responses consistent with our risk appetite and culture?
Is our business model giving rise to additional
risks? Are we encouraging the right behaviours?
What the board receives is integrated and focused
risk information that is underpinned by the logic of its
business model, which should help it spend its time on
the risks that have the greatest potential for damage.
By using the business model as the basis for the
risk-identification process, boards also avoid the trap
of focusing only on strategic risks and missing operational disasters that cause reputational damage. As we
saw above, risks identified through the business model
should be considered on every level strategic, operational, and tactical.

December 2015

32

SURVEY DATA

PATHS TO

SUSTAIN BILITY
According to a global
CGMA survey, management
accountants see the value of
reporting on environmental
and social (ES) factors.

Key business areas

for which respondents
provide ES information
to decision-makers:

76%

risk
management

INFORMATION
SHARING
its their
60% believe
responsibility as
a management accountant
to include ES factors

include relevant
45
% ES factors when
providing information and
analysis to decision-makers

CGMAMAGAZINE.ORG

SHARING
BY AREA

84%
strategic
decisions

69%

project and
investment
appraisals

33

BARRIERS TO
INCLUSION

Management accountants who

do not report ES information
give the following reasons:
say no
60
% demand
34%
from decision-makers

say ES
75
% issues
can impact cost,

believe its not

part of their role

38
%
say systems

and processes
dont support
the inclusion of
ES data

risk, and value

33
%
say data are

ASSESSING
THE BENEFITS

unavailable/
unreliable

31% lack
knowledge or

believe
71
% ES issues
impact financial
performance

agree there are

say ES
67
% significant benefits 69% issues
to including ES factors in
are relevant to

training

organisational decisions

their organisation

GLOBAL VIEWS
Percentage of respondents who
agree there are significant financial
and commercial benefits from
integrating ES factors into decisions:

63% 65% 67% 69% 88%

in the
Americas

in
Europe

in the
Middle East

in Asia
Pacific

in Africa

Redressing the Balance: How Management Accountants Drive Sustainable Corporate Strategies,
cgma.org/Resources/Reports/Pages/redressing-the-balance.aspx.

December 2015

A BETTER FIT FOR

Photos by Brent Clark/AP Images

FRANCHISES

CFO in a Box, the centralisation brainchild of CFO Joey Pointer,

leads to a smoother-running finance operation for Fleet Feet Inc.
By Neil Amato
CGMAMAGAZINE.ORG

35

franchised stores.
The result was Pointers CFO-in-a-Box programme and
an illustration of how finance transformation can succeed at
small and midsize businesses.
The programme, which started with the opening of Fleet
Feets first company-owned store, employs accounting professionals to maintain stores financial records and to coach
owners on finance. Currently, 12 full-time finance professionals help owners interpret, react to, and plan for the financial
situations their business will encounter.
It has made for a stronger company, Pointer said. Fleet
Feet, which specialises in running shoes and other fitness
equipment, has nearly doubled its store count since 2009.
Its revenue is up 32% in the past three years growth born
through a strategy of acquiring independent stores across the
country.

OWNERS FOCUSED ON FITNESS, NOT FINANCE

Joey Pointers CFO-in-a-Box system lets

Fleet Feets franchisees focus more on
customers and less on finance.

hen Joey Pointer, CPA, CGMA, joined

Fleet Feet Inc. in 2004, he saw enthusiasm
amongst the small US retailers franchise
owners. But Pointer, the companys CFO,
didnt see well-organised financial statements.
A successful store owner insisted he
had $700,000 in cash on hand. Pointers calculations showed
closer to $150,000. And major expenses such as payroll were
missing from the owners version of the books.
This was a problem. And Pointer saw an opportunity:
Create a remote financial management system that would
centralise financial information among most of Fleet Feets
155 stores and create order out of reporting chaos in the
books of what is now a combination of company-owned and

