Dec 7, 2015 - succeed at small and mid-size businesses. Resilience: ... A digest of the top business and management acco
Issue 2 – 2015
HOW TO SLEEP LIKE A BABY Taming the risks that keep you awake Page 26
6 categories of KPIs Page 41
Redesigning decision-making Page 46
Driving innovation in management accounting
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CONTENTS 26 Taking comfort in a well-fortified risk-management system
“Innovation is all about creating value by reducing risk and exploiting opportunity.” PAGE 10
Lines of defence US Bancorp tasked internal auditors with evaluating whether the company’s enterprise risk management approach was functioning as intended. Find out how they did it.
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9 ways to reduce risk by embracing innovation
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How to gather risk intelligence
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Focusing on unexpected successes and areas of strategic importance — and sometimes ignoring the customer — can help organisations survive competitive risks.
Risk management requires constant assessment of internal and external information. Here’s how it’s done at Siemens Wind Power in Denmark.
Awareness is your security blanket CIMA and Airmic have created a framework that aims to paint a comprehensive picture of an organisation’s risk universe.
7 6 Guide to CGMAMagazine.org See what’s available at the online home of CGMA Magazine.
On the cover and above: Photos by Goldmund/iStock
December 2015
Right: Photo by roibu/iStock
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Daring to adapt a brand
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How to minimise financial statement risk
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Paths to sustainability
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A better fit for franchises
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Resilience: How to perform better under pressure
To successfully tap consumer markets around the world, companies may have to risk changing their brands. Enterprise risk management offers tools to help deal with the challenge.
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The director of accounting at telecom giant AT&T offers ways organisations can avoid unintended errors in financial statements.
According to a global CGMA survey, management accountants see the value of reporting on environmental and social factors.
One finance executive centralised finance brainpower at his fitness company, offering an illustration of how finance transformation can succeed at small and mid-size businesses.
Learn how to improve performance under pressure — whether it’s in an interview, board presentation, or delicate negotiation.
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Redesigning decision-making: Pentland Brands
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Taming the email beast
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Sportswear manufacturer Pentland Brands is promoting new ways of informed decision-making, driving performance.
Email can morph into an after-hours monster. Setting digital boundaries can help minimise stress.
Clockwise from top: Photo by Gurinder Osan/AP Images; photo by Brent Clark/AP Images; image by Sashkinw/iStock; photo courtesy of Pentland Brands; photo by triloks/iStock
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6 categories of key performance indicators 41 This summary of a recent CGMA guide on KPIs recommends a series of factors to consider when developing and implementing a performance indicator model.
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FROM MANAGEMENT TO MASTERY.
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Creative Director: Michael Schad Johnstone Contributors: Mark S. Brooks; Matthew Hurst; Gillian Lees; Mike Skorupski, CPA, CGMA Technical Reviewers: Ana Barco; Nancy MarcThrasybule, CPA, CGMA; Rebecca McCaffry, FCMA, CGMA; Paul Parks, CPA, CGMA; Lori Sexton, CPA, CGMA; Kenneth W. Witt, CPA, CGMA Senior Manager, Business Development: Shreyas Mecheri External Affairs Manager: Rose Malik
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LINES OF DEFENCE US Bancorp tasked internal auditors with evaluating the design and strength of the company’s enterprise risk management approach.
ssessing an enterprise risk management (ERM) programme can prove challenging, Mark Sparano, CPA, CGMA, chief audit executive at US Bancorp, has learned. But he also has developed ways to deal with the challenges. US Bancorp, the Minnesota-based parent company of the fifth-largest commercial bank in the United States, formalised and updated an ERM framework in 2012 and has implemented and refined it ever since. This ERM framework
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serves as a guideline to perform ERM internal audits, and US Bancorp’s approach shows how companies can keep risk management relevant as risks emerge over the years. ERM audits assess how well a business’s enterprise risk management works and include what the board of directors and senior management are doing. “Auditing has evolved well beyond control testing alone,” Sparano said. “Today, the third line of defence must be equipped and prepared to critically evaluate and report on the company’s ERM approach, which includes the role of the board and executive management.”
December 2015
Photo by roibu/iStock
By Sabine Vollmer
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Communication is key to a strong ERM programme, says US Bancorp’s Mark Sparano.
Photo by Stephanie Rau-Barber/AP Images
US Bancorp, which employs about 67,000 people — including at least 250 internal auditors — and has business lines in the Americas and Europe, developed its customised ERM audit framework by consulting established risk-management principles and key regulatory guidance. Large financial institutions have dealt with increased regulations since the 2008 financial crisis sparked a global economic tailspin with lasting effects. Increased scrutiny — brought about by the US Dodd-Frank Wall Street Reform and Consumer Protection Act and the US Foreign Account Tax Compliance Act, as well as reforms developed by the European Commission and the Basel Committee on Banking Supervision in the past seven years — has caused many banks to bolster enterprise risk management. The US Office of the Comptroller of the Currency and the Federal Reserve Board as well as the Basel committee were among the regulatory contributors to US Bancorp’s ERM audit framework. Key risk-management principles came from the Institute of Internal Auditors, the Committee of Sponsoring Organizations of the Treadway Commission, and public accounting firms.
LESSONS LEARNED Communicating frequently and across functions has been critical in developing, implementing, and refining the ERM audit framework at US Bancorp, but the internal audit team also had to learn other lessons to ensure collaboration across functions would be successful, according to Sparano. Among them:
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Explain internal audit’s role
Talk to external and internal stakeholders, including senior management, board members, regulators, and independent public accountants, and tell them what you’re trying to do before you start auditing your company’s ERM efforts. Explaining internal audit’s role in enterprise risk management can clear up misconceptions and misunderstandings among key stakeholders and establish why an ERM audit is good for the business. At US Bancorp, internal audit visualised the team’s role with a picture of a soccer pitch that shows players in red uniforms attacking from one half. In the picture, each player has a ball representing a risk, such as reputational risk, credit risk, and interest rates. The offence faces three lines of white-shirted defensive players on the other half of the pitch. The bank’s business managers are tackling the risks in the first line of defence. The chief executive, the board’s risk committee, and the chief risk officer and his team are setting policy, doing oversight, and monitoring key risk and key profit indicators in the second line of defence. In the third line of defence, internal audit is the goalkeeper, catching risks not appropriately defended by the first and second lines — whether as designed or as operating. The result of an ERM audit is an opinion that lets the board of directors know whether the company’s risk-management approach is well-designed and functioning as intended, with recommendations as necessary to address areas needing improvement. The opinion matters because it affects what senior management and the board do. “So you’ve really got to do a lot of communicating upfront,” Sparano said.
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Consider your company’s governing structures in designing audit processes
A company’s governing structure influences internal audit’s approach because an ERM audit should look beyond standard risk-management practices. What the board does and what senior management does to manage and monitor risk and key performance indicators should be within the scope of an ERM audit. At US Bancorp, as at other companies, internal audit must stay away from setting policy to remain independent in its annual assessment to the board. The annual ERM audit opinion delivered to the board and its committees includes internal audit’s findings of what senior management and the board do right and what they need to do better in enterprise risk management. At US Bancorp, several board committees are interested in the findings, including the risk-management committee and the audit committee.
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“Auditing has evolved well beyond control testing alone.” — Mark Sparano, CPA, CGMA
Define the actions and objectives of an ERM audit and make sure all stakeholders fully understand and support the definitions
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US Bancorp has more than $400 billion in assets, but the enterprise risk is in the bank’s daily transactions reflected in treasury, capital, liquidity, and wire transfers. It’s a view key stakeholders don’t necessarily share, Sparano said, because risk management means different things for different stakeholders. US Bancorp’s independent public accountants, for example, focus on reserves, losses, and disclosures reflected in the consolidated financial statement. Regulators, for their part, care less about consolidated financial statements. To them, processes, corporate governance, and documentation are more important measures to gauge risk. “The stakeholders don’t closely align,” Sparano said. “So when you go out and audit enterprise risk management, you’ve got to do a lot of definitions and make sure it rings true with all your stakeholders.”
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Establish yourself as the third line of defence in the business
Sparano established a five-member ERM internal audit team. The ERM auditors, who are within the broader internal audit team, co-ordinate the work with the second line of defence. As the head of internal audit, Sparano delivers the results of the ERM audits to the board of directors, where he presents to several committees and works closely with the chief risk officer. “I try to make sure the first line of defence is doing their job and the second line of defence is doing their job,” Sparano said. “… The goal is to ensure each line of defence is functioning in a well-co-ordinated manner to maximise the efficiency and effectiveness of the overall risk-management programme.”
Acknowledge that developing, implementing, and refining an ERM audit framework and processes will take time
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A risk-management audit assesses several elements, such as risk culture, risk appetite, risk governance and oversight, and risk reporting and escalation — all of which take time, technology,
talent, and training to establish and bolster. As ERM matures across all business lines, so does the assessment. New regulations and business expansions may require changes, for example, to third-party risk-management procedures, which involve refining the audit design, Sparano said. Maturation involves more documentation, processes are established and repeated, metrics are increasingly defined to allow for quality assurance, and management deepens its understanding of ERM. In the most advanced stage, ERM decision-making and continuous improvement projects are based on data, metrics, formal quality assurance, and self-assessment feedback. A few years into refining ERM and the assessment of ERM at US Bancorp, Sparano said he has found it more productive to talk about the sustainability of ERM auditing rather than its maturity. Sustainability implies an open-ended process that is understood to require improvements as needed to benefit the business. Maturity quickly triggers philosophical questions from board members, Sparano said, who wonder when maturity will be reached and whether trying to reach it is cost-beneficial.
Meet frequently with the person in charge of ERM and encourage ERM auditors to talk to their colleagues who are managing enterprise risk
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Sparano considers US Bancorp’s chief risk officer his partner. The two see each other almost daily, meet one-on-one at least once a month, and frequently talk on weekends. “We’ve got to be joined at the hip,” Sparano said. As a result of their close work relationship, the heads of US Bancorp’s internal audit and risk-management teams use the same terminology and concepts when they talk to the board of directors about risk management. Sparano encourages his team members to talk daily to their colleagues in risk management. He said the daily interactions make it easier to integrate risk management and risk-management assessment, especially when ERM updates and changes are introduced and internal audit must recalibrate its processes.
