PwC Edge PwC edge Volume One 2006
Managing Complexity in Globalisation*
*connectedthinking pwc PwC Edge
Managing Complexity in Globalisation PwC Edge
Editor’s Note
hat keeps you up at night with excitement or fear? Never before are there more opportunities for CEOs of both large and small companiesW to grow their business as a result of globalisation of the world’s economy. Globalisation in a business context when properly managed brings success and exhilaration the obverse of which is complexity and crisis. Gautam Banerjee takes us through the findings of the PricewaterhouseCoopers’ (PwC) 9th Annual Global CEO Survey and reveals that the search for new customers and markets ranks as top priority along with the challenge of managing complexity.
China’s appeal to the West dates back 700 years when Marco Polo returned to Venice. Did he tell a million lies then about the Middle Kingdom? Foreign business people have since returned to China bearing witness to the fantastic opportunities: Technical brains equal to the best in the world! Millions of workers willing to work for peanuts! Hundreds of million of consumers hungry for the latest consumer goods and to watch the next blockbuster movie from Hollywood! Many have found success in this vast and bewitching country and many more found dreams of success in China to have no reality by day.
India, the world’s largest democracy by population, has been Kyle Lee pursuing various reforms to attract FDI. These reforms have Managing Editor gained momentum and found success. Like China, it has a huge population of willing low cost workers and a burgeoning middle class hungry for the consumer goods like their counterpart on the other side of the Himalayas. Are dreams of the global CEOs more likely to be realised in India?
My colleagues, Amitava Guharoy, Ng Jiak See and Karen Loon share their perspectives on opportunities and pitfalls in these vast markets. While cost reduction is not the chart topper of the global CEO it is not far away. Both China and India are popular destinations for offshoring. Mark Jansen in his piece Offshoring: Balance redefined reviewed the PwC and The Economist Intelligence Unit’s recent survey and the findings are interesting to say the least. PwC Edge
The issues of growing foreign revenue, to name but three are complex operations, taxation, and foreign posting for your best and brightest.
Complex supply chains is the norm in the global economy, have you considered the tax issues arising from such business arrangements? If not, Speed towards global supply chain structuring by Nicole Fung and Sunil Agarwal is a must read.
In The magic of IT, Tan Shong Ye and Thyag Venkatesan share insights on reducing complexity of your global IT systems and how to improve business performance in the process.
Imagine mishandling your most valuable and mobile assets, your people. When a foreign assignee returns to corporate office he promptly walks across the street to join your competitor because he is unsure of his future with your company. Mario Ferraro talks about Overseas posting: Opportunity or threat and addresses this hypothetical but common scenario.
The Enron saga is drawing to a close following the conviction of the key players Kenneth Lay and Jeffrey Skilling. Their conviction book-ends a five year period of extremes in corporate frauds which in addition to Enron are Tyco and Worldcom are examples and extremes in corporate regulations, of which the 2002 Sarbanes-Oxley Act is an example. Would a check-the-box approach help to reduce corporate frauds? Not according to Subramaniam Iyer et al in Managing the risks of white collar crime. If all else fails, and investigation ensues, Tan Shong Ye and Peter Viksnins tell us how forensic technology can help to crack the most complex cases in Navigating the data minefield.
The fraud at Enron is arguably the most complex in recent corporate history; many believe that it’s the complexity of global businesses which provided the opportunity for widespread frauds. Such flaws are not best addressed by a sledge hammer approach adopted by legislators but by activism at boardroom and shareholders meetings argue Keith Stephenson and Patrick Jourdain in their contribution on Can you afford not to have good governance. Find out how you can embed and culturalise good corporate governance.
Whether your main concerns today are growing revenue or managing complexity which my colleagues have addressed in this issue, I think you’ll find their ideas thought provoking and there is value in challenging convention wisdom. PwC Edge
Setting the scene - A foreword by Gautam Banerjee
Globalisation and complexity: Inevitable forces in a changing economy
Along with global trends, over 80% of Asia Pacific-based CEOs rank finding new customers and markets as their primary goal over cost- cutting followed by serving existing customers better in globalisation, reveals PricewaterhouseCoopers’ (PwC) 9th Annual Global CEO Survey.
From interviews with 1,410 CEOs around the world, including 331 CEOs from Asia Pacific, the findings show that nearly two- thirds of these CEOs are confident about the positive impact of globalisation on their businesses over the next three years. This enthusiasm is bolstered by opportunities in the BRIC (Brazil, Russia, India and China) economies, which are regarded as the Gautam Banerjee epicentre of globalisation efforts. Over 70% of the global CEOs Executive Chairman plan to do business in at least one of the BRIC countries over the next three years. Closer to home, more than 90% of these corporate leaders are excited about the investment opportunities Asia Pacific has to offer over the next five years.
Optimism notwithstanding, the CEOs are also aware of the obstacles on the road to globalisation. Barriers cited are overregulation (64%); trade barriers/protectionism (63%); political instability (57%); social issues (56%); terrorism (48%); and organised opposition to globalisation (21%).
In relation to the financial stability in Asia Pacific, the global CEOs are concerned about non-performing loans (60%), fluctuating foreign exchange rates (46%) and high level of public debt (43%). But while BRIC can provide competitive advantage, they can also be a source of competitive threat. China and India are regarded by these global head honchos to pose the most competitive threats to other markets. Seventy-four per cent (74%) of Asia Pacific-based CEOs expect serious contenders to emerge from China in the next three years; lesser (42%) anticipate the same from India. In fact, 75% of global CEOs believe that China is likely to become one of the region’s leading foreign acquirers. However, 77% of them believe that poor risk management and internal control of some Chinese companies will become a major barrier to China’s overseas expansion. PwC Edge
Choice destinations for expansion by Asia-based CEOs: i) China – 75% ii) India – 45% iii) Russia – 21% Complexity: Managing the inevitable iv) Brazil – 15% An inevitable by-product of pursuing a global strategy is increased Intended range of complexity. Seventy-seven per cent (77%) of the CEOs globally say activities in BRIC that the level of complexity in their company is higher than it was three by order of preference: years ago, and 27% believe it is much higher. Along with global trends, Asia-based CEOs identify the following activities that contribute to i) forming alliances increased complexity: extending operations to new territories (45%); ii) opening new offices mergers and acquisitions (35%); launching new products and services iii) developing unique (35%); and forming strategic alliances (27%). products iv) outsourcing Outsourcing functions to third parties causes the least amount of v) mergers and acquisitions complexity. External forces that significantly increase complexity vi) offshoring include national and international laws and regulations, actions by competitors, and changing customer requirements.
While 77% of CEOs globally agree that managing complexity is a high priority, these findings suggest they are not managing complexity well. Only 4% of CEOs globally say they are very good at measuring complexity, and only 5% say they have a corporate-wide framework for managing complexity.
In terms of capabilities to combat complexity, CEOs view the following as extremely important, and they are ranked as follows: highly capable employees (55%); effective communications (45%); the ability to identify activities that create value (41%); the ability to identify activities that are destroying value (43%); the alignment of IT with business processes (32%); a corporate-wide framework for managing complexity (17%); and the ability to measure complexity (16%).
Ironically, the capabilities CEOs deem most critical for managing complexity are those which they feel their companies are performing the worst. For example, there is a 38% point gap between CEOs who rate having highly capable people as extremely important, and CEOs who rate their performance in this capability as very good. This and other “capability gaps” range from 38% points to 12% points. This suggests that the more important the CEOs perceive the capability, the greater the capability gap.
On the other hand, CEOs who believe that their organisations perform very well in certain areas of complexity management, also believe they perform well in others. For example, on average, across all seven capabilities, only 11% of the 1,410 CEOs rate their organisations as “very good”. However, this average is far higher for CEOs who say they are “very good” at measuring complexity (58%). This suggests that what gets measured in complexity gets managed. PwC Edge
“Managing complexity is not an unattainable task... By measuring complexity and eradicating it Issue of complexity has to be addressed where it reduces Based on findings from another regional survey, “Enhancing Value in Asia: Exploring the relationship between Finance, Governance and value, CEOs can Growth” by PwC and CFO Publishing Corporation, empirical evidence create strategic points to the critical need to manage complexity: advantage in the • seventy-six per cent (76%) of Singapore respondents (57% in Asia Pacific) say they cannot complete their budget exercises within two global economy.” months;
• CFOs feel that more can be done to improve planning, budgeting and forecasting (3.7/5 for Singapore); and
• across Asia, 30% of CFO have disjointed information systems; 25% poor data quality and 19% struggle with complex accounting rules.
At the same time, the survey reveals a high degree of agreement where desired business outcomes are not achieved due to rising complexity that is value destroying.
Some key reasons for project failures are poor project management; lack of clear definition of project objectives; invalid business care; failure to manage change; projected business outcomes not measured; lack of follow-up post completion of project; and poor training.
Managing complexity
Managing complexity is not an unattainable task. CEOs who lead with a corporate-wide framework and devise appropriate tools to measure complexity have reported success in managing complexity. Being proficient in these two capabilities can increase the likelihood of being good at other capabilities necessary to effectively manage complexity. By measuring complexity and eradicating it where it reduces value, CEOs can create strategic advantage in the global economy. Start by differentiating between value-creating and value-destroying complexition. Next, maximise value-creating complexity through simplifying and strengthening controls governance and managing complexity positively in audit committees. Then, minimise value- destroying complexity through demystifying complexity surrounding C-suites. Finally, identify your risks. PwC Edge PwC Edge Contents PwC Edge Volume One 2006
Can you afford not to have good governance 2-7 Globalisation is driving convergence of corporate governance mechanisms. However, apparition of rules and regulations can develop a tendency towards “box-ticking”, with compliance in mind rather than performance. Keith Stephenson and Patrick Jourdain discuss why governance should be on every Board’s agenda.
Banking for growth in M&A 9-12 Spurred by the promise of market liberalisation, mergers & acquisitions (M&A) among financial institutions inAsia are expected to gain momentum. Karen Loon looks at what lies ahead for the M&A space in the banking industry.
Speed towards global supply chain structuring 14-18 Given the growing importance of globalisation, it is increasingly crucial to create integrated models of global supply chains that take into consideration all the key aspects of operating in the global economy. Nicole Fung and Sunil Agarwal shed the light on traditional supply chain structures and how companies around the globe are restructuring their supply chains to minimise tax costs and maximise shareholders’ wealth.
Cross-border transactions in emerging economies: India and China M&A 20-25 The mergers and acquisitions (M&A) transactions environment in emerging economies has rarely been as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in an emerging economy. Amitava Guharoy and Ng Jiak See share the issues, opportunities and challenges surrounding deal-making in these emerging economies.
Offshoring: Balance redefined 27-30 Offshoring is here to stay and it will only increase in complexity over the years. Mark Jansen provides an insight into the challenges awaiting companies who want to tap into the benefits of offshoring. He also shares why organisations must work towards calibrating their balance to get the most out of offshoring.
Overseas posting: Opportunity or threat 32-35 In the past, employees view overseas posting as the golden ticket to career progression. Today though, employees are thinking long and hard before accepting an international assignment. Mario Farraro examines why.
Navigating the data minefield 37-40 In today’s electronic environment, many high-profile fraud cases have been solved through forensic searches of computerised media and experienced electronic discovery professionals are now in great demand. Tan Shong Ye and Peter Viksnins explore the role of IT as a double-edged sword in solving economic crime.
The magic of IT 42-45 Whether you are considering an acquisition, forming a strategic alliance, developing new products, or seeking markets to grow your company, the complexity of your business will inevitably increase with time. If complexity is not properly managed beyond a certain point, it can negatively impact your bottom line. Tan Shong Ye and Thyag Venkatesan show you the possible measures you can take to reduce the complexity of your IT systems and improve business performance.
