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Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
Kpmg International Agenda Issue4 112009
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Kpmg International Agenda Issue4 112009

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  • 1. Agenda Issue 4, Oct/Nov 09 Insights into growth, performance and governance Thriving in chaos How mining giant Vedanta profits from low prices Political economics What nobody is telling you about the return of big government Reducing risk Ten ways you can learn to expect the unexpected “If I wrote my memoirs, the title would be: It’s Not About The CEO” Stora Enso boss Jouko Karvinen on the power of great teams © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 2. ‘‘ Opportunities are back on the menu. The information contained herein is of a general nature and is not intended to address the Most companies have been circumstances of any particular individual or entity. Although we endeavor to provide accurate and through the “Are we okay?” stage. timely information, there can be no guarantee that such Some businesses are still embroiled in the battle to remain viable, information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a but the vast majority have shone thorough examination of the particular situation.The views and a light into every dark cranny, done all the prudent, sensible opinions expressed herein are those of the authors and interviewees and do not necessarily represent the views and opinions of KPMG’s network of firms. © 2009 KPMG housekeeping and can now ask: International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of what opportunities will present themselves and independent firms are affiliated with KPMG International. KPMG what are we going to do about them? International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG We have relearned the art of managing in a International have any such authority to obligate or bind any member firm. All rights reserved. recession. The next step is to ensure we are ready to Printed in the United Kingdom. KPMG and the KPMG logo are ride over any remaining bumps in the road – and, more importantly, to prepare for renewed growth. registered trademarks of KPMG International, a Swiss cooperative. This edition of Agenda includes a number of Publication name: Agenda: insights into growth, performance thoughts on the road to recovery, including and governance Publication no 909004 Publication date August 2009 Printed in the UK by Park Communications Ltd. Environmental Management System ISO 14001 accredited and Forest Stewardship Council (FSC) ‘‘ advice on managing change and the uncertainty of how governments will play their roles. Opportunities, rather than crises, are becoming chain of custody certified Printed on Think White, manufactured from 100% the order of the day. Elemental Chlorine Free (ECF) pulp, of which 50% is recycled post-consumer fibre and is sourced from well-managed forests independently certified Alan Buckle according to the rules of the FSC. Global Head of Advisory, KPMG © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 3. o contents Agenda Oct/Nov 09 04 Foresight 08 Swine flu’s cost; new management theory; controlled growth 06 Ones to watch Leaders in emerging economies facing career-defining challenges 08 taking risks seriously How risk management – properly organized, understood and adopted – can help you control your costs in hard times 12 the sustainable CEO MuSt READS 12 Jouko Karvinen, CEO of forest products giant Stora Enso, says 08 Risky business managing change is about speed, differentiation and teams Why you need a systematic approach 16 Curing healthcare to manage the risk How the healthcare crisis could affect business – and what behind every reward lessons it has for future public and private sector collaborations 12 Stora Enso 19 Left field Jouko Karvinen’s personal insight into What the 20th century’s greatest poem says about teamwork CEOs, China and Moviestore Collection; David Short; Dirk Anschultz, Dougal Waters, Image Source/Getty Images winning 20 the profits of reinvention 16 Mining behemoth Vedanta can’t control prices but grows profits 16 Healthy debate Experts diagnose the because staff drive a continuous re-engineering of the company cause of healthcare’s ills – and discuss 22 ten opportunities for 2010 and beyond likely cures Time to explore lean finance, divestment and benchmarking? 26 the business of government Forget big government being back for good and new Sarbanes- Oxleys. Recession may force the state to reconsider its role 22 29 Learning curve What managers can glean from Napoleon’s invasion of Russia 30 Boring but important All the data should be at your fingertips, so why can’t you find it? Search guru Conrad Wolfram on the benefits of data control 31 Any other business Setting up sustainable supply chains; CEOs get blogging Agenda: Insights into growth, performance and governance is published by Haymarket Network, Teddington Studios, Broom Road, Teddington, Middlesex TW11 9BE, UK on behalf of KPMG International. Editor Paul Simpson Managing Editor Robert Jeffery Art Editor Sarah Power Production Editor Sarah Dyson Staff Writer Laura Bridgestock Sub Editor Peter Bradley Designer Paul Frost Group Production Manager Jane Grist Production Manager Jim Turner Board Account Director Kate Law Senior Account Manager Caroline Watson Group Art Director Martin Tullett Editorial Director Simon Kanter Managing Director, Haymarket Network Andrew Taplin Reproduction by Colour Systems, London, UK. Cover photography by David Short. No part of this publication may be copied or reproduced without the prior permission of KPMG International and the publisher. Every care has been taken in the preparation of this magazine but Haymarket Network cannot be held responsible for the accuracy of the information herein or any consequence arising from it. Views expressed by contributors may not reflect the views of Haymarket Network or KPMG International or KPMG member firms. Agendamagazine 03 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 4. foresight The swine flu Buzzword bingo H1N1 virus: a stark reminder of why continuity matters Jargon you really don’t want to hear in your workplace Architected Invented verb, a more pretentious way of saying “designed” Baked-in Automatically included Blue ocean Unexplored market space Negatron The employee who always looks for the fly in the ointment North of More than, especially referring to cash flow Polish the cannon ball CEO-speak for “just do a good enough job” Ready for anything? Shoot the puppy Take an unpopular but necessary action Business continuity gets serious in the face of a pandemic Super-black In June, the scale of global alert surrounding a C-level concern. “There has been a fair The ultimate secret swine flu was raised to level five by the World amount of scaremongering in the mass media Toxic accountability Health Organization (WHO), just 42 hours about swine flu, but it is one of the emerging Too much of the wrong after it had reached level four. Experts had threats focusing people’s minds. Organizations kind of accountability expected such a hike to take around a month. are taking the risk process more seriously.” With some businesses still contemplating orders for anti-bacterial handwash, the news It is easy to be daunted by the variety of threats and the speed with which Gender highlighted the fast-moving and devastating threats they face. Business resiliency experts they change. Brown says that rather than just run a multitude of complex scenarios, agenda iJet said only 57% of multinationals had a companies should focus on two key factors: Male-only boardrooms pandemic preparedness plan in place by the how many staff and/or buildings would may be missing out: research by Catalyst found CMSP/Getty Images; George Hammerstein/Corbis time level five was reached. need to be inactive before operations were that, between 2003 and The potential cost to business is huge. Last seriously affected, and how long it would 2007, the Fortune 500 year, The World Bank estimated that a flu take to recover from such a situation. They companies with the most pandemic could cost US$3 trillion (€2.1 should agree on what level of business women on their boards trillion) and trigger a 5% drop in global GDP. activity a board expects in a pandemic. enjoyed equity returns 53% Business continuity planning used They might also want to ask the same of the higher than those with the fewest. Norway has led to mean being ready in the event of key players in their supply chain. Europe by stipulating that a terrorist incident or serious power failure “Businesses should undertake an impact 40% of directors must be but, says Will Brown, KPMG in the UK’s analysis to understand the time frame they female by 2010. Spain aims head of business resilience, companies should could be out of action, and the points at which to reach that target by 2015. factor in everything from pandemics to that would have a significant impact. The aim Yet only 0.2% of Japanese concerted cyber-attacks. “The current crisis is to develop a resilient organization that can firms have a woman on the board and a quarter of means our appetite for risk is lower than ever,” withstand anything – from a pandemic to a European company boards he says – and that’s why continuity is becoming local problem,” he says. have none at all. 04 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 5. leading edge g g Who moved my Growth? management theory? Don’t get Business authors name the next big thing me started Gary Hamel reinvented management and Michael Hammer re-engineered the Gary Cokins Author of Performance on that… Management Matthew Gwyther, editor of Management Today magazine, corporation. But where will “The new focus is planning says if companies are to move on, they will have to look to management theory go after and analytics. Change at all internal sources while the market remains so unpredictable the credit crunch? We asked levels has accelerated so four leading commentators. much that reacting after-the- We don’t know where we are yet fact is too late and risky. So is the global economy patient off life-support, into the Kieran Levis By measuring and analyzing recovery room and on the way to finding its way back onto its Author of Winners and Losers what truly matters, feet? It’s hard to tell just yet, because the modest improvements “What enabled Apple, Sony, management’s job could be in financial markets and confidence levels follow such enormous Amazon and Google to create less stressful.” declines. Calling the bottom requires some nerve. new markets was the same as it was for Henry Ford and Anders Drejer This crisis is global and severe in its nature George Eastman: distinctive Aarhus School of Business, This is highlighted by the performance of equities. The organizational capabilities Denmark capitalization of global stock markets has rebounded from a low that meant they could make “The financial crisis will lead compelling propositions to of US$29.8 trillion ( €21.3 trillion) in March 2009 to US$41.5 trillion to more holistic and dynamic customers… the key is having ( €29 trillion) in July. This is a big jump; however, it still leaves management theories. We are the ability to continue to do capitalization way off its US$63 trillion ( €45 trillion) peak of realizing that an organization better what the business October 2007. Despite recent gains, the loss of wealth has been has several bottom lines and already does well.” severe – an enormous volume of blood has been lost – and the that innovation as well as body business is severely anaemic. corporate social responsibility should be included to secure CFOs are cautious – with good reason long-term survival. We will The early stages of an economic recovery are a delicate see management theories that business and a tricky time for the board of any company. make this more operational.” This means that although other board members – those who innovate and who wish to take stuff to market – may be Henry Mintzberg straining at the leash to get back into growth mode, most Author of Mintzberg on CFOs will remain highly cautious. Management “I hope that the next big The appetite for risk is healthy thing in management This period is probably one of the most nerve-wracking for will be no big thing, but many a CFO because it means re-entering the world of risk, rather a recognition that even though the rules aren’t as straightforward as they were management is a basic before the crash. There is no doubt that it is the bold who will human activity that reap the rewards: while competitors are still inward-facing isn’t helped by what is and fretting over costs, it is the right time to strike. fashionable.” Credit where credit’s due microtrend Many companies will discover that even though they may have the appetite for risk and wish to make a strategic move that requires investment, the capital simply won’t be available. Green shoots need the rain of available finance and Industrial commons at the moment, even when lenders reluctantly ease open the Can Western nations avoid losing their manufacturing sluice, the rates of return they seek are unrealistically high. (Even the AAA-rated UK government – which next year is base? Experts have called for an ‘industrial commons’. proposing to spend four pounds for every three it receives in The term, spinning off the concept of ‘common’ or revenue – is finding it tougher to place debt.) publicly owned land in English law, refers to a collective R&D, engineering and manufacturing capability where It is wrong to rule growth out of the equation business and government can nurture know-how, people Growth may have to be organic and from within. This could and manufacturing ability. Sharing IP isn’t new, though involve the unpleasant task of canning less successful projects to free up resource for more promising enterprises, or a opening up other areas of business will be a trickier sell. redeployment of troops, rather than a recruitment campaign. But governments may prefer to encourage this if it stops Firms can only move when the buying public is ready. It’s always manufacturing vanishing to emerging economies. worth remembering John Maynard Keynes’s words: “The markets can remain irrational