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Middle EastPublished by Deloitte & Touche (M.E.)and distributed tothought leadersacross the region.

Fall 2013 PointofViewTranscending boundaries

Friend or foe?Gas, Russia and the Middle East

Keep your hat onEmbracing cloud computing

I do. Or do I?Employee engagement

Seeing the future clearlyOman's Vision 2020

2 | Deloitte | A Middle East Point of View | Fall 2013

Fall 2013Middle East Point of ViewPublished by Deloitte & Touche (M.E.)

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Deloitte | A Middle East Point of View | Fall 2013 | 3

A word from theeditorial team

In one of the opening scenes of the highly acclaimed1989 movie Dead Poets Society, Robin Williams a.k.a.Mr. Keating, the new English teacher, stands on his deskand urges his students to do the same in order to lookat the world from a different perspective and to always“seize the day,” the moment, daring them to transcendthe sometimes rigid boundaries of tradition andconservatism imposed on them by their home andschool environment.

Mr. Keating’s unorthodox views and teaching methodseventually cost him his job, but not before he hadalready changed his students’ lives, we are led tobelieve, forever.

Transcending boundaries, be they physical ormetaphorical, pervade this issue of Middle East Point ofView. In his enlightening article on Gas, Russia and theMiddle East, Who goes there, friend or foe? KennethMcKellar points to the difficulties the two energypowers have in forging a strong partnership despite thecomplementary aspects of their respective gasbusinesses.

Ben Hughes, in his article The Project Finance Compass– East and West, explains how the “irrepressible rise ofthe Public Private Partnership as a way of executingmajor projects” in the developed economies has yet tomake the leap into the Gulf economies, despite the fact,he says, that “adopting project finance to fund a PPP is one of the best ways to achieve sustainable andprofitable, operational growth – even here in the GCC.”

Perhaps one of the best examples of transcending one’sown boundaries in this issue comes from Alfred Strollaand Phaninder Peri’s article on Oman. Strolla and Peri’sthorough account of the Sultanate’s development planfocusing on diversification points out how, “in a mid-sized, open economy in which the biggest driver of

growth so far has been oil, managing the transition to a more diversified economy is challenging. Fortunately,”they say, “Oman's government has taken a number of steps in terms of efficient economic planning andimplementation of various social development initiativesthat have contributed to the success of the Omanieconomy.”

Borders of a more physical kind are pointed to by RalphStobwasser and Collin Keeney in their article Risk, why isit your problem? Stobwasser and Keeney explain howbusinesses that are looking towards better prospects in markets other than their own also face risks of bribery and corruption, which are brought into sharperperspective by the rising trend of cross-border regulatoryaction and the increasing focus of investors ongovernance and transparency.

Employee engagement through corporate volunteerism,moving out of the IT department and embracing “TheCloud,” innovation – in and of itself a break throughlimitations – and human resources in the region are theother topics explored in this issue of Middle East Pointof View, which continuously seeks to transcend allboundaries and bring you insights on the hottest topicswithin, and without, the borders of the region.

ME PoV editorial team


In this issue

Who goes there: friend or foe? Gas, Russia and the Middle EastKenneth McKellar

The project finance compass East and WestBen Hughes

Oman20/20 visionAlfred Strolla and Phaninder Peri

Risk, why is it your problem?Corruption, money laundering, tax evasion and sanctionsRalph Stobwasser and Collin Keeney

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Contents


28

32

36

48

Table of contents

“I do. Or do I?”Employee engagementSoughit Abdelnour

The CloudA CIO's survival guideBasit Saeed

InnovationA chimera no moreMichael E. Raynor and Heather A. Gray

Human Capital TrendsMore similar than you thinkGhassan Turqieh


Russia and the Middle East both supply gas to Europeand to Asia. In theory that makes them competitors.They are also both affected by Chinese demand andNorth American supply and, in theory, that givesthem a common cause. Should Russia and the MiddleEast be enemies or friends?

Who goes there: friend or foe? Gas, Russia and the Middle East


Oil and gas

The effects of growing gas-to-gas competitionThe European and Asian gas markets are in flux. Gas-to-gas competition is rapidly growing in importance, withlower-priced spot supplies increasingly undermining thehigher-priced long-term supply contracts that havetraditionally dominated the market. As a result, Russiaand the Middle East are being forced to adapt to themore liberalized practices of European and Asianmarkets. On the basis that “a problem shared is aproblem halved” there may be merit in Russia and theMiddle East co-operating to supply these markets in away that they have not achieved before.

Long-term, oil-indexed contracts are under seriousscrutiny as overall demand for gas decreases in Europe,while new, non-Russian, non-Middle Eastern sources of supply increase. Shale gas in the U.S. has freed upLiquefied Natural Gas (LNG) – originally designed forAmerican ports – to address European and Asian spotmarkets. As a result, spot prices are now lower than the oil-indexed prices of Russian and Middle Easterncontracts, with the result that gas from these sourceshas become among the most expensive in the world.The extent of this shift is illustrated by France, achampion of nuclear power, increasing its imports toover 16 billion cubic metres (bcm) despite flat domesticconsumption. Another example of this shift is in the U.K.where the spot prices at the virtual trading hub there,the National Balancing Point (NBP), are increasinglyrecognized in the market as independent benchmarks.

To achieve this shift in 2011 the NBP attracted 22 bcmof alternative gas supplies, 85 percent of which wassourced from Qatar, bringing Qatar’s total share of theEuropean gas market to over 10 percent. With Belgiumand the Netherlands physically connected to the U.K.where the NBP lies, European spot price influence isspreading eastwards towards the German border, whereRussian gas prices have been fixed through long-termcontracts. As a result, the big Russo-German pipelines,which were necessarily financed by long-term contractsand have formed the backbone of European supply overthe past 50 years, are operating at less than full capacity.

Key participants in the European gas market have acted accordingly. Statoil signed a GBP13 billion NBP-anchored supply agreement with the U.K.’s Centrica,which in turn signed a 3.26 bcm per year deal withQatar. Spain’s Gas Natural has contracted to receive LNGbased on U.S. Henry Hub prices from 2016-17 onwards,following BG Group. As a result, in 2011, almost half ofEurope’s gas contracts were concluded outside long-term contracts.

GECF – a GASPEC?What would happen to liquidity if Middle Easternsources were to not supply Europe with currentvolumes? A more coordinated supply approach toEurope would certainly benefit Russia and this is wherea Russian/Middle Eastern axis might play out. Russia is afounding member, and currently holds the top position,


in the Gas Exporting Countries Forum (GECF) comprisingsome of the world’s leading natural gas producers andexporters. It is not a cartel in the same sense as OPEC(Organization of Petroleum Exporting Countries) in thatit does not control marginal production in an effort toinfluence prices. There are structural differences inglobal natural gas and global oil that make this type ofcontrol difficult. Nevertheless, the GECF provides avenue for its members to discuss topics of interest suchas production projects, exports, etc. Its members –which include Algeria, Bolivia, Egypt, Equatorial Guinea,Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago,and Venezuela – control 36 percent of world productionand 47 percent of global trade. Kazakhstan, theNetherlands and Norway have observer status at theGECF. Major natural gas producers that are not affiliatedwith the GECF include Australia, Azerbaijan, Canada,Indonesia, Malaysia, Oman, Turkmenistan, the UnitedStates (the world’s leading natural gas producer) and the United Arab Emirates.

At the first GECF summit held in Doha in 2011, Russiaindicated its keenness for Qatar to focus on Asia and tomarket LNG under long-term oil-indexed contractsrather than to European spot markets. Qatar however,emphasized its contractual commitments to Europe,particularly in the face of Russia’s desire to continue tosupply Asian markets. Yet a number of commentators

have indicated that the supply of LNG to Asia underlonger-term contracts would be more profitable forQatar than the supply to European markets on a spotbasis in the short- to medium-term. Qatar is currentlyselling around 36 bcm a year of gas to Asia. Netbackson Qatar’s spot LNG sales into Asian markets are aroundUSD14 per million British Thermal Units (mmbtu),around twice the figure achieved in the U.K. andNorthwest Europe, where benchmarks are currentlytrading at about USD 8/mmbtu.

However the demand situation in Asia is notstraightforward enough for Qatar simply to focus itsefforts there. Asian demand would need to use up to 23 bcm of diverted Qatari LNG from European markets.On the face of it, this looks possible. The disaster atFukushima has increased Japanese demand by some 11percent. South Korea has been a core demand marketfor Qatar for many years. India's geographical locationmeans that LNG will be its major source of gas supplies,whilst the maturing gas provinces of Malaysia andIndonesia are importing increasing quantities of gasthese days. But the swing demand market in Asia isChina, where demand is expected to increase by over 5 percent per annum to 2030. Just because China needs gas however, does not mean that this gas willnecessarily come from Qatar, or from Russia.

And then there’s China China has started to diversify supplies effectively bysigning numerous memoranda of understanding withmajor suppliers for prospective supplies whilst securingsupplies from Central Asia. Turkmenistan is an importantplayer, with 30 bcm of Turkmen gas expected to flowinto the Chinese mainland by 2015 (China produced 97bcm in 2010 and consumed 109 bcm, but its importneeds are set to grow sharply). Additional agreementstowards 65 bcm are in place with Uzbekistan andKazakhstan. China-Turkmen prices have fallen to aroundUSD 6-7/mmbtu and in addition, burgeoning AustralianLNG production (forecast to be the largest in the world

Spot prices are now lower than the oil-indexed prices of Russian and MiddleEastern contracts, with the result thatgas from these sources has becomeamong the most expensive in the world


by 2018) has proven attractive to Chinese buyers.It is in China’s interest to ration its Qatar LNG imports at current prices and to allow gas-to-gas competition to develop further in Europe, as that will help it innegotiating lower prices with Russia for larger quantities(up to 60 bcm) in the short- to medium-term and withCentral Asian suppliers in the medium- to long-term. Itmay well be in China’s interest to retain Qatar as amarginal rather than a base-load supplier in order toforce down the price of pipeline gas. Russia has so farbeen unable to replicate, in China, the 50 year-oldsuccess that it enjoyed in delivering pipeline gas toGermany and to the rest of Europe. In the meantime,China has secured a portfolio of alternative supplies andhas earmarked future domestic shale production of 30 bcm per year.

Given these challenging conditions for both Russia andQatar, one option might be for Russia to start limitinggas sales into Asian markets, ensuring that China startsto use Qatar supplies as base-load supply. Greaterprogress than to date would need to be made inoffering Qatar major Russian upstream swap agreementsand downstream stakes possible in Europe. Anysignificant Qatari shift towards Asia will see Russia's spot market pressures eased in Europe with few otherproducers looking likely to substitute Qatar’s supply.

Shale – evolution or revolution?The second GECF summit in Moscow in 2013 took place against the background of significant shale gasproduction in the U.S., increasing competition forcustomers and uncertainty over future gas demand,prompting some analysts to call current marketconditions the "Dark age of gas." Leonid Bokhanovsky,the Secretary General of GECF, however changed “Dark”into an acronym: Development, Affordability, Reliabilityand Known (Energy), all attributes of natural gas. He didacknowledge that the “current challenging areas for allgas-exporting countries and other energy participantsinclude vulnerability in the security of demand, energypolicies in place – mainly in consumer countries andparticularly within Europe – and the European Unionplans to diversify its energy supply and to develop localenergy resources."

As far as shale gas is concerned, GECF remains of theview – as does the International Energy Agency, whichrepresents the OECD (Organization for Economic Co-operation and Development) demand-side countries –that the shale gas “revolution” has not yet occurred. Theability to replicate the very favorable conditions underwhich shale has been developed in North America,elsewhere in the world and especially in Europe (wherethere are legal constraints for possible development ofresources) is largely unproven, except in the one areacritical to both Qatar and Russia, namely China. A keyassumption underlying the North American shale“threat” to Qatar and Russia is that North America will export unfettered volumes of LNG to both European and Asian markets. However, there arepowerful lobbies – economically, in the form of users of gas for power generation and industrial feedstock –and environmentally, in the form of opponents tohydraulic fracturing, who may curb such exports. Thisopposition echoes the many plans a decade ago forLNG regasification plants for the United States whichnever came to fruition.