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Benchmark your audit results against your peers
To make sure US Bancorp is in line with the industry, Sparano benchmarks his ERM audit methodology against what other banks do. “It’s a pretty hard audit approach,” Sparano said, adding that he networks with other bank chief audit executives, participates in various industry round tables, and uses benchmarking data provided by internal audit and financial services associations. n
December 2015
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Photos by Vadmary/iStock
Photos by Vadmary/iStock
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WAYS TO REDUCE RISK BY EMBRACING INNOVATION
Innovation may sometimes seem risky, but ignoring it could prove fatal. Focusing on unexpected successes and areas of strategic importance — and sometimes ignoring the customer — can steer an organisation away from an early grave. By Mark S. Brooks
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an you recall the first time you were told to “think outside the box”? The phrase, which originated with management consultants in the 1960s, has since become a cliché. But what it is meant to entice — innovation — will never grow tired. Innovation can sometimes be perceived as the job of someone else — scientists, risk-seeking businesspeople, youthful tech start-up founders. And those associations can complicate our understanding of innovation, so much so that we cling to our old ways. We don’t want to make waves. We’re uncomfortable with ambiguity. We can’t justify fixing something that is not visibly broken. And while innovation may sometimes seem risky, ignoring it could prove fatal. Competitors are pursuing new ways to create and capture market value and make your business irrelevant. They are differentiating themselves and trying to disrupt the market through new business models, new products, or new services. Eighty-seven per cent of Fortune 500 companies from 1955 no longer exist today as a result of bankruptcy or M&A activity. The same could be true 60 years hence. But what about the 13% that still exist? They are making tomorrow, rather than being subjected to it.
Take IBM, for example. The company once known by its longhand name, International Business Machines, used to make everything from cash registers to computers. Now IBM specialises in software and services. Reinvention is a constant for those who make tomorrow. To not innovate is to increase risk. And, at its root, innovation is all about creating value by reducing risk and exploiting opportunity. Fortunately, there are some tenets you can follow to reduce risk by innovating:
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Focus on areas of strategic importance
The emergent and adaptive nature of innovation must be balanced with existing priorities. Innovations that do not directly apply to the mission and vision of a business often fail due to lack of market support and alignment. Effective innovations are focused, specific, and strategically important. Innovations that do not solve a problem or do not address a customer’s need often fail because of lack of relevance. Innovations that try to be everything to everyone often fail due to lack of specificity. Nook electronic tablets produced by US bookseller Barnes & Noble struggled to sell in the face of competition from similar products made by companies that specialise in technology.
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Nook failed in part because it was too great a leap for a brickand-mortar retail outlet to start making and selling electronic tablets. While there was market demand for e-readers, the Nook tried to be more than an e-reader and lacked support from third-party developers. It was beaten by Apple’s iPad and Amazon’s Kindle because those products were far better aligned with market needs and their parent companies’ mission and capabilities. Consider where your business is going, its mission, its vision, and its strategic priorities. What problems do your customers have? What jobs do they need to get done? What are the growth priorities of your business? What does your business want to be known for? Focus your innovations on these answers.
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Practise purposeful abandonment
Not all products and services should continue to be offered or supported despite their profitability. It may be more profitable to abandon offerings that have low growth and low market share, in favour of more attractive opportunities. The freed-up resources can then be used to fund new initiatives that may yield higher returns. Abandon customers, products, markets, and channels that provide marginal or negative growth. Move your resources to areas of higher value and productivity. Put your best people and resources on the biggest opportunities for growth instead of ones that maintain or defend stagnant markets. To purposefully abandon, ask these questions of every product and service your business offers: ■■ Is the return on investment positive and growing year over year? ■■ Does this offering advance the strategic goals of the business? ■■ Does this offering help achieve the vision and mission of our business? ■■ Is the market growing? If yes, can we grow our share? ■■ If we did not have this offering, would we go into this offering, this market, this channel, this business model today? If the answer is not “yes” to all of the above, consider abandoning the offering and moving the resources to new, higher-potential opportunities. Do it before your competition forces it upon you (see “Redesigning Decision-Making: Pentland Brands,” page 46).
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Foster learning
Learning is closely linked to innovation and creativity. As knowledge is acquired, the brain makes new connections, as-
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sociates disparate concepts, and can produce novel ideas and insights. This leads to questioning and more knowledge. The value of learning through questioning cannot be understated. Research by Paul L. Harris, a professor at the Harvard Graduate School of Education, suggests the average child asks about 40,000 questions between ages two and five. Their minds are open to all possibilities with few, if any, assumptions about the world. As an adult, maintain childlike mental attributes of curiosity and questioning to boost learning. Read books and articles from unrelated disciplines, attend conferences, take online courses in unfamiliar subjects, and encourage colleagues to further their own learning.
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Don’t rely on your customers
Your customers have a job to be done. They don’t always have the best idea of how to address it. They need you for that. Asking them how to solve their problem won’t get you far. Understand your customers’ needs and pain points, but mostly ignore their ideas for solutions. Consider Henry Ford, founder of Ford Motor Co. and builder of the first mass-produced, petrol-powered car. His customers wanted to get from one place to another more quickly. He thought that if he had asked his customers what they wanted, they would have said, “a faster horse”. Use design thinking and observation, and adapt ideas and insights from other industries and technologies to conjure up novel ways to solve your customers’ jobs to be done.
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Compete up-market on performance
Innovative products and services that displace competition and change customer behaviour often target non-mainstream needs to compete up-market. To drive innovation, build something that performs better for non-mainstream customers. Small markets are often underserved, and they are more likely to demand fewer features and less performance to meet a non-mainstream need. This enables you to grow into the mainstream or change it entirely. The evidence in Michael Raynor’s book The Three Rules: How Exceptional Companies Think supports this tenet so well that one of his rules is “better before cheaper” (see “Following the Rules to Sustained Profitability,” CGMA Magazine, Issue 1, 2014, page 20). For example, excavators in the early 1900s were operated through a series of pulleys and cables. Hydraulic excavators were developed half a century later but were used primarily for small jobs by non-mainstream customers. Over the next two decades, manufacturers of hydraulic excavators moved closer to the mainstream market by maturing the technolo-
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ated, online email system with iterative steps. Thomas Watson, the founder of IBM, is believed to have said that the fastest way to success is to double your failure rate. So embrace failure through quick, iterative tests, and apply the learning to the next iteration.
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gy and competing on performance. By the 1960s, hydraulic excavators had matured enough to satisfy mainstream market needs. Once the performance was equalised, competition shifted to reliability, then to convenience, then to cost.
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Constantly communicate and connect
Frequently engage with your industry’s thought leaders, current customers, and aspirational customers. Create a dialogue of idea sharing. It will enrich your perspective and keep you attuned to emerging trends. As knowledge is acquired, it should be shared with your colleagues and business partners. Connect with non-experts whose minds may be free of conventional associations. They can help you ask more poignant questions and freshen your perspective. Host internal lunch-andlearn sessions, chat over coffee with colleagues, attend conferences, and connect with non-experts in other industries for a fresh perspective.
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Iterate and fail quickly
Traditional project planning calls for meticulous scoping, documenting, resource allocating, and launching. This process is slow, and failure can be costly. A better approach for innovation is to take small, quick, iterative steps to test the market and the performance of your offering. This can result in inexpensive failure at low levels of investment with increased learning. The minimum viable product (MVP) concept, made popular by Eric Ries’s book The Lean Startup, is a great framework for iterating quickly. MVP is a recursive process to build just enough of an offering to test, measure its performance in the market, capture the learning, and repeat. The agile methodology in software development is similar. Classic examples of this approach can be seen with many virtual products such as Google’s Gmail, which has evolved from a basic, yet differenti-
Choose the right metrics
An old management adage says that what gets measured is what gets done. Choosing the right metrics is essential to maintaining focus and measuring success. Balance your metrics between leading and lagging indicators. Ensure each metric is clear, actionable, and simple. Avoid vanity metrics, which measure the illusion of progress such as the number of page views or likes on Facebook. Consider what job your customer is hiring you to do. Focus on outcomes and impacts. Determine what specifically can be measured to gauge progress. Limit yourself to three to seven meaningful metrics.
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Look for unexpected successes
The market will occasionally surprise you. Pay close attention to unexpected successes. Why did a particular offering sell more units than expected? Why did we get a higher market share than expected? Why did a market segment that we didn’t think of buy a particular offering? Where could it lead us? Digging deeper into these questions may reveal opportunities for growth. Perhaps the offering is used in ways you did not envisage, perhaps it touches a sensitive nerve for customers that you didn’t consider, or maybe a different type of customer finds it valuable. Peter Drucker, in his book Innovation and Entrepreneurship, uses the US department store chain Macy’s as an example: When Macy’s began selling appliances, it saw a rapid and unexpected increase in sales and profit. Macy’s was embarrassed that nearly three-fifths of its revenue was from appliance sales instead of fashion apparel. Instead of capitalising on this unexpected success, Macy’s tried to restrict appliance sales. Bloomingdale’s, a Macy’s competitor, saw this as an opportunity and built a new market with its housewares department. As you identify unexpected successes, consider how to exploit them for growth. Where could they lead you? Look at unexpected successes to reveal opportunities to enter new markets or serve existing customers in new ways. n Mark S. Brooks is a senior manager of innovation at the AICPA, where he is focused on member value, growth of the profession, thought leadership, culture change, and strategic innovation.
December 2015
HOW TO GATHER
Photo courtesy of Siemens AG
RISK INTELLIGENCE Risk management requires constant collection and assessment of internal and external information. Here’s how risk intelligence is collected and managed at Siemens Wind Power in Denmark. By Mike Skorupski, CPA, CGMA CGMAMAGAZINE.ORG
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management (ERM) programme, it is essential to draw on the collective intelligence of the organisation to ensure that a holistic view of the risk landscape can ultimately be provided to the board. To gain a complete view of threats on the horizon, risk managers have to build their risk community within the organisation. To seek input, it is essential for the risk manager to establish communication channels and build trust with stakeholders and influencers throughout the business. These should include CEOs and CFOs of regions and sub-regions, sales, production, engineering, project execution, legal, and strategy, as well as other operation and support functions. Establishing the right formal and informal networks, and then keeping those communication channels open, is essential to creating a well-functioning risk organisation. In addition to conversations on the phone or via video conferencing, regular face-to-face meetings help build lasting relationships and trust.
Step 1: Individual consultation The first step in the process is to consult the members of the risk community individually to hear their ideas and opinions. Once the initial consultation has been conducted, the risk manager can collate and analyse the findings before presenting and testing them in formal risk workshops.