longer than you can stay solvent.” © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 6. What’s on their ‘to do’ list? 02 Sri Mulyani indrawati 46, minister of finance, Indonesia These five leaders have a challenging role to play in the world’s 01 Ex-IMF executive director and USAID consultant, Sri Mulyani Indrawati has quickly made her mark as Indonesia’s most exciting emerging Martin finance minister, since being appointed in 2005 by President Yudhoyono. Her economies. What can roMan firm CEZ Group 39, CEO, Czech energy success in stamping out corruption, cutting debt and attracting foreign you learn from them? direct investment has prompted Forbes The economic downturn won’t beat the to call her the world’s 23rd most head of CEZ Group, central and eastern powerful woman. Europe’s biggest power business (a The story so far When she took over conglomerate of 96 companies) – as long as finance minister, Indrawati fired the as he survives election turmoil. heads of the notoriously corrupt tax and The story so far Martin Roman customs divisions. Indonesia is still joined CEZ as CEO in 2004, after five ranked as quite corrupt (126th of 180 years running engineering group Škoda countries), but, as she says: “We started Holding, and has fast turned the national from an empty glass. Now it is 60% full.” giant into a major player. Acquisitions Foreign investment has soared, while her in eastern and central Europe and the ‘sunset policy’ on tax delinquency has decision to focus on nuclear power have boosted tax receipts by 50%. paid off: Q1 2009 profits, up 23%, beat What’s next? Indrawati predicts most forecasts. With Czech households economic growth accelerating to 7% and firms feeling the downturn, Roman from 2011. If this growth proves, as she ditched planned price hikes for an offer believes it will, to be sustainable, to lock in 2009 prices until 2010. Indonesia – already the largest economy What’s next? In the run-up to Czech in south east Asia – could qualify for elections, the correlation between rising inclusion among the BRIC economies. household bills and bulging executive Indonesia’s GDP grew 4% in Q2 2009, bonuses at the 70% state-owned company outperforming Russia and Brazil in the has become a political battlefield. Roman same period. Indrawati has vowed to lift persuaded the EU it would be “economic the stimulus package to the G20’s suicide” to force firms in this coal- recommended 2% of GDP but plans to dependent region to pay full price for keep debt at 32% of GDP. A deal with CO2 emissions from 2013. CEZ still Japan should ease the currency wants to buy high-return projects within fluctuations that disrupt her forecasts its geographical territory and is investing and the government is looking to open more than US$5.5bn (€3.8bn) in coal new markets to FDI. generation in the Czech Republic. She’ll succeed if… Interest rates and He’ll succeed if… He convinces the prices, especially of rice, remain stable. incoming government to back him and Infrastructure investment pays off. She Go further the public that he’s not a profiteer. Czech can cut admin costs – still around 15% of Find out more at: www.cez.cz/en/home. customers don’t move to rival German public spending. She stops Chinese html; www.depkeu.go.id; www. supplier E.ON. Tighter trade standards manufacturers dumping goods and orascomtelecom.com; www.foxconn.com and www.zain.com open up paths to the West. clamps down on smuggling. 06 agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 7. LESSONS IN LEADERSHIP 04 TERRy 03 GOu Hai Precision Industry 58, CEO, Hon 05 NAGuIb Hon Hai Precision, better known by trade DR SAAD SAwIRIS 55, CEO, Orascom Telecom name Foxconn, is a rags-to-riches story. Founded in 1974 by workaholic Terry AL bARRAk 54, CEO, Zain Gou to make TV switches in a garage, the Taiwanese group is the world’s largest Egypt’s first multinational, Orascom contract electronics maker, mainland Having set himself the goal of getting Telecom, has a reputation for conquering China’s biggest manufacturing exporter Kuwait’s first mobile operator into the the markets others steer clear of, such as and, Business Week says, the world’s world’s top ten by 2011, Dr Saad Al war-torn Iraq. A loud critic of China’s second most powerful IT firm. Barrak isn’t wasting time. refusal to “play fair” with foreign firms, The story so far Gou’s low-cost, The story so far A former systems CEO Naguib Sawiris has set his sights on high-speed model has won contracts engineer, Al Barrak transformed IT an even tougher market: North Korea. with most leading brands in computing, group ITS before becoming Zain CEO in The story so far Set up in 1998, communications and consumer 2002. He launched an expansion strategy Orascom Telecom is the largest wireless electronics. With its proprietary eCMMS targeting global presence, 150m customers operator in the Middle East. Willing to model, a trail of acquisitions and a diverse and an EBITDA of US$6bn (€4.1bn) by invest in an untapped market, Sawiris product range, Hon Hai kept revenue 2011. Describing his management style as launched North Korea’s first mobile growth above 50%. But at the end of “chaos by design”, he has a hands-off network in 2008. He doesn’t believe 2008, the company posted its first annual approach to business units: “If you try to in the approach many other telecom decline in net profit since 1991. make management a science, you end up giants have adopted to global branding: What’s next? After lowering costs and treating people as machines,” he says. “As a foreign investor, you’re at a boosting R&D spend, Gou continues to Al Barrak has tried to replicate disadvantage, why make it worse by aim for 30% revenue growth this year. Google’s people-centric culture. But having a foreign brand?,” he says. With 80% of production in coastal China, Zain began 2009 with Drive11, a cost- “We’ve created the perception that our labor costs couldn’t be much lower unless cutting plan to shed 13% of the group’s company understands the culture in it was moved inland, and Hon Hai makes 15,500 staff. In six years, Zain has grown each market.” But net profit for Q1 2009 a third of its own components, so it can from a single operator in Kuwait to a fell 66% and a court ruling means a rival undercut rivals. A number of new commercial presence in 24 countries. In company could buy Orascom’s 35% industrial developments should help stave Ghana last December, Zain launched stake in Egyptian wireless leader off rivals in mainland China. With clients the second 3.5G mobile phone service Mobinil – if it is willing to pay 80% more reluctant to depend on one manufacturer, in Africa. Its One Network mobile than market value for the shares. the focus is on R&D and service revenue. platform, which has eliminated roaming What’s next? If the Mobinil sale cash Hon Hai files more patents in Taiwan charges, helped 2008 net profit rise 6% Maurice Tsai/Landor,Kirst Wigglesworth/Press Association arrives, Sawiris plans to expand in the than any other company and after to US$1.2bn (€850m). Middle East (he has just struck a deal opening an R&D centre in China stands What’s next Al Barrak says Drive11 with the Lebanese government), Asia to benefit from stronger ties with the will cut costs by 5% in 12 months. He has (he’s set to acquire in the region but has mainland. Gou has begun looking for earmarked $5bn (€3.5bn) for acquisitions been thwarted in attempts to launch in managers to devolve power to: “I want to before 2011 and expects net profit to rise China) and Canada. But the biggest sit back and give young people more 20% this year. Money transfer service challenge remains North Korea. responsibilities, when I’m still young”. Zap, which includes a partnership with He’ll succeed if… He gets North He’ll succeed if… He keeps Western Union, will allow customers to Korea to relax high taxes on handsets. broadening services’ scope, moving up pay bills and bank through their phones. The expansion into African markets pays the value chain and into new markets. His The big question is whether he accepts off and he cracks China. team copes when he takes a back seat. bids for Zain’s African business. “If you try to make management ng He’ll succeed if… Zain stays at the forefront of mobile broadband, expected a science, you will end up treating to enjoy revenue growth of 188% in the Middle East by 2014, and money transfer. people as machines” Operating costs stay low and he convinces investors about the African business. Agendamagazine 07 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 8. best prActice Moviestore Collection Michael Caine is caught out by the trade-off between risk and reward in The Italian Job 08 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 9. The RIsk BehInd eveRy RewARd A healthy attitude to risk should encourage sensible growth and prevent financial implosion. Can the errors of the recent past show us a new way forward? R By RichaRd NoRthedge aNd PeteR BRadley isk management is in the dock, accused of partially precipitating person called a risk manager for binding things recession. Yet paradoxically, the magnitude of the crisis together. It does not have to be at board level, but has taught many companies one salutary lesson: those who fail the risk manager should have direct access to the to grasp that every reward comes with a risk attached – and CFO or CEO. At some companies, the job is too misunderstand that risk – are in trouble.“The credit crunch has far down the food chain.” highlighted not only financial risks – but all risks,” says Oliver Engels, an As risk management moves up the agenda, it internal audit, risk and compliance services partner based in KPMG’s German could overburden companies. Engels warns: “A firm. “One reason we had the credit crunch was companies measuring lot of companies have risk, compliance, internal liquidity risk, credit risk and operational risk – but not all the other risks.” control and internal audit – so you have four risk For René Stulz, chair of banking and monetary economics at Ohio State assessments. That’s wrong.” He proposes a single University, it is too simple to blame the discipline of risk management: “The assessment that looks at risk in terms of each of fact that an institution makes an extremely large loss does not imply that the requirements, with each function being risk management failed or that the institution made a mistake.” represented on the risk committee. “It’s longer After studying the collapse of Long Term Capital Management (LTCM), and more cumbersome to do it for all four, but it the U.S. hedge fund rescued in 1998 by a US$3.65bn (€2.61bn) Federal ensures nothing slips between the chairs.” He Reserve bail-out, Stulz notes: “The only argument one could make is that says a narrow approach to risk management managers took risks they should not have, but that is not a risk management contributed to the credit crunch. “Companies did issue as long as the risks were properly understood. Rather, it is an issue of what was necessary for regulation, but nothing assessing the costs of losses versus the gains from making large profits.” Stulz more. They did a compliance exercise, but not so points out that top management held large stakes in the big U.S. banks that as to challenge their own business.” collapsed recently and had every incentive to avoid taking risks knowingly Here are ten steps which can help companies – but still their institutions went under. better focus on risk. They will be most effective He identifies half a dozen mistakes companies commonly make: relying when considered in unison. Risk management can too much on historical data; focusing on narrow measures; overlooking help to lower the cost of capital and open up new knowable risks outside the normal risk classes; overlooking concealed risks; profit opportunities, but only if all your efforts are failing to communicate and not managing in real time. On the big question – coordinated under one strategy. how do you prepare for the next crisis? – Stulz urges companies to take a leaf out of the disaster management handbook: use scenario analysis to understand 1 Adopt a champion the ways a crisis might unfold, and plan how you would respond to each. If companies fail to consider risk, they cannot Stulz says risk managers should not rely solely on statistical models: they manage it. Who takes responsibility is crucial. must think about how crises could unfold. “Such a scenario requires Appointing a risk manager is not the whole economic and financial analysis. It cannot be done by risk management story. Stulz says: “If risk is everybody’s business, departments populated only by physicists and mathematicians.” it is harder for pockets of risk to be left One concept whose time may finally have come is enterprise risk unobserved. And if employees’ compensation is management (ERM). Mike Nolan, global head of risk and compliance for affected by how they take risks, they will take KPMG and partner in the U.S. firm, says the old worry – that it was hard to risk more judiciously.” gauge ROI on ERM programs – is no longer valid. He says there are plenty of Someone must accept ownership of risk and quantifiable ERM outputs: decreased variability in financial results, as well that person must be on the board – or directly as reduced hedging and capital costs. “Used proactively, ERM can help avoid answerable to it. Engels says: “Responsibility for the risk management failures that precipitated the current crisis,” he says. risk has to be with those who take business The obvious thing to do – appoint a risk manager – can, Engels warns, be decisions.” That said, in a recent Economist damaging if it means others no longer feel responsible for risk. “You need a Intelligence Unit/KPMG survey of executives, Agendamagazine 09 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 10. only 30% think their organizations spend enough time discussing risk at Sometimes, the historical data can lead firms board level. In most companies surveyed, chief risk officers play no role in to overestimate risk and forgo revenue. In the strategic initiatives. Half the businesses have no risk committee and don’t 1930s, MGM initially turned down the movie intend to appoint a director with risk experience. rights to the bestseller Gone With The Wind on If Texaco had taken a risk management