Exceptional · Hal Yoh of Day & Zimmermann ... we look at how high-growth businesses have...

Exceptional Am

ericas July–Dec 2010

Entrepreneurship + Innovation = Grow

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ExceptionalEntrepreneurship + Innovation = Growth

“There are half a billion professionals in the world. We’d love to connect them all”

Family fortunes Hal Yoh of Day & Zimmermann on running a multibillion-dollar family-controlled business

What language barrier? David Yang of translation software developer ABBYY

Need for speed Under the hood with racecar designer Gian Paolo Dallara

Jeff Weiner on why nothing is too ambitious for professional networking site LinkedIn

Americas

July–December 2010

Exceptional July–December 2010

WelcomeEven in the wake of a global recession, entrepreneurial-minded companies are growing with incredible speed and quickly entering the ranks of the world’s largest corporations. The leading advisor to high-growth companies, Ernst & Young, tracks these innovative enterprises, helping them seize opportunities, gain share, increase employment and contribute to their communities.

With this new semiannual magazine, Exceptional, we aim to offer advice and inspiration to high-growth companies — wherever they may operate — by telling the stories of some of the world’s best business leaders. This new Americas edition is being distributed to more than 20,000 executives throughout the US, Canada, Central America and South America.

In this issue, we look at how high-growth businesses have implemented strategies to expand internationally. From franchises to M&A, joint ventures to organic growth, there are a variety of ways to go global — a must in our interconnected economy.

One company with its eyes on faraway markets is professional networking site LinkedIn. Not content with adding a member per second, it aims to expand its physical presence abroad and target even more of the world’s half a billion professionals. We speak to CEO Jeff Weiner about what it’s going to take to scale LinkedIn and deal with the pace of growth he foresees.

Services contractor Day & Zimmermann, a family enterprise, ranks among Fortune’s top 500 privately held US businesses. CEO Hal Yoh shares his strategy for achieving sustained growth, including positioning the company for overseas success through selected joint ventures and commercial partnerships.

Other companies we highlight include Czech hospital bed manufacturer Linet, Mumbai-based Allcargo Global Logistics, Danish hearing technology developer Widex and Russian translation software developer ABBYY. We also put the spotlight on Ernst & Young’s recent Entrepreneur Of The Year Forum in Zurich.

Lastly, I encourage you to attend the Ernst & Young Strategic Growth Forum 2010. This by-invitation-only CEO event will be held on November 10–14 in Palm Springs, California. There, you can acquire business advice on growth strategies and meet market-leading corporate CEOs from around the world. The Forum concludes with the 24th annual US Ernst & Young Entrepreneur Of The Year awards, the largest gathering of entrepreneurs in America. Read more on page 34.

I hope you enjoy reading Exceptional.

Steve Howe Americas Managing Partner, Ernst & Young

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Editor Molly BennettEditorial assistant Frances HedgesSenior designers Rachel Creane and Lynn JonesDesign director Oisin O’Malley Picture editor Johanna Ward Publisher Mick HurrellProduction Rob FielderProduction director John Faulkner

For Ernst & YoungMarketing and Communications Leader, Americas Strategic Growth Markets Lisa Schiffman

Exceptional is published on behalf of Ernst & Young LLP by Wardour, Walmar House, 296 Regent Street, London W1B 3AW, United Kingdom. Tel +44 (0)20 7016 2555 www.wardour.co.uk

Exceptional is printed in the US by Greystone Graphics.

For further information on Exceptional, please contact Lisa Schiffman at [email protected] or +1 215 448-5596

Ernst & Young

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About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

For more information, please visit ey.com

About Ernst & Young’s Strategic Growth Markets NetworkErnst & Young guides the best high-growth companies to market leadership worldwide. Our multidisciplinary teams of dedicated professionals provide perspective, advice and insight to help our clients accelerate their growth. We are the undisputed leader in guiding Russell 2000 companies, IPO-bound companies and Forbes’ largest private enterprises.

© Ernst & Young LLP 2010. All Rights Reserved. Proprietary and confidential. Do not distribute without written permission.

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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

In line with Ernst & Young’s commitment to minimize its impact on the environment, this magazine is printed on paper made from wood/pulp from sustainable producers.

What’s next for your business?Entrepreneurs and the leaders of high-growth companies understand that innovation should never end. They are constantly rediscovering, reshaping and reconnecting new ideas to be successful.

Find out what the best minds in business are thinking at the Ernst & Young Strategic Growth Forum® 2010, where top entrepreneurs, CEOs and other leaders share ideas about vital business issues. Attend the Forum to plot the next step on your company’s growth trajectory.

What’s next?ey.com/us/strategicgrowthforum

Ernst & Young Strategic Growth Forum 2010November 10–14, Palm Springs, CaliforniaFollow us on Twitter: twitter.com/eysgm

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All together nowProfessional networking site LinkedIn adds a member every second. CEO Jeff Weiner explains why running a new media company is all about scale

Looking back, moving aheadHal Yoh is multimillion-dollar services company Day & Zimmermann’s seventh CEO in 100 years. He plots out his strategy for expansion

Sound decisionsDanish hearing aid designer Widex is a family business that works, says Executive Vice President Anders Westermann

On the moneyHow CFO Mike Wilson played a key part in the recent MBO of UK cash management solutions company Talaris

Opportunity knocksWith Saudi Arabia lagging behind in terms of technological and entrepreneurial know-how, a new university aims to address this

A sense of wellbeingCzech hospital bed manufacturer Linet has the user experience at its heart. Founder Zbyněk Frolík explains how they do it

Fantastic voyageAlain Capestan, CEO of Voyageurs du Monde, on the French travel company’s global expansion plans and how to organize the impossible

King of cargoShashi Kiran Shetty, MD of Mumbai-based Allcargo Global Logistics, on why the economic downturn has been good for business

International trends in tax enforcementA country-by-country look at recent changes to tax reporting requirements around the world

Model behaviorUK retailer Mothercare has undergone a remarkable turnaround. CEO Ben Gordon explains how he did it

Full speed aheadAs Gian Paolo Dallara, founder of Italian racecar design company Dallara tells us, a business can never be truly successful without passion

Meeting of mindsAt Ernst & Young’s Entrepreneur Of The Year Forum, top business leaders held forth on innovation, carbon footprints and globalization

Talking across bordersFounder David Yang on why he doesn’t mind that ABBYY’s first piece of software became one of Russia’s most pirated programs

“A business is made up of hundreds of different skills, all of which have to fit together”Zbyněk Frolík, founder of Czech hospital bed manufacturer Linet

Hal Yoh, CEO of Day & Zimmermann

Exceptional July–December 2010 3

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Welcome An introduction to the talented entrepreneurs profiled in this issue of Exceptional

AgendaA look at Ernst & Young’s latest publications, plus a preview of forthcoming activities

Doing business in...Advice for companies looking to set up in the Commonwealth of Independent States

Beyond profitShona McDonald of South African social enterprise Shonaquip on the unique challenges she’s faced

Regulars

LinkedIn

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Professional networking site LinkedIn adds a million members every 10 days. CEO Jeff Weiner tells us why his ambitions don’t stop there

All together now

“We’re enabling talent to connect with opportunity on a massive scale”

LinkedIn


Not all of the planet’s working professionals are connected through LinkedIn, but CEO Jeff Weiner sees no reason why they can’t be members of his

fast-growing networking site. “By some estimates there are as many as half a billion professionals in the world,” Weiner says. “Ultimately, we’d love to be in a position to connect them all.”

After joining the company in December 2008, and officially taking over the top post at LinkedIn in June 2009 from co-founder Reid Hoffman, Weiner has introduced several initiatives to keep the site growing and evolving, including hiring outside directors and expanding its international presence.

Weiner, a New York native educated at the prestigious Wharton School at the University of Pennsylvania, made his name during a seven-year tenure at the rapidly growing Yahoo! Inc. There, he ran Yahoo!’s Network division, including its home page, mail, search and media properties.

“My experience at Yahoo! taught me the value of scale,” he says, having overseen operations that started at US$400m in revenue and ultimately expanded to roughly US$3b.

His experience with a rapidly growing company is key at LinkedIn, which adds a member every second. Weiner says it took 477 days to get the first million members. Now, the site adds a million users every 9 to 10 days, with a total membership of more than 70 million in 200 countries and territories.

Accommodating growthThe company eventually plans to double the size of its 500-member staff to deal with the pace of growth. “We’re focused on how to scale the company and build a company that is going to last,” Weiner says. “When you are building a global digital company, scale becomes very important. Especially network vitality — investing in infrastructure, software and hardware to keep up with the growth of a network.”

While LinkedIn relied primarily on venture capital when it started up in

2003 — the original team raised more than US$100m in funding from Goldman Sachs, Bain Capital, Greylock Partners and other firms — its last round of financing was in October 2008. That year, it became profitable, and Weiner aims to maintain this profitability through three revenue streams: ad sales, premium subscriptions and enterprise licensing. They all accounted for roughly a third of revenue (as a private company, LinkedIn does not disclose specific revenue) until the economy began to pick up in the latter half of 2009 and enterprise licensing became the largest and fastest-growing business.