Managing the risks of white collar crime 47-52 Corporate scandals drawn from today’s headlines are forcing executive management worldwide to take a closer look at the policies and procedures they have in place to control and mitigate incidents of fraud. Subramaniam Iyer, Chan Kheng Tek and Peter Viksnins highlight the importance of a fraud risk management programme to effectively battle economic crime. PwC Edge PwC Edge PwC Edge
Can you afford not to have good governance
Globalisation is driving convergence of corporate governance mechanisms. However, apparition of rules and regulations can develop a tendency towards “box-ticking”, with compliance in mind rather than performance. This attitude can contribute to value-destroying complexity. Good governance, by clarifying roles and responsibilities, can help organisations resolve the complexity created by the new compliance requirements. Business leaders who understand the benefits of good governance and take this to a cultural level can participate in releasing the ultimate value-creation driver for their organisations as well as their stakeholders: the value of trust. BY KEITH STEPHENSON AND PATRICK JOURDAIN Performance Improvement PwC Edge
Globalisation: A local phenomenon uncertain about their ability to sustain value from current efforts. Events happening on the other side of the globe translate into fundamental shifts at our doorsteps, Compliance efforts with recent governance prompting changes in the way we live and work. regulations such as Sarbanes-Oxley have resulted The responses to the challenges of globalisation in fundamental changes in the way organisations are, however, influenced by local cultures and operate, in particular, their finance functions. It has practices. In the corporate governance arena, the also exposed Boards to a degree of complexity that attitudes taken by governments, accounting boards, hitherto did not have their attention. In this respect, stock exchanges and other regulatory bodies all the findings of a recent survey of 400 CFOs and seem to converge with the creation of complex and senior financial executives from 13 countries in 2 demanding pieces of regulation. While organisations Asia , conducted jointly by PwC and CFO Asia, are around the world are navigating a host of new of particular significance here. Amongst the worrying standards and stakeholder expectations, they are signs of value-destroying complexity is the fact that challenged to do so in a way that truly supports the majority of companies take two months or longer performance objectives and effectively sustains to complete their annual budget exercise (57.3%). value. Moreover, 30% of CFOs surveyed acknowledge having disjointed information systems, 25% report Clearly, there are advantages for companies that poor data quality and 19% struggle with complex are prepared to go beyond “box-ticking” compliance accounting rules. While the CFOs surveyed are still where corporate governance is concerned. One of reasonably satisfied with the accuracy of transaction the benefits is sustainable growth. Once companies processing and monthly results, as well as the appreciate the value of good governance and truly adequacy of internal controls, they agree that more embrace it in all facets of their corporate goals needs to be done to improve planning, budgeting, and mission, corporate governance can be a real forecasting, and performance management, all of performance driver for any organisation. which are key areas that support sustainable growth.
Value-destroying complexity Apart from this survey, recent research also validates the link between good governance and unmanaged performance. A benchmarking analysis and research by the General Counsel Roundtable found that In theory, while good governance is universally each additional dollar of compliance spending recognised as a performance driver, many saves organisations, on average, US$5.21 in organisations are not prepared to efficiently address heightened avoidance of legal liabilities, harm to the the potentially value-destroying complexity increased organisation’s reputation and lost productivity. Taken governance can result in. as a whole, these findings point to the increasing importance of good governance to an organisation. Significantly, only 4% of global CEOs say they are However, are productivity and reputation the only 1 good at measuring complexity , and only 5% have a elements that justify good governance? Can a corporate-wide framework of managing complexity. better case be made for the dire need to adopt good All organisations are affected by the complexity governance? generated by the convergence of the three elements of Governance, Risk and Compliance (GRC). Although some organisations have had positive Good governance is the core of experiences in coordinating an approach to address value-creation their GRC elements arising from the convergence of global standards, almost all we speak to are The answer lies in value-creation. Good governance is the core driver of value-creation because the transparency it creates helps identify the layers 1Source: PwC’s 9th Annual Global CEO Survey of value-destroying complexity. The added
2Source: “Enhancing value in Asia: Exploring the relationship between transparency brought into an organisation by Finance, Governance and Growth” regional survey by PwC and CFO governance sows the seeds of trust. Governance Publishing Corporation PwC Edge
“Good governance is the core driver of value-creation because the transparency it creates helps identify the layers of value-destroying complexity.”
Stakeholders
Customers Employees Society Partners Service levels Childcare facilities Waste management Co-branding Quality assurance Fair wages and Aesthetics Favourable terms Flexible terms benefits Enviromental risk Partner engagement Customer engagement Recruitment, training reduction Fair trading practices and development Consumer rights and Energy conservation Mutual accountability interests Workplace safety Infrastructure and transparency Product/service safety Employee Enviroment engagement
Example Investments rehabilitation Diversity and ethics Good neighbour
Trust Loyalty Enhanced asset Motivation Asset utilisation quality
Payoff Increased sales Reduced revenue risk of litigation Increased Reduced productivity costs
Source: Integral Business – Integrating Sustainability and Business Strategy 2003, PwC. creates an environment where good practices and • turning this view into a strategy that drives value ethical behaviours are codified. With this, business throughout the organisation. leaders find the right people to help them achieve sustainable growth. The benefits for the organisation will be magnified by taking an integrated approach that drives Better governance creates greater transparency sustainable performance rather than a “box-ticking” and is achieved by key investment initiatives which compliance one. META Group research3 supports address all of the stakeholders of an organisation. the view that an integrated approach to GRC is a With this focus business can achieve improved value driver that provides competitive advantage value. while managing risk. In this study, respondents noted that an integrated approach can enhance the To unlock the full value of good governance, following performance dimensions: organisations must invest in key initiatives that engage all their stakeholders by: • reputation value by 23%;
• taking a broader view of strategic stakeholder • employee retention by 10%; and constituencies; • revenue by 8%. • developing a deeper acknowledgement of the importance of good governance; and 3© 2003 META Group, Inc., Stamford, CT, USA. PwC Edge
Effective integration of Governance, Risk and Compliance (GRC)
DER EXPE HOL CTA KE TI A ON ST
NOLOGY EMERGIN TECH G STA Setting objectives, tone, policies, S & ND ES AR C DS RO & risk appetite and accountabilities. , P N E Governance E R W Monitoring performance.
U R T E
L Q
U
U
C
I
R
G Identifying and assessing risks that
E
N
I Enterprise M
L
E
B
N
A
T
N may affect the ability to achieve S E Risk Management objectives and determining risk response strategies and control activities. Compliance Operating in accordance with objectives and ensuring adherence ______Extended Enterprise & Value Chain ______with laws and regulations, internal policies and procedures, and stakeholder commitments. ET RE HICAL CULTU
Source: Integrity Driven Performance: A new strategy for success through integrated governance, risk and compliance management 2004, PwC.
Corporate governance as the “Truly effective governance platform for an effective finance function drives improved financial effectiveness, which itself Truly effective governance drives improved financial effectiveness, which itself supports business supports business growth, growth. But this happens only when it establishes a bond of trust between the Board and the Finance but only when it establishes Department. Have we failed to see the link between a bond of trust between governance and financial effectiveness? Ask any CEO or Board member and they will tell you that the Board and the Finance finance is probably the function which has been most impacted by the recent developments in the Department.” GRC space. Coincidentally, if the finance function works well, it can support the Board as well as the Indeed, corporate governance can act as a entire organisation by relieving them of a large platform for a more effective finance function. The portion of their worries. If it does not work well, you PwC-CFO survey demonstrates the strong link will find the company stumbling around aimlessly, between value-adding corporate governance and lacking the glue that holds it together. financial effectiveness. But for this to work, there needs to be a mechanism to tangibly create the bond of trust between finance and the Board. We find the existence of a Corporate Governance Statement a key part of creating the trust. Through its preparation, both sides can expose their views on key risks and understand how to address each other’s concerns. PwC Edge
Does it work? takes a transparent, measured and disciplined approach to risk management. Such an organisation But how effective is the Corporate Governance monitors and measures the performance of its GRC Statement? Four of ten CFOs who say that activities, recognising that informed risk-taking when their company has issued a finance governance aligned with the organisation’s values policies and statement keep the cost of the finance function standards, is integral to an entrepreneurial spirit. An below 1% of total consolidated sales – the global integrated approach to GRC reveals the importance benchmark. Only 30% of respondents who do not of culture, integrity and ethics, which are the true have such a statement say the same. For those foundations of sustainable value-creation. This organisations that have implemented a finance has prompted leading organisations to implement governance statement, the survey also identified fraud management programmes to ensure they stronger financial effectiveness in 15 key areas, are proactive in their monitoring of potential fraud some of which are: triggers.
• improved accuracy of financial forecasts and Why are leading organisations now supporting good more rigorous processes to review results against governance? They recognise that when they move budgets; away from “box-ticking” compliance and progress towards the path of a more meaningful corporate • more effective tax planning mechanisms; governance framework, they are actually creating value for their internal and external stakeholders. • getting better value from organisational policies However, for this to really happen, there must be a and procedures manuals; and culture of trust, which, when it really works, acts as the glue sticking the organisation together around • clearer documentation in segregation of duties and its strategic objectives. As we have noted, added delegation of authority. transparency drives better financial effectiveness, which in turn drives sustainable development. The same study also reveals that finance departments in Asia are supporting corporate growth Quantifying benefits of through better financial effectiveness. It appears that governance nearly half the CFOs spend 50% or more of their 4 time on decision support to management , which Quantification of the added value generated by can be considered to be a proxy for the finance true performers of good governance will always be function’s role to support corporate growth. difficult to analyse independently of other factors. As an initial step, such an attempt was made by the Aside from decision support, CFOs are also the Association of Chartered Certified Accountants expected to take the lead in emphasising (ACCA) in the UK in January 2006 by looking at the transparency, integrity and ethics in business FTSE4Good Index. The FTSE4Good index aims to dealings, act as the main agent of control within expose investors to companies that meet globally the company, and play a key role in enterprise risk recognised corporate social responsibility (CSR) management (ERM). In an integrated approach standards. to GRC, ERM delivers value by focusing the right efforts on the right risks and at the right time. According to the report, investors are likely to be better off, or at worst, neutral investing in CSR- However, this works well only when a bond of embracing companies. Indeed, the report states trust exists across the organisation, such that the that since its launch in July 2001, FTSE4Good true risks are reported on an accurate and timely has gained higher financial returns with less risk basis. It is important to note that an organisation relative to other indices. Initiatives to publish committed to integrity-driven performance is not company rankings assessing the quality of risk adverse. Rather, it understands risk and corporate governance using such key criteria as Board composition or the quality of disclosures are 4However, whether this is fully sustainable given the limited resources many such departments in the region have, remains to be seen. appearing globally. The Globe and Mail Report on PwC Edge
Business Corporate Governance in Canada or the About PricewaterhouseCoopers Business Times’ Corporate Transparency Index Performance Improvement in Singapore are good illustrations of heightened expectations of good governance happening PricewaterhouseCoopers Performance Improvement globally. These various initiatives, in the UK, Canada helps clients attain increased performance by and Singapore, are all indicative of a trend of improving the efficiency and effectiveness of key converging governance into a globally consistent business processes. Our in-depth industry expertise process. This falls in line with the findings of our and understanding ensures tailored solutions for our recent 9th Annual Global CEO Survey which showed clients. that 57% of CEOs expect corporate governance standards to converge to a large extent. We focus on Financial Effectiveness, IT Effectiveness and Governance, Risk and As summarised by Sam DiPiazza, Global CEO of Compliance business processes and deliver PricewaterhouseCoopers, “Leading companies this through key enablers such as Change and build sustainable businesses by embedding strong Programme Management, Data Services governance and corporate responsibility into their and Technology. strategies and culture. By earning the trust of their employees, communities, trading partners and the capital markets, companies with a culture of Keith Stephenson, Advisory Partner and Asia corporate responsibility are able to generate value Pacific Leader for Performance Improvement can be where others cannot.” contacted at tel • (65) 6236 3358 “Leading companies build e-mail • [email protected] Patrick Jourdain, Performance Improvement Senior sustainable businesses Manager can be contacted at by embedding strong tel • (65) 6236 3387 e-mail • [email protected] governance and corporate responsibility into their strategies and culture. By earning the trust of their employees, communities, trading partners and the capital markets, companies with a culture of corporate responsibility are able to generate value where others cannot.”