approach to its bid for Getty Oil, the grounds that, as producer Irving Thalberg it might have been spared bankruptcy. Getty agreed a deal with Pennzoil in told studio boss Louis B Mayer: “Forget it, Louis, 1984. Texaco stepped in and won the battle for Getty – but it lost the war. no Civil War picture ever made a nickel.” The box Pennzoil was awarded US$10.5bn (€7.4bn) in damages; and in 1987, Texaco office records of previous U.S. Civil War epics filed for Chapter 11 protection. proved Thalberg right. But Gone With The Wind still went on to become the biggest-grossing movie 2 Adopt a strategy of all time (when ticket prices are adjusted for Risk can be avoided, reduced, mitigated or accepted. Organizations should inflation), raking in US$1.22bn (€860m) in today’s consider their risk tolerance before deciding how to cope with it. While some money, 32% more than Titanic. will accept none, others will find different degrees of risk acceptable. Tightening procedures or changing activities can reduce risks, but some can 5 Don’t ignore risks be offset by hedging, insurance or sharing with partners. Given that the Never turn a blind eye to a risk just because it is current crisis took most people unawares, businesses worldwide are wondering hard to evaluate. A bad assessment is better than how to identify the next big risk. KPMG’s research suggests that big risks none, but more consideration – or a new approach often emerge from within, as a direct consequence of management actions. – might allow better measurement. Stulz says if Charles ‘Tex’ Thornton was a young Texan entrepreneur who expanded risks are ignored, they are not monitored and a tiny microwave company into Litton Industries, one of the most successful large organizations can expand in unmonitored high technology conglomerates of the 1960s. Making selective acquisitions, areas – with dire results. Samsung’s diversification Litton grew at an explosive rate. But it began to buy larger and more troubled into cars in 1995 coincided with an economic crisis firms in industries it barely understood. The failure to monitor its own risks in Korea and – realizing it had underestimated the triggered a downward spiral and, in 2001, it was acquired by Northrop. market risk and been overconfident about the All change equates to risk: the trick is to create a more self-aware contribution its core competencies could make – it corporate risk culture. However, having assessed a threat, some executives sold its car business to Renault in 2000. will choose to accept it. “A lot of our firms’ clients identify a risk but, as a conscious business decision, take it,” says Engels. “That’s good. That is what 6 Allow for unknown risks risk management is about: it’s not about not doing things.” No matter how good your processes, you have to allow for the unexpected. For a financial firm, that 3 Identify your risks: internal, external, systemic means keeping capital in reserve; for others, it may Risks come from all directions. It may be weather, demographics, mean ensuring management have the resource to competition, process failure – or risk from pricing, hedging or leverage. handle problems that emerge out of left field. Sometimes the threat from within – a careless, disgruntled or dismissed The bursting of the South Sea Bubble in 1720, employee – is greatest. In 2007, nine Trusts of Britain’s National Health which ruined many British investors, is a reminder Service lost 168,000 patient details. In 2008, French regulator la Commission of how massive hidden risks can be. The South Sea Bancaire fined Société Générale US$5.7m (€4m) for shortcomings in its control systems and internal procedures leading to tardy identification of rogue trader Jérôme Kerviel – a failure that cost the firm US$6.9bn (€4.9bn). “If being risk-averse One internal lesson of the banking crisis in particular is that traders’ risk was not aligned with their employers’. Stulz describes this as a ‘concealed’ deters companies from risk: desk traders receive a significant share of any profits they generate, but don’t have to defray their losses, so they are encouraged to assume risks. growth, that’s as serious Such misalignments trouble Nolan, who urges companies to look out for as underestimating risk” the moment “strategy looks in one direction but incentives encourage movement in a different direction”. As risks develop, companies should constantly align and realign the linkages between the array of activities they undertake, Nolan says. The rising dangers of systemic risk – banks unable to lend, a collapse of consumer spending, swine flu preventing staff travel – are Moviestore Collection; Wally McNamee/Corbis a challenge, because they rarely fall within the remit of one regulator. The current crisis suggests effort should be expended at a macro level. Extensive scenario analysis, as recommended by Stulz, may help tackle systemic risk. 4 Measure the risk accurately Entrepreneurs are usually optimists, but often see the worst when assessing potential dangers, says Engels. “People tend to be more risk-averse and to exaggerate the risk propensity. But if that deters companies from growth, it is as serious a failure as underestimating risk.” Stulz says statistical techniques work when risks are known, but points out there was no historical data for house prices falling when sub-prime lending Risk managers might was high: “In such a case, statistical risk management reaches its limits and have quashed Gone With The Wind risk management goes from science to art.” 10 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 11. best prActice Company, a British joint stock company, was granted a monopoly to trade in Spain’s South American colonies during the War of the Spanish Succession (1701-1714). In return, it assumed England’s war debt. Through promotion, insider dealing and a get-rich-quick fever, its shares rose tenfold in a year before crashing. Scientist Isaac Newton, one of thousands who lost money, noted: “I can calculate the movements of the stars, but not the madness of men.” A dictum that ought to be on every risk manager’s desktop. 7 Never underestimate the velocity of risk Remember, risks alter. “If you see risk registers that change minimally from one year to another, it is not reflecting the real situation,” says Engels. The All that dangers threatening a company change constantly and managers should glitters… regularly re-assess their strategy, measurement and appetite for risk – yet the Nelson Bunker Hunt KPMG survey suggests most do not have a clearly defined, updated register. (above) is a former Boards are becoming depressingly familiar with the concept of ‘velocity of Texan billionaire. risk’. Nolan says the existing audit committee or a newly created, board-level He might still be a risk committee can help cope with the way risk rapidly evolves. Ideally, the billionaire had he not internal audit function should have a voice on the board. decided, with his brother William, to try to buy the world’s 8 Communicate the strategy silver as a hedge There’s no point having a risk management plan if the rest of the organization against inflation and knows nothing about it. “Communications failures played a role in the most what he believed recent crisis,” says Stulz. If a risk manager cannot explain a system to senior was a forthcoming executives properly, even perfect systems can do more harm than good by economic apocalypse inspiring false confidence, he says. “Worse, information can arrive to top in which paper money would management too late or distorted by intermediaries.” become worthless. Too much information can swamp management, but it is important By 1979, a pool of communication is horizontal – across the corporation – and vertical. In the investors led by Hunt KPMG survey, only 36% of respondents think their organizations ensure had amassed what information about risk reaches the right people. “A failure in communicating was variously risk to management is a risk management failure as well,” says Stulz. estimated as between a third and two-thirds So how can a risk management culture be fostered? The International of the world’s silver. Financial Risk Institute says it’s the board’s responsibility to clearly allocate But Hunt and his risk management responsibilities at the highest level to ensure accountability, partners had ignored placing risk control on a par with other strategic business matters. The one large risk: the function should be properly resourced, says IFRI, and risk control personnel attitude that the recognized – not regarded as second-class citizens because they are not authorities might take to their quest. direct revenue-earners. It is vital that lines of communication are clear – so The risk of state risks are reported to where they can be managed – and useful if project intervention was managers discuss risks with the relevant experts to secure buy-in. The board Go further known but hard to must ensure appropriate risk education continues throughout the company. Stulz’s analysis of calculate until the LTCM is Fisher College early 1980s, when 9 Invest wisely of Business Working the alarmed U.S. Paper No. 2008-03-017. authorities increased The main obstacles to successful risk management used to be poor data His article, ‘Six Ways margin requirements quality and availability, shortage of relevant expertise and ineffective tools Companies Mismanage for silver investors and technology. But many executives surveyed by KPMG identified a lack Risk’, was published and reduced the of financial resources as their biggest problem in the coming year. Without in Harvard Business amount of silver careful planning, a dearth of money will prevent problems being addressed. Review, February 2009. contracts any party The KPMG report, could hold. Silver Managing risk in prices fell by 80%. 10 Risk management isn’t all negative perilous times: Practical To Hunt, these were Risk strategies need not be a costly brake on entrepreneurial activity. steps to accelerate “artificial factors”, Recession is making many users realize that ERM can be quantitative as recovery, is at but they led to his well as qualitative and deliver a return on investment. By using ERM and www.kpmg.com/Global/ bankruptcy and a creating a corporate risk awareness culture, companies can more shrewdly IssuesAndInsights/ lifelong ban from identify, monitor and prioritize risk, reduce the volatility of their results and ArticlesAndPublications/ commodity trading. Pages/Managing-risk-in- Still, Hunt did give save on wasteful insurance, hedging or excess capital. perilous-times.aspx. the world two great If improved measurement shows companies operating below risk tolerance, For more on the history soundbites: “People they can increase exposure. Optimizing capital can cut financing costs and of risk, read Peter who know how much give scope to expand. Measuring lost opportunities is hard, but the effects Bernstein’s Against the they’re worth aren’t are real and can justify the costs to even the most skeptical accountants. ● Gods: The Remarkable usually worth that Story of Risk (Wiley). much” and “Invest The ISO’s risk in silver and you can Richard Northedge is a former U.K. Sunday Telegraph City editor who management guidelines never go wrong”. appears as a commentator on Sky and Bloomberg are at www.iso.org Agendamagazine 11 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 12. © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 13. keys to success “If I wrote my memoirs, the title would be: It’s Not About The CEO ” Jouko Karvinen, CEO of forest products giant Stora Enso, says managing change is all about acting fast, finding differentiation and focusing on teams, not stars E words by paul simpson photography by david short Key lessons “ very morning I wake up and think ‘where am I late today?’” For Jouko Karvinen, chief executive officer of products industry was struggling to repay the cost of its capital,” he says. It didn’t help that some investors believed that forest products was a 1 Thinking you’re the best is a kiss of the forest products group Stora sunset industry that was bad for the environment. death. Think: what Enso, success in business is, in part, “People say to me, ‘Aren’t newspapers going opportunities am I missing? And act. a matter of speed and timing. “We sold our online?’ and I say, ‘Yes, but packaging is moving 2 Prioritize businesses “If I factories in North America just six months after from plastic to wood fibre’,” he argues. “People with a clear point of I took over. That was 20% of our company and often say, ‘Don’t you kill trees?’ and I say, ‘We differentiation: either a some people said we were going too quick, too plant two for every one we chop down and, by new product or a hefty early, but boy am I happy we sold them.” the way, that newspaper you’re reading – that’s cost advantage. Always wrote Relaxed, dapper, quietly forceful, 52-year-old printed on paper recycled from the one you ask: what is my winning advantage? Karvinen admits that life as Stora’s CEO is never read two weeks ago’. Finland and Sweden dull. He recalls, with a small smile, that his probably get four times as much of their energy 3 Never grow out of trouble: get your my appointment in January 2007 was greeted in his from bioenergy as the rest of western Europe – margins right first. home country, Finland, by such headlines as “Jouko who?” The anxiety was understandable. and 70% of that comes from our pulp mills.” 4 Choose your battlefield: beat competitors on your One in ten Finns is, in some way, dependent on Credit, change and the zero option terms, not theirs. Stora Enso, and Karvinen, though he had run The credit crunch has posed a challenge to forest divisions of ABB and Philips, was no household name. He learned the importance of speed early products which, Karvinen says, “nobody can solve alone”. In essence, he says, “we need to 5 You can’t manage by always looking in the rear view mirror. on his watch: “We have faced the threat – and then the imposition – of a Russian tax on wood start with the premise ‘this is what the customer is willing to pay for paper, so how do we find a 6 The true test of a CEO is whether their successor emerges exports, the weakness of the dollar, the oil price way to make and deliver it at a low enough cost from within. surge and then the credit crunch.” so we can all make a living?’ It’s better than On top of this, Karvinen came into the pulp wondering ‘how do you split a zero?’” and paper producer with a clear mission: to Changing the industry is one thing, but manage change. “Even in good years, the forest Karvinen has a more urgent mission: to change Agendamagazine 13 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 14. Karvinen’s road to the top 1982 Joins Finnish group Stromberg 1990 Vice-president, Power Electronics, ABB Drives 2000 Head of ABB’s Automation Technology Products Division 2002 CEO, Philips Medical Systems 2007 Headhunted to join Stora Enso as CEO Stora Enso. As he sought to stimulate change, planned capex by 55% over 2008 and 2009. he looked back to his experience as CEO of Having managed at a senior level in different Philips Medical Systems. The division had countries, sectors and companies, Karvinen has Sustainability, whether grown through four massive acquisitions and it been exposed to many management philosophies. in Brazil (bottom) or a was his job, effectively, to knit them together But the crucible that forged him as a manager Finnish factory, is high and make the business more profitable. was the Swedish-Swiss engineering group ABB, on Stora Enso’s agenda “General Electric were far bigger than us in where he worked from 1988 to 2002. healthcare, but it was our job to beat them. Karvinen almost fell into management. “My Everyone said we couldn’t, they were too big. brother said university was fun – though I’m not So we looked for ways to win. We could not do sure how much of that fun had to do with that by being bigger but by trying to be faster studying – so I did a degree in power electronics, and, because we were Philips, by using our applied electronics and industrial economics.” experience in the consumer markets and looking A job at Finnish electromechanical products at healthcare from the point of view of the real group Stromberg soon followed. Speaking customer, the patient. We set out to double our German pretty fluently, he was hopeful of the profit in 18 months – nobody thought we could right posting but was sent instead to California do it, but we did.” to run a project. “My English was so bad I could Karvinen has started a similar process at barely order breakfast at the hotel,” he says Stora Enso. Concluding that ‘size matters’ was a now. But he came through. And in 1987, cliché, not a strategy, he focused on profitability, Stromberg was bought by ASEA which, a year aiming for a 13% return on capital employed later, merged into ABB. (ROCE). The industry average is around 5%. The credit crunch has made his target seem Brilliance, mediocrity and the CEO Utopian now but in 2007, the ROCE on the Karvinen was lucky enough to be working for group’s continuing businesses was up to 11.3%. ABB when it was run by Percy Barnevik, a And the focus on cash flow and protecting charismatic CEO once described as Europe’s prices in recession has led Stora Enso to cut answer to Jack Welch. As Karvinen recalls those 14 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 15. keys to success days, the lessons almost come tumbling out of the urgency of doing business in China don’t Capital him. “If you have a problem at work, many people impress him much. He flies to China four times a allowance manage it by telling their boss. At ABB, the year to “learn, not teach”. The country accounts Stora’s return on capital employed question was always: ‘What would you do if you for 3% of Stora Enso’s paper and board Source: Stora Enso couldn’t ask me?’” But no manager was an island. production, but he says: “China is a large, growing They were encouraged both to be independent, market. It will be a large, growing market whether and to recognize when help was vital: “Make sure you’re there or not. The question we all have to bad news comes in one piece and early, not late answer about the Chinese market is ‘why would and bit by bit.” The ABB mantra was to let we win there?’” managers make mistakes when they were young so the errors would cost less – but to make sure Wins, costs and Lance Armstrong they didn’t keep making the same mistakes. “Can you win?” is a recurring theme in the Karvinen learned a lot about the bottom line conversation, which raises the question: what too (“at ABB, they always said, never grow out of would he consider a victory? “I don’t care how trouble, too many people get killed that way – get big we are, I care about whether we can generate your margins right first and then grow”) but returns above the cost of capital. And you can many of the lessons that flew at him so thick and do that if your investments give you a dramatic fast were about how to manage people. Having differentiation through cost advantage – not 2% someone in the organization who knew which but 20%, with something that can’t be copied at 2007 11.3% 2004 3.3% 2008 3.4% 2005 4.7% 2006 8.7% staff were ready for a challenge or a new project all, or not for many years – or if your product was crucial. Recognizing “it is easy to get stuck has a unique feature. For example, we have a in a big company”, Karvinen encourages senior new paperboard DVD case that has a tenth of managers at Stora Enso to create a path that the carbon footprint of normal cases.” allows staff who are good enough to reach the Asked to name managers or business top to fulfil their potential. thinkers who have inspired him, Karvinen reels Global “One thing I learned is that, as a general off a list of colleagues. The management books business manager, no matter how good you are or how hard and CEO memoirs he has read left him cold. Paper and board capacity by country, you work, the biggest difference you can make to “I’m not a great believer in the hero CEO. Good 2009 your team’s effectiveness is having the courage To Great was interesting, but that had a lot of Source: RISI to hire people who are better than you are.” data to back it up.” The thought prompts him to give his own Has he ever considered writing a book? He 4 5 6 forthright variation on the “there are two kinds laughs and says: “If I ever wrote my memoirs – of people” speech: “There are two kinds of I’m not going to, but sometimes I say I will 3 1 people in companies – the right people in the because my wife gets worried about what I’ll do right jobs, and the right when I finally retire – people in the wrong jobs. And if they’re in the “Look for a real point of the title would be inspired by Lance 2 wrong jobs, it’s the CEO’s fault. Often, when you differentiation: it might Armstrong’s book, It’s Not About The Bike. move someone into a position and they be a product that can’t I’d call my book It’s 1 Finland 42% 2 Sweden 28% Not About The CEO.” be replicated quickly or 3 Germany 14% struggle, people say they CEOs work in two 4 China 3% 5 Brazil 1% need time to settle in. But if you leave someone to an area where your cost time-frames: the fast- moving here and now 6 Others 12% settle into the wrong job, the organization will advantage is 20%” and the enigmatic long term. If he signs off on destroy them. a new paper mill, the investment could take 10, “Western business culture overvalues general 20, or even 30 years to make an impact. So the management. We need to develop a dual career quality of his successors is key. “As a manager, Stora Enso at path, so specialists can do what they’re good at. you need to know the numbers. I’m never If we don’t, we risk taking brilliant experts and impressed if I ask and someone has to look them a glance making them into mediocre managers.” up. But too many managers are led purely by ■ Founded in 1998 after Swedish group Stora By 2000, Karvinen was running ABB’s budgets and forecasts. Business is inherently merged with Finnish automation technology products division. Two unstable and you need managers who can cope rival Enso years later, he was hired to run Philips’ medical with that. One of the best ways to judge a CEO is ■ The group has 29,000 systems division. Watching Philips CEO Gerard on the quality of their successors.” staff and 85 production Kleisterlee transform the entire group, including Karvinen was a dark horse candidate to run facilities in 35 countries selling off the semiconductor unit, he learned Stora Enso. He was succeeded at Philips by an ■ In 2008, sales stood at US$17.3bn ( €11.03bn) that sometimes as CEO you have to do what you internal candidate, Steve Rusckowski. When he ■ Stora has cut capex know is right, even if the outside world does not arrived at Stora, Karvinen said he’d do but is still acquiring, immediately understand it. everything he could to ensure that his successor and spent US$434m Karvinen brings this singularity of vision to came from within. That, you sense, would be his ( €276m) to build a pulp Stora Enso. Such modern business shibboleths as greatest victory. ● mill in Uruguay Agendamagazine 15 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 16. HealtHcare: HOW BaD IS It, DOc? The prognosis seems bleak as healthcare inflation grows – and that’s as critical for business as for patients and governments. Three specialists diagnose the problems By RHyMER RIGBy W hen Howard Schultz, CEO of change, and sustainable revenue for the businesses The panel Starbucks, says his company involved. For companies willing to engage with spends more on healthcare the issues, there is a genuine opportunity to enter alan DOWney KPMG’s Global Head of insurance than on coffee, it’s new, rapidly expanding markets. Healthcare and a partner terrifyingly clear how critical Agenda spoke to three experts with different in the UK firm; a former the financial impact of healthcare has become. perspectives: Shivinder Singh, managing director civil servant America’s Congressional Budget Office of India’s Fortis Healthcare hospital chain; Dana predicts that unless federal law changes, the U.S. Goldman, chairman and director of health Dana GOlDman will be spending 25% of its GDP on healthcare by economics, finance and organization at the Chairman and director of health economics, 2025. So it is easy to see why Barack Obama has RAND Corporation and a professor at UCLA; finance and organization decided to overhaul the U.S. healthcare system. and Alan Downey, KPMG’s Global Head of at think tank the RAND Change is inevitable – but, as the debate over Healthcare and a partner in the UK firm. Corporation, and Obama’s plans shows, agreeing on that change a UCLA professor seems impossible. Many other countries will, at How big is the burden to business of different times in the future, face their own rising healthcare costs? SHIvInDer SInGH Managing director of reckoning on healthcare. This January, China Goldman There are concerns about healthcare India’s Fortis Healthcare announced a US$124bn (€87bn) healthcare reform costs affecting competitiveness, although in some hospital chain and co- plan which predicts that by 2011 the state will bear cases these are overblown. We know, for example, owner of brokerage firm the brunt of the nation’s healthcare costs. that much of the cost ends up falling back on Religare Enterprises; As analysts and commentators have begun workers in the form of lower wages. However, for a regular on Forbes’ examining the controversies – and success stories some companies with legacy commitments to ‘India’s 40 Richest’ list – surrounding current global healthcare retirees, including GM, healthcare promises made provision, private sector involvement has been given a predictably mixed review. Research-driven innovation and technological “The biggest problem is that you can’t breakthroughs will extend life span but increase the associated costs of caring for older people, shop around. Hospitals don’t post according to a report by the influential RAND Corporation. And a lack of genuine competition their prices, and with third parties among insurers has been blamed for adding to paying the bill, why would they?” the problem in the U.S. (see chart, page 18). Yet a thriving private healthcare sector in India decades previously are impacting on the bottom has slashed costs and increased provision, and line. Over the past few decades, industries with there are signs in Europe – including in the UK’s more health coverage in the U.S. have experienced state-run National Health Service, Europe’s less job growth. That is worrying. largest employer – and parts of Asia that public- Downey In any country where the cost of private partnerships are starting to deliver real healthcare is borne by business, it is a huge issue. 16 agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 17. the greAt debAte the Cost of illness broken ChinA The World Health Organization says China will China now spends forego US$558bn (€ 395bn) in national income US$161m ( €116m) on during the decade to 2015 due to chronic diseases. healthcare, 75 times Globally, deaths from chronic disease are what it did in 1978. expected to rise by 17% in the same period. But the state plans to spend more as it seeks to extend medical insurance to 90% of the population. Cost vAriAtions The U.S. health system costs 83% more per capita than Canada’s, which is 70% funded by taxes. Americans pay roughly US$500 (€350) a month for full coverage; Taiwanese pay US$20 (€14). insuring the future On average, only 28% of the population of the 30 OECD nations has private health insurance. These countries spend an average of 9% of GDP on healthcare, but the U.S. – by far the biggest spender – pays 15.3%, a figure that is forecast Dirk Anschutz/Getty Images to hit 20% by 2017. Agendamagazine 17 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 18. the greAt debAte That’s why people say GM is the biggest healthcare The cost No contest insurer in the world [the company spent US$4.6bn of care Market share of the (€3.2bn) on healthcare in 2007, equivalent to Healthcare spend as largest insurer in US$1,525 (€1,065) for each vehicle it sold]. a percentage of GDP selected U.S. states Source: OECD Source: Business Week What obstacles prevent change? 