Old hand, new mediaWeiner has spent 15 years in the internet sector. Between leaving Yahoo! in June 2008 and joining LinkedIn in December 2008 as President, he advised venture capital firms Accel Partners and Greylock Partners on consumer technology companies. He also places an emphasis

on socially responsible uses for technology and sits on the board of education charity DonorsChoose and Malaria No More.

At LinkedIn, Weiner is excited about increasing the number of products available to its users. Already, the site has added features such as mobile applications that are available for most smart phones, including the iPhone and BlackBerry, and a Twitter partnership that lets users sync their Twitter and LinkedIn status updates. The site also has an API, or application programming interface, which is designed to help third-party developers use some of LinkedIn’s information — much like third-party developers create apps for the iPhone.

Weiner sees many possibilities along this line. “What is interesting about being a digital-oriented asset is the ability to create a platform leveraged in so many different ways,” he says.

A significant development for the company has been to extend its offering

Jeff Weiner came to LinkedIn from Yahoo! in 2008

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“When you are building a new media company, scale becomes very important”

LinkedIn


LinkedIn

› › New companies that emerge during the digital era face unique challenges. How they face them can serve as a model for more traditional companies as they adapt to an ever more digital era.

Social media is an unstoppable global phenomenon that continues to shift consumer attention and behavior away from traditional media and business models. It has fundamentally altered how people behave online and created new expectations for how companies interact with one another and their consumers.

Both new media and other companies must learn how to deal with the rapidly changing nature of the technology landscape by constantly evolving their product or service offerings to reflect the latest in technology innovations that improve the customer experience.

Successful digital companies have placed high importance on the customer experience, emerging media channels and platforms. They leverage data analytics to better understand consumer behavior and reveal consumer insights that will enable them to provide a superior consumer experience, whether it is a product or a service they are selling.

Two ways in which new media companies have introduced innovation recently are that they are beginning to provide location-based services and are taking advantage of social networks’ portability. For example, Twitter recently added location-based geotagging as an option for tweets, and Foursquare, a popular mobile social network, teamed with Starbucks to offer discounts and deals to customers that “check in” to a Starbucks location via the network.

Meanwhile, some of the more traditional media companies face serious challenges to their existing business models. For the first time, they are in direct contact with consumers, rather than relying on distributors and middlemen to deliver their content or products. As such, they must rapidly adopt and invest in new customer strategies, new content distribution and models for monetization — in other words, how to charge for content or services on the web and mobile phones.

Companies can no longer rely on one-way traditional broadcast media. They are now using emerging digital media platforms such as Facebook, Twitter or location-based services such as Foursquare to get closer to consumers.

They are leveraging a variety of social technology platforms to listen, monitor and analyze consumer conversation about products and services. This method of mining social data for consumer insight, called social media monitoring or strategic listening, has been proven successful at identifying key consumer behavior changes very early in their lifecycle and has emerged as a key input for developing social media strategies.

All companies can follow the lead of new media companies in answering a fundamental question: what technology platforms and devices should we be using to reach our consumers in this new age?

With the answer ever changing, all companies must be vigilant about staying up to date with the latest trends and successes in the digital arena to figure out how to apply these new models to their customer relationships.

Challenges for new media companies

Kenneth J. Burbary, Advisory Services, Ernst & Young LLP

Viewpoint

More informationFor details of Ernst & Young’s services for digital media companies, email Kenneth Burbary (Americas) at [email protected], Farokh Balsara (EMEIA) at [email protected] or speak to your local Ernst & Young contact.

“Our membership wants to keep their professional and personal lives separate”

from individuals to corporate bodies. There are now about a million company profiles on the site, which can be updated by employees, and LinkedIn recently started allowing members to “follow” a company and get updates about it.

Through LinkedIn Corporate Solutions, staffing departments can also post jobs and search for potential hires by skill and experience, with input from recruiters and other LinkedIn members. What LinkedIn calls enterprise licensing has been growing faster than other parts of the business, a trend that is continuing this year.

Weiner hopes to expand it further. “The work we’re doing within the world of hiring solutions is unique,” he says. “We’re enabling talent to connect with opportunity on a massive scale.”

Being an external hire himself, Weiner knows the value of bringing in outside talent to help the company continue to grow. LinkedIn’s first two outside directors on its six-person board were his appointments: former Andersen Consulting executive A. George Battle and Leslie Kilgore, the CEO of DVD subscription service Netflix. Weiner says that Kilgore’s experience with subscription services will help LinkedIn as it increases its own subscription businesses.

As well as developing its product offering, LinkedIn’s growth strategy has a strong international focus — a logical strategy, given that about half of the company’s current membership is overseas. Some areas of the world are growing more rapidly than others, namely

Brazil, China and India, and European growth is also accelerating.

To Weiner, international growth means not just translating the site — it is now available in Portuguese, English, French, Spanish, German and Italian — but establishing a physical presence in other countries. “We think there are very interesting opportunities in having a local presence, in terms of continuing to grow, engaging our users and monetizing the site,” he says.

Going globalSince Weiner joined the company, it has opened its international headquarters in Dublin, Ireland. It also has offices in London and Toronto, and recently opened branches in Amsterdam, Mumbai and Sydney.

Having offices in other countries allows the site to better understand the needs of each country or region’s users, Weiner says, and local ad sales and marketing efforts can have a home base.

As the site grows — Weiner says that it is important to distinguish LinkedIn from social networking sites such as Facebook and Twitter.

“We provide a unique value proposition,” he says. “’Social network is a bit of a misnomer since we focus exclusively on the professional. Our membership wants to keep their professional and personal lives separate.”

Over the next five years, Weiner says the goal of LinkedIn is to continue to grow its membership, facilitate the sharing of professional knowledge, invest in mobile technology and tools to allow the site to work with third-party web developers and, ultimately, make sure that job seekers can find the best jobs available and that recruiters can find the best candidates.

As LinkedIn expands, there has been speculation about the possibility of it going public. But Weiner says the aim right now is on growth rather than on any public offering. “We’re completely focused on executing the plan and continuing to build our business,” he says. “The more successful we are with that, the more options we’ll have available to us.” E

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LinkedIn Corporate Solutions is a

fast-growing part of the business

Essential reading The latest thought leadership publications from Ernst & Young

Agenda

Contacts Ernst & Young has teams throughout the world dedicated to working alongside high-growth businesses. Visit ey.com to find your local contact, or get in touch with any of the team members below.

• AmericasMaria Pinelli+1 212 773 [email protected]

• Europe Julie Teigland +49 621 4208 1151 [email protected]

• Russia/CIS Alexander Ivlev+7 495 705 [email protected]

• Middle East Ahmed Al-Aiban+973 17 [email protected]

• IndiaSanjay Chakrabarti+91 22 4035 [email protected]

• AfricaZanele Xaba+27 82 901 [email protected]

Ernst & Young Entrepreneur Of The YearThe Ernst & Young Entrepreneur Of The Year (EOY) awards program recognizes the exceptional men and women whose products and services keep the global economy progressing. Regional winners from 26 programs across the US advance to the national EOY awards gala, which is part of the Ernst & Young Strategic Growth Forum held each November in Palm Springs, California. To learn more, visit ey.com/us/eoy

Ernst & Young Strategic Growth ForumThis by-invitation-only event convenes more than 1,500 C-level business leaders and provides an unparalleled opportunity to hear leading business advice on sustaining and turbo-charging company growth, plus keynotes from some of the world’s most recognizable CEOs. Held each November in Palm Springs, California, the Forum concludes with the annual EOY national awards hosted by Jay Leno. For information on the 2010 Forum, visit ey.com/us/strategicgrowthforum

Russell 2000 Index companiesWith R2000 companies representing the majority of Fortune 1000 new entrants, Ernst & Young studies R2000 companies, the impact of market conditions on company performance, what investors tend to value and what the annual index reconstitution means for this market. Our network of professionals works with R2000 companies to address their specific business needs and opportunities. For more information about our service for R2000 companies, visit ey.com/us/strategicgrowthmarkets

Initial public offerings (IPO) Ernst & Young is the undisputed US leader in the number of companies we take public. Not only have we advised more companies going through the SEC filing process than any other firm, we’ve also helped these and other high-growth businesses establish tax structures, compensation plans, business processes and controls, and corporate governance structures. For more information about going public, visit ey.com/US/en/Services/Strategic-Growth-Markets/SGM_Article_IPO_Overview_Page_Main

Cleantech As climate change moves up the corporate agenda, cleantech investment is reaching record levels. Ernst & Young advises emerging cleantech companies and helps multinational corporations understand the sector and the opportunities it affords. For more information on Ernst & Young’s cleantech capabilities, visit ey.com/US/en/Services/Strategic-Growth-Markets/CT_Article_Overview_Page_Main

