Five-star accommodation Laurence Yuen, of Shanghai Jin

Transcription

financial management November 2007
14
The descent to
Avernus is easy:
how small issues
easily grow into big
ethical dilemmas
www.cimaglobal.com
16
Terminal situation:
the economic impact
of the global shipping
industry’s impending
capacity crisis
24
“Yes, please, minister”:
why companies’
corporate lobbying
activities are coming
under the microscope
November 2007 £4.50
financialmanagement
Five-star
accommodation
Laurence Yuen,
of Shanghai Jin
Jiang International
Hotels, on China’s
tourism boom
Technical matters
Customer profitability
Transforming finance
Performance measurement
Finance business partnering
Study notes
Paper P1 Management Accounting – Performance Evaluation
Paper P3 Management Accounting – Risk and Control Strategy
>inbusiness
Gordon Grant
CIMA president
Photograph: Charlie Hopkinson
collaborative
projects around
the world keep
cima at the cutting
edge of innovation
The global business community
is well aware of the seismic shifts
that are transforming how and
where we do business. More
crucially for CIMA, these shifts
are highlighting the scope and
intensity of competition around
the world in the war for talent.
CIMA, which was
commissioned last month by
the World Bank to lead a project
to strengthen the capabilities of
the main accountancy body in
Bangladesh, is playing an
increasingly important role in
helping developing nations to
improve their financial and
business management skills.
It’s vital that enterprises in these
expanding economies can
operate with confidence and
integrity in the global
marketplace. The institute will be
the sole expert supplier to the
Ministry of Commerce and the
Institute of Cost and
Management Accountants in
Bangladesh. The project, funded
by the World Bank, will provide a
model for CIMA to collaborate on
similar programmes for other
developing nations in future.
Part of CIMA’s recognised
value to employers, regardless
of whether they operate in
developed or developing
economies, is that we don’t
simply educate people to
become technical accounting
experts. We advocate a much
wider role for the finance
professional in supporting other
parts of the organisation.
Employers expect us to
anticipate the skills required to
develop their finance
professionals of the future.
The institute is delighted,
therefore, to announce the
launch of the CIMA Centre of
Excellence at the University of
Bath School of Management.
Uniquely, the centre will conduct
longitudinal, independent,
international research into the
knowledge and skills needs of
finance professionals. It will
investigate how these
requirements change over their
careers and how to develop best
practice in order to meet them.
The objective is to maximise the
value that financial managers add
to their organisations.
As far as we’re aware, this is
the first time that a leading
professional body and academic
institution have come together to
investigate these issues with a
sole focus on finance
professionals. Although
anecdotal evidence is available,
the centre will use rigorous
academic research to find out
precisely what changes are
taking place within the finance
function and what this means
for management accountants
over the long term. In this way
CIMA will remain at the
forefront of innovation in the
profession’s development.
I was delighted to represent
UK accountants in business
last month at the first of three
global forums for management
accountants. The 2007
International Financial
Executives’ Leadership Forum in
Montreal was jointly hosted by
the Society of Management
Accountants of Canada (CMA
Canada), the American Institute
of Certified Public Accountants
(AICPA) and CIMA under the
theme “The future role of
finance”. Delegates from all over
the world attended this powerful
and inspiring event. Next year’s
forum will take place in
Washington DC and 2009’s will
be hosted by CIMA in London.
We work in partnership with
AICPA and CMA Canada
because of our shared focus on
management accountancy. We
have already co-operated to
produce highly topical
management accounting
guidelines (MAGs) that are
relevant to accountants in
“
The institute is
delighted to
announce the
launch of the
CIMA Centre of
Excellence at the
University of Bath
School of
Management
business around the globe.
We also work together to host
infocasts, which allow members
of all three bodies to listen to
expert presentations online.
These innovative
collaborations raise the profile of
the profession globally and
provide exclusive intellectual
property to the three bodies’
memberships and, in turn, their
employers. The MAGs and
infocasts can be accessed in
your My CIMA section of the web
site, under “CIMA Professional
Development Centre”.
CIMA is the Chartered Institute of Management Accountants, 26 Chapter Street, London SW1P 4NP.
Tel: +44 (0)20 7663 5441 President Gordon Grant FCMA Deputy president Glynn Lowth FCMA
Vice-president Aubrey Joachim FCMA Chief executive Charles Tilley FCA
financial management
Contents
CIMA, 26 Chapter Street,
London SW1P 4NP
+44 (0)20 7663 5441
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Editor Ruth Prickett
Chief sub-editor Neil Cole
Creative director Nick Dixon
Art director Erroll Jones
Art editor Clare Meredith
Account manager Tina Franz
Publishing director Jules Rastelli
08
08 One2one
Laurence Yuen,
joint company
secretary at
Shanghai Jin Jiang
International Hotels
(Group), on the
unique challenges
of being a CIMA
member in China.
Advertising
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All payments should be in sterling
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CIMA reserves the right to grant
permission to reproduce articles.
Opinions expressed in FM are the
authors’ own and do not necessarily
represent the policies of their
employers or CIMA council. Caspian
Publishing and CIMA accept no
responsibility for views expressed by
contributors. The publisher reserves the
right to refuse, cancel, amend or
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Total average
net circulation
(Feb 2007):
155,665.
16
04 Letters
Pensions; changing CIMA’s name;
FM’s new design and UK focus.
06 First in…
All the latest news affecting
accountants in business,
including regulations updates.
12 Opinion
12Northern Rock’s trial by media.
14A real-life ethical dilemma.
29 Career
development
Change programmes: how to lead,
how to follow and how to survive.
33 Technical
matters
Delving into the detail of
management accounting.
33Customer profitability.
36Transforming finance.
38Finance business partnering.
43Performance measurement.
47 Study notes
Your guide to entering, taking and
passing the CIMA qualification.
47Student one2one:
Ozgur Kilic, head of oncology
finance, Novartis, Milan.
48Exam tips: paper P1
Management Accounting –
Performance Evaluation.
54Exam tips: paper P3
Risk and Control Strategy.
58Exam notice: important
information for candidates
and passed finalists.
16 Shipping
forecast
Ports worldwide are
suffering a capacity
crisis. Could this
seriously weaken
your supply chain?
24 Lobby
correspondence
Why investors and
analysts want to
61 Institute update know what your
CIMA news and a diary of events. firm’s doing to win
friends and influence
65 So you want
policy-makers.
to be…
What a job as front-office business
and project manager entails.
72 … Last out
Bizarre communications from
the wonderful world of business.
54
>letters
Please send letters to: Financial Management, Caspian Publishing,
198 King’s Road, London SW3 5XP. E-mail: nc1@caspianpublishing.co.uk
Photograph: Getty Images
Penalty zone
Your news item “Pension penalty” (First in,
October) indicates how accounting standards
that apply to pension schemes seem to have
a misleading and, sometimes, damaging
effect on company accounts without
providing any benefit either to shareholders
or – a more important factor to me – to
members of occupational pension schemes.
As I understand it, FRS17 requires
companies to value their pension scheme
assets as if they were all in class-A bonds.
This has actually influenced the investment
policy of some schemes, which is surely not
what accounting standards are about.
Now we learn that IAS19, when
combined with IFRIC14, could cause Alliance
Boots to take a £418m “hit” on its balance
sheet. (I’m not sure what the opposite entry
on the balance sheet would be.) Surely there
is something wrong with the logic of our
standard-setters, one of which is presumably
our own institute?
Has CIMA, or any of its members who
may be experts in this field, any comment to
make? As far as members of pension funds
are concerned, the only sensible way to value
a fund properly is at a buy-out valuation.
Bernard Potter FCMA
Secretary of the Royal Ordnance Pension
Scheme and treasurer of the Occupational
Pensioners’ Alliance
CIMA’s response:
The institute published “The pension
liability – managing the corporate risk”
(www.cimaglobal.com/pensions) under
the guidance of CIMA’s Pension Advisory
Group. This report acknowledges that
there are several approaches to
valuation, including accounting;
buy-out; pension protection fund;
and ongoing.
CIMA has also been involved
in the Report Leadership project
(www.reportleadership.com),
which features a
best-practice example of
disclosure that includes
the buy-out approach to valuation as well as
the IAS19 method.
The institute is not a standard-setter, but
it does respond to consultations from the
International Accounting Standards Board
and the Accounting Standards Board (ASB).
It also seeks members’ views on these
matters via the consultations database
(www.cimaglobal.com/cdb). Your letter raises
some complex issues that are high on the
ASB’s agenda. It’s planning research that it
says “will reconsider the fundamental
principles of pensions accounting”.
Richard Mallett FCMA
Director of technical development, CIMA
Quack shot
Jeremy Ash asks in his letter (October) if
renaming CIMA the Chartered Institute of
Finance and Strategic Management would be
a step too far. My answer? Yes, it would.
In the 20 years or so that I have been in
the profession, about half of these as a
CIMA member, virtually all my work has
concerned solid, old-fashioned accountancy,
tax and audit. I would hazard a guess that
this applies to most of the institute’s
members and students.
It may well sound cool and sexy to refer to
oneself as a “strategic financial manager”,
but the ordinary man on the street will not
understand. I go by the adage that if it looks
like a duck and quacks like a duck, then it
probably is a duck. And this means that,
whatever we may call ourselves, we are
accountants. Quack, quack!
Mark Jones ACMA
Tabloid taste
What has happened? Although
most of FM’s articles are
reasonable, the most appalling
layout has been
perpetrated. It would
disgrace a tabloid
comic.And the piece
entitled “Mates’
rates” (September)
is sheer feminism.
No more. Please may we return to a
professional journal that’s worthy of CIMA?
Alan Orme FCMA
Keeping it clean
The new-style FM looks like a first-rate
newsstand magazine. If I were buying the
Economist and Management Today, I’d pick
up FM, too. The features are interesting and
challenging, while the design is clean and
modern without being distracting. I
particularly like the “Last out” section.
Name and address supplied
British bias
I support the idea of modernising FM to make
it more interesting to all members, but the
September issue falls short of the mark. While
there is some content, it generally seems to
have degenerated into a mass of UK-centric
advertising, while the articles fail to appeal to
those members worldwide who are not UK
focused. It’s time to go back to the drawing
board and realise that CIMA is now global.
Peter Murray FCMA
Editor’s response
The FM team is well aware that CIMA’s
membership spans more than 150 nations,
although the largest group of members
based in one country is still in the UK.
We aim, wherever possible, to include articles
that are relevant across borders and we’re
always happy to consider proposals for
articles from members and students
anywhere in the world. We believe, for
example, that articles in the September issue
on public speaking, Islamic finance and
strategic audits have international relevance.
The student one2one featured a Pakistani
student working in Dubai, while the feature on
the CIMA difference covered the institute’s
global promotional campaign.
Publishing adverts is necessary in order to
reduce the cost of the magazine to the
institute. We would, of course, be happy to
accept adverts from around the world, but
FM’s key advertisers tend to target CIMA’s
largest national membership.
All the latest news affecting accountants
in business, including regulations updates
www.cimaglobal.com
>firstin…
Why Gut
reactions
rule
photography: corbis/photo library
Trigger happy? Research
has found that US police
are more likely to fire their
guns if they work in pairs.
CIMA has warned that companies
around the world are putting their
competitive position at risk by failing
to transform their finance functions
to improve decision-making at every
level. According to a new report
published by the institute,
accountants must develop a broad
range of business skills to remain
relevant in the evolving marketplace.
The report, “Improving decision
making in organisations”, was
developed using information
provided by member bodies of
CIMA’s Improving Decision Making
in Organisations Forum. They
include Kimberly-Clark, The Linde
Group, Rolls-Royce and Tesco.
Unconscious decision-making strategies,
based on experience and information
accumulated over many years, are central to
how the best-performing people in any field
make decisions, according to Malcolm
Gladwell, author of Blink and The Tipping
Point. But developing this kind of expertise
takes far longer than most of us believe and
our instincts are easily confused by external
influences, he warned.
“Some of the wisest decisions we make
cannot, by definition, come with an explanation
and it’s important that we recognise this,” said
Gladwell (pictured, right). He pointed out that
“experts” from investors to surgeons to
sporting champions based many good
decisions on instinct.
When US tennis coach Vic Braden asked
several leading players how they hit a topspin
shot, they all told him that they rolled their
wrists at the moment of impact, yet, when he
filmed them, none of them did this, Gladwell
said. Braden worked out that they played
instinctively – ie, with no conscious idea of
how they did it. He came to the conclusion
that there was “nothing to be learned about
tennis by talking to top tennis players”.
This has implications for many business
areas, including marketing, Gladwell said.
“If Andre Agassi can’t tell you how he hits a
Visit www.cimaglobal.com/
decisionmaking for details. For the
background story, see page 36.
The University of York is to offer
accelerated masters degrees for
CIMA members, aiming particularly
at those working in the public
sector or healthcare. This is the
university’s first collaboration with a
professional organisation.
The partnership aims to help
members advance their careers and
fulfil their CPD requirements.
Programmes will include online
masters courses in public policy and
management, public administration
and health sciences. They can be
Freestyling fcma
conquers channel
topspin forehand, how can a housewife tell
you why she likes a tie?”
But studies suggest that it takes 10,000
hours of practice to learn how to make a
good instinctive decision. That’s about ten
years practising for three hours a day – far
longer than most employers would expect.
We should also be aware that instinct is
easily subverted. US police have found that
armed officers are more likely to start firing
their guns if they have just been in a highspeed car chase or if they are in groups of
two or more, largely because of adrenaline
and peer pressure, Gladwell said. Similarly,
the illustrious Getty Museum made a serious
mistake when it bought a Greek statue now
widely believed to be a fake. Its experts were
probably influenced by their desire for the
piece to be genuine. External art historians,
however, immediately “felt” that the statue
was not right when it was displayed.
Malcolm Gladwell was speaking with
Steven Levitt at a conference entitled “Tipping
point strategies in the age of freakonomics”,
held in London by Benchmark for Business
(www.benchmarkforbusiness.com).
taken full-time, part-time or via
e‑learning and will include more than
20 online CPD units, with modules
on globalisation, the environment,
economics, public service reform
and managing change.
CIMA members receive a 15 per
cent discount on fees for e‑masters
courses and a ten per cent discount
on the masters in health sciences.
Fast-track options are available,
depending on previous qualifications
and experience
For admissions advice, contact
Caroline Carfrae at poli-postgradadmissions@york.ac.uk; or, for
the health sciences course, contact
graduate@york.ac.uk. Visit
www.york.ac.uk/enterprise/eio/cpd
for information on CPD.
Learning how to value a company
or appraise a capital expenditure are
just two subjects in CIMA’s new
range of online courses. These were
developed in response to research
showing that members wanted a
functional and flexible CPD tool.
Courses are open to all finance
and business professionals, but
CIMA members receive a discount.
Each provides unlimited access for
three months and a certificate is
issued on completion.
For further information visit www.cimaonlinecourses.com.
CIMA members are known for their persistence in pursuit of a goal,
but few go to the physical extremes of Jim Boucher FCMA, who on August
12 swam solo across the English Channel in 15 hours and 28 minutes. It
was his second attempt, after bad weather forced him to give up on July 10.
Boucher, the Northern Ireland record-holder for the 100m and 50m
breaststroke in his age group, had swum part of the Channel before in a
relay team, but the full crossing proved a far more serious challenge. He
began training in November 2006 and was taking dips in London’s
Serpentine in January before starting in the sea in May in temperatures of
11˚C. “The average temperature on my two crossing attempts was about
16˚C, but I can honestly say that I wasn’t cold,” said Boucher, who is
operations director of consultancy Esys. “But the tides led me a merry
dance. The shortest distance to France is 21 miles. I ended up travelling
36 or 37 miles because of the strong currents.”
The Channel is world’s busiest shipping lane and Boucher’s safety
depended on the navigational skills of the captain of his support boat.
“Ferries were more of a problem than the biggest ships, which we could see
coming from a long way off,” he said. “But there’s no way the big boys can
stop. You just have to keep out of their way.”
About a mile from France he reached “the graveyard of dreams – you can
see the shore, but you can’t break through the current. You just have to take
your time, keep swimming and go with it. The crucial thing is not to panic.”
Fortunately, the good weather held. “The crew had spotted a dolphin
following the boat, so they didn’t get bored,” Boucher said.
French laws prevented the boat from landing, so he had to clamber up
the rocks unaided and then swim another
300m back to it for the return journey.
He is now planning a relay swim from
Scotland to Northern Ireland – a similar
distance but an even tougher prospect.
“It’s very cold and inhabited by terror
jellyfish the size of manhole covers.
There have been only 16 successful
solo crossings,” Boucher said.
“My story goes along the lines of
‘if at first you don’t succeed…’,” he
added. “It has an awful lot of parallels
with the lessons you learn in business.”
Start 10.38pm: tide
sweeping north east.