Steps 2 and 3: Workshops, assessments
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iemens Wind Power is one of the world’s leading suppliers of wind power solutions, with annual revenues in excess of€€5.5 billion ($6.9 billion) as of September 30th 2014. The company must maintain a dynamic risk-management programme that will capture, assess, respond to, and monitor risks and opportunities in a consistent and sustainable manner. In addition to commonly known risks such as geopolitical instability and slowing rates of growth in target markets, the wind power sector faces additional challenges posed by changing government policies. Public subsidies for renewable energy projects are becoming less popular throughout the world and are being phased out in a number of countries, and wind turbine producers have had to adjust their business models accordingly. Alongside the pre-defined framework of an enterprise risk
The second step includes workshops that bring together all of the key functions mentioned above to discuss the initial findings. The sessions serve as a sense check as well as an opportunity to brainstorm additional risks. Sometimes the risk manager acts as a moderator and sometimes as a subject matter expert, depending on his or her background knowledge and the severity of the risk being discussed. Risk workshops achieve better results when separate sessions are held for the risk community and the executive management. Members of the risk community tend to be more willing to contribute their opinions during brainstorming when their immediate superiors are not present, facilitating a more open and frank discussion. The first steps help reveal some of the risk concerns to individual departments. Often, when you are working within your department or function, a certain degree of silo thinking is inevitable to maximise the benefit or minimise the risk for your own area of responsibility. This could lead to risks or opportunities being identified which relate to a specific area, rather than the enterprise as a whole, such as the effect any production delays might have on individual key performance indicators.
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Ensuring the ERM programme has lasting impact Here are three factors that ensure that risk awareness is embedded in the Siemens culture. Vigilance Employees are urged to be vigilant, and every member of the staff is encouraged to speak up about any problems they have identified or ideas they have. The challenge is to ensure that input is received and reflected upon. A number of risk-reporting protocols are available to employees, including software tools to categorise and describe risks as well as opportunities and to report the risks to internal and external third parties including auditors, lawyers, and various investigative bodies. However, the most important element is that staff know who their risk manager is and are able to call or set up a meeting with that person to discuss any difficult topics. A crossfunctional open-door policy is a prerequisite for fostering an atmosphere of trust throughout the organisation. Business acumen The members of the risk community are the foundation of a successful ERM system. Everyone needs to understand the levers
Step 4: The board provides a holistic view Once the workshops have been conducted and the third stage — the bottom-up risk-assessment process — is complete, the findings are presented to the board, which will provide a final reality check. The holistic view provided by executive management and board members helps to eliminate topics identified in the earlier steps, from the organisational risk assessment. At this stage, the board’s role is to assess whether they share the same understanding of the severity of each risk, the likelihood of occurrence, and the likely effectiveness of any countermeasures which are to be put in place. You can never be absolutely certain that information brought forward from the bottom of the organisation to the top has captured all the important elements decision-makers need. However, by seeking input from key people embedded in every layer and function of the organisation, you reduce the possibility of missing something. In other words, the broader the risk community you have established, the less likely you will paint a skewed or incomplete risk picture for your management. Ultimately, it is the responsibility of the executive management and board members to scrutinise and challenge the outcome of the risk consultation presented to them, drawing on their expertise, industry knowledge, and experience
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which drive profitability and move the company forward. Without the expertise and business knowledge of those actively and even passively involved in the programme, the results would be mediocre. Ownership and empowerment A mentality of ownership, empowerment, and accountability throughout the organisation is key to ensuring the ERM programme has a lasting impact. It is absolutely essential that people are empowered and held accountable for their actions down to the lowest level of the organisation. Goal-setting processes must be realistic and cause and effect clearly established, with periodic follow-up reviews in place. Siemens Wind Power has revised its goal-setting programme to seek better alignment with the strategy of the wind business. There is still work to be done to eliminate conflicting goals being set across functions and inadvertently promoting a silo mentality.
in the job to add valuable insights.
ALIGNING RISK CONSIDERATIONS WITH STRATEGY It is vital that any measures taken to mitigate risk support the organisation’s overall strategy. Those that do not, such as over-reached informational campaigns or over-extended internal reporting requirements, should be discontinued. At Siemens, there is a continuous dialogue between market units, divisions, and corporate risk managers as well as members of the executive management team to align all of the internal and external risk considerations. Of course, in a technology-driven company such as Siemens Wind Power, the ERM programme has to be flexible and agile to ensure the company keeps pace with the evolution of new technologies. The focus of the business needs to be constantly verified, and any changes, such as entry into a new geographic market, could cause capacity constraints, or there may be legal or tax implications, for example. For each change in focus, a whole new set of risks may need to be assessed. n Mike Skorupski, CPA, CGMA, is head of finance governance at Siemens Wind Power in Denmark.
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DARING TO ADAPT A
BRAND
To successfully tap consumer markets around the world, companies may have to risk changing their brands. Enterprise risk management offers tools to help deal with the challenge. By Sabine Vollmer
H
arley-Davidson, an iconic US brand that for decades has built a reputation for heavy touring and cruising motorcycles with large, powerful engines, took a chance and introduced in 2014 a line of smaller, lighter-weight motorcycles. The Harley-Davidson Street 750 and Street 500 are meant to appeal to beginning riders and younger, urban riders with a smaller budget in the US, southern Europe, and emerging southern Asian markets such as India. Street motorcycles that are sold overseas are assembled at Harley-Davidson’s India plant, which started operations in 2011 in Bawal, about 100 kilometres southwest of New Delhi. The Street motorcycles “are all about bringing our brand promise to a new, global generation of young adults,” John Olin, Harley-Davidson’s CFO, said in a video announcing the new product lines. Offering an entry-level product to young men and women of all ethnic backgrounds is part of
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the company’s “Fatten the Tails” strategy to access new and emerging markets over the next ten to 20 years. It’s a strategy projected to boost sales and more than make up for demographic shifts away from white, male US Baby Boomers, the core of Harley-Davidson’s fiercely loyal fan base. But Harley-Davidson also faces other strategic risks, said Robert Gould, CPA, the company’s director of internal audit. Emissions and safety regulations are getting stricter worldwide, and environmentally conscious customers are less accepting of rides they perceive as expensive gas guzzlers. “We need to be innovative,” Gould said. “We need to compete with other companies doing different things. How do you do that when you’re the iconic US heavyweight motorcycle brand?” Specifically, how do you do that without jeopardising the Harley-Davidson look, feel, and sound — the attributes that define the brand, which is one of the company’s biggest assets?
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HOW TO ASSESS THE RISK Multinational food and beverage companies are particularly likely to encounter this challenge because tastes and preferences are often tied to culture, religious beliefs, or regional traditions. Cheese-topped pizzas don’t go over well in China because about 90% of Chinese are lactose-intolerant. Alcohol cannot be legally sold in Saudi Arabia. And anything to do with meat can be off-putting to the about 30% to 40% of Indians who in polls identify themselves as vegetarian. Enterprise risk management (ERM) offers tools to companies facing this challenge, said Jim Traut, CPA, CGMA, an ERM expert and president of Traut Consulting. He was previously vice president for reputation, risk management, and ethics and compliance at food-processing company H.J. Heinz. An enterprise-wide risk assessment that involves all functions of the business (strategy, finance, quality, supply chain, R&D, etc.) and all business units worldwide lets people share their ideas and collect information that can then
be synthesised, Traut said. “This is the strength and the value and the benefit to [ERM],” he added. “You have an iconic brand, something extremely valuable, and you have an organisation that understands the concept of risk management, of capturing reward, and that then can readily deploy whatever the change process is.” Traut suggested companies considering introducing a brand into a new market answer the following five questions during their risk assessments: 1. Do we want to be in the new market long-term? 2. Do we understand how to serve customers in the new market, including, for example, maintaining a supply chain in the face of possible corruption pressures? 3. Do we have the capacity to supply the product? 4. Do we make the product locally — build or acquire a local plant or enter a joint venture with a local partner — or are we shipping it in?
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Photo by Gurinder Osan/AP Images
Harley-Davidson, known for its powerful, heavyweight motorcycles, shown here, has introduced a line of smaller, lighter motorcycles.
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5. What does all this mean financially over a five- to ten-year period?
BUSINESSES INCREASINGLY WORRY ABOUT THEIR REPUTATION An enterprise-wide risk assessment is important because strategic missteps can be costly. Strategic risks are on top of executives’ and directors’ minds worldwide, ahead of operational, financial, and compliance risks, according to research by accounting and consulting firms. Reputational risk, which is driven by consumers’ brand experience, product or service quality, and public perception about a company’s ethics, is a leading strategic risk concern. Seventy-six per cent of CGMA designation holders said in a global survey in 2013 that businesses in their industry focused more on reputational risk than before, and 65% reported their companies always or often consider the financial implications of reputational risk. Of about 300 senior executives and board members Deloitte polled worldwide last year, 87% considered reputational risk to be more important than any other strategic risk their companies face, and 81% identified customers as the top stakeholder for reputational risk. Revenue and brand value are most likely at risk in case of reputational damage, respondents said.
TAKING ONE STEP AT A TIME Risk to the brand has been well-considered amidst Nestlé’s Nespresso strategic change in Japan. Nespresso started adapting its brand to the Japanese market about three years ago, 25 years after the Swiss multinational introduced coffee machines that use pressurised steam and capsules containing a single serving of coffee in a country known for its tea-drinking culture. Departing from brand promotions Nespresso uses in the rest of the world, Nespresso Japan launched a Japan-specific television advertisement in 2014 that focused on the quality of the coffee and the convenience of the machine, said Takayuki Ichikawa, marketing director at Nespresso Japan. “We make the product the hero,” Ichikawa said, because the educational message better fits Japanese consumption needs. But the company is stopping short of redesigning the coffee machine to suit Japanese tastes. “We can accomplish a lot with the existing product offering in Japan,” said Felix Langenbach, head of finance at Nespresso Japan. “The biggest mistake would be to do everything at the same time and then do nothing right,” he said. “We’ll take one step at a time and make the step perfect, because to do some-
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Revenue and brand value are most likely at risk in case of reputational damage. thing that’s not perfect would be the biggest risk to the brand.” The Japanese have developed quite a taste for coffee in the past several decades. Consumption of roasted coffee tripled from 1980 to 2010. In 2014, Japan ranked third, behind the US and Germany, in total coffee consumption. In the summer, about two-thirds of the coffee drinks in Japan are consumed cold with large ice cubes — a preference that presents an opportunity for Nespresso in Japan, Langenbach said. Japanese customers are demanding, he said. They expect high quality and service — a product with even slightly dented packaging will be returned — and they value convenience. In a country where households are getting smaller, Nespresso would benefit if it introduced a solution that made hot and cold coffee by the cup without loss of quality, Langenbach added. But the financial risks with such a technical redesign would have to be carefully assessed, especially since Japan’s unique power supply requirements would render such a development unsuitable for the rest of the world, Langenbach said. “Some study would have to be done to understand the additional benefits for the consumer to see if it is a relevant innovation,” Langenbach said. For now, Nespresso Japan’s priority is to heighten the awareness of the brand amongst Japanese consumers, but if the company were to consider changing the technical design of its coffee machine, he said, “we would pretty much work backwards by first focussing on the additional value from the consumer point of view.”