Venture capital (VC)Ernst & Young, the No.1 service provider to portfolio companies of the US’s top 40 VC firms, maintains relationships with leading VC firms through our Venture Capital Advisory Group.Its professionals harness our global resources to serve the world’s premier VC funds and their portfolio companies. To learn more, visit ey.com/US/en/Services/Strategic-Growth-Markets/SGM_Article_Venture_Capital_Overview_Page_Main

Private equity (PE)Ernst & Young has worked with leading PE firms and their portfolio companies since the industry’s inception. Our global, multidisciplinary teams offer sector insight and make relevant introductions to help our PE clients achieve their strategic, long-term objectives. Visit ey.com/US/en/Industries/Private-Equity/Private-Equity-Overview Ernst & Young Entrepreneurial Winning Women programNow in its third year, this program identifies and connects a select group of women entrepreneurs with the advisors, resources and insights they need to become market leaders. Applications for this competition are open through June 2010. For more information about applying or nominating a deserving women entrepreneur, visit: ey.com/us/entrepreneurialwinningwomen

WebcastsStrategic Growth Leadership SeriesThese Ernst & Young webcasts are designed to provide topical insight and practical guidance to CEOs and other C-suite executives of high-growth companies. Deborah Norville, host of TV’s Inside

Edition, moderates. To see what topics are coming up or to view our archived webcasts, visit http://webcast.ey.com/thoughtcenter

Strategic transactions and IPO readinessErnst & Young’s “Capital matters: strategic transactions and IPO readiness” webcast features insights from leading industry executives who have completed two successful recent IPOs — Dollar General’s CFO and Executive Vice President and Sensata’s Chairman and CEO — as well as two Ernst & Young professionals. The webcast covers recent, real-world experiences in building competitive advantage by preparing for strategic transactions and IPOs. View the webcast archive at http://webcast.ey.com/thoughtcenter/?pid=2342

How we can help grow your business Ernst & Young events, activities and competencies


Americas SGM Qualifications — Leader to leader Find out why Ernst & Young is the leading advisor to high-growth companies in the US and how we address the growth imperatives and challenges of Russell

2000 companies, large private companies, venture capital investees, private equity portfolio companies, IPO-bound companies, cleantech companies and entrepreneurs.

Entrepreneurship and innovation: the keys to global economic recovery Global economic recovery depends on the proven relationship

of entrepreneurship and innovation to economic growth. Leveraging Ernst & Young’s multi-decade engagement with the world’s best entrepreneurs and high-growth companies, and the extensive community we have built around them, this white paper argues that there’s no time like now to take advantage of entrepreneurial thinking to lead the marketplace back to health. It provides a point of view about the entrepreneurial mindset and why “You’re never too big to be an entrepreneur.”

Ernst & Young’s guide to going public — Lessons from the leadersAn IPO marks a turning point in the life of a company. The rewards can be monumental. The keys are proper preparation,

knowledgeable guidance and effective execution. This comprehensive overview of the going-public process includes perspectives from experienced CEOs and CFOs and top advisors who have taken their companies public.

World of opportunity: entrepreneurial perspectives on globalizationCountry winners from the Ernst & Young Entrepreneur Of The Year program, including 2008 US winner Matthew Szulik,

Chairman of Red Hat Inc., explore topics such as the instinctively global nature of entrepreneurs, opportunities and challenges in globalization, the challenges of leading a global workforce and the role of government in business.

2010 global private equity watch: new horizons emergeErnst & Young’s first annual global private equity report focuses on acquisition, divestiture and PE firms’ fundraising activities. It looks at the challenges of 2009 and

highlights the industry’s flexibility in adapting to a changing economic environment. Specifically, it shows that there have been encouraging signs in early 2010, with more deal activity and PE exits on the horizon.

Capital Confidence BarometerHow organizations manage their capital today will define their competitive position tomorrow. That is the critical message arising from this regular survey conducted by the

Economist Intelligence Unit and Ernst & Young’s Transaction Advisory Services. More than 800 senior executives worldwide were surveyed about their growth plans, confidence in economic recovery, capital availability and allocation, and other aspects of the capital agenda.

NVCA Venture Capital ReviewThe National Venture Capital Association’s (NVCA) Venture Capital Review, sponsored by Ernst & Young, is distributed to the NVCA’s more than 3,000

members. The spring issue features an article on IPO readiness for venture-backed companies by Ernst & Young’s Jackie Kelley, Americas IPO Network Leader, and Bryan Pearce, Americas Venture Capital Advisory Group Leader.

Cleantech matters: the Future of Energy Cleantech Ignition sessionThis report distills the insights that arose from Ernst & Young’s Future of Energy Cleantech Ignition session, held in November in conjunction

with the Ernst & Young Strategic Growth Forum in Palm Springs, California. At the event, a group of more than 50 investors, entrepreneurs, corporate executives and advisors from across the energy industry discussed the integration of cleantech innovation into established energy industries and the financing challenges in bringing cleantech innovation to commercial scale.

Scaling up: why women-owned businesses can recharge the global economyWomen entrepreneurs own or operate up to a third of the world’s

private companies. Get a fresh look at women’s productive potential in this special report.

For copies of any of the above, email Lisa Schiffman at [email protected] or speak to your local Ernst & Young contact.

Day & Zimmermann


Looking back, moving ahead


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Over the past century, Day & Zimmermann has grown to become one of the biggest family firms in the US. Here, CEO Hal Yoh explains his strategy for future growth

If being a company’s seventh CEO in 100 years tells us anything about Hal Yoh, it’s that he is a company man. At the helm of the construction

and maintenance services giant Day & Zimmermann, Hal follows in the footsteps of his father and grandfather before him. Describing him as a dyed-in-the-wool Day & Zimmermann lifer barely does him justice.

However, while family businesses in the past may have formed the backbone of the US economy, finding one that has revenues of US$2.1b and employs 24,000 people is pretty rare these days. But not at D&Z. “The strength of a family business is mainly centered around the alignment of the

Hal Yoh, photographed near Day & Zimmermann’s headquarters in Philadelphia

Day & Zimmermann


More informationTo learn more about Ernst & Young’s services for high-growth private companies, email Maria Pinelli (Americas) at [email protected] or speak to your local Ernst & Young contact

he has been able to steer a course of sustainable growth by investing in businesses with the potential to accelerate their growth over the long haul and allowing them to flourish.

“You see companies having a great quarter and then missing Wall Street’s estimates and their stock tanks,” he says. “What we’re all about is what we call ‘strategic growth,’ which basically means profitable and sustainable growth. To achieve that, we look at organic growth, because I do believe that if you can’t grow organically, then you simply don’t have a healthy company. What we also use is, first, acquisitions — typically where we can create economies of scale, or where we can gain entry to a business that’s close to us — and, second, joint ventures.”

D&Z works with a range of JV partners, from small hi-tech businesses to giant corporations. One is with Areva, while

“I do believe that if you can’t grow organically, then you simply don’t have a healthy company”

shareholders,” says Yoh. “That, and the benefit of not having to deal with the issue of reporting quarterly earnings — we’re in it for the long haul. So really, as long as you have access to capital in order to grow your business, then you’re in good shape.”

And D&Z is indeed in good shape. Since taking over from his father in 1999, Yoh has overseen its ascent to the middle ranks of the Forbes 500 list of the US’s largest private companies. It currently provides architecture, engineering, procurement and construction services; plant maintenance and modification services; protective services to government installations; and a wide range of ancillary engineering and security services. Its markets include government and defense, power, pharmaceutical and biotech, chemicals, business services and manufacturing.

One step at a timeD&Z has been through a period of sustained growth, thanks in part, says Yoh, to its healthy banking relationships. But he says that there is more to it than simply borrowing. “The other thing we do is take our cash and reinvest it in the company,” he says. “For the most part, reinvesting in the company is a no-brainer and we don’t want to take it out. At the end of the day, we feel that if we continue to reinvest the cashflow as well as bank credit, we can continue that strong growth.” This is a remarkable feat given D&Z’s determination to stay private.

But despite the obvious constraints in terms of tapping the markets for cash, Yoh explains that, free from market pressures,

have many different services going into many different markets,” Yoh explains. “And not all markets and services are down. We were down last year, by around 8%. Given the markets we have, we should be happy to grow, but given what’s happened in the past two years, then we’re fairly happy with how we’ve coped.”

So, what’s next? The routes to growth may be seemingly obvious — avoid the sluggish US recovery and target emerging markets overseas? Not so, according to Yoh. “We are a company that does international work,” he says. “But are we called a global company? No. We do have capabilities through JVs and partnerships and that’s mainly how we service our clients on a global basis. But is it a case of some country welcoming us in to do something new? No, not really.”

For Yoh, then, the focus is on improving and growing in D&Z’s existing markets. “Our growth strategy is simple: we look at our existing services — the things we are experts in — and find ways to expand them into new markets or broader offerings,” he says, citing the example of how D&Z took its role in operating complex government facilities and developed that expertise into a thriving commercial security business. D&Z also recently took its staffing experience and resources and packaged them into a portfolio of services targeted at the US Government’s unique workforce needs.