Time and tide: a chart of
Boucher’s epic crossing.
10 hours: current pushes
Boucher past Cap Gris Nez.
12 hours: tide turns
back to north east.
6 hours: tide
turns to south west.
15 hours 28 minutes:
on the beach.
Shortlist
announced for
CIMA Financial
Management
Awards 2007
nK
erry Group.
nM
organ Stanley.
nR
euters.
Finance team of the year –
public sector, sponsored
TOPCIMA success award
by Insight MSC:
sponsored by Witan
nH
er Majesty’s
Jardine: to be announced
Court Service.
on the night.
n Leeds City Council.
nO
ldham Primary
Tutor of the year:
Care Trust.
nS
enaka Kakiriwaragodage, n S
kills for Health.
Achievers Lanka Business
School.
Finance team of the year –
nS
arah McHenry, Kaplan
private sector, sponsored
Financial.
by Badenoch & Clark:
nS
tuart Pedley-Smith,
nO
2 UK.
Kaplan Financial.
nP
rocter & Gamble
nM
M Clancy Peiris,
Financial Solutions Team.
Wisdom Business School. n R
oyal Bank of
n Hasitha Premaratne,
Scotland Insurance.
Wisdom Business School.
Recruitment consultancy
Part-qualified of the year,
of the year:
sponsored by FSS:
nH
ays Accountancy
nD
avid Beare, Needlemans.
& Finance.
n Richard Dove,
nM
ichael Page.
Sainsbury’s Supermarkets. n R
obert Half.
nT
hanushka Jayasundera,
HSBC Sri Lanka.
The Financial Management
n Helen Johnson, Procter
award for corporate
& Gamble.
social responsibility:
nM
ark Kula, Mars UK.
nD
rivers Jonas.
nW
arren Jia-En Leow,
nF
ord Motor Company.
BP Oil UK.
nM
AS Intimates Division.
Employer of the year,
sponsored by Hays
Accountancy & Finance:
nA
mba Research Lanka.
n AstraZeneca.
nB
&Q.
nB
arclays.
n British American Tobacco.
nC
apgemini UK.
nF
ord Motor Company.
nH
BOS.
Innovation in management
accounting, sponsored by
EM Finance:
nN
power.
nP
unch Taverns.
Outstanding contribution
to business performance,
sponsored by Hewitson
Walker: to be announced on
the night.
One2ONE
Laurence Yuen FCMA
Authorised representative
and joint company
secretary, Shanghai
Jin Jiang International
Hotels (Group)
What are the key trends in China’s hotel industry?
The number of international arrivals is growing rapidly – we
recorded a compounded average growth rate of 10.4 per cent from
1990 to 2004. China will be the world’s most popular holiday
Photographs: Kevin Lee
How big is your organisation?
According to Hotels magazine’s latest ranking of the 300 biggest
hotel companies in the world, we had the 17th-largest number of
rooms (53,552) last year. We have a workforce of about 18,000 and
the accounting and finance department has about 950 employees.
“
China will be the
world’s most popular
holiday destination by
2020, according
to the World Tourism
Organisation, with
a market share
of 8.6 per cent
“
What does your job involve and what’s at the top of your
agenda at the moment?
I joined Shanghai Jin Jiang International Hotels (Group) last year
when it was preparing for an H-share listing – ie, the flotation of a
mainland company on the Hong Kong stock exchange. The
principal shareholder is Jin Jiang International, which is controlled
by the Shanghai state-owned Assets Supervision and
Administration Commission of the State Council. Hong Kong
operates under what’s known as the common-law system, which is
distinct from that of the rest of China. Its listing rules require the
issuer to appoint a company secretary and qualified accountant as
a member of the senior management team to oversee financial
reporting procedures, internal controls and compliance. The
appointee must obtain the appropriate professional memberships
recognised for these purposes.
Much of my time is taken up with our many compliance
responsibilities, because we have a presence in different
jurisdictions with a subsidiary listed separately on the Shanghai
stock exchange. All notices, results announcements and circulars of
the listed subsidiary have to be published in Hong Kong. I edit all
corporate notifications and oversee the compilation of our annual
and interim reports and accounts. I’m also partly responsible for
investor relations.
My role is fairly autonomous and I co-operate with external
professionals, such as our compliance adviser, lawyers and
auditors. It gives me the chance to participate in processes such as
reorganisations, non-competition agreements and due diligence.
Other projects that I’ve recently been involved in include signing
agreements with Fairmont to co-manage its landmark heritage
building, the Peace Hotel, and with the Swatch Group (Hong Kong)
to renovate the Peace Palace Hotel as an arts centre and flagship
store for international watch brands.
>
“
“
China’s new business
accounting standards are being
implemented this year
destination by 2020, according to the World
Tourism Organisation, becoming the largest
single destination with a market share of
8.6 per cent. In addition, our National Tourism
Administration reported that the income of
both star-rated and budget hotels increased
at a faster rate than the economy from 2000
to 2004.
Next year Beijing will be hosting the
Olympic Games and in 2010 there’s the
World Expo in Shanghai. I see the World
Expo as a big national event. It will certainly
attract many visitors to the Yangtze delta
region. In 1970 the Osaka World Expo
attracted 64 million visitors. China has a
population of 1.3 billion – almost ten times
that of Japan – so, if only five per cent of our
population were to come, that would still
mean 65 million visitors.
What are the unique challenges of being
a CIMA member in China?
Regulatory compliance, taxation and
language are the main issues here. CIMA
exams operate under the common-law
system and western countries allow
organisations a certain degree of selfdetermination over how they run their
businesses. But there are many delegated
legislations and administrative codes in China
that don’t apply to the wider market. It’s not
surprising, therefore, that most professional
firms have to run in-house research
departments to ensure that policies and
directives are available for their clients.
For example, loans and advances can
be effected only through financial institutions
in China, so our group has an authorised
finance company playing a treasury role to
cater for the funds requirements among
group companies.
China’s new business accounting
standards, which aim to introduce
convergence with international accounting
standards, are being implemented this year.
They are known as 1+38 (one basic standard
plus 38 specific standards).
And language also remains a big barrier
to overseas CIMA members, of course,
because almost all government documents
are published exclusively in Chinese.
10
Why did you study for the CIMA
qualification and how has it helped you
in your career?
I decided 20 years ago to take CIMA
because it was so focused on business.
My big personal interest is economics, but I
realise that market, demand and supply are
abstract concepts. The substance relies on
industries and individual companies. In
particular, CIMA membership helps you to
deal with the practical issues facing these
enterprises, which are the organs of the
economy. The institute’s qualification is
regarded as world class and a passport to
exemptions for many overseas examining
accountancy bodies.
Qualifying with CIMA also helped me to
start my career in a managerial role. It
shortened the time it took me to learn how
to operate in management and allowed me to
develop experience in corporate planning,
control and capital maintenance in order to
further my career.
specific plans to undertake further studies.
I was recently invited to be an editorial board
member of the Shanghai Academy of Social
Science. I now plan to spend some time
communicating through published articles
instead of private research.
What changes do you hope to see in
China and your industry over the next five
to ten years?
According to the 2006 world politics and
security report published by the China
Academy of Social Science, the top five
nations in terms of national power are the
US, the UK, Russia, France and Germany.
China is sixth on the list. With our consistent
annual economic growth of between eight
and 11 per cent since 2001, compared with
a world average growth rate of 3.6 to five per
cent over the same period, we should move
up the list within a decade – as long as the
current peace and economic development
continues. If so, Chinese consumers will
definitely demand more and more
opportunities for leisure, business and
personal travel, and holiday facilities.
The company transfers him to the
Liaoning province of mainland China
as a financial controller in Shenyang.
The municipal government honours
him with a “rose award” for his
services to the local economy.
What was the subject of your doctoral
thesis and do you have plans for further
research projects?
My PhD focused on China’s national
economies and policies. I have spent too
many sleepless nights preparing articles for
academic journals, so I don’t have any
Quick CV
1991-98
Having qualified with both CIMA
and the Institute of Chartered
Secretaries and Administrators,
Yuen joins the corporate office of
Shangri-La Hotels as a financial
analyst. He gains an MBA with
Brunel University and moves to the
Island Shangri-La in Hong Kong as
assistant financial controller.
1998-2001
2001-06
The Marriott Company recruits him
as director of finance for two of its
managed properties in Shanghai. He
takes a research degree in industrial
economics at Fudan University.
2006-
Joins the Shanghai Jin Jiang
International Hotels (Group) as the
company’s qualified accountant,
authorised representative and joint
company secretary for listing rules
compliance. He is responsible for
compliance with accounting, finance
and listing regulations. In early 2007
he gains his PhD in economics.
>opinion
Director debit
Photograph: Getty images
Northern Rock’s board has been portrayed as the villain of
the piece, but it’s unfair to blame it for everything and accuse
it of immorality, writes Ruth Prickett. If anything, it was guilty
of underestimating the media’s ability to whip up a panic.
I may be alone here, but I found myself
feeling sorry for Adam Applegarth, CEO of
Northern Rock, as he repeatedly told reporters
that the bank’s customers wouldn’t lose any
money. Why were people so willing to equate
Northern Rock’s acceptance of a Bank of
England (BoE) loan to imminent penury?
The British may be renowned for their love
of queuing, but it would take a lot to make
me stand in line overnight for anything. Those
queuing eventually got what they wanted,
withdrawing sums running into hundreds of
thousands. I’d have expected more faith in
the UK’s financial system. Surely, the fact that
the BoE deemed Northern Rock worthy of
the loan should have suggested that their
savings were safer than they’d been on the
day before the deal was agreed?
There has been much debate on whether
the crisis was caused by the way in which
Northern Rock broke the news. Maybe it
could have done it better. Maybe the queuers
all had a good understanding of its exposure
to the US sub‑prime mortgage market and
had made more accurate calculations about
the bank’s solvency than the BoE had done.
Maybe they had nothing better to do in the
early hours of a September morning.
But I can’t help feeling that the media did
them no favours. Within a few hours of the
announcement that accounts were being
closed, the BBC’s web site ran a poll asking:
“Northern Rock – are you worried?” If people
weren’t worried before they read that, they
would have been afterwards. Item after item
on the radio and TV featured queueing
customers telling reporters how dire the
situation was and that “‘they’ ought to do
something about it”. Most of them admitted
they were withdrawing their money because
everyone else was. It was a classic panic
– no different from people hoarding
sugar because someone had said
that there might be a shortage.
Politicians were no better, criticising the
“fat cats” who’d jeopardised the life savings
of hard-working voters. Some even compared
the non-collapse of Northern Rock to the
demise of the Farepak Christmas savings
club. The people who probably had most to
complain about were the shareholders, but
few politicians had much to say about them.
Vince Cable, shadow chancellor for the
Liberal Democrats, was quick to see a moral
dimension. The bank’s “near-collapse” was,
he said, a product of “greed and reckless
gambling by overpaid executives, lax,
indulgent bank regulation and a complacent
government. What will be done about those
irresponsible managers who led Northern
Rock into its current problems?” Cable never
went as far as saying that the managers had
acted illegally, but his hint that heads should
roll indicated a moral judgment. Somehow,
he implied, they had acted immorally, growing
rich by making others poor. This is nothing
new. As H L Mencken said: “The theory seems
to be that as long as a man is a failure he is
one of God’s children, but that as soon as he
succeeds he is taken over by the Devil.”
The banks do not seem to have learned
much from history, either. In 1929 Bernard
Baruch explained his reasons for getting out
of Wall Street before the crash: “When
beggars and shoeshine boys, barbers and
beauticians can tell you how to get rich, it is
time to remind yourself that there is no more
dangerous illusion than the belief that one
can get something for nothing.”
The problem nearly 90 years later seems
to be that lenders have encouraged would-be
homeowners to believe that property can be
had for next to nothing. There are clearly
questions to be asked about the criteria on
which banks base lending decisions. Some of
these have already proved flawed, with dire
results for debtors. There are also questions
about Northern Rock’s dependence on
continual growth to service its current liabilities.
But mixing legitimate business concerns
with moralistic judgments about increasing
personal debt is unhelpful. Rising levels of debt
are not intrinsically bad. They are what you’d
expect in an increasingly wealthy society.
Nor are they necessarily risky. And borrowers
aren’t victims: while banks may have been
too willing to let people go deep into debt,
borrowers must accept their responsibilities.
Tragic stories of individuals who took out loans
for good reasons and then suffered a series of
unforeseen financial blows should not obscure
the fact that many people get into trouble
because they consistently overspend on trivial
items. It’s harsh to call banks immoral for
getting rich by lending to people with more
designer clothes than their salaries permit. In
such cases the seven deadly sins seem evenly
distributed. It just seems hard to kick someone
when they’re down – unless they’re a banker.
The Northern Rock affair has raised many
issues that should concern us and only one
of these involves the international financial
markets. If they learn nothing more from it,
business leaders should take note that in any
media pantomime the customer is the
princess and the CEO is the wicked
stepmother. And in any political morality tale
the voter is the virtuous widow and the banker
is, of course, the grasping money-lender.
>ethics
Going downhill fast
photograph: GETTY Images
Danielle Cohen shares the true story of a CIMA member
who contacted the institute’s ethics helpline for advice. His
problem stemmed from allowing what seemed, on the face of
it, a minor issue to snowball into a job-threatening situation.
14
Andrew was the management accountant
of a small firm that was part of a plc. His
boss, Chris, was the firm’s CEO. Several
months ago Chris had approached him with
a query about the month-end figures that
Andrew had produced, saying that they must
be wrong. At the time there was a certain
amount of confusion, because their firm had
just taken over another small company, so
Andrew adjusted them as instructed.
Next month Chris questioned the numbers
again, and Andrew duly changed them
once more. This happened at several more
month-ends until he began to suspect that
Chris’s reasons for changing the numbers
might not be valid – and that the business
was simply not performing. He raised the
issue with his boss, who assured him that he
would sort everything out. Relieved that Chris
had recognised that the matter needed to be
dealt with, Andrew dropped it.
At the end of the firm’s financial year, Chris
announced that he had, as promised, found
a solution to the problem of the ongoing
adjustments. Unfortunately, this was very
different from what Andrew was expecting.
Chris proposed that he own up to the
discrepancies, admit that they were the result
of a simple error and then resign to prevent
any further questions from being asked. In
return for carrying the can, Andrew would
receive a glowing reference – on the
understanding, of course, that he kept quiet
about the whole affair.
Shocked and unsure about what to do,
Andrew contacted CIMA’s ethics helpline.
He had gone from accepting a small monthend adjustment to his figures to finding
himself about to lose a job. Our guidance to
Andrew was that he should consider taking
the problem to more senior people in the
group, since raising it with Chris wasn’t an
option. Andrew had some concerns about
the possible repercussions of doing this,
particularly because Chris was well respected
in the group, and he was worried that his
version of events would not be believed.
The lack of an internal grievance or whistleblowing procedure made it hard for him to
predict how his case would be handled.
Given all these factors, Andrew questioned
whether quitting was an acceptable solution.
A good reference had been promised, but
was this pledge worth anything coming from
Chris? And how would he explain to any
future employer why he had left? And what
would happen if a colleague were to
complain to CIMA about his lack of
competence? If this were to happen, he
could potentially lose his membership. Even
worse, lying to accept responsibility that
wasn’t his would be another breach of CIMA’s
code of ethics. If discovered, this would also
have consequences for his membership.
After further discussion, Andrew identified
a potential ally (a financial controller) at group
level. He arranged a meeting through a
trusted colleague in order to minimise the
chances of discovery by Chris.
We suggested that Andrew should speak
to the institute’s legal advice line for expert
guidance on his legal obligations and
employment rights, and also to the whistleblowing advice line for free, confidential,
independent advice on raising his concerns.
Andrew spoke to the financial controller
and Chris was eventually forced to resign.
But Andrew’s ongoing compliance with his
boss’s wishes was enough to have tarnished
his reputation. A few months later he
resigned of his own accord.
Andrew’s case is a reminder of how crucial
it is to use your professional judgment, heed
the warning signs and establish the facts at
the first sign of an ethical dilemma. Armed
with these and CIMA’s code of ethics, you
can decide whether or not you need to act
and, if so, what that action should be.
So how exactly do you know when an
ethical dilemma is an ethical dilemma?
As Oscar Wilde observed: “Morality, like art,
means drawing a line someplace.” When the
amount of money is not material, the report is
only for internal purposes or when no one
else seems to think there’s an issue, how can
you be sure where that line is?
Taking time to consider the situation
from all angles will help you to know for sure.
In the code of ethics, the line is where a
threat to our fundamental principles is
anything more than trivial. Although the
changes that Andrew made to the numbers
in that first month might not have been
material, the pattern that they established
was. If he had stood up to Chris the first time
he was asked to adjust the figures, the
situation might never have developed.
Danielle Cohen is CIMA’s ethics manager.
