ey performance journal - volume 5, issue 4

Harmonizing rhythms

Victory from strategy Staying ahead of the competition

Problem solvingSpotting the “X” factors

Volume 5 │ Issue 4

Providing insight and analysis for business professionals

Recently, the International Monetary Fund (IMF) revised its global economic growth projections to 2.9% for 2013, rising to 3.6% in 2014 (compared with 3.2% in 2012). It commented that, “Global growth is in low gear, the drivers of activity are changing and downside risks persist.”1

The implications of this forecast for business are manifold, but the bottom line is that growth is picking up, albeit slowly, and opportunities are there for the taking if organizations are prepared to face the drivers and risks that the IMF refers to in its recent report.

For example, the Southeast Asian pharmaceuticals industry is predicted to see strong growth over the next few years. It’s a great opportunity for companies in that sector, but there are a range of distribution risks that need to be overcome in the short term. “Feeling the pressure: managing supply chain risk in Southeast Asia” examines these risks but argues that, by embracing the challenges they present, companies have the opportunity not only to improve margins but, more importantly, provide safe, affordable products.

Staying with a sector focus, “Energy demands: what are the emerging risks for the oil and gas industry?” explores challenges such as IT security, counterparty risk and increasing project scale and complexity. The article argues the benefits of managing uncertainty, to ensure the industry is equipped and ready to meet the opportunities presented by the energy needs of a growing global population.

Governments also have to step up to the mark. For example, “Solving unemployment for GCC2 nationals: a sectoral approach” acknowledges how GCC governments have been proactively working to reduce unemployment for their nationals. But the article explains why a generic approach will never be as successful as one that targets a specific sector. A bespoke, strategic solution is what’s needed to create job opportunities in the region.

The message is clear: if organizations want to maintain a competitive edge, as global growth returns, they must have an effective strategy in place that is understood by everyone. “Victory from strategy: are you evolving ahead of the competition?” discusses the core elements every company needs for a successful strategic approach.

“Who are your organization’s problem solvers?” is an article that highlights the significant impact these people can have on a business. Often, it is the chief operating officer who takes on this role, but how good is your business at spotting and developing this potentially undervalued talent?

Other articles explore the essential role of the finance function when establishing an internet start-up company, psychological motivation in revenue management decisions, and the key strategic leadership challenges in high-growth markets.

I hope the articles in this edition of Performance provide valuable insight and information to help your business innovate, grow, optimize and protect.

Enjoy reading this issue!

Welcome

Markus HeinenChief Patron, Performance


1. IMF, World Economic Outlook, 2013.

2. Gulf Cooperation Council.

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01

10Contents

02Reducing human error in revenue

management decision-making

10Solving unemployment for GCC

nationals: a sectoral approach

18Victory from strategy: are you

evolving ahead of the competition?

26Feeling the pressure: managing supply

chain risk in Southeast Asia

32Culture: the elusive path to

business success

40Who are your organization’s

problem solvers?

48Internet start-ups: the essential role of

the finance function

56Energy demands: what are the

emerging risks for the oil and gas industry?

62The anatomy of high-growth markets:

key strategic leadership challenges

26

32

40

02

48

56

62

Reducing human error in revenue management decision-making

Recent revenue management (RM) research has demonstrated what appear to be systematic deviations from optimization models of decision-making. It turns out that decision complexity exacerbates specific elements of biased RM decision-making. There are ways, however, in which managers can use this information to improve the quality of RM decision-making in their companies. More fundamentally, companies can learn from these predictable patterns to design programs that minimize RM decision-making error.


Authors

Elliot Bendoly Associate Professor Goizueta Business School Emory University, US

Michael Alan Sacks Associate Professor Goizueta Business School Emory University, US

03



Have you noticed recently that airline flights almost always fill to capacity? If you’re a seasoned traveler, you may have also observed that full flights are more common

today compared with even only a few years ago. The reason: sophisticated RM systems that maximize the yield for seat sales.

RM is the science of maximizing the sales and price per unit of inventory. The airlines industry has developed highly sophisticated dynamic computer models for its pricing structure. These models make real-time pricing decisions based on the number of seats available at the time of purchase, amount of time remaining prior to the flight, and past purchase history for that specific flight. With a significant amount of meaningful data available, these systems optimize revenue and seat capacity, largely eliminating the role of human judgment in the process.

However, the airline industry is an extreme case where all such RM decisions can be made via optimization models. For most other industries, a mix of computer models and human judgment are required for RM decision-making. The hotel industry serves as an ideal example. RM packages designed for the hotel industry allow for real-time monitoring of capacity utilization, integration with forecasts, and advanced analytics. However, individual RM judgment is still viewed as essential to appropriately manage the nuances confronted in real-world RM settings. For example, complex large group bookings, last-minute purchases, cancelations, weather-related changes and trip adjustments all complicate

the RM system. Hence, the effectiveness of many of the applications of these systems, and their associated operating policies, is still very much human driven.

Predictable human errors in RM judgmentGiven the central role of human decision-making in RM decisions, one might question the extent to which people make optimal versus suboptimal RM decisions. A wealth of research shows that human beings make common, predictable errors in general decision-making. However, little is known about decision-making errors in RM judgment specifically, and how to mitigate them moving forward. Just how good are people at making challenging RM decisions? It turns out that the answer is complex, yet understanding decision-making errors in RM can make a big difference in optimizing RM outcomes.

A recent study by Bendoly1 sheds light on this very question. The author sought to measure the extent to which human decision-making in an RM context differs from optimal levels, then study the reasons for such decision errors. The author carefully designed a controlled experiment to test pricing decisions across variations of resource capacity and time urgency.

In the experiment, a revenue manager had S total units of capacity available for allocation to clients over a time frame of T discrete periods. The goal of the experiment was to maximize total revenue by selling as much of S as possible, and at the highest possible price levels, prior to the end of the total time T available (think of a hotel manager selling rooms for a specific date in

the future). The experiment began at time T=40 (the full amount of time) then slowly advanced until T=0 (no time remaining), with subjects charged to sell five units at the highest possible levels of revenue. Subjects would receive computerized bids along the way, which they had to either accept or reject. The actual decision faced in each period is, therefore, whether to allocate the requested capacity, thus generating an associated level of revenue, or reject the request, assumedly with the hope of allocating that capacity to a higher-paying customer later (with the associated risk that such an opportunity might never surface).

To address how complexity affects optimal RM decision-making, three experimental contexts were designed (see Figure 1). Experiment A was the most straightforward and experiment C was the most complex. Thus, the goal was to assess human decision-making on RM across three levels of increasing complexity, then compare the results to the same decisions made by optimization models.

The final twist in the experiment is perhaps the most intriguing. The author used the latest theories within behavioral operations to assess how, and why, subjects make distinct types of decision-making errors, specifically looking at the relationship between motivational levels and performance. The first motivational dynamic might be categorized as indifference, in which a lack of sufficient

RM is the science of maximizing the sales and price per unit of inventory.

1. E. Bendoly, “Linking task conditions to physiology and judgment errors in RM systems.” Production and Operations Management 20(6), pp. 860-876, 2011.

05

challenge in a task results in a low state of motivation for the individual worker. Typically, such a lack of motivation is ultimately associated with lower measures of objective performance in a task. The second dynamic revolves around increasing the level of challenge associated with a task by a sufficient, but not an excessive, amount. Challenging, yet attainable, tasks can raise a decision-maker’s motivational level and increase attentiveness and arousal regarding the task, generally resulting in enhanced performance. The qualifier ‘‘not an excessive amount’’ is critical here, as excessive challenge raises the third

dynamic: distraction, stress and a general reduction in motivation driven by a kind of hopelessness from perceptions of being overwhelmed by unattainable work expectations. Together, these findings imply an inverted-U relationship between challenge and performance outcomes (see Figure 2).

Because the concurrent management of multiple blocks of capacity (in experiments B and C) can generally be viewed as more challenging than the management of a single block (in experiment A), one would expect to see differences in the dynamics of arousal, indifference and stress, as

well as their impact on performance. The number of blocks simultaneously managed by an RM is, of course, only one possible contributor to the level of challenge associated with a task. Also ostensibly relevant to the management of these tasks, is the comparison of time remaining to capacity yet to sell. For example, it may be that individuals faced with seemingly high levels of capacity still unallocated close to the deadline may feel particularly challenged. In an attempt to fill this capacity and, hence, avoid non-occupancy, individuals might operate with lower than normatively modeled price thresholds.

Figure 1. Assessing human decision-making on RM across three experiments of increasing complexity

Source: Authors’ own.

Experiment

Example

Units of capacity available for sale by revenue manager

A B C

One block of five units

Two independent blocks of five units

Four independent blocks of five units

One hotel with five rooms

Two hotels in different cities with five rooms

Four hotels in different cities with five rooms

City 1

City 1

City 2

City 1

City 2

City 3

City 4

With too little challenge and plenty of time, people are more likely to reject offers they otherwise should accept.



Alternatively, those with limited capacity remaining near the deadline may feel that earlier efforts to use ambitious thresholds yielded the result desired, and are sufficient in securing their net performance over the horizon considered. They may, in turn, be less likely to seek out ambitious revenue levels for the remaining capacity, either by virtue of a fundamental lack of motivation (indifference) or the view that pursuing ambitious revenues on such capacity is simply less realistic (overwhelming), given their own assumptions regarding the pool of demand. The result that follows might be a tendency to use less than normatively modeled thresholds at these low capacity levels, irrespective of the time remaining.

The overall expectation was that low levels of time remaining, coupled with high levels of capacity yet to allocate, should be particularly associated with feelings of stress related to overwhelming workload. Additionally, such effects should be particularly relevant in increasingly complex contexts (experiments B and C) where multiple blocks of capacity are managed concurrently. These compounded issues, if in fact serving to generate stress rather than simply arousal, are expected to be associated with increases in ‘‘accept’’ errors (agreeing to bids priced at lower than necessary rates) more so than ‘‘reject’’ errors (taking a pass on bids that otherwise should be accepted). That is, people will accept bids that they should objectively reject due to the aforementioned biases. Conversely, with high amounts of time remaining and no imminent decision necessary, people may be more likely to make reject errors due to low motivation

caused by under-stimulation. This would be most likely in the least complex situations (experiment A) as compared to more complex scenarios (experiments B and C).

Measuring motivational stateThe only way to determine whether certain types of deviations from anticipated RM (i.e., certain errors) are being driven by either a lack of arousal or a sense of being overwhelmed, is to simultaneously study hypothetical markers of such emotional reactions more directly. Fortunately, objectively observable physiological markers of emotional and cognitive states, such as arousal (or lack thereof in the case of indifference) and stress, exist. Markers that have been studied in the past, range from neuroelectrical activity in the brain, as measurable by electrodes, or functional magnetic resonance imaging to heart rate variance. Physiological responses that require less obtrusive means for measurement, such as those measurable through the video-monitoring of the eye, have also proved useful and increasingly cost-effective.

Eye tracking offers the advantage of allowing the simultaneous observation of multiple potentially idiosyncratic markers (e.g., pupil size, blink rate, x-y fixation). Pupil size has consistently been shown to increase upon heightened levels of mental workload and arousal. A typical range of pupil diameters for humans is 2mm–8mm, with relative variations from an individual’s relaxed state (i.e., when not engaged with work) typically used to denote increases in arousal. In contrast to the observed linkage between pupil size and arousal,

blink frequency is largely thought to reflect negative mood states, such as nervousness, stress and feeling overwhelmed by a task. An often-cited reference for this marker is “the Nixon effect,” referring to the former president’s increased blink frequency (50 times per minute) during a discussion of his removal from office. Conversely, blink rate is thought to slow down when individuals engage in successful and comfortable problem-solving endeavors. Thus, the author utilized pupil size to measure arousal and motivation, and blink frequency to measure stress and anxiety.

Given the central role of human decision-making in RM decisions, one might question the extent to which people make optimal versus suboptimal RM decisions.

07

The resultIn the single-block experiment (A), reject errors were more commonly made with high levels of capacity and time remaining as compared to the optimization model. In other words, subjects took a pass on bids that they otherwise should have accepted when they had plenty of time and capacity remaining. Conversely, accept errors were more commonly made with low amounts of time remaining and resources yet to allocate. In this case, subjects settled for lower offers than they needed to accept.