– Sam DiPiazza, Global CEO of PricewaterhouseCoopers PwC Edge PwC Edge
Banking for growth in M&A
Spurred by the promise of market liberalisation Mergers & Acquisitions (M&A) among financial institutions in Asia is expected to gain momentum. Many financial institutions in the region are now hunting for deals within Asia, particularly in China and India.
BY KAREN LOON Banking and Capital Markets Industry Group 10 PwC Edge
In 2005, M&A in the financial services sector in Asia potential outsourcing countries included China, totalled US$38.7 billion according to M&A Asia. Singapore, Malaysia and Hong Kong. Inbound M&A replaced domestic activity in 2005 as the larger source of M&A in Asia on a value basis. The results of our survey were striking in the way respondents’ answers clustered strongly around A recent survey of 130 senior executives in Asia’s six primary themes. Financial services executives financial services industry commissioned by in Asia today face growing pressure to satisfy PricewaterhouseCoopers (PwC) and conducted shareholders, please customers and capitalise on by the Economist Intelligence Unit (EIU) suggests their successes. that the trend towards cross-border M&A will gather momentum in the coming five years, • Competitive pressures define today’s despite continuing obstacles posed by regulatory financial services industry, and institutions environments and corporate cultures. must be prepared for larger, more aggressive M&A, joint venture and partnership deals. Of the survey respondents, 68% predicted that their organisations would undergo significant M&A activity A certain amount of consolidation is to be in the coming five years and an equal number felt expected in a market as fragmented as that of that joint ventures and partnerships would be key Asia. But the trend today is given added impetus to their expansion plans in Asia. In most areas by the many financial market opportunities in the of financial services, the wave of expansion is region that are all waiting to be tapped, both in powered by a strategic imperative to seek out new, terms of geography and products. The ongoing under-served markets, and to meet a rising tide of erosion of regulatory barriers has already competition from both domestic and foreign players. emboldened larger financial institutions, which In other sectors, the opportunity for buyers lies in have made inroads into countries and market leveraging their skills to help acquisition targets segments that until recently, were considered improve their business models and boost growth. impenetrable to outsiders. This, in turn, has led smaller, more specialised firms to court these The strongest evidence that market barriers are giants in their quest for foreign direct investment, no longer defining the M&A landscape is the management talent, product and market financial services industry’s focus on China, despite expertise, and other resources. Sixty five per cent ownership restrictions on foreign investors. The (65%) of our survey respondents cited the need prospect of access to the Chinese market has given to expand geographical and regional coverage foreigners a keener sense of urgency to develop a as a growth-related objective that is most likely “China strategy”. It would seem that in their pursuit to drive M&A and other restructuring, while 58% of growth, executives regard regulatory uncertainty pointed to the need to expand product/service as merely another cost of doing business. Foreign offerings. The competitive landscape that has banks intent on making strategic investments emerged is extraordinary. in India may have to adopt a similar attitude. Nevertheless, the depth of market liberalisation • Organic growth offers advantages, but it in Asia’s banking and finance industry varies— is not enough, or even possible, in many sometimes markedly—from country to country. markets.
China is likely to remain the major target for M&A in While survey respondents believe that organic the region, with almost 52% of survey respondents growth is the best strategy to meet objectives indicating that they would conduct M&A in China such as maintaining a focus on core businesses, in the coming five years. India was the next most meeting evolving regulatory requirements and likely target, cited by 36% of respondents. No other managing risk, such growth alone is unlikely country or region was chosen by more than 20% of to meet all needs. The survey findings point respondents. Predictably, India ranked at the top of to an increasing emphasis on M&A — 38% countries where financial services companies will of respondents said that M&A would be the most likely set up outsourcing arrangements. Other primary focus of their organisations’ restructuring PwC Edge 11
activities over the next five years, with 40% pragmatism must be struck. In some markets, saying that M&A is the best strategy for financial services firms cannot offer their increasing market share. In reality, the intense complete product range without some form of competition in Asia combined with remaining local alliances. regulatory barriers means that financial institutions must use multiple channels of Of our survey respondents, 40% of them investment to achieve their objectives. specified M&A as the best strategy for increasing market share. At the same time, 67% of them • Regulatory obstacles are transitory and plan to expand their outsourcing activities in IT should not dictate strategy. infrastructure and applications. Here again, a true understanding of core competencies is critical to While regulatory barriers still factor heavily into identifying exactly which of these operations can all expansion scenarios, they elicit far less fear be effectively outsourced. and loathing than they previously did. Intrepid and calculating, today’s financial executive has • Economies of scale are the Holy Grail, but learnt to look beyond a target country’s regulatory environment, and to consider long-term political What will be the main goals of your organisations’ M&A opportunities, demographic and macroeconomic restructuring activity over the next five years? trends, and opportunities to leverage core Entering new geographic markets - 48%
strengths in new areas and markets. Smart Entering new product markets - 36% institutions are anticipating situations where Securing distribution - 17% regulatory changes will be to their advantage and Increasing market share - 45% Increasing shareholder value - 39%
indeed are attempting to drive regulatory thinking. Reducing costs - 13%
Improving customer service - 18% As market windows begin to open earnestly Focusing on core business - 8% Improving capital efficiency - 9%
across Asia, waiting for regulatory hurdles Managing the organistion’s risk profile - 9%
to be dismantled could mean missing out Meeting evolving regulatory requirements - 5% on opportunities. Competition for assets is Accessing new talent - 5% None of the above. We do not expect to undergo intensifying. It makes little sense to allow significant M&A or restructuring in the next five years - 6% regulatory issues to dictate M&A strategy. Other, please specify - 2%
Financial institutions would do better to identify 0% 20% 40% 60% 80% 100% areas of growth in terms of service offerings, market segments, and geographical specialities and use these as the foundation of a restructuring strategy. Negotiating regulatory hurdles has become just another cost of doing business. “Without scale and the efficiencies it brings, • Focus must be maintained and M&A applied to hone competitive edge. growth accomplishes little.
The sheer size of the region’s financial services Economies of scale should market dictates that any player should possess a keen and objective understanding of its be the Holy Grail of M&A, own peculiar strengths, and then capitalise or any form of restructuring, upon them. However, the regulatory climate in some countries, combined with the expansion for that matter.” imperative, can mean that buyers will have to take on operations that do not strictly conform to their core competencies in order to secure the assets they really want. In the end, a balance between adherence to core competencies and 12 PwC Edge
difficult to achieve in Asia. What growth-related objectives are likeliest to drive M&A and Without scale and the efficiencies it brings, restructuring activity at your organisation? growth accomplishes little. Economies of scale Need to expand product/service offerings - 58% should be the Holy Grail of M&A, or any form of Need to expand distribution channels - 42%
restructuring, for that matter. But such economies Need to expand geographic/regional coverage - 64% can be particularly difficult to achieve in Asia, Need to acquire certain technologies - 11% Need to reposition organisation to exploit regulatory where multi-channel strategies involving a changes - 18% combination of direct investments, equity stakes Need for personnel to acquire certain skills - 14% and joint ventures are often necessary. Need to access sources of funding - 16% None of the above. We do not expect to undergo significant M&A or restructuring - 6% Economies of scale require that processes be Other, please specify - 2% harmonised and streamlined, non-strategic 0% 20% 40% 60% 80% 100% operations pared back or eliminated completely, and all means of producing more for less be explored. Investors who are restricted from taking significant equity stakes are unlikely to form the About PricewaterhouseCoopers Banking and type of true partnership that would enable such Capital Markets Industry Group activities. As a leading professional services firm in Singapore, Regulations are not the only barriers to PricewaterhouseCoopers Singapore’s dedicated achieving economies of scale. Differences in Banking and Capital Markets Industry Group (www. corporate culture and defensiveness by owners pwc.com/sg/banking) has a team of multidisciplinary or managers of the acquired company, and by professionals with specialist knowledge, in-depth politicians when jobs are threatened could be met local market knowledge and proven expertise with stiff resistance, if not outright hostility. that enable us to address our clients’ specific needs, coupled with insights into market place • Opportunity abounds but there are risks as developments and global opportunities. well. Karen Loon, Banking and Capital Markets Industry Financial institutions embarking on M&A in Asia Group Partner can be contacted at are in many cases buying an interest in future tel • (65) 6236 3021 high growth. But there are risks associated e-mail • [email protected] with this strategy. Many of the acquisitions of controlling interests in the region will result in increased revenues but few cost synergies — most acquisitions are into new markets and/or business lines and in practice, integration may be difficult because of unforeseen factors such as cultural resistance to retrenchment. Expected economic growth may also be blunted by global shocks such as Avian flu. PwC Edge 13 14PwC Edge PwC Edge14
Speed towards global supply chain structuring
Given the growing importance of globalisation, it is increasingly crucial to create integrated models of global supply chains that take into consideration all the key aspects of operating in the global economy. This article discusses the traditional supply chain structures and how various companies around the globe are restructuring their supply chains to minimise tax costs and maximise shareholders’ wealth.
BY NICOLE FUNG AND SUNIL AGARWAL Corporate Tax PwC Edge 15
Global markets today are fiercely competitive. To • higher warehousing costs and inefficient inventory survive in today’s market place, businesses have management where the industry has volatile to achieve greater cost efficiencies, deliver more demand patterns; efficiently and constantly innovate to maximise value to their various stakeholders. • greater costs and operational inefficiencies as a result of duplication of functions in each local Supply chain management is one of the key country; functions of management today. Given the growing importance of globalisation, it is increasingly crucial • higher effective tax rate as a result of profits to create integrated models of global supply chains residing in high tax jurisdictions; and that take into consideration all the key aspects of operating in the global economy. • greater management time and costs (e.g. IT infrastructure) incurred by parent entity for Traditional supply chain model servicing multiple locations.
The traditional supply chain model consists of These issues have challenged companies to speed domestic and single-country supply chains. In the towards an integrated model of restructuring. traditional model, the domestic subsidiaries of a multinational parent are responsible for multiple functions in each of their respective countries, such as: “An optimised supply chain regards the whole world • sourcing raw materials (procurement function); as one territory with no • converting raw materials into finished goods (manufacturing function); boundaries and is structured in a manner where the • supplying the finished goods to customers (distribution function); maximum functions and
• providing the necessary after-sales services (sales risks are centralised in one functions); and location.” • undertaking the in-house functions of accounting and debt collection (administrative services function). Optimised supply chain model Optimum supply chain model should be designed Essentially, each country assumes all the risks and as a world without boundaries and structured such rewards of undertaking the above functions. The that maximum functions and risks are centralised, as profits of the multinational group are thus captured much as possible, in a single location. Each activity in the various local countries of operation, some of (e.g. manufacturing or shared services) should which have high tax rates. Therefore, the traditional ideally be undertaken in countries which offer the model is not optimum from a tax viewpoint and will highest cost and location advantages. not be cost efficient. Typically, a tax and operationally optimised supply Since the traditional supply chain model is locally chain model comprises the following elements: driven in today’s global economy, the traditional supply chain structures can result in the following • “entrepreneur” or a “principal” entity; disadvantages: • toll or contract manufacturing entity; • higher production costs as a result of fragmented manufacturing; 16 PwC Edge
• sales agent or a stripped-risk distribution entity; Toll or contract manufacturer The contract manufacturer will typically be set up • central or regional warehousing centre; and in a country with very low labour costs (e.g. China, India or Indonesia) to achieve cost efficiencies • shared service centre & call centres. and it will manufacture goods on behalf of the Entrepreneur. The manufacturer may or may not The optimised supply chain structure is own the raw materials, depending on whether diagrammatically represented below along with brief the set-up is toll manufacturing or contract discussions on each of the elements. manufacturing. The contract manufacturer does not face any direct “market risks” and is guaranteed Entrepreneur a minimum return from the Entrepreneur for The optimised supply chain model involves the undertaking the manufacturing activity. establishment of an Entrepreneur entity, which will assume all the major risks of the group such as Stripped risk distributors or marketing agents credit, inventory, product liability, market risks and As a general rule, the selling companies are more. The Entrepreneur will be the focal entity in located close to their customers, often in high tax the group liaising with manufacturers, distributors jurisdictions. As such, the optimised supply chain and customers. It should also own the intellectual model should ideally try to ensure that majority of the property and other intangibles to the extent assets (e.g. marketing intangibles) and risks (credit possible. Since profits follow functions and risks, and market risks) are shifted to the Entrepreneur the Entrepreneur entity will derive the maximum entity, so that only a minimum profit margin can be profits from the group’s operations and is thus retained in the stripped risk distributor entity. typically set up in a jurisdiction which offers superior infrastructure coupled with relatively low taxes to achieve operational and tax efficiencies (e.g. Switzerland, Singapore or Hong Kong).