83% 15.3% Goldman There are enormous vested interests 79% 78% 78% 77% 75% 75% in the status quo. The political process hinders change. Take Medicare [in the U.S.]: it’s a 11.6% 11.1% dinosaur. It can’t reform – that’s the problem 10.7% 9.8% with single-payer systems, no-one will take a 9.1% 9.1% 8.9% Getting better 8.3% 8.3% really fresh look and pay for performance. all the time There are too many vested interests. Rhode Island Singh The biggest obstacle to fixing problems Switzerland How technology can is for someone to have authority and be Germany Arkansas Alabama Montana Vermont meet healthcare’s most Norway Canada Sweden Hawaii France Maine protected from the downside. It’s too emotive a Spain pressing challenges Italy U.S. UK subject for people to tackle in a practical way. 1 Sharing information It’s very hard to fix problems if any change you The U.S. has pledged make causes riots in the streets. Singh In fast-growing economies like India and US$19bn ( €13.5bn) to create a national Downey The governments that get it right China, employees in better positions tend to get IT infrastructure for understand the need for universal coverage the best healthcare. If GDP grows by 10% every healthcare providers. regardless of ability to pay, but recognize that you year and healthcare inflation is 3-4% it’s nothing Swine flu in the Middle can’t fund what everyone wants from taxation, so to worry about. It’s only a problem in developed East is being tracked by they mix both. People say this produces a two-tier countries with slower growth, where healthcare an IBM-designed system system, but I see no alternative. inflation outstrips economic growth. Almost all which helps experts analyze the spread of small, developed countries get it right – places like diseases in real time. What part can increased competition Singapore and the Netherlands seem to have it and private sector involvement play? figured out. As the model is quite small-scale, the 2 Streamlining Downey One of the arguments about private question it begs is: why can’t we break up countries diagnosis sector partnerships is that governments can borrow into small islands of 10m people or so? When you’re in a remote more cheaply than the Downey There’s a part of a developing nation, how do you private sector, so why “It’s very hard to fix the consensus in healthcare would they involve it? that you get better diagnose complex conditions? Non-profit To me, that’s missing problems if any time you outcomes and lower costs Click Health arms health workers with camera the point. It’s about having access to the make a change it leads if you move care upstream – education, early phones to send pictures to consultants on the expertise enthusiasm which can and to riots in the streets” diagnosis and managing conditions. Outcomes other side of the world. drive down costs. are better for patients, but it may push costs up. I 3 Monitoring patients Goldman The big problem in healthcare is that wonder if we are pursuing goals such as ever- Remote technology you can’t shop around. Physicians and hospitals extended life expectancy without thinking it means doctors can keep don’t post their prices, and with third parties through. an eye on at-risk groups paying the bill why would they? And even if we (such as diabetics or the elderly) through devices knew the prices, the reality is that most patients How big is the opportunity for the linked to phone lines. don’t even know the services they need until they private sector? Patients take their insulin see the doctor. To help stimulate the market, we Goldman There will be many reforms in the levels or blood pressure, can make pricing more transparent for basic healthcare system over the next decade, and and doctors are alerted services (say, for example, an office visit) and make change always presents opportunities. Businesses to potential problems. sure regulations allow managed care organizations that understand where the healthcare system is 4 Speeding up treatment to exclude providers who are too expensive. headed will do best. I expect much more focus on Aravind Eye Hospital in Singh In fields like IT, improvements in deriving value, and this will affect the India performs 50,000 technology go hand-in-hand with falling prices; pharmaceutical industry, the hospital industry, operations per year and in healthcare, technology has improved, but and others. With healthcare at nearly 17% of offers cataract surgery prices have risen. There is huge scope for GDP and going up in the U.S., reform will lead for US$50 (€ 36) by innovation and improvement. to big winners and losers. keeping operating theatres in use 24 hours Downey In the NHS, there has been a lot of a day, and allowing Will facing awkward truths be part of controversy over independent treatment centres, changing the system? which involve the private sector. But the NHS has Stuart Forster/Alamy surgeons to monitor two operations at once. At Goldman Yes. The least expensive thing to do is gone away and innovated and come up with new Narayana Hrudayalaya to let someone die, although it’s also the most services in the face of that threat, which actually hospital in Bangalore expensive because life is so valuable. We don’t do proved the validity of the exercise. The private (above), heart bypass surgery costs as little as a good job of weighing up the costs and benefits. If sector benefits from extra business, and the overall US$2,000 (€1,433). we let the technocrats take over, we’d be OK. standard goes up too. ● 18 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 19. left field e From good to great Keen to make your teams more productive? The strange collaboration behind T.S Eliot’s The Waste Land dispels many of the myths that handicap teamwork By PAUL SIMPSON Poets are reputed to be solitary geniuses who he noted in the margin once), defined how that wander lonely as a cloud as they pen verse. But the goal was accomplished. Their roles were clear 20th century’s greatest poem, The Waste Land, but, as Hoffman recommends, fluid enough to was the fruit of intensive teamwork by T.S. Eliot evolve – Pound felt free to suggest wholesale cuts and his friend, the poet and critic Ezra Pound. which Eliot, on occasion, happily ignored. Eliot and Pound were unlikely collaborators. Every good team needs a structure that enables Eliot was formal, almost congenitally shy, with it to do its work. Pound and Eliot’s task was clear, hidden, but deep, eccentricities. (When separated if daunting. They had what Hoffman calls a “rich, from his first wife, for example, he greeted guests intimate and emotional relationship”, and their while wearing green face powder, and insisted on mutual trust encouraged them to be open. This is being referred to only as ‘Captain’). Pound was where many teams go wrong. In one team brilliant, intellectual, bombastic, supremely self- Hackman studied, he noted: “Being a team player confident and, in later life, a Fascist. was so strongly valued that individuals self- J. Richard Hackman, professor of social and censored their contributions for fear of disrupting organizational psychology at Harvard University team harmony.” Emboldened by Eliot’s trust, and author of Leading Teams, has identified five Pound felt no compunction about damning his basic principles that define a good team. And odd friend’s fondness for modifying adjectives like As an awkward, as Eliot and Pound’s collaboration over The Waste ‘perhaps’, advising on the poem’s structure and perceptive critic, Ezra Pound (above) worked Land was, it met three of these conditions. playing the vital role of the team deviant who isn’t closely with T.S. Eliot The first principle is that teams must be real. afraid to ask the awkward questions. to create a modern “People have to know who is on the team and who Eliot and Pound had discussed poetry for masterpiece is not,” says Hackman. Sounds obvious, but his eight years before they started serious work on research into teams of senior executives found The Waste Land manuscript. That probably that fewer than 10% agreed who was on the team. eased their task. Hackman says the idea that new Dr Edward Hoffman, an expert on teamwork teams are more productive than established ones and director of NASA’s Academy of Program whose members have become familiar with each and Product Leadership, says organizations other is a fallacy. NASA research has shown that should “create the smallest team possible that tired crews who had worked together previously includes all the necessary skills”. There was no made 50% fewer errors than crews of rested Go further confusion on The Waste Land: Pound and Eliot pilots who had never flown together. Read Hoffman’s Tropical Press Agency/Getty Images principles of effective were the team. Usually communicating by post, There were, mysteriously, none of the explosive teamwork at tinyurl. rather than in person, they were a virtual team 50 ego clashes which wrecked the Surrealist com/agendalf1. years before the internet existed. movement. Pound recognized that The Waste Hackman’s research on teamwork is at The second principle is that teams need “to Land was “enough to make the rest of us poets www.people.fas. know and agree on what they’re supposed to be shut up shop”, but Eliot realized Pound was the harvard.edu/~hackman. doing together”. Eliot, as poet, decided the goal most useful critic he could have had. Together, Read the poem at – to improve The Waste Land – but it was Pound they took the drafts of The Waste Land and made www.bartleby. com/201/1. Or buy the who, with his cajoling, praise and brutal criticism one of the most difficult jumps in business: from facsimile and transcript (“Bad but can’t attack until I get the typescript”, a good 19-page poem to a great 434-line one. edition (Harvest Books). Agendamagazine 19 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 20. How to profit from low prices Mining giant Vedanta can’t control its prices, so managers and staff collaborate to revolutionize costs and boost performance By paul simpson Do you know how many companies in the 1960 same price for the product, so the most successful Fortune 500 were in the same list in 2008? The companies have the lowest cost of production.” answer is 76. That corporate mortality rate should When Agarwal says “no control”, he’s not focus the mind of every CEO and CFO. Navin exaggerating. From the middle of 2008 to the Agarwal, deputy executive chairman of diversified middle of 2009, the price of aluminium Bad fortune mining group Vedanta Resources (pictured right), plummeted by 52%, copper slumped 45%, while Most of 1960’s Fortune says this trend has driven the company’s relentless zinc prices fell 19%. The only way to survive such 500 companies have desire to sharpen its competitive edge through drastic fluctuations – let alone give yourself a clear now left the list. The an internal process that improves performance, competitive edge – is to perfect a model that figures below show the whatever happens in the marketplace. continually improves performance so you have survivors from the 1960 “If you look at the Fortune 500 companies the lowest cost of production (COP). That is just group at various points. between 1960 and 2008,” he adds, “you find that what Vedanta Resources has done. many were unable to sustain their position under The company’s roots go back to 1976 and in 1960 500 pressure from new ‘attackers’ in their industry. 2003 it became the first Indian company to be The drop-out rate among these companies has listed on the London Stock Exchange, as Vedanta intensified, which suggests that the challenge of Resources. In 1996, management started exploring sustaining business is becoming tougher.” Indeed, programs such as Total Quality Management, Peter Hendrie/Getty Images 1985 247 almost 40% of leading U.S. industrial companies realizing that the group, if it was to go beyond its dropped out of the first quartile of their sector Indian base and become a truly global player, had during the 2001 recession. to transform its efficiency. And sustaining the business is harder still – What has emerged is a structured program to 2008 76 because of the sector it is in. “We are in the encourage entrepreneurialism that delivers commodities business,” says Agarwal, “which something greater than the one-off benefit to be means we have no control over the top-line price had by high-profile belt-tightening. Agarwal for our goods and services. Everybody gets the 20 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 21. competitive edge believes a company’s cost advantage has to be improvement process yields a variety of SIIL: bigger systematic and sustainable. To achieve that, initiatives, from small changes in working means better Vedanta studied programs such as Six Sigma and practice to large capital investments, but does it Vedanta’s SIIL cut its the Toyota Production System, that have delivered deliver the goods? Agarwal is convinced it does: smelting costs by 80% in 2003-08 sustained improvements in performance. “If you look at the cost of new projects in the Smelting costs From this research, Agarwal concluded that mining industry, we are delivering these projects the most successful programs have three core at 25-30% lower cost than the industry average Production (‘000 Mt) elements: “A technical operating system, the and completing them in 25-30% less time than (US¢/lb) mindsets and capabilities of staff – and the right the industry average. These breakthroughs management infrastructure.” cannot be achieved unless we focus on health, To make this process work, Agarwal says, you safety and environment, which are at the heart 350 10 have to ask six questions: “What tools do you use of our sustainability strategy.” 9.1 9 to generate improvement initiatives? How do Vedanta believes it is among the lowest-cost 300 7.8 8 you involve internal and external experts? How producers of copper and zinc in the world. The 7.1 250 7 do people think, feel and conduct themselves in group’s 2009 results (year to March 31) show 6.1 6.1 the workplace? How do you build their that, despite a US$1.4bn (€1bn) drop in earnings 6 200 capabilities so they can drive the improvement as metal prices plunged, its working capital 5 program? How do you organize systems and improved by $621m (€446m). 