The next step was to assess the extent to which motivational levels drove these behaviors. As predicted, pupil-dilation levels (indicative of arousal levels) rose as capacity decreased and as the number of blocks increased. In contrast, blink rates (measures of stress and discomfort) increased with higher levels of remaining capacity, combined with lower levels of time left. This shows that the low levels of arousal at the early stages of the experiment (where high levels of time and capacity remain) are associated with reject errors, and

higher levels of stress in the latter stages (where time is limited and capacity remains) contribute to the accept errors.

In experiments with multiple concurrent blocks to manage (B and C), reject errors appeared much less common, or at least smaller in magnitude on average. Pupil dilation rates suggest that the greater complexity in managing multiple blocks appears to mitigate the lower levels of engagement. In contrast, accept errors appear much more common in the more complex experiments (B and C), when compared with those observed in experiment A. Thus, in the comparatively more complex context, subjects were less likely to reject offers they should accept but more likely to accept suboptimal offers they should reject.

The impact of time remaining and capacity appear to have the greatest impact on blink rate in experiment C, and, conversely, to be significantly reduced in experiment A. In experiments B and C, blink rate seems consistently on the rise, with decreasing time and increasing capacity levels. Interestingly, the point of this inversion seems to map to the point at which individuals appear to shift from a tendency to commit reject errors to a tendency toward accept errors.

The findings of this study shed important light on the biases that people may have in making RM decisions. With too little challenge and plenty of time, people are more likely to reject offers they otherwise should accept. Conversely, overwhelmed by limited time and capacity yet to allocate, people are more likely to accept offers they otherwise should reject. This effect is



magnified in conditions of complexity. In especially complex RM decisions, people are less likely to be bored by any decision, thus less reject errors take place. The concern in complex scenarios is higher rates of accept errors, where the combination of complexity and time scarcity with resources yet to allocate adds significant levels of stress. Knowing the types of errors that take place in RM decisions, and why they occur, helps to build actionable tools for preventing and overcoming such biases.

Implications for practiceAs a starting point, managers should be aware of the conditions under which RM decision-makers will make suboptimal decisions, reject or accept errors specifically. By doing so, they can begin to monitor for the root causes of such behaviors and reduce their frequency. The onset of stress due to excessively challenging work (to the detriment of performance) may be dealt with simply through creating mechanisms to bolster self-confidence commensurate with difficulty level. A broad approach to achieving this state is suggested in the form of increased training and resource availability to bolster awareness of these important dynamics. If successful, these programs can reduce the negative effects of stress, and consequently reduce costly accept errors.

Aside from these general tactics, however, the present work suggests that certain more nuanced approaches to managing workload might be applied. For example, if the amount of capacity to be filled in a limited amount of time appears

stressful, one solution may be simply to artificially lower the apparent amount of capacity that needs filling. Such an adjustment might involve a reallocation of some of that capacity task to another revenue manager or an individual cross-

trained sufficiently to deal with it, or even to a more automated, if imperfect, artificial intelligence (AI) mechanism. Alternately, portions of capacity might be held in buffer, beyond the purview of RMs, until other capacity units are allocated, and the threat

Figure 2. Motivation and performance: inverted-U relationship between challenge and performance outcomes

Source: Authors’ own.

Pupi

l dila

tion

Level of challenge

Arousal

Indifference

Cognitive limit?

Few errors

Errors of some kind are made

Visual engagement

Negative stress effects

Data validity check

Growth strategy check

Cost optimization check

Business culture check

Recommendations

Blin

k ra

te

Level of challenge

Arousal Stress

Perf

orm

ance

Level of challenge

Knowing the types of errors that take place in RM decisions, and why they occur, helps to build actionable tools for preventing and overcoming such biases.

09

of stress-based complications in judgment are mitigated. By selectively reducing capacity, RM decision-makers will feel less stress and thus have a reduced tendency to make accept errors.

Having access to accurate measures of work arousal (through pupil dilation measures as in this study) and stress (through blink frequency) could deliver a huge impact in real-time adjustments to work conditions. On first thought, it is difficult to imagine a typical workplace adopting the type of software necessary for such measurements today. However, it is conceivable that at some point certain workers themselves may be willing to have stress levels monitored with an interest in allowing management to take action to reduce it. If acceptable, such state-manipulations might be applied more effectively. Based on the views of revenue managers participating in a related follow-up study, this manipulation tactic appears to be a tenable prospect.

Finally, we can use the above tools to help pinpoint thresholds where stress levels affect the quality of RM decisions across specific industries. The challenges of RM decisions within the airline industry, for example, may be distinct to those within the bed mattress industry. Examining the role of psychological motivation in RM decisions within industries can help solidify measures specific to that industry. From there, interventions can be designed specific to employee needs within industries and even within unique firms. These efforts can help maximize human decision-making in an RM context and improve working conditions at the same time, a win for companies and their employees.

These efforts can help maximize human decision-making in an RM context and improve working conditions at the same time, a win for companies and their employees.


Solving unemployment for GCC nationals: a sectoral approach

Creating sustainable and attractive employment for their national populations is a top priority for the countries of the Gulf Cooperation Council (GCC). A range of initiatives have had partial success but, in this article, the authors recommend that these approaches are complemented by sector-specific solutions.

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Authors

Stephen Farrell Deputy Advisory Leader, Middle East and North Africa (MENA), and MENA Markets Leader EY, United Arab Emirates

Michael Mamish Senior Director, MENA Nationalization Leader EY, Saudi Arabia

12 Volume 5 │ Issue 4


For a number of years, GCC governments have attempted to facilitate national workers’ entry into the domestic labor market and substitute for expatriates, with mixed results. An oil-driven

development model has provided rapid economic growth and diversification into a variety of sectors; however, citizens of the GCC continue to face significant underemployment.

Population growth rates in all six GCC states are at 3% or more, with large numbers of expatriates — in some states, such as the UAE and Qatar, outnumbering locals — creating a disproportionately young population across the GCC. This projected demographic growth will add new national entrants into the labor market for years to come. Increasing private sector engagement in creating job opportunities for nationals is crucial.

In Saudi Arabia, the largest of the GCC countries by population and GNP, 400,000 Saudis, on average, reach working age every year. The Kingdom needs to create three million job opportunities by 2015, and six million jobs by 2030, to handle the surge of youths looking for employment. The public sector is already over-staffed and, given its inability to stimulate real non-oil output directly, it will be the private sector that plays a pivotal role in creating more jobs for nationals.

Unaddressed, unemployment could reach 40% for youths aged between 20 and 24, and higher for women. Creating appropriate job opportunities for nationals, and reducing current unemployment, is a critical focus of GCC governments. Another

The Kingdom needs to create three million job opportunities by 2015, and six million jobs by 2030, to handle the surge of youths looking for employment.

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key aim of the region’s labor nationalization includes reducing dependence on expatriate workers and capturing and reinvesting capital that would otherwise flow overseas in the form of remittances and increased self-enabled economic competitiveness.

A survey of efforts and initiatives: overview of the different programs undertaken by GCC governmentsGCC governments have been pushing on multiple fronts to address the problem. Those efforts range from long-term strategic policies, to short-term desired outcomes.

One example of long-term strategic outcomes from GCC governments, was to increase spend on education, vocational training, workforce engagement, employment information dissemination and job search support, to better equip the national workforce with private sector

job requirements. Enforcing quotas for nationals in the workforce, specifying certain jobs for nationals only, and tightening work visa permits are some short-term solutions engaged. Other mid-term measures include fees for hiring expatriate labor. Short- and mid-term measures, if not implemented carefully, may lead to labor market distortion, forcing private sector companies to hire nationals instead of cheaper, more productive expatriates, which may reduce their competitiveness and force them to consider relocation and outsourcing.

This combination of incentives to increase national employment and regulate the labor market for the private sector has created mixed feelings with employers, where some believe the governments’ policies are inconsiderate to their competitiveness and ability to profitably grow while dealing with those measures. Many of these employers have lobbied successfully with the political elite, and gained stay measures in a number of sectors for long periods of time.

A key rationale used in this lobbying is the gradual replacement of expatriates with nationals as a prudent economic strategy, particularly because of the region’s demographics, but it will not be successful if it focuses on job substitution at the expense of job creation. Neither will it be successful if it results in making private sector companies less competitive, and deters foreign direct investment.

The Kingdom of Saudi Arabia (KSA) is one GCC country that implemented a number of market-based strategies across the spectrum, such as:

► Nitakat: a program assessing the nationalization performance of enterprises (i.e., the percentage of Saudis in the enterprise in comparison with the total number of employees within the organization). The better the organization’s classification, the easier it is for it to act in the labor market.

► Hafez: the first GCC unemployment program, where unemployed Saudi nationals are provided a monthly benefit while looking for employment.

► Takat: an employment match-making process using a number of virtual and non-virtual media to facilitate job seeker meetings with private sector employers.

► Reserving specific job categories for Saudis such as security, HR and administrative. Unemployment among women received special attention, and all retail sales positions for feminine products are now restricted to Saudi females.

The programs that the GCC has implemented have been generic in nature and have not targeted specific sectors.



► Subsidization of training and initial employment for Saudi workers through the Human Resources Development Fund (HRDF) by providing financial support for training and education to trainers, trainees and employers to match private sector requirements, both on-the-job training and in preparation for entering the job market. These subsidies include

Figure 1. Sectoral analysis V-model

Source: EY.

Evolve sector-

strategic policy

Sector- strategic

policy direction

Build the capability and prepare impacted bodies and stakeholders

Measure and monitor success

Embed change

Undertake detailed design (policy, process, people, systems)

Undertake high-level design (policy, process, people, performance, systems)Confirm new model with stakeholders and

develop an implementation model

Develop detailed hypothesis model

Develop detailed business case

Identify and define

Mea

sure

and

mon

itor

Undertake detailed assessment of labor supply and demand

Develop recommendations and case for change

Analyze current state and future state options

Gate 0Commission sector analysis

Gate 1Commission business case development

Gate 3Transition to “business as usual”

Gate 4Post implementation review

Gate 2Commission implementation project

(and transfer of governance accountability)

Key governance stage gates

Accountability: Ministry of Labor

Business case and new model

Sector analysis

Sustain and monitor

Implement

Accountability: implementation owners (other Ministry)

Potential focus for sector’s labor supply

and demand

The MoL recognized that, without bespoke solutions, current methods to drive more nationals into AHW would not be sufficient to meet the sector’s requirements and increased demands.

15

wages for Saudis for their initial employment period.

► Funding the King Abdullah Foreign Scholarship Program providing support to over 150,000 young Saudis to complete their higher education outside the Kingdom and bring back employable knowledge at par with educated expatriates.

► Eliminating the gap between the output of the local educational systems and the requirements of the market.

Although these initiatives had measurable success in Saudi Arabia and other GCC countries, the need for additional sector-specific efforts is evident. This is because the sectors receiving generous government funding are important drivers of economic growth, however, those sectors create low-skill jobs that GCC nationals are not attracted to.

Sectoral analysis modelEY developed a sectoral analysis V-model to design sector-specific solutions to complement the existing broad initiatives.

This proved most useful in bringing differentiated solutions to certain sectors where there are specific requirements not met by broad solutions. Examples of such sectors are health care, tourism and the small and medium-size enterprises. Figure 1 shows the sectoral analysis V-model.

The sectoral analysis V-model consists of two main sets of activities. The model is initiated on the left hand side proceeding through a number of gates to verify the requirements of the targeted sector and build a fact-based business case for change to implement a new model to meet the specific sector’s requirements. Most of these activities usually are sponsored by labor regulators, mainly the Ministry of Labor (MoL). As the case for change is formulated, the implementation efforts move to the right side of the V-model, where sectoral stakeholders and other partners would own the accountability under the sponsorship of labor regulators.

The sector facts-based analysis is founded on gathering data, including the sector’s available labor supply and demand information. A key aspect of the data collection is learning from the sector’s stakeholders, through interviews and surveys, a true sense of the current state of the employment picture, its needs and any gaps that might exist from current unemployment initiatives. The interviews and surveys aim to highlight a specific sector’s priorities and initiatives requiring particular talent-management attention.