“That’s about really sticking to our knitting, but at the same time targeting growth,” Yoh says. “We ask ourselves what services we do well already, and what new markets we should look at. Or, for the markets where we have a lot of expertise and in-depth knowledge, how we can enhance our offering to provide a richer solution to our customers’ needs. But, at the end of the day, we will only continue our history of success by living up to our promise: we do what we say.” E

its biggest partnership is its US$520m relationship with Lockheed Martin.

“Ultimately, we want to make sure we get the best solution for our clients and we don’t subscribe to the idea that ‘it’s only invented here,’” Yoh states. “That’s why it works for us to look at acquisitions and JVs in order to compete in the market and to come up with the best solutions.”

There’s no doubt that D&Z is swimming in competitive waters. The US Government is one of its largest clients, and its contracts tend to run to the hundreds of millions of dollars on the back of cutthroat tendering processes involving some of the world’s largest companies. Plus, the past three years have seen some of D&Z’s markets fall, in some cases, by 25% or more.

So how has this huge, multifaceted company coped with such seismic shifts? “We’ve got a very diversified model, so we

Day & Zimmermann’s revenues in 2009

$2.1b


Allcargo Global Logistics

The recession saw logistics companies around the world tighten their belts and fret over their volumes, which,

in some cases, had dipped by between 40% and 50%. But Mumbai-headquartered Allcargo Global Logistics had the foresight to look beyond the recession and plan investments for the future.

Founded in 1993, Allcargo is India’s first multinational in the logistics sector and the world’s second largest less-than-container-load (LCL) consolidator. It has a presence in segments such as container freight stations (CFS), inland container depots (ICDs), LCL consolidation services, warehousing, project logistics and equipment hiring and transportation.

Allcargo has weathered the downturn well: its consolidated income from operations declined by only 11% in 2009. How did it manage this in such a challenging climate? “During the recession, we benefited in two ways: companies switched from FCL [full container load] to LCL and from airfreight to LCL in order to cut costs,” says Shashi Kiran Shetty, Allcargo’s Chairman and Managing Director. This was because, with profit shrinking under the pressure of the downturn, some companies found airfreight and full cargo container financially unviable. Their financial compulsions came as a boon Ph

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Shashi Kiran Shetty, MD of Allcargo Global Logistics, says the downturn was good for business

King of cargo

In the past five years, Mumbai-based Allcargo Global Logistics has emerged as a global player in the sector. MD Shashi Kiran Shetty outlines its strategy


Allcargo Global Logistics

› › Cross-border acquisition is an increasingly common strategy deployed by entrepreneurs from the emerging markets to gain an immediate global footprint and technology edge. Interestingly, in some of these acquisitions, the target entity has a much larger business than the acquirer, both in terms of volumes and revenues. In the recent past, Indian entrepreneurs have followed the acquisition route to increase their global footprint and to consolidate their Indian presence.

For the acquisition to be successful, however, getting the right strategic fit at a suitable value is simply the starting point. An acquisition is much like parenting: the real work starts after the baby is born. The challenge is to ensure that the baby grows up into a mature and responsible adult. Similarly, after an acquisition, the challenge for an entrepreneur is to ensure that the company achieves new heights in the global marketplace.

To achieve this, meticulous planning for the pre- and post-acquisition process is pivotal to the success of the transaction.

In the pre-acquisition period, the acquirer needs to be sure that the target has synergies with its existing business and is not merely a “trophy” acquisition. It is critical to access the key strengths of the target company, such as its intellectual property, brands, leverage in the market and the strength of its senior management.

Equally critical is for the company to evaluate the challenges and risks for each functional area. The acquiring

entity also needs to undertake thorough commercial, financial, legal, tax and HR due diligence.

Post-acquisition, a smooth integration without disturbing the business of both the acquirer and the target takes center stage. Among other things, people, processes, policies, accounting and IT need to be well integrated. The strengths of the acquirer and the target need to be leveraged to the fullest to ensure that the overall business is able to capture the synergies and benefits it envisaged at the time of the acquisition.

The global market expects a multinational company to deliver a standardized product or experience. Entrepreneurs must also show the ability to understand disparate cultures. Several Indian companies are sending out their management personnel to other countries to understand people across cultures. This is the right way of doing things.

Employees of the target company may have several fears and concerns, and the new leadership must allay these. They must also share their vision with all employees across all geographies. This will help them win over their new set of employees and retain the right talent.

The new leadership needs to be able to make rational decisions and lay out the investment plans while keeping the long-term vision in perspective and, more importantly, communicate this to all stakeholders.

Entrepreneurs must tread the path carefully by following a structured approach to the transition. Ultimately, it’s all about change management.

Steps towards ensuring a smooth acquisition

Sunil Chandiramani, Partner & National Director, Advisory Services, and Business Leader, Government Services, Ernst & Young India

Viewpoint

More informationTo learn about how Ernst & Young can support your business expansion to or within India, please email Sanjay Chakrabarti at [email protected] or speak to your local Ernst & Young contact.

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19

“Even during the recession, our equipment was more than 90% utilized”

to Allcargo, with its flourishing LCL consolidation business.

Allcargo has built its success on a solid foundation of international growth. It acquired ECU Hold NV of Belgium in 2006, expanding the geographical reach of its LCL services and emerging as the world’s leading LCL consolidator, with 139 offices in 59 countries around the world. Post-acquisition, its revenues grew from US$61.9m (in 2005–06) to US$202.4m for the calendar year 2006. Today, it is a US$464.22m multinational.

Meanwhile, in the Indian market, the economic downturn meant that companies preferred to lease infrastructure development equipment, owing to sluggish cash flows and tight liquidity. This trend helped Allcargo’s equipment-hiring and project logistics business.

Its maturity as a business has helped, too. India’s nascent logistics industry does not have many reliable companies in the equipment-hiring business, as many flout safety norms and are not committed to customer needs.

“As an organized player, we fill this gap,” says Shetty. “Even during the

recession, our equipment was more than 90% utilized.”

Behind Allcargo’s success is Shetty’s business acumen and zeal. He has always been committed to making Allcargo a market leader in India and began to realize his global ambitions early in the company’s history. In 1995, Allcargo joined hands with E-Line NV, Belgium, to serve as its agent in Mumbai and New Delhi. And in 2001, the company went one step further, making strategic investments in E-Line, Mauritius, and E-Line, Middle East (Dubai).

“When we tied up with E-Line, the idea was to move beyond Indian shores,” says Shetty. The move not only gave Allcargo a global footprint, it also ensured that the Belgian company will not enter the Indian market on its own.

Acquiring valueAllcargo has grown its operations through a series of strategic acquisitions. Besides ECU Hold NV, it acquired the freight forwarding arm of Thomas Cook — Hindustan Cargo — in 2006 and the equipment rental business from TransIndia in 2008.

Shetty also has a talent for finding funding just when it is most needed, enabling him to seize opportunities as they arise. Allcargo has raised money three times: by bringing in New Vernon Private Equity Limited as a private equity investor in 2005, by listing on the Bombay Stock Exchange in 2006 and by selling shares

to private equity investor the Blackstone Group in 2008.

Since the logistics industry in India is still in its infancy, getting the right people can be a challenge. But Allcargo has found a way out. “We hire people from outside the industry and train them. We also hire people from overseas,” says Shetty.

Moreover, logistics costs in India are high. Rail transportation, for instance, is three to four times more expensive than in Europe, and the poor state of the roads results in higher operating costs and fewer efficiencies. The same is true of India’s ports — just one more factor that is driving down logistics companies’ profitability.

However, Shetty views each problem as an opportunity. “Companies in India are looking for a reliable logistics company. And we deliver what we promise,” he says.

Allcargo’s future growth will depend on capital investments. It has several new projects in the pipeline, beginning with a plan to add three or four ICDs to the existing five. The company has acquired land in Hyderabad, Bengaluru and Nagpur for this purpose, and is also planning a CFS in Kolkata and Visakhapatnam.

By purchasing both assets and companies, Shetty is confident of achieving between 20% and 25% growth over the next three to five years. But what about expanding Allcargo’s global footprint? “In terms of our global presence, there is still a lot of potential to grow,” says Shetty. “We are waiting for the right opportunities to come our way.” And judging by his previous achievements, he’s unlikely to let any of them pass him by.

The minimum growth rate Shetty expects in the next three to five years

20%

Tax reporting

More informationFor more information on Ernst & Young’s tax policy and controversy services, please visit ey.com/tpc

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International trends in tax enforcement

1. Ireland An investigation into taxpayers who have undeclared tax liabilities in trusts and offshore structures began in September 2009, with the opportunity to make a qualifying disclosure to the tax authority.

2. Isle of Man The Budget for 2010–11 introduced a disclosure amnesty, to be in effect for three months, that would see penalties waived in respect of any relevant voluntary disclosures. Interest charges remain applicable.