It is in China’s interest to ration itsQatar LNG imports at current pricesand to allow gas-to-gas competition todevelop further in Europe, as that willhelp it in negotiating lower prices withRussia for larger quantities

Oil and gas


Nevertheless, shale gas has already forced Qatar andRussia at least to consider, if not implement, alternativeexport strategies. North America is no longer (at leastfor now) a significant export market for Qatar whilstEurope and Asia (Qatar and Russia’s target markets)could be significant import destinations for NorthAmerican shale-produced LNG. As far as fuel sources forpower generation are concerned, cheap shale gas isdisplacing coal to the extent that coal is now moreattractive for power generation in other parts of theworld.

The Middle East is not just QatarImportant as Qatar is, there are other major MiddleEastern countries that we should not forget: Algeria,Oman, Yemen, Egypt and the U.A.E. together produced54 bcm of LNG in 2012. Algeria and Egypt areparticularly interesting, given their proximity to Europeanmarkets and to Russian alternative supply into Europe.

Algeria may hold shale gas resources much greater thanits conventional reserves, which are already substantial.In March 2013 Algeria passed a new set of amendmentsto its hydrocarbon law to address shale gas in the country.

Depending on the development of its unconventionalnatural gas resources and its conventional resources,Algeria could become a more significant natural gasproducer and exporter. However, a difficult businessenvironment may continue to limit its potential. In 2011,Algeria produced 79 bcm and exported 51 bcm, with 45bcm going to the E.U. Although Algeria is focusing onpreserving its resource base and not expandingproduction too quickly, with domestic consumptionpossibly outstripping exports within the next decade,Algeria continues to expand its connections to Europe.In 2011, the Medgaz pipeline from Algeria to Spain wasopened with an initial capacity of approximately 8 bcmper year. Despite this new addition, Algerian exports toSpain do not have much direct impact on the rest ofEurope, as the interconnection between Spain andFrance is limited. In addition to Medgaz, Algeria exportsnatural gas to Europe via the 12 bcm Maghreb-Europepipeline to Spain and the 6 bcm Trans-Mediterraneanpipeline to Italy. Algeria has also announced plans toexpand its LNG export capacity.

Since 2005, demand for natural gas in Egypt has beenon the rise, increasing almost 57 percent over the timeperiod. Although production has grown as well, thesubsidy-driven demand has hindered the governmentfrom offering attractive terms for internationalcompanies to continue developing Egypt’s resources.Additionally, much of Egypt’s remaining natural gas is in difficult-to-access, high-cost areas, which contributesto the lack of interest by many international natural gascompanies. That said, British Petroleum signed a deal in2010 that was substantially higher than previouscontract terms. Since the resignation of Hosni Mubarak,Egypt’s natural gas infrastructure in the Sinai Peninsulahas been attacked many times, disrupting gas shipmentsvia two separate pipelines to Israel and Jordan. Egyptianexports to the E.U., which are solely in the form of LNG,dropped almost 12 percent in 2011, after droppingalmost 35 percent in 2010. The Arab Gas Pipeline fromEgypt to Jordan, Lebanon and Syria has been planned to

The ability to replicate the veryfavorable conditions under which shalehas been developed in North America,elsewhere in the world and especiallyin Europe is largely unproven, exceptin the one area critical to both Qatarand Russia, namely China


extend to Turkey in order to move Egyptian natural gasto Europe, but given the issues surrounding Egypt’snatural gas sector this is highly doubtful. Production in2010 fell for the first time in over a decade, butstabilized in 2011. With domestic consumption likely tocontinue increasing and production probably declining,exports are not likely to increase for some time. In partto meet its export commitments, Egypt announced inDecember 2012 that it would begin importing LNG,possibly as early as 2013. Depending on the orientationof a new government (i.e. whether it promotes Westerninvestment in Egypt’s energy sector) and whether thegovernment addresses its natural gas subsidies, thisdeterioration of Egypt’s natural gas sector could bereversed.

It can be concluded that at least in the medium-term,Algeria and Egypt are unlikely to exert significantinfluence in Europe in terms of increased supplies.

The Middle East and Russia: not close enough tobe friends or distant enough to be enemiesThe gas map of the world is too complicated,fragmented and dynamic to enable the forging of astrong partnership between Russia and the Middle East.The United States and China also have their owndivergent agendas for gas and these are affecting theglobal gas supply/demand balance. The countries of theE.U. are caught in the middle and, due to their largenumber, differing market conditions and geographies,have never been (and are unlikely to be) able to act asone single economic bloc with the focused marketpower to dictate terms to major gas suppliers.

Yet it would be foolish for Russia and the Middle East toregard themselves as enemies in the global gas market.They have many complementary aspects to their gasbusinesses. One is focused on the delivery of pipelinegas, while the other focuses on LNG. Both cannotignore the supply issues that the U.S. poses, or thedemand conundrum of China. We can thereforeconclude that the relationship between these two keygas-producing regions will ebb and flow according tothe supply, demand and prices of each gas year. And, as we know, no gas year is ever the same.

by Kenneth McKellar, Middle East Energy & Resources Leader, Deloitte Middle East

The gas map of the world is toocomplicated, fragmented and dynamicto enable the forging of a strongpartnership between Russia and theMiddle East

Oil and gas


East and WestIf there is one defining feature of major publicsector construction projects over the last twodecades in developed economies, it is theirrepressible rise of the Public Private Partnership(PPP) as a way of executing major projects. Howdoes the Middle East, the liquidity-rich Gulf inparticular, compare?

The project fi


nance compass

Public Private Partnership

Comparison of global and MENA countries on PPP maturity

High

High

Low

Low

Lega

l and

pol

icy

fram

ewor

k de

pth

Experience and track record

Malawi Mauritus

Nepal

Kuwait

Slovenia

BahrainOman

China

QatarUAE

KSA

India

Australia

UK

Canada

Egypt

Singapore

USA

Latvia

Source: Markab Analysis

The key inertia behind any PPP is project finance, the keyfunding mechanism required to undertake any majorcapital or infrastructure investment. Since 1992, the PPPForum estimates that 630 Private Finance Initiatives (PFI)in the United Kingdom alone have been put in place,covering an investment of some USD 100 billion. TheU.K. has historically been a forerunner in the field of PPP,but less so more recently as project finance became too

expensive. Across the Gulf Cooperation Council (GCC),PPP is at a more embryonic stage. Across the region,there has been little PPP activity in historically core PPP sectors such as transport, health and education,particularly since the crash in 2008. The map belowclearly shows where GCC countries rank in terms of PPP maturity globally and highlights the need for a much better regulatory framework.

Project finance, in and of itself, is highly volatile withfinance rates ranging from single digit figures to rates in the mid-teens, depending on a number of variables,including existing relationships with funders or priorexperience. What this means is that the viability of thoseprojects funded by project finance are extremelysusceptible to financial market swings or the propensityto risk afforded by project finance lenders.

The situation in the GulfIn the GCC, the opposite is true. Whilst there may beliquidity in the market, the terms of borrowing areheavily stacked in favor of loans from the Treasury. As with most other markets across the globe, projectfinance is expensive and unless the financial terms orthe project itself are an attractive proposition to theprivate sector, then this will remain the case.

The very nature of a PPP, of course, relies upon theavailability of project finance and the ability for ascheme to pass a “value for money” test. Traditionally,PPPs have been an ideal way for the public sector totransfer risk to the private sector or for those withoutthe land or capital up front to fund a scheme.

The pass or fail test for the PPP relies on whether valuefor money is achieved and affordability underpins this.However, as the cost of finance has risen, PPPs have inturn become much more expensive for the public sector.

Governments across the GCC typically have theresources to fund large-scale capital projects, therebyobviating the need for project finance in the first place.

Indeed, the very term “project finance” means differentthings in each geographic location. Across the GCC,project financing is typically a short-term, direct fundingstream to facilitate a construction project, typically 3-5years. This contrasts sharply with the more traditionalterm project finance, which is a much longer-term viewin more established PPP markets, such as India, Europe and the U.S.

When cynicism meets ironyMoreover, there is widespread cynicism about theviability of PPPs in the region as the majority of PPPs that actually close are restricted to major Infrastructure,Water and Power Projects (IWPP). Other PPPs that areeither proposed or under due diligence invariably fail toclose.


Across the Gulf Cooperation Council(GCC), PPP is at a more embryonicstage. Across the region, there has beenlittle PPP activity in historically corePPP sectors such as transport, healthand education, particularly since thecrash in 2008.

PPP deals initiated and closed in the GCC region (2005-2011)

76%

Initiated Closed

24%

Source: Deutsche Bank, “The challenges and potential for privatefinancing of infrastructure in the GCC,” May 2011

Yet, ironically, at a time when the availability of projectfinance has been significantly hindered by the tighteningof global credit markets, calling its viability into question,there are several factors that could see it, and PPPs, riseonce again to prominence.

Across the GCC, this might be particularly relevant.While many GCC countries have the financial resourcesto facilitate their own projects, they do not always havethe skill base to undertake huge infrastructure projectsand may instead opt to use a PPP to harness theexpertise and appetite for risk of the private sector.

Major IWPP schemes benefit from private sectorinvolvement, for instance, as the size and complexity ofthese projects dictate innovation, significant humanresource and direction. The most notable examples ofthis can be found in Qatar, Kuwait and Saudi Arabiamost recently.

Lowest cost driven by market forcesThe most obvious mistake is to view the cost of aproject purely in terms of a fixed price establishedthrough the bidding process. As discussed earlier, PPPsare major, 15-25 year investments funded through long-term finance. The original rate of borrowing maybe re-financed and/or may change at pre-determinedintervals throughout the course of the borrowing. Ifmargins at the outset are tight, then the first place tolook is often the build costs, which could haveramifications in the long-term.

A contractor constrained by bringing in a project onbudget with tight margins might easily look for ways tocut their own costs, whereas collaboration between twoparties, even in the GCC, may actually become amutually beneficial partnership which may deriveenormous long-term advantages.

Of course, choosing a more expensive bid is noguarantee that such adversarial relationships will notemerge and careful project management is always ameans by which to avoid this. It is clearly more of a riskwhen competition is so fierce.

In the GCC, amidst a backdrop of political cynicismabout PPPs and their perception of giving control to the private sector, the argument for providing genuine value for money resonates just as loudly as it does instruggling markets elsewhere. If the public sector in GCCcountries cannot see the potential benefits that a privatesector partner can bring to a major infrastructureproject, then there is little hope for PPP, in the region.

ConclusionThis leads us full circle. Adopting project finance to funda PPP and construct a project through a long-termpartnership with the private sector is one of the bestways to achieve sustainable and profitable, operationalgrowth – even in the GCC.

The subtle distinction between lowest cost and value for money must not be lost in the current economicclimate. It is inevitable that cost has become a majorfactor, but innovation and flexibility are also needed to create new ways of getting things done on majorinfrastructure projects. By breaking down traditionalbarriers of mistrust in the private sector, the rightinvestors will come to the fore, and with the rightconsultant who is experienced in this sector, it is a recipe for success.

by Ben Hughes, assistant director, Infrastructure &Capital Projects, Deloitte Corporate Finance Limited(Regulated by the DFSA), Middle East


In the GCC, amidst a backdrop ofpolitical cynicism about PPPs andtheir perception of giving control tothe private sector, the argument forproviding genuine value for moneyresonates just as loudly as it does instruggling markets elsewhere

Public Private Partnership


Oman20/20 vision

Once a middle-income economy heavily dependent on depleting oil resources, the Sultanate of Oman has been actively pursuing a development planfocusing on diversification, industrialization andprivatization, with the objective of reducing itsreliance on the oil sector’s contribution to GDP,currently at 48.44 percent (USD 37.8 billion) andcreating more employment opportunities for therising number of young Omanis entering theworkforce. And the outcome? The Public Authorityfor Investment Promotion and Export Development(PAIPED) was recently recognized at the UnitedNations Conference for Trade and Development heldin Geneva for its efforts to promote non-oil products.

Oman



Growth potentialDuring the last decade Oman had set apace a reformprogram aimed at developing and diversifying theeconomy and releasing its potential for growth with the ultimate goal of promoting development andcompetitiveness through increased governmentspending on key sectors and stimulating privateinvestment.

Oman’s economic growth strategy underlines thedevelopment of simple industrial chains, particularly inbasic manufacturing and allied activities as well as otherindustries that will enhance the Sultanate’s position andoffer a competitive advantage in the region.