The gathered knowledge is used to develop a sector-specific employment maturity framework for assessing “as-is” and “to-be.” The implementation of

this maturity model yields a “long list” of sector-specific opportunities. Options analysis of global benchmarks and the developed priorities will offer a “short list” of strategic initiatives that will bring a focus on the issues that the sector would benefit from the most. Impact assessment of the initiatives and their implementation approach feeds into the case for change for labor market management for the sector. Socializing the short list with the private sector stakeholders is important to verify the appropriateness of sector-specific initiatives and to gain support for the additional efforts complementing the existing initiatives.

Refer to the case study highlighted in this article to see how the V-model works in practice.

Creating appropriate job opportunities for nationals and reducing current unemployment is a critical focus of GCC governments.



V-model success in Saudi Arabia

Large-scale unemployment solutions should be coupled with sectoral solutions addressing specific issuesThe GCC countries have been proactively working on the unemployment problems for their nationals for a number of years, but all the indicators suggest that the situation will become ever more urgent. The

programs that the GCC has implemented have been generic in nature and have not targeted specific sectors. We believe these initiatives need to be complemented by a sector approach that identifies the current issues within each sector, so that a bespoke strategic solution can be developed.

17

We successfully used the V-model in a project that focused on the health care sector, working in conjunction with the MoL in KSA. KSA is

currently facing a problem in the quality and number of Saudi nationals going into the Allied Health care Workers (AHW), and it is not meeting the requirements and demands of the sector. The demands are driven by a number of factors: increased demographics, demographic trends including higher pediatric and geriatric needs, disease trends such as increased cardiovascular and hypertension, increased health care service delivery and patient safety standards, better labor densities of AHW to population and other health care professionals, such as physicians and nurses. The MoL recognized that, without bespoke solutions, current methods to drive more nationals into AHW would not be sufficient to meet the sector’s requirements and increased demands.

V-model sectoral analysis of AHWDesk-based research, stakeholder engagement through interviews, surveys and global leading practices (GLP) research were among the initial stages of the analysis, forming the base for a report into the nationalization issues in the AHW sector. Bolstering this research was the development of an issues list with the cooperation of stakeholders, which was segmented into four major areas;

K-12 education, post secondary school training, pre-employment and employment. Identified issues included weakness in math and science education, lack of unbiased counseling, entry into training not being hurdled and AHW training being the course of last recourse. The training was not meeting defined standards, language of instruction was considered difficult to most students, lack of balance between theory and practice, lack of alignment between employers, trainers and curricula. Weak follow-up commitments after training, lack of orientation, and weak expectations management after starting employment. Separately the list of issues included opportunities to improve certain employment aspects such as career pathing, rewards and recognition, better coordination of demand and supply.

This list was validated with stakeholders before work could begin on developing a business case addressing these issues. A list of opportunities to drive nationalization was developed, again in cooperation with stakeholders and a short list of 15 initiatives and opportunities was finalized.

V-model business case development for AHWAdditional interviews and data collection was carried out to establish the project governance and stakeholder targeting. Outline requirements for initiatives were confirmed, and a vision and target operating model (TOM) developed. A detailed current state assessment was

undertaken to compare against the TOM, and an action plan drawn up to address any gaps.

From this action plan, a detailed business case containing options appraisal, cost-benefit analysis, key risks and implementation timescales was developed. The business case included:

► Improving AHW labor density to 8.7 per demographic growth and labor densities against other health care professionals

► Increased health care standards and reach

► Drivers such as demographics, diseases trends and geographic distribution

Once the business case was formed, an implementation and deployment strategy and approach was confirmed. The design for the implementation plan for a new model for AHW labor supply was to include all stakeholders in an accelerated design event, where participants would collaborate to agree on the final features of the new model, and then agree on specific actionable items with ownership and timeline commitments.

1. A comparative assessment of labor market nationalization policies in the GCC, S. Hertog, Gerlach Press, 2012.

2. Emerging strains in GCC labor markets, U. Fasano and R. Goyal, IMF, 2004.

3. Are the GCC’s labor nationalization policies working? E. Rutledge, Gulf Research Center, 2005.

4. Saudi Arabia’s youth and the Kingdom’s future, C. Murphy, Woodrow Wilson International Center for Scholars, 2011.

5. On Saudi Arabia: its people, past, religion, fault lines — and future, K. E. House, Knopf, 2012.

Victory from strategy: are you evolving ahead of the competition?

EY´s Strategy experts share insights and lessons learned from their strategy review projects, one of many elements of EY Strategy’s service portfolio.


19

Authors

Robert Jung Manager Strategy EY, Germany

Jule Parulewski Consultant Strategy EY, Germany



According to Sun Tzu, author of the seminal sixth-century Chinese military treatise The Art of War, “Tactics without strategy is the noise before defeat.” In today’s evermore

competitive business environment, companies lacking a coherent strategy are doomed to lose in their own battleground — the market.

But what is strategy, and why has it become so important in the business world? The word has military origins. It is derived from the Greek word stratēgia, meaning “the art of the general.” Used today in different contexts, strategy has various definitions. Canadian management guru Henry Mintzberg defines it as a pattern in a stream of decisions, where all of these decisions are targeted toward a common goal. For a business, this goal might be to create or sustain a long-term competitive advantage; in other words, to win in the market.

EY understands the growing importance of strategy. Thus, it established a dedicated global Strategy practice to support its clients on their journeys when optimizing, growing or innovating their business.

Stick to the basicsEven the most minimal strategy approach needs three basic elements in order to be effective: situation diagnosis, guiding principles and a set of coherent actions.

“Situation Diagnosis” means analyzing the current situation and environment of the company, and developing scenarios about how the future is most likely to materialize.

Subsequently, “guiding principles” determine the direction an organization could develop in these scenarios, without going into the detail behind the direction itself. Lastly, a set of “coherent actions” assures the coordinated use of resources, activities and decisions to enable the desired future state.

Ask aroundThe process of forming a strategy is triggered by the company’s leadership team, but delivering input for diagnosis requires the deep understanding of the firm’s employees and operations.

Input from all levels of the organization helps to inform and enhance the decisions made at the top, and it starts the process of building support for the strategy execution among employees and responsible managers.

Furthermore, it develops the commitment and understanding of all employees who will be held responsible for delivering the results required by the strategy later on.

Make a long story shortA common mistake companies make when setting their strategy, is developing one that is too complex or inconsistent.

Many companies either have no strategy, or one that is not connected with existing operations or the external environment — one whose meaning is lost in its complexity or built in an isolated vacuum. An effective strategy is hard to develop, but its result should be straightforward, easy to adhere to and understandable by everyone.

An effective strategy is hard to develop, but its result should be straightforward, easy to adhere to and understandable by everyone.

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Defining a strategy is a continuous, flexible process that must adapt to changing internal and external conditions.

Don’t fool yourselfSetting objectives or plans and calling them a strategy is another common mistake. “Becoming the market leader” is not a strategy — it’s an objective or vision. It only becomes a strategy if it is connected with the elements of situation diagnosis, guiding principles and a set of coherent actions supporting it. This is when strategies become realities.

Stay flexibleIn today’s highly dynamic economies, business models are becoming short-lived. Defining a strategy is a continuous, flexible process that must adapt to changing internal and external conditions. Whenever the core assumptions about the current and future developments in the environment change, the strategy needs to be reviewed and adapted, if required. As a rule of thumb, every company should review its strategy at least once a year — the more volatile the environment the more often you should review and refresh your strategy.

Winning in the marketSun Tzu also wrote: “All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.” When the future arrives, and you find yourself in a stronger position in the market, your competitors might wonder how you got there. But those responsible for setting and pursuing your strategy — including the employees who helped to inform and deliver it — will be left in no doubt.



To help shed some light on the theory, here’s an example of how EY’s Strategy team worked with a client to review its strategy and recommend improvements.

In previous years, the client — a market leader within the Swiss automotive leasing market — has drawn on a stable return on equity and fulfilled all sales and performance targets.

External market developments, such as evolving customer requirements or increased pressure from the competition, forced the client to develop a strategy to react to these threats. Members of

the company’s top management team developed ideas for meeting their expected future challenges.

With the aim of securing further progress and growth, the management team asked EY to review, challenge and refresh its existing strategy and recommend improvements.

Project approachThe EY team initially conducted a complete as-is analysis of the client’s current situation, its strategic plans, operating model, service offering and ideas for innovation.

Figure 1. Strategy review report

cultu

re c

heck check

data overview

optimization check

strategy check

validity

chec

k

Recommendations

Busi

ness

Cost

Growth

Data

Data integrity

Consolidated

Strategy review report

Report on the current state and validity of internally developed growth strategy

Report on existing data and current state of business planning

Report on the level of data integrity with appropriate adjustments wherever possible

Report on the validity of data and its underlying assumptions

Report on the current state and validity of internally

developed enhancements to company culture

Report on the current state and validity of

internally developed cost optimization approach

Advise on enhancements to existing internal planning and strategy

Case studyHow EY s Strategy team supported a market leader in reviewing its strategy and staying ahead of the competition

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In order to get a holistic picture of the company, EY gathered data through extensive document analysis, as well as from more than 30 interviews with employees from all divisions and hierarchy levels.

It was extremely important to ensure employee support from all levels of the organization, and so the client’s leadership team held an official kick-off event communicating the project’s importance to the company’s future success and positioning.

This event served as a demonstration of the senior team’s full commitment, and made it clear to all employees that change was on the way — and that ongoing success would require everyone in the company to go the extra mile. “The management’s clear commitment to involve and receive honest feedback from all employees was crucial to obtain the necessary information needed from the very beginning” says Jule Parulewski from EY’s Strategy practice.

Actions taken and results deliveredOnce the project started, the first phase was to screen, consolidate and analyze all data collected and draw the right conclusions from it. In parallel, the team developed initial hypotheses for improvement paths on the basis of the data analysis, and began to search for additional information to test, challenge and evaluate these hypotheses.

Figure 2. Output from scenario analysis

25.0%

20.0%

Scenario 120.9%

15.0%

10.0%

5.0%

–15.0%

Econ

omic

ret

urn

(%)

Impact of interest margin on scenarios

–20.0%

–5.0%

0.0%

–0.0%

Source: EY.

2017201620152014201320122008

Baseline15.3%

Scenario 2–2.5%

Scenario 3–9.9%

Scenario 4–18.9%

25.0%

20.0%

Scenario 124.9%

15.0%

10.0%

5.0%

–15.0%

Econ

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Impact of fleet size on scenarios

–20.0%

–5.0%

0.0%

–0.0%

2017201620152014201320122008

Baseline20.9%

Scenario 26.1%

Scenario 3–1.8%

Scenario 4–11.4%



To account for possible future developments of the Swiss automotive leasing market, the EY Strategy team developed and tested multiple scenarios using a specially developed proprietary financial model to assess the impact of each scenario on the client’s overall strategy and business model.

Results of the situation analysis and

possible improvements to the client’s business model, value proposition or customer portfolio were evaluated against employee’s current level of skill and experience, in order to assess the realization chances of each improvement.

Additionally, the team reviewed the client’s internal organization and processes for their cost-saving potential.

A benchmark for comparison with competitors enabled the EY team to support its enhancements with facts and figures.

At the end of the project, EY summarized all of this information and helped the client to rate and prioritize its existing initiatives. The EY team recommended a set of coherent actions

Figure 3. Structure of business model analysis with example questions

Source: EY.

Customer relationships

Value propositions

Keyresources

Revenue streams

Keyactivities

Customer segments

Keypartners

Coststructure

Channels

What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each customer segment?

Through which channels do our customer segments want to be reached? How are our channels integrated? Which ones are most cost-efficient? Which ones work best?

What type of relationship does each of our customer segments expect us to establish and maintain with them? How are they integrated with the rest of our business model? How costly are they?

Who are our key suppliers? Which key activities do partners perform? Who are our key partners?

What key activities do our value propositions require? How do our distribution channels affect customer relationships?

What key resources do our value propositions require? Which key resources are we acquiring from partners?

For whom are we creating value? Who are our most important customers?

What are the most important costs inherent in our business model? Which key resources are most expensive? Which key activities are most expensive?

How much does each revenue stream contribute to overall revenues? What value are customers really willing to pay for? How are they currently paying?

The value delivered by the EY Strategy team helped me and my management team further enhance our company’s positioning.I am very thankful to the EY Strategy team for its uncompromising dedication and exceptional hard work.Managing Director

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which, in combination, allows for the client to adjust its strategy and reach its objectives. EY provided a strategic road map with readily implementable quick wins as well as medium- and long-term actions.