Suppliers Shared service centre
Web sales Principal / Call (e-markets)
raw materials Entrepreneur centre Sales force
Marketing Toll/contract agents/ manufacturing commissionaires finished goods
Customers Central/regional finished goods warehousing
Material flows Information flows Legal title flows PwC Edge 17
Shared service centres To avoid duplication of services and achieve greater “The restructuring of the operational efficiencies, all the administrative supply chain model has to be functions such as accounting, invoicing and debt management should be centralised in one entity. first driven from a business The shared service centre entity will be remunerated on a cost-plus basis by the Entrepreneur entity. The and operational perspective shared service entity is typically set up in a location followed by consideration on that offers good infrastructure facilities, good legal framework and tax advantages (e.g. Malaysia, India, tax advantages.” Philippines or Singapore).
Research and Development (R&D) and other functions Practical challenges The other functions of the group such as key management functions and R&D can be centralised However beneficial it may be to realign the in the Entrepreneur entity to create more substance traditional model with a more robust modern value in the Entrepreneur entity. Alternatively, R&D can chain model, there are difficulties and challenges also be sub-contracted to another entity, with the in the implementation. Typically, these challenges necessary intellectual property residing in the emerge in the following arenas: Entrepreneur entity. • people and culture;
Benefits of the optimised supply • process re-engineering; chain model • restructuring; and By restructuring the supply chain model on the above basis, the whole globe or region is regarded • IT related issues. as one territory. With it, the economies of scale and rationalisation of functions result in great operational Recognising these challenges and undertaking steps benefits to the multinational group. Structuring the to manage these issues will require sustainable operations as contract manufacturing and stripped change. risk distributors also enable the multinational companies to identify “portable profits” to be shifted Whatever the challenges, the benefits substantially to the Entrepreneur. derived from restructuring supply chain can be magnificent. However, there is no “one-size-fits-all” In summary, an optimised supply chain model can type of model. offer the following benefits to a multinational group: Each of the businesses will have to carefully • reduced inventory levels through centralised evaluate their own industry issues, operational inventory holding in the Entrepreneur; challenges, organisational culture, customer demands, costs and benefits analysis to develop • lower raw materials costs and manufacturing costs a customised supply chain model that will achieve through centralised production and manufacturing; efficiencies to the whole group. The restructuring of the supply chain model has to be first driven from a • improved customer responsiveness; business and operational perspective followed by consideration on tax advantages. In today’s global • efficient and lower cost distribution network; environment, an optimised supply chain model with effective implementation can definitely help • higher operational and cost efficiencies; and organisations enhance shareholders’ value.
• lower effective tax rate. 18 PwC Edge
These reasons are summarised below:
People and Culture Reasons Restructuring Reasons • Lack of management support/ • Unrealistic vision of new sponsorship organisation • No perceived need for change • Employee opposition • Benefits drivers not understood • Poor people issues management • Insufficient training • Insufficient employee involvement • Insufficient understanding of current organisation
Process Re-engineering IT Reasons Reasons • Mismatch between structure and • Lack of employee involvement IT infrastructure • Lack of management support for • Working across national new processes boundaries not understood • Working across national boundaries • Reluctance to embrace new IT • Tasks falling “between the cracks”
About PricewaterhouseCoopers Tax
PricewaterhouseCoopers Tax practice is among the largest in Singapore. With more than 250 tax professionals and directors, we help individuals, businesses, both public and private organisations, with tax strategy, planning and compliance. From financial services, treasury, fund management, mergers and acquisitions, intellectual property, international tax planning (inbound and outbound) and Goods and Services Tax (GST) to transfer pricing, our tax professionals will provide you with the ideal tax solution.
Nicole Fung, Tax Partner can be contacted at tel • (65) 6236 3618 e-mail • [email protected]
Sunil Agarwal, Senior Manager for Tax can be contacted at tel • (65) 6236 3847 e-mail • [email protected] PwC Edge 19 20PwC Edge PwC Edge20
Cross-border transactions in emerging economies: India and China M&A
The mergers and acquisitions (M&A) transactions environment in emerging economies has rarely been as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in an emerging economy. In this context, China and India deserve special mention having changed the landscape for cross-border transactions in emerging economies.
BY AMITAVA GUHAROY AND NG JIAK SEE Corporate Finance PwC Edge 21
The mergers and acquisitions (M&A) transactions grow PRC companies as competitive global players environment in emerging economies has rarely been in major industries. as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in Inbound deals by target industry sector in terms an emerging economy. In this context, China and of number of the deals India deserve special mention. Even a couple of Others 5% Basic Materials 8% years back, most of such transactions in these two Utility 2% countries were inbound transactions into the country. Technology 6% In recent times, there have been a number of very Communication 12% high profile transactions where Indian and Chinese corporates have made big ticket acquisitions abroad. Industrial 22%
The pertinent question that arises is why emerging economies like India and China are becoming such important M&A drivers. The value of cross-border Consumer 31% M&A in India and China more than quadrupled to US$21.4 billion and US$25 billion respectively in Financial 13% 2005 as companies sought to capitalise on the Energy 1% economic boom. The general air of expectancy in Source: Bloomberg, 4 April 2006 almost all industries has played a significant role in corporates seeking to expand in scale, acquire new Leading sectors for inbound transactions in China technologies or markets, develop new competencies were consumer, industrial and financial services. or wanting to take advantage of new opportunities Some examples of the mega deals in these sectors that emerge. However the most significant are: development in the last couple of years has been the large overseas acquisitions by corporates like • Consumer sector the Tatas, Dr Reddy’s, Mahindra & Mahindra, Bharat Belgian brewer InBev, the world’s largest beer Forge, Lenovo, China National Petroleum Corp, producer, has struck a US$730m deal to acquire Shanghai Automotive, to name only a few. While Fujian Sedrin in early 2006. InBev has already foreign companies seek to benefit from the rapidly acquired three other Chinese breweries – Jinling growing Indian and Chinese markets driven by Beer, KK Bear, and a 24% stake in Pearl River increasing disposable incomes, a young population, Beer. The purchase of Fujian Sedrin would make change in spending patterns and a general “feel- InBev the second-largest brewer in China. InBev good” factor, Indian and Chinese corporates are also is confident that China will account for half of seeking to expand overseas and become truly multi- global beer demand within ten years. national companies. • Iron/Steel sector Overview of deal activities in China Mittal Steel, acquired 36.67% of Hunan Valin and India Steel Tube & Wire Company (Hunan Valin) for a total consideration of US$338 million in 2005. Hunan Valin is one of the largest steelmakers in China China with annual steel production capacity of 8.5 million tonnes. It is listed on the Shenzhen There were 637 cross-border transactions Stock Exchange. Lakshmi N. Mittal, Chairman completed in China over the last 3 years with and Chief Executive of Mittal Steel, said, “This announced deal value of over US$38 billion, is a key strategic transaction for Mittal Steel as according to Bloomberg. In 2005, there were 215 it marks our first step into China, the world’s completed inbound deals with announced value of leading steel market. It is our intention that this close to US$20 billion. There is also a trend where acquisition should create a platform for Mittal more Chinese companies have emerged as strong Steel’s future investments in the country.” buying forces in the international M&A market, in line with the Chinese government’s “Going Out” policy to 22 PwC Edge
• The acquisition of Hunan Valin is one of the most as “the dawn of a new era in China’s M&A market” significant transactions in China where a foreign and a “milestone in China’s integration in world investor has been approved to acquire A-share business”. This deal has successfully pushed up PRC listed companies. Lenovo’s status to be one of the top three global PC suppliers. • Financial sector Royal Bank of Scotland led a team including One of the largest cross-border deals in 2005 was a unit of Merrill Lynch & Co. and Hong Kong the acquisition of PetroKazakhstan Inc by China billionaire Li Ka-shing in investing US$3.1 billion National Petroleum Corp (CNPC) with transaction to buy 10% of Bank of China in August 2005. value of approximately US$4.18 billion. In early 2006, Temasek Holdings paid US$1.5 billion for a 5% stake in Bank of China. Global India investors are eager to tap into China’s US$1.6 trillion in personal bank savings with products There were 436 cross border transactions completed and services ranging from credit cards to home in India over the last 3 years. insurance, ahead of the full opening of the Chinese banking industry to foreign players at Inbound deals by target industry sector in terms the end of 2006. of number of the deals
Others 7% Basic Materials 6% Outbound deals by target industry sector in Utility 1% terms of number of the deals Communication 12% Technology 13%
Others 1% Basic Materials 4% Utility 11%
Communication 14% Industrial 18% Technology 14% Consumer 32%
Financial 9% Industrial 8% Consumer 29% Energy 2%
Source: Bloomberg, 4 April 2006 Financial 5% Energy 14% Similar to China’s M&A landscape, leading sectors
Source: Bloomberg, 4 April 2006 for inbound deals were consumer and industrial, which constituted 50% of the total completed Fierce economic competition and declining transactions in terms of number of the inbound domestic revenues, combined with government deals. Technology and communications are also two encouragement and financial support, is pushing active sectors, especially the telecom sector, which Chinese firms to globalise in order to establish was the hot favourite for foreign investors in 2005. global sales and distribution networks, secure Some of the recent notable inbound deals in India access to raw materials and natural resources, and were: acquire technology, cutting-edge manufacturing know-how, and global brands. Based on the chart • Acquisition of a minority stake by Vodafone Plc, above, outward investments made by Chinese in Bharti for US$1.5 billion in late 2005. It was companies were concentrated mainly on consumer, one of the largest foreign investments in India. communication and energy sectors like oil & gas, coal, mining, telecommunications, software, home • Maxis Communications Bhd of Malaysia has appliances and home furnishings. announced that it is on track to complete its US$1.08 billion acquisition of Aircel Ltd, a The US$1.75 billion acquisition of IBM’s PC cellular service provider operating in the Chennai business by Lenovo in 2004 was seen in the market and Tamil Nadu circles. On completion of the PwC Edge 23
acquisition, Maxis will have 74% equity stake in Global Network (TGN), turning into a global Aircel, of which 65% will be direct stake with an player. With TGN, VSNL got an undersea cable investment of US$702 million and 9% indirectly link of 60,000 km. With the buyout of Teleglobe, a through Deccan Digital Networks Private Ltd carrier, it now has access to network capacities in (DDN). DDN is a joint venture between Maxis 240 countries. Analysts believe that what VSNL and the Reddy family of the Apollo Hospitals gains most from this buyout is the fast-growing Group. Aircel has announced an investment of voice over internet protocol business which, $500 million over 2006-2008 to expand coverage although accounting for just 15% of the global to 10 new circles in India. market currently, is growing at two to three times the pace of the voice market. • Singapore Telecom has increased its equity holding in Bharti from 26.96% to 32.81% for an • Pharmaceutical sector aggregate cash consideration of $252 million in Dr. Reddy’s Laboratories paid Euro 480 million in mid 2005 its acquisition of 100% of Betapharm Group, the fourth-largest generic pharmaceuticals company One key feature of Indian M&A activity is the active in Germany. Satish Reddy, chief operating officer, overseas acquisitions by Indian companies. There Dr. Reddy’s Laboratories, said, “The strategic were 89 transactions completed in 2005. Indian investment in Betapharm is a step forward companies largely went for consumer, technology, towards realising Dr. Reddy’s strategic intention basic materials, industrial and communications of building a global generics business with sectors. strategic presence in all key markets”.