The industrial sector has for long been the foundation of Oman’s long-term diversification strategy as it is alsocapable of meeting the country’s social developmentneeds and generating more employment opportunities.There is no doubt that the contribution from industryhas played a significant role in shaping the Sultanate’seconomy in terms of accelerated growth, sustainableeconomic and social development and creating newjobs; however, other sectors such as tourism and gas-based industries, banking and finance, healthcare andinsurance, agriculture, retailing, aviation and recently therailways project, have also been key components of thegovernment's diversification strategy (see below).

The mineral industry in Oman, for instance, is on astrong growth path. Oman’s mineral resources includechromite, zinc, limestone, gypsum and silicon amongothers. A large number of investors have been drawninto the sector as it is potentially expected to contributesignificantly to the country’s GDP. Several industries havebeen developing around the mineral sector as part ofthe national development process, which as a result, has boosted the employment opportunities for a young Omani workforce as well as contributing to the nation’s GDP.

The industrial sector has for long beenthe foundation of Oman’s long-termdiversification strategy as it is alsocapable of meeting the country’s socialdevelopment needs and generatingmore employment opportunities

Vision 2020The Omani economy had been on a steadytransformation course through developmentplans, beginning with the first Five-Year Plan(1976– 1980). At the instruction of His MajestySultan Qaboos bin Said, Vision 2020, a planfor Oman's economic future up to the year2020 was set, outlining the country'seconomic and social goals, which include:• Economic and financial stability;• Reshaping the role of government in theeconomy and broadening private sectorparticipation;

• Diversifying the economic base and sourcesof national income;

• Globalization of the Omani economy;• Upgrading the skills of the Omani workforceand developing human resources.


One of the benchmarks for sustainable developmentand increased private investment is increased investmentin infrastructure. Accordingly, the continuousdevelopment of Oman’s infrastructure and theavailability of investment funds for such developmentprojects is a determinant factor for the future growth of the economy. Government spending during the pastfew years on infrastructure projects such as roads,airports, seaports, hospitals and health centers cannotbe overlooked.

OmanizationOmanization as a national objective is regulated andmonitored in the public sector and, most recently, in the private sector as well. The government, along withvarious industry segments, has initiated training anddevelopment programs to enhance the skills andcompetencies of nationals in various fields and promotethe employment of nationals in the private sector. Theaim has been to match the supply of labor locally withmarket requirements. It is intended to see Omaninationals playing a leading role in all areas ofemployment – both in trade and professions – in theSultanate. The natural consequence of this process hasbeen the prioritization of education and training.

In-Country Value (ICV) strategyIn-Country Value (ICV), which refers to the total spend retained in the country to aid in job creation,development of human resource capabilities andestablishment of industries locally to stimulateproductivity, has been growing in importance in Oman, particularly in the oil and gas sector.

ICV aims at enhancing the value of goods, services and skills in the sector and stimulating local productionand manufacturing in order to reduce the imports ofgoods and enhance the provision of services in Oman,thereby reducing dependency on external experts andimproving the skills and capabilities of Omani nationalsby increasing their contribution to the activities of the oil and gas sector.

ConclusionIn a mid-sized, open economy in which the biggestdriver of growth so far has been oil, managing thetransition to a more diversified economy is challenging.Fortunately, Oman's government has taken a number of steps in terms of efficient economic planning andimplementation of various social development initiativesthat have contributed to the success of the Omanieconomy.

Other factors that have contributed to Oman’s successinclude the significant rise of foreign investment in manysectors as a result of competitively low tax rates in theregion. The development of Small and MediumEnterprises (SMEs) together with ICV strategy lays a solidfoundation for self-reliant industry and modernization of the economy. Despite the various challenges withinthe region and in the country, Oman’s economy is seton the right path of sustainable growth, development,diversification and progress.

One of the benchmarks for sustainabledevelopment and increased privateinvestment is increased investment in infrastructure. Accordingly, thecontinuous development of Oman’sinfrastructure and the availability ofinvestment funds for such developmentprojects is a determinant factor for thefuture growth of the economy.

Oman


SMEs• The past few years have witnessed greaterfocus on the growth and development of smalland medium enterprises (SMEs) to compete inthe international arena, beyond the domesticmarkets.

• Establishment of the Public Authority for Smalland Medium Enterprises Development(PASMED), an independent body created toencourage young entrepreneurs and to providesupport in terms of technical, financial,training, marketing and management, allnecessary fields for aiding these enterprisesduring the coming periods.

• The Omani government anticipates sizeableexpansion of jobs created from the developmentof SMEs. The planned expenditure on the SMEsector in 2013 is estimated at RO12.9 billion,almost 30 percent up from 2012.

Tourism • Tourism is being developed as an importantand sustainable socio-economic sector of theSultanate of Oman in a manner that reflectsthe Sultanate's history, cultural and naturalheritage and spirit of traditional hospitality.Tourism will facilitate economic diversification,the preservation of cultural integrity and theprotection of the environment of theSultanate.

• According to the latest statistics, tourismcontributes approximately 2.4 percent toOman’s GDP and is expected to increase to 3percent by 2020. There is a significant increasein investment in the tourism sector creatingconsiderable jobs.

Human ResourcesThe Omani government has a strong desire to haveOmani nationals play a leading role in all areas oftrading and professional employment in theSultanate. As a result, education and training areprioratized and have been a cornerstone of each ofthe Sultanate’s five-year development plans. TheMinistry of Education’s commitment to a sectorthat – while maintaining traditional values – ismodern and advanced, is reflected in its range ofeducational programs, including the basic educationsystem, designed to meet the demands of modernscience and culture in the information age.

Industry• Development of industrial estates in Sohar, Sur,Salalah, Nizwa and Buraimi.

• The provision of natural gas to the industrial estatesin Sohar and Salalah has helped promote theexpansion of those industries reliant on largequantities of energy.

• Tax exemptions are an incentive to the developmentand expansion of the industrial sector, whichcontributes significantly to the country's GDP,currently at 16.3 percent (USD 12.9 billion).

• The Duqm region is one of the newest industrialareas growing in prominence with a port andindustrial zone project that will transform the areainto a major economic development center in whichthe port will act as facilitator unlocking the potentialgrowth opportunities. The Duqm port & dry-dockwill be one of the major ports in Oman with itsstrategic location. This port is also equipped with aship repair yard and dry-dock facility, which is thefirst of its kind in Oman.

• Oman has also started to build a rail network that isexpected to link major ports, industrial areas andfree zones at Sohar, Salalah and Duqm with a widerGCC network.

• An accelerated program to add significant newcapacity to increase the supply of power and waterto meet the rising demand in the Sultanate,essential for sustained growth and development.

Oman

by Alfred Strolla, managing partner, Oman, Sudan andYemen, Deloitte Middle East and Phaninder Peri,senior manager, Tax, Deloitte Middle East


Taxation In 2009, Oman introduced a new tax law thatconsolidates a number of ministerial decisions,interpretations and practices arising from theprevious 28-year old law, along with theintroduction of certain new tax regulations.

One of the noteworthy changes brought into the new tax law was the elimination of thediscrimination in tax rates between the branches of foreign companies and Omanicompanies/establishments and the introduction of a unified rate of 12 percent applicable to allestablishments. Further, under the U.S. Free TradeAgreement, American companies can register alimited liability company with 100 percent foreignownership without the involvement of a localpartner.

The reduction in tax rates, the amendment to thedefinition of “permanent establishment,” which isnow in line with the Organization for EconomicCooperation and Development (OECD) and thefree trade agreements entered into by Oman, hasencouraged and increased foreign investment inOman.

Another major change introduced by the new tax law is a shift from a territorial system of tax to a global system of tax, whereby revenue earned outside Oman is also taxed and which,consequently, increases the government’s revenue from tax.

The new executive regulations to the new incometax law that came into force in tax year 2012 andapply to all accounting years ending after January1, 2012, provide clarifications and specifyguidelines and rules in relation to the provisions of the new tax law.

As part of simplifying the compliance andthereafter the assessment process, the taxauthorities introduced 18 new different tailor-made forms enabling them to collect relevantinformation on a timely basis at the time ofcompliance, which is expected to speed up theassessment process. It is worth noting that thenew provisions also include exemptions for smallbusinesses for filing returns and financialstatements and from mandatory tax registrationand compliance on fulfillment of certainconditions. Tax deductions now require moredetailed documentation than in the past.Provisions of penalty for non-complianceintroduced in the new tax law are likely to beimplemented soon.

With implementation of Islamic financeregulations, the tax authorities are currentlyreviewing the tax laws and are likely to introduceamendments to accommodate the effect of theIslamic finance transactions.

Various service improvement measures to taxpayers have already been, or are in the process ofbeing implemented. These include establishing aLarge Tax Payers Unit (LTPU), online portals andrevamping of the tax system among others.


Corruption, money laun

Risk, why

ndering, tax evasion and sanctions

is it your problem?


As businesses continue to face a challengingeconomic environment in most developed economiesand are looking towards rapid-growth markets withpotentially better prospects, they also face the risk ofhigher levels of bribery and corruption. The risingtrend of cross-border regulatory action and theincreasing focus of investors on governance andtransparency have brought these risks into sharperperspective. Leading companies are responding withenhanced compliance and due diligence measures,robust internal audits, enhanced investigativecapabilities, whistleblowing and leveraging off thelatest data analytical tools. The precautionary adage:better safe than sorry, has never been more pertinent.

Risk


In a recent panel discussion hosted by Deloitte on thesubject of “Risk, why is it your problem?” it emergedthat corporate counsels in the region have twoimmediate concerns related to navigating the challengesthat come with operating in an international businessenvironment over the next 6-12 months: the increasedvolume and complexity of international regulatory andlegal obligations on the one hand, and the risksassociated with expansion into new markets on theother. Those two factors frequently converge –especially when the expansion involves emerging orlesser-developed markets where prevailing local businesspractices are at odds with international norms. With that tension comes one very large risk: the risk of thecompany committing an act that yields a cross-borderregulatory enforcement action.

Attendees were especially concerned about thereputational damage, fines and profit disgorgementsthat can accompany non-compliance with cross-borderregulations. This is notably acute for those expandinginto emerging markets where pressures to establish andgrow their business in a new market frequently raisechallenges with regard to regulation and compliance.

The impact of cross-border business practices are placedin even sharper perspective through an increasing trendunder the Foreign Corrupt Practices Act (FCPA) ofprosecuting executives and individuals with controlresponsibility over organizations that have violated anti-corruption legislations.

What are the cross-border enforcement prioritiesthat companies should be concerned about?There are numerous methods that companies and theindividuals who run them can brush up against the longarm of the U.S. authorities. Examples of current prioritymatters for U.S. authorities include corruption, moneylaundering and tax evasion.

Corruption - The driving force of anti-corruptionenforcement continues to be the U.S. SecuritiesExchange Commission (SEC) and U.S. Department of Justice (DoJ) through the FCPA, with recent finesamounting to over USD 2.7 billion between 2010-2012.In 2012 the SEC and DoJ collectively enforced actionsagainst 23 corporations. During the first six monthsalone of 2013, 17 actions have been enforced. With thepassing of the U.K. Bribery Act in 2010 and theaggressive promotion of anti-corruption legislation by Organization for Economic Cooperation andDevelopment (OECD) countries, bribery and corruptionare appearing increasingly on the agenda ofgovernments around the world. Although enforcementof the U.K. Bribery Act has gained little public traction,the Act does give the U.K. Serious Fraud Officesweeping powers to prosecute bribery anywhere in the world and thus compliance with it needs to be aheadline issue for companies with U.K. connections,irrespective of the geography of their operations.

Money laundering - Anti-money laundering regulationshave yielded U.S. authorities some of the largest fineson record, underscoring the challenge that internationalfinancial institutions face in enforcing consistentcompliance of policies across widespread and loosely-integrated overseas networks. However, it is not justextra-territorial enforcement that organizations face,local authorities are also tightening their regulations.

There are numerous ways thatcompanies and the individuals who run them can brush up against the longarm of the U.S. authorities. Examples of current priority matters for U.S.authorities include corruption, moneylaundering and tax evasion.