3. United Kingdom Various disclosure schemes were announced last year. In July 2009, the New Disclosure Opportunity (NDO) allowed companies and individuals with unpaid taxes linked to offshore accounts or assets to settle their tax liabilities at a favorable fixed penalty rate of 10%, subject to certain conditions. In January this year, HMRC announced a “Tax Health Plan.” Doctors and dentists could fully disclose any undisclosed tax liabilities and benefit from a fixed penalty.

4. Switzerland This year, Switzerland has introduced an amnesty for income tax and inheritance tax evasion on condition of voluntary, spontaneous disclosure and

cooperation with the authorities. It only covers penalties, fines and the principal amount — interest and arrears are applicable.

5. France In April 2009, resident taxpayers had the opportunity to regularize their tax position through the creation of a specialized unit within the French Tax Department. The cellule de régularisation enables taxpayers to disclose legal, but previously undeclared, foreign funds and assets in tax havens, avoiding prosecution and potentially benefiting from more lenient penalties.

6. United States In October 2009, the US Government passed legislation to prevent people from evading an estimated US$8.5b in US taxes over the next 10 years. The Foreign Account Tax Compliance Act of 2009 requires foreign financial institutions, trusts and corporations to provide more information about their US account holders, grantors and owners. It imposes penalties for underpayment and extends the related statutes of limitations.

7. Netherlands Antilles From April to June 2009, the Antillean Tax Administration enabled taxpayers to report without fear of

penalty interest received from an EU Member State between 2005 and 2007. In Bonaire, St. Eustatius and Saba, a new tax legislation bill also contained a general tax amnesty provision with a penalty reduction to 15% if the taxpayer made a voluntary correction.

8. Brazil In July 2009, the Brazilian Government expanded a program designed to facilitate the payment of back taxes, including federal taxes and social security. Companies with tax debts were given up to 15 years to pay them off, with reductions to penalties and interest rates including zero penalty and interest reduced by 45% for those liquidating their total debt in a single payment.

9. Argentina In December 2008, the Government launched two special regimes: a moratorium to regularize unpaid taxes by allowing taxpayers to pay arrears in 120 installments with low interest; and an amnesty law permitting the repatriation of money from abroad by paying a maximum 8% of the regularized amounts, rather than the unpaid 35% income tax, or 21% VAT.

10. Italy In August 2009, the anti-crisis incentives became law, creating a “tax shield” for individuals and small and medium-sized businesses. Under the scheme, taxpayers may pay a one-time 5% on repatriated funds from offshore accounts and be pardoned any back taxes. The amnesty also includes a rebuttable presumption for undeclared funds and assets held abroad, and doubled the penalties for any failure to report or pay taxes. A new specialized team within the Italian Tax Authority been created to encourage international cooperation and deal with international tax evasion and avoidance.

11. Netherlands In April 2009, a voluntary disclosure program enabled taxpayers to declare their money in foreign bank accounts and avoid penalty and criminal prosecution. In July 2009, a new law entered into force that made tax advisors and tax directors, as well as the taxpayer, liable for penalties, the maximum amount of which is 100% of the tax that has not been paid. In January, it was announced that the proposal to increase the penalty imposed upon the voluntary disclosure of foreign bank accounts

from 15% to 30% would come into effect from 1 July 2010. Last year also saw Dutch amnesty penalties become more severe, increasing from 100% to 300% of the tax owed.

12. Belarus In March this year, the Belarusian Government introduced a five-year exemption from income tax on dividend, interest, royalties and securities, or from the sale of real estate, to help simplify and improve tax payments in the state. Applying to both Belarusian citizens and foreign residents, the amnesty aims to encourage taxpayers to repatriate income generated abroad.

13. Kyrgyzstan In June 2009, the parliament adopted a bill on the legalization of property, undeclared tax and customs liabilities. This included an amnesty scheme whereby movable and immovable property of Kyrgyzstani individuals and companies legalized during that period would be exempt from tax, customs and social security. Certain criminal and administrative liabilities and penalties for violations committed before 31 December 2008 would also be waived.

14. Hungary In March 2009, a new tax bill introduced a major amendment to the corporate income tax regime, giving a partial amnesty to repatriated income accumulated in foreign companies (CFCs) based anywhere except Andorra, Monaco and Liechtenstein. Three quarters of the dividends from CFCs were exempt if a taxpayer invested at least half of the repatriated income into treasury bonds held for a minimum of two years. The amnesty also applied to income realized upon the divestment of participation in a CFC. A tax amnesty for individuals was also introduced.

15. Turkey A tax amnesty set to encourage the legitimization of domestic and foreign assets was extended multiple times throughout 2009.

16. Liechtenstein In August 2009, Liechtenstein and the UK agreed measures to improve tax compliance, clearing up the tax arrears of UK clients of Liechtenstein financial services companies and ensuring future tax liabilities are met. The Liechtenstein Disclosure Facility (LDF) runs from 1 September 2009 to 31 March 2015 and sees penalties on unpaid tax capped at 10% of tax evaded over the past 10 years, provided the taxpayer discloses all issues to HMRC. Those who fail to make a full disclosure face their accounts being closed.

17. South Africa The Budget for 2010–11 included a voluntary disclosure program to be implemented from 1 November 2010 to 31 October 2011, allowing taxpayers to disclose their defaults and regularize their tax affairs.

18. Australia More than A$313m was collected from tax evaders through the Project Wickenby crackdown. The project investigated a range of tax avoidance schemes, including the use of offshore tax havens and “phoenix” companies, which deliberately go into liquidation to avoid tax and later re-emerge as other corporate entities. E

The global economic slowdown has turned governments’ attention to anemic public income levels. In other words, they now want their fair share of tax from both individuals and businesses. Over the past year, tax authorities around the world have announced a raft of new amnesty and disclosure schemes designed to bolster governments’ tax revenues. This is in line with global trends in tax, including greater cross-border information sharing between tax authorities, greater emphasis on alternative ways of resolving disputes, and the use of more carefully targeted penalty regimes. Here, we give an overview of some of these changes.

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Mothercare


Model behavior

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nBen Gordon, CEO of Mothercare, and, opposite, a branch in India — a key market

On his first day as CEO, Ben Gordon was faced with the mammoth task of making the ailing Mothercare profitable again. He explains how he brought the UK mother-and-baby chain back from the brink — and why it’s gone global

Mothercare

“We have 28 stores in India, but we are aiming to open as many as 100 in the next five years”

Mothercare ensures its franchisees respect

the brand identity


Ben Gordon describes the past eight years as “great fun.” When you hear the story of how he led Mothercare back from the brink of disaster,

turning it into a global company operating in more than 50 countries, you can understand why.

Gordon has made the recovery of the mother-and-toddler retailer look remarkably easy. When he became Chief Executive in 2002, Mothercare had been underperforming for years and was in the midst of profit warnings, with losses of £20m (US$29.5m).

Within a year, Gordon and his team had turned things around so dramatically that the business was once again bringing in surplus income. This profit would be used to expand the company internationally, turning the English high street name into a global brand.

“We built up the company’s profitability by focusing on improving our product ranges, introducing a new pricing policy, redesigning and refurbishing our stores

and rethinking our logistics,” Gordon says. “Once we had repaired the business, we were soon able to start looking at expansion overseas.”

After identifying Mothercare’s international potential, Gordon set about adding to the company’s handful of overseas stores. The company now has more than twice as many stores as it did when he joined, has a presence in 52 countries and is well recognized throughout the world.

When deciding on which international markets to enter, Gordon takes inspiration from one very important, yet simple factor: babies. In the past year, Mothercare has concentrated on opening stores in India and China — both countries in which the number of births each year tops the 20 million mark.

“The numbers of babies born in these countries each year clearly presents great opportunities for us,” Gordon says. “There are large middle-class groups emerging in both China and India, and the families have high aspirations for their children. This is where Mothercare’s products fit in.”

MENA-boundBased on this theory, Mothercare has also recently branched out into the Middle East and North Africa. According to Gordon, who is confident about the company’s future, the business will now continue to “expand as we see fit.”

“Once we have a store in a country, there is then huge potential to grow our offering to the people that live there,” he explains. “For example, we have 28 stores in India, but we are aiming to open as many as 100 in the next five years.”

As well as setting up a joint venture in both India and China, Mothercare’s successful and rapid international expansion is facilitated by using franchisees to operate the stores. By working together, these partnerships ensure both parties reap the benefits: the franchisee gets

the opportunity to sell a well-known and popular brand, while Mothercare receives a royalty payment and increased exposure in that particular country. Mothercare ensures its brand identity remains by selecting its franchisees carefully, designing the store and delivering the same quality of products as it provides to its other stores globally.

“Using franchisees works brilliantly well,” says Gordon. “They enable us to grow quickly to take advantage of the huge amount of potential out there. There are millions of births each year worldwide, so the market is huge.

“The Mothercare brand travels well because the needs of a mother don’t really change from country to country. Whether a new baby has been born in Manchester, Mumbai or Moscow, the family needs to feed, clothe and transport their child in the

same ways. This means our products are transferable from country to country.”