150 4 1.8 processes to encourage the The picture is clearer when 3 100 generation and implementation you study Vedanta’s business 2 of new ideas? And what reward units. In six years, Indian 50 1 and recognition systems do you copper-maker SIIL doubled 339 273 156 179 313 171 put in place? production and reduced the 0 0 2003 2004 2005 2006 2007 2008 “If you haven’t got the right cost of production by 80% (see mindset, you’ll have a nice theory graph, right), after teams but no execution. If your eliminated several bottlenecks, operations practice isn’t right, raised productivity, managed Hindustan Zinc: you’ll have highly motivated staff by-products more effectively thinking smart whose ideas make no impact. And and used less liquefied HZL’s efficiency drive: in if the management infrastructure petroleum gas in the smelter. two years, COP is down as output climbs isn’t there, you won’t be able to At iron ore subsidiary Sesa, steer the process,” he says. teams sweated the detail on Production (Kt) So how is this theory put into small initiatives and combined practice? “If it was done as an “Our projects them with major changes, such COP (¢/lb) order from head office, it would as buying railway sidings to never work,” says Agarwal. “It cost 30% under transform logistics costs. has to be embedded in the culture. At zinc maker Hindustan We have 8,000 professionals – the industry Zinc (HZL), bought in 2002, a 250 50 every one of whom has, at least, a average, and we switch to a more performance- 45 38.6 first-class science degree – in our linked compensation scheme, 200 40 complete them in 30.1 workforce of 30,000. We recruit a Six Sigma program and the 35 25.9 the best, brightest talent, commissioning of a new power 150 30 encourage them to grow and provide clear paths for them to 30% less time” plant (completed in seven months) helped raise output by 100 25 20 take up leadership roles.” 18% and cut cost of production by 22% in the first 15 These professionals, and other senior staff, year of acquisition (see graph, right). 50 10 are appraised not just on their day-to-day job These are not small numbers. And they have 5 2003 207 2004 221 2002 176 but on the commitment, imagination and helped fuel Vedanta’s growth, as it seeks to 0 0 collaborative effort they bring to sharpen become one of the four largest players in business performance. They usually work in aluminium, the biggest zinc company (it is small, grassroots teams who take on a specific currently second behind Xstrata), one of the top project with an agreed timeline. “The process two copper-makers and one of the ten leading lets the people who have identified the iron ore suppliers. opportunities run these teams,” says Agarwal. Many of the company’s rivals have delayed The reward mechanism is based on long-term or shelved plans to bring new mines or capacity incentives, partly driven by the share price on stream. Others are seeking to drive a performance. In the company’s experience, consolidation process through acquisition. conspicuous examples of success breed other Vedanta regards the downturn as an opportunity. Go further successes, because all staff can see that the The group isn’t yet in the Fortune 500, but this Visit www. process delivers. Performance improvement, US$6.6bn (€4.7bn) revenue company will, if vedantaresources.com Agarwal says, is “a journey, not a destination”. Agarwal is right, be around far longer than many or revisit historical Fortune 500s at www. All staff understand that – even those at of those that already are. ■ aggdata.com/business/ businesses acquired by Vedanta. The fortune_500 Agendamagazine 21 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 22. issues on the horizon In turbulent times, being prepared is essential if you aim to thrive rather than merely survive. Here are ten challenges that could define your future 24 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 23. COMING UP 2 Divestment M&A grabs headlines, but selling a subsidiary can be as transformational – and testing. Pressure to sell underperforming or non-core businesses to raise cash is 1 mounting. KPMG’s M&A 3 Spotlight survey of managers Achieving found that a third expect to make one or two divestments Ethical closure this year (see chart below). Such sales can bolster investment “If it were done, when ’tis balance sheets and redefine The Quakers started it. done, then ’twere well it vision. Dutch financial Long ago, they decided their were done quickly.” Many services group ING plans to modest pension funds would firms that close units have sell 10-15 businesses for up to not support the arms trade. followed Macbeth’s advice. US$11.18bn (€8bn), to create Once derided by many However, the desire not to what CEO Jan Hommen stockbrokers, ethical prolong the agony – and calls a “more focused group, investment funds have make quick cost savings – with growth potential”. delivered reasonable, can destroy morale and Deciding how to deal with sustainable returns. The damage shareholder value. shared overheads, brands, twin crises of climate change Less Macbeth, more patents and processes can be and the credit crunch mean tortoise might be better. Treat tricky. Smart divestors sweat that socially responsible a closure as a major project. the detail. Conglomerate investment (SRI) has gone Use an experienced leader Textron’s team of divestiture beyond saving souls to with a strong team. Ensure experts keeps a database of saving the planet – and people receive compassion, would-be buyers and, from shaping corporate agendas. decent notice and good 2001 to 2008, it has produced The remit of SRI has communication: it may help shareholder returns 6% broadened far beyond carbon you avoid alienating staff, above those of its peers. emissions and sweatshops. customers and suppliers – and Divestment is not a tactic, The Australian Ethical damage to your reputation. but a strategy. It has been Investment fund shuns firms Thomas Morris, president claimed media group VNU who “create markets by the of consultants Morris might not have been acquired promotion of unwanted Associates, says a by private equity groups in products”, “acquire land or downsizing plan should be 2006 had it divested better. commodities for speculative “constructed from head and gain” and “entice people into heart”. The Swedish Postal The divestment financial over-commitment”. Service, which halved its paradox If such criteria became workforce of 72,000, gave KPMG’s April 2009 survey of universal, how would your staff 18 months’ salary if 270 M&A professionals found: business fare? they joined a job-seeking Ethical investors could program: 3,000 did and 85% sway hard-nosed investors, found work. This proved especially if they use the Portrait Essentials/Alamy; Shutterstock nicer – and cheaper – than techniques of shareholder the usual early retirements plan three advocacy to make a fuss 33% and severance packages. or four over remuneration, bonuses The quick and dirty divestitures and perks. In 2003, Pfizer approach to closure may started talks with religious 9% 50% seem cost-effective. But investors worried about pay when stories about your disparities. As one corporate staff having to clear their plan one are in the PR guru puts it: “CEOs desks reach the market, the or two market for don’t like to be shouted at by divestitures distressed only winners are your rivals. in 2009 assets nuns at AGMs.” Agendamagazine 23 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 24. 4 6 Why green is good for The valley your bottom line of debt Investing now may be better and Moviemaker Orson Welles cheaper than retrofitting later lived like a millionaire even when he wasn’t one, making sherry ads to pay creditors. For companies weathering the storm of the financial 5 Few businesses are as crisis, valuing the risk of climate change may not seem spendthrift, but many, like a worthwhile investment. However, forward- Lean like Welles, don’t fully looking companies that start investing in ‘green’ initiatives may find that opportunities abound. finance understand the nature of indebtedness. As the public begins to evaluate companies with a Could your finance “Debt was ignored, green eye, brand analyst Landor predicts that firms department do more for because the terms of trade positioned as green leaders are part of a “long-term less? With KPMG’s ‘Being were so easy,” says Neill megatrend” that will carry into the next decade. The Best: thriving not just Thomas, Partner and Head Management consultant A.T. Kearney analysis surviving’ survey showing Debt Advisory, KPMG in the found that companies committing to sustainability that the best-performing UK. Even now, once facilities during the current crisis are outperforming their finance functions have an are refinanced it is assumed peers in the financial markets. A World Resources average of 16% greater debt is off the agenda and Institute policy brief for the U.S. Congress, A Green influence on core operations, focus is lost. Thomas warns: Global Recovery?, argues that demand for green likely gains are significant. “If you don’t remain on top technologies will give first-mover companies a ‘Lean management’ – of your financing, it will competitive edge, cost savings and greater efficiency. removing processes that don’t come back to bite you.” As for the science, there really is no question contribute to end value – For many borrowers, about the business risks of climate change. Rising could help. Lean Enterprise 2009 is Year Zero (see temperatures affect agricultural output, new Institute founder Jim graph). Thomas says the diseases reduce employee productivity, severe Womack says: “Traditional next year is critical and weather disrupts logistics, while resource financial metrics need to be advises companies to review constraints increase energy and water costs. removed from day-to-day facilities and covenants, Likewise, the global response to climate change— decisions on key processes. subject financial projections including climate legislation—will transform the way Toyota has a conventional to timely and sceptical that many economic sectors do business. Companies accounting system, but analysis and identify actions may be forced to adapt their products or technologies operating managers don’t to preserve cash. No short to new regulations and must decide if it’s better use it to manage. Instead, cuts: liquidity remains key. to invest now rather than retrofit later. Litigation they look for waste and against polluters may remove it, knowing from Short-term pain increase as plaintiffs decades of experience the Fairtrade coffee: Maturity dates of is climate change more easily link financial numbers will be outstanding European an opportunity for companies’ emissions positive, although possibly corporate debt your business? to environmental with some lag.” Source: Standard & Poor’s Global Fixed damage. Internet Small steps such as Income Research communication tools simplifying, standardizing 700 have made it easier to and automating invoicing, attack the reputations or faster reporting, can make 600 Non-financial (US$bn) companies of companies that a big difference. However, 500 Financial are associated with CFOs can be more ambitious, companies ‘dirty’ projects. Many focusing on real needs of 400 businesses are likely customers – rather than to find they simply internal perception of those 300 cannot afford to leave needs – to cut costs and 200 going green until simplify processes. Indeed, tomorrow. some CFOs say lean 100 accounting is superior to the “post-mortem approach” of 0 2008 2009 2010 2011 2012 2013 2014 2015 By Kirk Herbertson and Shally Venugopal, associates traditional accounting. at the World Resources Institute (www.wri.org). © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 25. COMING UP 8 10 Benchmarks Your “If you want your company to become world class, it is likely next job that another organization Market turbulence is giving will be achieving superior CFOs the chance to apply performance and you should their skills – described learn from them,” says Joe by one finance chief as 7 Goasdoué, CEO of the 9 a “crystal-clear view and British Quality Foundation. an obsession with control” M&A the “You should be looking at the best, regardless of industry.” Managing – as CEOs. Buccaneering, deal-making CEOs are out, BRIC way The trouble with sector- specific metrics is that it’s IT risks as cash is again king, belts are tightened and debt With savvy investors easy to relax if your figures The civil servant who leaves moves sharply into focus. worrying that M&As never are above the norm: but the office laptop on a train is Royal Dutch Shell’s deliver value, Western CFOs successful firms push harder. a figure of fun, but data loss appointment of CFO could learn from the way Computer giant Dell was best is no joke. It harms security, Peter Voser as CEO raised multinationals in emerging in class for managing working damages reputation and eyebrows, but it’s part of a economies acquire firms. capital but Michael Dell exposes your information trend. One-fifth of Fortune In June, Chinese refiner realized, when he studied to public scrutiny – and it is 500 CEOs are former CFOs; Sinopec bid US$7.2bn retailers, that his company getting worse. KPMG’s Data Nokia president Olli-Pekka (€5.2bn) for Canadian oil could improve still further. Loss Barometer predicts Kallasvuo and WPP Group explorer Addax Petroleum, When Dr Robert Camp serious incidents will rise CEO Sir Martin Sorrell both the largest overseas initiated Xerox’s successful 10% in 2009. Much of it is spent a decade in finance acquisition by a Chinese benchmarking program, “easily preventable and silly”, before taking the top job. company. In 2007, Indian he saw that “the unique says Malcolm Marshall, CFOs start their new aluminum producer and innovative practices Partner, KPMG in the UK. role with one big advantage: Christopher Pillitz, Biggie Productions, Image Source/Getty Images; Sipa Press/Rex Features; Shutterstock Hindalco bought Canadian we needed to remain He views memory sticks, like the CEOs they replace, giant Novelis, twice its size. competitive did not exist CDs and portable media they are used to seeing the The sector has been within our industry”. Camp (such as iPhones) as high-risk business as a whole. The key affected by the crunch, found that a wider remit items often used to take is to successfully delegate but intelligence service made benchmarking an data home: “Personal the finance function (without mergermarket.com reported easier internal sell: “If we responsibility is important. easing up in the war on waste that BRIC M&A deals in the take one of our managers People wouldn’t leave a or the quest