The Dubai Financial Services Authority (DFSA), forinstance, has just published a new Anti MoneyLaundering (AML) rulebook, which came into force on 14 July, 2013. As anticipated, this rulebook placessignificant focus on a “risk-based approach” and on the assessment of money laundering risk, in terms of both business risk and customer risk assessment.Organizations operating in the Dubai InternationalFinancial Center (DIFC) will need to familiarizethemselves with the changes in the regulations.

Tax evasion - Another U.S. law designed specificallywith cross-border enforcement in mind is the ForeignAccount Tax Compliance Act (FATCA). FATCA, designedto prevent tax avoidance of U.S. citizens abroad throughforeign (non-US) financial institutions (FFIs) will begin tobe implemented in 2014, is and should be an immediateand current concern for any financial services institutions.The Act requires FFIs and non-US non-financial entitiesto identify and disclose their U.S. account holders andmembers or face a new 30 percent U.S. withholdingtax. The U.S. Internal Revenue Service (IRS) expects theAct to raise USD 7.6 billion in tax revenue over a 10-yearperiod (and perhaps a small fortune in fines as well), andwill have a direct and profound impact on FFIs that haveany U.S. proprietary investments, account holders, orfinancial dealings. Compliance with FACTA will requireorganizations in the financial services sector toimplement enhanced Know Your Client (KYC) and AML due diligence and acquire deeper knowledge of IRS rules.

Economic and trade sanctions - Particularly relevant inthe Middle East – given the region’s history as a tradingentrepôt and the presence of sanctioned regimes – arethe host of laws and regulations controlling trade andflow of funds that add an additional layer of risk andcomplexity to conducting business internationally. Theselaws, covering a range of goods and services, target aneven wider range of regimes, organizations andindividuals even. Authorities such as the U.S. Office ofForeign Assets Control (OFAC) are aggressively

employing new tools to more closely and effectivelyimplement sanctions, such as prohibiting internationalbanks from accessing U.S. dollar markets if they areconsidered to be providing financial services to entitieson sanctions lists. OFAC in 2012 completed or settled 16 enforcement actions and collected penalties of overUSD 1.1 billion. There is no sign that OFAC’s vigor isdying down.

How can companies avoid being the nextheadline story? Reputation is key to every organization – it is good to bein the news, but only for the right reasons. Oncedamaged, reputation can be very difficult to repair,particularly where integrity is called into question.Violating anti-corruption, tax evasion, moneylaundering, trade sanctions or human rights laws areexamples of a handful of different ways that a companycan tarnish its reputation through careless overseasactivities. Allegations of corruption seem to get the mostattention recently, because of the high-value fines beingdoled out by the U.S. authorities, as well as theireagerness to cast the broadest shadow possible. Risksare increasing, but standards are not. It seems there arefew companies who can truly claim to be exempt fromU.S. oversight.

Violating anti-corruption, tax evasion,money laundering, trade sanctions orhuman rights laws are examples of ahandful of different ways that acompany can tarnish its reputationthrough careless overseas activities

Risk


Third-party due diligence - FCPA corruptionsettlements frequently cite the role of third-party agentssuch as vendors, joint venture partners, governmentliaisons, customs and immigration agents and acquiredentities in alleged violations. Although we are seeing agreater reliance on outsourcing key functions to third-parties, especially in emerging markets, it is no longerpossible to circumvent risk through a third-party.Determining the potential risk of third-party corruptionrequires organizations to consider factors such as thetype of third-party with which they are planning toengage, the services to be provided, the locations inwhich parties operate and the level of interaction thatthey may have with the public sector.

Organizations looking to expand into new marketsshould regularly perform integrity and corruption duediligence on third-parties and should ensure that theyconduct KYC procedures on new clients to ensurecompliance with anti-bribery and corruption and AMLregulations.

Compliance culture and “t one from the top” To avoid falling foul of the FCPA or any of the localauthorities who are increasingly joining the enforcementbandwagon, organizations and executives responsiblefor compliance can take a number of steps – includingdemonstrating a strong “tone from the top” approach

and implementing a robust corporate governanceframework containing a defined ethics and compliancepolicy. Officers, directors and employees should beissued guidelines, policies, and should be regularlytrained on anti-bribery, anti-corruption (ABC)compliance. Potential risks should be highlighted toemployees and suppliers, whilst compliance covenantsshould be included in contractual agreements.

Internal risk assessment and risk management -Another proactive step that companies can take is toconduct risk assessments. This is critical in any area ofcompliance concern (be it corruption, fraud,environmental or other) and includes conductingreviews of operations, comparing the objectives ofcontrols with individuals’ understanding of thosecontrols and their responsibilities, identifying deficienciesand developing a prioritized action plan to plug anygaps. Furthermore, implementation of a whistleblowinghotline and regular reviews of compliance with anunderstanding of the firm’s policy are all crucial todemonstrate to authorities that organizations arecommitted to compliance and that any violations are the result of individual or “rogue” action, rather thanthe result of shoddy controls or, worse, corrupt businesspractices.

Companies should prevent beingcaught by surprise with an overseasauthority brandishing a statute theynever thought would apply to them

The US Dodd-Frank Act poses a significantchallenge to companies operating in thecrosshairs of U.S. regulators. Provisions forwhistleblower protection and reward mean thatevery company needs to be especially diligentabout implementing a robust complianceprogram. A fundamental component of thatprogram should be a whistleblowing programthat encourages employees to report theirconcerns internally, rather than succumb to thetemptation to report externally and seek areward from the U.S. authorities.


Companies should also consider including a broaderreview of fraud risks in any corruption risk assessmentand vigorously investigate any potential violations.Organizations should be aware that would-be makers of corrupt payments frequently use methods that mirrorother forms of fraud thus, an emphasis on fraud in thecorruption risk assessments may help tighten downcontrols in areas that might escape the attention of theanti-corruption compliance teams. Proactively tacklingany corruption or fraud identified within an organizationembeds the notion that the company is attentive to thesubject. The knowledge that someone is watching is initself the greatest deterrent to would-be perpetrators ofany number of potential violations.

Whistleblowers - Another significant piece of U.S.legislation that is likely to have significant ramificationson extra-territorial enforcement is the Dodd-Frank Act. Acomponent of Dodd-Frank is a whistleblower protectionand reward program that effectively offers a bounty towhistleblowers who take their allegations directly to theSEC/DoJ (should their allegation yield a fine to eitherauthority). The policy allows employees to discloseinformation without fear of reprisal, thereby enhancingcorporate transparency and accountability. It howeveralso encourages employees to report concerns internally(rather than externally) which can lead the company toself-investigate and report if necessary.

Given these pressures, it may well be that non-U.S.companies should consider implementing a new form ofrisk assessment: the risk of U.S. regulatory action toestablish a clear and complete picture of the differentways in which they may be exposed to cross-borderenforcement by significant overseas regulators, andevaluate the controls and monitoring mechanisms theyhave in place to alert themselves to risk as it arises.Companies should prevent being caught by surprisewith an overseas authority brandishing a statute theynever thought would apply to them.

In light of the growing emphasis on cross-borderenforcement and the very direct impact it can have onthe control persons within an organization, the questionarises: who should be responsible for these risks withinan organization? While it is certainly important to have abroad range of staff trained on matters of critical risksand to generally raise risk awareness within anorganization, there may be no “one size fits all” riskframework applicable to all companies and industries. Itis important that the risk management framework is fitfor purpose and each organization should be aware ofthe risk factors most relevant to it and its industry.Assessing what is appropriate can be complex and manycompanies seek external advice to ensure that they arebenchmarked appropriately. Going forward, it may beimportant to include in that benchmarking thecompany’s awareness and attentiveness to the complexweb of international regulations to which they may beexposed. Growth and expansion can no longer beseparated from corporate awareness and ethicalconduct.

by Ralph Stobwasser, director, Forensic, DeloitteCorporate Finance Limited (Regulated by the DFSA),Middle East and Collin Keeney, director, Forensic,Deloitte Corporate Finance Limited (Regulated by theDFSA), Middle East

Endnotes1 Held at Legal Week’s 6th annual Middle East Corporate CounselForum in Dubai on 15 May, 2013.

Risk

Growth and expansion can no longerbe separated from corporate awarenessand ethical conduct


Over the last decade the business world has shownsignificant interest in the concept of employee“engagement.” Identified as an internal state ofbeing – physical, mental and emotional – employeeengagement brings together concepts of work effort,organizational commitment, job satisfaction andoptimal experience. But does the social engagementof employees lead to a lasting and successfulmarriage? Yes, says this author.

“I do.” Or do I?

Employee engagement


Employee engagement is about being positively presentat work by willingly contributing intellectual effort,experiencing positive emotions and meaningfulconnections to others. This gives employee engagementthree dimensions:• Intellectual: related to the job and how to enhance it;• Affective: linked to feeling positive about doing agood job; and

• Social: concerned with taking opportunities to discusswork-related improvements with others at work.

Extensive studies have demonstrated the importance ofemployee engagement to organizational performance asa business concept that addresses employees’ levels ofinterest and commitment to the job, resulting in apositive attitude towards one’s occupation and firm andconsequently leading to greater productivity. Gallup’sQ12 Meta-analysis of 1.4 million employees conductedin 2012 and examining business performance, shows apositive correlation between employee engagement andbusiness outcomes despite tough economic conditions.More specifically, Gallup found that engaged employeesare more productive and customer-focused, as well asmore likely to stay with their employers (Gallup® andQ12®, 2013).

Enter the MillennialsThe study, which covered different dimensions ofemployee engagement, shows that employeeengagement with corporate volunteerism is increasinglybeing identified as a key element in attracting andretaining top talent (see box). This correlates tightly witha prevailing characteristic of the current Generation Y, orthe Millennials: defined as being between the ages of21 and 35, the fastest growing segment in today’sworkforce and the most sought after talent despite theprolonged recession. Perhaps one of the most distinctivecharacteristics of Gen Y is their search for meaning inthe work place, a platform that encourages them tocontribute to society. It is important to understand andengage with members of the Millennial generation asthey will represent the bulk of the workforce, the futureof economic and social life and the future of business.

While many have claimed that employee engagementpredicts employee outcomes, organizational success andfinancial performance, a considerable number of leadersquestion the return on investment (ROI) in terms of theamount of time and resources spent trying to addressemployee concerns. In fact, some observers warn thatfixating on ever higher engagement survey scores iswrongheaded and may backfire if employers fail atimproving the metrics and ensuring that their more“engaged employees” are behaving in ways thatpromote higher productivity.

Perhaps one of the most distinctivecharacteristics of Gen Y is their searchfor ‘meaning’ in the work place, aplatform that encourages them tocontribute to society

Deloitte’s Volunteer IMPACT 2011 survey foundthat Millennials who frequently volunteer aremore likely to be proud, loyal and satisfiedemployees as compared to those who rarely ornever volunteer. The same research showed thatthose who participate in employer-sponsoredvolunteerism were 52 percent more likely to feelvery loyal toward their company than thosewho did not participate. The report also foundthat 70 percent of Millennials want to work fora company that is committed to its community.Of all Millennials surveyed, 61 percent said thatwhether an organization were committed to itscommunity and sponsored volunteerism, wouldhave an influence on whether they accept a joboffer or not (Deloitte, 2011).


The importance of social engagementRecognized or not, without a motivated and engagedworkforce, even the most brilliant business strategiescan falter. The affinity that employees feel toward anemployer has the power to create a competitiveadvantage that can be hard to imitate and is inextricablylinked to organizational performance (Deloitte, 2011).Studies indicate that organizations that have engagedemployees actually outperform those who do not. Infact, employers who take into account the connectionbetween corporate volunteerism and employeeengagement can reap substantial rewards. Bysponsoring volunteerism, a company has theopportunity to communicate the values it shares with itsemployees, which in turn can result in a more engagedand committed workforce that drives the firm’scompetitive advantage (Madison, 2012).

Companies seeking to enhance organizationalcommitment by means of volunteerism may have moresuccess if their employees have the freedom to selectfrom a wide array of volunteer opportunities. This isdriven by the increased agreement with organizationalvalues and increased perception of the organization that employees report as a result of participating inemployer-sponsored volunteerism (Madison, 2012).