The headquarters view of individual stores finances gleaned

by CFO in a Box is critical in a company such as Fleet Feet.
Rather than competing on price, Fleet Feet focuses on
staff expertise to win customers. It offers running clubs,
training programmes, and highly individualised service. To
wit: The company helps analyse customers gaits to ensure
theyre getting the best shoe for the way their feet land. This
approach helps Fleet Feet differentiate itself from competitors
such as the US brick-and-mortar behemoth Dicks Sporting
Goods and online giant Amazon.
Many of the stores are managed or owned by people who
are perhaps fitness fanatics first and finance managers second.
I was probably spending 10% of my time dealing with
financials, when Joey & Co. took over, said Jeff Wells, who
owns two Fleet Feet stores in Richmond, Virginia. They
were doing it more efficiently; it was in their wheelhouse. I
felt that burden taken off of me. I felt free.
John Dewey, who owns two North Carolina franchise
locations, also felt that freedom. As the owner of independent
stores that were converted to Fleet Feet franchises, Dewey
spent time keeping the books or hired a local CPA to do the
job. His background is in physical therapy, not finance.
I really enjoy the fitting process, watching people walk
and run, and trying to figure out their biomechanics and
what will work best with them, Dewey said. Interacting
with customers thats where I thrive.
Pointers initiative has done more than help owners get
more time with customers. It has caught instances of credit
card fraud, employee theft, and hidden credits from vendors.
It has led to the purchase of a group insurance policy for runners in the stores training programmes, which was costing

December 2015

eh

36

How to centralise finance in a franchise model

Fleet Feet CFO Joey Pointer, CPA, CGMA, offers the following steps for bringing the finances of franchised locations under
one roof:
Hire one person to run the show from day one
While piecing it together with several people may seem like the
cheaper option, ultimately, something is going to get dropped
along the way. If everyone is responsible for something, then
no one is responsible for everything, so find someone who will
own the programme. This person could start as an accountant,
producing tangible results each day in addition to overseeing
everything. Or the manager could oversee several other
functions in the company, but ultimately there needs to be one
CEO of the programme.

tries have been made, the last date various accounts have
been reconciled, and when a month is closed. We have
a giant, colour-coded spreadsheet that we use to evaluate
our accountants performance.
Establish a primary point of contact for customers
Dont have a data-entry person call with a question in the
morning and an accountant call with a question in the
afternoon. Have one person who is responsible for communicating everything with the client, and allow this person
to become someone the client trusts with their financial
information.

Create an organisational hierarchy

A well-trained data-entry staff can enter bills, receipts, and sales
information more accurately, which will free up your team of
Automate
accountants to perform higher-level functions and analysis.
Constantly hiring, training, and managing staff is exhausting, especially in the early phases, when your bigger focus
Determine pricing structure upfront
is on adding clients quickly. Automating as many functions
Its more difficult to change prices once a customer in this
as possible enhances the ability to expand quickly.
case, the franchise owner has become accustomed to a set
price. Even if you offer a deal to early adopters, do it with a
It wont happen immediately, but be prepared to run an
clear end point. For example, half price for the first year.
accounts payable department
The more bills that come through, the more you need a
Develop systems
team of people to help ensure your clients records match
For data entry, you will need systems to track who has entered those of the vendor. The most noticeable error to your
what documents and where those documents reside. For month- customers is one involving payment of bills, so you need a
end accounting work, you will need systems to track what enteam in place to prevent these errors from occurring.

the individual stores far more than chain-wide coverage does.

CFO in a Box also works by providing forward-looking
advice and allowing franchise owners some of whom left
careers in rocket science, engineering, and teaching the
freedom to talk running and running products with their
customers.

PILOT PROJECT
The programme unfolded like this:
A store Wells opened in Nashville, Tennessee, in 2004
was the test case for CFO in a Box, as the first corporateowned location. Wells ran the front of the house basically,
everything the customer could see. Pointer, meanwhile,
handled the finances on Wednesday nights and Saturday

CGMAMAGAZINE.ORG

mornings from Fleet Feets headquarters in Carrboro, North

Carolina.
Fleet Feet was opening other locations, and especially in
some of the franchised stores, it was easy for spending to
get out of control: A marketing budget of $50,000 suddenly
became $85,000. The buildout costs to prepare a store for
opening sometimes went from $100,000 to $150,000 or more.
We didnt have visibility to everything that was going
on, Pointer said. We were always reacting to data that
was six months or nine months too late to really make an
impact.
The task of finding a local bookkeeper for a growing
number of locations seemed daunting. With no finance
staff to speak of, Pointer was boot-strapping, trying to