EY submitted a final report summarizing the results and documenting recommendations. It included an in-depth analysis and evaluation of the current growth strategy, process improvement plans and an assessment of internal innovation ideas. The report was further enriched with enhancement options for each area.

The project´s extensive analysis has empowered the client by giving the

company a better understanding of key challenges on the horizon. The company also now has much deeper insight into its own strengths and weaknesses and can, therefore, take these into consideration when dealing with future challenges.

As a result, the company is enabled to address its potential for improved economic success and is aware of its internal and external development areas. It has also been equipped with a clear road map together with a set of coherent actions that will support the continuing fulfillment of economic targets and profitability objectives.

“This project, again, demonstrated that a strategy is different from a vision or mission. It is more than goals, targets and objectives,” says Robert Jung, Manager at EY’s Strategy practice. “A strategy is the result of extensive research, analysis, planning and hard choices. It is a carefully developed, problem-focused action plan aimed at solving a critical challenge. If done properly, it provides everyone in the organization with guidance on what to aim for, the reason behind it and how to get there.”

Figure 4. Recommended coherent actions

Growth

Culture Cost

Supp

ortin

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tiviti

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Source: M. Baghai, S. Coley and D. White, The Alchemy of Growth, Basic Books, 1999.

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enin

g M

&A ta

rget

s

Process

design

Cost quick

winsProcess

quick wins

Process

documentation

Implement CPM

Pilot “one table”

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management

Cultural quick wins

Employee flexibilization

Cost optimization

Concept

segmentation

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dedicated

project

management

skillsConcept

service

segmentation

Pilot

concepts

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dedicated

analytical

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rs an

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(M&A

)

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Suppo

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activ

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2017 Phase 1: 2013–14Culture

Phase 2: 2014–15Service

Phase 3: 2015–17Growth

The value-driven project approach of EY’s Strategy team helped us to focus our resources on the main drivers of success. The holistic project design ensured our employees’ support.Finance Director

Feeling the pressure: managing supply chain risk in Southeast Asia

The Southeast Asian pharmaceuticals industry is taking center stage in the region, with predictions that the market will grow to US$3.9b by 2016.1 This rapid growth is gaining attention from both governments and patients, and pharmaceutical companies must gear their production and distribution infrastructure if it is going to withstand this growth and pressure. The majority of this increasing pressure is being felt by the health care supply chain, which in turn, is increasing risk that companies must address.


1. According to PR Newswire (US) as seen on The Jakarta Post 20 August 2013.

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Authors

Philip Chu Partner Advisory, Supply Chain EY, Singapore

Sing Hwee Neo Partner Advisory, Risk EY, Singapore



A variety of internal and external forces are driving the rise of supply chain risks. Macro trends, such as increasing globalization and global connectivity, are

rapidly changing markets and demands. Varying customer expectations and product life cycles, along with increasing quality and compliance issues, give rise to complexities in the pharmaceutical supply chain across clinical research, sourcing, manufacturing, distribution and sales. Pharmaceutical companies are expanding their portfolios and improving their operational efficiency

to cater to increasing demand for high quality and affordable products delivered on time with excellent customer service. While increased use of outsourcing is meant to improve efficiency — allowing businesses to focus on their core competencies — it has also made operations more complex and exposed them to greater third-party risk.

Extended value chain risks associated with upstream and downstream operational activities, product development, manufacturing and distribution also must be considered. Furthermore, by reducing slack in the network through lean manufacturing, centralization, just-in-time inventory and

In larger countries, such as China and India, currently, sub-distributors, most of which are local players, handle 30% of the main distributors’ sales revenue. However, the principals don’t have any visibility or transparency on sub-distributors’ compliance.Survey respondent

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capacity rationalization, companies have not only reduced the margin for error but also introduced new kinds of supply chain risk. Supply chain centralization also poses a big risk for the organization to align policies and standardize procedures across regions and countries. Additionally, the rising internet sales of drugs have brought in higher risk of counterfeiting drugs.

These complexities pose a myriad of risks to business sales performance, brand equity and reputation — ultimately impacting product quality and patients’ safety. For pharmaceutical industry leaders, this environment raises some pressing questions: how can companies understand where the most important risks in their supply chain are? How much risk should they tolerate? How can they reduce their exposure to unacceptable risk today, and prevent their occurrence in the future? These questions are not only restricted to Southeast Asia — they are problems that must be addressed by pharmaceutical companies worldwide.

Distribution in the pharmaceutical supply chainWhile all large pharmaceutical multinational companies (MNCs) have sophisticated supply chain management processes and deem upstream risks critical, few recognize distribution risk. This is despite the extraordinary potential costs arising from its ignorance. In the current pharmaceutical market, distributors play a critical role in the value chain as most of them not only purchase products from the principal for on-sale, but also manage the marketing,

sales and distribution to customers locally. Some of them also manage the after-sales support and customer relationship.

Additionally, as distributors manage product portfolios for multiple principals, fair treatment of all brands without bias poses a significant risk to the principal’s brand equity, revenues and reputation. Distributors may lend greater focus to certain brands during the sales process. The principal must recognize these risks and develop a mechanism to safeguard itself against them.

Furthermore, greater complexity in front-office administration is leading to increased focus in monitoring contracts, rebates and chargebacks. There is also a need for systemization to obtain visibility on distributor compliance, risk reduction and counterfeits. Newer models for health care delivery and reverse logistics are being explored. There is greater emphasis on the use of electronic health records, e-prescribing, mobile health applications and remote monitoring.

The industry’s current supply chain model will not be able to meet these challenges forever, requiring companies in the sector to develop new capabilities and new ways of working together.

An executive perspectiveWe interviewed a number of senior executives from pharmaceutical companies across the supply chain and distributor management functions. They highlighted four main risks that must be considered when looking at the supply chain in emerging Southeast Asian markets, such as Vietnam and Indonesia.

All distributors claim that they have the best reach. The difficulty for us is to ascertain those claims. Despite having sophisticated market intelligence, we still need an exhaustive on-the-ground check to validate distributor coverage.Survey respondent



1. Product liability Although distributors handle the principal’s products across local markets, the accountability of the product rests with the principal. This means it is they who are susceptible to market and reputational risk due to quality issues, such as contamination during distribution, physical damage, counterfeiting or mislabeling of products, cargo theft due to inadequate security measures, and diversion of products from the intended authorized market to another.

2. Financial stabilityThis relates to the financial health and bankruptcy risk of the distributors. As the principal’s products are registered under the name of the distributor, its revenues are earned only when the actual downstream sales transaction occurs. Thus, there is mutual dependency between the principal and distributor. In the event of bankruptcy or adverse global economic conditions, the principal’s cash flow is impacted if the distributor is unable to sell. In addition, it is difficult for the principal to engage with another distributor and sell to them within a short turnaround time. Distributors’ financial health thus needs periodic assessment through timely audits of financial statements, past transactions and overall business analysis.

3. ComplianceMain distributors in a country may not have full coverage, especially in larger countries, and thus engage sub-distributors to support them locally. Often, the principal has established practices and programs to validate and assess the business of the main distributor but ignoring the sub-distributors

that are present at the sub-regional level. Processing errors and negative chargebacks cannot be ignored either. There is a risk that the sub-distributor may resell a returned product and improperly request an additional chargeback, or claim a chargeback for a product that was shipped to a non-contracted customer. Such risks do not only impact the principal’s brand but also its relationship with the main distributor. How can sub-distributor compliance and risk be managed?

4. Distributor reach and coverageDistributors today reach out to several thousands of pharmacies, hospitals and health care institutions. The risk here is how this reach can be validated. Distributors carry a plethora of brands and product portfolios for multiple principals. The question to be addressed is whether the principal’s products are actually reaching the end customers fairly, consistently and in an unadulterated manner. If neglected, this area could result in unfilled demand from the end consumer, thus impacting revenues and profits. There needs to be a program and research to validate a thorough check on the distributor’s claims based on the market and competitive intelligence.

Remediating the riskTo mitigate these risks, businesses need to have an effective and holistic risk management program, encompassing not just the company’s risk management team but all the functional arms including sales, marketing, purchasing, operations and finance. The program should provide greater clarity on distributor transactions,

Distribution in Indonesia is a challenge, due to the highly regulated distributor environment. Improper handling of the products poses a big risk to product liability for the principals.Survey respondent

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Distributors collect money on behalf of principals. If they are not financially stable to carry out the sales, they will burn up the principal’s cash flows.Survey respondent

competitive health and capabilities, the sub-distributor mapping and improved visibility across the value chain.

Coordinated supply chain and distribution management efforts, by contrast, can provide a clearer and more comprehensive understanding of the strengths and weaknesses. Simply recognizing the value of distributor risk management is not enough. Unknown and unforeseeable risks will always be with us, and not even the best risk assessment approach can identify all of them. Even so, greater insight into the way they might play out can provide a more comprehensive picture of an industry’s competitive dynamics and help shape a better corporate strategy.

There are three key attributes to help companies build a resilient supply chain for distributor management: information sharing, control and collaboration.

Information sharing across the organization, to check for adherence to compliance and applicable standards by distributors, should be used as common risk assessment practice. The ability to monitor supply chain events and patterns as they happen, allows companies to address problems proactively. Data analytics is one of the critical enablers. Control is essential: having robust policies, monitoring, and control mechanisms to help ensure the proper procedures and processes are actually followed. Collaboration is also key; having the ability to work effectively with distributors through symbiotic, trust-based relationships in order to avoid disruptions and achieve common goals. Currently,

the consignment model is widely used for distributor agreements.

A service-oriented model can also be explored in more mature markets. Controls need to be established through a comprehensive audit and due diligence of distributor sales, transactions and margins. Risk from third-party distributors poses a significant challenge to pharmaceutical companies. A systematic approach to managing those risks can lower costs and help pharmaceutical companies present a coherent approach to all key stakeholders, including regulators.

ConclusionDistribution risk opportunities do much more than improve the bottom line. By embracing the challenges of supply chain leadership and distribution excellence, pharmaceutical companies have the opportunity to further the most important missions of the health care industry: providing safe, affordable access to products that can enhance, or even save, the lives of people across the world.

Section title

Culture: the elusive path to business success

Revitalizing talent has a lot less to do with changing people, but a lot more to do with the culture that the organization, the management team and the people themselves create and contribute to.


Authors

Seshni Samuel EMEIA Talent Leader EY, South Africa

Joya Appadu Senior Manager Organizational Development EY, South Africa

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Imagine the ultimate success story: a business, an organizational strategy that is guaranteed to win in the market, and then of course, the right people who make it all happen. Like most things, this is more easily said than done. What

keeps the typical HR practitioner up at night is: how do we ensure we have the right people to successfully deliver on the business strategy?

But, according to Sumantra Ghoshal, late Professor from the London Business School, that is the wrong question to ask. Rather, he claims: revitalizing talent has a lot less to do with changing people, but a lot more to do with the context — or the culture — that the organization, the management team and the people themselves create and contribute to.

We wanted to create an environment where our people felt supported and empowered in delivering on our strategic objectives.Ajen Sita, EY Africa CEO

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“Let me try to describe ‘context’ in the best way I experience it,” says Ghoshal. “I come from Calcutta, India. Calcutta is a wonderful town in spring, autumn and winter … but in the summer, well, the temperature is 40 degrees, and the humidity is 99%.” Imagine the heat, the humidity, the noise, the dirt. “It sucks up all your energy, drains your brain and exhausts your imagination,” he says. Ghoshal then takes us to springtime in the forest in Fontainebleau, near INSEAD, a business school, where he was a professor at the time. “The smell of the trees, the crispness in the air, the flowers, the grass underfoot … how one’s heart lifts up, how the energy and creativity bubble away!”

The issue is not about changing people. “In Fontainebleau in spring, I have a lot of energy,” he says. “In Calcutta in the summer, I am a bit tired. And yet I’m the same person.” The issue is beyond the abstractions of strategy, or organization, or processes. “Most companies, especially large companies, have created downtown Calcutta in the summer, inside themselves,” says Ghoshal. At the end of the day, the question Ghoshal poses is, how do we create Fontainebleau inside people? How do we create a culture and an environment that brings out the best in people?