TURNING AN ENTERPRISE RISK INTO A BUSINESS OPPORTUNITY Changes in consumer demographics, new regulations, and increased competition from emerging markets continue to pressure businesses to be more innovative. Diageo, a multinational alcoholic beverages company based in the UK, is in the process of introducing a series of innovative new beers in the very competitive North American market. The first in the series was the Guinness Blonde American Lager, which is brewed in Latrobe, Pennsylvania, with American hops and the yeast Guinness has used in Ireland for 125 years. “Millennial consumers are looking for brands which are new, interesting, and authentic,” Diageo’s chief executive,
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Ivan Menezes, told industry analysts in January. “They are a multicultural group, internet-savvy, less category-loyal, and they are one-third of the US population.” Attracting Millennial consumers was just as important to Harley-Davidson. The risk implications of the Street line of motorcycles were vetted in an exercise that was part of a road map the company developed in 2010 to improve its strategic risk management, Gould explained during a risk-management conference at North Carolina State University’s Poole College of Management in 2013. Each step of the exercise consists of a to-do list: ■■ Step 1: Develop templates to identify, assess, and monitor risks; develop risk-mitigation responses; and agree on risk appetite levels before an issue is brought to the board’s attention. ■■ Step 2: Close risk-management gaps, communicate risk-mitigation plans throughout the company, track risk-mitigation activities, and train risk owners. ■■ Step 3: Integrate new risks into strategic planning, and provide assurance that the risk-management processes are adequate and appropriate. This stage includes an internal audit and benchmarking of the risk-management programme. Harley-Davidson refreshes the road map every year, Gould said. Implementing continuous improvement concepts,
developing contingency planning scenarios, and devising approaches to manage emerging risks are among the tasks that were new in the 2014 version of the exercise. A key goal of the exercise is better management of black swan risks, significant events that could damage the Harley-Davidson brand to the point that the survival of the company would be at stake. Such risks are tricky to identify. In 2010, Harley-Davidson held a workshop in which vice presidents named business assumptions they believed to be critical to the company’s success, Gould said. The assumptions were based on the company’s business strategy, competitive forces, growth objectives, and resource requirements, among other factors. The executives also discussed what would threaten their assumptions and how to prepare for or prevent the threats. The first workshop initially produced 62 black swan risks. The participants then whittled the list to the top five, determined whether they had detected any signals that one of the black swans was approaching, and considered whether any of the black swan risks harboured a possible business opportunity, Gould said. Harley-Davidson’s No. 1 black swan back in 2010? That regulatory, cultural, and competitive factors would significantly compromise the look, sound, and feel of its motorcycles. The company’s responses included innovative new products such as the Street line of motorcycles. n
December 2015
Photo courtesy of Nespresso
Nespresso Japan is navigating new territory with coffee machines for a tea-drinking nation.
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HOW TO
MINIMISE FINANCIAL STATEMENT RISK Telecom giant AT&T’s director of accounting discusses a few ways organisations can avoid unintended errors in financial statements. By Ken Tysiac
and restatement. Bill Schneider, CPA, CGMA, the director of accounting for multinational telecommunications giant AT&T, has insight on these risks after serving on the advisory panel for the 2013 update of the internal control framework of the Committee of Sponsoring Organizations of the Treadway Commission. He also serves on the Professional Accountants in Business Committee of the International Federation of Accountants. Below, in his own words, Schneider shares his perspectives on some of the areas in financial reporting that carry the most risk:
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REVENUE RECOGNITION Everybody is starting with inexperience in the new, converged revenue recognition standard, which was developed jointly by the International Accounting Standards Board and the Financial Accounting Standards Board to provide principles-based guidance with the goal of enhancing comparability across jurisdictions and industries. The standard, which was released in May 2014 but had its effective date delayed and still is being amended, will create significant changes in my industry and some others, but fewer changes in other industries. Even where there are changes, you can still lean back on a lot of what you have learned. For example, a promise is similar to a deliverable, and a performance obligation is similar to a separate unit of account. There are some differences arising from the new standard, but at its core, based on experience, you should have a concept of what a performance obligation is. But still, the lack of knowledge
Photo by Justin Clemons/AP Images
I
n a complex world of evolving standards and technology, there are many risks associated with financial statements. Fortunately, there are things financial executives can do to minimise the unintended errors that can lead to a misstatement
Photo by Justin Clemons/AP Images
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Bill Schneider, CPA, CGMA, the director of accounting at AT&T
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or experience with the standard is going to cause more errors and restatements when it’s in place, and not because anybody is trying to defraud everybody. It’s because no one knows all the answers yet. There are some common concepts that a lot of people are going to have to focus on, and one is deferral of costs, which is an area that may surprise people in a revenue recognition standard. You may find yourself wondering, “If I defer costs, I have to figure out, what period do I amortise it over? In fact, are those costs recoverable in the first place?” Businesses may have to figure out how to adapt their internal costing systems to this deferral process. Your costing system and the way you look at costs internally may not comply with the new standard’s requirements. Or maybe because your system has been internal, it has not been set up with the same rigour and controls that an external reporting process is required to have. There are a lot of things you have to look at, and that’s going to surprise some companies, because you’re dealing with costs in a revenue standard.
there are constantly errors in spreadsheets. Fortunately, there are ways to minimise them. First, you have to make sure spreadsheets don’t have errors in them when you set them up. Then, you have to control the spreadsheets after you set them up. This is an access issue. You have to do something to protect a spreadsheet so people can’t change it. Maybe they can read it, but they can’t change it. There are some simple techniques you can use to help set up that control and make it less likely that errors will be created through the process of working on a spreadsheet. If you have shared drives, everybody in the finance department probably doesn’t need access to every spreadsheet. So divide those up. Create one shared drive for the budget group, another for the accounts payable group, and another for the general ledger. If you’ve got a really small finance department, you can’t do that. Simple password protection can help instead. As you scale up, start dividing up who has access to what, and it can be very beneficial.
SPREADSHEETS
This can be a challenge for any business with more than a couple dozen employees. It’s important to practise the concept of providing the minimum access that’s necessary for people. You don’t want to have a lot of people with write
We all love our spreadsheets, but once they start getting a little complex, they are prone to errors. You hope that they’re immaterial. You hope you find them and correct them. But
IT ACCESS
Trouble with fair value Forensic and valuation accountants surveyed for a 2014 American Institute of CPAs report predicted that valuation of assets carried at fair value would be the most prevalent financial statement representation issue in the next two to five years:
Valuation of assets carried at fair value Inadequate disclosures of material transactions and fraud Revenue recognition Treatment of off-balance-sheet assets and liabilities 0% 5% 10% 15% 20% 25% 30% 35% n Respondents who said the issue would be the most prevalent financial statement misrepresentation issue in the next two to five years. Source: The 2014 AICPA Survey on International Trends in Forensic and Valuation Services.
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access to systems when they only need to be able to have read access and searchability on the systems. You don’t want to give a lot of people the authority to go in and change and add things to the general ledger. Therefore, you should also consider limiting access to certain individuals during certain periods; for example, access to record specific types of entries may be restricted. With the constant churn in employment these days, it’s difficult enough for businesses of any size just to make sure that when somebody leaves a business, the IT department removes them from the systems. The real trick is when somebody changes jobs within the company, you not only give them access to new systems, but you also may need to cut off their access to the old systems. Although 99% of employees are not going to do anything bad, you have to have the controls for that bad apple out there.
VARIANCE ANALYSIS This is something a lot of businesses do. You compare month over month, current versus budgeted, and other various metrics, and it tells you if something’s outside a normal range and warrants a closer look. It can be a very powerful tool. But a lot of companies that rely on this control may not use it as well as they should. If you’re going to use this control, you need to have very specific thresholds that trigger further investigation. If you just “eyeball it”, it’s hard to identify that as a control. You have to set a percentage or dollar amount for variance that calls for a closer look and stick to it. Another question: Is your variance analysis finding anything? If it’s never finding anything, maybe your thresholds are too high. If you never find anything to investigate in a whole year, that should raise suspicion, because most people’s accounting systems are not that perfect. When you do find a variance, you need to react properly. Fixing it is just the first step. The next step is to find out why the error happened in the first place. Was there a breakdown in control further up the chain that you need to find? The final aspect of variance analysis is not relying too heavily on automatically produced reports. How do you know those reports are right? You’d better have some controls around making sure that report is right and is actually pulling the information you want. If you’re pulling the information through some sort of data query, if somebody adds a column or changes things in a database, your report may not work right anymore. So you have to be careful about the reports themselves and make sure that they’re still pulling accurate information in the way that you want.
Is your variance analysis finding anything? If it’s never finding anything, maybe your thresholds are too high. VALUATION This is an area where judgement really comes into play. While it’s not your job to be a valuation expert, you at least need to understand how the valuation experts’ model works. You need to know what the critical assumptions are. And you need to know how sensitive those assumptions are. If one assumption varies the valuation by 50%, you obviously want to make sure you’re really comfortable with that assumption. You have to ask the right questions of the valuation experts and learn in that process. That’s the key, being willing to ask those questions, not expecting to be the expert in everything, and being humble enough to say, “Explain this to me, and maybe explain it again.” Because you are responsible for the results of those numbers that are going in the financial statements. Finally, valuation is something everybody should have at least some knowledge of. You need to have an idea of what the major types of valuation are in your field … so when the valuation expert comes to you, you can know whether the valuation methods they used make sense for your business.