Further information
CIMA’s code of ethics can be viewed at www.cimaglobal.com/codeofethics.
For details about the institute’s full ethics support package, visit www.cimaglobal.com/helplines.
Shipping
forecast
As East Asian factories multiply and more ports
worldwide reach capacity, Charles Orton-Jones
spots a storm brewing. How will your business
fare if it has to wait for its ship to come in?
World leaders don’t seem to be worried. The BBC is unperturbed.
As for Joe Punter, reading the Daily Sport on the Clapham Omnibus or
the Lanka Sun on the Colombo commute, everything is tickety-boo.
But Andrew Linington, editor of the seafarer’s journal Nautilus, has words
to shiver the timbers of complacent landlubbers.
“I can see a crisis with a potentially devastating impact for everyone,”
he says. “It could start with a slight disruption but become a major global
problem. In a worst-case scenario we are talking about a complete
meltdown.” And the timescale? “Soon: three to four years.”
Linington is talking about an impending disaster in world shipping.
Demand is rocketing and we are inches from full capacity. The global
supply chain is already showing the strain. In the world’s busiest coal port,
Newcastle, New South Wales, 60 ships are queuing to load up. Some
have been waiting for four weeks. In Long Beach, Los Angeles, capacity
has hit 100 per cent. Ships remain at anchor outside the harbour,
awaiting the call to dock. British ports are at crisis point, too. All it would
take is a small spike in demand – just the sort that you see at Christmas –
and they’d be overwhelmed.
In one category, shipping has already hit crisis point. Dry bulk is
defined as cargo that can’t be containerised and isn’t a liquid:
predominantly iron ore, coal and steel. The Baltic Dry Index (see panel,
page 18) is a measure of the cost of shipping these materials. Unlike the
FTSE or Nasdaq it is not affected by market sentiment, reflecting only
the price of transporting cargo by ship. Since 2000 it has risen fivefold –
up 40 per cent this year alone.
“This is what happens when demand rises faster than supply.
Suddenly the industry can’t cope” says Linington, who warns that other
categories of cargo may follow. “Worldwide shipping capacity is running
at 90 to 95 per cent. There are forecasts that capacity won’t be able to
16
I can see
a crisis
with a potentially
devastating
impact for
everyone. It could
start with a slight
disruption but
become a major
global problem
17
Big berther: the
Emma Maersk
Launched in August 2006, Emma Maersk
is the world’s largest container vessel.
She is 50m longer than the USS
Enterprise, America’s largest aircraft carrier,
and only a fraction shorter than Exxon’s
two longest oil tankers.
Capable of handling twice the amount
of cargo of a standard Panamax vessel
(see panel, page 22), Emma Maersk has
the world’s largest diesel engine and
reaches a top speed of 29 knots. She is so
wide that many ports have needed to
reprogramme their computerised cargohandling equipment to unload her. Despite
her size, she has a core crew of only 13.
They enjoy an IT café for using the internet
and playing computer games, a library, an
extensive collection of DVDs, a gym and
even a small swimming pool.
Emma Maersk is owned by the world’s
largest shipping firm, AP Moller-Maersk.
Her regular route is between Rotterdam
and Ningbo in China, via Xiamen, Hong
Kong, Yantian, Tanjung Pelepas in Malaysia
and Algeciras in Spain. Nicknamed the SS
Santa last year, her pre-Christmas voyage
brought a significant percentage of all the
toys imported from China to the UK just in
time for the Yuletide rush.
Freight’s rates: the Baltic Dry Index
Economists often refer to the Baltic Dry Index (BDI) as their best-kept trade secret.
The index is provided by the Baltic Exchange, a 250-year-old company based in the
City of London, which supplies shipping data to the world’s shipbrokers.
The BDI is regarded as a guide to current levels of global economic activity. It reveals
the price of moving important raw materials such as coal, iron ore and grain by sea.
Taking in 40 shipping routes, the index is a composite of the Baltic Handymax, Panamax
and Capesize indexes, which measure the cost of shipping goods using vessels of
various sizes. These indexes are calculated using professional assessments made by a
panel of international shipbroking companies.
Other indexes supplied by the Baltic Exchange include the Baltic Dirty Tanker Index
and the Baltic Clean Tanker Index (“dirty” tankers carry crude oil and fuels that leave a
residue, whereas “clean” tankers contain diesel, gasoline and jet fuel). But the BDI is the
one valued by economists and central bankers as the surest guide to world trade activity.
8,000
BDI
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
January 2002
18
May 2003
January 2004
March 2006
August 2007
handle demand. When there is no slack in the
system, you get gridlock.”
He’s not scaremongering. The Bain
Consulting Group published a report in May
detailing the choking of world ports and
lamenting that “few executives at retail or
durable-goods companies understand the
magnitude of the challenge being forced on
them”. It warned of a “riptide effect” that
would turn outsourced operations in China
into a “strategic trap”. The situation was
becoming so bad, it said, that companies
should consider shifting their East Asian
operations back closer to home.
China is at the heart of this story. In 2000
its ports handled 1.4bn tonnes of cargo.
Last year they handled 5.6bn tonnes and the
figure will rise by about 20 per cent this year.
China’s insatiable appetite for raw materials
such as iron ore, coal, oil, asphalt and tin is
the reason that dry bulk shipping costs have
spiralled. And the country’s prodigious
manufacturing industry is likely to have the
same effect on container shipping. China
recently overtook the US to become the
world’s number-one exporter of
manufactured goods. Its neighbours are
contributing to the problem. Vietnam’s
economy has been posting seven per cent
growth since 2000, while Malaysia, Thailand
and Indonesia are close behind. The effect of
this boom has been to increase demand for
shipping as much as 20 per cent a quarter.
This is a serious problem when the supply
takes years to catch up.
Port construction is normally a slow
process and planning delays often hold up
crucial developments. “The lead time for
expanding capacity is getting longer and
longer,” says Neil Davidson, research director
at shipping consultancy Drewry. “It can take
three years to get approval for an
infrastructure expansion project. Then it takes
18 months to build.”
Shipbuilding is an equally time-consuming
process. The dockyards of South Korea,
Japan and China are full and the number of
orders has tripled in three years.
“If you want to order a ship of any type,
the earliest you’ll see the finished product is
2010,” says Peter Norfolk, research director
at Simpson, Spence & Young shipbrokers.
“Even with this high level of construction, all
the new ships won’t be enough to bring the
cost of shipping down.”
Given the size of the vessels under
construction, this is surprising. Container
ships used to be limited to a capacity of
5,200 containers, known in the trade as 20ft
equivalent units (TEU). Not any more: with a
29 tonne anchor and a fuel tank big enough
to take it around the world without a refill, the
400m-long Emma Maersk can carry 11,400
TEU (see panel, above).
Should the ship ever sink, its insurers
would have to pay out £1.5bn. As the world’s
largest container vessel, this leviathan is
shipping’s closest thing to a celebrity,
attracting crowds wherever she berths. Yet
AP Moller-Maersk’s shipyard in OdenseLindo, Denmark, is building eight larger ones.
The trouble is that, even when these are
afloat, the industry still won’t be able to cope
with demand. And, although they may
alleviate some of the pressure, other factors
will hamper progress.
A shortage of crews is one such problem.
“There is a crisis of personnel,” Linington
says. “A study in 2005 suggested that the
industry was short of 10,000 officers. A
19
Case study
EAST ASIA’s
BIG THREE
Hong Kong hopes to increase total
container traffic to 40.2m TEU by 2020
and has planned a number of schemes to
achieve this growth, including: increasing
the efficiency of boundary crossings;
improving turnaround of empty containers;
reviewing licences and fees; improving
barge services; improving its electronic
document system; enhancing its transport
infrastructure; and expanding the port
while minimising its environmental impact.
Shanghai
(www.portshanghai.com)
n21.7m TEU in 2006 (a 20 per cent
increase on 2005).
n 537m tonnes of cargo in 2006.
n55,000 ships, including 23,000
container ships, berthed in 2006.
Shanghai claimed to have overtaken
Singapore to become the world’s largest
cargo port in 2005 when it handled 443m
tonnes of cargo, according to the
Shanghai Port Management Department.
It doubled its cargo-handling capacity from
200m tonnes to 400m tonnes in five years,
but it still trails Singapore and Hong Kong
in the container-handling stakes.
The first phase of its new deep-water
terminal at Yangshan Isles went operational
in December 2005. This development is
ongoing and is intended to have an annual
handling capacity of 25m TEU by 2020. The
Gudrun Maersk was able to dock there for
the first time in April 2007. The 367m ship is
the largest ever to visit Shanghai and is
scheduled to stop there every two months.
Hong Kong
(www.pdc.gov.hk/eng/home)
n 23.5m TEU in 2006.
n 80 international shipping lines.
n500 container services a week.
n231,000 ships (including both ocean
and river vessels for cargo and
passengers) visit the port each year.
Known as the fragrant harbour, Hong Kong
has been a container port for more than
30 years. It is one of the few big
international ports where the facilities are
financed, owned and operated by the
private sector, although the government is
responsible for long-term development
plans and supporting infrastructure.
20
Singapore
(www.mpa.gov.sg)
n 24.8m TEU in 2006.
n 449m tonnes of cargo in 2006
n140,000 ships visit the port every year,
with 1,000 berthed at any one time.
Singapore is at the crossroads of some of
the world’s major trade routes. The
maritime industry contributes about seven
per cent of Singapore’s GDP and employs
100,000 people. It offers easy access to
more than 67 cities and a regional market
of 2.8bn people within seven hours’ flight.
Singapore has double tax agreements
with more than 45 countries, bilateral
shipping deals with China, Germany, India,
Myanmar, South Korea and Vietnam, plus
free-trade accords with Australia, the
European Free Trade Association, Japan,
Jordan, New Zealand and the US. It offers
an established shipbuilding industry and
vessels can call at either the oil terminals
run by oil companies or at those run by
PSA Singapore and Jurong Port. It has
developed a petrochemical complex on
Jurong Island in a bid to become the AsiaPacific region’s hub for this industry. By
2010 it predicts that this will accommodate
five refining plants and 150 companies.
With more than 12,000 oil tankers and
3,000 chemical tankers docking every
year, safety and security is a big issue.
Singapore was the first Asian country to
sign up to the US container security
initiative. It also adopted the international
ship and port facility security code, which
took effect in 2004. PSA Singapore
Terminals, which operates four container
terminals and two multi-purpose terminals
in Singapore, handles a fifth of the world’s
total container transhipment throughput:
23.98m TEU in 2006. The PSA group as a
whole operates 25 ports in 14 countries.
recent study indicated that the problem could
be between twice and five times worse.”
Pay for crews is rocketing as a result.
Employers are renegotiating contracts every
six months, but new recruits still aren’t
coming though. “It’s not attractive to go to
sea,” says Ted Sangster, chairman of the
British Ports Association. “We have a culture
of blaming seamen when something goes
wrong. The issue of criminalising seafarers is
damaging the supply of crews.”
Other factors don’t help. “Silly things, such
as being unable to go ashore when in dock,
are putting people off,” he says. “The US has
rules to stop crews disembarking for reasons
of national security.”
For businesses the lack of capacity means
delays, extra costs and, potentially, a global
economic slowdown. Embarrassingly, UK
ports could be the worst part of the problem.
“Our big ports realised a few years back
that they would need to expand,” Davidson
says. The government also knew it, but didn’t
help. “The ports are on their own,” he says.
“Felixstowe has had to pay to upgrade its rail
link up to 100 miles away. It funds roadworks,
too. The port authorities have had to levy a
charge on port users to cover the investment.”
Southampton is also struggling. As one of
only three UK ports capable of handling
deep-water container ships, it had an
ambitious plan to create a new super-terminal
at nearby Dibden Bay. The facility would have
been one-third of the size of Heathrow airport
and cost £600m. But it won’t be built
because of environmental concerns.
“The government needs to assess its
priorities,” Sangster warns. “If our ports can’t
meet demand, the effects will hurt the entire
economy. When there is uncertainty, retailers
increase inventory to avoid shortfalls, which
reduces profitability. The rest of the country
will notice quickly when the ports experience
capacity problems.”
The man who vetoed the expansion was
the then deputy prime minister, John
Prescott. “Politicians simply don’t understand
the industry,” Sangster complains. “We could
be in the daft position of having to knock
down houses that have been built too close
to ports when it becomes clear that the
nation needs more capacity.”
If British ports can’t expand fast enough,
the UK may be relegated to the status of a
secondary shipping destination. This means
big ships will dock in Rotterdam and leave
Dubai Port World
(www.dpworld.com)
Everything in Dubai seems the largest, tallest
Moore believes that such growth is vital.
will be watching where their key exporters
or most impressive in one way or another.
About half the global volume of containers
choose to manufacture. They are also trying
Competition for superlatives is so fierce that
comes from Asia and it’s increasing fast. But
to see whether changes in international
the city won’t even reveal the planned height
it takes about 11 years for a container port
politics, such as an improvement in Iraq’s
of the skyscraper it’s intending to be the
project to get started in the west. “A tsunami
situation, will create new opportunities.
tallest in the world, just in case another city
in terminal-handling is coming and we need
“It takes a long time to develop a
decides to pip it to the post. So it’s not
to cope with this,” he warns. “For 15 to 20
terminal, so timing is important,” she says.
surprising that its Jebel Ali port is the largest
years there has been spare capacity in the
“You need to be there at the start, but it’s
container terminal between Rotterdam
European and US ports. Not any more.”
much harder to expand capacity when
and Singapore.
This is why Moore is keen for DP
you’re working with existing facilities than it
Dubai Ports
Jebel Ali has been voted “best
World, which is the world’s
is to develop in new markets. It’s a very
Authority
seaport in the Middle East” for
fourth-largest port operator, to
long-term investment.”
Ruth Prickett
13 consecutive years in the
grow faster than its main
Dubai Ports was the
Asia freight and supply chain
rivals. “The big four will
DP World’s big deals
world’s eighth-largest
awards, and has also been
outpace
the
growth
of
the
February 2006: The company acquired P&O
container terminal in 2006.
named “the Lloyd’s List port
rest and it will be increasingly
for £3.3bn to gain a foothold in North
Containers handled in
operator of the year” in the
hard to be a smaller player.
America and complete its global chain. That
2006: 8.92m TEU.
Middle East logistics awards.
One reason why we bought
move gave the combined group a capacity of
Forecast capacity by
This is even more impressive
P&O was that it was the only
50m TEU across 51 terminals, including six in
2030: 55m TEU.
given that, like most of the rest
one on the market,” he says.
the US. But it later had to sell the US ports
of Dubai, it’s still under construction.
But it hasn’t all been plain
after a political outcry about the security risks
Owned by the city’s government,
sailing. “We had a presence in
created by non-US ownership.
Dubai Ports comprises the Dubai Ports
the US until March last year when
May 2007: DP World gained
DP World
Authority and Dubai Ports World (DP World).
we had a bit of a problem and
permission to turn 600 hectares
42 terminals
It is part of one of the world’s largest
had to sell,” says Sarah
of land into the London
owned worldwide.
conglomerate holding companies.
Lockie, vice-president of
Gateway development. It
New developments:
“The Dubai national bird used to be the
corporate communications.
plans to invest £1.5bn over
13 in 27 countries.
falcon; now it’s the crane,” jokes Michael
“We won’t have a presence
ten to 15 years to create a
Combined throughput in
Moore, head of commercial for DP World.
there again for about two or
deep-water port capable of
2006: 42m TEU.
The whole of the city is shifting sideways on
three years at least.”
taking the largest ships
to a colossal new site. New hotel complexes
This problem occurred
alongside one of Europe’s
Forecast capacity by
in the shape of palms have hit the headlines,
when a political storm broke
largest
logistics and business
2017: 90m TEU.
but these are only part of the plan. A highout in the US about security
parks. The facility should be
security road will lead from the seaport to the
issues following DP World’s
operational from 2010.
vast new airport so that goods can pass
acquisition of P&O, which brought with it six
October 2007: DP World’s most recent deal
through for re-exporting without further
US ports. The case highlighted two types of
secured the right to develop Senegal’s busiest
checks. The Jebel Ali free zone allows firms
threats to port operators: security concerns
international container port. It will take over the
to operate warehouses close to both
and vulnerability to international politics.
Dakar terminal later this year and plans to
transport hubs. And Dubai Ports Authority is
Other obvious risks include the weather and
double its capacity to 550,000 TEU. The next
also building massive facilities at its other
exposure to global recession.
phase of the £34m project will involve
terminals around the world, from a 3m TEU
The opportunities of the future will follow
designing and building a new terminal with a
facility in India to others in Australia, China,
the largest manufacturers, such as Nike and
potential capacity of 1.75m TEU, which is
Turkey, Thailand, the UK and elsewhere.
Wal-Mart, Lockie explains, so port authorities
expected to be operational by 2011.