Creating an organizational culture to underpin organizational strategySo what is culture? Ghoshal describes culture as the “smell of a place.” Strategy, defined by top management, then flows down to the rest of the organization. What does the strategy “smell” like, when it

comes down to the front line manager, and how does the “smell” then affect the front line manager’s behaviors?

Although abstract, the phenomena of culture are concrete and very powerful — and very difficult to change. Another pundit of culture, Edgar H. Schein, in his book Organizational Culture and Leadership,1 categorizes culture into four elements: structural stability, depth, breadth and patterning. “Structural stability” is the notion that culture is the foundation of group identity. It holds the group together and defines the group even as members come and go. “Depth” is the concept that culture is so deep that group members may be unconscious of it. It is simply the way you do things and needs no explanation. “Breadth” is the effect of culture on everything about an organization, touching every function and activity. Lastly, “patterning” is the notion that culture is what makes the group’s behaviors, values and rituals coherent.

“Taking on a cultural transformation is no small feat,” says Shirley Zinn, graduate from Harvard University, Faculty at Duke Corporate Education and Extraordinary Professor at University of Pretoria. “Culture goes beyond capturing the minds of employees, but captures their values, their beliefs, their hearts. It is ultimately what drives behavior. And that behavior needs to support the strategic objectives of the firm, in order to result in business success.”

Zinn adds, “Executive buy-in is absolutely essential.” After all, if executives of the firm feel the need to foster an empowering culture — that, in itself, speaks to the culture of the firm.

Per Schein’s research, guiding an organization through cultural transformation also requires “unlearning” as well as learning. “It is not enough to define what behaviors are required to achieve the strategy,” says Zinn. “The behaviors that need to be unlearned, and cannot be tolerated, also need to be defined.”

Putting theory into practiceIn August 2006, EY Africa set about uniting its offices by integrating all processes, legal entities and systems. You can rightly call this undertaking ambitious: there are 33 separate country units across EY Africa, each with their own cultures, languages and operations. The need to create an organizational culture to support the company’s strategic objectives was quickly apparent.

“Our purpose at EY is to build a better working world for our people, our clients and our communities,” says Ajen Sita, EY Africa CEO. “Our ambition is to be the most distinctive professional services firm in Africa. We wanted to create an environment where our people felt supported and empowered in delivering on our strategic objectives.”

And so began the search for a unique organizational culture that defined and united these different offices. Understanding what needed to change was the first step for EY Africa’s management.

1. E. H. Schein, Organizational Culture and Leadership, 1985.


Based on the Bluprints concept,2 all 5,400 employees in the continent were asked the same question: what should we be doing more of, and less of, to become the professional services firm that builds a better working world across Africa for their people, clients and communities? Adds Sita, “As the executive, we wanted to know what our people wanted — from the partners of the firm, to the managers and down to each and every employee.”

With this approach, it is the people of EY Africa who defined what culture they were willing to embrace in order to meet their company’s strategic objectives. Also, true to Schein’s research, this approach addressed not only behaviors that needed to be learned, but also those that needed to be unlearned — all the while creating commitment from the people from the start of the process.

Responses were provided electronically via an online survey, which drew more than 11,000 replies from 84% of the workforce. Those responses were then divided into top-line themes (behaviors that employees wanted to see more of) and bottom-line themes (behaviors that employees wanted to see less of). The employees then voted and narrowed the list down to the 10 top and 10 bottom themes that they thought deserved the most attention.

EY Africa then took the process a step further. We asked every employee: for each top-line and bottom-line theme, what

visual icon would you associate it to? “True to our purpose of uniting our employees beyond barriers such as language, it was important for us to express our culture in the universal language of art,” says Seshni Samuel, EMEIA Talent Leader. “The use of iconography was instrumental in reinforcing culture by using a right brain language to create association.” More than 1,300 creative ideas were submitted — after

which the executives had the formidable task of narrowing down each behavior to its most appropriate visual icon. Refer to Image 1 to see a photograph of the visual icon, modeled from clay, created to show teaming and integration.


2. www.blu-prints.com.

Image 1. Visual icon, modeled from clay, to show teaming and integration

Sustaining a culture and embedding it within the organization is as important as defining it.

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The result: EY Africa’s formula as an organization, developed by its people across the continent, that defines the culture that is deemed important to its people. Refer to Image 2 to see a photograph of the formula brought to life in the EY Johannesburg office, where all the icons, modeled from

clay, are on display. We called this journey “Our EY,” in recognition of a shared desired organizational culture that belongs to all those who created it.

“Our EY reinforces EY Africa’s purpose and creates an EY Africa identity, giving employees a unique EY culture and sense

of belonging, which transcends their countries, languages and cultural barriers,” says Samuel. “The innovative approach of cocreating a culture as a firm, and then translating it into a visual formula, not only defines our culture into concrete behaviors, but it also engages our people.”

Image 2. EY Africa’s formula on display in a Johannesberg art gallery


Strengthen global, empower localSome people consider Africa to be one country or region — yet it is home to more than 2,000 languages and cultures. Embedding the culture and making it relevant to each employee — across 33 countries — was the next battle.

The solution: the executive team called on local partners in each country to discuss the cultural formula by organizing “pod” sessions that involved, at most, 20 people at a time. That’s correct — that would be more than 250 pod sessions, across 33 countries in Africa. During those sessions, local leadership presented the Our EY formula directly to their teams, so that

issues uncovered and questions probed remained relevant to each local office. “What teaming and integration means in Lagos could be very different from its meaning in Walvis Bay,” says Samuel. “We wanted the local leaders to introduce these behaviors, in a small intimate safe setting, so that all people could internalize it in the way that made most sense to them, in their context.”

Sustaining a culture, and embedding it within the organization, is as important as defining it. “Language is a huge part of culture,” says Samuel. “To embed the behaviors in the organizational culture, we need to use it in our daily communication.” As such, internal communications, more

often than not, carry the emblem of the relevant Our EY visual icon, depending on the context of the message. The Johannesburg Spring Day event features a Masterchef challenge, where teams involved lose points for “accepting mediocrity” (a bottom-line behavior) if their stalls are untidy after completing a cooking challenge.

Every six months, all employees across Africa participate in a survey to rate how well their colleagues are living up to their desired culture. As part of the survey, the following question is asked: what are the top- and bottom-line behaviors that most attention should be given to in the next six months? Results are sliced and diced into


Image 3. Our EY coins

The innovative approach of cocreating a culture as a firm, and then translating it into a visual formula, not only defines our culture into concrete behaviors, but it also engages our people.Seshni Samuel, Talent Leader, EY EMEIA

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business or country units to give meaningful feedback to management. Meetings are held every six months to discuss these results and microformulae, which then drive locally relevant interventions.

As part of its plan to establish an Africa-wide culture, EY launched the “make a difference” program to recognize people who demonstrate the Our EY behaviors. Special silver-coated coins that say, “Thank you for living Our EY and making a difference,” are awarded to employees to thank them for their efforts (see Image 3, which is a photograph of the coins). The benefit of receiving the coin is that the recipient can then pass it on to other colleagues throughout Africa who have shown a similar commitment to living the Our EY behaviors. Each coin is encircled by a compass, to signify the business moving in the right direction whenever someone recognizes a colleague. This scheme helps

connect employees in different business units and countries with one another, and encourages recipients to pay tribute to colleagues who demonstrate best practice.

“Africa’s social systems, beliefs, and cultures are as diverse as its peoples and as disparate as its climates,” Samuel says. “While Our EY gave us the opportunity and platform to unite our people across the continent, the success of this initiative lies in its versatility to still be impactful in each country, even as each harnesses hundreds of different societies with their own laws and languages. Our EY is EY Africa’s culture that helps bring out the best of our people.”

Tips for a successful organizational cultural journey

► Understand the business needs — what works for one business may not work for another. Know what you are trying to achieve and why it is critical for success

► Appreciate the importance of executive commitment — ongoing executive and partner support and involvement

► Create an empowering platform — allowing everyone to contribute and giving them a voice

► Demonstrate innovation and creativity — capturing the imagination and spirit of the organization

► Implement meaningful initiatives — delivering messages that are relevant to the local context

► Encourage sustainability — embedding the culture in existing processes and systems


Who are your organization’s problem solvers?

The impact of an effective problem solver within an organization can be significant. In an environment where operational excellence is a necessity, companies that know who their problem solvers are and are proactively nurturing this talent within the organization, will have the advantage over their competitors.

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Authors

Uwe Michael Mueller Performance Improvement Leader Europe, Middle East, India and Africa (EMEIA) EY, Germany

Nelson Taapken People and Organization Leader Germany, Switzerland and Austria (GSA) EY, Germany



Who are your organization’s chief problem solvers? Most businesses have such individuals: they are the small group of people

to whom the company automatically turns when a challenge is to be confronted or an opportunity is to be grasped. Their status may not necessarily be overtly recognized, but people across the business — from the CEO downward — instinctively know who they are.

If your organization doesn’t have such a group — or you can’t name them — there is a good chance that it isn’t operating to its full potential. These are the go-to people for challenges of every description — from, say, scrutinizing the minutiae of a supply chain problem to delivering a strategic transformation of the entire business. Without them, these challenges are never fully met.

This is especially relevant in today’s difficult operating environment, which some leaders have taken to describing as a “VUCA” world: volatile, uncertain, complex and ambiguous. To cope with that, organizations are being forced to ensure that their operational performance is as good as it can be. They need to hardwire agility into their day-to-day work, in order to respond to a constantly shifting marketplace. And they need to work hard to create a culture that fosters and supports operational excellence.

To do so, organizations are creating a formal job title for individuals who can help deliver on these goals. Two decades ago, relatively few companies employed chief operating officers (COOs), but today the role is far more common. These roles are often taken by the most senior problem solvers within the business. The kind of person on whom CEOs depend to drive operational excellence. And the sort of

Many organizations instinctively know when they have a natural problem solver but struggle to define what inspires such confidence, making it impossible to develop the COOs of tomorrow.

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leaders that earn the respect of colleagues and subordinates because of their consistency in delivering day in and day out. Still, in the end, the job title is unimportant. Whether you call them COOs, Operations Directors or Presidents, these individuals are invaluable to successful organizations.

How, then, do companies ensure they have someone who is capable of making sure that thousands of moving parts work together in the most effective way possible? And how do they guarantee a flow of these talented problem solvers for the future?

The core characteristics of future problem solversThe answer is to think more carefully about what makes these individuals who they are — and how these characteristics can be engineered and encouraged. For although many organizations instinctively know when they have a natural problem solver, who is trusted and relied upon by everyone, they often struggle to define what it is that inspires such confidence. Unless they are able to do so, it will be impossible to develop the COOs of tomorrow.

In fact, EY’s research suggests the attributes these leaders display are more complicated than is often thought.1 Broadly speaking, they fall into two groups: a set of core capabilities that a future operational leader must develop, plus a further set of less tangible qualities that are just as crucial for the most effective problem solvers.

1. For more, see: Aiming for the top: a guide for aspiring COOs and their organizations, EY, 2013.

Anyone who hopes to have a transformative effect on the organization must have the leadership skills required to enthuse and motivate those they work with.



It is the core capabilities that many organizations will look to first, both as they seek to find problem solvers for the here and now, and to ensure their most talented individuals can step up in the future. The typical capabilities that are considered are wide ranging, not least because this reflects the demands associated with creating a high-performing business:

► Change management. An ability to manage transformation is crucial. Successful change agents are able to lead different groups of people, bringing them together at the right moments and breaking down the barriers that act as a drag — not least people’s resistance to change.

► Strategy. The best problem solvers understand how to set objectives, map resources and monitor progress. They turn the company’s strategic vision into workable reality. To meet that challenge, they’ll need to join the dots between the business’s day-to-day operational issues and the changing environment of the industry in which they operate.

► Compliance. Businesses increasingly operate in a controlled environment — and not only in highly regulated industries such as financial services. It is the COO, or their equivalent, who must ensure these controls are in place and enforced — and that they do not unduly hinder the business’s ability to perform.

► Structure. Organizations need an operating model that spans people, process and technology in order to turn vision into reality. The quality of that model — its efficiency and effectiveness — will determine whether the business succeeds or fails in realizing its vision.