As well as concentrating on expansion, Gordon masterminded Mothercare’s acquisition of the Early Learning Center (ELC) two years ago. Taking ownership of the British toys and games retailer was a move that complemented the Mothercare brand and strengthened it further.

Gordon says: “The acquisition worked so well because ELC needed smaller stores that couldn’t be found at out-of-town locations. We added centers into our larger Mothercare stores, meaning we could offer parents a complete set of products under one roof. The acquisition solved issues for both brands.”

Eight years of clever business decisions such as this is why Gordon has been able to lead Mothercare towards a bright future. Indeed, any other business looking to

Mothercare Mothercare

› › More than any other factor, the market currently values companies who have traded through the downturn and have been able to deliver high-quality earnings. This is the start of a self-reinforcing cycle that allows them to finance growth using retained earnings and through access to the capital markets. If, for example, the value of a company’s stock were up and the cost of capital were down because debt was well covered, the company could take advantage of profitable situations when its competitors were financially weak and so reinforce its already strong position. The winners from the recession are already in place and coming out stronger than they went in.

The downturn has turned investors’ eyes towards stocks that provide stability and visibility in earnings, and they will pay a premium for companies that can provide that. And if a company’s stock price is going up because of strong earnings, then the stockholders will be much more relaxed about leaving those earnings within the business, allowing the owners to invest in the company’s growth story.

Sustainable earnings growth is also key when looking for funding from debt providers. For businesses with good credit, the market is fairly liquid right now. Much of what we have heard about banks not wanting to lend in the aftermath of the credit crunch is not true for strong credits. A number of factors have contributed to this liquidity, the main one being the fact that the corporate sector has, on the whole, been repaying debt faster than banks have been able to create new lending

opportunities. The bond market has also been active, with record issuances over the past year. In the second half of 2009, it was about investment-grade companies refinancing their balance sheets. So far this year, it has been about high-yield borrowers; investors seeking yield have pushed the risk appetite in the market.

Smart growth companies are diversifying their sources of finance — so having some bond debt and some bank debt. They are also diversifying their maturities to bring some stability to their balance sheets and avoid having to refinance all their debt at the same time. It is surprising how many companies were caught out by this in the downturn.

We expect the M&A market to gather pace in the second half of 2010. The corporate sector is currently sitting on a large amount of retained earnings and undrawn credit lines that can finance growth both organically and through acquisitions. We would expect to see the corporate sector being more active in the second half of the year in terms of mergers and acquisitions, particularly those companies who have traded well through the recession.

The same is also the case for many of the private equity funds. We know that they are actively pursuing opportunities at the moment and deploying much lower levels of leverage than has been the case in the past. We are calling this the “low Beta investment case”: investors value quality of earnings more than they do a highly leveraged rollercoaster, which relies on buying and selling at the right time to drive returns at least as much as it does the fundamentals of the business.

Methods of funding growth

Dougald Middleton, Head of Capital and Debt Advisory, Ernst & Young UK

Viewpoint

More informationTo learn more about Ernst & Young’s restructuring or M&A services, please email Dougald Middleton (UK and Ireland) at [email protected], Rich Jeanneret (Americas) at [email protected] or your local Ernst & Young contact.

Mothercare’s jump in profit between 2008 and 2009

12.4%


He makes it all sound almost straightforward, and this ethos continues when it comes to facing any challenges. Mothercare’s main hurdles to overcome are those involved with brand consistency, and the company works hard to ensure that its products and services are the same for its customers throughout the world.

“We devised a brand strategy at the beginning and we have stuck to it and carried it through,” says Gordon. “We have to ensure that our products have the same look and feel wherever they are being sold and that they arrive at the right place at the right time.

“It is important that our level of customer service is high and we spend a lot of time with our franchisees to ensure our customers are treated well.”

As well as ensuring that his customers are satisfied, Gordon places an emphasis on making sure that his employees are happy. Mothercare regularly features in the top five of The Sunday Times’ “100 Best Companies to Work For.”

Before joining Mothercare, Gordon was Senior Vice President and Managing

Director of Disney Store, Europe and Asia Pacific. He also held senior management positions with the WHSmith Group and L’Oréal, where he gained his first experience of dealing with a global brand.

“I have always enjoyed working with brands and fulfilling the potential of that brand,” he says.

Now on track to fulfilling the potential of the Mothercare brand, Gordon is looking towards the future of the company. It is aiming to open more out-of-town stores in the UK and will continue to pair up Mothercare and ELC to help drive sales of each brand in stores and on the internet. Internationally, the overseas markets still offer plenty of room for further growth with limited risk. A partnership with Boots to design, source and supply its childrenswear and accessories will also commence by the end of this year.

“I have always believed that Mothercare is a great British brand,” says Gordon. “It had clearly been mismanaged, and I saw a great opportunity to repair and then grow it internationally — and that has always been the strategy.” E

turn its fortunes around would do well to observe how Gordon and his team have improved things so dramatically. Last year, the company reported profits of £37.1m (US$54.6m) — up 12.4% on 2008.

Under its own steamWhat makes this business model even more remarkable is that Mothercare funded its international expansion entirely by its own profits, meaning it has been left in complete control and with no loans to contend with. How have they done it?

“Frugality and a lot of hard work,” says Gordon. “We were very short of cash in 2002, so to avoid a crash, we were hard on the use of cash and aggressive in managing stock control. This worked really well and the company soon had a positive balance, which enabled us to concentrate on expansion overseas.

“We continue to be conservative with money, and we were sensible with our acquisition, so we haven’t had to rely on loans. As our significant debt has turned into a significant surplus, we have been able to fund our expansion ourselves.”

Ben Gordon places an emphasis on

employee happiness

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Dallara


Success in the racing car industry is about more than just speed. Italian engineer and entrepreneur Giao Paolo Dallara tells us why you also need foresight, perseverance and enthusiasm

Hard work, determination and unflagging optimism are some of the qualities needed to build a business from scratch, says Gian Paolo Dallara. The

Italian engineer should know. After having worked for some of the biggest names in the Italian car industry, including Maserati, Lamborghini and Ferrari, he realized that to pursue his dream of building racing cars, he would have to go it alone. So, in 1972, he founded Dallara Automobili.

The business, which is based near Parma in northern Italy, has grown substantially in the intervening years.

Dallara started out with just four employees; its workforce today is 200-strong. The chassis builder has also racked up wins in prestigious tournaments and made a name for itself — it now has a 90% share of the world market for new Formula 3 cars. This success has taken careful planning and dedication. In the early days, Dallara relied on consulting work to supplement the fledgling business, and he says that this safety net gave him confidence. But he also believes that life was easier for an entrepreneur in the 1970s.

› › The average age of Dallara’s employees is 31. That may seem young, but it reflects the critical role of innovation in this industry. Fresh minds drive change. And let’s make it crystal clear: the automotive sector is all about entrepreneurship.

Ernst & Young recently surveyed 300 European automotive companies about their priorities. First was quality: if you fail to deliver that, then you’re in trouble. Just look at some recent manufacturers’ problems. Number two, however, was R&D and innovation.

Manufacturers have always had to differentiate, offering changing designs and new technologies in such areas as gear systems and noise reduction. But real innovation is becoming extremely expensive, and it’s increasingly difficult to differentiate. Engineers need to stretch themselves to stand out.

The Tata Nano is my favorite example — it represents the benchmark of automotive innovation and a complete reversal of thinking. Most manufacturers try to develop budget cars through a top-down approach by starting with a premium vehicle and working down. It’s impossible. Tata used a bottom-up approach, starting with the bicycle and working up. They asked what their Indian customers really needed: four wheels, a chassis and to sit together with their family; not 0–60 in five seconds or the most modern electric seats.

It may surprise people to learn that 60% of the development of parts involved in the Nano came from German suppliers. And the same people who made its anti-vibration parts make anti-vibration

products for high-end luxury cars. These are the truly innovative engineers — developing parts for both luxury and budget manufacturers.

If you’re looking to expand to different markets, you have to innovate. People used to believe that we needed a world car — one model that would appeal to every market. You won’t see it. The Chinese market likes extended cars; that’s no good for India. And US customers are different than Europeans, who like their cars to be an emotional toy. In the US, it’s just about getting from A to B.

That’s why manufacturers are opening engineering ventures in India and China. Yes, it’s cheaper, but it also means access to the best young talent. India has hundreds of thousands of engineering graduates every year. They are developing new products not just for their domestic market, but in competition with head offices overseas to see who can create the best ideas for mature markets, too.

And while there are still doubts over whether they can deliver all they promise, we shouldn’t underestimate Chinese manufacturers. Battery IT companies such as BYD are entering the car market — that’s a new form of competition entirely. They’re using a similar approach to the original Volkswagen to appeal to first-time buyers: saying that this is a car for everyone.