21
Lobby
Correspondence
Investor relations used to be simple:
a couple of times a year, companies would
update fund managers and analysts on how
much money they had made and how much
they expected to make in the near future.
Then, at the start of this decade, investors
began demanding more information, more
frequently and in more detail. Corporate
governance and corporate social
responsibility (CSR) became normal agenda
items in shareholder meetings. And now
another subject is becoming a regular topic
for discussion: corporate lobbying.
According to a new research report,
“Coming in from the cold: public affairs and
corporate responsibility”, investors are
becoming particularly interested in how
closely companies’ lobbying actions are
aligned with what they are claiming in their
24
CSR reports. This interest has arisen for two
reasons. First, it’s a symptom of the
investment community’s increased vigilance
after Enron and the scandals that followed.
These made fund managers, analysts and
the financial regulators realise that they could
not take it for granted that a particular
company would be run in either a wellstructured or ethical way. And, as one analyst
says: “Soft non-financial issues have a nasty
habit of becoming hard financial issues.”
As CSR climbed the sociopolitical agenda,
particularly in the US and northern Europe,
companies came under growing pressure to
report more non-financial information than
just their corporate governance policies –
for example, how they were treating their
suppliers or what their recycling practices
were. The increased demand for details
about a company’s lobbying activities is
a natural extension of this hunger for nonfinancial information.
“Also, you’ve got an increase in the
number of vocal stakeholder networks
pushing for greater transparency in reporting
– shareholder activist groups, consumer
groups and others,” says Julia Harrison,
co‑author of “Coming in from the cold” and
managing partner of Blueprint Partners, a
Brussels-based public affairs consultancy.
The second reason why corporate
lobbying has become a hot topic is the
increase in the scale and sophistication of the
practice itself. In Europe, the rise of lobbying
is a response to an increase in EU legislation
affecting business, according to Harrison.
“Public affairs activity has grown over the
past 20 years or so in the UK, but it has
photograph: Getty images
The investment community’s appetite for non-financial
information has never been so voracious. In order to
assure itself that companies’ actions match their CSR
rhetoric, it now wants them to report on what they are
doing to persuade legislators to act in their interests.
Scott Payton explains the implications of this trend.
25
now also taken off much more widely across
Europe,” she says.
Commercial areas affected by new and
proposed EU regulations include mergers,
acquisitions and sector-specific topics such
as mobile phone call charges and the
licensing of chemicals. “For investors, it’s
important to know whether companies have
these issues under control. Otherwise, their
business model could be affected severely,”
Harrison says.
When they evaluate a company’s
corporate lobbying activities, investors are
looking for three things. First, they want to
know that the firm is campaigning in a way
that protects its long-term interests.
Reporting on
corporate lobbying:
the top four
Last year corporate responsibility
consultancy SustainAbility, along with
Standard & Poor’s and the United
Nations environment programme, ranked
50 global companies’ reporting on their
lobbying activities.
The rankings were based on the
extent of lobbying and public affairs
content in the companies’ printed CSR
and sustainability reports and on their
web sites. The researchers found that,
in general, reporting on public affairs
activity was a “minority pursuit”, although
the practice was slowly becoming more
widespread. The top four reporters, in
alphabetical order, were:
n British American Tobacco.
n BT.
n Co-operative Financial Services.
nMigros.
The full results can be found in the
report “Coming in from the cold:
public affairs and corporate
responsibility”,
produced by Blueprint
Partners, SustainAbility
and the World Wide
Fund for Nature. The
publication can be
downloaded from
http://snipurl.
com/1rpj4.
26
“It would be remiss of companies not to
lobby on certain occasions if they think their
interests are being damaged by a particular
policy,” says David Russell, joint head of
responsible investment at the Universities
Superannuation Scheme, the second-largest
pension fund in the UK.
Some investors also want assurances that
an organisation’s lobbying activities protect
the interests of its industry as a whole. “It’s
impossible to have a sustainable business in
an unsustainable market, so we need policies
that enable sustainable markets. Investors
need to know which companies are working
for that policy change and which ones are
hindering it,” says Oliver Greenfield, head of
sustainable business at the World Wide Fund
for Nature, the world’s biggest conservation
organisation and joint publisher of “Coming in
from the cold”.
Second, investors need to be confident
that a company’s public affairs activities
(and the those of any trade associations that
it belongs to) are consistent with its
communications activities. Russell cites a
case in which a company was inconsistent in
this respect. “A few years ago, BP indicated
that it wouldn’t lobby for access to protected
areas such as Alaska’s Arctic national wildlife
refuge for oil. But the company was actually
funding a lobbying group that was asking for
just that. BP resolved the issue by pulling its
funding from the lobby group,” he says.
“Inconsistency creates a reputational risk that
can, if exposed, damage shareholder value.”
So what should a company do if a trade
association that it belongs to adopts a policy
that’s at odds with its own stance? “It’s
beholden on the corporate member to stand
up and say: ‘No, we don’t agree with that,’”
Russell says.
The third thing that investors want is
to be sure that the campaigning of one
company does not conflict with the interests
of other firms in their portfolios. Seb Beloe,
head of research and advocacy at
SustainAbility, a CSR consultancy that also
worked on the “Coming in from the cold”
report, says that resolving this tension
between the lobbying interests of one
company and the interests of a portfolio as a
whole is an ongoing challenge for all the big
pension funds. “It’s an issue that came up
during our research for the report and
something that they are thinking about more
and more,” he says.
The investment community may want
more information about firms’ lobbying
activities, but how can these operations, or
their results, be measured in a meaningful
way? Russell points out that certain actions,
such as donations to political parties,
campaign groups or trade associations, are
easy to quantify. Indeed, UK companies are
obliged to give shareholders the chance to
vote on all donations to political
organisations. When it comes to reporting the
more intangible aspects of corporate
lobbying, the key is to explain to investors
why you are doing it, according to Beloe.
“Explain how lobbying ties in with your other
business goals. Paint a coherent picture of
how these things connect,” he says.
Corporate lobbying is most established
and widespread in the US, where the practice
is not without its critics. For example,
Michael Massing, a regular contributor to
The New York Review of Books, argues that
lobbying by the US automotive industry over
the past two decades has not only damaged
the environment; it has also damaged the
industry itself. As he pointed out in the
Financial Times earlier this year, congressional
proposals to raise fuel-efficiency standards
were successfully opposed by US car makers
in 1990, 1995, 2000 and 2001. As a result,
Massing argues, the US car industry failed to
develop the kind of environmentally friendly
vehicles that were produced with great
commercial success by Japanese
companies such as Toyota
Record companies lobbied against the
growth of online music distribution,
which – as later developments such as the
success of the iTunes Store proved – they’d
have been better off embracing at the start
and Honda – leaving the likes of Ford and
General Motors to play catch-up.
He adds that US electricity suppliers also
did themselves no favours by lobbying
against a law to encourage alternative
methods of energy generation. If such
legislation had been successful, electricity
firms would have then been better placed to
cope with rising oil and gas prices. Similarly,
record companies lobbied against the growth
of online music distribution, which – as later
developments such as the success of Apple’s
iTunes Store proved – they’d have been
better off embracing at the start.
Could corporate lobbying have similarly
counterproductive effects on businesses in
the EU? Russell argues that lobbying in
Europe differs greatly from how it’s done in
the US, because the region’s democratic
structures and processes are different.
He points out that companies are perfectly
entitled to fight their corner with
governments and regulators. “They have a
right to lobby in their interests, as long as
they are open about it and not saying one
thing to shareholders and a different thing to
policy-makers,” he says.
Harrison, meanwhile, argues that
corporate lobbying does not deserve its
cloak-and-dagger reputation. “There’s a
misconception that it’s all secretive, doing
deals behind the scenes. It really doesn’t
work like that in Europe,” she says.
Beloe believes that being open about your
lobbying activities actually increases your
chances of a successful result. “In
order to be an effective
lobbyist, it is
sensible to be
transparent,” he says. “Your position
becomes much more powerful if you are able
to build coalitions with other organisations.”
But Beloe concedes that more covert
operations do take place on both sides of the
Atlantic. “There has, in my view, been a lot of
quite shady practices among the lobbying
community in the US and also in Europe. I
used to work in a lobbying agency in
Brussels, so I’ve seen some of this in action.”
The key to keeping it wholesome is
ensuring that all lobby groups operate on a
level playing field, according to Harrison.
“This will maximise transparency because
everyone is obliged to behave in the same
way,” she says.
For its part, the European Commission is
trying to achieve just that through the
so‑called European transparency initiative.
In March it set up a public register of all
“interest representatives” working to influence
decisions made in EU institutions. But the
register is voluntary, which isn’t good enough,
according to groups such as the Alliance for
Lobbying Transparency and Ethics
Regulation, which are critical of the influence
of corporate lobbyists in the EU.
“By first trying out a voluntary lobbying
register, the European Commission is wasting
precious time. EU citizens will have to wait
several more years before they get effective
lobbying transparency,” the alliance
complained when the plan was announced.
While the debate about the impact of
corporate lobbying on the democratic
process continues, much public affairs
activity is moving in what environmental
campaigners at least would see as a more
morally sound direction. As Russell points
out, in the US and Europe many companies
are no longer using their clout to shirk tighter
environmental regulations. Instead they are
pushing for limits on carbon emissions.
“There is a general recognition that climate
change is the world’s worst market failure,”
says Oliver Greenfield. “From an investment
perspective, we need to ensure that markets
are sustainable. Otherwise, they risk losing
value. We believe that the companies that are
actively shaping a new sustainable market
will be better placed to operate within it and
will, therefore, be more profitable. It’s not
about protectionism; it’s about survival.”
Scott Payton was launch editor of Real IR,
the European investor relations magazine.
He is now a freelance business journalist
and editor.
Sipper trumps
guzzler: did
US car makers
out-brake
themselves by
lobbying against
legislation to improve
fuel efficiency?
27
Economic boom:
widening work
has begun on the
Panama canal to
accommodate the
new generation
of cargo vessels.
smaller vessels to transport the cargo to the
UK. Sangster believes that we won’t end up
in this embarrassing position, but there are
doubters. “We at Nautilus are pessimistic,”
Linington says. “Our ports’ road and rail links
need to keep pace, but infrastructure takes
such a long time to upgrade. We need more
investment, as there’s a danger that the UK
could end up being bypassed.”
It’s not all bad news, though. Milford
Haven and Harwich are implementing
expansion plans. And there is an enormous
development at the new London Gateway
port. Situated in the Thames estuary, the
terminal will feature two miles of harbour
frontage capable of handling 3.5m TEU a
year. Its rail link is being upgraded and will
handle 40 cargo trains a day by 2009 when
the construction work is finished.
Despite these improvements, with
capacity so close to full, it could take only
one further problem to cause mayhem.
The US’s new homeland security policy is one
potential trigger. “President Bush has just
signed a bill that requires every container to
be X-rayed for radioactive material,”
Davidson says. “This will cause serious
delays that will get worse as other ports
introduce security measures.”
The cost of fuel, or “bunker”, is another
issue. “When bunker costs go up, the
industry reacts by slowing ships down or
even removing them from service,” Davidson
explains. The ferry industry has already
reacted to high bunker costs. Stena has
slowed down its fast services at Holyhead
and Harwich by 40 per cent and retired
Why Panama’s
first cut wasn’t
the deepest
Work to expand the Panama canal will
be finished in 2012, removing the world’s
most significant transport bottleneck.
Currently, only ships shorter than
291m can pass through, creating the
definition of a Panamax vessel. But
almost 40 per cent of container ships are
now larger than Panamax, so last
year the Panamanian people voted in a
referendum for a colossal widening
project to allow the canal to take ships of
up to 426m in length.
Overall capacity will double, requiring
the excavation of a new channel, plus
two multi-billion-pound lock complexes.
The channels will also be made deeper
to allow far heavier vessels than were
envisaged at the time of the canal’s
construction a century ago.
President Martin Torrijos has
calculated that the project will reduce
poverty in his country by about a third
and generate enough wealth to turn
Panama into a first-world nation.
three of its four high-speed ferries. “It takes a
speed reduction of only three or four per cent
to reduce capacity enough to affect global
supply chains,” he warns.
Some old vessels are already overdue for
retirement. “Ships that should have gone are
still in service,” Linington says. “This tactic by
ship owners has temporarily masked the
severity of the shortage, but eventually these
ships will have to go, reducing capacity.”
The consequences of a port gridlock are
incalculable. “Coal shortages will send
electricity costs up,” Linington predicts.
“The cost of transporting containerised goods
could double, which will lead to inflation.
World trade depends on the sea, but only
occasionally does the wider world notice this
dependence. When the Suez canal was
closed for a few days in 2004, for example,
it prevented the new PlayStation from
reaching the shops before Christmas, which
was disastrous for Sony. If you get logjams
across the world’s ports, even consumers
who don’t care about the sea are going to
notice. It will take only the merest disruption
to kick things off.”
Worried?
Charles Orton-Jones is former deputy
editor of Real Business and is now a
freelance business journalist.
If you get logjams across the world’s
ports, even consumers who don’t
care about the sea are going to notice
22
>careerdevelopment
Conversion course
Photograph: Getty IMAGES
Natalie Gordon offers her plan for surviving
and thriving during an organisational change
programme – as both a leader and a follower.
We’ve heard it all before. In the current
climate of M&A mania, we’re constantly
being told to embrace change. We have to
be leaner and faster; to create more growth
and more profit. And we have to impress the
new owners of our organisations with ever
more ambitious plans. Does that sound
familiar? More and more of us belong to
companies that have recently merged or
been bought by private equity – and that
means new people with new ideas are at the
top. Whatever level you are at in your
organisation, there are practical things you
can do to survive the inevitable changes that
are on their way.
If you have just been given the task of
leading change in your organisation, the
chances are that you have a sense of
trepidation at this stage. This is a healthy
sign. If it were an easy job, no one would
bother writing about it. As former US
president John Adams said: “If your actions
inspire others to dream more, learn more, do
more and become more, you are a leader.”
It’s a tall order, so where do you start?
Your first task should be to create a vision for
the first 100, 300 or 600 days. This needs to
be something that you can articulate in one
sentence, explaining what your organisation
will become and by when. And the first
question to ask yourself about the new vision
is whether it inspires you or not. If it doesn’t,
it’s unlikely to inspire anyone else. Once you
have the right vision, it’s easier to work out
your journey towards it, planning what the
main achievements will be along the way and
how you will reach them. So now you have a clear vision and you
know how you’re going to try to achieve it,
but do you and your fellow leaders have the
ability to lead the transformation? This
requires a high level of self-awareness, as you
will need to face some brutal truths about
yourself and your company. For example,
how connected are you to your organisation?
This is an important issue, because you will
need to empathise with its members and
mobilise them, removing barriers, seeing
through the politics and bringing the vision to
life. Placing a high value on innovation will
also be vital in creating solutions to
apparently intractable problems – something
that can be done only in a climate of trust,
collaboration and creativity. As a change
leader, you need to stay focused on what
needs to be done. The ability to see clearly
what must change and in what order is key,
as is knowing what can remain the same.
To do this, you need a robust framework in
which to operate, with clear accountabilities,
goals and review mechanisms.
Know what you are asking of your people.
Whatever change theory you subscribe to,
one thing is a given: change is emotional and
people will respond to it differently at different
stages. From the outset you need to consider
how people will feel and react. Something
that you can certainly influence is how you
behave. If you can alter your behaviour
appropriately to the situation and coach
others to do the same, you will have a better
chance of reaching your desired outcomes.
29
>careerdevelopment
1
2
3
4
5
6
7
8
9
10
Not communicating the hard
messages – eg, potential job cuts.
People will think that redundancies
are coming anyway and blow the issue
out of proportion.
Not ensuring that every member of
the leadership team is “on
message”. Slightest variations in the
information communicated will be picked
up on and spread around the company.
Pushing the change down from the
top, rather than involving people
from the bottom up, too. If they
aren’t engaged and don’t see any benefits
for them, change is unlikely to happen.
Failing to provide space and
support for people to think through
the personal implications of
change. The key to success is
understanding “what’s in it for me”.
Ignoring or fighting “troublemakers”.
These are often crucial individuals
and, if you can win them over by
responding to them effectively, they can
become your most powerful allies.
Not reviewing your progress
regularly. You will not be able to
correct your course if you plough
on regardless.
Focusing on the rational at the
expense of the emotional and
political – ie, proceeding with no
understanding of what people feel. If you
do this, the change won’t stick.
Focusing on the emotional and
political at the expense of the
rational. As with all things in life,
there needs to be a balance.
Thinking “it won’t happen to me”.
Ignore the change and it won’t
go away, but you might get
sidelined as a result.
Going along with the most
vocal element. Often, those
who make an impact through
the change process are not the usual
(loud) suspects, but those who have
grown in confidence by using it as an
opportunity to progress.