to find cash in first half of 2009 were still to a competing warehouse wallet lying around, but will the business), communicate worth US$102.5bn (€72.4bn). at Kodak, he becomes leave a CD on display.” often and, if necessary, adjust So what is the BRIC defensive, because Kodak The most recent your style: the tone that secret in tough times? is doing things differently. corporate victim is a payment suited finance may not fit as Rather than doing deals Take him to an automotive processing company, where CEO. David Tyler, chairman reactively, these cash-rich parts warehouse and he up to 130m credit card details of IT giant Logica and an ex- firms identify targets that does not find it threatening.” from customers of U.S retail CFO, has a word of caution: will drive development over The best way to persuade chains are alleged to have “If you, as CEO, do a the longer term. Deal-makers managers, already trained to been stolen by hackers in turnaround, you’re a hero. If from emerging economies believe they are the best, of what could be the biggest you fail, there may not be a seek new technology, skills the need to change is to let ever data loss. way back to a finance role.” or intellectual property to them see the evidence. Marshall says managers complement their low-cost must know where sensitive model. Kumar Birla, customer data is held. Better chairman of Indian security and employee conglomerate Aditya Birla awareness programs can help. Group, says it “acquires There are so many big risks talent, not just assets”. in IT – data security, viruses, With so many Western tech failure – managers firms suffering, Chinese and should spend less time on Indian companies will have self-inflicted wounds and no shortage of targets. more on preventive measures. Agendamagazine 25 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 26. The business of government Recession has brought big government back – but for how long? And in an uncertain fiscal, political and regulatory climate, can firms protect shareholder value? By PAUL SIMPSON R onald Reagan declared in his 1981 inauguration address: heavily regulate what Lenin famously described as “Government is not the solution to our problem, government is the “commanding heights” of the economy. The the problem.” As a sign of the times, Josef Ackermann, CEO goal is to save the free economy, not destroy it. of Deutsche Bank, told a conference in Frankfurt last March: Benjamin Segal, assistant professor of “I no longer believe in the market’s self-healing power.” accounting and control at INSEAD, says that In a recession, government – in an ironic twist that would have perplexed the from the investor’s point of view, the old strategy former U.S. president – has emerged as the savior of capitalism. of “regulation with a light touch” wasn’t efficient. The changes have been so quick and unprecedented, it’s worth recapping “If you take issues such as stock-option expensing, how far we have come. Many banks in the U.S., Europe and Japan are off-balance-sheet financing and capitalizing partially or largely state-owned. The AIG bailout makes Washington a leases, for a long time it was impossible to get a major player in insurance. Many governments have provided billions of true picture of a business. Investors could end up dollars in loans and equity infusions to car makers and are intervening, as investing in companies riskier, more leveraged investors, guarantors and subsidizers, in energy, housing and telecoms. The and less liquid than they thought.” G20 heads of state, who speak for 83% of the world’s GDP, aim to lead an Market capitalism is supposed to work because unprecedented global revolution in regulation to ensure that the interests of it allocates funds to companies that most deserve financial institutions and society never diverge as catastrophically again. them. In practice, Segal says, the true differences It is easy to see why political strategist Robert Reich, an adviser to Barack between businesses competing for funds are Obama and labor secretary under Bill Clinton, believes the “pendulum of obscured by an opaque, imperfect and inconsistent public trust” has swung decisively away from business. In the July/August approach to regulation and accounting standards. 2009 Harvard Business Review, Reich predicts CEOs will be under “tighter scrutiny than we have seen for decades”, affected by “indirect forms of Tainted politics intervention” – albeit with regulations seeking to coax rather than control, “In theory, regulations will facilitate vibrant relying less on rules and penalties than incentives to reward business behavior markets, but the process by which these regulations government believes is in the public good. He suggests “managers will work are drafted is politically tainted, so it is very tricky,” more directly with government than at any time since World War II” and he says. Improvements can take years, and “partner with it rather than fend it off”. Boiled down to basics, Reich’s industries may lobby hard against them, so new argument is that big government is back. rules, intended to be for the common good, are But for how long? John Herhalt, global chair of KPMG’s government sector often far from perfect. Businesses often insist that and partner in the Canadian firm, says: “In an economic crisis, government every change – such as accounting for stock options does the things it believes are necessary to protect the public interest. as a cost in a profit-and-loss account – would make Sometimes that can be quite extreme. But government has no intention, in the them uncompetitive. To Segal, clear, fair and long term, of being an owner and stakeholder in the automotive industry, consistent regulation would be good for the banking or insurance.” The pendulum has not swung so far back that ministers investor – and CEOs: “If you look in a mirror and subscribe to the neo-Keynesian orthodoxy that government should control or don’t like what you see, it’s not the mirror’s fault.” A history of government intervention 1800s capitalism 1920s realism 1933 1944 Woods Industrial Socialist New Deal Bretton The ideas of David Hume With Russia’s economy President Roosevelt uses A conference, inspired by and Adam Smith lead to foundering, Lenin authorizes ‘state capitalist’ economic John Maynard Keynes, the collapse of British limited private enterprise policies to help the U.S. out creates the IMF and sets mercantilism, with factory through a New Economic of the Depression, including in place a global system owners replacing merchant Policy. In 1928, Stalin brings banking reform and work- of governmental adventurers. in a fully planned economy. relief schemes. exchange rates. 26 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 27. the big issue G20, 2009: Behind the smiles, heads of state face hard choices about debts and cuts Herhalt is more optimistic about the benefits of new regulation and says have to consider the public good to protect that, outside the financial sector, CFOs should not fear a new round of shareholder value. The adage that what’s good for controls as costly and onerous as the Sarbanes-Oxley Act (see panel, page business is good for the country no longer applies. 28). But he warns policy makers: “Government cannot introduce regulation The multinational rescue mission to save the that would eliminate risk. The question is: what is the acceptable, balanced world economy suggests that big government has risk to be left in the economy?” The other question, Segal says, is what might made a startling comeback. But the neo-Keynesian be the unintended consequences of these new regulations? renaissance is far from permanent. As Segal points Reich is right to say that the dynamic of the relationship between out, we no longer believe one economic theory has government and business has changed. As he says, the imperative is for CEOs all the answers. The cycles of action and reaction, to “engage with, not shield from” government, helping to resolve government state intervention and privatization, have left Tom Stoddart/Getty Images; Rex Features; Shutterstock concerns, not block or ignore them. In the short term, some politicians – governments taking astonishing steps: not in the perhaps the European Union itself – may seek to micro-manage bonuses and name of a particular political or economic remuneration. That will pass. But in an age of unprecedented media scrutiny, philosophy but as pragmatic responses to a crisis with the public trusting business as little as they do politicians, companies will that exceeded all expectations. 1945-51 heights 1961 whisper 1980s 1989the Wall Commanding Chinese Reagan-Thatcher Fall of The U.K.’s post-war Labour A crack in communist ideology The conservative leaders “Mr Gorbachev, tear down government makes the appears when Deng Xiaoping of the U.S. and U.K. come to this wall,” Reagan said in state the major actor in the says: “I don’t care if it’s a symbolize the retreat of the Berlin in 1987. Two years economy, nationalizing coal, white cat or a black cat. It’s state and the ascendancy later it comes about rail and steel and setting up a good cat if it of Milton Friedman’s – a potent symbol of the the National Health Service. catches mice.” monetarist theories. end of socialism. Agendamagazine 27 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 28. the big issue Sarbanes-Oxley But global stimuli are likely to prove short-term The U.S. Public for two reasons: first, because their continuation Company Accounting may ultimately inhibit the very economic growth Reform and Investor they are supposed to promote; and second, because Protection Act of 2002, many governments, having assumed mammoth commonly called debt, need to balance the books. Sarbanes-Oxley after its political sponsors, Herhalt says there is evidence that, in the long Paul Sarbanes and run, too much state spending could “take away Michael Oxley, was the engine that drives the economy”. This debate passed after several is politically charged. Opponents of state pump large corporate and priming often cite the Rahn curve, which seeks to accounting scandals. prove mathematically that once state spending The law created the Public Company exceeds 25% of GDP, it restricts economic growth. Accounting Oversight The curve has a beguiling simplicity but if history Board (PCAOB), to teaches us anything, it is that political economics Alberta premier oversee and discipline are seldom clear-cut. Ralph Klein strove to accounting firms. It get government “out also covers auditor of the business A question of expediency independence and of business” corporate governance. The projections for many national treasuries do Supporters say possess a certain stark simplicity. The Sarbanes-Oxley has Thatcherite principle that governments should and cut federal spending by around 20% without helped restore public be careful not to spend too much more than is triggering a massive public backlash. By 2000, the confidence in corporate coming in will haunt many finance ministers in budget was US$12.5bn (€8.7bn) in surplus, and accounting. Critics say the years ahead. Herhalt says they face two spending on public programs accounted for just its complex provisions have blunted the U.S.’s choices: “Find more revenue or cut spending.” 11.5% of GDP, the lowest in 40 years. competitive edge. With economies wobbling, cutting spending The lessons Massé drew from this success were A 2005 paper by Ivy and services seems the likelier option. that arbitrary cuts didn’t always deliver as expected Zhang of the University Herhalt co-authored a KPMG report, The Wolf (they often lowered the quality of service), of Rochester, NY, Is At The Door, based on interviews with 124 civil efficiency savings only took you so far (they might estimated the total cost servants in six nations. It warns that, by 2012, shave 4% off spending at best), and that this of Sarbanes-Oxley to U.S. business at $1.4 credit rating agencies could be pressuring the U.K. re-engineering was so intensive it was very hard trillion (€900bn). – and possibly Australia, Germany and the U.S. – for the state to undertake other major projects. In 2008, the Wall to cut debt. Budgets could Massé’s seminars on this Street Journal said: “The new laws have face severer cuts from 2011. Herhalt says the “Government cannot experience have been attended by, among others, neither prevented frauds nor instituted window for governments eliminate risk. So the Gus O’Donnell, the fairness. But they have managed to kill the to radically rethink their organizational model and question is, what is an British Cabinet Secretary. To the chagrin of creation of new public companies and damage deflect such pressure could close within a year. acceptable risk?” theorists like Reich, the need to balance the books entrepreneurship.” It is human nature, in a may persuade many But official statistics crisis, to find an inspiring precedent. At the start finance ministers to emulate Ralph Klein, the don’t show any great reduction shift created of the crunch, the Swedish model of extracting premier of the Canadian province of Alberta, by start-ups after the equity, as states bailed out banks, was in fashion. who, between 1992 and 2006, slashed spending, act was passed. The new precedent in vogue is Canada in the mid- sold state assets and deregulated in a quest to get The U.S. Supreme 1990s. With the government deficit at 9% of GDP government “out of the business of business”. Court is to hear a and debt at 70%, Ottawa comprehensively Business may bear the brunt of recessionary challenge to the law’s reviewed its purpose, goals and performance, pressure now, but the reality behind the gloss and constitutionality. asking, as cabinet office minister Marcel Massé glamor of the G20 and G8 summits is that many of brutally put it: “What needs to be done by these leaders – or their successors – will have to, as Justin Lane/Corbis; Donald Weber/Getty Images government – and what can we afford to do?” JFK so eloquently put it, ask what they can do for Through a complete re-examination of the their country. They may not like the answer. ● state’s role, Canada axed 55,000 public sector jobs 1990s 2002 2009 diplomacy Indian resurgence Sarbanes-Oxley Summit Confused monetary policies The U.S. legislature passes The G20 London summit and corruption in India lead to an act requiring tighter agrees US$1.1 trillion ( €700bn) decades of stagnation. After an accounting standards, in state funding for economies IMF bailout, the Rao government response to a number of worldwide and promises initiates reforms that lift corporate scandals that tighter regulation on hedge 300 million out of poverty. raised public ire. funds and tax havens. 