Outbound deals by target industry sector in terms of number of the deals
Others 4% “The general air of Utility 1% Basic Materials 10% expectancy in almost all
Technology 21% Communication 8% industries has played a significant role in corporates
Industrial 11% seeking to expand in scale,
Financial 3% acquire new technologies Consumer 40% Energy 2% or markets, develop new Source: Bloomberg, 4 April 2006 competencies or wanting to take advantage of new • Iron & Steel sector India’s steel giant Tata Iron and Steel completed opportunities that emerge.” its acquisition of NatSteel Asia, Singapore’s steel miller, for US$303 million. Tata intends to leverage on NatSteel facilities and brand in the Asian markets to further expand its reach in the Challenges region. Some typical challenges that one may need to • Telecom sector consider in any cross-border transaction, particularly Videsh Sanchar Nigam Ltd (VSNL)’s US$239 in emerging economies, include: million acquisition of Teleglobe International Holdings complemented its takeover of Tyco 24 PwC Edge
Regulatory Cultural Differences
Foreign investors investing into China should Organisations from different countries typically consider, inter alia, the following: have very different cultures and values. It is highly likely that conflicts may arise, resulting in higher • Catalogue for the Guidance of Foreign integration costs which may erode the benefits Investment Industries expected from the merger. For example, the way of Catalogue for the Guidance of Foreign doing business in China can be very different from Investment Industries shall be the basis for the how business is conducted in the west. One needs guidance of examination and approval of foreign to be open-minded, understand how and why certain investment projects and for the policy application practices are followed. It is important to build strong of foreign investment enterprises. Foreign relationship with the Chinese party. A good mix of investment projects shall be classified into four management participation between the two entities categories: encouraged, permitted, restricted and post merger may be necessary. It is also important prohibited projects. for the top management team to cultivate a common value system so that the acquirer does not start to • Administrative Measures on Management of lose key talents from the merger. Strategic Investment of Foreign Investors in Listed Companies Opportunities and outlook going The China Securities Regulatory Commission forward (CSRC) released the Measures for the Administration of Share Capital Segregation Looking ahead, the fundamentals for sustained M&A Reform of Listed Companies in August 2005, activities remain strong in China and India. Deals in aiming to convert the RMB2.1 trillion in non- the consumer, industrial, technology and financial tradable A-shares currently tied up in listed sectors are expected to continue, both large and companies (many of them are held by the state) smaller ones. into tradable A-shares. Further, new regulations published on the last day of year 2005 permit With the relaxation of regulatory barriers of entry foreign investors to buy A-shares both in to service industries as part of China’s World listed local companies which have completed Trade Organisation’s (WTO) accession agreement, shareholding reform and in newly-listed firms. one can expect more M&A activities in sectors across financial institutions, logistics, education, • State Administration of Foreign Exchange telecommunication, professional services and other (SAFE) service sectors over the coming years. With the Foreign investors who need to set up offshore Indian economy exhibiting sustainable growth rates joint venture vehicles with PRC domestic in excess of 6% to 7% in the short to medium term residents will need to be familiar with the and the continuance of the reform and liberalisation provisions of Notice 75 issued by the PRC State process cross border M&A will continue to remain Administration of Foreign Exchange (SAFE) extremely active. in November 2005. Under Notice 75, which replaces the two notices issued in early 2005 and allows domestic residents to establish Conclusion offshore entities to invest in wholly foreign owned enterprises in China, provided that certain In conclusion, while cross border transactions prescribed procedures are followed. Such in emerging economies have their own unique structure was often used by venture capitalist challenges, such transaction will continue to remain and private equity funds as well as Chinese buoyant in the near future. And if one is a M&A seeking listing outside the PRC. practitioner, India and China are the countries to focus on. PwC Edge 25
About PricewaterhouseCoopers Corporate Finance
PricewaterhouseCoopers Corporate Finance Pte Ltd’s (PwCCF) team of dedicated corporate finance professionals with diverse expertise are well- qualified to provide strategic and financial advice to companies that look to Mergers & Acquisitions as progressive moves to the next stage of their growth. Our international network of Corporate Finance Services professionals well-positions us to serve our clients effectively in any part of the world. With access to market intelligence facilities, local and global resources, coupled with an international client and consultant base, we are able to efficiently identify targets, undertake fund-raising activities and capitalise on opportunities across the globe to help you maximise the value of your local/cross-border transactions.
Amitava Guharoy, Managing Director of Corporate Finance can be contacted at tel • (65) 6236 4118 e-mail • [email protected]
Ng Jiak See, Executive Director of Corporate Finance can be contacted at tel • (65) 6236 3928 e-mail • [email protected] 26 PwC Edge PwC Edge 27
Offshoring: Balance redefined
Whilst offshoring may be the latest “buzzword”, financial services organistions are increasingly faced with new challenges when managing a cross-border workforce.
BY MARK JANSEN Banking and Capital Markets Industry Group 28 PwC Edge
Mention work-life balance to those managing or always fully appreciated and/or recognised. While dealing with offshored locations on a regular basis these managers expect rewards and advancement and you are likely to be met with a muted response. for the type of lifestyles required to get their jobs The reality of the pursuit for cost reduction, greater done, “traditional” rewards often do not provide efficiency and global cohesion is that, people tasked adequate recognition or compensation vis-a-vis the with this collective objective are often required to be impact on the managers’ well-being arising from available “twenty-four-by-seven”. While the official such lifestyles. expectation may be different, the reality for many is that the concept of “work-life balance” sadly remains Therein lies a new key risk for organisations relying a concept. on offshore operations - talent management. Such a talent management issue is not at the process This story holds true across many financial level where organisations face as a firm-wide institutions. As revealed in PricewaterhouseCoopers’ challenge. Rather, the challenge lies specifically in (PwC) and the Economist Intelligence Unit’s (EIU) managing the key individuals tasked to lead offshore recent survey “Offshoring in the Financial Services operations. Industry: Risks and Rewards”, the offshoring trend is expected to continue, implying hence that the issue Many sleep studies have shown that sleep of imbalance work-life is unlikely to disappear. deprivation has effects similar to excessive alcohol consumption (17 hours of wakefulness is the According to the PwC/EIU survey, organisations equivalent to a blood alcohol level of 0.05%) – that benefit most out of offshoring are likely to be impairment in judgement, the ability to handle stress those who put in the greatest effort into planning at and maintain a healthy immune system. By working the outset, and those who look towards leveraging continually for long hours and travelling across global talent pools, but beyond the initial cost time zones, it is not always possible for people to savings. However in many instances, these are not maintain the required amounts of sleep necessary easily achieved as reflected by the responses from for effective work performance. As a result, the the survey. effectiveness of people will diminish leading to lost productivity and possibly business opportunities. One of the difficulties faced as organisations seek to Whilst there is no definitive causal link, those who leverage global talent pools, is the ability to ensure are sleep deprived definitely feel its negative effects. that the offshored location cohesively integrates with the global operations. This has become the job of Since the trend of offshoring is likely to continue, the many managers today, who have become the “glue” challenge is to effectively manage key talent and that helps to build this cohesion. These managers understand the link between personal effectiveness understand the global strategic objectives and are and the bottom line. Ensuring staff maintain tasked with integrating them with offshored offices. their competitive edge requires human capital to operate at, not below, capacity. Take for example The nature of such a role however, requires these an organisation that is seeking to further expand its managers to be available almost round the clock offshored operations in Asia. Core to this process due to the time difference in global conference calls is in ensuring that global expectations are met with and requirements for travel. This is also experienced regard to cost savings, timelines and efficiency. This by managers on the other end of the offshored requires an initial investment in time to properly operations and those who have regular cross-border recruit and train staff to be effective. dealings. More often than not however, the burden is greater at the offshored locations. Increasingly, it Further, at least in the medium term, there is often a becomes not a case of who can do the best job, but need for increased oversight by an experienced staff rather who can sleep best on the plane and perform (i.e. fly-ins). Fly-ins are often required not because at work the next day. of the unavailability of local staff but rather, their presence help to set the right tone, provide a link to Yet, the time and commitment put in by these key global objectives, and at the same time allow them managers to provide firm-wide global cohesion is not to share their experiences. As these people are PwC Edge 29
instrumental to the success of offshored operations, • Proactive negotiation: Contract negotiation care is required in recognising the unique demands needs to be considered on a proactive basis to of the roles for both fly-ins and local staff alike. actively identify the additional needs or flexibility These demands whilst sometimes seemed short key staff require. Organisations need to be term, are in reality, present on an on-going basis. upfront in the recognition of the impacts and be While some people are able to adapt, meet such careful not to be reactionary. demands and still deliver, the question is if this is sustainable going forward. Such steps are important to help foster long-term commitment and productivity. As seen by the recent PwC/EIU Survey, turnover is yet another major concern. Whilst much are being Ultimately, a balance approach is key. It is also done at operational levels, the topic appears to be important that senior executives lead by example taboo at the senior management level. and not just talk rhetoric. Simple steps such as no conference calls on Friday evenings and limiting the Organisations need to consider the importance of amount of travel on weekends help in alleviating culture, behaviours and norms so as to provide the some of the pressure. However, most important of right environment for staff. It is certainly not realistic all, it is recognising that all of these do take its toll on or possible to cancel conference calls or business the managers’ lifestyles, and that even the best are travels, since these are powerful tools in linking not able to take the challenge without some kind of offshored operations with their global counterparts. compromise. However, some consideration can be given in terms of better planning or scheduling so as to avoid too Organisations need also to be clear and assess many disruptions to the managers’ lives after work. the sort of contribution they want from their staff. To recruit and retrain is expensive; therefore it is Furthermore, reward structures for people impacted imperative that companies consider how to retain need to be reconsidered. In many cases, while key staff. It should be recognised that in some increased bonuses and other monetary rewards instances work-life balance need not be key, in are important, they rarely reduce the dissatisfaction particular where there are large supplies of eager other than provide a momentary stay of execution. staff willing to out do each other in an effort to make Organisations need to consider new options such an early impression. However when it comes to as: more senior staff, greater care is required.
• Structure: Sharing of the work load across key Organisations need to remember that the managers individuals to reduce key man dependence and whom they have appointed to take on leadership provide additional flexibility. roles and to act as the glue between offshored functions and major transacting locations, were • Infrastructure: Recognising the need for time selected precisely because they are the best and saving through the provision of communication most qualified. The organisations are relying on tools such as the “Blackberry”. Further them to meet their long-term goals. Increasingly consideration is required with regard to the however, these individuals are becoming more time- flexibility and comfort of travel arrangements to poor, and this has negatively impacted their capacity minimise the impact on productivity. to deliver the results they so desire.