PERSONAL BIAS We all have to worry about our own unintentional biases. It’s easy to explain something away to yourself: “Oh, I’m doing this for this reason. I’m doing that for that reason. It makes sense.” And before you know it, you’ve crossed the line, and everybody is saying, “How could you possibly make that decision?” If you’re a little humble, you don’t think you have the answer to everything, and you rely on others; a lot of times that will keep you out of trouble. But don’t be so humble and so reliant that you subvert your judgement to others. You still have to be smart enough and confident enough to ultimately make those good judgements, so there’s a balancing act there. And keeping that balance throughout your career is very important. n
December 2015
Photo by Goldmund/iStock
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AWARENESS
IS YOUR SECURITY BLANKET CIMA and Airmic have created a risk-identification framework that can help executives find peace in preparation and knowledge. By Gillian Lees
Photo by Goldmund/iStock
O
rganisations can find all sorts of ways to trip themselves up. A recent CGMA survey of 1,300 executives across the world found that 60% agreed that they faced a wide array of increasing and complex risk issues. Quite understandably, there is a desire to comprehend what goes wrong and, perhaps more importantly, what needs to be done to put things right. During the past 20 years or so, policymakers have responded on many levels with legislation, such as the Sarbanes-Oxley Act in the US, the introduction of corporate governance codes in many countries across the world, and the development of risk-management frameworks such as the one created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). More recently, particular attention is being paid to corporate culture. In the UK, the Financial Reporting Council, which oversees the corporate governance regime, is leading a project to provide guidance to boards on setting and embedding the right culture. Its existing guidance on risk and internal control, published in September 2014, emphasises the importance of setting the right risk culture in part by ensuring that performance incentives do not trigger excessive risk-taking. While culture is important, it seems that failure to understand how the different parts of the business come together to create value in the context of the external environment — the business model, in other words — is also a factor. In their Roads to Ruin report, researchers from Cass Business School investigated 18 high-profile cases of major risk
events and identified seven key issues that were described as dangerous underlying risks. These included inadequate leadership on ethos and culture, but also blindness to inherent risks, such as risks to the business model or reputation. (Also see “Resilience Through Rapid Response,” CGMA Magazine, Issue 2, 2014, page 16.) Boards appear to lack the right tools and information to enable them to have an effective risk conversation that focuses on building resilience and protecting reputation. A McKinsey survey revealed that directors “struggle to understand and make time to manage business risks — one of several areas where directors indicate room for further improvement.” What is needed, therefore, is a practical framework to help boards engage more effectively with the key risks to their business. The basic idea is to paint a far more coherent picture of the organisation’s risk universe. The two core building blocks underpinning the framework are the business model and the risk-management process.
INTRODUCING THE BUSINESS MODEL The business model is defined in the International Integrated Reporting Framework as the organisation’s “system of transforming inputs, through its business activities, into outputs and outcomes that aims to fulfil the organisation’s strategic purposes and create value over the short, medium, and long term.” A thorough understanding of the business model within the context of the external environment provides a
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sound basis for identifying risks and opportunities. The inputs and outputs of the business model are expressed in terms of the “six capitals” — the organisation’s key resources and relationships: financial, manufactured, intellectual, human, natural, and social and relationship. This ensures a broad, integrated view of value creation, which takes intangibles as well as externalities into consideration. A chart of the business model showing the value-creation process in the context of the external environment is available with the online version of this article at tinyurl.com/q95euc9.
THE RISK-MANAGEMENT PROCESS Setting the risk context The business model needs to be applied to a robust risk-management process. This is illustrated in Figures 1 and 2, which show an iterative cycle of setting the context against which risks can be assessed, treated, and subsequently monitored and reported on.
Risk assessment An essential element of the risk-management process is risk assessment. Typically, a risk register or inventory is developed, identifying a series of possible risk events. The benefit of using the business model as the basis for risk identification is to ensure that risks are viewed in an integrated way over the short, medium, and long term. This should help the board better understand cause and effect, giving it greater assurance that it has line of sight over all the principal risks. Understanding the quality of key inputs, such as people or relationships, may help the board assess whether the organisation is setting up potential problems for the future, such as poor customer/patient care or industrial accidents. An events-based risk register or inventory might not pick up such broad-based risks that may play out over the longer term. A more systematic approach is to use the four components of the business model (inputs, business activities, out-
Figure 1: The risk context
n Purpose n Values n Behaviours
n Controls n Key risk indicators n Change programmes n Strategies
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n Activities involved n Stakeholders
involved
Culture
Process
Actions
Content
n Registers n Reports n Mapping n Assessment
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puts, and outcomes) as a basis for identifying risks within the context of the external environment, as shown in Figure 3. This process of identification creates the basis for an integrated risk analysis and evaluation, which informs how the risks need to be managed. Figure 3 shows that risks need to be identified for each component of the value-creation process. For example, in relation to inputs, each of the six capitals needs to be considered in terms of cost availability and quality. The outcome of this process is a systematic identification of all the risks related to inputs, business activities, outputs, and outcomes. Figure 3 shows the key considerations relating to each category. These key considerations can then be integrated and analysed to create a principal risk narrative. For example, an organisation may identify a risk that it is not able to access talent in sufficient numbers with the required skills to deliver its services effectively (a risk to an input). It can track this
risk through the business model by connecting it to the risk of process failure (risk to business activity), resulting in poor service delivery (risk to output) and, ultimately, damaged reputation (risk to outcome). This process should also flush out risks that have been missed. It enables risks arising from the different capitals to be integrated. For example, poorly trained people combined with inadequate equipment may result in poor customer experience and, at worst, a serious accident. This process of integration enables a richer risk assessment by: ■■ Identifying recurring or particularly strong risk themes, such as safety. ■■ Developing a more comprehensive understanding of causes, effects, and consequences, leading to more complete risk responses. For instance, an organisation may address the risks of poor service delivery by investing
Figure 2: The risk-management process — including the risk context
Establishing the context
Risk assessment
Communication
Risk identification
and
and consultation
Monitoring
Risk analysis
review
Risk evaluation
Risk treatment
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Figure 3: Managing risk through the business model
Inputs
Business activities
Outputs
Outcomes
n Financial
n Strategy
n Products
n Manufactured
n Processes
n Services
n Market share n Reputation
n Intellectual
n Projects
n Finances
n Profitability
n Human
n Incentives
n Infrastructure
n Social and
n Distribution
n Intellectual
n Share price n Customer
relationships
property
n Natural
Consider: n Supply and demand n Cost n Availability n Quality
Consider: n Changes to activities n Process n People n Technology
About the framework and a call for feedback The Chartered Institute of Management Accountants (CIMA) has been working with the UK-based risk-management association Airmic to develop the framework described in this article. The project builds on Airmic’s sponsorship of two seminal reports, Roads to Ruin and the follow-up report Roads to Resilience, with its eight cases of risk-management successes. CIMA is refining its initial thinking to develop a practical framework. The organisation is seeking input on what readers think is the most useful way of looking at a business to identify risk. Send feedback to Gillian Lees at gillian.lees@ cimaglobal.com. More risk-management resources, tools, and case studies are available at cgma.org/risklandscape. More information about Airmic is available at airmic.com.
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satisfaction
n Brands
n Sustainability
Consider: n Supply and demand n Quality n Consistency n Distribution n Distinctiveness
Consider: n Stakeholders n Risk and reward n Long-term viability
in staff training, which may prevent short-term problems. However, in the longer term, it may be necessary to address the talent issue at a deeper level by collaborating with education providers, automating processes, and/or outsourcing some activities. Based on this risk analysis, therefore, the organisation can determine appropriate risk responses over different timescales and at three levels: strategic, tactical, and operational. Some risks will be relatively simple, demanding a relatively straightforward operational response. Others, such as the example above of poorly trained people combined with inadequate equipment, will benefit from being viewed through the lenses of the different capitals across all components of the business model to generate appropriate risk responses at the strategic, tactical, and operational levels. n Gillian Lees is head of research and development at CIMA, where she develops thought leadership on governance and risk. She also teaches risk management at the London School of Economics.
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The board risk conversation Based on the risk-management process, management should be able to determine what risk information is material for the board report as follows:
The risk-management process, including the risk context.
Conversation points: ■■ Setting the context and tone from the top. ■■ Is the risk-management process effective? ■■ Are we picking up all the principal risks?
Report on the recurring and dominant risk themes, eg, safety.
Conversation points: ■■ Would we expect these to be dominant themes for our business? ■■ Are there other dominant themes we should reasonably expect to see? What are we missing? ■■ Are the risk responses consistent with our risk appetite and risk culture? ■■ Is our risk culture giving rise to these risks? Are we getting people to do the right thing?
Report on key business model risks.
Each headline risk would be supported by a strong narrative, which explains detailed causes and consequences, integrating all aspects of the business model and indicating a range of risk responses at the strategic, tactical, and operational levels. These risks would form the main part of the board risk conversation and would need in-depth discussion, relating the risks to risk culture and appetite as well as changes in the external environment. Conversation points: ■■ In view of these risks, is our business model fundamentally sustainable? ■■ Are we comfortable that we are not risking catastrophic loss? ■■ What metrics do we need to monitor these risks? ■■ Are these risks and proposed responses consistent with our risk appetite and culture? ■■ Is our business model giving rise to additional risks? Are we encouraging the right behaviours? What the board receives is integrated and focused risk information that is underpinned by the logic of its business model, which should help it spend its time on the risks that have the greatest potential for damage. By using the business model as the basis for the risk-identification process, boards also avoid the trap of focusing only on strategic risks and missing operational disasters that cause reputational damage. As we saw above, risks identified through the business model should be considered on every level — strategic, operational, and tactical.
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SURVEY DATA
PATHS TO
SUSTAIN BILITY According to a global CGMA survey, management accountants see the value of reporting on environmental and social (ES) factors.
Key business areas for which respondents provide ES information to decision-makers:
76%
risk management
INFORMATION SHARING it’s their 60% believe responsibility as a management accountant to include ES factors
include relevant 45 % ES factors when providing information and analysis to decision-makers
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SHARING BY AREA
84% strategic decisions
69%
project and investment appraisals
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BARRIERS TO INCLUSION
Management accountants who do not report ES information give the following reasons: say no 60 % demand 34% from decision-makers
say ES 75 % issues can impact cost,
believe it’s not part of their role
38 % say systems
and processes don’t support the inclusion of ES data
risk, and value
33 % say data are
ASSESSING THE BENEFITS
unavailable/ unreliable
31% lack knowledge or
believe 71 % ES issues impact financial performance
agree there are say ES 67 % significant benefits 69% issues to including ES factors in are relevant to
training
organisational decisions
their organisation
GLOBAL VIEWS Percentage of respondents who agree there are significant financial and commercial benefits from integrating ES factors into decisions:
63% 65% 67% 69% 88% in the Americas
in Europe
in the Middle East
in Asia Pacific
in Africa
Redressing the Balance: How Management Accountants Drive Sustainable Corporate Strategies, cgma.org/Resources/Reports/Pages/redressing-the-balance.aspx.