37

prove that his idea could work, even if the pricing structure
wasnt feasible in the long term. He was convinced that
the headquarters, which had a view of all franchises and
company-owned stores, was the best place to have financial
oversight.
Pointer began teaching part-time Fleet Feet employees to
be his eyes and ears for the stores finances. Bit by bit, more
stores financial health was monitored. By 2009, eight stores
were taking part in CFO in a Box.
Even remotely, he took pride in the level of service
offered.
At our stores, we compete on experience, he said. You
can find the product cheaper at other places, but you wont
compete with the knowledge and experience [of staff]. With
CFO in a Box, were competing on that same knowledge
and experience. Were going to give you an unbelievable
experience and level of service that you just cant find at the
local level.
Today, CFO in a Box is voluntary for franchisees, who
pay 0.75% of sales (for a store that has $1 million in annual
sales, the fee is $625 a month). About two-thirds of the stores
participate.
Fleet Feets finance department offered full and light ver-

sions of CFO in a Box early on. The light version cost less,
stores did their own data entry, and the staff at the headquarters handled month-end close and reconciliations. Pointer
said the staff spent more time correcting mistakes than they
would have if they had done the data entry themselves.
Today, the service is all or nothing.

BUILDING TRUST
In addition to giving store owners time savings, CFO in a
Box gives them someone they can trust. Pointer said he knew
the programme was doing well when he started receiving
non-finance questions from owners.
Id get a phone call about something like what e-fax
service we used, he said. It was something that had nothing
to do with the financials, but they had a high degree of
confidence.
Part of the reason was strong hiring. Just as the stores
are focused on delivering a customer a great fit, the finance
employees take steps to build relationships with the franchise
owners beyond a monthly call to go over the balance sheet. If
the finance staff have been to the retail stores, they are better
able to understand and relate to the challenges faced by the
franchise owners. When a Fleet Feet store in Boulder,

Joey Pointer stands in front of

employees on a lunchtime run at
Fleet Feets corporate headquarters in
Carrboro, North Carolina.

December 2015

38

Colorado, had a change in ownership, accountant Chad Gentry volunteered to take part in the inventory process for the
new owner.
I said to Chad, Why do you want to count shoelaces at
2 oclock in the morning? Pointer said. He said, Thats
when the relationship is formed. There are processes and
procedures, but its about forming that relationship. This is a
time early on when I can form the relationship with that new
franchisee, so they look at me as a trusted business adviser.

CFO in a Box allows

franchise owners the freedom
to talk running and running
products with their customers.

TECHNOLOGY CUTS DOWN ON LABOUR COST

another store, which had credits worth $6,000. Then he asked

for a company-wide spreadsheet for credits from Nike. The
total amount was $150,000, at least half of which was from
the previous year.
Now, he believes, the value he provides stores is not in
unearthing past oversights but in piloting a franchise forward.
Because Staley sees the financials of so many other franchises,
he knows when one locations numbers are amiss.
Pointer believes in presenting big-picture comments along
with financials, and he creates a PDF of hand-written notes
to go along with a spreadsheet sent each month to individual franchise owners. Staley and others have followed suit,
offering three or four key points and then discussing those
with the owner.
Those three [points] usually lead to a bigger discussion
about their business and how it can be improved, Staley said.
And thats where the value is. We can say, Youve got an
issue thats going to lead to a bigger problem down the road
if you dont take care of it now. Your inventorys too high, or
your payrolls been creeping up.

From 2004 to 2009, franchise owners put paper invoices into

the mail for someone at the corporate office to review and
input into the accounting system. That process was slow and
labour-intensive, and it was too easy to have information get
lost or entered incorrectly.
Today, Fleet Feet uses a digital invoicing system that has
cut the average time to pay invoices from about 40 days to
four. Franchisees approve or dispute invoices online at least
weekly, and that information is automatically sent to the
CFO in charge and to the companys accounting program,
which is hosted on a cloud-based server.
The hosting company provides technical support for franchise owners, an important outsourced task given that Pointer is the de facto IT director but spends a good bit of his time
travelling to look at real estate and recruit new stores.
Technological advances enable more Fleet Feet stores to
pay faster, therefore taking full advantage of early-payment
discounts from vendors.

ADDING VALUE WITH ANALYSIS

Fleet Feets CFO-in-a-Box staff have mitigated franchise owners financial and cyber-security risk by uncovering instances
of credit card fraud. The staff also can see patterns in product
return rates of individual employees that might indicate a
worker is stealing from the company. These are the kinds of
things a busy franchise owner might not even notice, especially one starting a new store.
Something like that might have gone right under my
nose, said Wells, the Virginia franchise owner.
Senior Accounting Manager David Staley, CPA, who
now manages CFO in a Box, went from new guy to popular
guy when he began calling stores in his first few months on
the job and telling them how much money they had available
to spend with shoe and apparel giant Nike.
Staley learned that Nike didnt always send a credit memo
when it issued a credit for returned merchandise. In talking
with Nikes credit department, Staley learned that one store
had 11 credits totalling about $4,000. Then he asked about