• Time: Provision of time in lieu that can be Ultimately, as summed up by the PwC/EIU survey, extended to those impacted by travel and long finding and retaining people of the right quality are hours, to allow for sufficient recovery time at the amongst the most prominent risks facing offshore appropriate periods. managers. The best way to tackle rising rates of attrition, deliver sustainable improvements to • Succession planning: Clearly defining role performance and ensure that the firm’s brand and requirements, time frames and outcomes, whilst reputation are consistently maintained around the actively grooming replacements that are ready to world, is to treat offshore staff as you would towards accept the challenge going forward. people in your home market. 30 PwC Edge
Four out of five respondents point to training and career development as the most effective way of “Ultimately, a balance keeping best performers. approach is key. It is also Having said these, the survey findings also led to important that senior the conclusion that while labour arbitrage can deliver substantial savings, many of the long-term gains executives lead by example from offshoring come from smarter ways of doing and not just talk rhetoric.” things, from improved processes to knitting together a number of offshore centres, some in low-cost countries and others in high-cost ones, into single, About PricewaterhouseCoopers Banking and cohesive activities. A summary of the findings is Capital Markets Industry Group enclosed. As a leading professional services firm in Singapore, PricewaterhouseCoopers Singapore’s dedicated Banking and Capital Markets Industry Group (www. Key messages from pwc.com/sg/banking) has a team of multidisciplinary PwC/EIU Survey professionals with specialist knowledge, in-depth local market knowledge and proven expertise • Current offshoring activity in financial that enable us to address our clients’ specific services is at the tip of the iceberg – 36% needs, coupled with insights into market place of those surveyed currently have over 10% developments and global opportunities. of their headcount offshore. In three years, more than 64% expect over 10% of their Mark Jansen, Banking and Capital Markets Industry headcount to be based in offshore centres. Group Senior Manager can be contacted at Tel • (65) 6236 3213 • Cost saving objectives fuel almost 80% Email • [email protected] of offshoring projects. Improved quality of service, as well as the ability to focus on core competencies, are also significant drivers.
• Fifty-six per cent (56%) experienced an increase in costs or no change in the first year of their offshoring project.
• “Higher-value” activities such as knowledge- based activities (e.g. financial research and modelling and customer contact activities involving inbound enquiries as opposed to scripted sales calls), will increasingly move offshore over the next three years.
• Financial services firms who get the most out of offshoring are likely to be those who put the most into planning at the outset and who look beyond the initial cost savings and towards leveraging a global talent base. PwC Edge 31 32PwC Edge PwC Edge32
Overseas posting: Opportunity or threat
Organisations around the world are stimulating international mobility by focusing on financial incentives rather than staff development and career progression for their employees. It is not surprising that employees are thinking long and hard before accepting an international assignment.
BY MARIO FERRARO Human Resource Services PwC Edge 33
Look at any organisation’s mission statement or Most organisations address their international Annual Report, and you will probably find a sentence mobility needs through corporate policies that labelling their employees as their “most valuable provide reassurance and motivation for employees asset”. Whether or not organisations truly live up considering an overseas posting. Typically, a lot to this statement, the fact remains that in many of effort goes into the planning of the assignment, industry sectors, employees are a very costly and in finding the right “package” for the asset to acquire and maintain. They represent an employee. Much of the focus is usually on financial investment against which stakeholders expect to considerations, particularly if the employee has a see measurable returns. The care and attention working partner who would need to give up his or that goes into this investment is also reflected her job and income to move abroad. The tendency in the rigorous assessment and selection of the is therefore to motivate prospective assignees candidates before they are hired, a process often through compensation and benefits. But while supported by sophisticated profiling models and financial considerations are obviously important techniques. Once hired, employees usually enter a to the employees, recent research suggests that career development framework, which involves the their real concerns are more focused on long-term investment of hundreds of business hours to ensure issues: how will the assignment enhance their that the resources are developed and the return on skills? Is the assignment really an opportunity for investment maximised. career progression, or will it be detrimental to it? Will it enhance their leadership potential? How And if employees represent a costly investment, will the assignment affect their work-life balance? expatriates can be three times more expensive, Interestingly, even the most comprehensive when allowances, logistic arrangements and corporate policies are often rather vague, or the effect of taxation are factored in. This huge downright silent, on these points - which are of expenditure on international assignments is greatest concerns to the employee. often justified by the business objectives that the organisation needs to address abroad. In fact, to The employees’ concerns are certainly not compete in today’s global and fast-paced economy, unjustified. The recent study conducted by PwC organisations must be able to deploy staff on reveals that while 85% of organisations recognise overseas projects quickly and affordably. However, the importance of re-integrating employees who a close look at how many organisations handle their return home from an international assignment, international assignments reveals that despite their only 25% of organisations feel that they are doing best efforts, the vast majority of organisations still it well. Furthermore, statistics show that only 27% face a number of challenges which can rapidly erode of companies provide a guarantee to the employee the return on investment, shareholder value and that they will still have a job back home when they employee morale, if left unresolved. return from an international assignment, and the percentage of companies guaranteeing a role at What employees want the same level is as low as 15%. This means that at the point of repatriation, the employees should A recent study titled “Understanding and Avoiding consider themselves lucky if they still have a job, Barriers to International Mobility” conducted by and should certainly not expect to go back into a PricewaterhouseCoopers (PwC) and Cranfield higher position, compared to the level they occupied School of Management (UK) reveals that many during the assignment. The research reaffirms of these issues are the result of a misalignment this point, showing that only about one-third of between what the employees are looking for and international assignees are promoted as a result of what their employers typically provide. The study an international assignment, whereas the majority suggests that the international assignment policies remains at the same level, and one in ten is actually of many organisations place too much emphasis demoted. on areas that are of little concern to the employees while neglecting some of the factors that employees What these numbers show, effectively, is that once consider are more important. Let’s have a closer an employee embarks on an overseas posting, look at some of these interesting gaps. there is a good probability that nobody within the 34 PwC Edge
organisation has the slightest idea as to what he (especially choice schools) for a few years and or she will be doing upon returning home – the having to reintegrate them at a later stage. grim reality that there is usually little or no long- Other family commitments such as caring and term planning involved at all. To add fuel to fire, the supporting an extended family also affect the pace of change is too fast in today’s organisations assignment take-up rate among Singaporean to make any firm commitment to assignees who executives. are due to return “home” in two, three or five years’ time. With such prospects ahead, it is not surprising The biggest threat that employees are thinking long and hard before accepting an international assignment. Rather than When all these considerations are taken together, seeing it as an opportunity, they may look at it as a it becomes clear that while many organisations are risky career move. trying to stimulate international mobility by focusing on financial incentives for the employees, what The case in Singapore appears to be lacking is a solid framework that brings the overseas postings in the bigger context of As HR consultants, our experience suggests that staff development and career progression. some local organisations find it hard to overcome the employee’s concerns regarding career progression It is possible that the continued pace of globalisation when proposing an international assignment. This and the ensuing war for talent may result in some is particularly true when the proposed overseas job international assignment policies shifting the focus posting is to another Asian location and is less of an towards issues that are most important to the issue when the proposed assignment is to European employees. Extending career management and or US locations. This trend suggests that employees mentorship programmes to staff while they are away foresee better career opportunities if they remain from their base office will increasingly be means to closer to the regional or global headquarters (HQs). reassure assignees that they are not being forgotten Similarly, career concerns and proximity to global or neglected as the organisation evolves. However, HQs can represent a potential barrier to attracting unless companies find ways of addressing the senior management employees from overseas varying motivations and concerns of individuals locations to Singapore and Asia. considering an assignment, the ability to deploy staff on international projects quickly may be impaired, Many of our clients have commented that it is not with a resulting loss of competitive edge. always easy to attract Singaporeans to take up positions abroad. In line with the survey results, As much as international assignments are attracting employees at the start of their career to considered a costly investment in the “company’s take up assignments is a lot easier. In the Singapore most valuable assets”, it pays to factor in a context, this scenario is more pronounced for single framework that addresses the long-term career employees who have fewer family commitments. goals of employees. If you are even thinking why, Singaporeans who have studied abroad and who just imagine: your most valuable assets upon have had positive experiences from their years returning from an assignment richer in experience, abroad are also generally easier to attract for foreign knowledge and networks, eventually realise the postings. many uncertainties surrounding their position, and decide to take career progression into their own Yet, it is important to note that most Singaporean hands – by joining the competition. families are also dual-career families. In such cases, the career uncertainties mentioned above would concern both partners. The potential loss of spousal income may represent an additional barrier to mobility. Married couples with children of school-going age are even more difficult to attract. Most parents are also concerned about taking their children out of the Singapore education system PwC Edge 35
About PricewaterhouseCoopers Human “Just imagine: your most Resource Services valuable assets upon With more than 5,000 HR professionals, the Human returning from an assignment Resource Services (HRS) arm of PwC is one of the largest human resource consulting practice globally. richer in experience, Through the use of selective human capital knowledge and networks, interventions and our wide array of solutions relating to people, process and culture, we collaborate with eventually realise the many clients to develop holistic and practical solutions to address both tactical and strategic human resource uncertainties surrounding challenges to achieve bottom-line results. Some of their position, and decide to the key advisory services we offer include Human Resource M&A, strategies and processes alignment, take career progression into job evaluation and job redesign, HR functional effectiveness review, human capital benchmarking, their own hands – by joining compensation and benefits review, change the competition.” management and executive search. Mario Ferraro, Associate Director, Human Resource Services can be contacted at tel • (65) 6236 3867 e-mail • [email protected] 36 PwC Edge PwC Edge 37
Navigating the data minefield
In today’s electronic environment, many high-profile cases have been solved through forensic searches of computerised media, and experienced electronic discovery professionals are now in great demand. Forensic technology can provide investigative teams a roadmap through the deluge of data. Investigative teams should, however, remember to use electronic discovery in the context of an overall document search, focusing on subject matter and investigative targets rather than purely on the discovery methodology. If improperly employed, electronic discovery procedures can create difficulties, overwhelming investigators with truckloads of irrelevant data that may hamstring BY TAN SHONG YE AND an investigation. PETER VIKSNINS Performance Improvement 38 PwC Edge
Scope of search determines Usually, computer forensic experts will need to search types be able to document the electronic infrastructure architecture at a corporation, and describe the electronic data storage options available to In general, investigative teams are usually investigative targets and the relevant data retention composed of internal and external legal counsel policies. It is also important to maintain unaltered and internal and external financial experts. Once copies of all data retrieved – the expert should work these professionals have determined investigative with a copy of the unaltered original drive for two objectives and identified investigative targets and reasons. The first is to preserve a “chain of custody,” subject matter, they must make a decision as to which is especially important in criminal cases, and the scope of the search for relevant documents. In demands that evidence not be altered. The second certain instances, a “rifle-shot” approach may be is to preserve an audit trail, in case the expert needs best, where investigators search for documents in to defend, modify, or re-perform procedures. the possession of one investigative target or in one area. Systematic data streamlining There is the “concentric circle” method. With this method, investigators use an iterative process, Once the data gathering phase has ended, beginning with the “rifle-shot” and expanding as electronic discovery personnel and investigators results are analysed, providing leads to wider areas should begin to “filter” data to determine what data of investigative interest. is potentially relevant to an investigation. There are several procedures that will reduce the amount of In other cases, investigative teams may decide to data that investigators need to review manually. adopt a “no-stone-unturned” approach. Usually, First, if data has been collected from multiple the more comprehensive searches take place in sources (live servers, backup tapes, desktop and environments where a corporation is trying to prove laptop computers), the data sets can be merged and that a certain action did not occur or that a certain sorted to eliminate truly duplicative files. problem does not exist within the corporation. We have found that the broader document search is There are a variety of ways to accomplish this useful when assisting legal teams in their response “deduping” process. One popular method is to use to regulatory agencies that may need to be the computer to “hash” the files and produce a convinced that exhaustive investigative procedures mathematically unique value for their contents. This have been performed. These types of searches value can be compared to the values of all of the have been seen in Foreign Corrupt Practices Act files collected in an investigation. If the hash values (FCPA) investigations, due diligence reviews and/ of two files match, the files are identical. or in responding to bank regulators on potential compliance issues. Second, there are certain files that are usually not modified by computer users, and are therefore Documentation is key in discovery generally irrelevant to an investigation. Examples are *.exe or *.dll files. However, this approach opens planning investigators to a risk of eliminating potentially useful files as users can use these extensions for word After the team has determined which search type processing files and spread sheets, as a way to hide to employ in pursuit of investigative objectives, data. investigators will need to perform some preparatory procedures. These procedures should include Rather than relying on file names, more the identification of document retention policies, sophisticated electronic discovery experts use including hard copy, microform (microfilm and “hash libraries” to identify known files that can safely microfiche), and electronic documents. Investigators be eliminated from searches. Hash libraries can should identify all possible document storage also be used to identify other files that may be of locations, including on-site and off-site archives, investigative interest, such as images of counterfeit e-mail and other data storage servers, hard drives, currency or stock certificates. desk files, diskettes and other portable electronic media, and backup tape storage locations. PwC Edge 39
Electronic discovery experts may also employ Smith and John Doe, referring to income transaction key word searches using commercially available dated XX/XX/XXXX in the amount of $XXX,XXX” software to identify data of particular interest to would be very useful in assisting the counsel and a given investigation. In this case, the legal and the forensic expert in determining the document’s financial teams identify a list of key words, avoiding responsiveness to discovery requests or relevance common terms and computer language if at all to the investigation. possible. In general, the more specific a key term, the more likely search results will contain relevant Conclusion information. Searching for a term like “income” or “output” in a major corporation will guarantee many In summary, an organised and systematic approach irrelevant hits, causing eyestrain and long nights for is vital to the proper employment of electronic investigators reviewing search results. Furthermore, discovery within investigative parameters. The investigators retain the option to perform searches marvels of technology can be employed to assist within searches, winnowing down the amount of files in the implementation of this approach, from to be reviewed manually. preparation of data for searches to the organisation and analysis of search results. Investigators should not hesitate to use electronic discovery methods, provided they have clearly identified their “If improperly employed, objectives, the universe of data available for review, electronic discovery and the decision process involved in identifying and distributing relevant information to counsel. procedures can create It is much easier to “second-guess” yourself and your investigative teammates in the privacy of a difficulties, overwhelming conference room prior to beginning searches than in investigators with truckloads a courtroom or boardroom afterwards. of irrelevant data that may hamstring an investigation.”