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A BETTER FIT FOR
Photos by Brent Clark/AP Images
FRANCHISES
CFO in a Box, the centralisation brainchild of CFO Joey Pointer, leads to a smoother-running finance operation for Fleet Feet Inc. By Neil Amato CGMAMAGAZINE.ORG
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franchised stores. The result was Pointer’s CFO-in-a-Box programme — and an illustration of how finance transformation can succeed at small and midsize businesses. The programme, which started with the opening of Fleet Feet’s first company-owned store, employs accounting professionals to maintain stores’ financial records and to coach owners on finance. Currently, 12 full-time finance professionals help owners interpret, react to, and plan for the financial situations their business will encounter. It has made for a stronger company, Pointer said. Fleet Feet, which specialises in running shoes and other fitness equipment, has nearly doubled its store count since 2009. Its revenue is up 32% in the past three years — growth born through a strategy of acquiring independent stores across the country.
OWNERS FOCUSED ON FITNESS, NOT FINANCE
Joey Pointer’s CFO-in-a-Box system lets Fleet Feet’s franchisees focus more on customers and less on finance.
hen Joey Pointer, CPA, CGMA, joined Fleet Feet Inc. in 2004, he saw enthusiasm amongst the small US retailer’s franchise owners. But Pointer, the company’s CFO, didn’t see well-organised financial statements. A successful store owner insisted he had $700,000 in cash on hand. Pointer’s calculations showed closer to $150,000. And major expenses such as payroll were missing from the owner’s version of the books. This was a problem. And Pointer saw an opportunity: Create a remote financial management system that would centralise financial information among most of Fleet Feet’s 155 stores — and create order out of reporting chaos in the books of what is now a combination of company-owned and
W
The headquarters view of individual stores’ finances gleaned by CFO in a Box is critical in a company such as Fleet Feet. Rather than competing on price, Fleet Feet focuses on staff expertise to win customers. It offers running clubs, training programmes, and highly individualised service. To wit: The company helps analyse customers’ gaits to ensure they’re getting the best shoe for the way their feet land. This approach helps Fleet Feet differentiate itself from competitors such as the US brick-and-mortar behemoth Dick’s Sporting Goods and online giant Amazon. Many of the stores are managed or owned by people who are perhaps fitness fanatics first and finance managers second. “I was probably spending 10% of my time dealing with financials, when Joey & Co. took over,” said Jeff Wells, who owns two Fleet Feet stores in Richmond, Virginia. “They were doing it more efficiently; it was in their wheelhouse. I felt that burden taken off of me. I felt free.” John Dewey, who owns two North Carolina franchise locations, also felt that freedom. As the owner of independent stores that were converted to Fleet Feet franchises, Dewey spent time keeping the books or hired a local CPA to do the job. His background is in physical therapy, not finance. “I really enjoy the fitting process, watching people walk and run, and trying to figure out their biomechanics and what will work best with them,” Dewey said. “Interacting with customers — that’s where I thrive.” Pointer’s initiative has done more than help owners get more time with customers. It has caught instances of credit card fraud, employee theft, and hidden credits from vendors. It has led to the purchase of a group insurance policy for runners in the stores’ training programmes, which was costing
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How to centralise finance in a franchise model
Fleet Feet CFO Joey Pointer, CPA, CGMA, offers the following steps for bringing the finances of franchised locations under one roof: Hire one person to run the show from day one While piecing it together with several people may seem like the cheaper option, ultimately, something is going to get dropped along the way. If everyone is responsible for something, then no one is responsible for everything, so find someone who will own the programme. This person could start as an accountant, producing tangible results each day in addition to overseeing everything. Or the manager could oversee several other functions in the company, but ultimately there needs to be one “CEO” of the programme.
tries have been made, the last date various accounts have been reconciled, and when a month is “closed”. We have a giant, colour-coded spreadsheet that we use to evaluate our accountants’ performance. Establish a primary point of contact for customers Don’t have a data-entry person call with a question in the morning and an accountant call with a question in the afternoon. Have one person who is responsible for communicating everything with the client, and allow this person to become someone the client trusts with their financial information.
Create an organisational hierarchy A well-trained data-entry staff can enter bills, receipts, and sales information more accurately, which will free up your team of Automate accountants to perform higher-level functions and analysis. Constantly hiring, training, and managing staff is exhausting, especially in the early phases, when your bigger focus Determine pricing structure upfront is on adding clients quickly. Automating as many functions It’s more difficult to change prices once a customer — in this as possible enhances the ability to expand quickly. case, the franchise owner — has become accustomed to a set price. Even if you offer a deal to early adopters, do it with a It won’t happen immediately, but be prepared to run an clear end point. For example, “half price for the first year”. accounts payable department The more bills that come through, the more you need a Develop systems team of people to help ensure your client’s records match For data entry, you will need systems to track who has entered those of the vendor. The most noticeable error to your what documents and where those documents reside. For month- customers is one involving payment of bills, so you need a end accounting work, you will need systems to track what enteam in place to prevent these errors from occurring.
the individual stores far more than chain-wide coverage does. CFO in a Box also works by providing forward-looking advice and allowing franchise owners — some of whom left careers in rocket science, engineering, and teaching — the freedom to talk running and running products with their customers.
PILOT PROJECT The programme unfolded like this: A store Wells opened in Nashville, Tennessee, in 2004 was the test case for CFO in a Box, as the first corporateowned location. Wells ran the front of the house — basically, everything the customer could see. Pointer, meanwhile, handled the finances on Wednesday nights and Saturday
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mornings from Fleet Feet’s headquarters in Carrboro, North Carolina. Fleet Feet was opening other locations, and especially in some of the franchised stores, it was easy for spending to get out of control: A marketing budget of $50,000 suddenly became $85,000. The buildout costs to prepare a store for opening sometimes went from $100,000 to $150,000 or more. “We didn’t have visibility to everything that was going on,” Pointer said. “We were always reacting to data that was six months or nine months too late to really make an impact.” The task of finding a local bookkeeper for a growing number of locations seemed daunting. With no finance staff to speak of, Pointer was “boot-strapping”, trying to
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prove that his idea could work, even if the pricing structure wasn’t feasible in the long term. He was convinced that the headquarters, which had a view of all franchises and company-owned stores, was the best place to have financial oversight. Pointer began teaching part-time Fleet Feet employees to be his eyes and ears for the stores’ finances. Bit by bit, more stores’ financial health was monitored. By 2009, eight stores were taking part in CFO in a Box. Even remotely, he took pride in the level of service offered. “At our stores, we compete on experience,” he said. “You can find the product cheaper at other places, but you won’t compete with the knowledge and experience [of staff]. With CFO in a Box, we’re competing on that same knowledge and experience. We’re going to give you an unbelievable experience and level of service that you just can’t find at the local level.” Today, CFO in a Box is voluntary for franchisees, who pay 0.75% of sales (for a store that has $1 million in annual sales, the fee is $625 a month). About two-thirds of the stores participate. Fleet Feet’s finance department offered full and light ver-
sions of CFO in a Box early on. The light version cost less, stores did their own data entry, and the staff at the headquarters handled month-end close and reconciliations. Pointer said the staff spent more time correcting mistakes than they would have if they had done the data entry themselves. Today, the service is all or nothing.
BUILDING TRUST In addition to giving store owners time savings, CFO in a Box gives them someone they can trust. Pointer said he knew the programme was doing well when he started receiving non-finance questions from owners. “I’d get a phone call about something like what e-fax service we used,” he said. “It was something that had nothing to do with the financials, but they had a high degree of confidence.” Part of the reason was strong hiring. Just as the stores are focused on delivering a customer a great fit, the finance employees take steps to build relationships with the franchise owners beyond a monthly call to go over the balance sheet. If the finance staff have been to the retail stores, they are better able to understand and relate to the challenges faced by the franchise owners. When a Fleet Feet store in Boulder,
Joey Pointer stands in front of employees on a lunchtime run at Fleet Feet’s corporate headquarters in Carrboro, North Carolina.
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Colorado, had a change in ownership, accountant Chad Gentry volunteered to take part in the inventory process for the new owner. “I said to Chad, ‘Why do you want to count shoelaces at 2 o’clock in the morning?’” Pointer said. “He said, ‘That’s when the relationship is formed. There are processes and procedures, but it’s about forming that relationship. This is a time early on when I can form the relationship with that new franchisee, so they look at me as a trusted business adviser.’”
CFO in a Box allows franchise owners the freedom to talk running and running products with their customers.
TECHNOLOGY CUTS DOWN ON LABOUR COST
another store, which had credits worth $6,000. Then he asked for a company-wide spreadsheet for credits from Nike. The total amount was $150,000, at least half of which was from the previous year. Now, he believes, the value he provides stores is not in unearthing past oversights but in piloting a franchise forward. Because Staley sees the financials of so many other franchises, he knows when one location’s numbers are amiss. Pointer believes in presenting big-picture comments along with financials, and he creates a PDF of hand-written notes to go along with a spreadsheet sent each month to individual franchise owners. Staley and others have followed suit, offering three or four key points and then discussing those with the owner. “Those three [points] usually lead to a bigger discussion about their business and how it can be improved,” Staley said. “And that’s where the value is. We can say, ‘You’ve got an issue that’s going to lead to a bigger problem down the road if you don’t take care of it now. Your inventory’s too high, or your payroll’s been creeping up.’ ”
From 2004 to 2009, franchise owners put paper invoices into the mail for someone at the corporate office to review and input into the accounting system. That process was slow and labour-intensive, and it was too easy to have information get lost or entered incorrectly. Today, Fleet Feet uses a digital invoicing system that has cut the average time to pay invoices from about 40 days to four. Franchisees approve or dispute invoices online at least weekly, and that information is automatically sent to the “CFO” in charge and to the company’s accounting program, which is hosted on a cloud-based server. The hosting company provides technical support for franchise owners, an important outsourced task given that Pointer is the de facto IT director but spends a good bit of his time travelling to look at real estate and recruit new stores. Technological advances enable more Fleet Feet stores to pay faster, therefore taking full advantage of early-payment discounts from vendors.