I do. Do you?At the moment, employee engagement initiativesaddressing community involvement and corporatevolunteerism are being incorporated into the backbonesof leading organizations. Forward-looking companiesseeking a lasting “marriage” with their employees areencouraged to embrace the trend and establish socialengagement as a differentiating agent of their firms.These organizations should emphasize the importanceof employee engagement through offering a holistickind of experience to their workforce and aligning withtheir passions if they wish to retain the talent that otherfirms are competing for.

by Soughit Abdelnour, senior manager, HumanResources, Deloitte Middle East

EndnotesBarton, F. E. (2012) The Millennial consumer - debunkingstereotypes. The Boston Consulting Group.

Deloitte, D. L. (2011) 2011 Executive summary Deloitte volunteerIMPACT survey. Deloitte Touche Tohmatsu Limited.

Frauenheim, E. (2011, September) A skeptical view of engagement,workforce. Retrieved from Workforce Website:http://www.workforce.com/article/20091202/NEWS02/312029985/a-skeptical-view-of-engagement?AID=20091202/NEWS02/312029985#

Gallup® and Q12® (2013) Engagement at work: its effect onperformance continues in tough economic times. Gallup, Inc.

Harter, N. B. (2011) Majority of American workers not engaged intheir jobs. Gallup® and Q12®.

Khan, W. (1990) Psychological conditions of personal engagementand disengagement at work. Academy of Management Journal, Vol.33, pp. 692-724.

Madison, W. R. (2012) Corporate social responsibility, organizationalCommitment, and employer- sponsored volunteerism. InternationalJournal of Business and Social Science, Vol. 3 No. 1.

While many have claimed thatemployee engagement predictsemployee outcomes, organizationalsuccess and financial performance, a considerable number of leadersquestion the return on investment(ROI) in terms of the amount of timeand resources spent trying to addressemployee concerns

Employee engagement


Despite a grand entrance into the technologyarena, cloud computing has become a point ofcontention in some organizations. While somedepartment leaders have bypassed their trusted IT departments completely and procured services directly from cloud providers to addressimmediate needs – claiming reduced costs, fastertime to market and improved user experience –some CIOs are not convinced. So how does a CIO survive and remain relevant within theorganization if the cloud is viewed as a threat totheir existence? Embrace the cloud and evolveyour value proposition.

The Cloud A CIO’s survival guide


Cloud computing

Cloud computing entered the technology arena withgreat fanfare and promise, presenting a paradigm shiftin how technology would be offered – and consumed –and promised to demystify what IT departments acrossthe globe actually do in their “top secret” data centersto make today’s companies run with such intelligenceand agility.

Although technology providers have remained fullycommitted to investing in cloud capabilities, with manychanging their entire business model to expand theircloud solutions and capabilities, many Chief InformationOfficers (CIOs) are still not convinced and are waiting forthe buzz to pass. But several years into the paradigmshift, the topic remains very much alive and has becomeeven more relevant, not only for Chief InformationOfficers but also for Chief Financial Officers, ChiefMarketing Officers and many Chief Executive Officers asthey struggle to align the ever-so-growing appetite fortechnology in the modern enterprise with all thecomplicated technology costs and processes thatcontinue to grow year on year.

In many organizations it has almost become a weaponof sorts, with CFOs threatening IT budgets with thecloud and CIOs aggressively combating the claims oftheir own trusted providers with arguments of uniquecapabilities and protection that can only be provided bytheir internal experts.

The cloud discussion in many organizations starts as afinancial opportunity to drive efficiency into technologyspend that is immensely complicated and never fully

understood by anyone but the CIO. System licensingmodels, capacity planning forecasts, software supportcontracts, business continuity configurations and non-production landscapes are lively conversations whenexplaining the total cost of ownership to a departmentleader sponsoring a new business initiative. In contrast,the cloud offerings seem almost too simple. Youdetermine what you need, for how many users and themethod of payment. At times it can really be that simplebut in most cases there are additional items to considerand should be fully evaluated in advance of anycommitment. What is a technology leader to do whentheir CMO requests a global media streaming solution to allow real-time presentations, knowledge sharing and improved corporate training within six months andpresents the request with board approval and funding?This will require new skills, new technology and possiblya revamp of the entire infrastructure. However, thebudget approved only covers a fraction of what isneeded and was based on marketing material from acloud provider and monthly pricing presented on theprovider’s website. For technology leaders they will notknow where to start.

In many companies it may not quite happen this waybut for many this is how expectations are first set. As the CIO, do you admit defeat and walk away? Let the CMO bring in their preferred vendor and removeyourself from the conversation?

Never. If anything, the CIO should wear the internal hatof cloud expert, never the anti-cloud lobbyist. Becomewell versed in what the market offerings are proposing


and how. Understand how they can be leveraged withinyour company, the pitfalls as well as the hidden costsand considerations. Update your enterprise architectureand strategy to consider cloud technologies and howthey will fit into the broader landscape for businessintelligence, reporting and data protection. In somecases, selecting a cloud offering is the only feasiblesolution. Prepare for this in advance. Be the first personengaged when a cloud idea arises, put in place thenecessary controls and capabilities that will prevent the cloud from disrupting what is already in place andworking today and champion the change across theorganization.

Many technology leaders spend endless hours ensuringthat all systems are built to last and performing asexpected. Systems are up and running, sufficientcapacity is on hand, operating procedures are in place,all while keeping a close eye on variable costs. In thecloud-enabled world you may not be as involved in the daily details of operating such technical elements.However, someone has to be aware of what ishappening every day. Are services meeting thecontracted levels of performance and stability? Arebusiness and user expectations being met? As the CIO

and custodian of all things technology, embrace thisopportunity to become the broker between yourbusiness and cloud providers. You may not own theassets nor have visibility in how they are operated butyou do have the responsibility of ensuring the business is realizing the value of their investment. Put in placestrategic vendor management disciplines thatconsistently measure the cloud provider’s performancewith effective controls that drive accountability.Benchmark their performance and capabilities againstcompetitors and ensure that the needs of your businessare clearly understood and delivered upon. This may feelcloser to a procurement officer role but as the trustedtechnology expert, the CIO is best positioned tointerface with cloud providers and manage thecommercial relationship on behalf of their business. Do not compromise on expectations and results because the service is being managed externally.

What happens if the cloud turns to rain? The greatest fear and hold off for most organizationsadopting cloud services is the loss of control. Matureproviders have responded well to this concern and offer very comprehensive and stringent agreements that cover the best interest of any organization with the appropriate recoveries, penalties and warranties. But what do you do when disaster strikes? Do not wait for the unforeseen, be proactive. • Governance and controls - Alongside the effort toupdate the enterprise architecture and strategy, revisit governance processes, security standards andcompliance programs to ensure that cloud-basedservices are considered and provisioned for. Put inplace specific standards that must be complied withfor all cloud-based services, detail requirements thatmust be met to uphold security posture and be expliciton what must be considered prior to committing toany service. This should not evolve into a situation inwhich cloud services will never qualify, but rather aguideline of how to proceed and what to watch outfor. If anything, this should simplify the review andselection process.

As the CIO, do you admit defeat andwalk away? Let the CMO bring in theirpreferred vendor and remove yourselffrom the conversation? Never. Ifanything, the CIO should wear theinternal hat of cloud expert, never theanti-cloud lobbyist.


• End users - The ever-growing popularity of BYOD(Bring your own device) and mobility solutions hasintroduced many consumer-focused solutions that areleaking into the enterprise. It is very challenging tostay ahead of all the solutions and services that arebeing downloaded by users every day. An easierapproach to adopt is one of education and policy.Help users understand how to protect themselves andtheir employer in the digital world. Define usagepolicies that clearly articulate how information shouldbe handled, shared and protected. Make it simple butmake it clear.

• Business continuity and exit - Establish a plan for theworst-case scenario. Implement an exit strategy thatensures that you have access to your information andthe ability to recover from a technical or relationshipcrisis. Understand the impact and planned reaction inthe event of a major failure and test this. Test thesecurity, privacy controls and procedures of the cloudprovider to understand the potential for exposure orbreach. As the guardian and protector of all digitalassets, ensure that data hosted outside of your controlis included in your risk management reviews, securityassessments and planning.

The cloud has come a long way and will continue toevolve in capability and relevance. It will force changewithin organizations and disrupt business-as-usual for ITdepartments across the globe. However, the cloud willnot replace enterprise IT departments. To fully realize thepotential, prepare your organization and yourself tocapitalize on this window of opportunity. Lead thechange through proactive planning, embrace thechange through increased knowledge and participationand embed the cloud within your IT strategy witheffective standards, controls and measurements.

by Basit Saeed, Chief Information Officer, IT,Deloitte Middle East

As the trusted technology expert, theCIO is best positioned to interfacewith cloud providers and manage thecommercial relationship on behalf oftheir business. Do not compromise onexpectations and results because theservice is being managed externally.

Cloud computing


Oil and Gas

A chimera no moreInnovation is celebrated far and wide, but the lackof a shared, accurate definition has underminedour collective ability to manage it effectively. The implications are anything but academic.Companies that treat an attack based ondifferentiation as if it were breaking importanttrade-offs may overreact, but mistake a trueinnovator for the merely different and the pain can last for decades.

Deloitte Review

Innovation


Like the old chestnut of the bumblebee’s flight,innovation seems to work in practice but not in theory.There are myriad examples of success from which wecan draw inspiration, yet almost no one seems able to innovate repeatedly and on purpose. Practitionerscontinue to lament the unpredictability of innovation,the more Zen-like among them embracing the idea thatfailure is inevitable. Who hasn’t been told something to the effect that if you’re not failing often, you’re nottrying hard enough? It’s difficult to know if this ispowerful advice or just defeat cloaked in the rhetoric of victory.

In such circumstances, it is common practice to invokethe parable of the six blind men and the elephant, withthe hope that progress lies in synthesizing the many and divergent views. Unfortunately, such a path is notavailable to those who wish to understand innovation,for this field of inquiry faces a much more fundamentalproblem: where the blind men knew that they each had purchase on the same animal, when it comes toinnovation, many of us hold parts of entirely differentbeasts.

Think of the variety and diversity of initiatives in mostorganizations that seek to bask in innovation’s goldenlight. From disruptive new product initiatives to effortsto introduce recyclable cutlery in the commissary, thereis precious little that doesn’t seem to qualify. It is not anelephant we seek to describe, but a menagerie. Imaginenow the sightless six grasping, respectively, the wing ofa condor, the body of a lion, the horn of a rhino, andthe fluke of a whale. It is unsurprising, if disappointing,that our efforts to make innovation manageable haveconjured only chimeras.

Few other fields in applied management labor under thisburden: hedging financial risk belongs to finance, whilemotivating and rewarding employees falls to a subfieldwithin human resources and reducing the variation inthe output of a manufacturing process belongs tooperations management. Managers can be effective inthese domains largely because the implicit or explicitdefinitions that limn the boundaries of each tell themwhat they need to know in order to achieve specifiableoutcomes and how to improve over time. If we are tobecome similarly effective at managing innovation, weneed to define what it is in practical, useful terms. Onlythen can we assemble the parts of the creature thattruly belong together.

More than a harmless drudgeEstablishing a useful definition to guide any field ofinquiry is not an esoteric exercise but the most practicalof first steps. Unfortunately, it is a step we have yet totake for innovation, which has been plagued, almostsince its inception, with far too broad a notion of whatit might encompass.

The trouble began with the seminal work of JosephSchumpeter in the 1930s and 1940s. Almost single-handedly, the Harvard economist convinced a disciplineobsessed with marginal cost competition that whatreally mattered was innovation, which he defined as“the introduction of new goods…new methods ofproduction… the opening of new markets…theconquest of new sources of supply…and the carryingout of a new organization of any industry.”1

Consider now what this definition places withininnovation’s remit. Do we really think that finding aChinese distributor for CAD software (opening newmarkets) requires the same sort of managementprocesses as shifting from bricks to clicks in the retailsector (establishing a new organization)? Does exploringdigital fabrication or additive manufacturing (3-Dprinting as a new method of production) raisechallenges that are sufficiently similar to those arisingfrom finding substitutes for rare earth metals in thehigh-tech sector (new sources of supply) that they canbe treated as one and the same?

If we are to become similarly effectiveat managing innovation, we need todefine what it is in practical, usefulterms. Only then can we assemble theparts of the creature that truly belongtogether.