Organised review of potentially relevant files
Eventually, however, investigative team members will have to visually review search results. It is useful to identify “hot documents” and disseminate them to team members first, while organised batches of other potentially relevant files are compiled for more systematic review. This process aids the preparation for investigative interviews, as well as determining if additional key term searches are warranted.
Electronic tools have been developed to allow investigative team members to review documents online. It may also be helpful to have team members review potentially relevant documents and briefly summarise the contents of the document for review by the legal team. A spreadsheet with lists of filenames and enter descriptions such as “Correspondence dated XX/XX/XXXX between Jane 40 PwC Edge
About PricewaterhouseCoopers Security and Technology Group
PricewaterhouseCoopers is the global leader in information security and privacy solutions, with more highly trained professionals in the field than any other organisation. Our multi-disciplinary teams help clients effectively identify, assess, implement and manage security and privacy solutions.
Through proven methodologies, best-of-breed tools from our Alliance Vendors and best practice services, we help organisations build and maintain a secure and high-performance business infrastructure. Our service offerings include:
• Security Strategy Services • Threat and Vulnerability Assessments • Managed Security Solutions • Enterprise Application and Control Services • Security Integration Services • Identity Management • Data Management • IT Assessment and Architecture Review • IT Requirements Definition and Analysis • Technology Selection and Implementation Support
Tan Shong Ye, Advisory Partner and Head of Security and Technology can be contacted at tel • (65) 6236 3262 e-mail • [email protected]
Peter Viksnins, Advisory Manager of Crisis Management can be contacted at tel • (65) 6236 4021 e-mail • [email protected] PwC Edge 41 42PwC Edge PwC Edge42
The magic of IT
Whether you are considering an acquisition, forming a strategic alliance, developing new products, or seeking markets to grow your company, the complexity of your business will inevitably increase with time. If complexity is not properly managed beyond a certain point, it can negatively impact your bottom line. In this article, we provide some insights on the possible measures you can take to reduce the complexity of your IT systems and improve business performance.
BY TAN SHONG YE AND THYAG VENKATESAN Performance Improvement PwC Edge 43
If you were to list down all the issues that are on Measures to reduce the complexity your plate at present, chances are that one of the of your IT systems following will surface: Examine your IT budget • a list of new products or services that you plan to introduce; To reduce the complexity of your IT system, we recommend that you start by examining your IT • plans to introduce operations in a new market such budget. You can consider your IT expense as as China or India; purchasing the following four capabilities for your firm: • chats with other players to form strategic alliances to leverage mutual synergies; or • infrastructure services that support all business applications (e.g. your network infrastructure); • plans to acquire another firm. • utility services necessary for your business but If you were to implement any of the above, you will that may not help your firm differentiate itself (e.g. increase the complexity faced by your organisation. email and office); This view is shared by majority of the 1,400 CEOs who participated in the recent Global CEO Survey • enhancing services that will help your firm – that these are the four issues most responsible for perform better than it would have without increasing the complexity of their businesses. these applications, or provide your firm with some differentiating capability (e.g. sales force As long as you are not actively managing it, the automation and ERP); and complexity of your business will increase to a point which may negatively impact on your business, • frontier applications that will help your firm change giving rise to increased costs and organisational the competitive landscape (e.g. Wal-Mart’s supply risks, as well as reduced earnings. chain system, CISCO’s e-business portal, etc). We asked the CEOs participating in the survey It will require some work to allocate all the items in on the current initiatives in their organisation to your IT budget to one of these four components. reduce complexity. Nearly 70% of them identify the While some items can be clearly allocated to one following four areas as the main focus for reducing of these four components, others such as staff complexity: salaries may require more work to allocate them proportionally to these components. At the end of • information technology (IT); the exercise, your firm’s IT budget will look similar to the following sample. • organisational structure;
• customer sales and services; and ______Frontier • financial reporting and controls. 100% ______Enhancing Let us assume that you decide to focus on one of these areas as well to reduce the complexity ______Utility in your business. With the possible exception of organisational structure, initiatives in all other Budget (%) IT areas will impact your IT organisation. Our recommendation is to manage the complexity in your ______Infrastructure IT organisation first. This will ensure that you have a stronger foundation to leverage upon, when you use IT to reduce business complexity in other areas. 0% 44 PwC Edge
If your IT budget has less than 10% allocated to Map the business functionality that is supported by the Enhancing and Frontier components, it is an these systems as shown in the sample Application indication that your IT organisation is tied up in Map (see diagram below). providing essential day-to-day operations. If you are in a highly competitive environment requiring Looking at the “Alignment” column will help your your firm to differentiate itself, you may need to team identify those applications that are no longer allocate more budget to the Enhancing & Frontier relevant to your business. We have seen firms being components. In most firms, asking for an IT budget stuck with systems and applications that were rolled increase to achieve this will not make you very out in the past, but are no longer relevant. popular. An alternative is to check for opportunities to reduce the cost of the Utility and Infrastructure Consider a global leading technology firm with a components. similar problem. The firm implemented a fancy Internet portal in 2000 in its Singapore offices. This portal aimed to help the firm’s sales organisation track certain interactions with their customers and “Our recommendation is to internal operations. However, the sales staff did not adopt this system as it was considered an overkill. manage the complexity in Yet, the firm continued maintaining this system and your IT organisation first. sinking good money year after year. Does your firm support such systems? This will ensure that you Analysing the data in this column along with have a stronger foundation the “Cost” column will help identify systems or to leverage upon, when you applications that are no longer relevant to your business needs but are consuming resources. The use IT to reduce business relevant stakeholders from business, operations, IT and senior management can review these systems complexity in other areas.” and develop the plan to decommission these systems/applications.
Identify irrelevant systems and applications Rationalise disparate IT systems The first step in trying to reduce the cost of these components is to try and identify the reason behind The next step is to try and reduce complexity the costs. One way to do this is to start with an arising from disparity of the systems in your IT inventory of the applications and systems pertaining organisation. Take a closer look at “Alignment” and to these two categories. “Support” columns of the map and try to identify
Application Map Alignment Support Cost Application 1 Application 2 Application 3 Application 4
What business What are the IT How much does functionality does systems, staff and this application this application processes behind cost the firm? provide? this application? PwC Edge 45
possible opportunities of reducing disparity. Can Reallocate resources the functionalities being provided by some system be provided by other existing systems with similar The above mentioned measures may reduce your quality? Is the original justification for maintaining expense and complexity for the Infrastructure and disparate systems still valid? Is the cost involved Utility components while freeing up staff resources. significant enough to consider rationalising these You will be able to reallocate resources to the systems? Enhancing and Frontier components from your existing budget. While these components may help the IT organisation support your business more effectively, they may also help you better manage “…it is worthwhile to identify business complexity in other areas. the disparities in your IT organisation, understand About PricewaterhouseCoopers Security and the rationale behind the Technology Group disparities and to rationalise PricewaterhouseCoopers is the global leader in information security and privacy solutions, with more the systems where highly trained professionals in the field than any other organisation. Our multi-disciplinary teams help necessary.” clients effectively identify, assess, implement and manage security and privacy solutions.
An IT organisation with many disparate IT systems Through proven methodologies, best-of-breed (say, Firm D) will suffer certain disadvantages tools from our Alliance Vendors and best practice in comparison to an IT organisation with more services, we help organisations build and homogeneous systems (say, Firm H) as follows: maintain a secure and high-performance business infrastructure. Our service offerings include: • Firm D may require greater staff strength to develop and maintain applications to deliver the • Security Strategy Services same number of functionalities as Firm H; • Threat and Vulnerability Assessments • Managed Security Solutions • disparate systems may lead to difficulties related • Enterprise Application and Control Services to inter-operability between systems. Firm D may • Security Integration Services end up maintaining additional applications just to • Identity Management interface between these systems. This represents • Data Management expenditure that is not really adding value to its • IT Assessment and Architecture Review customers or business; • IT Requirements Definition and Analysis • Technology Selection and Implementation Support • chances are that Firm D will have to maintain relationships with more vendors and paying more Tan Shong Ye, Advisory Partner and Head of license and maintenance fees. There is also the Security and Technology can be contacted at opportunity cost of reduced buying power; and tel • (65) 6236 3262 e-mail • [email protected] • sometimes, disparate applications will necessitate having to maintain more hardware and peripheral Thyag Venkatesan, Performance Improvement systems than necessary, thus adding to Manager can be contacted at complexity. tel • (65) 6236 3263 e-mail • [email protected] Hence it is worthwhile to identify the disparities in your IT organisation, understand the rationale behind the disparities and to rationalise the systems where necessary. 46 PwC Edge PwC Edge 47
Managing the risks of white collar crime
Corporate scandals drawn from today’s headlines are forcing executive management worldwide to take a closer look at the policies and procedures they have in place to control and mitigate incidents of fraud. In the aftermath of a scandal, most investigations reveal failures at the internal controls level. What this means is that the internal controls put in place were either ineffective or had been circumvented to allow the fraud to occur. The potential risks were also not detected and assessed to devise appropriate preventive measures. Faced with an ever increasing complexity of business transactions, the white-collared fraudster could well be lurking in the background and waiting for the perfect opportunity to strike. What are the potential gaps that companies should look out for in preventing fraud? And what key measures should be adopted in managing the risk of fraud?