ADDING VALUE WITH ANALYSIS Fleet Feet’s CFO-in-a-Box staff have mitigated franchise owners’ financial and cyber-security risk by uncovering instances of credit card fraud. The staff also can see patterns in product return rates of individual employees that might indicate a worker is stealing from the company. These are the kinds of things a busy franchise owner might not even notice, especially one starting a new store. “Something like that might have gone right under my nose,” said Wells, the Virginia franchise owner. Senior Accounting Manager David Staley, CPA, who now manages CFO in a Box, went from new guy to popular guy when he began calling stores in his first few months on the job and telling them how much money they had available to spend with shoe and apparel giant Nike. Staley learned that Nike didn’t always send a credit memo when it issued a credit for returned merchandise. In talking with Nike’s credit department, Staley learned that one store had 11 credits totalling about $4,000. Then he asked about
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WORD OF MOUTH HELPS SELL THE PROGRAMME Franchise owners are constantly talking and comparing themselves with others. If one has had a good experience or a bad one, they will be vocal. Staley said owners who first received a pitch about CFO in a Box were the people they were certain had “zero desire to ever do anything financial.” Once those owners, including Wells, could quit worrying about finance, their outlook brightened. They talked to other owners, some of whom called Staley to ask how they could sign up. These days, Staley and 11 other full-time employees manage the finances for 73 CFO-in-a-Box stores — a far cry from Pointer’s solo work on nights and weekends in 2004. The company hopes to grow to 125 CFO-in-a-Box stores by the end of 2016. “For the good of the brand, we needed this,” Pointer said. “We need good financials, which are the building blocks for any successful business.” n
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6 CATEGORIES OF KEY PERFORMANCE INDICATORS
A PRACTICAL GUIDE FOR CGMA DESIGNATION HOLDERS Key performance indicators (KPIs) are measures used to reflect an organisation’s success or progress in relation to specific short- to long-term goals.
They are useful for all types of businesses across all industries and sectors — from small to large entities and not-for-profit as well as governmental institutions. In selecting and developing KPIs, it is important to clearly define the priorities and limit the KPIs to those factors that are important to successfully achieving your organisation’s goals.
This summary of our latest guide for CGMA designation holders recommends a series of factors to consider when developing and implementing a performance indicator model.
DEVELOPING QUESTIONS FOR KEY PERFORMANCE INDICATORS Performance indicators should be structured in the context of the organisation’s overall mission and direction. They should be part of an overall strategic management process that connects the vision and strategy of an organisation — and its short- and long-term goals — to specific strategic business objectives and their supporting projects or initiatives. Secondly, performance indicators should focus on the fundamental core processes. Emphasis should be placed on elements that are truly central to the growth and success of the organisation. Developing key performance questions (KPQs) provides a great opportunity to engage everyone in the organisation, as well as some external stakeholders, in the performance management process.
THE FOLLOWING ARE SOME GUIDELINES FOR DESIGNING KPQS:
We have listed some example KPQs to illustrate how organisations developed key performance indicators for some of their non-financial value drivers.
EXAMPLE KEY PERFORMANCE QUESTIONS • How well are we sharing our knowledge?
KPQs should be short and clear — A good KPQ contains only one question.
• To what extent are we retaining the talent in our organisation?
Design one to three KPQs for each category of performance and capital value driver — Try to keep them to the vital few.
• How well are we promoting our services?
Involve people in the process — The more people who understand and agree with these questions, the more likely it is that everybody will pull in the same direction.
• How do our customers perceive our service?
KPQs should be formulated as open questions — Open questions make us reflect; they engage our brains to a much greater extent, and they invite explanations and ignite discussion. KPQs should focus on the present and future — By focusing on the future, we open up a dialogue that allows us to “do” something about the future. KPQs are refined through usage — Once KPIs are in use, they can be refined to improve their focus.
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• How effective are we in managing our relationships? • How well are we innovating? • How successful are we at building our new competencies in X? • To what extent are we continuing to attract the right people?
• How well are we fostering a culture of innovation and continuous improvement? • To what extent do people feel passionate about working for our organisation? • How well are we helping to develop a co-ordinated network to perform clinical trials? • How motivated is our workforce? • How successful are we at sharing one set of values? • How effective are we at protecting our intellectual property?
CATEGORIES OF PERFORMANCE INDICATORS There are two major categories of performance indicators: financial and non-financial. A performance indicator model that focuses only on financial measures will prove to be deficient in today’s fast-changing economic landscape. Well-designed KPIs should be expanded to include financial and non-financial measures and external and internal activities and events to maximise the longterm value and success of the organisation. Financial KPIs provide an assessment of the financial position of an organisation and generally are based on income statement or balance sheet components. Non-financial KPIs are other measures used to assess the activities that an organisation sees as important to the achievement of its strategic objectives. They typically include measures that relate to customer relationships, employees, operations, quality, cycle time, supply chain, or pipeline.
Below are six important categories of financial and non-financial indicators that will aid in providing a holistic assessment of the value and health of your organisation. More detail on each category is available in the full resource at cgma.org/kpis.
6 important categories of financial and non-financial indicators
Internal business practices
Financial
Human resources
The way organisations manage their underlying business processes and how they streamline and automate their work flows could transform the business, create value to both internal and external stakeholders, lead to innovation, and have a direct impact on their bottom line.
Key priorities for all organisations are building value and creating long-term sustainable success. Among the many forms of realised value, financial health is a primary indicator of success.
Employees are the greatest asset of any organisation. Meeting the needs of employees is significantly important as it is tied to the performance, satisfaction, and long-term success and survival of the organisation.
Key performance indicators
Environmental
Competitor
Customer
The sustainability of businesses in the long term also depends on the welfare of the ecosystems. It is increasingly crucial for organisations to understand their role and contribution in protecting and maintaining the environment in which they operate.
To be successful in today’s rapidly changing global marketplace, organisations must know their principal competitors, their business models, their strengths and weaknesses, their products and services, and generally have a sense of where they are headed.
Successful companies realise that, to achieve and sustain a competitive advantage, their business strategies must address their entire value proposition from the perspective of the customer.
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THE IMPORTANCE OF COMPREHENSIVE PERFORMANCE INDICATORS Performance indicators help an organisation improve its focus and make betterinformed decisions. It also provides a great opportunity to engage everyone in the organisation as well as external stakeholders. Developing a comprehensive set of performance indicators that are relevant to the various functions of an organisation is a big task. It will take time and require a strong and collaborative effort to accomplish. It also necessitates demonstrating a need and getting senior
management’s strong support and commitment. As the business landscape constantly changes, it becomes more imperative for organisations to constantly evaluate their progress towards stated goals, objectives, and strategic directions for long-term success.
Measures that matter across industries Banking
Petroleum
Retail
Customer retention
Customer expenditure
Capital expenditure
Customer penetration
Exploration success rate
Store portfolio changes
Asset quality
Refinery utilisation
Expected return on new stores
Capital adequacy
Refinery capacity
Customer satisfaction
Assets under management
Volume of proven and probable reserves
Same store/like-for-like sales
Loan loss
Reserve replacement cost
Sales per square foot/metre
Source: PwC Guide to Key Performance Indicators: Communicating the Measures That Matter.
For more detailed guidance on performance indicators, visit cgma.org/kpis.
VISIT CGMA.ORG FOR MORE PRACTICAL TOOLS TO HELP YOU AND YOUR BUSINESS SUCCEED Essential tools for management accountants – In this collection, we bring together the essential tools used by management accountants and outline how they can benefit the majority of organisations, regardless of size or sector. cgma.org/essentialtools
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HOW TO PERFORM BETTER UNDER PRESSURE RESILIENCE:
By Samantha White
Build rapport “When you’ve got rapport, you can influence people,” Sheasby says. “Listen to people and try to understand the world through their eyes. Find something they are interested in, such as a hobby, and get them talking about it. Once they are talking, you are building rapport. You can use rapport to work with people who completely disagree with your position, and influence them.” In a conflict, listening to the structure of what someone is saying can also reveal that person’s subconscious beliefs, which can help you overcome their objection or resistance to a situation.
Be clear about your ideal outcome In a high-pressure situation, it is vital to retain a clear idea of what you want to achieve. “The goal you have in mind should be framed in positive terms, focusing on what you want to happen, rather than what you are trying to avoid,” Sheasby says.
Manage your state For communication to be effective, the nonverbal signals we send out have to be congruent with our message. When we allow ourselves to get flustered or panicked, those signals start to tell a conflicting story. Managing your state of mind helps you remain calm, resourceful, and able to think clearly.
Remember that adversity is temporary How you react to events conditions your resilience. Bear in mind that the challenge you face is temporary, specific to a particular incident, and is not a judgement on your self-worth. To illustrate the importance of how we frame things, Sheasby gives the example of a struggling business. If the CEO says to staff, “You could all be out of work in six months’ time unless we turn this situation around,” he or she has focused the workers’ minds on the prospect of losing their jobs. This engenders reactions not conducive to the organisation’s survival, such as staff deserting what they perceive to be a sinking ship. Alternatively, the leader might say, “Let’s be honest; we have got some real problems here. But just think how proud we are going to be in six months’ time when we have turned this around. And looking around me now, I know that this team has the skills to do that.” By changing the structure of the language, Sheasby explains, this statement makes the problem temporary and implies that the employees have the strength to succeed, creating a different response to the same adversity.
December 2015
Photo by Sashkinw/iStock
P
erformance coach Mark Sheasby developed techniques of maintaining composure under duress during high-stakes situations as a police firearms commander in siege interventions. He has since used that knowledge to help police negotiators, elite athletes, and businesspeople thrive under pressure. Sheasby explains how everyday professionals can build resilience and improve their performance under pressure — whether it’s in an interview, board presentation, or delicate negotiation.
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REDESIGNING DECISION-MAKING:
PENTLAND BRANDS
The sportswear manufacturer is working to promote informed decision-making and, ultimately, drive performance. By Samantha White
Photo courtesy of Pentland Brands
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ark Baker, FCMA, CGMA, has made it his mission to ensure that when colleagues throughout his business think about strategy or operational activities, they’re thinking about risk at the same time. Baker most recently did that at Pentland Brands, where he was head of planning and risk at the sportswear manufacturer. He was responsible for the business-planning process, including strategic planning, as well as the risk portfolio and principal risk assessment. His role was unusual in that it combined responsibility for both planning and risk below the CFO level. It was Baker’s objective to improve the decision-making behind strategy selection, which is one of the major risks for a business. Baker left the company earlier this year. Before he did, though, he explained how this has worked on two levels: deciding at the group level which strategic opportunities to pursue, and, at the brand level, deciding which designs to bring to market as part of a collection. The objective on both levels is to drive performance.
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Pentland owns some of the world’s top sportswear brands, which clothe leading athletes, amateurs, and hobbyists throughout the world. Speedo products and designs are used by Olympic swimmers, and in this year’s Rugby World Cup, the England and Ireland teams wore kits from the Canterbury brand. Pentland is also responsible for outdoor wear brand Berghaus, which targets explorers and climbers. One of the major risks is whether the business model is still relevant and whether it will continue to be relevant in the medium and longer term. That involves extrapolating some of the trends and changes that are happening and asking, “What is the world going to look like in a few years?” and “Will we still be geared up to succeed the way we are now in that environment?”