A reasonable question is whether having a commondefinition matters all that much. Can’t we follow thelead of Potter Stewart, a late Justice of the U.S. SupremeCourt, who famously averred that when it came toobscenity, he knew it when he saw it?2 As a practicalmatter, the answer appears to be no. In a seeminglydirect riposte to the Potter Stewart school of thought,recent literature identified 60 distinct definitions ofinnovation, prompting the derisive conclusion thatresearchers had collectively abandoned the question ofdefinition entirely, leaving it “to the reader to intuitivelyunderstand what is now a popular subject inmanagement literature.”3

When definitions are offered, they collectively lack the coherence necessary to create a solid, commonfoundation. Is innovation “the creation of newknowledge and ideas to facilitate new businessoutcomes,”4 “the effective application of processes and products new to the organization and designed to benefit it and its stakeholders,”5 “the generation,acceptance, and implementation of new ideas,processes, products, or services,”6 or something else altogether?

The lack of a shared, accurate definition hasundermined our collective ability to manage innovationeffectively because we cannot determine what mattersand why.7 One study identified 9 factors and 31subfactors that determined success.8 Another revealed55 factors and a metastudy of the field itemized 42subfactors clustered into 10 factors.9 In short, efforts tounderstand innovation are looking at phenomena thatare the same in name only, so it is no surprise that thereare wildly different opinions about what matters most.10

How shall we get out of this muddle? We cannot adoptthe lexicographer’s conceit and attempt to derive adefinition from how the word is used. Yet on what basisand with what authority would we – or anyone else, forthat matter – impose a definition?

No free lunch?There is perhaps a third way: rather than infer or imposea definition, we can perhaps derive one by following toits logical conclusion the microeconomic theory at theheart of modern competitive strategy.

In his 1996 article “What is strategy?” Harvard BusinessSchool professor Michael E. Porter synthesizes over 20 years of writing, research and reflection on theimplications of microeconomic theory on businesscompetition.11 He concludes that different strategies are defined by the trade-offs in the performance of theactivities that define the value created by a businessmodel.12 Porter illustrates this framework using twodimensions of customer value: price and nonprice.(Nonprice value is really a vector of all the differentdimensions of performance that customers want. Forinstance, in the case of automobiles, these might besafety, acceleration, styling, roominess and so on).

Delivering any given bundle of nonprice benefits alwaysincurs a cost – it is tough, after all, to get something fornothing. The minimum cost required to achieve aspecified nonprice value is not some fixed Platonic ideal:it is whatever cost is incurred by the lowest-cost providerin the market. Similarly, the level of any nonprice valuethat can be provided at any cost has a maximum: nomatter what you’re willing to pay, you cannot have a carthat goes from 0 to 60 in 2.8 seconds and gets 75 milesper gallon in the city. The limits of what can be providedat what cost describe the “productivity frontier” for abusiness model at a point in time.

The lack of a shared, accurate definitionhas undermined our collective ability to manage innovation effectivelybecause we cannot determine whatmatters and why

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In figure 1, at point 1, a firm can appear to break trade-offs and deliver greater nonprice value without an increase in cost; that is, it can move “right” to point 2(an increase in nonprice value) without moving “down”(an increase in cost). This is because a firm is merelywringing out inefficiencies that others already knowhow to avoid. In other words, at point 1, it really canget something for nothing by working smarter ratherthan harder. Firms that have reached the frontier of

what a given business model can do are “operationallyexcellent,” in Porter’s terms.

Once a firm gets to 2, however, that is as smart as it canwork: The frontier defines the limits of what is possibleat that moment. Of course, one could exploit differenttypes of trade-offs to reach a different point on thefrontier, competing instead at 3 by moving “up” (areduction in cost) from 1 without moving “left” (areduction in nonprice value). Once firms are at thefrontier, however, changes in cost and nonprice valueare inextricably linked: more of one necessarily meansless of the other. Thus, 2 and 3 are qualitatively differentstrategies because they are at different points on thesame frontier.

A company’s strategy, then, is defined by the trade-offsinherent in its business model, or the activities itperforms in order to deliver value to customers. Acompany’s business model is strategically differentiatedto the extent that it exploits a different set of trade-offsthan its competition, choosing, for example, to providehigher quality but at higher cost and hence price.

For all its power, this model is essentially static becauseit takes the production possibility frontier (PPF) as givenand fixed. This is a useful assumption, but like manyassumptions, it eventually buckles under the weight ofaccumulating reality. In the auto industry, for example,the trade-off between cost and power has changeddramatically over time.

Today, for example, one of the least expensive machinesthat we are willing to call a “car” (a closed-body privatetransportation device with a given passenger capacityand range) is the Tata Nano. Its price (a proxy for relativecost) is approximately USD 2,600, and it has 38horsepower. At the other end of the spectrum is theBugatti Veyron, which at USD 1.9 million delivers 987horsepower. These two automobiles define, to areasonable approximation, the PPF of the trade-offsbetween cost and power in the commercial market forautomobiles (figure 2).


A company’s strategy, then, is definedby the trade-offs inherent in itsbusiness model, or the activities itperforms in order to deliver value tocustomers

Figure 1. The productivity frontier

Low

Low

High

High

Rel

ativ

e co

st p

osit

ion

Nonprice value

Productivity frontier

Source: Adapted from Michael E. Raynor, The Innovator’sManifesto, 2011


It will come as no surprise that 90 years ago the industrywas subject to different constraints. In 1920, a goodcandidate for the cheapest car generally available wasthe Ford Model T, which cost USD 3,200 (in 2013dollars) and delivered 20 horsepower. Back then it wasstill a Bugatti (the Type 35) at the other extreme, whichcost USD 180,000 inflation-adjusted and delivered 140horsepower.

It’s worth noting that breaking a trade-off does notnecessarily translate into commercial success: someinnovations disappoint when the trade-offs broken arenot broken in ways valued by customers. For example,the Nano has faced some headwind in findingmarketplace acceptance. March 2013 Nano sales weredown 86 percent from a year prior and only 229,157units have sold since inception. The reason seems to be

that many scooter owners aren’t upgrading to the Nanobecause it isn’t viewed as a “real” car and car buyersview the Nano as inexpensive and too akin to ascooter.13 In other words, although the Nano fallsbetween a car and a scooter, it is still too close to ascooter. Consequently, commercial success seems to liein being more like a car.

Independently of the commercial success, from anengineering standpoint, this outward expansion in theautomotive sector’s PPF means that the combination of cost per horsepower and total horsepower readilyavailable in a minivan today would have beenunfathomable to the engineers contesting Le Mansduring the interwar period. Such movement does notpose a problem for Porter’s notion of strategy sinceminivans in 2013 do not compete with racing cars from1923. Yet this somewhat contrived example reveals howthe accretion of many small improvements over theyears can yield dramatic improvement overall.

Conceptually, of course, there is no difference betweenany one of those small improvements and theircollective impact on automotive performance.

It’s worth noting that breaking a trade-off does not necessarily translate intocommercial success: some innovationsdisappoint when the trade-offs brokenare not broken in ways valued bycustomers

Deloitte Review

1920 2011

Figure 2. Production possibility frontiers in theautomotive industry

10

10

2000

1000

1000

100

100

$/hp

Total hp

Tata Nano$2,60038 hp

Bugatti Veyron$1.9 million987 hp

Bugatti Type 35$180K140 hp

Ford Model T$3,20020 hp

Source:Wikipedia; company websites; Deloitte analysis

How then are we to think of those products or services that expand the frontier compared to theircontemporaries and, rather than competing by makingdifferent sets of trade-offs, compete by breaking trade-offs? We propose that strategy is defined by the trade-offs you exploit, while innovation is defined by the trade-offs you break.

Establishing the utility of a definition is not somethingone does with regression equations or purely deductivearguments. This definition will have to prove its worthone case at a time and gain currency only throughadoption. To begin to make the case for defininginnovation this way, consider four competitive battlesand how viewing them through the lens of innovationas “breaking trade-offs” brings into focus whathappened and why.

Beer and wingsIn an oft-told tale, the structure of today’s Americanbeer market is a legacy of prohibition. With the repeal of 1919’s 18th Amendment to the U.S. Constitutionthrough the passage of the 21st Amendment in 1933,

the manufacture and sale of alcohol was once againlegal. Americans, so the story goes, wanted their beercheap, fast, and in large quantities. The only breweriesthat had managed to stay afloat were those big enoughto diversify into other businesses, and so America’sbrewing industry has long been dominated by arelatively small number of megabrewers: today, the twolargest, both global players, have 75 percent marketshare between them.14

Beginning in the 1970s, however, smaller microbreweriesbegan to crop up. Focusing on specialty formulations –bocks, pale ales, wheat or honey beers and so on –microbreweries brew small batches, distribute locallyand often use highly idiosyncratic ingredients andprocesses. With 10 percent of the U.S. beer markettoday, microbreweries see themselves as innovative andare frequently described as such by the popular media.15

In truth, however, they are simply exploitingcost/performance trade-offs to appeal to less price-sensitive segments of the beer market. They have notfound a way to make “better beer, cheaper.” Rather,they sacrifice economies of scale in their supply chain,production and distribution in the pursuit of otherdimensions of performance that matter to thecustomers they court. They have not expanded thefrontier of the beer industry, merely staked a claim to a different spot on the same frontier.

Megabrewers have responded by launching their own craft beer brands, addressing increasing marketfragmentation with a careful balancing of productionefficiencies and product differentiation. Leveragingproduction facilities and expertise, supply chains andeven marketing spend, the craft beer divisions of themajor brewers are really no different from traditionalline extensions one might see in any consumer productsindustry. One of the majors in the United States has aportfolio of over 250 craft labels, and megabrewer craftbrands are now growing faster than microbreweryvolumes.16 The result has been a new competitiveequilibrium in the beer market, with the majors takingconstant and careful measure of the craft beer segmentsof the markets they serve.


How then are we to think of thoseproducts or services that expand the frontier compared to theircontemporaries and, rather thancompeting by making different sets of trade-offs, compete by breakingtrade-offs? We propose that strategy is defined by the trade-offs you exploit,while innovation is defined by thetrade-offs you break.

Incumbents are not always able to mount such effectiveresponses to competitive incursions, however. Considerthe fate of established airlines at the hands of low-costcarriers (LCCs). At one level, it is a mirror image of thesame problem the larger brewers faced. New entrantspopped up in response to regulatory changes thatallowed them to exploit different cost/performancetrade-offs that appealed to more price-sensitivesegments of the market for air travel. Incumbent airlines typically responded in much the same way themegabrewers responded to microbreweries, comparingthe marginal cost of leveraging existing assets such asplanes, airport gates, reservation systems, loyaltyprograms and staff with the total cost of setting upsomething from scratch. This strategy led them tolaunch LCC divisions that were very often closely tied to the core operations, just as the megabrewers havedone.

Yet the outcomes were far less favorable. Over a 13-yearperiod, there were six major attempts by incumbentairlines to launch an LCC division, none of which provedsuccessful. Continental was first out of the gate withContinental Lite (1993–1995), followed by United’sShuttle by United (1994–2001), whose run overlappedwith Delta’s Delta Express (1996–2003). US Air took akick at the can with MetroJet (1998–2001). Delta’s Song(2003–2006) was a second at-bat for the Atlanta-basedcarrier and United tried it again with Ted (2004–2009).What kept going wrong?

The problem was that, unlike the microbrewerychallenge, the stand-alone LCCs were true innovators,delivering comparable performance at a cost thatincumbents could not match (figure 3). They were not merely exploiting trade-offs in the interests ofdifferentiation; they were breaking trade-offs, that is, they were innovating.

Microbreweries opened up new growth opportunities in the beer industry by creating products that appealedmore directly to what had been latent, unserved marketsegments. The megabrewers’ response was effective atleast in part – and perhaps in large part – because the

organizational context of their response was appropriateto the nature of the challenge. Faced with the need todifferentiate their product, they used the organizationaltools of differentiation but kept those elements of theunderlying business model that did not need to change.This allowed them to exploit their inherent cost anddistribution advantages. Incumbent airlines, however,mistook a true innovation for mere differentiation.Consequently, when they too reached for the tools ofdifferentiation, their responses fell dramatically short.