CGMAMAGAZINE.ORG

WORD OF MOUTH HELPS SELL THE PROGRAMME

Franchise owners are constantly talking and comparing themselves with others. If one has had a good experience or a bad
one, they will be vocal. Staley said owners who first received
a pitch about CFO in a Box were the people they were certain
had zero desire to ever do anything financial.
Once those owners, including Wells, could quit worrying
about finance, their outlook brightened. They talked to other
owners, some of whom called Staley to ask how they could
sign up.
These days, Staley and 11 other full-time employees
manage the finances for 73 CFO-in-a-Box stores a far cry
from Pointers solo work on nights and weekends in 2004.
The company hopes to grow to 125 CFO-in-a-Box stores by
the end of 2016.
For the good of the brand, we needed this, Pointer said.
We need good financials, which are the building blocks for
any successful business. n

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CGMA MAGAZINE
EXCLUSIVE REPORT

6 CATEGORIES OF
KEY PERFORMANCE
INDICATORS

A PRACTICAL GUIDE FOR CGMA

DESIGNATION HOLDERS
Key performance indicators (KPIs) are measures used to reflect an organisations
success or progress in relation to specific short- to long-term goals.

They are useful for all types of businesses

across all industries and sectors from small
to large entities and not-for-profit as well as
governmental institutions. In selecting and
developing KPIs, it is important to clearly
define the priorities and limit the KPIs to
those factors that are important to successfully
achieving your organisations goals.

This summary of our latest guide for CGMA

designation holders recommends a series
of factors to consider when developing and
implementing a performance indicator model.

DEVELOPING QUESTIONS FOR

KEY PERFORMANCE INDICATORS
Performance indicators should be structured in the context of the organisations
overall mission and direction. They should be part of an overall strategic
management process that connects the vision and strategy of an organisation
and its short- and long-term goals to specific strategic business objectives
and their supporting projects or initiatives.
Secondly, performance indicators should focus on the
fundamental core processes. Emphasis should be placed
on elements that are truly central to the growth and
success of the organisation.
Developing key performance questions (KPQs) provides
a great opportunity to engage everyone in the organisation,
as well as some external stakeholders, in the performance
management process.

THE FOLLOWING ARE SOME GUIDELINES

FOR DESIGNING KPQS:

We have listed some example KPQs to illustrate how

organisations developed key performance indicators
for some of their non-financial value drivers.

EXAMPLE KEY PERFORMANCE QUESTIONS

How well are we
sharing our
knowledge?

KPQs should be short and clear A good KPQ

contains only one question.

To what extent are we

retaining the talent in
our organisation?

Design one to three KPQs for each category

of performance and capital value driver
Try to keep them to the vital few.

How well are we

promoting our
services?

Involve people in the process The more

people who understand and agree with these
questions, the more likely it is that everybody will
pull in the same direction.

How do our customers

perceive our service?

KPQs should be formulated as open questions

Open questions make us reflect; they engage our
brains to a much greater extent, and they invite
explanations and ignite discussion.
KPQs should focus on the present and future
By focusing on the future, we open up a dialogue
that allows us to do something about the future.
KPQs are refined through usage Once KPIs
are in use, they can be refined to improve their focus.

CGMAMAGAZINE.ORG

How effective are we

in managing our
relationships?
How well are we
innovating?
How successful are we
at building our new
competencies in X?
To what extent are we
continuing to attract
the right people?

How well are we

fostering a culture of
innovation and
continuous
improvement?
To what extent do
people feel passionate
about working for our
organisation?
How well are we
helping to develop
a co-ordinated
network to perform
clinical trials?
How motivated is our
workforce?
How successful are
we at sharing one set
of values?
How effective are
we at protecting our
intellectual property?

CATEGORIES OF PERFORMANCE INDICATORS

There are two major categories of performance indicators: financial and
non-financial. A performance indicator model that focuses only on financial
measures will prove to be deficient in todays fast-changing economic landscape.
Well-designed KPIs should be expanded to include financial and non-financial
measures and external and internal activities and events to maximise the longterm value and success of the organisation.
Financial KPIs provide an assessment of the financial
position of an organisation and generally are based
on income statement or balance sheet components.
Non-financial KPIs are other measures used to assess
the activities that an organisation sees as important to
the achievement of its strategic objectives. They typically
include measures that relate to customer relationships,
employees, operations, quality, cycle time, supply
chain, or pipeline.