► Performance. In a volatile and uncertain economic environment, all organizations must do more with less. Identifying and delivering those efficiency gains are crucial objectives for most operational leaders.

► Insight. It will be difficult for problem solvers to be truly effective unless they have a granular understanding of the operational issues in the industry

in which they operate. That typically requires extensive experience in the sector, as well as the ability to adapt quickly to emerging challenges.

► Global grasp. Multinational organizations operate in many markets, coping with different local practices, cultures and regulatory frameworks. Problem solvers must bridge those differences with structures that deliver the necessary freedoms for local managers to operate effectively, while also conforming to the organization’s strategic vision and its implementation model.

Spotting the “X” factorsThese core capabilities are common to nearly any business, making them the foundational elements for anyone planning to become the organization’s future problem solver. But it is a less obvious set of qualities that set out future high performers

Those organizations that have already hired an effective problem solver understand the impact that these individuals make. Those that haven’t risk being left behind.

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from the rest, and help organizations identify which candidates to focus on. These are attributes that might be described as “X” factors. Accordingly, many are intangible in nature. However, what is most encouraging is that nearly all of these can be nurtured and developed within the most promising candidates.

The first attribute is simply about their depth and breadth of experience. The most effective operational executives will often have worked in a variety of the business’s functions during their career, developing crucial insights into what is required in commercial roles, as well as operations and functions such as HR or marketing. They may also have spent time in different geographies or at subsidiary businesses. Organizations can ensure they have such individuals by developing programs and schemes that enable individuals identified as future leaders to rotate through the business. This process may begin with graduate trainee programs and lead right through to executive management training designed for senior staff.

A second attribute is international perspective. In a multinational organization,

an individual whose experience has all been in a single country may find it difficult to function across borders and cultures. The knowledge gleaned from international postings gives future leaders a bank of ideas about leading practices on which they can later draw — from different operating models to innovative technologies. Ensuring future leaders get exposure to the international operations of the business should therefore be a priority in executive career development and succession planning.

A third relates to leadership skills. Problem solvers can’t do it all by themselves. Anyone who hopes to have a transformative effect on the organization must have the leadership skills required to enthuse and motivate those they work with — even where those people aren’t direct reports. Organizations should not make the mistake of thinking leaders are all born with these skills. It is possible to help talented individuals become effective leaders, by providing them with the opportunity to work with those who already display such skills. Specialist training and coaching can also make a huge difference.



The most effective problem solvers know their Plan B even before Plan A has come unstuck, and have creative solutions even to unexpected problems.

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Flexibility is next. The rapidity of change is a pressing theme for multinational organizations — their leaders must be prepared to constantly adapt to the evolving environment in which the business has to operate. The most effective problem solvers know their Plan B even before Plan A has come unstuck, and have creative solutions even to unexpected problems. It is difficult to teach people how to be flexible. But adaptability can be acquired with experience. By exposing future leaders to different challenges in different places, organizations build their ability to learn quickly and to operate with greater agility.

An often overlooked attribute is courage. New challenges are unnerving, but a willingness to move out of the comfort zone is a crucial attribute to have. This is how individuals learn new skills, broaden their experience and become the leaders to whom the business looks for solutions. Courage is about being prepared to be the one who volunteers for the tough challenge, or the one who is able to concede mistakes or failures where colleagues are running scared. It is important to identify individuals who display such courage and to build upon it — offering them moves to new functions or geographies, for example, or putting them in charge of underperforming divisions.

Another element that is easy to forget is sociability, although it is often the most obvious one to discern. All organizations, in the end, are people businesses. No individual will be able to take the organization by the scruff of its neck unless

they are skilled networkers, capable of building strong relationships throughout the business.

Not only must they know who to call to make things happen, they need to be able to navigate the political issues that are a feature of all organizations. They’ll often lack the direct authority to implement change, so they’ll need strong powers of persuasion and motivation. Some of these skills can be taught, but self-awareness and a willingness to submit to the assessments of others, through 360-degree appraisals, for example, are necessary for those individuals aiming to improve their emotional intelligence.

Building a talent pipelineAny company seeking to ensure its long-term performance needs to work hard to develop a solid talent pipeline of future organizational “fixers” that hold these foundational skills — and also the related “X” factors that help them truly stand out. They may not necessarily become COOs, but the attributes above are strongly desirable for any company seeking to cope in a VUCA world.

In the short term, it may be necessary to look for external candidates for the role, but many of the attributes identified as wanted imply that internal appointments are better. For organizations unable to hire internally today, it is even more important to develop a robust framework for developing such individuals for the future. By mapping out existing talent, and framing that against likely future organizational needs, it can

then be possible to design effective talent development programs to produce future problem solvers.

Ultimately, these are investments that may not pay off for many years. But they are worth making if companies plan to deliver operational excellence over the longer term. Those organizations that have already hired an effective problem solver understand the impact that these individuals make. Those that haven’t risk being left behind.

For further information about EY’s COO program, please visit ey.com/future-coo.

Internet start-ups: the essential role of the finance function

There is much to focus on when establishing an internet start-up, such as finding an investor who shares the belief in your vision, designing prototypes and building a business plan — all this activity can mean the essential role of the finance function is often forgotten. Overlooking this crucial part of a fledgling company can cause real, and frequently dire, repercussions as the business grows.


Authors

Ricardo Steuer Manager Advisory Services EY, Germany

Sven Westeppe Consultant Advisory Services EY, Germany

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The term “start-up” is usually associated directly with internet businesses, such as social networks or online brokerage services (see Figure 1). However, there are

many variations such as corporate, small businesses or lifestyle business start-ups that often begin as offline business models. Whatever the type of start-up, they all have a common challenge: to secure and manage finance. This article concentrates on internet start-ups due to their broad public awareness, taking into account the fact they show a large variety of different business models in terms of size and complexity.

Finance function helps build investor confidenceWhen an internet start-up kicks off, having secured funding during the first phase and raised capital through an investor to accelerate the business idea, things often move forward very quickly. Although a finance function might not be one of the core business building blocks of the young enterprise in its initial stages, it will become increasingly important as the start-up grows and has to manage payments, handle receivables or plan budgets. As the small start-up struggles with the fundamentals, such as establishing its legal entity and tracking payroll or tax-related activities, outsourcing to an external tax accountant may be a good initial solution. This enables the founders to concentrate on the growth of their business idea, rather than spending resources on back-office activities that could be provided by an external party.

As the start-up grows, investors demand due diligence and transparency of operations and security, introducing complex processes that often require a large investment of resources.

Figure 1. Types of start-ups

Source: EY.

Example:Google, Skype

Example:Instagram

Example:Jumo

Example:car sharing

Example:hairdresser, carpenter

Example:surf teacher

These start-ups are born to become big, as founders and investors believe that their idea will change the world. They hire the best and brightest, and focus on creating equity in order to go public in the future.

Crowdfunded or backed by angel investors, these start-ups build web or mobile applications and seek to be acquired by a larger corporation.

These type of start-ups can be networks or organizations that operate with the goal of making the world a better place. Sometimes operate as not-for-profit organizations.

Large, mature corporations that understand the need to innovate from inside and invent new business models to stay ahead.

Overwhelming number of small businesses, born out of the founder’s desire to run their own business.

Lifestyle start- ups evolve from a desire by the founder to live the life they love and pursue their passion.

Common appearance of online or internet start-ups

Small companiesScalable Buyable Social Corporate Lifestyle

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On the other hand, there are multiple finance aspects feeding into the business case, many of which are fundamental to the fund-raising process and attracting investors’ interest. A central task of the finance function is, therefore, the steering of the start-up through the calculation, monitoring and controlling of its business case. For this reason, the finance function and its management of the business case are of particular importance for investors, who are interested to see how their investments are performing.

This ambivalence between the need for a finance function due to legal setup requirements, the lack of focus on finance and back-office activities early on, and the interests of the investors in the business case, represents a stumbling block for many start-ups, leading to frequent challenges:

► Poorly defined finance strategy

► Lack of a strong foundation of finance knowledge from which the business can grow

► Decoupled finance activities from business case

► Missing general accounting and controlling procedures

► Ad hoc and unstructured ramp-up of finance staff in later stages

► Organizational challenges during growth and expansion phase

► Unharmonized finance processes (especially accounting)

► Missing transparency

To tackle and cope with these challenges, a clear finance strategy — including service

delivery model — needs to be implemented, at the beginning, to avoid complications as the business grows.

The start-up’s life cycleIn the traditional life cycle of a start-up enterprise, a young business must go through three stages before it reaches market expansion and maturity: seed, start-up and growth phase (see Figure 2). In the initial seed phase, founders establish their business plan, design the beta version of the internet platform or app and begin fund-raising with potential investors. With the first cash flows from investors, the

start-up can roll out sales mechanisms and begin to place its product or service on the market. Typically in this stage, capital resources are scarce, which forces the team to concentrate their resources on activities such as marketing, IT production and development. At the beginning of this phase, one member of the founding team, typically with a business studies background, assumes the responsibility for finance, accounting and other back-office activities. However, shortly after go-live, the scope of back-office and especially of financial and accounting activities becomes more complex. Given the fact that capital

Figure 2. The impact of a clear finance strategy on internet start-ups (illustrative example)

Time

Seed Start-up Growth Expansion

Source: EY.

Fully fledged finance organization led to economies of cost and cannibalism of profitability

Flexible and modular finance function supports profitable growth

Translate strategy into daily operations and synchronize staffing

Evolve finance strategy

Profit and transparency gap

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In-houseOutsourcedSourcing trend

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Static finance functionRevenueUS$50m

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Elastic finance functionRevenueUS$50m

Fina

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resources are rare, most start-ups make use of a small tax accounting agency to support the founding team member handling finance responsibilities. These accounting agencies offer to handle all accounting and tax-related activities, allowing the founder to step back and concentrate on core activities — making the start-up a success. However, a risk is that they may be unable to handle the substantial increase in activities that could result from the potential success start-ups experience in their early years.

Rising sales and brand awareness allow the business to raise additional capital from venture capital firms, and the scope of the finance activities grow. However, as the business success and capital grows, so too must staff levels to meet the growing demand. Companies often look to employ marketing and IT specialists to maintain the growth pace. According to the latest German Startup Monitor issued in June 2013, 75% of start-ups with job postings are seeking engineers, software developers or other technicians.

Alternative start-ups: internet incubatorsNot all start-ups begin in the seed phase. Large internet incubators such as the German Rocket internet or Team Europe, adopt business models that have proven profitable in markets abroad, adapting them to the local market and helping the early start-up into business quickly. Backed by multiple venture capital partners, these incubators support their new business models with funding to boost their market

entry. In case the business model gets a foothold in the local market, the incubators invest further millions to grow and foster their market position. If the model is proven to be wrong, incubators halt investments and look for another business model and investment opportunity. Given the size of these start-ups, which can be substantially larger than start-ups emerging from the seed phase, they tend to build up their finance function directly due to the volume of transactions, and need to abide by investor regulations. In both cases, a clear finance strategy faces challenges including how to handle high volumes of payables and receivables, whether to outsource or not, and how to align and integrate the finance function into the entire organization. To meet these challenges, the founding team needs to have a clear vision of their future finance function.

Entering the growth phaseDepending on the speed of success, and the time it takes to enter the growth phase, internet start-ups eventually achieve a sales volume that most small tax accounting firms cannot cope with. According to Sebastian Esser, founder of German start-up networking company CEO Events, the volume of work and expertise required by successful start-ups quickly outgrows such agencies. “Especially when it comes to expanding the business model abroad, most third-party accounting providers lack knowledge, forcing start-ups to build up knowledge on their own and perform finance activities in-house,” he says.

Often, the new internal finance department grows in accordance with

the size of the business. But, if finance processes and procedures have been established on an ad hoc basis, then moving from tax accounting agencies to internal functions carries a risk that the finance department may grow larger than needed. Consequently, this leads to a fully fledged finance organization with low profitability. Some well-established internet start-ups have finance departments that are larger than public traded corporations. This rapid growth of finance activities and unnecessary staff recruitment consumes resources that start-ups could otherwise use to foster market position before entering the next stage. The main challenge

Young entrepreneurs looking to establish an internet start-up need to think early, during the initial phases, about their business modeling and how to structure their back-office solution.

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is that many enterprises double their staff numbers as their revenue increases. Therefore, a modular designed and financially flexible organization that has specialized job profiles and an optimized service delivery model should be the target.