Ambitious companies are developing centers abroad and acquiring R&D companies overseas in niche areas. Engineers from other regions come in with a different mentality. And that’s what drives the automotive industry: a changing mindset.

Innovation in the automotive market

Peter Fuss, Automotive Leader Germany, Switzerland and Austria/ Global Automotive Center, Ernst & Young

Viewpoint

More informationFor more information on Ernst & Young’s services for automotive companies, please email Peter Fuss (EMEIA) at [email protected] or Jeff Henning (Americas) at [email protected] or speak to your local Ernst & Young contact.

Dallara


Gian Paolo Dallara founded racing car

engineering business Dallara in 1972

— Dallara says that it will build 50 cars, make revenues of €42m (US$56m) and a profit after tax of €6m (US$8m).

The company’s major clients currently include the Volkswagen Group, Maserati, Bugatti and the Fiat Group. Adding new contracts to its existing business could mean that it doubles the number of cars it builds in 2010–11, says Dallara.

As ever, reputation is everything, and Dallara Automobili has it in spades. The company counts among its greatest successes eight wins of the famous Indy 500 — a 500-mile race on the Indianapolis Speedway — but it is best known for its success in the Formula 3 segment, which it entered in 1978.

R&D focusThe real secret behind the company’s continued success, however, is its generous investment in technology and skilled staff. Dallara racing cars are painstakingly designed in 3D using advanced software that allows engineers to build up a 360-degree model of what the prototype will look like before any component is made.

The company’s engineers use computer models to simulate lap times, comparing their findings with timings from real circuits, and analyze the behavior of materials — including lightweight composite structures — under different conditions to understand more about their performance. Exhaustive tests, including full-chassis crash tests, complete the process.

To maintain its high technical standards, the group pays no dividend, investing between 15% and 20% of its revenues in research each year. Dallara stresses the company’s youth: of its 200 employees, 70 have engineering degrees, and the average age is just 31. “There is a very significant charge of enthusiasm,” he says.

Dallara has been there since the start, but, now aged 73, he is thinking of the company’s future. In 2007, he appointed Andrea Pontremoli — formerly the Head of IBM Italy — as Managing Director, believing him to be the best choice to continue what he himself started almost 40 years ago.

Along with a shared belief in continual investment in research, Dallara says that Pontremoli will ensure that the company does not try to grow too fast. “He shares with me the necessity to remain small, but to remain present.” E

”No matter what the activity, it is

viewed through a global lens. There

are no barriers, so you have to

achieve excellence immediately”

“The market offered more obvious opportunities,” he says. “It was less global so you didn’t need to be the best in absolute terms — you needed to be the best in the small market you operated in.”

Things have changed. “Now, no matter what the activity, it is viewed through a global lens,” he says. “There are no barriers — luckily — and so you have to achieve excellence immediately.”

Dallara Automobili is living proof of this need to go global, having set its sights far beyond its home region of Emilia-Romagna, which is famous for its automobile heritage. Ferrari is not far

away, in Maranello, while Lamborghini’s home is in Sant’Agata Bolognese, just outside the region’s capital city, Bologna. The racetrack in the nearby town of Imola is home to the San Marino Grand Prix.

“Being in that region, knowledge is distributed by osmosis,” Dallara says. “It’s easy to find specialized technicians or expert suppliers.”

But the racing world extends far beyond Italy, and the company aims to crack the US market. Dallara plans to open up a design and production base there. “In the US, there are types of competition that do not exist in Europe,” he says. “If we really want to continue to be strong, we need to have a presence there.”

And, while the Chinese market is “still immature,” Dallara believes that the company may one day need a production base there to take full advantage of that market.

For now, its performance stands it in good stead. Last year, the company built 40 racing car chassis for various classes of race and pulled in revenues of €37m (US$50m), making a profit after tax of €5m (US$6.7m). This year — its financial year runs from July to June


Summy nissim quiEMEIA Entrepreneur Of The Year Forum

Above: The Dolder Grand, Zurich. Right: A cartoonist captures the key discussion areas. Opposite: Jonas Ridderstråle on business as unusual

appreciation of reality and consequences. She believes that neuroscientists could work with software writers to create a new breed of computer program to help develop qualities such as empathy.

Controversial environmentalist Bjørn Lomborg argued that slashing carbon emissions wasn’t the only way to tackle climate change and that innovation could offer an easier, cheaper and smarter way to do this. And Professor Dr. August-Wilhelm Scheer, founder of IDS Scheer, described the ingredients needed for innovation.

The thought-provoking speeches inspired workshops during which the entrepreneurs considered these and other issues based on the three main themes.

They agreed to create a multicultural video to show young people that you don’t need a Harvard degree to do well in business — just the will and passion to succeed. Ernst & Young has committed to support the distribution of the video to schools across Europe, the Middle East, India and Africa.

The entrepreneurs also agreed that it is vital to nurture a culture that opens up

“We could do a lot more, a lot easier, a lot cheaper, in a much smarter way — right now. This is where innovation comes in”

Some of the world’s most original thinkers joined forces with 82 leading businesspeople to address the

major global challenges at the inaugural Ernst & Young EMEIA Entrepreneur Of The Year (EOY) Forum, held in Zurich.

The entrepreneurs were all finalists or winners of the EOY award in Europe, the Middle East, India and Africa, and between them represent US$4b in annual turnover and employ close to 20,000 people. They considered how their talent and influence might be used to solve issues in education, enterprise, innovation and the environment.

Dr. Jonas Ridderstråle, the bestselling author of Funky Business, captured the unconventional tone of the summit with his suggestion that watching all 22 James Bond films was the way to understand our changing world. In parallel with the business environment, the plots have become more complex and can no longer be polarized between good and bad.

Neuroscientist Baroness Susan Greenfield told delegates that we now spend so much time in front of screens that we may be creating a generation lacking an

organizations to innovation. Employees must be given the time and space to innovate — and permission to fail. They believe this is essential to creating the next generation of entrepreneurs and products.

There was also an impassioned call for a combined solution — involving governments, big business and entrepreneurial thinking — to tackle climate change.

The forum finished with an inspirational speech by scientist-adventurer Bertrand Piccard, who completed the first non-stop balloon flight around the world. His spirit of adventure mirrored that of the entrepreneurs — as president of Solar Impulse, his latest project is to fly a solar airplane around the world.

Turn the page for a preview of the 2010 Ernst & Young Strategic Growth Forum.

In February, some of the world’s leading entrepreneurs gathered in Zurich to discuss the challenges of the 21st century. Here, we take a look at what happenedMeeting

of minds

More informationFor more information on the 2010 program and plans for the 2011 event, please visit eoy-forum.com or email Sina Fueess at [email protected]

Bjørn Lomborg

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Event

Five days. 1,500 business leaders. One incredible opportunity

Find out what it takes to reshape your company. Learn new strategies.

Meet today’s rising performance standards. And reconnect with colleagues. It’s all possible at the 2010 Ernst & Young Strategic Growth Forum. This five-day event in Palm Springs, California, is not only the largest gathering of entrepreneurs in America, but also a conference named by Forbes.com as a “get-ahead executive retreat.”

With more than 100 speakers and 30 content-rich learning sessions, it’s a gathering that provides you with the following unique opportunities:

• Master strategies for company growth • Discuss ideas on the transaction market

and available capital • Learn critical success factors of

mergers, acquisitions and IPOs • Hear inspiring stories from game-

changing entrepreneurs • Meet potential customers, investors,

partners, acquisition targets and buyers

New this year is a special IPO Readiness session, “A CEO’s guide to navigating the S-1 registration process.”

The Forum will feature keynote speeches from Muhtar Kent, Chairman and CEO of the Coca-Cola Company, and A.G. Laffley, former Chairman, CEO and President of Procter & Gamble. Other featured speakers include Academy Award-winning director Kathryn Bigelow; bestselling author Deepak Chopra; Arthur Levitt, the former Chairman of the US Securities & Exchange Commission; and Tom Adams, CEO of Rosetta Stone and the 2009 Ernst & Young US Entrepreneur Of The Year.

For years, the Strategic Growth Forum has been guiding top CEOs into the future. Ernst & Young’s extraordinary convening power creates an event that’s sure to leave an indelible impression on you. Hearing firsthand from the leading lights in business provides a treasure trove of action-oriented guidance you can’t get anywhere else.

More informationTo find out more about what you can expect, and to receive an invitation to this event, exclusively for CEOs, please visit ey.com/us/strategicgrowthforum

“This was the best conference I have ever attended”Jeffrey S. Lyon, Chairman and CEO, GVA Kidder

Learning curveThe 2009 Strategic Growth Forum uncovered all sorts of advice on how to get ahead. Below is a selection of what attendees heard:

• Consider repurchasing corporate debt at a discount. When loans are carried at face value, lenders are often willing to review debt covenants or extend maturity dates.

• Maintain strategic growth and flexibility by using a combination of debt, equity and strategic partnerships.

• Build partnerships around your products or services to develop relationships now that will lead to successful exits down the road.