Below are six important categories of financial and

non-financial indicators that will aid in providing a
holistic assessment of the value and health of your
organisation. More detail on each category is available
in the full resource at cgma.org/kpis.

6 important categories of financial and non-financial indicators

Internal business practices

Financial

Human resources

The way organisations manage their

underlying business processes and how they
streamline and automate their work flows
could transform the business, create value
to both internal and external stakeholders,
lead to innovation, and have a direct
impact on their bottom line.

Key priorities for all organisations are

building value and creating long-term
sustainable success. Among the many
forms of realised value, financial health
is a primary indicator of success.

Employees are the greatest asset of

any organisation. Meeting the needs of
employees is significantly important as
it is tied to the performance, satisfaction,
and long-term success and survival
of the organisation.

Key performance indicators

Environmental

Competitor

Customer

The sustainability of businesses in the long

term also depends on the welfare of the
ecosystems. It is increasingly crucial for
organisations to understand their role and
contribution in protecting and maintaining
the environment in which they operate.

To be successful in todays rapidly changing

global marketplace, organisations must
know their principal competitors, their
business models, their strengths and
weaknesses, their products and services,
and generally have a sense of where
they are headed.

Successful companies realise that, to

achieve and sustain a competitive
advantage, their business strategies must
address their entire value proposition
from the perspective of the customer.

December 2015

THE IMPORTANCE OF COMPREHENSIVE

PERFORMANCE INDICATORS
Performance indicators help an organisation improve its focus and make betterinformed decisions. It also provides a great opportunity to engage everyone in
the organisation as well as external stakeholders.
Developing a comprehensive set of performance
indicators that are relevant to the various functions of an
organisation is a big task. It will take time and require
a strong and collaborative effort to accomplish. It also
necessitates demonstrating a need and getting senior

managements strong support and commitment. As the

business landscape constantly changes, it becomes more
imperative for organisations to constantly evaluate their
progress towards stated goals, objectives, and strategic
directions for long-term success.

Measures that matter across industries

Banking

Petroleum

Retail

Customer retention

Customer expenditure

Capital expenditure

Customer penetration

Exploration success rate

Store portfolio changes

Asset quality

Refinery utilisation

Expected return on new stores

Capital adequacy

Refinery capacity

Customer satisfaction

Assets under management

Volume of proven and

probable reserves

Same store/like-for-like sales

Loan loss

Reserve replacement cost

Sales per square foot/metre

Source: PwC Guide to Key Performance Indicators: Communicating the Measures That Matter.

For more detailed guidance on performance indicators, visit cgma.org/kpis.

VISIT CGMA.ORG FOR MORE PRACTICAL TOOLS TO

HELP YOU AND YOUR BUSINESS SUCCEED
Essential tools for management accountants In this collection,
we bring together the essential tools used by management
accountants and outline how they can benefit the majority of
organisations, regardless of size or sector.
cgma.org/essentialtools

CGMA.ORG/RESOURCES

CGMAMAGAZINE.ORG

45

HOW TO
PERFORM BETTER
UNDER PRESSURE
RESILIENCE:

By Samantha White

Build rapport
When youve got rapport, you can influence people,
Sheasby says. Listen to people and try to understand the
world through their eyes. Find something they are interested
in, such as a hobby, and get them talking about it. Once they
are talking, you are building rapport. You can use rapport
to work with people who completely disagree with your
position, and influence them.
In a conflict, listening to the structure of what someone
is saying can also reveal that persons subconscious beliefs,
which can help you overcome their objection or resistance to
a situation.

Be clear about your ideal outcome

In a high-pressure situation, it is vital to retain a clear idea
of what you want to achieve. The goal you have in mind
should be framed in positive terms, focusing on what you
want to happen, rather than what you are trying to avoid,
Sheasby says.

Manage your state

For communication to be effective, the nonverbal signals we
send out have to be congruent with our message. When we
allow ourselves to get flustered or panicked, those signals start
to tell a conflicting story. Managing your state of mind helps
you remain calm, resourceful, and able to think clearly.

Remember that adversity is temporary

How you react to events conditions your resilience. Bear in
mind that the challenge you face is temporary, specific to a
particular incident, and is not a judgement on your self-worth.
To illustrate the importance of how we frame things, Sheasby
gives the example of a struggling business.
If the CEO says to staff, You could all be out of work
in six months time unless we turn this situation around,
he or she has focused the workers minds on the prospect of
losing their jobs. This engenders reactions not conducive to
the organisations survival, such as staff deserting what they
perceive to be a sinking ship.
Alternatively, the leader might say, Lets be honest; we
have got some real problems here. But just think how proud
we are going to be in six months time when we have turned
this around. And looking around me now, I know that this
team has the skills to do that.
By changing the structure of the language, Sheasby
explains, this statement makes the problem temporary and
implies that the employees have the strength to succeed, creating a different response to the same adversity.