FUTURE-PROOFING THE BUSINESS MODEL Trying to work out what the company needs to succeed at in the future is one of the methods the company has adopted to manage some of its longer-term risks, as well as to give Pentland a better chance of grasping opportunities that might
Pentland Brands, the global licensee of Ted Baker and other footwear brands, is using data to make better decisions about which products to sell.
have been missed in the past. Knowing which initiatives are going to be important to Pentland in the near future enables the company to put work into building the supply chains required and ensure they are working with the best partners to achieve those goals, Baker said. Involving a wider group of people in this process — “visioneering,” as Baker called it — reaped rewards. Bringing younger members of the leadership team into the conversation helped the company realise that it needed better organisation to succeed in the future. Pentland has also sought to improve its ability to identify opportunities in its markets, creating attractive propositions for those markets and being ready to manage complex global extended supply chains. As part of the transformation, Pentland made changes to its organisational structure in early 2015, creating new roles with oversight across the various brands to encourage best-practice sharing across the supply chain, product and marketing, and strategic customers. The organisational changes prompted the creation of three new roles: a global marketing director, a global cus-
tomer director, and a global supply-chain director. Each is to apply his or her functional expertise across Pentland’s 12 brands to ensure a consistently high standard is maintained across the whole portfolio. Pentland’s visioneering identified two trends that make this move important. The first is that the way brands are positioned will change significantly over the next five years, becoming more about a relationship with the consumer. The second is the volume of available data (about consumer preferences, their thoughts on a particular brand, and so on) that can guide strategy selection and the relationship the company has with its customers. Previously, the company was not equipped to use those data to the best advantage of the whole business. Improved alignment between the brands will make such data easier to interpret and act on. Aligning the individual brands has enabled the company to become more responsive from the customer’s perspective, and it makes it easier to spot important opportunities with customers around the world. The heads of each brand and the functional leads are now
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reviewing strategy and risk together. Rather than dealing with half a dozen representatives of the different lines, management can talk to the functional lead, who can see the picture across the whole business and can implement any changes fairly quickly across the organisation as a whole. The company expects to see the benefit of that approach in the next year or two.
Mark Baker, FCMA, CGMA
STRATEGY SELECTION One of the major risks facing any business involves strategy selection, and spreading resources too thin over too many different initiatives itself is a risk. Therefore, informed decision-making to ensure resources are directed to the most important value-creating strategies is vital to mitigating risk. The heads of the various brands and the functional directors undertake a situational analysis as the first step in deciding where to focus planning efforts. This requires Pentland to spend more of its planning resources focusing on the key value-creating opportunities, rather than taking time on each of the options, regardless of the size of the potential benefit. Entry into a new market, for instance, may involve developing a range of products that are specific to that market across
Photo by Anthony Upton/AP Images
Example of market assessment: China Looking at market trends in China, the Pentland team observed that there had been a boom in the construction of 50-metre swimming pools, which suggested participation in swimming would increase. This presented an opportunity for the Speedo swimwear line. The team assessed the potential market growth and the specifics of the market, asking questions such as “How do consumers make purchasing decisions?”, “Which channels do they use to make their purchase?”, and “Does the product need to be customised or adapted for the market?” The Speedo brand has now had a presence in China for more than seven years. The growing success of the Chinese national team at the Olympic Games (including five gold medals in swimming in London in 2012) inspired more people to get involved in the sport. There is also a greater awareness across the country of the health benefits of swimming, all contributing to increased participation over the past eight years. In contrast, in a mature market such as the UK, swimming participation has decreased in recent years, making China a golden opportunity for Pentland.
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a number of the businesses. That involves a co-ordinated approach. “You can’t do too many of those things, so you really want to find what the big winners are,” Baker said. “You’re trying to assess these opportunities, even put a value on them if you understand the market and where you’re trying to target.” A key part of governance is ensuring that the information on which people are basing decisions is of high quality. Evaluating an opportunity such as a new market or a new product category involves asking the practical risk questions at the same time, another advantage of having a combined risk and planning role. These include “What might get in the way of us achieving that?”, “If we were to pursue that strategy, could there be any unintended consequences we haven’t thought of yet?”, “Are we organised to deliver it?”, and “Do we have the talent to pull it off?”
OUTCOMES As a result of building risk concerns into the strategicplanning process, Pentland has started to see greater transparency around why management teams selected a particular strategy, as well as about the risks associated with that particular strategy. Baker observed a change in risk discourse and dialogue within the company. People know that they must think about risk when they are presenting their plans. In review meetings, “everybody’s expecting to see questions both on how you have evaluated the option and selected it against other choices, but also transparency about assessing the risk,” Baker said. Staff have seen the approach translate to greater profit and are motivated to want more informed decision-making, he said.
PRODUCT SELECTION Another way of managing risk in the business is through improved planning capability. In fashion and footwear, new product development and selection is crucial given large collections and short life cycles. Baker equipped design colleagues with skills and data to
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make more informed choices about which products make the collections. Before the project, the brands were producing a number of items that were underperforming and therefore not adding value. Baker realised that the quality of the controls being applied to product selection was not consistent across the business, and he came up with a framework to address this, carefully. “It’s all about balancing control and creativity,” he said. “You don’t want to stifle entrepreneurship, but you still want to have control. “It’s actually counterintuitive,” Baker explained. One might think that in a fashion collection, the more choice the consumer has, the better a range will do. “In today’s world, given a lot of macroeconomic changes, such as the continued retail price deflation in footwear and apparel, and the reduction in Asian manufacturing capacity since 2008, you can’t really afford to do that,” Baker said. “… You could quite easily choose a lot of products that don’t perform, but you’ve lost a lot of resources and cash out of the business.” With better controls in place, Pentland has been able to remove superfluous products from its collections and generate greater profit as the design and development effort is better targeted. The approach instituted by Baker involves forecasting the volume of each product that can be sold by looking at factors such as market size and where the growth is coming from. If you calculate, for example, that you can sell 100,000 pairs of shoes, and each style will sell about 1,000 units, you only need to design and develop 100 styles. Previously, teams may have been designing up to 200 pairs, but now that they have guidance from the data, they look at collections with a much sharper lens and eliminate products that do similar things for the same target customer. The key is encouraging staff to anticipate the outcome of their decisions, constantly projecting the performance of the portfolio as it is being designed. That involves forecasting, planning, scenario planning, and incorporating risk in decision-making. One of the initial changes brought about was to stop brands producing any items that the analysis indicated had a high likelihood of being a loser. “There is much more forecasting done about the likely volume of business that will be done by selecting one product compared to another and then looking at the whole portfolio and asking, ‘Does that stack up?’ ” Baker said. This has worked in reducing the amount of cannibalisation, which dilutes financial returns for the amount of development effort, enabling teams to select what they believe is the optimum portfolio of products to launch into the market.
Designers are now using more “feed forward” information: As the project goes on, designers also get to see feedback, including productivity information, so they can track how good they are at deciding which designs should go into a collection, all of which helps motivate them to implement higher-quality controls in their decision-making.
COMMUNICATING RISK To help colleagues improve the quality of a risk assessment, Baker put it in practical terms, asking questions such as “How have you made this decision?”, “What information have you used, and what thresholds are acceptable?”, and “What should you be doing that you’re not?” The way you present performance information is also crucial. “A lot of the effort ... is thinking through how we can get the information across in the simplest, most powerful way to our very broad bunch of stakeholders,” Baker said. “... Simple tools like risk heat maps have been useful to help people who aren’t normally thinking about risk to start getting engaged with it.” Spreadsheets appeal more to the accountants and the technical side, whereas graphics, such as heat maps, are a more effective way of reaching commercial and design colleagues, Baker added. Waterfall charts give the company a graphical way of representing the progression from one profit measure to another, breaking it down to show where the change came from. For example, a block in the chart could represent $1 million that came from cost savings. Another could represent $2 million from a new venture, and so on. Communicating performance information quickly and effectively allows a business to adapt and respond when something is not working, another part of managing risk. The sooner you can get people to realise what is and isn’t working, the sooner they can take action to rectify it. Baker and his team helped to provide frameworks and approaches to incorporate risk considerations into the day-today work of other teams. And he was able “to show that where you improve risk management … you can improve performance,” he said. That motivates people to engage with risk and look for better ways of doing what they are doing. Now, Baker said, people are saying, “I can see why forward-looking at risk is so important for our long-term success.” Improving performance is the reason Baker promoted more informed decision-making. “When that is your driver,” he said, “you then get focused on the real risk, and that engages everybody, from the board all the way through the business.” n
December 2015
TAMING THE EMAIL BEAST By Neil Amato
mail can morph into an after-hours monster for some workers. One top regret of managers is checking in too often whilst on holiday, according to research by staffing firm OfficeTeam. No doubt, this is a byproduct of the email beast. Setting proper digital boundaries can help you feel more refreshed upon return — and can help employees learn communication discipline. A recent Gallup poll shows that employees who spend time outside of work checking email are more likely to experience stress than those who don’t. Stefany Williams, CPA, CGMA, the CEO of Goodwill of Western Missouri and Eastern Kansas, is an advocate of “going dark” during time off. Here is her advice:
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Pay attention to what motivates you to check your email relentlessly — and make it stop
Photo by triloks/iStock
“For me it was the light on my phone blinking across my kitchen at 9pm while the phone charged,” Williams says. “That’s where I started reclaiming my ground. I turned that blinking light off and started checking the email on my terms instead of the phone’s terms.” She suggests disabling email notifications.
Talk with your boss and your team Get clarity on the expectations about response times and protocol for urgent situations. “This is fairly easy if you are sitting at your desk,” Williams says. “If you are in the field, more clear expectations need to be in place.” Make sure
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“No one is at their desk every minute of every day.” — Stefany Williams, CPA, CGMA
people who may need to reach you know about your change in response patterns and how it will affect them.
Do not combine personal and professional mobile devices to save money Many people don’t like the hassle and cost of having two phones, but having one often means workers give up the ability to separate work and personal life. “This was not a fair trade,” Williams says. She suggests doing a cost/benefit analysis of “the restorative power” of time away from work. The cost of a personal phone will be worth it, she says.
Set a good example with email at work to make your organisation more efficient Williams advises setting calendar appointments to check and respond to email, say 15 minutes every three to four hours. Training employees to be more disciplined with email is an ongoing process, as workers have grown accustomed to getting immediate replies. “No one is at their desk every minute of every day,” she says.
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