The major management consultanciesof the day overreacted because theymistook mere differentiation for a trueinnovation

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3%

70%

15%

12%

Financial structure

OtherBusiness model

Work rules, labor relations

Gap between avg. network carrier and major LCC

OtherFrills

Distribution

Process &pace

Schedule

7.2

Figure 3. Drivers of a major LCC’s cost advantage over incumbent airlines

US networks and a major LCC (737-300: Stage length, seat density, and factor cost adjusted)

Source: Adapted from Michael E. Raynor, The Innovator’sManifesto, 2011


It needn’t have turned out this way. What might havehappened had the megabrewers responded to themicrobreweries as if they were true innovators? Howbad could it have gotten for them? What if the airlineshad better understood the nature of the threat theyfaced? How effective a response might they havemounted? We can never know for sure, of course, butfor some insight into these questions, consider theexperiences of Intel in microprocessors and incumbentmanagement consulting firms during the dot-com era.

Silicon Valley vs. Silicon AlleyFrom 1985 to the end of the twentieth century, Intelenjoyed near hegemony in the chip business thanks toits ability to introduce increasingly faster chips on anincreasingly shorter life cycle. Yet in 1999, for the firsttime, Advanced Micro Devices (AMD) had higher marketshare than Intel in the U.S. retail desktop segment with43.9 percent, thanks largely to its gains in the sub-USD1,000 system segment.17

AMD had gained this lead by beginning early – in themid-1990s – to focus on less demanding tiers of themarket, where chips that were less powerful than thebest that Intel had to offer were welcomed with openarms, especially since they were being sold at muchlower prices than Intel’s highest-performing products. In other words, AMD captured a different segment ofthe market by making different trade-offs amongdimensions of performance and cost.

So far, this is just the beer example with higher capitalintensity. However, unlike the microbreweries and farmore similar to the case of the LCCs, AMD had set itselfon a trajectory of performance improvements thatpromised to break the cost/performance trade-offs that,at that time, defined Intel’s product roadmap. Whatlooked in cross section like a segmentation-based attackwas actually the beginning of one based on innovation.

Intel’s response was to establish a new unit in Israel, faraway from the core operations in Santa Clara, California,to focus on building what would become the Celeronprocessor. Based on the Pentium “chassis,” the Celeronwas a deliberate attempt to fight back with a lower-cost, lower-priced, lower-performance microprocessor.Launched in 1998, the Celeron’s performance improveddramatically even as its price remained constant (figure4). It quickly became the largest line of processors byrevenue in Intel’s history. Only in the last few years hasIntel phased out the Celeron and replaced it with Atom,Intel’s new line of low-price microprocessors.

Treat an attack based on differentiationas if it were breaking important trade-offs and you will likely overreact, butmistake a true innovator for the merelydifferent and the pain can last fordecades

Figure 4. Price and performance of Intel microprocessors, 1985–2005

Feb-

04

Apr-0

2

Jun-

00

Aug-9

8

Oct-96

Dec-9

4

Feb-

93

Apr-9

1

Jun-

89

Aug-8

7

Oct-85

Pentium 120 MHz

0

$200

$400

$600

$800

$1,000

$1,200

Celeron 266 MHz − 3.2 GHz

Pentium IV2.2 GHz

Pentium III 1 GHz

Pentium II233MHz

i486DX2

80386DX

Source: Adapted from Michael E. Raynor, The Innovator’s Manifesto 2011,

Now cast your mind back to the late 1990s. Venturecapital partnerships prowl university campuses,showering millions in seed financing on anyone whocould spell “dot com.” (At least it felt that way). Noindustry seemed immune from the corrosive yetgenerative, terrifying yet exhilarating impact of theInternet, including management consulting. The so-called Fast Five (in a dig at the consulting arms of thethen Big Five accounting firms) of RazorFish, iXL, Scient,Viant, and marchFirst were scooping up the cream ofthe business school crop and securing high-profileengagements with not just other start-ups but even the incumbent firms’ major clients. With dot-com erafinancing to sustain them, the Fast Five were eager to take equity rather than cash in payment, and,unencumbered by established process or allegedlyoutdated paradigms, they promised a level of creativityand insight mainstream firms couldn’t even aspire to.

After two or three years of this, even the bluest-bloodedconsulting firms began to respond in ways Intel wouldhave recognized. They set up new divisions with newnames, new brands, new locations and seeminglyunprecedented autonomy. They looked for talent inentirely new places, claiming that they didn’t want allthose MBAs after all, and that Ph.D. students in physicsand math were just what they needed. They aped the“payment in equity” with some clients and developednew compensation models, sometimes based on ghostequity in the division itself in an effort to create the buzzof a true e-consultancy and the high-powered rewardstructures that implied.

None of it lasted long or amounted to much. Scient andiXL became part of Razorfish, which is today part ofPublicis, a multinational advertising and public relationscompany. Viant was acquired by divine inc., which wentbankrupt in 2003, and marchFirst went public in March2000 and was defunct by May 2001. Most of themainstream consulting firms, if they talk about thisperiod at all, do so with some chagrin. Their new divisions were closed, the ping pong tables disposed of,the new business models and compensation systemsabandoned.

The major management consultancies of the dayoverreacted because they mistook mere differentiationfor a true innovation. Thanks to the economic andsociological phenomenon of the dot-com bubble, newmarket segments emerged that wanted, for a time, adifferent set of price/performance trade-offs. But the e-consultancies that sought to capitalize on thosepreferences had not created a new frontier. They wereat best seeking to exploit trade-offs and were a longway from breaking them.

The end of the beginningThese case studies reveal the importance ofunderstanding at a fundamental level what is and isn’tinnovation. Treat an attack based on differentiation as ifit were breaking important trade-offs and you will likelyoverreact, but mistake a true innovator for the merelydifferent and the pain can last for decades.

As these examples illustrate, at least some of what isprescribed for successful innovation can be veryeffective. Providing high degrees of organizational

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Providing high degrees of organizationalautonomy and developing new businessmodels seems to increase dramaticallythe likelihood that one can eventuallybreak the trade-offs that define anindustry’s existing frontier. Takingadvantage of this insight, however,demands that we apply this advice onlywhere appropriate – that is, whereinnovation is in fact called for.



autonomy and developing new business models seemsto increase dramatically the likelihood that one caneventually break the trade-offs that define an industry’sexisting frontier. Taking advantage of this insight,however, demands that we apply this advice only where appropriate – that is, where innovation is in fact called for.

Identifying these circumstances means having apractical, accurate definition of innovation, and“breaking constraints” would appear to meet thesecriteria. In each of the four cases examined above, itwould have been possible to map the cost/performanceprofiles of the market opportunities in play anddetermine with sufficient precision whether innovationor differentiation were likely to be the more effectiveresponse (figure 5).

For innovation researchers, we hope our definition willhelp bring some consistency to the field so that it canemerge from its current pre-paradigmatic welter. Byconsistently defining the underlying phenomenon,perhaps it will be possible to move beyond argumentsover the factors and subfactors of innovation andengage the real question: how to innovate effectively.

For practicing managers, who are deliberate or de facto consumers of management theory, we hope ourdefinition will allow them to screen the advice theyreceive and identify the nuggets that speak to theproblems they actually face. Is it any wonder that somany see “predictable innovation” as an oxymoronwhen so much of the advice on offer is actually targetedat an entirely different outcome?

Whatever the merits of our definition, we remainconvinced that one is needed. Only when we attempt tosynthesize our elephant from the parts of an elephantwill innovation be a chimera no more.

by Michael E. Raynor, director with Deloitte ServicesLP and its Innovation theme leader and Heather A. Gray, manager with Deloitte Services LP

By consistently defining the underlyingphenomenon, perhaps it will bepossible to move beyond argumentsover the factors and subfactors ofinnovation and engage the realquestion: how to innovate effectively

Figure 5. Matching organizational responses to competitive opportunities and threats

Basis of marketopportunity

Mechanisms of organizational response

Innovation (Autonomy and

new activity sets)

Differentiation (Marginal cost analysis)

Differentiation(Exploitingtrade-offs)

Innovation (Breaking trade-offs)

Incumbent consultancies respond to e-consulting with highly autonomous

divisions

Megabrewers respondto microbreweries

with craft beer brands

Intel responds to AMD with the

highly autonomous Celeron unit

Incumbent airlinesrespond to low cost

carriers with LCCdivisions

Failed

Failed

Succeeded

Succeeded

Source: Adapted from Michael E. Raynor, The Innovator’s Manifesto, 2011


Endnotes1 Joseph A. Schumpeter, Theory of Economic Development

(Cambridge, MA: Harvard University Press, 1934).2 Jacobellis v. Ohio (1964).3 Anthony Read, “Determinants of successful organisational

innovation: A review of current research,” Journal ofManagement Practice 3, no. 1 (2000): pp. 95–119; AnahitaBaregheh, Jennifer Rowley, and Sally Sambrook, “Towards amultidisciplinary definition of innovation,” Management Decision47, no. 8 (2009): pp. 1323–1339.

4 Victor A. Thompson, “Bureaucracy and innovation,”Administrative Science Quarterly (1965): pp. 1–20.

5 Michael A. West and Neil R. Anderson, "Innovation in topmanagement teams," Journal of Applied Psychology 81, no. 6(1996): p. 680; most recently quoted in Alfred Wong, DeanTjosvold, and Chunhong Liu, "Innovation by teams in Shanghai,China: Cooperative goals for group confidence and persistence,"British Journal of Management 20, no. 2 (2009): pp. 238–251.

6 Marina Du Plessis, "The role of knowledge management ininnovation," Journal of Knowledge Management 11, no. 4(2007): pp. 20–29.

7 Ian Barclay, "The new product development process: Pastevidence and future practical application, Part 1," R&DManagement 22, no. 3 (1992): pp. 255–264; Mary M. Crossanand Marina Apaydin, "A multi-dimensional framework oforganizational innovation: A systematic review of the literature,"Journal of Management Studies 47, no. 6 (2010): pp.1154–1191; Richard Adams, John Bessant, and Robert Phelps,"Innovation management measurement: A review," InternationalJournal of Management Reviews 8, no. 1 (2006): pp. 21–47.

8 Marisa Smith et al., "Factors influencing an organisation's abilityto manage innovation: A structured literature review andconceptual model," International Journal of InnovationManagement 12, no. 04 (2008): pp. 655–676.

9 Garry L. Adams and Bruce T. Lamont, "Knowledge managementsystems and developing sustainable competitive advantage,"Journal of Knowledge Management 7, no. 2 (2003): pp.142–154.

10 Gerben Van der Panne, Cees van Beers, and Alfred Kleinknecht,"Success and failure of innovation: A literature review,"International Journal of Innovation Management 7, no. 03(2003): pp. 309–338.

11 Michael E. Porter, “What is strategy?” Harvard Business Review,November/December 1996.

12 As a definitional aside, I used “business model” in the previoussection as it is a term in general use. I take it to be synonymouswith Porter’s notion of an “activity set,” and make thissubstitution later in what is otherwise a rehearsal of Porter’sargument.

13 Philip, Siddharth, “The World’s Cheapest Car Runs Out of Gas,”Bloomberg Businessweek, April 15-21, 2013, p. 21.

14 Charlie Papazian, Bob Pease, and Dan Kopman, “Craft or crafty?Consumers deserve to know the truth,” St. Louis Post-Dispatch,December 13, 2012,<www.stltoday.com/news/opinion/columns/craft-or-crafty-consumers-deserve-to-know-the-truth/article_e34ce949-d34a-5b0f-ba92-9e6db5a3ed99.html>.

15 Devin Leonard, “Jack McAuliffe, father of American craft brew,brings back New Albion Ale,” Businessweek, March 29, 2013,<http://www.businessweek.com/articles/2013-03-29/jack-mcauliffe-father-of-american-craft-brew-brings-back-new-albion-ale>; Brewers Association, “Craft brewing statistics: Facts,”<http://www.brewersassociation.org/pages/business-tools/craft-brewing-statistics/facts>.

16 Papazian, Pease, and Kopman, “Craft or crafty?”; BrewersAssociation, “Market Development Committee chain buyers sellsheet & presentation notes and beer & food matching chart,”<http://www.brewersassociation.org/pages/business-tools/chain-buyers-presentation>.