December 2015

Photo by Sashkinw/iStock

erformance coach Mark Sheasby developed techniques of maintaining composure under duress during high-stakes
situations as a police firearms commander
in siege interventions. He has since used
that knowledge to help police negotiators,
elite athletes, and businesspeople thrive under pressure.
Sheasby explains how everyday professionals can build
resilience and improve their performance under pressure
whether its in an interview, board presentation, or delicate
negotiation.

46

REDESIGNING
DECISION-MAKING:

PENTLAND
BRANDS

The sportswear manufacturer is

working to promote informed
decision-making and, ultimately,
drive performance.
By Samantha White

Photo courtesy of Pentland Brands

ark Baker, FCMA, CGMA, has made it

his mission to ensure that when colleagues
throughout his business think about strategy or operational activities, theyre thinking
about risk at the same time.
Baker most recently did that at Pentland
Brands, where he was head of planning and risk at the
sportswear manufacturer. He was responsible for the business-planning process, including strategic planning, as well as
the risk portfolio and principal risk assessment. His role was
unusual in that it combined responsibility for both planning
and risk below the CFO level.
It was Bakers objective to improve the decision-making
behind strategy selection, which is one of the major risks for
a business. Baker left the company earlier this year. Before he
did, though, he explained how this has worked on two levels:
deciding at the group level which strategic opportunities to
pursue, and, at the brand level, deciding which designs to
bring to market as part of a collection. The objective on both
levels is to drive performance.

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Pentland owns some of the worlds top sportswear

brands, which clothe leading athletes, amateurs, and hobbyists throughout the world. Speedo products and designs are
used by Olympic swimmers, and in this years Rugby World
Cup, the England and Ireland teams wore kits from the Canterbury brand. Pentland is also responsible for outdoor wear
brand Berghaus, which targets explorers and climbers.
One of the major risks is whether the business model is
still relevant and whether it will continue to be relevant in the
medium and longer term. That involves extrapolating some
of the trends and changes that are happening and asking,
What is the world going to look like in a few years? and
Will we still be geared up to succeed the way we are now in
that environment?

FUTURE-PROOFING THE BUSINESS MODEL

Trying to work out what the company needs to succeed at
in the future is one of the methods the company has adopted
to manage some of its longer-term risks, as well as to give
Pentland a better chance of grasping opportunities that might

Pentland Brands, the global licensee of Ted Baker and other footwear brands,
is using data to make better decisions about which products to sell.

have been missed in the past. Knowing which initiatives are

going to be important to Pentland in the near future enables
the company to put work into building the supply chains
required and ensure they are working with the best partners
to achieve those goals, Baker said.
Involving a wider group of people in this process
visioneering, as Baker called it reaped rewards. Bringing
younger members of the leadership team into the conversation helped the company realise that it needed better organisation to succeed in the future. Pentland has also sought to
improve its ability to identify opportunities in its markets,
creating attractive propositions for those markets and being
ready to manage complex global extended supply chains.
As part of the transformation, Pentland made changes
to its organisational structure in early 2015, creating new
roles with oversight across the various brands to encourage
best-practice sharing across the supply chain, product and
marketing, and strategic customers.
The organisational changes prompted the creation of
three new roles: a global marketing director, a global cus-

tomer director, and a global supply-chain director. Each is

to apply his or her functional expertise across Pentlands 12
brands to ensure a consistently high standard is maintained
across the whole portfolio.
Pentlands visioneering identified two trends that make
this move important. The first is that the way brands are
positioned will change significantly over the next five years,
becoming more about a relationship with the consumer.
The second is the volume of available data (about consumer preferences, their thoughts on a particular brand, and so
on) that can guide strategy selection and the relationship the
company has with its customers. Previously, the company was
not equipped to use those data to the best advantage of the
whole business. Improved alignment between the brands will
make such data easier to interpret and act on.
Aligning the individual brands has enabled the company
to become more responsive from the customers perspective,
and it makes it easier to spot important opportunities with
customers around the world.
The heads of each brand and the functional leads are now

December 2015

48

reviewing strategy and risk together. Rather than dealing

with half a dozen representatives of the different lines,
management can talk to the functional lead, who can see the
picture across the whole business and can implement any
changes fairly quickly across the organisation as a whole. The
company expects to see the benefit of that approach in the
next year or two.