30
The first question to
ask yourself about the new
vision is whether it inspires you. If it doesn’t, it’s
unlikely to inspire anyone else
Natalie Gordon
To convince people to change, find
innovative ways to communicate the urgency
of the need and alter something small but
significant that indicates to the entire
organisation how committed you are
personally. At the same time,
expect people to push back –
either by blatantly refusing to
co-operate or, perhaps, by
agreeing to something but
never quite finding the time to
follow it through. It could be
useful to identify who really
supports the change and give
them a position of influence.
Likewise, by identifying the most
influential resistors, you can find
out why they’re against the change
and work out how to win them over.
Engage your workforce, involving people
at every level. As John Kotter, emeritus
professor of leadership at Harvard Business
School, argues: “Individuals alone, no matter
how competent or charismatic, never have
all the assets needed to overcome tradition
and inertia.”
You should create your vision with your
management team, communicate it to
everyone and then set up small teams
throughout the organisation to work on
specific problem areas. Once you have their
initial backing, you can maintain it by ensuring
that they have the resources they need and
that they’re all using the same tools to review
their progress and report back to you. Small
teams visibly working on change projects will
be noticed quickly, which will help to build the
momentum you need, particularly if you have
a well-structured internal communications
system in place.
If you’re not in a leadership role, you’ll be
able to see something big coming down the
line towards you. First, be true to yourself:
are you reacting from an emotional (“I don’t
like this”), political (“what’s in it for me?”) or
rational (“where’s the plan?”) standpoint?
Do you believe in it, or, more crucially, do you
want to believe in it? If you’re unsure, the
best place to start is to seek some
information. Talk to your line manager and
find out when the next communication event
is scheduled. Sort out the myths from the
facts and avoid
“emotional
vampires” who will
suck you dry of
energy by telling you
why this is wrong for
you, the organisation and
business in general. Look to
the positives.
Get involved. Heard about
the work groups springing up
around the organisation? Find out how you
can participate in them. This change may not
be for you, but you won’t be able influence it
if you disengage. Typically, any organisation
going through a big change will expect to
lose some of its workforce because they
don’t fit with the new vision. Don’t let that be
you just because you haven’t bothered to find
out how to make it work for you.
Whether you are asked to lead or support
the process, there comes a point when
delivering change becomes part of
everybody’s day job. To reach that stage with
as little pain as possible, you will need to
work fast, stay focused, be flexible, cope with
the demands of ambiguity and take control of
your own destiny. So don’t let change
happen to you – be the one making it.
The people who survive change will be
those who embrace it, taking the lead and
taking others with them so that the whole
organisation is moving in the same direction.
Natalie Gordon is senior consultant at
Egremont Group
PHOTOGRAPH: Alamy Ten common pitfalls
to avoid during a
change programme
>technicalmatters
36
Customer
profitability
38
Finance business
partnering
43
Performance
measurement
For more articles on management
accounting, careers and development,
see www.cimaglobal.com/insight.
Liz Murby explains why a strategy of keeping every one of your
customers satisfied is unlikely to optimise your bottom-line results.
The goal of business is not to improve
customer or employee satisfaction at any
cost, but rather to manage these
relationships and the drivers of customer
profitability to improve corporate
performance. The maximisation of profit
and shareholder return is best achieved
through the effective management of a
company’s relationships with each of its
customers. In order to do this, the company
Bank of America classified
its customers as either
‘preferred’ or ‘unprofitable’, and
the level of service delivered
to each type could be
customised accordingly
should identify the most and least profitable
elements of its total customer base (and
those in between), and manage these
relationships accordingly. Customer
profitability analysis (CPA) is the first stage
in this process.
Although they are clearly a significant
source of income to companies, customers
are equally the cause of various costs –
for example, marketing, delivery, after-sales
service and payment collection. Where all
customers not only buy a similar product but
also share the total servicing costs equally,
the profitability of each customer (income less
costs of service) is identical. In reality, of
course, this is seldom the case. Companies
generally offer a range of different products
and services, while their customers’
responses are similarly divergent.
Long-term, effective and profitable
customer relationship management is an
imperative which demands that companies
do the following:
nUnderstand the concept of customer
profitability and conduct CPA.
nMaintain and improve customer profitability.
nConvert unprofitable customers into
profitable ones.
Meeting the first of these challenges
requires a clear understanding of the causes
of both revenues and costs. Strategic cost
management tools such as activity-based
costing (ABC) facilitate this understanding.
Essential components of the drive to increase
customer revenues and decrease customer
costs include the following:
nAn analysis of the cost of customer service
(through ABC, for example).
nThe measurement of the lifetime value of a
customer to the company.
33
>technicalmatters
nProduct and service quality must extend
throughout the value chain.
nMaximising customer value requires the
involvement of the whole organisation.
An increasing focus on customer
profitability has led some companies to
change their marketing strategy. Instead of
pursuing new, unprofitable customers, they
are switching to defensive strategies, seeking
to retain existing customers and increase
the volume and value of their purchases.
Federal Express, for example, reviewed how
it managed customer relationships as the
result of a CPA exercise. It now treats clients
who spend a lot of money while demanding
little customer service and marketing
investment differently from those who spend
just as much but are costly to maintain.
FedEx no longer promotes itself aggressively
to those customers who spend little and
show few signs of spending more in the
future. These changes have substantially
reduced the company’s costs.
Standard Life Assurance has benefited
from CPA in a similar way. The results of its
analysis suggested that, although the
company’s direct-mail campaign had led
1 The service profit chain
Internal
Operating strategy and
service delivery system
External
Service
concept
Target market
Loyalty
Revenue
growth
Satisfaction
Productivity
Employees and output
quality
Service
value
Satisfaction
Loyalty
Capability
Profitability
Service
quality
Workplace design
Job design/
decision-making latitude
Selection and development
Rewards and recognition
Quality and
productivity
improvements
yield higher
service quality
and lower cost
Attractive value
Lifetime value
Service designed
and delivered to
meet targeted
customers’ needs
Retention
Repeat business
Referral
Information and
communication
Adequate “tools” to
serve customers
An exhibit from “Putting the service profit chain to work,” by J Heskett, T Jones, G Loveman, W Sasser and L Schlesinger,
March-April 1994. Adapted and reprinted by permission of Harvard Business Review. Copyright © 1994 by the president and fellows
of Harvard College, all rights reserved. Source: Heskett, Sasser and Schlesinger, 1997.
34
to higher total revenues, it was attracting the
wrong types of new customer: older couples
and stay-at-home mothers who typically
signed up for costly home visits by sales
agents and purchased one policy with a small
margin. The profitability of each new
customer was low.
First Union has also changed its
strategies to increase shareholder value.
While it once focused on exceeding
customer expectations, the company came
to realise that profitability was sacrosanct if
the long-term viability of the business was not
to be compromised.
Delivering customer satisfaction requires a
complete understanding of organisational
value drivers and of the causal relationships
among employee satisfaction, customer
satisfaction, customer profitability and
corporate profitability. Some companies have
used the service profit chain model (see
diagram 1) to help them understand the
causal links between employees and
customers and their combined impact on
revenue growth and corporate profitability.
The application of CPA has proved
particularly profitable in the banking
industry, where a range of different products
is offered to a varied customer base. Bank
of America recognised the need to balance
customer service and customer profitability
to optimise activity. It used CPA to reduce
the number of customer defections and
increase balances among the top ten per
cent of its customers. The programme’s
launch in 1997 saw the introduction of a
personal identification number for each
caller. This allowed the bank to determine
different customers’ attributes and
segment the market according to their
profitability rankings. It classified
customers as either “preferred” or
“unprofitable”. As a result, their calls could
be routed to different operators and the level
of service delivered to each type could be
customised accordingly.
Similarly, a CPA by First Chicago
Corporation generated profit and loss
statements for every client, leading it to
impose a $3 “teller fee” on some of its least
profitable customers. Although about 30,000
people closed their accounts as a result,
many others became more profitable,
either by increasing their balances to avoid
the fee or by managing their money using
ATMs only, which are cheaper to run.
Before implementing CPA, Paging
Network, a Dallas-based paging service
provider, had based its strategy on increasing
market share. To this end, it had provided
free pagers to users. But it became evident
from the CPA data for individual customers
that many were actually too costly to service
profitably. Since the company had no room
for further cost reduction, it increased rates
for marginal customers and lost about
138,000 of them as a result. Although Paging
Network expected to lose a further 325,000
(3.2 per cent of its customer base), it was
determined that, since the cost of servicing
these customers was greater than the
revenue this generated, the company should
cut its losses and let them go.
Accountants and marketing professionals
have traditionally addressed different aspects
of the company-customer relationship. Where
accountants tend to focus on cost reduction,
marketers generally consider how to increase
customer satisfaction, primarily by examining
the links between overall satisfaction and
revenues. CPA attempts to bring together
these approaches to analyse, manage and
improve customer profitability.
As can be seen from the experiences of
FedEx and Paging Network, “satisfied”
customers can prove to be unprofitable.
Furthermore, individual customer satisfaction
is not the sole, or even the most significant,
factor in ensuring customer profitability.
Customer retention, customer loyalty and
customer service costs are key factors, too.
Customer retention describes the ongoing
relationship that yields revenues from sales of
additional products or services. The revenues
become more profitable as the customer
becomes easier to serve. Since the customer
is buying again, it might be assumed that:
nLess selling effort is required for these
additional purchases.
nCustomer service costs will decrease.
nThe average cost of customer acquisition
will decline.
The validity of such causalities can have
a big impact on organisations’ strategies.
Ford Motor Company, for example, based its
corporate goal on increasing the customer
retention rate from 60 per cent to 80 per
cent, convinced that each additional
percentage point of customer retention was
worth $100m.
Customer recommendations, a by-product
of loyalty and retention, can have significant
2 Why customers are more profitable over time
Profit from price premium
Profit from referrals
Profit from reduced
operating cost
Company profit
nThe development of profitable, long-term
customer relationships for increased
corporate profits and shareholder returns.
Improvements in IT have allowed
organisations to develop closer relationships
with their customers. Companies are able to
interrogate large databases of customer
information and identify groups of people with
similar attributes. By matching marketing
expenditure against the anticipated reaction
of identified segments of the customer base,
they can manage marketing expenditure to
optimise shareholder returns. This can lead to
significant operational changes.
Many companies are aware that customer
satisfaction is a prerequisite for long-term
corporate profitability. Although customers do
not determine corporate strategy, their values
and expectations are influential. The following
five axioms apply to most companies and
help to explain a customer’s value:
nThe customer defines product or service
quality and the acceptable price.
nCustomers form their expectations relative
to competitive alternatives.
nCustomer expectations change – and
they usually increase.
Profit from increased
purchases and higher
balances
Base profit
0
1
2
Customer
acquisition
cost
3
4
5
6
7
Year
An exhibit from “Zero defections: quality comes to services”, by F Reichheld and W Sasser (September-October
1990). Reprinted by permission of Harvard Business Review. Copyright © 1990 by the president and fellows of Harvard
College, all rights reserved. Source: Heskett, Sasser and Schlesinger, 1997.
and valuable effects on the company’s
bottom line. Word-of-mouth recommendation
is important to Southwest Airlines (whose
reservation system has never been accessible
to travel agents). It has relied on advertising
and customer loyalty to spread awareness of
its brand. The company, which began flying
in 1971, has consistently been profitable.
Convinced that customer loyalty is a more
important factor than market share in
increasing its profitability, Southwest Airlines
strives to build customer loyalty by providing
dependable, frequent services on relatively
short routes at low fares, with an emphasis
on friendly service.
Analysis of the total profitability of
customers reveals, perhaps understandably,
that it changes over time, as the benefits and
costs of purchased offerings change, for both
organisations and individual customers.
Diagram 2 suggests that reduced operating
cost and referrals combined are not only the
largest source of company profit, but also the
fastest-growing source of profit.
Since the advent of ABC in the eighties
and the emergence of the balanced
scorecard some time later, managers have
been prompted to examine closely the cause
of costs in the quest for increased profits.
The effective use of both approaches relies
on improved understanding of the
organisational drivers of profits. The two
models rely on the identification,
measurement and understanding of the
drivers and causal relationships among
employee satisfaction, customer satisfaction,
customer profitability and corporate
profitability. Only with the specification and
measurement of these relationships can the
costs and revenues related to improving
corporate performance be managed properly.
Liz Murby is technical issues manager
at CIMA.
Further information
This article is based on “Customer profitability analysis”, a Management
Accounting Guideline written by Marc Epstein and published by
CIMA, the American Institute of Certified Public Accountants and the
Society of Management Accountants of Canada. CIMA members
can access the full version at www.cimaglobal.com/cpdcentre.
35
>technicalmatters
The CIMA Improving Decision Making in
Organisations Forum is so named because
its members recognise that management
accounting has a broad role to play in
supporting decision-making across
organisations. As global markets give
companies around the world access to
similar resources, and as increasing
competition causes business processes to
converge on similar standards, decisionmaking remains the crucial link in the value
chain leading to superior returns.
The forum’s viewpoint is supported by the
distinguished academic Thomas Davenport
in Harvard Business Review (“The coming
commoditization of processes”, June 2005).
He also suggests that this convergence of
standards will lead to the further outsourcing
of non-core business processes.
Diageo is an example of a global company
that has applied this logic. It has a keen
understanding that its brands create
shareholder value. Brand management is,
therefore, the basis of Diageo’s success.
It has outsourced many other processes –
including accounts – that might once have
been considered core activities.
The world’s best-performing firms have
already seized the opportunities presented by
finance transformation to make their accounting
functions more efficient. But they have also
developed accounting professionals to operate
as business partners, helping to improve
decision-making across the organisation.
The long-discussed finance transformation is
already a reality for these companies, giving
them a significant competitive advantage.
The blueprint for improving the efficiency
of the finance function is relatively clear, but
developing effective business partners to
provide decision support is a greater
challenge. It requires a change management
programme, starting with a shared vision
of the future role of the function.
1 The decision-making process
Strategic
position
Strategic
options
Strategic
implementation
Strategic
risks
CIMA Strategic Scorecard
“Context
mindset”
“Frame”
the issue
Assemble
information
Feedback
Select
alternatives
Decision
Manage
implementation
Impact
Source: CIMA, September 2007.
36
The forum contends that any company
not transforming its finance function to
become more efficient and effective in
supporting decision-making could be
jeopardising its competitive position. This
opinion is supported by a number of studies.
For example, research by Accenture has
shown a correlation of over 70 per cent
between businesses with high performance
and the excellence of their finance functions.
And a study by the Economist Intelligence
Unit for KPMG has found that, relative to
their peers, top-performing companies’
finance departments place more emphasis
on decision support.
Diagram 1 illustrates the decision-making
process as discussed by the forum. From
this it’s clear that:
nDecision-making is not the end of the
process. It extends through to achieving
results and is a continuous process.
nAccountants contribute to the
strategic planning and enterprise
governance framework (the CIMA
Strategic Scorecard), which articulates
the business’s competitive position
and objectives.
nIndividuals’ personal contexts and
attitudes can impair decision-making,
but business partners can address this
problem by championing evidence-based
decision-making.
nBusiness partners can help to “frame”
a decision, provide management
information, contribute insights and
analyse alternatives to help the decisionmaker. They can then support risk
management and performance
management to aid implementation.
It is clear that management accountants
have – as they’ve always had – a significant
contribution to make at each stage of the
decision-making process. This is good news
for financial managers who have technical
know-how, understand the business and use
good communication and influencing skills.
Although the term “business partner” is
widely used to describe a role that brings
Forum facts
The CIMA Improving Decision Making in
Organisations Forum is an assembly of
large organisations represented by senior
finance and accounting professionals.
Members include the BBC, Diageo, the
Department for Work and Pensions,
Ford, Fujitsu Siemens, Kimberly-Clark,
the Linde Group, Pfizer, Roche, RollsRoyce, Royal Mail, Tesco and Unilever.
The institute facilitates their discussions,
which can provide useful insights for
future-proofing the profession.
The forum first met in 2000 to share
experiences of implementing strategic
enterprise management systems to
improve decision-making. More recently,
it has been considering a related, but
more challenging, issue: how to develop
and deploy management accountants
who can partner their businesses to
improve decision-making.
The forum also keeps management
accountants abreast of developments in
the finance function that may affect their
CPD requirements. CIMA recognises that
it must continually develop its syllabus
and CPD framework to meet employers’
changing needs and ensure the
continuing employability of its members.
Directorate
Strategic
A CIMA forum has warned business leaders that a failure to change their
finance functions could harm their competitiveness, writes Peter Simons.
2 Four types of business partner
Operational
accounting and business management
together, expectations of the role can
vary (see diagram 2). Although shared
service centres – whether in-house or
outsourced, local or offshore – are
becoming increasingly able to provide
regular financial reports and analysis
(denoted as type 1 in the diagram), most
business partners are based within the
business lines to provide operational
support (type 2). As long as they can be a
“constructive irritant” when necessary, this
form of relationship seems satisfactory for
manufacturing companies with long
product life cycles – Ford and Rolls-Royce,
for example.