Another risk of unstructured financial activity for start-ups can be the exit of investors through an initial public offering (IPO) where shares of stock in the company are sold to the general public for the first time. Thus transforming a private company to a public company, creating further financial challenges. As legal and reporting requirements are strict for IPOs, start-ups must restructure and reorganize

their finance activities as it’s unlikely that standardization of processes, procedures and reporting will have previously been in place. Start-ups that build their own finance departments, often recruit an external, experienced chief financial officer (CFO). Irrespective of the possible exit, many start-ups that are successful in this stage, consider testing their business model on a geographically larger scale, go abroad and enter the expansion stage. This stage inevitably reveals inefficiencies and structural problems caused by a missing finance strategy.

A central task of the finance function is the steering of the start-up through the calculation, monitoring and controlling of its business case.



Outsourcing can be invaluableIn order to avoid or reduce internal, structural problems with respect to finance activities and to make best use of capital — a crucial asset for a start-up — a combination of outsourcing and in-house finance activities is favorable. If outsourcing is used, similar to large capital enterprises, multiple finance activities can be highly standardized including transactional tasks, such as order management, invoice management, cash collection as well as the payment

process (see Figure 3). The outsourcing of these transactional activities can be done throughout the whole start-up life cycle and beyond. The key to a successful outsourcing strategy is to release internal resources, especially in the start-up and growth phase, where finance activities are often run in-house, in order to focus on the business. As the start-up grows, investors demand due diligence and transparency of operations and security, introducing complex processes that often require a large investment of resources.

There are some crucial early tasks that should be managed internally, however, such as business case setup and its calculation, which should be done throughout all phases by the founding team. Further, highly business-related activities such as campaign evaluation, customer order and billing, exception handling, and liquidity management should be handled in-house. Rather than outsourcing all finance activities from the outset, and missing out on the building of internal knowledge, start-ups should

Some well-established internet start-ups have finance departments that are larger than public traded corporations.

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concentrate on few, but essential, finance activities internally to protect the start-up in later stages from expanding the finance function unnecessarily. A well-defined strategy helps to constantly structure the internal and external finance organization, including its process and IT landscape, around the business size, allowing scalability. This flexibility establishes a firm financial base from which to expand the business overseas.

From thought to finishRushing into a start-up business without the necessary regard for the finance function can have negative repercussions for a business once it grows and achieves

success. Young entrepreneurs looking to establish an internet start-up need to think early, during the initial phases, about their business modeling and how to structure their back-office solution. They should think about which activities can be managed internally, and which activities are not adding value for their young company and would be best outsourced.

References used for this articleS. Blank, “6 Types of Start-ups,” The Wall Street Journal, 2013.G. Cassar and C. D. Ittner, Initial retention of external accountants in start-up ventures, 2009.A. Davilla and G. Foster, Management accounting systems adoption decision: evidence and performance implications from early-stage/start-up companies, 2005. M. Ozer, The role of flexibility in online business, 2002.“The outsourced CFO,” CFO Insights, http://www.cfo-insight.com/corporate-strategy/cost-efficiency/the-outsourced-cfo-what-start-ups-need-to-know/.“The 3 jobs your start-up should outsource,” Forbes, http://www.forbes.com/sites/theyec/2012/10/29/the-3-jobs-your-startup-should-outsource/.“Outsourcing fills the start-up skills gap,” Financial Times, http://www.ft.com/intl/cms/s/0/4ed18b1c-fcbc-11e1-ba37-00144feabdc0.html#axzz2bMXvi8ps.“Deutscher Startup Monitor 2013,” Bundesverband Deutsche Start-ups e.V., 2013.

Figure 3. Finance activities for start-ups

Source: EY.

Master data management Invoice posting Invoice verification Payment processing

Bank statement processing Cash pooling and management Tax computation Tax submission

Customer queries handling Inbound sales and orders management Customer invoicing

Deductions resolution Cash collection process Credit and debit notes Dunning process

Manual journal calculation Standard costs calculation Technical manual journal entries Month-end close

Profit and loss reporting Balance sheet reporting Creation of reports Data upload

Cost allocation and accounting

Retrieval and extraction of KPI from system

Purchase order handling

Liquidity management

Exception handling

MD quality assurance Issue management

Financial statement quality assurance

Variance analysis and commentary Legal, risk and statutory reporting

Business case calculation and maintenance Function and business support KPI definition

Finance vision and strategy design Interpretation and analysis of results Make or buy decision

Tran

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Finance management

Business performance

Reporting and consolidation

Generalaccounting

Accounts receivable

Order management and billing

Cashmanagement

Accountspayable

Outsourcing potential


Energy demands: what are the emerging risks for the oil and gas industry?

What are the new challenges that need to be overcome if the oil and gas industry is to continue to meet the world’s growing demand for energy?

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Authors

Dale Nijoka Global Oil & Gas Leader EY, US

John Avaldsnes EMEIA Oil & Gas Leader EY, Norway



With many of the older, more mature, oil and gas fields and basins now past peak production, we are moving into a major new phase of investment

across the industry, as the challenges of providing more energy to a growing global population intensify. Consequently, fundamental new trends are emerging across the industry:

► Exploration activity is increasing in new and existing oil and gas geographies. New frontiers such as Brazil, East Africa and the Arctic are being opened up.

► New sources of unconventional hydrocarbons, such as shale oil and gas, tar sands and coal bed methane are now economically and technically recoverable. Technology is creating new opportunities and pushing the boundaries of what constitutes recoverable reserves ever further.

► Gas is playing an increasing role in the global energy mix. Its environmental benefits in power generation can be clearly seen when compared with coal, and its reliability can also clearly be seen when compared with renewable

sources such as wind or solar. This has led to a dramatic increase in the number of liquefied natural gas (LNG) and gas pipeline projects around the world.

► Emerging markets are seeing significant growth in their energy demand and are consequently seeking energy security and new sources of supply. This, in turn, is leading to significant new infrastructure projects that are linking new sources of supply to new markets.

All of these factors make it an exciting time within the oil and gas industry.

Risk balancing across suppliers and joint venture partners has become critical.

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However, the pace and scale of change is resulting in significant alterations to the industry’s risk landscape. Heath, safety and the environment (HSE), price volatility, exploration risk and supply disruptions have long been the key risk drivers within the industry. While these well-explored risks still remain, in this article we take a look at some of the new risks that are emerging.

Waking up to an invisible threatIT security has entered the top 10 risks for the first time in this year’s survey,1 a reflection of the industry’s growing use and reliance on technology to manage all major technical, operational and commercial aspects of the business. This risk has a number of dimensions to it, ranging from operational sabotage and theft of intellectual property rights, to commercial espionage. All of these could have catastrophic operational or commercial consequences for an oil and gas company. Organizations need to be vigilant and to ensure that their IT security approach is leading edge, well maintained and regularly tested. IT security has moved from being the domain and concern of the IT leadership team to being a board-level issue.

Increasing project scale and complexityThe past decade has also seen the rise and rise of the megaproject in the oil and gas sector. Recent EY analysis identified over 350 oil and gas projects (pre- and post- final investment decision) with a projected capital expenditure greater than US$1b. These projects are increasingly complex and often involve multiple contractors and partners. They face a range of unpredictable variables including commodity prices, labor markets, local content, fiscal policy and, of course, geology and climate. These factors can often conspire to make the most carefully constructed cost projections look wildly and woefully optimistic.

Consequently, there is a well- documented list of megaprojects that have been delivered either significantly over budget or late or both. Getting to grips with this challenge, and improving performance in predicting and managing megaproject costs, will be critical to the industry going forward. Capital providers and shareholders will demand it. Rising oil prices over the past decade have in many cases masked significant cost overruns but this is a trend that cannot continue forever. A period of falling or stable oil prices will only magnify the importance of this issue. It is, therefore, no surprise that, with such a large portfolio of these megaprojects either under way or in the latter stages of planning, this risk entered the Business Pulse survey top 10 for the first time this year.

Partners share reputationsFollowing the 2010 Gulf of Mexico spill, the issue of counterparty risk management rose rapidly up the management agenda. The widespread use of contractors across the industry, and the prevalence of joint ventures, meant that this had always been a significant area of focus for the sector. However, the scale of the incident in terms of the loss of life, the extensive cleanup operations and the financial repercussions for all parties concerned, was such that companies needed to re-evaluate how they assessed and managed these risks.

The safety and operational issues rightly took priority and lessons have clearly been learnt. However, the commercial risks exposed by the incident were on an unprecedented scale, and the industry has taken longer to assess and to try and mitigate these. Risk balancing across suppliers and joint venture partners has become critical. Ongoing assessment of supplier and partner financial health has become an important activity for all top performing oil and gas companies. Portfolio reviews have focused management attention on high-risk and low-margin activities, and questioned whether these should not be earmarked for possible divestment. There has been a greater focus on core competence, with companies withdrawing from or outsourcing non-core areas of the business. The impact has been so fundamental that it was identified as a theme running across several of the top 10 risks.

1. Business Pulse: exploring dual perspectives on the top 10 risks and opportunities in 2013 and beyond, oil and gas report, EY, 2013.



Uncertain fiscal outlook for oil and gasFiscal terms and regulatory policy have always played an important role in the industry’s investment decisions and financial performance. They are an integral part of its traditional risk landscape. However, in recent years, a number of new developments have increased focus on these areas. For example, with the onset of the global financial downturn in 2007 to 2008, many governments have been subjected to fiscal constraints that have led them to look for new sources of revenue, or additional revenues from existing sources, to assist them with budget deficits and high levels of sovereign debt. In a number of high profile cases, significant changes have been made to oil and gas fiscal regimes that have led to consternation in the industry. Relative stability and predictability in fiscal regimes is required, if the industry and shareholders are to invest in projects with very large initial capital expenditure and a 20- to 30-year investment life cycle.

With the oil and gas industry playing a fundamental role in many emerging economies, there has been a trend toward governments wanting to use the commercialization of the country’s natural resources to drive national economic progress and development. Consequently, the use of “local content” laws has been on the increase and the scope of activities covered by these laws has also been expanded.

The intent of these laws is to improve the economic and social quality of life of the country’s population and they should, therefore, be seen as a positive, well-intentioned move. However, there can be issues if the local supply chain cannot meet the industry’s requirements in a cost-efficient and timely manner. This can lead to project delays and cost overruns that may impact the country’s international competitiveness and, therefore, attractiveness to investors.

Regulators are, therefore, faced with the difficult challenge of driving local growth in a way that does not delay projects or

dramatically increase their costs. For this reason, regulators need to consider what areas of the industry are best suited to short-term local skills development, and what are realistic and sensible longer-term timelines for building capabilities in the more technological and complex aspects of the industry.

Managing uncertaintyAt a time when the industry is embarking upon a major phase of investment in new geographies, and in new unconventional sources of hydrocarbons, the level of uncertainty and volatility in the three areas highlighted in the Business Pulse report presents the sector with some unique challenges. The oil and gas industry’s capital expenditure is forecast to be in the region of US$20t between now and 2035, according to the International Energy Authority (IEA). With much of this investment having a 20- to 30-year time line, shareholders and investors will play a key role in meeting the industry’s capital challenge.

As the global pace of change is accelerating, it is critical that as much uncertainty as possible is de-risked, and managed effectively, to ensure the industry can continue to meet the rising energy needs of a growing global population.

Find out moreFor further information about the survey referred to in this article, visit ey.com/oilandgas/business-pulse.

IT security has moved from being the domain and concern of the IT leadership team to being a board-level issue.

Improving performance in predicting and managing megaproject costs will be critical to the industry going forward.

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Every two years, we survey a broad cross section of leading oil and gas industry executives to determine what they see as the major risks and opportunities facing their organizations and the industry. In the most recent version of the Business Pulse2 report, published in May 2013, over 100 industry executives from over 20 countries were surveyed.

When analyzing the results, three distinct themes emerged:

► Interaction with governments and regulatory bodies: rich rewards for engagement and transparency

► Core business focus and counterparty risk management: covering your bases

► The pace of technological change: staying ahead of the game

The research shows, unsurprisingly, that health, safety and the environment, regulatory compliance, price volatility and the increasing challenge associated with accessing reserves and markets take the top spots. But there are a number of significant new entrants to the top 10 this year and these are considered in the main article.