Mark Baker,
FCMA, CGMA

STRATEGY SELECTION
One of the major risks facing any business involves strategy selection, and spreading resources too thin over too
many different initiatives itself is a risk. Therefore, informed
decision-making to ensure resources are directed to the most
important value-creating strategies is vital to mitigating risk.
The heads of the various brands and the functional directors undertake a situational analysis as the first step in deciding
where to focus planning efforts. This requires Pentland to
spend more of its planning resources focusing on the key
value-creating opportunities, rather than taking time on each of
the options, regardless of the size of the potential benefit.
Entry into a new market, for instance, may involve developing a range of products that are specific to that market across

Photo by Anthony Upton/AP Images

Example of market assessment:

China
Looking at market trends in China, the Pentland team observed that there had been a boom in the construction of
50-metre swimming pools, which suggested participation
in swimming would increase. This presented an opportunity for the Speedo swimwear line. The team assessed
the potential market growth and the specifics of the market, asking questions such as How do consumers make
purchasing decisions?, Which channels do they use to
make their purchase?, and Does the product need to
be customised or adapted for the market?
The Speedo brand has now had a presence in China
for more than seven years. The growing success of the
Chinese national team at the Olympic Games (including five gold medals in swimming in London in 2012)
inspired more people to get involved in the sport. There
is also a greater awareness across the country of the
health benefits of swimming, all contributing to increased
participation over the past eight years. In contrast, in a
mature market such as the UK, swimming participation
has decreased in recent years, making China a golden
opportunity for Pentland.

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a number of the businesses. That involves a co-ordinated approach. You cant do too many of those things, so you really
want to find what the big winners are, Baker said. Youre
trying to assess these opportunities, even put a value on them
if you understand the market and where youre trying to
target.
A key part of governance is ensuring that the information
on which people are basing decisions is of high quality.
Evaluating an opportunity such as a new market or a new
product category involves asking the practical risk questions
at the same time, another advantage of having a combined
risk and planning role. These include What might get in the
way of us achieving that?, If we were to pursue that strategy,
could there be any unintended consequences we havent
thought of yet?, Are we organised to deliver it?, and Do
we have the talent to pull it off?

OUTCOMES
As a result of building risk concerns into the strategicplanning process, Pentland has started to see greater transparency around why management teams selected a particular strategy, as well as about the risks associated with that
particular strategy.
Baker observed a change in risk discourse and dialogue
within the company. People know that they must think about
risk when they are presenting their plans. In review meetings,
everybodys expecting to see questions both on how you
have evaluated the option and selected it against other choices, but also transparency about assessing the risk, Baker
said.
Staff have seen the approach translate to greater profit
and are motivated to want more informed decision-making,
he said.

PRODUCT SELECTION
Another way of managing risk in the business is through
improved planning capability.
In fashion and footwear, new product development and
selection is crucial given large collections and short life cycles.
Baker equipped design colleagues with skills and data to

49

make more informed choices about which products make the

collections.
Before the project, the brands were producing a number
of items that were underperforming and therefore not adding
value. Baker realised that the quality of the controls being
applied to product selection was not consistent across the
business, and he came up with a framework to address this,
carefully. Its all about balancing control and creativity, he
said. You dont want to stifle entrepreneurship, but you still
want to have control.
Its actually counterintuitive, Baker explained.
One might think that in a fashion collection, the more
choice the consumer has, the better a range will do. In todays
world, given a lot of macroeconomic changes, such as the
continued retail price deflation in footwear and apparel, and
the reduction in Asian manufacturing capacity since 2008, you
cant really afford to do that, Baker said. You could quite
easily choose a lot of products that dont perform, but youve
lost a lot of resources and cash out of the business.
With better controls in place, Pentland has been able
to remove superfluous products from its collections and
generate greater profit as the design and development effort
is better targeted.
The approach instituted by Baker involves forecasting the
volume of each product that can be sold by looking at factors
such as market size and where the growth is coming from.
If you calculate, for example, that you can sell 100,000 pairs
of shoes, and each style will sell about 1,000 units, you only
need to design and develop 100 styles. Previously, teams
may have been designing up to 200 pairs, but now that they
have guidance from the data, they look at collections with
a much sharper lens and eliminate products that do similar
things for the same target customer.
The key is encouraging staff to anticipate the outcome of
their decisions, constantly projecting the performance of the
portfolio as it is being designed. That involves forecasting,
planning, scenario planning, and incorporating risk in decision-making.
One of the initial changes brought about was to stop
brands producing any items that the analysis indicated had a
high likelihood of being a loser.
There is much more forecasting done about the likely
volume of business that will be done by selecting one product
compared to another and then looking at the whole portfolio and asking, Does that stack up? Baker said. This has
worked in reducing the amount of cannibalisation, which dilutes financial returns for the amount of development effort,
enabling teams to select what they believe is the optimum
portfolio of products to launch into the market.