Some business partners work more
closely with the directorate and offer
expert support and direction from the
centre (type 3). Risk management services
are provided in this way at the Linde Group,
for instance.
3 Expert
services
4 Finance
leadership
1 Shared
service centres
2 Financial
support
Centralised
Embedded
Source: CIMA, September 2007.
The emerging ideal type of business
partner, especially in the fast-moving
consumer goods industry, is someone who
can collaborate empathically with
operational managers (type 4). He or she
speaks their language, rather than financial
jargon, but brings accounting discipline to
decision-making and can challenge their
assumptions – in effect, a sparring partner.
Leading companies run training programmes
to develop such professionals. Unilever, for
example, has its own finance academy.
One bank told the forum that a number
of its accountants in business partner roles
seemed to prefer spending time reworking
reports provided by its shared service centre,
rather than working alongside operational
managers. The bank has since provided
“business performance managers” to help its
business partners and remove this excuse.
Roger Tomlinson, executive vice-president
of finance for Rolls-Royce’s gas turbine
operations, comments that enterprise
resource planning (ERP) systems actually
created more work for the firm’s management
accountants initially, keeping them busy with
spreadsheets. But there is now scope to
add front-end reporting, planning and
analysis systems to ERP systems so that
information goes directly to operational
managers in a format that they can readily
understand. Rolls-Royce found that this
significantly reduced the time that its
management accountants needed to spend
on reworking figures, freeing them up to
serve as business partners.
It seems to their operational colleagues
that most accountants are working in their
comfort zone, according to the forum. The
transformation of finance gives them the
chance to increase efficiency in this area
and also effectiveness in supporting value
creation. Many accountants will be
challenged to move out of their comfort
zone, becoming less of a score-keeper and
more of a player alongside their team mates
in the business. A number of forum members
have warned that some people from the
operational side, often engineers or MBAs,
will provide stiff competition for accountants
applying for business partner roles.
The forum has described the
development of accountants as business
partners as the process of becoming
“T‑shaped”. This means that they should
acquire a broad range of business and
interpersonal skills to top off the core
strengths and technical skills acquired
through their professional training. This
requires a formal development programme
that includes performing a range of finance
roles and working closely with, or even
within, business lines.
The institute has just published a report
based on the discussions of the forum
entitled “Improving decision making in
organisations: the opportunity to transform
finance”. The publication shows how leading
organisations have engaged accounting
professionals as business partners to improve
decision-making. It makes a compelling case
for accountants in business to be engaged in
such roles, providing real examples of how
they can combine their core technical skills
with an understanding of the enterprise.
The report, which can be downloaded
from www.cimaglobal.com/decisionmaking,
also alerts management accountants to
developments in the finance function that
may affect their CPD requirements.
Peter Simons is a technical specialist in
CIMA’s Innovation and Development team.
Further information
If you would like to comment on the report or share insights from your
own experience, please e-mail peter.simons@cimaglobal.com.
37
>technicalmatters
Performance measurement
Richard Bull explains the three “effs”: efficiency, effectiveness and efficacy.
categorised by three “effs”: efficiency,
Management accountants can
1 The enterprise stewardship model
effectiveness and efficacy.
make an important contribution
When we use financial metrics, they
towards maximising the value and
tend to be quantitative by nature, so
success of an enterprise. One way we
Effective?
they are most appropriate as measures
do this is by setting appropriate targets
Efficacious?
Efficient?
of efficiency. The more we understand
for financial performance, translating
the processes that lie behind them, the
them into operating requirements and
Reinvestment
more we can use them qualitatively to
then measuring performance against
Growth
Stage 6
Dividends
measure the effectiveness of those
them. But there are many measures
management
processes. But, if true success is to be
of value and of success, which – like
Disposable
measured by the efficacy of an
beauty – are very much in the eye of
profit
enterprise’s performance, we need to
the beholder and can be assessed in
Tax
Tax
Stage 5
management
relate measures to the quintessential
different ways from different viewpoints.
nature of that enterprise. When
The value a company represents
Profit
assessing the role of performance
can be assessed in terms of, say, the
Value-add
Sales
Stage 4
management
measures – eg, financial ratios – in a
value of the assets on its balance
Purchases
model of success for a business, it is
sheet or its expected future profits.
Capacity
and expenses
useful to recognise their contribution in
Measures of success may include its
Asset
Customer
Stage
3
these three dimensions. In this way we
stock price or market share, but can
management
requirements
can ask appropriate questions to
also cover other factors depending on
Funds
assess how well a company’s strategies
the company’s particular vision and
are achieving its goals.
strategy, such as its use of natural
Funding
Borrowings
Stage 2
management
Having recognised the three
resources or its contribution to society.
dimensions of performance
It is important to understand how
Owner’s
investment
measurement, how can we apply them
financial results can measure the
to the full scope and complexity of a
different dimensions of a company’s
Potential
Strategic
Stage 1
business and choose the most
vision and strategy. A common twodemand
management
appropriate measures at each step?
dimensional view distinguishes
Idea
The enterprise stewardship model
between resource-based and marketuses the metaphor of a building (see
led strategies. The former seeks to
make the most of the resources
panel 1). The questions of efficiency,
available; the latter seeks to meet the needs of can be. Measures of effectiveness assess the effectiveness and efficacy apply at each stage
the market. But a third dimension is becoming value of output produced from a given set of
of construction. This story can be told in
increasingly important to the brand image
financial terms, as it will be here, but it can
resources. This subtly shifts our focus from
and differentiation of a company. It’s the way
encompass less tangible currencies such as
measuring inputs to measuring outputs.
we express, and live up to, our company’s
time, skills and reputation.
With financial measures it represents a shift
purpose and vision – and the extent to which
The six key stages are as follows:
from measuring cost to measuring value.
we achieve our own definition of success. This A success-led strategy focuses on how well a 1The people with the original idea for the
is what we might call a success-led strategy.
company can achieve its vision and purpose
business need to test the potential
In order to measure these three
as intended – the level of efficacy it achieves.
demand for it before investing.
dimensions we need to understand each type This is a little-used term but one that aptly
2They’ll need financial or other backing
of strategy. A resource-based strategy
describes this third dimension of
from elsewhere and will have to borrow.
focuses on how efficiently a company’s
performance. Measures of efficacy assess
3When using these funds they should
resources can be used. Measures of
the degree to which the inputs produced the
primarily consider the ultimate
efficiency take the inputs to a process and
intended result and thereby contributed to
customer’s requirements.
assess how economically they are used to
the achievement of the enterprise’s true
4Having established an asset base, the
produce a given output. They tend, therefore, purpose. Here we venture into aspects of
business then procures the bits and
to focus on cost. A market-led strategy
value that are often less tangible and have
pieces it needs in order to produce,
focuses on how well a company can respond more to do with measuring success. The
sell and deliver its products and services,
to demand and add value – how effective it
three dimensions can, therefore, be
thereby adding value.
43
>technicalmatters
2 Choosing ratios for performance measurement in the three dimensions
PROCESS
DIMENSION
Efficiency –
the economic use of scarce resources
Effectiveness –
the production of a result or effect
Efficacy –
the production of the intended results
Growth management
Dividend payout ratio
Book to market value ratio
Actual to plan performance
Tax management
Effective tax rate
Net after-tax profit rate
Investment equivalent of tax paid
Value-add management
Gross margin
Net margin
Customer loyalty
Asset management
Productivity rates
Asset turnover rates
Employee turnover rate
Funding management
Average interest rate
Debt coverage ratio
Share turnover rate
3 Asking strategic questions in the three dimensions
PROCESS
DIMENSION
Efficiency (quantitative)
Effectiveness (qualitative)
Efficacy (quintessential)
Growth management
How can we make best use of the
distribution and reinvestment of profits?
How can we maximise the growth and
value of the firm from the profit available?
How can we optimise the realisation of
our vision from the profit available?
Tax management
How can we minimise the amount of tax
we pay?
How can we maximise the profit
available to the firm?
How can we ensure that the tax the firm
pays complements our vision?
Value-add management
How can we deliver our product or
service at the lowest cost?
How can we maximise the value that
people receive?
How can we optimise the benefit that
our vision provides?
Asset management
What is the least amount of resources
we need for what is required?
What is the best quality that our
resources can produce?
How can we best use those resources to
enable our vision to be realised?
Funding management
What is the cheapest method of raising
the funds we need?
What are the most secure and
lowest-risk sources of funds?
What sources of funding will best help
us to sustain our firm’s vision?
5The business takes a share of the value it
adds (or deducts), as profit (or loss), which
is then subject to tax.
6It is able to apply the disposable profit left
over, either in the form of dividends or by
retaining it for future investment.
This six-step process can be applied to
any business. The sub-processes have inputs
and outputs that enable their performance to
be measured using ratios of inputs to
outputs. For example, funding management
can be measured by the firm’s gearing ratio;
its asset management by its asset turnover
ratio; its value-add management by its profit
margin; its tax management by the effective
rate it pays; and its potential for growth by
the amount of retained profits it achieves.
But such ratios can be crude measures of
the overall performance of a process. It is
helpful, therefore, to look at each process
and pick the most appropriate measure for
each of the three dimensions. Panel 2
provides an example of ratios that can be
44
chosen to measure these dimensions for the
more tangible stages “above ground”. From it
we can see that financial ratios are most
relevant to measures of efficiency. They can
also be applied as measures of effectiveness.
But they need to be supplemented with nonfinancial measures when seeking to measure
the efficacy of the business.
We can also use the enterprise
stewardship model to prompt strategic
questions across the three dimensions of
each process in a business. Questions of
efficiency focus on the economic use of
scarce resources: how can we do things as
cheaply as possible? Questions of
effectiveness focus on the product or service:
how can we maximise the value we add?
And questions of efficacy focus on the results
intended: how can we best realise our
corporate vision? Panel 3 sets out a range of
questions prompted by examining each
stage in the business process above the
ground and across each dimension.
Financial results must be monitored and
reported for both management and statutory
purposes. But, by recognising the wider
dimensions of their business, management
accountants can participate more fully in the
wider debates that concern some of the less
tangible, but no less crucial, aspects of
maximising value and success. They can
contribute by measuring the right things and
prompting the right questions.
Richard Bull ACMA is an award-winning
business writer. This article is adapted
from his latest book, Financial Ratios:
How to Use Financial Ratios to Maximise
Value and Success for Your Business
(CIMA Publishing, £29.95). To order your
copy at a 20 per cent discount and with
free P&P, call +44 (0)1865 474010 quoting
reference code ASB5, or order online at
http://books.elsevier.com/accounting,
adding the same code to the box. The
offer expires on December 31.
48
aper P1 P
Performance Evaluation
>study notes
54
aper P3 P
Risk and Control Strategy
>student
ONE2ONE
I am
prepared to
wander the
world for the
foreseeable
future. I have
no plans to
return to Turkey
permanently
– there are still
plenty of
other nations
to explore
Ozgur Kilic, Head of oncology
finance, Novartis, Milan
You went to university in Turkey and then
completed an MBA in Germany. How did
you end up taking the CIMA qualification?
I accepted a place on Novartis’s finance
development programme, which involves
three placements of two or three years each
in different countries. An MBA isn’t essential
to get on the scheme, but almost everyone
I know who’s doing it has one. I spent two
years at headquarters in Basel and then
started CIMA when I was sent to the UK on
my first placement. I chose it because it’s
widely recognised there and I had access to
excellent training providers.
You’ve just moved to Italy and you’re
planning to take your last strategic paper
this month. How will you find the time?
The UK office understood the course workload
and was very supportive. The company
financed my training and gave me some time
off. I mainly study in the morning before work
and on weekends and holidays and I will follow
the same strategy in Italy. I hope I will pass the
exam this month and take TOPCIMA in March
so that I can get my life back. It’s the first time
I’ve studied while working full time and I would
think twice before doing it again.
What does your new job involve?
In my previous role I was head of UK group
finance functions, covering treasury, tax and
group accounting issues. I had to oversee the
reports to HQ, as well as the statutory
accounts for a number of UK operations.
My new role focuses on planning, forecasting
and business partnering. It’s more about
management accounting because I’ve got to
support strategy by analysing data, ensure
there’s a rigorous performance measurement
structure in place and monitor this effectively.
The two roles should have given me all the
experience I need to become a member.
Where will you go next?
By the time I finish in Milan I should be ready to
go to a small to mid-sized business as CFO,
but I don’t know where. The programme is
informal, but structured. One of its conditions
is that we’re flexible about jobs and locations,
but our mentors in Basel try to ensure that we
gain different experience in each role.
What happens when you finish the scheme?
The programme aims to prepare me to become
a CFO, but there won’t be any immediate
change after finishing it except that my
assignments will be a bit longer. I am prepared
to wander the world for the foreseeable future.
I’d be happy to take a placement in Turkey
because it’s an interesting market, but I have
no plans to return there permanently. There are
still plenty of other nations to explore.
What have you found most challenging
about the CIMA course?
It’s tougher than I expected. You need to be
very disciplined and exam technique is
important. The only way to get this right is to
practise, which takes time. It also depends on
your background. I found paper P6 tough
because you have to interpret questions the
right way and manage your time well. But
many people had problems with P9, which is
quite technical and mathematical, whereas I
found that relatively easier.
Has CIMA changed your outlook?
In many ways – besides helping me to do my
job better. I now use my CIMA skills to analyse
how businesses treat me as a customer.
For example, I fly about once a fortnight and I
must really annoy airlines’ customer-service
staff. Whenever things go wrong I remind them
about their strategy and tell them how the way
they’re treating me undermines this. But at
least I usually get my money back.
financial management 47
>studynotes
PAPER P1
Performance Evaluation
Although a number of commentators have
questioned the value of budgeting and
continue to question it (see September’s
Study notes article on paper P1, for example),
most companies use budgets, since they
provide a framework for strategic direction
and operational control. For instance, a
CIMA-backed research project involving 41
UK companies last year revealed that only
one of the sample didn’t use budgets. It’s
clear, therefore, that budgeting is still part of
the lifeblood of enterprise, but the key
question concerns how to ensure that it
remains relevant for modern organisations.
Let’s look at the fictional case study of
Great Wall Cellars to compare and contrast
conventional budgeting, zero-based
budgeting (ZBB) and activity-based budgeting
(ABB). This company imports wine from
China, which it then resells to off‑licences and
specialist food and drink outlets in the UK.
At present, its customers send their sales
orders by post to the sales office. The orders
are entered into the computer system and
sales confirmations are posted back to the
customers. The sales office often has to deal
with customer enquiries about orders, since
the sales order cycle generally takes between
five and ten days.
Great Wall Cellars’ sales director recently
produced sales figures for the annual budget
after making a detailed analysis of current
and projected demand for the company’s
products from current and new customers.
Zero-based budgeting will
ensure that inappropriate
activities are not undertaken, since it
makes a full evaluation of existing
activities in relation to future needs
48
Forecast sales were £8m and budget sales
were £9m. The operations manager
estimated that the sales office would incur
costs of £200,000 in the current year.
Conventional budgeting, which is an
incremental approach, uses a company’s
existing operations and current cost structure
to determine budget costs. The starting point
for this process is to obtain forecast costs for
the current year. The next step is to make an
adjustment to forecast costs based on
budgeted output – eg, sales. The budget
for the sales office will be set at £225,000
– ie, £9,000,000 ÷ £8,000,000 x £200,000.
The sales office budget includes an
inflation adjustment, since the budget selling
price has been increased in line with the
expected rate of inflation.
Conventional budgeting will provide
accurate budget figures for variable costs
such as direct materials, direct labour and
sales commission, because these have a
clear volume-based link with production/
sales. But this approach is unlikely to produce
accurate figures for support departments,
whose costs are largely fixed and semi-fixed
and driven by other factors such as sales
orders and purchase orders. In addition, no
consideration is given to the cost of providing
existing activities, since the focus is on
Photograph: Photolibrary
Grahame Steven compares budgeting methods and considers whether
the activity-based approach provides a basis for better financial planning.
>studynotes
incremental change. Inappropriate business
practices may also be perpetuated, because
no evaluation of current activities is made.
ZBB was developed in the sixties as an
alternative approach to address the
deficiencies of incremental budgeting – in
particular, the non-evaluation of existing
activities. This method asks the following
key questions:
n Should an activity be performed?
nHow much of an approved activity should
be provided?
nHow should the activity be undertaken?
nHow well should the activity be done?
nShould the activity be performed in-house
or subcontracted?
The ZBB approach will ensure that
inappropriate activities are not undertaken,
since it makes a full evaluation of existing
activities in relation to future needs. The main
disadvantage of this method is that it is
extremely time-consuming, since it requires
the gathering, analysis and evaluation of
large amounts of data. As a result, it’s used
by very few companies.