28 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 29. leArNINg curve Napoleon, Icarus and the paradox that kills business What the Emperor’s invasion of Russia says about corporate strategy by shaun campbell “Let’s invade Russia.” It wasn’t one of Napoleon’s Revolution, imposing the Code Napoléon, Learning from most promising ideas, but consultant Jerry defending France from its attackers – ended with the imperialist pretentions symbolized by his self- the Emperor Manas says a detailed analysis of that failed 1812 n Recognize when your campaign has a lot to teach businesses. coronation in 1804. The sensible thing might have business has grown so As a manager, Napoleon was charismatic, been to say, “I’ve conquered most of Europe, much your management flexible, visionary, and tough, a motivational I don’t need Russia”, but the internal momentum structure has to change genius who won many battles through extensive of his organization – and the need to pre-empt n If a single deal preparation. His soldiers were well-trained, knew a Russian invasion of France – drove him on. could break your organization, it’s a deal what was expected of them and confident. His This shows how success changes the corporate too far other gifts included memory (“I knew the names balance: the things companies are good at attract n Consider whether of officers in all the regiments”), industry (he got most of the resources, while vital functions are success has unbalanced up early, worked hard and systematically) and neglected. Robert Maxwell’s empire proved not your business to be a world-class business. But Maxwell built up n Listen to opponents sangfroid (“I could listen to intelligence of the n Be visible to your team death of my wife without a change of feature”). He a profitable printing and publishing business n Be more imaginative had a touch of hubris but few shrinking violets before megalomania set in. Maxwell had always when monitoring risk make CEO, let alone Emperor. been acquisitive, and ultimately cash cows such as So what went wrong in 1812? “Napoleon put an print were starved of investment as the strategy For more information, read Jerry Manas’s unprecedented amount of effort into the logistics narrowed to focus on the big deals that, ultimately, Napoleon On Project of that campaign. He knew the Russians would ruined the business and many employees. Management (Nelson adopt a scorched earth strategy, that keeping his Perils of excellence It is hard, Miller says, to Business) and men fed and provisioned was vital. Each man had distinguish between the concentration of success Danny Miller’s The Icarus Paradox to carry four days worth of food in his pack,” says and the narrowness of irrelevance. Managers (Harper Business). Manas. “Two things went wrong. His officers must be alert to “the perils of excellence”. couldn’t stop the men eating all their rations in the Napoleon excelled as a military strategist and first day or two. And summer came two weeks risked almost everything on one venture, which early, which prevented the horses and supply no prudent CEO would ever do. By 1812, the trains from keeping up with the men. We often French empire was so large – and had so many focus on the winter retreat from Moscow, but the enemies – that no man, not even Napoleon, army was in poor shape before it even got there.” The Icarus paradox Perhaps the Corsican Napoleon shows how suffered from what business writer Danny Miller calls “the Icarus paradox” – the higher we fly, as strengths become a fatal individuals or companies, the more likely it is that our strengths cause our downfall. In Greek myth, weakness as success Daedalus made wings for his son Icarus who, exhilarated by his power, flew too close to the sun, changes organizations melted his wings and plunged to his death. Miller says the paradox “applies to many could run it single-handed. He had to delegate, outstanding companies: their victories and their but hiring had never been one of his strengths strengths so often seduce them into the excesses and asking brother Joseph to run Spain, soon that cause their downfall”. Among the typical lost to Wellington, was a blunder. Icarian “riches to rags” trajectories that Miller Perhaps he forgot his own advice, as a believer traces are DEC, a computer company that rose in KISS (Keep It Simple, Stupid): “The art of war through careful craftwork but sank when that does not require complicated maneuvers; the craft degenerated into obsessive tinkering; and simplest are the best, and common sense is fundamental. One might wonder how generals Imagno/Getty Images CDC, which stunned rivals like IBM with its Cray supercomputers in the 1960s but blew its blunder; it is because they try to be clever.” lead by developing fantastic, futuristic products Ironically, says Manas: “There are indications he that were too expensive for the marketplace. had learned from his mistakes during his exile on In Napoleon’s enterprise, a careful building Elba. But it was too late. He was a workaholic and, process – calming the chaos of the French by Waterloo in 1815, he was simply burnt out.” ● Agendamagazine 29 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 30. c acumen It’s not what you know… Managing data isn’t glamorous but Conrad Wolfram, the business brain behind the new name in online search, says it could make your company work smarter By ROBERT JEFFERy Accurate information has never been more public launch of Wolfram|Alpha, which takes the crucial for cash-conscious businesses but, says Mathematica approach to online search. “It tries Conrad Wolfram, getting hold of data is only to interpret the meaning of what you’ve entered,” half the battle. The real question is: how quickly says Wolfram. “Then it compares it to a huge can your data give you meaningful answers? sucked-in data resource that we have curated, “If it takes you longer than a minute to get an adding meaning and computation. It compares answer to a straightforward question, you need the two and gets you a bespoke answer to your a fresh strategy for getting your data out,” says specific question – not a list of links to other Wolfram, strategic director of Wolfram Research, people’s answers to other questions.” the firm behind the famous new ‘answer engine’ It’s not a search engine, insists Wolfram, but Wolfram|Alpha (www.wolframalpha.com). “If the company has still provoked a reaction from I want to know ‘What was John’s incentive last quarter?’, I should be able to type that in and get Google, whose co-founder Sergey Brin was a 1993 Wolfram intern. Google Scholar and Google “If it takes you an answer. It should be bespoke computing. Squared, two new offerings, are similar to certain longer than a “The problem nowadays isn’t a lack of data. We’ve all got tons of it, either from the web or facets of Wolfram|Alpha. Rather than wade into a David vs Goliath battle, Wolfram looks to minute to get from our own internal corporate sources. But sponsorship, licensing and subscription models an answer to a data is only one part of knowledge. The other part is knowing what to do with that data and to become profitable, not market share. Preparing for future growth means Wolfram straightforward how to get real answers from it.” is one of the few technology companies hiring. question, you Business intelligence is more than just ‘nice to While it doesn’t use Google-style algorithms have’. Steve Gallagher, partner, KPMG in the to sort job applicants, its approach is need a fresh UK, says: “Data analysis tools are nothing new, unconventional. “We have an argumentative, strategy for yet I’d suggest that businesses use 20% of their questioning culture,” says Wolfram. “We are full capability. They can facilitate understanding more interested in raw intelligence we think is getting your of customer bases, hot products or new markets.” applicable, not necessarily conventional wisdom data out” Wolfram says: “You work with quantitative and knowledge. We give people a set of questions results and analysis far more than a few years to choose between, in areas they aren’t claiming ago. Combining publicly available information to apply for, and let them figure out what they with your internal information is crucial to want to answer.” keeping a competitive edge.” Whether Wolfram’s software can tell it how to Wolfram Research – founded in 1987 by succeed where a slew of rivals has failed isn’t Conrad’s brother, CEO and acclaimed computer clear. But the business plan – “to take all scientist Dr Stephen Wolfram – started out to systematic knowledge and make it computable” market Mathematica, a computational software – suggests it is in for the long haul. And Wolfram program used by research scientists and academics believes CEOs increasingly understand just how to handle complex models. The program was fundamental business intelligence can be: inspired by Stephen Wolfram’s belief that all “Organizations that might have been happy with Go further natural phenomena can be computed (a theory how they were doing things are completely Visit the Wolfram site distilled in his bestseller A New Kind of Science). rethinking them in this period of change. And at www.wolfram.com. Wolfram Research has gradually broadened that includes the way they analyze and compute. For more on business intelligence, see www. its horizons and taken its technology to new They’ve been shaken out of the traditional way kpmg.co.uk/advisory/ markets, generating headlines in May with the of doing things.” l performance/fm. 30 Agendamagazine © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.
  • 31. aob need to know Sustainable supply chains Why would I want to go green now? Getting to grips with the real cost of going green; execs blog on change, arguing and dating on all its products within five years, and has told its Find out more Supply chain transformation is back on the agenda global suppliers to sign up to strict sustainability as businesses start scrutinizing costs. But if you’re guidelines. IKEA suffered a PR backlash earlier rethinking your supply chain to make it more this decade after being implicated in child labor efficient, why not enhance its sustainability at the scandals, but its IWAY program for suppliers has same time? “In this financial situation, it’s going to since earned it green kudos. According to an Being the Best: Thriving, be tough for companies to pay more money to be E2Open survey, 90% of supply chain directors Not Just Surviving environmentally friendly,” says Paul McCann, vice expect their boards to green up supply chains. This report focuses on president Asia of supply chain management Is this just about carbon footprints? how finance functions company Smurfit-Stone. “Companies will start Footprints and ‘food miles’ are consumer-facing are faring and how their with opportunities where becoming more signs of sustainability, but animal welfare, priorities have shifted. The report can help environmentally friendly also saves them money.” labor standards and product safety are equally finance support Who’s leading the way? pressing issues which have the ability to turn into business management Wal-Mart is introducing carbon footprint labelling full-blown crises. As supply chains become more effectively. increasingly global, focusing on the detail gets harder but regulation is on the rise too: the EU is planning carbon guidelines for food and drink retailers by 2012. There are also signs China recognizes its manufacturing sector needs to be more transparent over pollution. How do I get started? Building sustainability into an ongoing supply Joint Ventures – a tool chain transformation is the best way. Not only will for growth during an it protect you from unpleasant PR, it will help you economic downturn respond to new regulations, build brand value, A research report which reduce operating costs and exploit opportunities. explores joint ventures as a tool for growth. execs online Findings include high success rates, increased activity and key drivers for joint ventures such The edited highlights as reducing costs and “Everyone feels like change is in “Finding the right job is a lot like hold their own against me, entering new markets. the air. We’ve all heard the buzz dating. It’s hard until you start, boss.’” words – ‘the new normal’ or then it’s great till it’s not. Then Dave Kellogg, CEO of software To receive a copy ‘reset’ – and for the most part I it’s frustrating as hell until you developer Mark Logic of either of these think it’s a good thing. It’s about get it right. But when you do, it (marklogic.blogspot.com) publications, please getting back to the things in life all comes together.” send an email to that really matter – being fiscally Mark Cuban, owner of the “Investor commitment is agenda@kpmg.com Garrett Ellwood, Rachel Kenison/Getty images responsible rather than buying Dallas Mavericks and important… when the going more than you can afford, chairman of HDNet is good, everyone spending time with loved ones, (blogmaverick.com) expresses faith in the and re-evaluating priorities.” India story and your Bill Marriott, chairman and CEO “I had a boss who business. When of Marriott International loved to stop me in the chips are down, u CONTACT US (blogs.marriott.com) meetings and say: investors’ mettle We always want to ‘Dave, you’re arguing is tested. In the last hear your opinion “Late for meeting. Good news is with yourself.’ I viewed it meltdown, many VCs shut up about Agenda. client I am meeting with is about as a strength. Sometimes shop and left India.” Please email your 20 cars behind me.” I think I should have Sanjeev Bikhchandani, suggestions and Kel Kelly, CEO of Kel & Partners replied: ‘Well, I need CEO of Info Edge India feedback to: marketing agency, on Twitter to argue with (bikhchandani.blogspot.com) agenda@kmpg.com someone who can Agendamagazine 31 © 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

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