Designers are now using more feed forward information: As the project goes on, designers also get to see feedback, including productivity information, so they can track
how good they are at deciding which designs should go into
a collection, all of which helps motivate them to implement
higher-quality controls in their decision-making.

COMMUNICATING RISK
To help colleagues improve the quality of a risk assessment,
Baker put it in practical terms, asking questions such as
How have you made this decision?, What information
have you used, and what thresholds are acceptable?, and
What should you be doing that youre not?
The way you present performance information is also
crucial. A lot of the effort ... is thinking through how we can
get the information across in the simplest, most powerful way
to our very broad bunch of stakeholders, Baker said.
... Simple tools like risk heat maps have been useful to
help people who arent normally thinking about risk to start
getting engaged with it.
Spreadsheets appeal more to the accountants and the technical side, whereas graphics, such as heat maps, are a more
effective way of reaching commercial and design colleagues,
Baker added.
Waterfall charts give the company a graphical way of representing the progression from one profit measure to another,
breaking it down to show where the change came from. For
example, a block in the chart could represent $1 million that
came from cost savings. Another could represent $2 million
from a new venture, and so on.
Communicating performance information quickly and
effectively allows a business to adapt and respond when
something is not working, another part of managing risk.
The sooner you can get people to realise what is and isnt
working, the sooner they can take action to rectify it.
Baker and his team helped to provide frameworks and
approaches to incorporate risk considerations into the day-today work of other teams.
And he was able to show that where you improve risk
management you can improve performance, he said.
That motivates people to engage with risk and look for better
ways of doing what they are doing.
Now, Baker said, people are saying, I can see why forward-looking at risk is so important for our long-term success.
Improving performance is the reason Baker promoted
more informed decision-making. When that is your driver,
he said, you then get focused on the real risk, and that
engages everybody, from the board all the way through the
business. n

December 2015

TAMING THE EMAIL BEAST

By Neil Amato

mail can morph into an after-hours monster for some workers. One top regret of
managers is checking in too often whilst on
holiday, according to research by staffing
firm OfficeTeam. No doubt, this is a byproduct of the email beast.
Setting proper digital boundaries can help you feel more
refreshed upon return and can help employees learn
communication discipline. A recent Gallup poll shows that
employees who spend time outside of work checking email
are more likely to experience stress than those who dont.
Stefany Williams, CPA, CGMA, the CEO of Goodwill
of Western Missouri and Eastern Kansas, is an advocate of
going dark during time off. Here is her advice:

Pay attention to what motivates you to check your

email relentlessly and make it stop

Photo by triloks/iStock

For me it was the light on my phone blinking across my kitchen at 9pm while the phone charged, Williams says. Thats
where I started reclaiming my ground. I turned that blinking
light off and started checking the email on my terms instead of
the phones terms. She suggests disabling email notifications.

Talk with your boss and your team

Get clarity on the expectations about response times and
protocol for urgent situations. This is fairly easy if you are
sitting at your desk, Williams says. If you are in the field,
more clear expectations need to be in place. Make sure

CGMAMAGAZINE.ORG

No one is at their desk every

minute of every day.
Stefany Williams, CPA, CGMA

people who may need to reach you know about your change
in response patterns and how it will affect them.

Do not combine personal and professional mobile

devices to save money
Many people dont like the hassle and cost of having two
phones, but having one often means workers give up the
ability to separate work and personal life. This was not a fair
trade, Williams says. She suggests doing a cost/benefit analysis
of the restorative power of time away from work. The cost
of a personal phone will be worth it, she says.

Set a good example with email at work to make

your organisation more efficient
Williams advises setting calendar appointments to check and
respond to email, say 15 minutes every three to four hours.
Training employees to be more disciplined with email is an
ongoing process, as workers have grown accustomed to getting immediate replies. No one is at their desk every minute
of every day, she says.

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INSIGHT. NOW
MAKE AN IMPACT.

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