BY SUBRAMANIAM IYER, CHAN KHENG TEK AND PETER VIKSNINS Crisis Management 48 PwC Edge
Do a Reuters search on corporate frauds and what a thorough examination of those controls, as shows up within seconds is a trawl of headlines designed, if compared to what was really required in that see companies embattled by economic crime. the actual, changing risk environment, would have Around the world, the number of corporate scandals revealed significant gaps through which the fraud continues to increase. In Singapore, fraud has was driven. obviously not left the corporate landscape, and is unlikely to do so in the future. However, what is In the same survey mentioned above, Singapore worrying is that Singapore companies may have companies appear confident of their internal become complacent in managing the risk of fraud. controls, as 54% of those surveyed indicated that insufficient controls did not account for the economic According to PwC’s 2005 Global Economic Crime crime they experienced (compared to 35% globally). Survey, only 5% of Singapore respondents believe Furthermore, 67% of Singapore survey respondents their organisations will fall victim to fraud in the said they were either satisfied or very satisfied with next five years. In addition, many of the Singapore internal controls in practice, as an economic crime companies surveyed are satisfied with their existing prevention method. The obvious conundrum is prevention measures and are reluctant to improve this – if internal controls are in place, and people or expand their prevention measures. This type of are satisfied that they work, why do frauds keep attitude potentially places the entire organisation happening? at risk of economic crime. With the increasing complexity of business transactions today, the fight against fraud is a constant struggle. Many organisations realise the need for fraud prevention “While it is impossible to measures only after the business has been a victim of fraud. By then, much of the monetary loss caused eradicate fraud, efforts can by the fraudulent activity would be irrecoverable. be made to ensure that a Collateral damage arising from loss in reputation and investors’ and other stakeholders’ confidence would company has the proper already have set in as well. oversight, strong internal Clearly, the importance of fraud risk management controls, and detection cannot be over emphasised. While it is impossible to eradicate fraud, efforts can be made to ensure and deterrence procedures that a company has the proper oversight, strong internal controls, and detection and deterrence – all designed to create an procedures – all designed to create an environment environment where fraud can where fraud can be mitigated. In our view, there are only two types of companies – those that have been be mitigated. In our view, subjected to fraud, and those that will be. there are only two types of Are existing internal controls really companies – those that have up to mark? been subjected to fraud, and The first step in managing the risk of fraud is those that will be. “ to look at a company’s internal controls. From our experience, companies that have suffered fraud would often have had some internal control The “controls gap” structures. Occasionally, these controls could have even been described as excellent, and comparable Frauds keep happening because there is a “controls to industry best practices. However, while they look gap”. Controls generally work best where risks are good on paper, they often fail in implementation, or known, static and obvious. Unfortunately, at least are overridden by management. In many instances, from a controls perspective, motivations of human PwC Edge 49
behaviour are frequently unknown, dynamic and internal controls and the absence of fraud within obscure. their organisations. However, the overseas financial controller told us in an interview that these For example, one of the typical internal controls statements, which he acknowledged were false, used to combat economic loss is “segregation were simply formalities, and that he did not really of duties”. Usually, policies dictate that sensitive understand them entirely. actions, such as receipt of cash, deposit preparation, and bank reconciliation be performed by different The company in question had good controls, on people to minimise the possibility of one person paper, at the corporate headquarters. But it had manipulating the entire process to one’s personal failed to communicate the importance, or even the benefit. However, we have seen numerous cases existence, of many of those controls. As a result of in which the process, out of convenience, was left not setting and communicating the “control” tone to a single person, usually trusted and respected from the top, the company became a victim of within the organisation, who turned out to be the economic crime and took a reputation beating in its perpetrator of fraud. In such an instance, the industry. control policy did exist, but was overridden through complacency. The point we are driving at is this: a “controls mindset” is far more practical, flexible and beneficial We have also seen numerous examples where lack than a set of policies that are set in stone and of specificity and clarity with respect to job roles, waiting to be ticked, but in reality do not address responsibilities, and reporting lines contributed to the issues of an organisation, or are not executed loss through fraud. In a recent investigation we properly. conducted, one employee reported that he had no financial oversight responsibilities for the territory in Assessing fraud risk on a regular which he worked, while “home office” management basis assured us that he did. If such responsibilities had been specified more clearly beforehand, the Even with the proper internal controls and the right company might have been able to avoid the loss it mindset, fraud can still silently permeate into an incurred due to fraud. organisation. While there is no perfect preventive measure for fraud, it can be mitigated (or detected In light of the various investigations we have before the damage is catastrophic) by performing conducted, we have found that it is often easier to fraud risk assessments and implementing a mitigate fraud risk when companies have a “controls consistent fraud risk management programme. A mindset”, rather than simply a list of policies. This is fraud risk assessment measures traditional controls, because potential gaps can and do exist between but it focuses on areas where the company faces the best-designed controls and those required by the greatest potential for fraud. This should not be the realities of the changing business environment confused with setting a materiality level for a controls despite the best intentions of those who created assessment, as the risk for fraud may be greater in them. We have seen instances where corporations the dark corners of the company, away from the light with excellent controls policies were victimised of internal or external audit. by fraud because their businesses evolved faster than their controls environment, leaving room for Many U.S. public companies have been forced to exploitation of control weaknesses. implement a form of fraud risk assessment under the Statement on Accounting Standards (SAS) 99 In another recent investigation, a financial controller requirements, but companies globally can benefit at an overseas subsidiary of a large public company from the concepts underlying those requirements. faithfully filled out his Sarbanes-Oxley sub- One of the real benefits of a fraud risk assessment certifications and submitted them regularly. These is that it is typically performed by experienced fraud sub-certifications are used by most large public investigators, whose focus is different from internal companies to provide some level of assurance or external auditors’. Fraud investigators have seen to the ultimate signers, the CEO and CFO, that the effects of fraud and know the hallmarks while their subordinates are certain of the efficacy of auditors have little experience with it. 50 PwC Edge
Incentive/Pressure “It is easier to mitigate One of the reasons fraud is committed is because fraud risk when companies the perpetrators are in some form of financial difficulty or need. Some well-chronicled examples have a “controls mindset”, are fraudsters who need to feed their voracious gambling appetites. However, accounting fraud rather than simply a list can also be sparked by the need to meet loan of policies… A “controls covenants, produce healthy financial forecasts or meet market expectations. mindset” is far more Opportunity practical, flexible and The fraudster needs to be in the right place at the beneficial than a set of right time to seize his opportunity. In the case of the traditional fraud, he must generally have access to policies that are set in stone an account processing function (for example, cash, and waiting to be ticked, but payables, receivables or payroll). Accounting fraud, however, is usually committed in reality do not address the at a much higher level as it is more complex. The issues of an organisation, or accounting records generated to cover up a fraud need to look genuine enough to hoodwink the are not executed properly.” auditors. Hence, such a form of economic crime often involves the CEO and/or CFO. Generally, all fraudsters will have a good understanding of the However, it is unlikely that a single fraud risk company’s operations, policy and procedures, have assessment will provide long-term fraud risk access to the company’s books and records, and be mitigation simply because business environments in a position to exert requisite authority over relevant change. A fraud risk management programme that controls and procedures. includes periodic risk assessments and ongoing controls improvements will provide longer-term Ability to rationalise/Attitudes mitigation and keep these risks more firmly on the The often quoted justification for fraud is “I did it for company’s radar. the company, not for myself”. Other rationalisations have ranged from “I deserve the money for my Fraud risk management starts with sacrifice to the company” to “I was just testing the fraud triangle internal control weaknesses”. It is important that such attitudes are eradicated through regular fraud Before you sink every penny into your fraud training and regular reminders. risk management programme, it is imperative to understand the fraud triangle from a non “controls The assessor’s job gap” perspective so as to tailor a holistic programme that addresses every material risk you foresee. In order to perform an assessment of fraud risk, the assessor must take into account the three An environment where fraud occurs is generally conditions mentioned above. This usually involves characterised by three distinct conditions, commonly concentrating on key decision-makers, both to known as the “Fraud Triangle”, anchored by: identify the “pressure points”, as well as to locate those with sufficient access (i.e. opportunity) to 1. incentive/pressure; commit fraud, within an organisation.
2. opportunity; and A risk assessor also considers attitudes. Fraud investigators are typically skilled interviewers, and 3. ability to rationalise/attitudes. frequently glean information from discussions with PwC Edge 51
junior staff. Based on our experience, important Key messages of the PwC Global fraud evidence occasionally starts as “office gossip”, Economic Crime Survey 2005 provided the interviewer is sufficiently patient and diligent to winnow out the truth. We often find that • Rising economic crime poses a growing threat to the junior staff know the “secrets” that provide a hint companies, with nearly half of all organisations of the ability to rationalise, such as who was passed worldwide being victims of fraud in the past two over for promotion and has decided to exact revenge years, according to the PwC Global Economic through fraud, or who are living beyond their means Crime Survey 2005. Globally, the number of or suffering financial difficulties that might motivate companies reporting fraud increased from 37% them to commit fraud. to 45% since 2003, a 22% increase. Specifically, 16% of Singapore companies experienced fraud in In sum, it is important that companies, especially the past two years. those that feel very comfortable with their controls, remain vigilant and assess their “controls gap” and • Of those who reported economic crime in fraud risk periodically. Companies that are rapidly Singapore, 58% were subjected to asset expanding or changing their businesses need to be misappropriation. One third (33%) suffered from sensitive to the new opportunities for fraud that can false pretences and one third (33%) from financial be created by venturing into uncharted territory. A misrepresentation. thorough fraud risk assessment can help identify these gaps, be they business-related or people- • The cost to companies was an average US$4 related, and close them before they are exploited for million in losses from “tangible frauds,” those of fraudulent purposes. Fraud-risk management must which result in an immediate and direct financial become a business process if we are to effectively loss. This is significantly higher than the global and battle white collar crime. regional averages of US$1.7 million and US$1.6 million respectively. “It is important that • The effect of economic crime went beyond financial loss. Sixty-seven percent (67%) of companies, especially those Singapore organisations suffered damage to reputation and brand; 33% suffered an impairment that feel very comfortable of relations with other businesses; 100% suffered with their controls, remain a “decline in working morale or loss of motivation”. vigilant and assess their • All fraud perpetrators were male, with 64% between the age of 31 and 40. Sixty-four percent “controls gap” and fraud risk (64%) were employed by the defrauded company, periodically… Fraud-risk with 72% either in senior or middle management. management must become a • Only 5% of Singapore respondents believe they are at risk of economic crime in the next five years. business process if we are to • More than 60% of Singapore respondents were effectively battle white collar satisfied with existing prevention measures and crime.” had a low willingness to increase crime prevention in the next two years. 52 PwC Edge
About PricewaterhouseCoopers Crisis Management
PricewaterhouseCoopers Crisis Management assists organisations in responding to, mitigating and controlling a range of predicaments from simple problems to complex crises. Our Business Recovery services involves a range of restructuring, rescue and turnaround assistance for companies or stakeholders concerned about the ability to meet changing market demands, and when all these effects have failed, we help liquidate these companies.
As for Dispute Analysis and Investigations services, we provide forensic expertise to organisations (and their lawyers) that are facing issues with financial and legal implications, to help them make intelligent, informed decisions whether in the boardroom or courtroom.
Subramaniam Iyer, Advisory Partner and Head of Crisis Management can be contacted at tel • (65) 6236 3058 e-mail • [email protected]
Chan Kheng Tek, Advisory Partner can be contacted at tel • (65) 6236 3628 e-mail • [email protected]
Peter Viksnins, Advisory Manager can be contacted at tel • (65) 6236 4021 e-mail • [email protected] PwC Edge
Managing Editor Design & Layout This publication aims to provide clients with an update on business trends. Kyle Lee Yvonne Yan No liability can be accepted for any action taken as a result of reading the Contributors Circulation, comments & suggestions notes without prior consultation with regard to all relevant factors. Gautam Banerjee Maimunah Asmawi Keith Stephenson at (65) 6236 3953 PricewaterhouseCoopers (www.pwc.com) provides industry-focused Patrick Jourdain [email protected] assurance, tax and advisory services for public and private clients. More than 130,000 people in 148 countries connect their thinking, experience Karen Loon Printer Nicole Fung and solutions to build public trust and enhance value for clients and their Image Office Systems stakeholders. Sunil Agarwal & Supplies Pte Ltd Amitava Guharoy MICA(P)113/10/2005 Ng Jiak See “PricewaterhouseCoopers” refers to the network of member firms of Mark Jansen Address PricewaterhouseCoopers International Limited, each of which is a separate Mario Ferraro 8 Cross Street #17-00 and independent legal entity. Tan Shong Ye PWC Building Singapore 048424 Peter Viksnins Copyright© May 2006 PricewaterhouseCoopers Singapore. Thyag Venkatesan All rights reserved. Subramaniam Iyer *connectedthinking is a trademark of PricewaterhouseCoopers. Chan Kheng Tek www.pwc.com/sg PwC Edge
pwc