The activity-based approach to budgeting
is a more sophisticated version of traditional
absorption costing. Activity-based costing
(ABC) uses a number of different bases –
sales orders, purchase orders, machine
set‑ups and so on – to charge overheads to
products, since it recognises that many
support departments’ activities are not driven
by volume-related measures such as sales.
ABB uses the costs drivers identified by
ABC to derive budgets for support
departments. In simple terms, it involves the
following stages:
nDetermine the key budget factor (sales) for
the next budget period.
nEstimate the support activities required for
the budget from cost drivers.
nSet the budget for the support activities.
The following information was obtained
from Great Wall Cellars’ ABC analysis and
used by the sales director to determine the
sales department’s budget:
n Sales office cost driver: sales orders.
n Forecast number of sales orders: 40,000.
nThe company does not expect to lose any
of its current customers, because the
demand for Chinese wine is increasing.
nThe average sales value per order
received from existing customers has
been estimated to be ten per cent higher
in the next budget period.
50
PAPER P1
1 First ABB analysis
Cost per sales order
Sales office forecast
Forecast sales orders
Forecast cost per sales order
Inflation adjustment
Budget cost per sales order
Current customers
Forecast sales
Forecast average sales order value
Budget increase in sales order value
Budget average sales order value
Budget sales orders: current customers (1)
Budget sales
New customers
Total budget sales
Budget sales: current customers
Budget sales: new customers
Average sales order value: new customers
Budget sales orders: new customers (2)
Total budget sales orders
Current customers (1)
New customers (2)
Total sales orders
Sales office budget
Budget cost per sales order
Budget
nThe average sales value received from
new customers is expected to be £160
per order.
nExpected rate of inflation for the next
budget period: two per cent.
nThe maximum capacity of the
sales office is six people.
The first step of the ABB
analysis in table 1 is to calculate
the forecast cost of processing
a single sales order – ie, £5. The
forecast cost is then adjusted by
the budget inflation rate of two
per cent to obtain the budgeted
cost of £5.10 per sales order. It is
then necessary to determine how many
sales orders will be received in the next
budget period to calculate a total budget.
The average budget value of a sales
order from existing customers is
£200,000
÷ 40,000
= £5.00
x 1.02
= £5.10
£8,000,000
÷ 40,000
= £200
x 1.10
= £220
x 40,000
= £8,800,000
£9,000,000
– £8,800,000
= £200,000
÷ £160
= 1,250
40,000
+ 1,250
= 41,250
£5.10
x 41,250
= £210,375
expected to rise by ten per cent – ie, from the
forecast figure of £200 to £220. This will
produce budget sales from existing customers
of £8,800,000 (£220 x 40,000) and £200,000
from new customers – ie, £9,000,000 minus
£8,800,000. Consequently, the firm
will receive 40,000 sales orders
from existing customers, plus 1,250
from new customers, in the next
budget period.
The final step is to calculate
the total sales office budget from
the budget cost of processing a
single sales order – ie, £210,375.
The ABB analysis in table 1
assumes that costs incurred by the
sales office are mostly variable. In practice,
it would incur many fixed and semi-fixed
costs, including rent, heating, insurance
and salaries. The analysis must,
>studynotes
PAPER P1
2 Second ABB analysis
Forecast hours
Hours required per order
Total hours required (3)
Contract hours per employee
Current number of employees
Total contract hours (4)
Overtime hours (3-4)
Forecast cost
Salaries (including overtime)
Overheads
Total sales office forecast
Budget
Hours required per order
Total hours required
Contract hours per employee
Number of employees required
Annual salary per employee
Total salary cost
Sales office overheads
Total sales office budget
therefore, be amended to determine how
much of the key resource – staff time – is
required to process sales orders to provide a
better basis for determining the budget and
identifying any problems associated with the
sales office. Table 2 contains a revised ABB
analysis focusing on staff time.
The firm’s recent ABC project revealed an
average processing and query time for a
single sales order of 0.2 hours. The total time
required for forecast sales orders is,
0.2
x 40,000
= 8,000
1,500
x5
7,500
500
£80,033
+ £119,967
= £200,000
0.2
x 41,250
= 8,250
÷ 1,500
= 5.5
x £15,000
= £82,500
+ £124,000
= £206,500
therefore, 8,000 hours. This includes 500
hours of overtime, since the five-person
sales-office team is contracted to work only
7,500 hours a year. Great Wall Cellars is
considering employing an extra person on a
part-time contract, since the current high
level of overtime is unpopular with staff.
Forecast figures in table 2 for the sales
office indicate that £80,033 will be spent on
salaries and £119,967 on overheads in the
current year, making a total cost of £200,000.
The time required to process budget sales
orders is 41,250 orders x 0.2 hours = 8,250
hours. Because the firm has decided to
eliminate overtime, it will need to employ
8,250 ÷ 1,500 = 5.5 people in the sales
office to meet the projected workload.
Since the extra employee will have a 50 per
cent contract, the salary budget will be
£15,000 x 5.5 = £82,500.
While overheads have been increased
above the inflation rate to £124,000 to take
account of the additional staff member, there
is no need for extra office space, since the
sales office can accommodate a team of six.
The total budget figure for the second ABB
analysis is consequently £206,500.
By focusing on staff time, the second
ABB analysis calculates a better budget
figure and gives more information on the
sales office’s cost structure than the first
analysis. It also provides an insight into the
sales office’s cost structure. The firm will incur
a step increase in fixed/semi-fixed costs if it
has to employ more than six people in the
sales office to handle an increase in workload.
The second analysis may be superior, but
neither addresses the fundamental issue of
working practices. Although the sales office
uses an IT system, it appears to be a
computerised version of a manual system.
Great Wall Cellars needs to re-engineer its
business processes to allow the digital
transmission of information between itself
and its customers to increase efficiency and
reduce the number of queries. Companies
that implement ABB must ask the type of
questions inherent in ZBB to ensure that
their practices remain up to date.
Grahame Steven is a lecturer in the
School of Accounting, Economics and
Statistics at Napier University, Edinburgh.
P1 further reading
B Scarlett, Management Accounting – Performance Evaluation CIMA Learning System (2007 edition),
CIMA Publishing, 2006.
L Burke and C Wilks, Management Accounting – Decision Management CIMA Learning System
(2007 edition), CIMA Publishing, 2006.
C Drury, Management and Cost Accounting (sixth edition), Thomson Learning, 2004.
D Dugdale, T Jones and S Green, Contemporary Management Accounting Practices in UK
Manufacturing, Elsevier, 2006.
J Innes, F Mitchell and D Sinclair, “Activity-based costing in the UK’s largest companies”, Management
Accounting Research, Vol 11, No 3, 2000.
53
>studynotes
PAPER P3
Risk and control strategy
Photograph: Alamy
Steve Whittenbury casts a critical eye over recent events to highlight
how business risks are created and managed – effectively or otherwise.
54
It was the night before the 1997 UK
general election in the south Devon seaside
town of Torbay. Having finished his re-election
campaign, the constituency’s Tory MP,
Rupert Allason, dined in a local restaurant.
During his meal he is reputed to have
insulted the staff, all of whom had been
planning to vote for him. The following day,
the seven employees switched their
allegiance to the Liberal Democrat candidate.
Allason went on to lose his seat to the
LibDems – by 12 votes.
If this tale is to be believed, it illustrates the
foolishness of ignoring risks and the impact
that inappropriate acts can have. But surely
this is common sense? If you pre‑empt all
your risks, you can manage them away and
minimise their impact. This theory seems
sound and it underpins the P3 syllabus, yet
the following problems remain:
nMany employers continue to ignore some
of the fundamentals of
this subject (often at
their peril, as we will
see later).
nStudents have great
difficulty seeing how this
fits in with what is
required by P3, because
many of them do not
appreciate the nature of
risk and control in the
real world.
A quick look back over the
past year shows us that the
real world is full of uncertainty,
which must be dealt with in a
variety of ways. Royal Mail, for
example, has attempted to
introduce new working
conditions to modernise its
service and ensure that it’s
able to compete in the
21st century, but change has
brought its own problems.
Employees were unhappy
about its plans and took industrial action in
July and again last month. Although Royal
Mail and its trade union are trying to
negotiate a way forward as FM goes to
press, they have to balance two competing
demands: keeping the company financially
viable while ensuring that its human
resources are properly valued.
Postcomm, the industry regulator, has
allowed private companies to compete with
Royal Mail for daily postal deliveries. The
expected outcome is cheaper postal rates
and improved service through efficiencies –
for example, through the introduction of
size- as well as weight-related prices. Its
“Pricing in proportion” structure is designed
to match the revenue earned by transporting
printed matter with the true cost – an issue
that the previous system, based on weight
alone, did not address.
It remains to be seen how these
changes will affect consumers.
But both Royal Mail and its
rivals need to address the
impact that the virtual
world is having on the
postal business. The advent of
e-mail means that it’s no
longer the case that vital
correspondence needs to be finished by 5pm
in order to catch the last post and so be
guaranteed to arrive on the recipient’s desk
by 9am the next day. Postal services must,
therefore, be aware that they risk becoming a
redundant part of business communication in
the 21st century.
Is the real world now subject to risk as a
result of the technology we take for granted?
Telephone communications between
Washington DC and New York were
restricted recently when a maintenance crew
in New Jersey accidentally cut a fibre-optic
cable and calls had to be rerouted. Thanks to
its contingency arrangements, cable operator
MCI was able to report that its long-distance
services hadn’t been affected. But this case
does show the potential impact that the
physical environment can still have on its
virtual counterpart.
Across the Atlantic, environmental factors
of a different type proved to be the big talking
point of the summer. The wet weather
affected the quantity and quality of produce
grown across northern Europe to such an
extent that it has threatened the supply of
goods to supermarkets. If retailers have to
obtain more costly substitutes from
alternative sources, farmers’ revenues could
Postal services
must be aware
that they risk becoming
a redundant part of
business communication
in the 21st century
>studynotes
56
A master of risk management? The precocious Ferris Bueller, ever on the alert for danger.
On July 13 the former chairman and chief
executive of publishing company Hollinger,
Conrad Black, was found guilty of
fraudulently obtaining funds from his
employer, which until 2004 had included the
Daily Telegraph in its substantial portfolio.
The money had represented payments from
publishers that had bought titles from
Hollinger and did not want it to set up new
publications that would compete against
them. These so-called non-compete clauses
were agreed by the board and were all part of
the deal, according to Black, and he and his
colleagues shared nearly £30m as a result.
But the trial in the US concluded that the
payments had been clandestine and that
Black had not acted lawfully.
What conclusions can be drawn from
these events? This year has been a time of
significant uncertainty, brought on by political,
economic and environmental factors. Some
of them are beyond control; others are being
handled in a wide range of ways. All of these
examples are both topical and typical – very
much the subject of P3, which aims to cover
the following areas:
nThe identification and categorisation of
risks faced by organisations.
nThe management of such risks by an
appropriate response (taking corrective
action through the use of both proactive
and reactive measures).
nDifferent types of control – organisational,
accounting, financial, human resource,
information and even ethical.
nThe use of accounting and other systems
as a form of control.
nAssessing these systems and other risks
through the use of internal audit.
The crucial word to consider when
assessing both risks and controls is
“appropriate”, as it sums up what risk
management is all about.
The eponymous hero of the 1986
comedy film Ferris Bueller’s Day Off tells the
audience that “life moves pretty fast. If you
don’t stop and look around once in a while,
you could miss it.” Admittedly, he’s saying
this to justify playing truant from high school,
but managers need to take Bueller’s maxim
one step further. Life does move pretty fast
and things do change: unless you keep your
eyes open and ensure that appropriate
controls are in place at all times, you may
miss the danger and find yourself no longer
in business.
Steve Whittenbury is education team
subject specialist and tutor for BPP
Professional Education.
Photograph: The Movie Store Collection
be greatly reduced and store prices could
rise, hitting consumers’ pockets in turn.
This is an example of unpredictable risk that
isn’t easy to manage. Perhaps this is one
instance where it would be better to treat the
symptoms rather than the cause.
As the floodwaters rose in the summer,
so did mortgage interest rates, making life
more difficult for UK homeowners, many of
whom are now struggling with their
increasing loan repayments. In an attempt to
restrain the housing market, the personal
credit boom and the resultant inflationary
economic pressures, the Bank of England
increased its base rate from 3.5 per cent in
July 2003 to its current level of 5.75 per cent.
As a result, the proportion of fixed-rate
mortgages in the same four-year period
grew from 44 per cent to 88 per cent. HM
Treasury research has indicated that over the
past 30 years borrowers have taken far more
notice of short-term interest rates than
anything else when financing a mortgage,
predominantly because of the perceived
benefits of competitive rates offered by
lenders in the short term. This has inevitably
led to a far more volatile market – a factor
that longer-term fixed-rate loans are intended
to address.
Another economic pressure, felt by
homeowners and businesses alike, is the
volatility of energy prices. This has been
caused by political turbulence in various
oil-producing regions – including the Gulf,
Venezuela and Russia – and exacerbated by
the huge increase in demand for energy from
Asia’s booming economies. All this has
encouraged many consumers, both
commercial and domestic, to make advance
arrangements to fix their supply price in order
to avoid unpredictable future cost increases.
Many of these economic trends have led
to more widespread uncertainty that’s best
illustrated by the recent fluctuations in stock
market prices. Shareholders have seen the
value of their investments shrink as a result of
interest rate increases, energy price inflation
and the resulting threat to consumer
spending. But they will be reassured to
know that, while their investments may
fluctuate owing to factors that are mostly
beyond their influence, there are controls in
place to ensure that the organisations they
invest in are scrutinised by corporate
governance watchdogs. Unfortunately,
however, there are problems here as well.
PAPER P3
>study notes
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58
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>instituteupdate
Elections to council 2008
Disciplinary committee
As the terms of office of the council members in electoral areas
1, 2, 3, 4, 5, 6, 7, 11 and 12 expire at the end of the annual general
meeting in June 2008, elections will be held in February.
Nomination forms for candidates for election may be
downloaded from the web site at www.cimaglobal.com/council2008,
where further details about the ballot process and the role of a
member of council may also be found. The deadline for the receipt
of nominations is noon on Monday January 7.
The disciplinary committee
considered allegations of
misconduct against Andrew
Morgan ACMA by reason of his
conduct during the period in
which he had been a company
secretary. This had resulted in his
conviction under the Trade
Descriptions Act 1968 on July
29, 2004, which the institute
considered relevant to his
membership of CIMA. The
committee accepted that the
facts had been proved and made
a finding of misconduct.
When considering the
sanction, the committee took
into account mitigating
circumstances – in particular,
the fact that no client had
suffered financial damage; that
Morgan had expressed remorse;
and that he had found himself in
distressing family circumstances
at the time. It decided that a
reprimand was an appropriate
sanction in this case.
When considering costs, the
committee took into account
Morgan’s personal and financial
circumstances, and that he had
not contributed unduly to any
increased costs of the hearing.
It ordered him to contribute
approximately ten per cent of
the institute’s costs, amounting
to £330.
The disciplinary committee
considered six charges against
Morgan in connection with his
work for a client during
2004-05: failing to exercise
professional competence
and/or due care, and/or acting
in an unprofessional manner,
and/or acting in a manner
inconsistent with the good
reputation of the profession.
The committee found the
case for misconduct to be
proven in respect of one charge
only – namely, that Morgan had
inappropriately retained the
client’s records, despite being
Zambia hosts key event
This year’s CIMA Southern Africa regional conference took place
in Livingstone, Zambia, with the theme of “Wealth creation: seizing
the region’s business opportunities”. The event attracted over
300 delegates from around the world and challenged members in
all sectors to take commercial opportunities across the region.
Rupiah Banda, Zambia’s vice-president, emphasised his
government’s commitment to reducing poverty. He highlighted
the need to provide ways for people to build their assets and
wealth through home ownership, savings, higher education and
social security.
Joaquim Alberto Chissano, former president of Mozambique,
spoke about the impact of globalisation. “Our inability to generate
domestic savings forces our economies to rely on foreign capital
inflows for investment… Our knowledge, management skills and
business practices remain inadequate,” he warned, noting that
education was the most critical input if Africa’s business community
was to reap the benefits of globalisation.
Health also remains a fundamental concern in a region where
the HIV/Aids pandemic is taking many of the best brains and
entrepreneurs. Chissano appealed to African leaders to launch a
campaign to convince donors to increase their support for
research into a vaccine for the disease.
Presidential engagements
Nov 5
CCAB presidents’ group, ICAI.
Nov 7-8FEE group Berlin/IDW dinner, Frankfurt (deputy
president attending).
Nov 8
CIMA annual conference.
Nov (tbc) Honorary officers’ meeting, London.
Nov 13-16 IFAC council meeting, Mexico.
Nov 14
ACT dinner (deputy president attending).