17 Intel Corporation in 1999. Stanford Business School case SM-70.

Deloitte Review


Human capitaltrendsEMEA and Global: moresimilar than you think


In a recent survey1 conducted with business leaders andhuman resources (HR) executives world-wide, almostidentical top five trends were identified and similar topthree HR and Talent concerns were noted. While eachregion has its own specifics and challenges, the belowhighlights more commonality than difference in what isdriving the HR and Talent agenda today.

Human capital trends

Top leading trendsThe challenge for any organization, on the most basiclevel, is having the right leadership and people with theright skill sets in the company when you need them. Inpractical terms, this means HR needs to be embedded in the business and anticipate what programs they needto execute for their business strategy and this will vary

based on the business. Regardless of the business modelhowever, there is a need to shift away from the basics of HR operations and employee relations in order tobreak the cycle of ineffective programs that lack focuson direct organizational benefits or that solve businessproblems.


The trends that emerged as most highly relevant today(currently shaping – or should be shaping – talent andHR strategies and programs) include:• The war to develop talent: the talent managementtrend is switching from recruitment to development.

• Transforming HR to meet new business priorities: HRtransformation efforts are continuing to shift theirfocus to business priorities, concentrating on areassuch as talent, emerging markets and the HRorganization.

• How boards are changing the HR game: to seize newopportunities for sustainable growth and manage heightened risks, boards of directors at high-performing organizations are pulling Chief Human

Resources Officers much deeper into businessstrategy – and far earlier in the process.

• Organization acceleration: faced with tougher, morenumerous challenges, today’s organizations aredemanding more from their change initiatives bypursuing strategies that are customized, precise, and sustainable.

• Leadership.Next: yesterday’s leadership theories are not keeping pace with the velocity of today’sdisruptive marketplace. Organizations are seeking a new model for the age of agility.

Besides a difference in order of rank, the focus of EMEAand Global are almost identical.

War to develop talent

TransformingHR to meet newbusiness priorities

How boards are changing the HR game

Organizationacceleration

Leadership.Next

EMEA top 5 trends

25% 24%

7%6%

Global top 5 trends

This trend is highly relevant today

This trend is relevant in the next 1-3 years

This trend is relevant 3 years and beyond

This trend is not applicable

7%8%

24%

61% 60% 59%

9%10%

28%

5%

55%

12%

26%

6%

54%

13%

War to develop talent

TransformingHR to meet newbusiness priorities

How boards are changing the HR game

Organizationacceleration

Leadership.Next

25%

11%

23%

11% 11%8% 8%

7%

61% 61% 58%

28%28%

5%5%5% 6%

57%

27%

54%


One trend highlighted as of high relevance today by the smaller number of ME participants is “Branding theworkplace” which focuses on enhancing the talent valueproposition and innovating the talent brand. Talentbrand and corporate brand are two sides of the samecoin. Social media has erased whatever lines used toexist between them.

Top three HR and Talent concernsWhen executives were asked about the most pressingtalent and HR concerns facing them today, for Global aswell as EMEA, the top three turned out to be identical.EMEA executives are almost equally concerned about“developing leaders and succession planning” (49percent) and “sustaining employee engagement” (46percent). Global executives are even more concernedabout leadership development than their EMEAcounterparts; more than half of the executives (55percent) reported that “developing leaders andsuccession planning” is their top concern.

One of the pressing concerns is sustaining employeeengagement/morale which could indicate the highpriority of the first leading trend of EMEA, “the war todevelop talent.” In addition, connecting HR and talentwih business critical priorities is a concern which islinked to a leading trend called “transforming HR tomeet new business priorities.”

It is worth noting that the executives who participatedin the survey appear to recognize 2013 as a pivot pointin terms of economic expectations, with recession fears fading and optimism growing, while their Gulfcounterparts were already in the optimism mode.

ConclusionGiven that the key global trends and issues are identicalacross the regions, looking at how others are tacklingtheir HR and Talent issues should enlighten executivesinto solving their own in a more effective way. Evensmall missteps can have big unintended consequencesso paying attention to these trends can spell thedifference between success and failure.

by Ghassan Turqieh, partner, Consulting, DeloitteMiddle East

It is worth noting that the executiveswho participated in the survey appearto recognize 2013 as a pivot point interms of economic expectations, withrecession fears fading and optimismgrowing, while their Gulf counterpartswere already in the optimism mode

Human capital trends

#1

#2

#3 Developing leaders and succession planning

Sustaining employee engagement/morale

Connecting HR and talent with business critical priorities

EMEA 49%Global 55%

EMEA 46%Global 39%

EMEA 35%

Global 33%

Top three HR and Talent concerns (% of respondents)

Endnotes1 Deloitte, (2013) Resetting horizons: human capital trends 2013.Deloitte Touche Tohmatsu Limited.


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Blurring the lines 2013 TMT GlobalSecurity Study

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Exploring StrategicRisk300 executives aroundthe world say theirview of strategic riskis changing

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Deloitte in the Middle East

ME Regional officeGefinor Center, Block D Clemenceau StreetP.O. Box 113-5144Beirut, LebanonPhone +961 (0) 1 748 444Fax +961 (0) 1 748 999

ConsultingRegional office Deloitte & Touche (M.E.)Building 3, Emaar SquareDowntown DubaiP.O. Box 4254 Dubai, United Arab EmiratesPhone +971 (0) 4 376 8888Fax +971 (0) 4 376 8899

Enterprise Risk ServicesRegional officeDeloitte & Touche (M.E.)Building 3, Emaar SquareDowntown DubaiP.O. Box 4254 Dubai, United Arab EmiratesPhone +971 (0) 4 376 8888Fax +971 (0) 4 376 8899

Financial Advisory ServicesRegional officeDIFC, Currency HouseBuilding 1 P.O. Box 112865Dubai, United Arab EmiratesPhone +971 (0) 4 506 4700Fax +971 (0) 4 327 3637

Tax ServicesRegional office Currency HouseBuilding 1P.O. Box 282056Dubai, United Arab EmiratesPhone +971 (0) 4 506 4700Fax +971 (0) 4 327 3637

The Deloitte ME Islamic FinanceKnowledge Center (IFKC)Al Zamil Tower. Government Avenue,Manama, Kingdom of BahrainPhone +973 (0) 1 721 4490 Ext 2018Fax +973 (0) 1 721 4550

BahrainManamaAl Zamil TowerGovernment AvenueP.O. Box 421Manama, Kingdom of BahrainPhone +973 (0) 1 721 4490Fax +973 (0) 1 721 4550

EgyptCairo95 C, Merghany Street, Heliopolis 11341, Cairo, EgyptPhone +20 (0) 2 2290 3278Fax +20 (0) 2 2290 3276

Alexandria Madinet El SayadlaBuilding No 10,Smouha, AlexandriaPhone +20 (0) 3 426 4975Fax +20 (0) 3 426 4975

IraqErbilVital Village, No. 42Erbil, IraqPhone +964 (0) 66 257 6200

JordanAmmanJabal Amman, 190 Zahran StreetP.O. Box 248Amman 11118, JordanPhone +962 (0) 6 550 2200Fax +962 (0) 6 550 2210

KuwaitDeloitte & Touche Al-Fahad Al-Wazzan & Co.Kuwait CityDar Al-Awadi ComplexAhmed Al-Jaber Street, Sharq P.O. Box 20174 Safat 13062, Kuwait Phone +965 2240 8844Fax +965 2240 8855

LibyaTripoliTripoli TowerP.O. Box 93645Tripoli, LibyaPhone +218 (0) 92 370 1049

LebanonBeirutArabia House,131 Phoenicia StreetP.O. Box 11-961 Riad El-Solh, Beirut 1107 2060 LebanonPhone +961 (0) 1 364 700Fax +961 (0) 1 367 087

OmanMuscatMBD AreaMuscat International CenterP.O. Box 258, RuwiPostal Code 112 Sultanate of OmanPhone +968 (0) 2481 7775Fax +968 (0) 2481 5581

Palestinian Territories RamallahAl Mashreq, Insurance BuildingP.O. Box 447 Ramallah, Palestinian Controlled TerritoriesPhone +970 (0) 2 295 4714Fax +970 (0) 2 298 4703

QatarDohaAl Ahli Bank Building Sheikh Suhaim Bin Hamad Street P.O. Box 431 Doha, QatarPhone +974 (0) 4434 1112Fax +974 (0) 4442 2131

Saudi ArabiaDeloitte & Touche Bakr Abulkhair & Co.RiyadhPrince Turki Bin Abdullah Al-Saud StreetSulaimania AreaP.O. Box 213 Riyadh 11411, Saudi ArabiaPhone +966 1 282 8400Fax +966 1 282 8428

Al KhobarABT Building, Al Khobar P.O. Box 182Dammam 31411, Saudi ArabiaPhone +966 (0) 3 887 3937 Fax +966 (0) 3 887 3931

JeddahSaudi Business CenterMadinah RoadP.O. Box 442Jeddah 21411, Saudi ArabiaPhone +966 (0)1 2 657 2725Fax +966 (0)1 2 657 2722

South SudanJubaDeloitte Complex, Plot No.160, Block 3K-South2nd Class Thong Ping Residential AreaP.O Box 511, Juba, Republic of South SudanPhone +211 92 000 1024

SyriaDamascus9 Fardos StreetP.O. Box 12487Damascus, SyriaPhone +963 (0) 11 221 5990Fax +963 (0) 11 222 1878

Rawda38 Rawda StreetP.O. Box 12487Damascus, SyriaPhone +963 (0) 11 331 1212Fax +963 (0) 11 332 2304

United Arab EmiratesAbu DhabiAl Sila TowerSowwah SquareP.O. Box 990 Abu Dhabi, United Arab EmiratesPhone +971 (0) 2 408 2424Fax +971 (0) 2 408 2525

DubaiDeloitte & Touche (M.E.)Building 3, Emaar SquareDowntown DubaiP.O. Box 4254 Dubai, United Arab EmiratesPhone +971(0) 4 376 8888Fax +971(0) 4 376 8899

FujairahAl-Fujairah Insurance Co. BuildingP.O. Box 462 Fujairah, United Arab EmiratesPhone +971 (0) 9 222 2320Fax +971 (0) 9 222 5202

Ras Al-KhaimahRas Al-Khaimah, Insurance Building, Al-Nakheel, Ras Al-Khaimah, UAEP.O. Box 435 Ras Al-Khaimah, United Arab EmiratesPhone +971 (0) 7 227 8892Fax +971 (0) 6 574 1053

SharjahCorniche Plaza 2, Al Buhairah CornicheP.O. Box 5470Sharjah, United Arab EmiratesPhone +971 (0) 6 574 1052Fax +971 (0) 6 574 1053

YemenSana’aSana’a Trade Center Eastern Tower, Algeria StreetP.O. Box 15655Sana’a, YemenPhone +967 (0) 1 448 374Fax +967 (0) 1 448 378

For inquiries on Mauritania, pleasecontact the ME Regional office.

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The views expressed are the personal views of the author and do not represent the views of Deloitte.This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, itsmember firms, or its and their affiliates are, by means of this publication, rendering accounting, business,financial, investment, legal, tax, or other professional advice or services. This publication is not asubstitute for such professional advice or services, nor should it be used as a basis for any decision oraction that may affect your finances or your business. Before making any decision or taking any actionthat may affect your finances or your business, you should consult a qualified professional adviser.None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited byguarantee, and its network of member firms, each of which is a legally separate and independent entity.Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte ToucheTohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clientsspanning multiple industries. With a globally connected network of member firms in more than 150countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insightsthey need to address their most complex business challenges. Deloitte has in the region of 200,000professionals, all committed to becoming the standard of excellence.

Deloitte's professionals are unified by a collaborative culture that fosters integrity, outstanding value tomarkets and clients, commitment to each other, and strength from cultural diversity. They enjoy anenvironment of continuous learning, challenging experiences, and enriching career opportunities.Deloitte's professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities.

About Deloitte & Touche (M.E.)Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the firstArab professional services firm established in the Middle East region with uninterrupted presence since1926.

Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, andfinancial advisory services through 26 offices in 15 countries with around 3,000 partners, directors andstaff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax ReviewWorld Tax Rankings). It has received numerous awards in the last few years which include Best Employerin the Middle East, best consulting firm, and the Middle East Training & Development Excellence Awardby the Institute of Chartered Accountants in England and Wales (ICAEW).

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