With regard to opportunities, rising emerging market demand is this year’s number one, rising three places since our 2011 report.3 With the continued growth of the world’s emerging economies, energy demand in these countries will also rise rapidly, and the opportunity for oil and gas companies to take advantage of this is immense. The opportunity list saw many new entrants this year, including new infrastructure to gain access to, or to connect, resources and markets, safety and risk management used as a partnership enabler, and new or expanded markets for natural gas.

Taking the pulse of the oil and gas sector

2. Business Pulse: exploring dual perspectives on the top 10 risks and opportunities in 2013 and beyond, oil and gas report, EY, 2013.

3. Turn risks and opportunities into results: exploring the top 10 risks and opportunities for global organizations, oil and gas sector, EY, 2011.

Top 10 business risks and opportunities as ranked by respondents

The top 10 risks1. The risk of a health, safety or

environmental incident and in ensuring regulatory compliance

2. Price volatility; managing long-term investment with the potential for extreme price volatility

3. Access to reserves or markets

4. Cost escalation and inflation

5. Uncertain energy policy

6. Worsening fiscal terms

7. Human capital deficit (e.g., skills shortages, aging workforce)

8. Competition from new technologies and new sources (e.g., alternative fuels)

9. IT security

10. Increasing project scale and complexity

The top 10 opportunities1. Rising emerging market demand

2. Investing in innovation and research and development

3. Frontier acreage

4. Focused recruitment, training and retention programs

5. New infrastructure to gain access to, or to connect, resources and markets

6. Safety and risk management used as a partnership enabler

7. New or expanded markets for natural gas

8. Acquisitions or alliances to gain new capabilities or access to resources or markets

9. Additional corporate social responsibility and corporate sustainability measures and transparency

10. Strategic divestitures

The anatomy of high-growth markets: key strategic leadership challenges

Great upside potential in “high-growth markets” is often accompanied by tremendous difficulties. To succeed, executives must understand the key strategic leadership challenges in these markets, i.e., high risks, talent shortage, capital scarcity, as well as a cumbersome administrative heritage and institutional void.


Author

Kai-Alexander Schlevogt DPhil Oxford Educator & Area Orchestrator Duke Corporate Education, US

Former Full Professor, Holder of Endowed Chair in Strategic Leadership Graduate School of Management St. Petersburg State University, Russia

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Rapidly developing markets, such as China, India, Russia and Brazil, have become the ultimate growth frontier for multinational companies struggling for global dominance

in their industries. To signal the coming of age of these locations, which have turned into powerful engines of global growth, sophisticated multinationals have initiated the trend of replacing the worn-out terms “emerging market” and “transition economy” with the catchy label “high-growth market.”

Given their enormous potential, governments in these countries have for years attracted tremendous amounts of foreign direct investment and expertise. The managerial center of gravity moves to these markets with seemingly unlimited opportunities. IBM, for example, has set up a Growth Market Unit (GMU) in Shanghai, which controls a considerable share of global revenues and profits. Bruno Di Leo, General Manager, Growth Markets, IBM Corporation believes:

“ As the world today has grown smaller, flatter and smarter, multinationals such as IBM are evolving toward a model of globally integrated enterprise where innovation, investments and work flow to where they are most likely to prosper and succeed. Growth markets are very important in this globally networked world as sources of skills, rapidly improving infrastructure and high demand for innovation.”

Beating the “adversary” at the source becomes a strategic imperative and necessary condition for the survival of multinationals from major markets.

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Lands of unlimited opportunities …Not surprisingly, the best and brightest in mature markets, which, according to the new linguistic convention, are euphemistically called “major markets,” increasingly regard high-growth market experience as a key requirement for reaching the top. To prepare for the seemingly bright future, high schools in the West eagerly set up partnerships with high-growth market countries and teach their pupils Chinese, for example. In Western universities, the appetite for growth market-related knowledge, skills and contacts is steadily increasing.

Moreover, China, in particular, is on its way to become an R&D powerhouse and, because of its scale and growing sophistication, a key reference market in various industries. A host of national champions from high-growth markets is embarking on global expansion, threatening the entrenched positions of Western multinationals in their home markets. As a consequence, beating the “adversary” at the source becomes a strategic imperative and necessary condition for the survival of multinationals from major markets.

… and their mixed blessingsHowever, after significant investments into high-growth markets and long experience of operating there, the results of multinationals from developed markets are still mixed. Even experienced leaders often find it hard to compete in the uncertain, complex and volatile high-growth nations, and they get little guidance from scholars on how to improve performance in this

difficult terrain. Actual performance is frequently below expectations.

It is misleading to assume that an approach that has worked well in mature markets will have similar success in high-growth markets. Consumer preferences can vary considerably and this fact needs to influence strategic decisions when setting up, for example, outlets in markets such as China. Multinationals often underestimate local competitors, which, as a consequence, gain market share at their expense.

In addition, many multinationals operating in high-growth markets came under scrutiny from host governments, in particular when they became too successful.1 Ethical dilemmas can also tend to arise there for companies from the West.

Besides, many Western companies experience severe leadership problems in the mature markets at home. The addition of decidedly challenging high-growth markets to their portfolio makes things even more difficult. A lot of multinational corporations find it hard to effectively integrate high-growth market units into their global structures, systems and processes, which are geared to cater for mature markets. Cross-cultural management is often deficient. It thus comes as no surprise that an “us versus them” mentality is not rare.

1. K. A. Schlevogt, “It’s guerilla warfare for MNCs in China — they need to put in place structures and processes that prepare them for pandemonium.” The Business Times, 25 January 2007.

The top leaders at the global growth frontiers complained that they could not pursue extremely lucrative investment opportunities due to lack of funding.



Attempts to transfer expatriates back to HQ, or to move local managers from the growth frontiers to the mature markets and integrate them into the upper echelons, have repeatedly resulted in failure. Many entrepreneurial leaders prefer to leave their company at the end of their high-growth market assignment rather than returning to mature markets where they would occupy middle management positions with limited authority. Even those multinationals that have achieved great success in high-growth markets are suffering from a critical lack of tangible and intangible resources in these locations. Many Western players worry about the insufficient pool of talent, across all organizational levels, required for the next wave of expansion. There is also a lack of sufficient strategic leadership awareness, knowledge and capacity in high-growth markets.

Study design: first-hand insights from top leaders in high-growth marketsThe specific aim of the present research project is to help close the gap in our understanding of those challenges in high-growth markets that are of strategic importance to the leaders of multinational organizations. Only after having understood the anatomy of these competitive turfs, can they design effective strategic leadership approaches to succeed there.

This study combined the survey method using in-depth expert interviews with the analysis of cases and archival data. The sample consisted of 38 top managers working in corporate or regional headquarters in Asia, Central and Eastern

Europe (CEE) and the Commonwealth of Independent States (CIS). Overall, 31 respondents (82%) were local and the remaining 7 (18%) were foreigners, 6 of which were expatriates. A wide variety of industries was covered, ranging from commodities to high technology, including oil and gas, construction materials, automotive, retail and wholesale, information technology, software, postal services and logistics, financial services and consulting. Respondents were currently working or had occupied senior leadership positions in companies including: Daimler South East Asia Pte. Ltd., IBM East Europe/Asia, Citibank Singapore Ltd., SAP Asia Pte Ltd., SingPost and Infoteam Sales Process Consulting AG. The author additionally made use of insights gained from conversations with several hundred top leaders in high-growth markets encountered during executive education programs and other events.

Key strategic leadership challenges in high-growth marketsHigh-growth markets are extremely challenging environments because of the high degree of uncertainty, volatility, complexity and ambiguity to be found there. Operating in these markets requires navigating a “saw wavescape.”2 This term describes the frequent ups and downs that,

2. K. A. Schlevogt, Brave new saw wave world: emerging and submerging Asia in the global environment, London: Pearson/FT Press, 2011.

High growth makes the assimilation of new talent, particularly imbuing them with the right values, a real challenge.

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if drawn on a chart, together look like a blade with a toothed edge.

Based on the interviews, the following key strategic leadership challenges in high-growth markets, some of which are interrelated, can be discerned:

High risksIBM and other sophisticated multinationals have lately come to the conclusion that operating in high-growth markets such as China, India and several African countries exposes their valuable global brands to challenges. This verdict is based on the assumption that the level of integrity there is often lower than in more developed markets. Reputational risk is particularly high for companies that have brands whose core identity is tied to notions of integrity and social responsibility. Apart from IBM, typical examples of particularly vulnerable companies include IKEA, Starbucks and The Body Shop. The stakes have increased further due to new anti-bribery legislation in the United States, United Kingdom and other western countries. For examples, even non-US companies now will incur heavy fines in US courts if their suppliers engaged in corrupt practices. This applies even when companies were not aware of such practices.

Talent shortageAnother key challenge is the scarcity of talent at all organizational levels in high-growth markets. The senior leaders interviewed for this study reported that their human resources are constantly overstretched. Kirill Korniliev, Country General Manager, Russia/CIS, IBM East Europe/Asia, explains:

Multinationals often underestimate local competitors, which, as a consequence, gain market share at their expense.



“ We are always short of ammunition. When we double our growth targets, the number of people has to grow in line. In Russia, we have decent technical education. It is easy to find people who are good in the natural sciences. But with limited experience in the market economy, people with business skills are not so strong in this area. There are plus and minuses to having technocrats who became business people through a second education. There is a particular lack of leadership talent here.”

As a corollary of the talent shortage, employees have much broader responsibilities than staff in the same age group in mature markets. Korniliev states:

“ We are a constantly immature organization.”

Besides, high growth makes the assimilation of new talent, particularly imbuing them with the right values, a real challenge. Without an internal moral compass, the vulnerability to reputational risk in corrupt environments increases tremendously.

Moreover, since competitors are engaging in a veritable war for talent, opportunities abound and retention of the best and brightest becomes exceedingly difficult. Given the fast pace of change, the attitudes of employees often change more rapidly than in other parts of the world. Older executives in countries such as China, where the influence of traditional values, including Confucian ideals, is strong, are frequently surprised by the more liberal views of next-generation talent. Viewed from a global perspective,

there is a growing geographical imbalance, since a great amount of valuable talent is still concentrated in mature markets, although it is increasingly needed in high-growth markets.

Scarcity of capitalThere is also an internal and external shortage of investment funds available for operations in high-growth markets in multinationals from mature markets. For reasons of external political pressure, and due to internal constraints at home (such as the social imperative to keep staff employed), a substantial amount of funds is often channeled into projects in mature markets that offer significantly lower expected returns on invested capital than competing projects in high-growth markets. The result is an inefficient allocation of capital. It is also very difficult for leaders in high-growth markets to pursue long-term investment plans, since the global board often wants to keep the freedom to change capital allocation decisions quickly, depending on the exigencies of the moment. Major shareholders are often very concerned about debt reduction and thus put stringent limits on new investments. Besides, financial markets in mature countries lack the liquidity of previous boom times.

In the interviews, the top leaders at the global growth frontiers complained that they could not pursue extremely lucrative investment opportunities due to lack of funding. They mentioned constant fights for funds with “major markets” and other high-growth markets, as well as frequent disagreements with headquarters about central funding decisions. To make things

Many Western players worry about the insufficient pool of talent, across all organizational levels, required for the next wave of expansion.

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AcknowledgmentsThe author of this article would like to express his gratitude to all interviewees for participating in the study on which this article is based.

worse, internal controls time and again prevent these intrapreneurs from raising capital locally.

Cumbersome administrative heritage and institutional voidIn high-growth markets that move toward a market economic system with more liberal features, many important institutions are still either lacking or underdeveloped. Besides, in such state capitalistic systems, there are legacy structures that impede growth, and the government often heavily intervenes in the economy. Frequently, there are unclear or conflicting laws and regulations that constantly change. Apart from intracountry disparities, there are great differences between countries as regards institutions and the legal framework, which makes the strategic leadership challenge even greater.

ConclusionsMany emerging markets around the globe have come of age and are now more aptly called “high-growth markets.” They offer great expansion possibilities for multinational companies from mature markets, which sophisticated players euphemistically call “major markets.” However, changes in terminology notwithstanding, vital challenges abound in these exciting environments. Only those executives who understand them profoundly will be able to design effective strategic leadership approaches there.


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