Nov 17CIMA Dublin & District dinner dance (immediate past
president attending).
Nov 19
CCAB president’s dinner with David Tweedie.
Nov 27
CIMA president’s lunch, Scotland.
Nov 28
CIMA executive committee dinner.
Nov 29
CIMA executive committee meeting.
Nov 29
Honorary officers’ meeting, London.
Nov 29
CIMA awards dinner.
requested to supply them to
the superseding accountants.
Morgan did not have a written
contract with his client and,
therefore, he had no legal right to
retain those records except
where he had done work on
those records and rendered a fee
note in relation to that work.
The committee accepted
that Morgan had done work on
those records, but no fee note
was rendered, as he admitted.
The committee was concerned
that Morgan did not seem to
appreciate the seriousness of his
conduct in this case and had
shown a cavalier attitude to the
regulations. It did not accept his
argument that this was a
technical offence, and it
considered that a severe
reprimand was appropriate.
In relation to costs, six
charges had been brought
against Morgan, but only one
resulted in a finding of
misconduct. Morgan was not
asked to contribute to the costs
of the hearing.
Investigation committee
The committee found a prima
facie case for Justin Isaacs
ACMA to answer concerning his
alleged use of foul language in
the course of correspondence
with a client, and it made
reference to CIMA’s requirements
in relation to professional
behaviour and upholding the
good standing of the institute.
Pursuant to members’
regulation 6.3 (iii) and council
regulation 16, the committee
invited Isaacs to consent to the
imposition of an admonishment
by way of “consent order”,
without further proceedings,
to which Isaacs agreed.
The committee recorded a
finding upholding the complaint,
issuing an order for the
imposition of an admonishment.
61
Visit www.cimaglobal.com/events for updates and a full list of events
(all branch events are free unless otherwise stated). To book places, get in
touch with the contact for the relevant area, unless otherwise stated. To book
places on CIMA Biz.Net events, e-mail cimabiz.net@cimaglobal.com.
Central London
And North Thames
Contact: area.one@
cimaglobal.com.
Please book online,
where possible, at www.
cimaglobal.com/central
londonandnorththames
December 5
Wine tasting
Time: 6 for 6.30pm
Venue: CIMA, 26 Chapter
Street, London SW1P 4NP
Cost: £20
Central Southern
England
Contact: area.eleven@
cimaglobal.com
December 3
Visit to Heinz
UK headquarters
Time: 7 for 7.30pm
Venue: H J Heinz
Company, South Building,
Hayes Park, Hayes
UB4 8AL
December 4
Quiz night
Time: 7 for 7.30pm
Venue: The Raven Hotel,
Station Road, Hook
RG27 9HS
Cost: £5
December 5
Career profile workshop
Time: 7.30 for 8pm
Venue: Holiday Inn (J4/
M40), Handycross,
High Wycombe HP11 1TL
December 5
Wine adventure at the
Groucho Club
Time: 7pm
Venue: The Groucho Club,
45 Dean Street, London
W10 4QB
Cost: £29.50
Cima North West
Contact: area.six@
cimaglobal.com
December 10
Annual accountants’
carol service
Time: 12.20pm
Venue: St Ann’s Church,
St Ann’s Square
Manchester M2 7LF
Booking is not necessary
62
December 11
ProfessionaLiverpool
annual carol service
Time: 5.30pm
Venue: St Nicholas Parish
Church, Chapel Street,
Liverpool L2 8TZ
Booking is not necessary
North-east
England
Contact: area.five@
cimaglobal.com.
Please book online,
where possible, at
www.cimaglobal.com/
northeastengland
December 4
Teesside branch
members’ and students’
festive gathering
Time: 7pm
Venue: McQuays, 85
High Street, Yarm
TS15 9BG
Scotland
Contact: area.seven@
cimaglobal.com.
Please book online,
where possible, at
www.cimaglobal.com/
scotland
December 6
Membership
application workshop
Time: 6 for 6.30pm
Venue: Holiday Inn
Glasgow City Centre,
161 West Nile Street,
Glasgow G1 2RL
South-west
England AND
south wales
Contact: area.two@
cimaglobal.com.
Please book online,
where possible, at www.
cimaglobal.com/southwest
englandandsouthwales
December 6
CPD workshop
Time: 6.30 for 7pm
Venue: Room LC204,
University of
Gloucestershire, Park
Campus, Cheltenham
GL50 2RH
Cima
Mastercourses
T: 020 8849 2489
F: 020 8849 2460
E: mastercourses@
cimaglobal.com
The following are a
selection of events in
December, January
and February
(for the full list visit
www.cimaglobal.com).
Courses are in London
unless otherwise stated
December 3
December 5-6
The essential guide to
treasury security
and controls
December 5-7
December 12
December 6
Lean finance
Fifteen ways to reduce
costs, Castle Donington
December 6
December 12-14
Time management
December 6-7
December 13
December 3
Professional
presentation skills
Essential business
writing skills
December 3
The art of being brilliant
December 4
Better management
reporting, planning
and control
December 4
Successful business
plans, Edinburgh
December 4
Achieving process
excellence – Six Sigma
process improvement
December 4
Effective delegation
December 4
Read faster, read smarter
December 5
December 7
Understanding
commercial contracts,
Glasgow
December 7
MS Excel advanced
December 10
Getting more value
from overheads
December 10
Financial instruments for
the non-financial sector
December 11
Flexible planning and
rolling forecasts
December 11-12
Update for the
accountant in industry
and commerce
December 11-12
Financial awareness –
finance for non-financial
managers, Manchester
Sustaining
Sarbanes-Oxley
CIMA Northern Ireland invites all past presidents to
come and celebrate its 60th anniversary with members
and students over a three-course Christmas lunch:
January 21-22
December 20
Time management
December 20
Company accounting in
the USA
MS Excel expert
December 13
December 21
Budgeting basics
MS Access for end
users – introduction
December 13
January 3
Report writing
for business
Time management
December 13-14
January 3-4
Financial modelling –
project-based case study
Introduction to
management
December 14
January 3-4
Key management
accounting techniques,
Manchester
Persuading and
influencing people
January 3-4
December 17
January 10-11
Introduction to
management
January 10-11
Professional
presentation skills
January 11
Time management
January 11
Time management,
Birmingham
January 14
MS Excel introduction
January 14
Time management,
Manchester
MS Excel introduction
January 15
December 17 MS
January 4
January 16
Project introduction
Report writing
for business
December 17-18
January 7
Professional
presentation skills
December 18
January 7-8
FRSSE accounting
December 18
Group accounting under
UK Gaap – refresher
MS Excel intermediate
December 18
MS Project advanced
December 19
Essential business
writing skills
December 19
MS Excel advanced
MS Excel advanced
January 16-18
Company valuations
modelling methodology
and techniques
Project finance
modelling methodology and
techniques
January 17
January 9-10
MS Excel expert
Introduction to
management,
Birmingham
January 9-10
Professional
presentation skills,
Birmingham
January 10
Making an impact
at meetings
Persuading and
influencing people
Professional
presentation skills
Professional
presentation skills
December 18
12
January 21-22
CIMA Northern Ireland 60th anniversary
Christmas lunch
Time: 12.30 for 1pm
Venue: The Grand Opera House, Great Victoria Street,
Belfast BT2 7HR
Cost: £10 (includes meal)
Contact: georgina.wallis@cimaglobal.com
(020 8849 2429).
December 12
Calling past presidents of
cima northern ireland
December 12
Time management
Financial modelling –
financial planning
and budgeting-based
case study
December 6
December 3
Financial instruments –
practical application
of financial
reporting standards
The accounting
standards masterclass,
Birmingham
Spreadsheet skills for
forecasting, planning and
budgeting, Bristol
Strategic thinking,
influencing and
implementation
December 12
Photograph: Photoshot/Bob Saunders
Diary
Forthcoming
local events
in the UK
FRSSE accounting,
Bristol
January 17
January 17
Time management
January 17-18
Professional
presentation skills, Leeds
January 21
MS Access – introduction
to data management
January 22-23
Introduction to
management, Leeds
January 22-23
Persuading and
influencing people, Bristol
January 23
Company secretarial
practice for support staff
Persuading and
influencing people,
Birmingham
January 29-30
Persuading and
influencing people,
Manchester
January 30
UK Gaap – advanced,
Manchester
January 30
January 30-31
January 23
Corporate governance
and risk management,
Dublin
January 23-24
January 30-31
January 23-24
January 31
Introduction to
management
People and team
management
January 24-25
Project finance
modelling methodology and
techniques
January 24-25
Professional
presentation skills
MS Excel advanced
February 4
Company law update:
how the changes
affect you
February 5
Enterprise risk
management
Introduction to
management, Manchester
February 6
January 24-25
Key management
accounting techniques
Management excellence
January 24-25
February 7
MS Excel VBA
Commercial skills for
finance professionals
January 25
February 7
Time management
January 28
Time management,
Edinburgh
January 28-29
Advanced negotiation
skills for senior managers
January 28-29
Professional
presentation skills, Bristol
January 29
UK Gaap – fundamentals,
Manchester
Investment vehicle? Attendees
took the chance to admire the many classic cars on show.
January 29-30
Pricing strategies –
principles
February 8
Pricing strategies –
practice
February 8
Management accounting
– developments at
the cutting edge,
Manchester
New members enjoy
vintage evening
The recently refurbished Heritage Motor Centre in
Gaydon, Warwickshire, played host to the second
of CIMA’s two annual celebration events for
new members.
Nearly 70 new members and their guests toasted
their success and then networked with CIMA
committee members and staff over canapés
and drinks.
Next year’s celebrations will be held in London on
July 2 and in Liverpool, European city of culture 2008,
on September 25.
February 13
February 27
Understanding
commercial contracts
Dark art of budgeting
February 14
International financial
reporting standards:
comparison and update
Achieving process
excellence –
Six Sigma process
improvement
February 15
Smarter thinking,
smarter working
February 19
Funky finance –
focus on retail
(book before January 25
to receive a discount)
February 28
Better management
reporting, planning and
control, Nottingham
February 29
The balanced scorecard,
Leeds
February 25
Hidden costs and
lean accounting
February 26
Is marketing profitable?
February 11
February 26
Financial management
in SMEs
Investment appraisal
February 12
Getting more value
from overheads
Spreadsheet skills for
forecasting, planning
and budgeting
February 28
February 27
63
>so you want to be…
Front-office business
and project manager
Martin Long explains what a career at the sharp end entails.
If the advert on the right looks like an
opportunity you haven’t seen much before,
then you’d be absolutely right. Such
positions are rare – or perhaps I should say
“were rare”, because over the past few
years the number of job specifications
centred on project-driven work, as opposed
to more technical areas, has increased.
What makes this type of job so appealing
is that it offers the chance to work right
at the coalface of frenetic deal-making.
The most typical accounting positions tend
to be located in the traditional middle office,
so that in itself makes the advertised role
fairly unusual. Unfortunately, this
distinctiveness can sometimes suggest a
certain amount of exclusivity in terms of the
person required. I often receive queries from
CIMA-qualified candidates who worry that
roles such as these are the preserve of
ICAEW members. This is simply not the
case. What matters here is not the
qualification but the added benefits that
someone’s personality and business brain
can bring to the employer. Given this
particular vacancy’s focus on budgeting,
forecasting, reporting and analysis, you
could argue that a CIMA member would
in fact have an excellent head-start in the
selection stakes.
Some of the key phrases to pick up on
in the advert are the references to “strong
communication skills” and “presenting
business information to the executive
management committee”. In other words,
shrinking violets and nervous speakers need
not apply. This position requires someone
who can present the numbers clearly,
explain trends and stand their ground under
questioning. The personal qualities you
would need to demonstrate at interview are
that you can be assertive yet calm, and
quick-witted yet methodical.
Another key area that the job description
clearly focuses on is the business/projectdriven nature of the role. Again, you can see
this in phrases such as “the ability to think
laterally” and “improve the firm’s business
development and marketing efforts”. The
right person would need to demonstrate
Role: Front-office business and project manager
Salary: Excellent
Location: London
Niche financial services firm seeks a qualified accountant keen
to move closer to the commercial heart of business in a strategic
management role. Supporting the front office, the successful
candidate will deliver accurate reporting, budgeting and
forecasting for UK- and European-based managing directors
across the organisation. This work will include analysing key
performance indicators and presenting business information to the
executive management committee.
The role will be extremely varied, giving plenty of scope for the
right individual to develop across a number of ad-hoc projects,
including the provision of information to improve the firm’s business
development and marketing efforts. It requires a qualified
accountant with exceptionally strong communication skills and the
ability to think laterally. You will have a keen interest in financial
markets and want to move beyond the traditional accounting role.
their ability from previous roles to make
a real commercial difference.
Something that isn’t immediately
evident from the advert is the type of
experience a candidate will need in order
to be considered. From my knowledge of
recruiting for such positions, roles at this
level in the financial services industry do
require people with experience in a similar
institution. CIMA members from blue-chip
companies may get an interview, but not as
often as I think they should. Much of this
unwritten rule is to do with the type of
environment and the still fairly unshakeable
belief among financial services firms that
theirs is the most pressurised industry. If
you have a very different background,
therefore, you would probably need to move
into a more technical accounting role at a
bank or insurance company before you
could take on this type of job.
One bit of good news is that employers’
dreaded preoccupation with pass rates and
degree class/subject, which used to unfairly
dog many a candidate for ten years after
their graduation or professional exams, no
longer applies. For these roles and many
others it is your experience and how you
sell this at the interview that will make the
difference. Indeed, as part of the final stages
of the interview you may even be asked to
present a case study to show how good
your communication skills really are.
Martin Long is a consultant with Joslin
Rowe’s accountancy and finance team.
Need to know
Job level: managerial.
Salary: £50,000-£60,000.
Where: City of London.
Essentials: a strong personality,
an ability to add value and see
the bigger picture. Experience
of reporting and analysis.
65
>...lastout
We rummage through in-box and postbag to bring you astonishing
insights from the business world. If you’ve been on the receiving
end of such wisdom and would like to pass it on, please send the
most obvious and the most obscure in corporate communications
to rp1@caspianpublishing.co.uk clearly labelled “Last out”.
Mangled metaphors
“TCS Financial Solutions, a strategic
business unit of Tata Consultancy
Services (TCS), (BSE: TCS.BO, NSE:
TCS.NS), dedicated to providing business
application solutions to the banking,
insurance and capital markets industries,
announced that TCS BαNCS Corporate
Actions and TCS BαNCS Custody,
formerly branded NCS Corporate Actions
and Custody, have been certified as
SWIFTReady Gold Corporate Actions and
SWIFTReady Gold Securities Settlement
respectively for 2007.”
72
Hacked off?
Hacking kits for sale on eBay
The (un)clear winner
“Grant Thornton says new
chancellor’s pre-budget
Geology or meteorology?
report hamstrung by
“Organisations battling with
predecessor’s promises.
financial fault lines as
Francesca Lagerberg,
business climate changes.”
head of
Grant Thornton’s
Octopus Communications.
national tax office, believes
All at sea
that the spotlight was stolen
“E-bcm, the online credit
by Gordon Brown in this
checking and financial
year’s budget when the then
management service, is
prime-minister-in-waiting
calling on the UK government flexed his muscle for the top
to reverse its decision to
job by making a raft of
withdraw funding for the
forward-looking changes,
Better Payment Practice
which will hamper Darling’s
Group, saying that its
manoeuvrability in the
dissolution will mean the UK’s pre-budget report.”
small businesses being cut
adrift in the fight against late
Fighting “Osborne’s unfunded
tax commitments are
payments and bad debt.”
talk
Run that one
past us again
Press release of the month:
utterly feeble.”
Vince Cable, shadow
chancellor for the UK Liberal Democrats.
“Tier-3, the behavioural analysis IT security
specialist, has warned companies that hacker
toolkits – previously confined to specialist
hidden forums on the internet – are now being
sold openly on auction sites such as eBay.
‘This is a serious development,’ said
Geoff Sweeney, Tier-3’s CTO, who added
that, where would-be hackers previously had
to score brownie points to gain access to
hacker forums and source the kits, the fact
that they are now on open sale on eBay was
very worrying.
‘It basically puts high-level hacking tools,
including surreptitious Trojan loaders and
web site hacking utilities, into the hands of
almost any internet user – including novices
– providing that they have an eBay and
PayPal account,’ Sweeney said.
He went on to say that the hacker kits were
usually sold on eBay as ethical hacker training
courses, but the courses also included a
wealth of utilities for ‘educational purposes’.
For more on eBay hacker kits, visit
http://snipurl.com/1s9w0.”
Get a grip
“In an effort to get small business
owners and their accountants closer
together so that they can better
understand each others’ needs,
accounting software company
KashFlow is launching a campaign
to get October 25 recognised as
National Hug Your Accountant Day.”

Five-star accommodation Laurence Yuen, of Shanghai Jin

Transcription

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