• Think about Act II: 18 months after your IPO, what’s your story then? Will it be as compelling as it was before you went public?

• What kind of person do you want on your board? Don’t limit yourself to your immediate network.

• Think about the best people you can get for the job.

Nationally sponsored by

Founded and produced by

“This is a terrific program. I can’t believe how much it’s grown” Howard Schultz, Chairman, President and CEO, Starbucks Corporation

The Ernst & Young Strategic Growth Forum 2010

“I came away feeling inspired, feeling there is a bright future for the USA”Tom Adams, CEO, Rosetta Stone Inc.

On stage at the 2009 Strategic Growth Forum

35

Talking across borders

David Yang, co-founder of translation software developer ABBYY

37Exceptional July–December 2010

ABBYY

ABBYY

How many customers are currently using ABBYY’s products

30M


David Yang also owns several cafés in Moscow

39

When David Yang and his partner Alexander Moskalev launched dictionary software Lingvo for Russian to English and English to Russian translation in 1990, they sold a paltry 15 copies. But within months of its release, an estimated 50,000 pirated versions had cropped up around the Soviet Union.

“Every second factory, university and institute that we called using the yellow pages to make our sales pitch hung up on us. They were already using the program,” says Yang, son of Armenian and Chinese physicists, who at the time was in his final year at the prestigious Moscow Institute of Physics and Technology.

The mass proprietary infringement, however, turned out to be a blessing in disguise — it allowed Yang’s newly formed company ABBYY (known as Bit Software until 1997) to leapfrog over its competitors and almost instantly become the most widely used and recognized brand in translation software in the Soviet Union.

“Sure, the illegal market limited our sales, but it was an ideal, cost-free marketing tool for Lingvo,” says Yang. “When it became popular, we knew had a winning product that we could take forward.” He has since founded three other technology companies and now serves as the ABBYY Group’s Chairman.

ABBYY’s linguistic software and electronic dictionaries were responsible for making the brand a household name in Russian-speaking countries. But what fueled the company’s rapid expansion into international markets was its optical character recognition (OCR) software — data-capturing programs that function in tandem with scanners to produce editable digital copies of printed documents and photographs.

Yang had the idea to have ABBYY develop its own OCR technology a year after Lingvo was launched, having realized that people were “not buying translation software for the sake of the software but to complete a full document translation task.” He compared Lingvo users to drill consumers who buy drills to make holes, not for the sake of having a drill.

In 1992, with the small amount earned from Lingvo sales and promise of higher salaries in the future, Yang

brought 40 computer programmers and engineers on board. By the next year, ABBYY had launched the OCR program FineReader. It was sold both individually and packaged together with spelling-correction and translation software to eliminate the need for users to manually enter the original Russian text into the computer before translating it with Lingvo.

“Now all you had to do was put the Russian document into the scanner, press a button, and have your printer print out a raw translation in English,” says Yang.

The market’s response to the streamlined translation process was phenomenal. After the more sophisticated FineReader 2.0 hit the market in 1994, ABBYY had outpaced America’s top OCR companies IRIS and Nuance to become number one on the international market in terms of accuracy, measured in the number of misreadings the software makes per page.

“We kept winning international comparative tests, so hardware manufacturers and other international software developers began to take notice,” Yang recalls.

Yet ABBYY was still lagging behind its technically inferior competitors in sales, so in 1997 Yang began aggressively pursuing global distribution and licensing deals. His first stop was the United States, which had the largest market for scanners and related technologies.

Canny growthBut with several big players already on the field, Yang decided it was better to test the waters before diving in deep. He licensed FineReader to a US competitor, Presto! OCR, which then released it under the already-known Presto brand. Presto immediately began winning a slew of accuracy tests, and sales went up accordingly. After a year, Yang was convinced ABBYY could go it alone. He launched FineReader as its own brand and clinched key contracts and licensing deals with scanner manufacturers such as Acer, Mustek and Microtek, which bundle OCR software in with their scanning devices.

But Yang is not one to sit back and enjoy his achievements. FineReader’s success compelled him to find even more creative and practical uses for artificial intelligence technologies, and his focus on nonstop innovation has certainly paid off. Ph

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Is it ever a good thing when one of your

products gets pirated? ABBYY’s co-founder

David Yang explains why it can be — and how the

company is taking the translation software

market by storm

Summy nissim qui

› › The future of every country’s economy depends increasingly on the production of new ideas, inventions and other commercially significant innovations that can be secured by intellectual property rights (IPR). Global companies’ strategies for how to realize value from investments in innovation are shifting towards the active management of IPR.

Effective IPR management should be the domain of sales and marketing, top management and legal advisors. Success with these intangible assets requires knowledge of a particular market, an understanding of the corporate strategy of the business, as well as deep expertise in legal ground rules. Winners in IP management practice, therefore, will be those who can play at the nexus of three traditional fields: strategy, economics and law. Practically speaking, companies have two alternatives for responding to the dynamics of innovation and IPR management.

The first alternative for most companies is to do nothing or to maintain the status quo. Investments in innovation and new product development are risky and do little to address the harsh reality of quarterly reporting.

The second alternative is to be proactive about IPR management, with programs extensively supported by legal advice. Such initiatives benefit from the coordinated, premeditated planning

of commercially significant innovation programs in concert with various IPR regimes. This does not simply mean a focus on patentable inventions. Rather, it requires an effort to manage all aspects of an offering’s life cycle, together with the available methods of IPR (patents, copyrights, trademarks, know-how) in which lawyers should play a key role in helping to build the IPR portfolio.

Company- and industry-specific information is available from both primary and secondary sources. For example, public domain information on patents

and copyrights can be helpful for getting an idea of the innovation-related activities of particular companies in order to identify examples of firms that are best in class. Surprisingly enough, not all of these firms

are resource giants. This is especially true for technology companies.

In today’s competitive market, where there is commercial significance, there will be legal significance. Properly managed, IP rights are the legally significant assets that secure investments in commercial innovations. Competitive advantage flows to companies that are thoughtful in acquiring these rights and creating good legal structures for exploring and protecting them. Companies that choose the passive approach run the risk of becoming sidelined in the game of innovation and global competitive advantage.

Effective management of intellectual property rights

Alexey Markov, Partner, Law, Ernst & Young (CIS) B.V.

Viewpoint

More informationTo learn more about IP in Russia, email Alexey Markov at [email protected] or +7 495 641 2965 or speak to your local Ernst & Young contact.

“ Winners in IP management practice will be those who can deal in strategy, economics and law”

“Serious M&A activity could hamper our internal culture and spirit”


Today, ABBYY is the No.1 OCR company in terms of languages recognized (186, with Korean and Yiddish added to the list last year) and No. 2 in number of licenses. The world’s top scanner makers — Epson, Canon, BenQ, Toshiba and Xerox, to name just a few — all have deals with ABBYY. The company has upwards of 1,000 employees in 10 offices around the world, and a futuristic product line (sold in 130 countries) that dovetails with what Yang likes to call ABBYY’s mantra: the creation of technologies that help people more efficiently understand each other and the information they use.

ABBYY’s Fototranslate application, which has been bundled into new Nokia and Samsung phones, recognizes eight languages and translates the text in any photo taken with the phone. This provides big relief for frequent overseas travelers, all without having to be connected to the internet. ABBYY’s Business Card Reader, which runs on Nokia smartphones and iPhones, uses a similar combination of the

phone’s digital camera, imaging and text recognition software to automatically transfer the data from a paper business card into the phone’s digital address book.

Expansion aheadIn the next five years, Yang expects ABBYY to grow tenfold, as the company stays focused on expanding its mobile application division and software development kits for enterprise content management.

“Today, we have more than 30 million people using our products,” he says. “We understand that this will soon grow to 300 million users.” But Yang maintains that that growth will be organic. “We have discussed it [going public] many times,” he says, referring to the company’s management (90% of the company is owned by 40 of its own employees, most of whom were part of the original ABBYY development team that joined in 1993. Private venture funds own the rest).

“Listing would certainly help us grow more aggressively and quickly, but that would call for serious M&A activity, which could hamper our internal culture and spirit,” he adds. “I think we will spend several years finalizing some development projects before considering an IPO.”

China is the focal point of one of those projects. In 2008, ABBYY released its first Chinese FineReader, which can recognize more

than 99% of the official character set of the People’s Republic of China.

“In 2008, we were fifth in quality of recognition in Chinese. Today, according to our internal tests, we think we are first in page-layout analysis and among the top three in recognition. A lot of Chinese scanner manufacturers want our software now,” says Yang.

ABBYY is also zeroing in on the high-margin enterprise market, selling and developing new OCR engines that allow banks, insurance companies, government agencies and other large corporations to integrate data capture and image recognition technology into their electronic document and archiving systems.

To access these high-profile clients, ABBYY licenses its software to systems integrators, or value-added resalers (VAR), the middlemen in charge of setting up large companies’ internal systems and databases.

“The enterprise and retail markets both bring in about equal amounts of revenue, but enterprise has much higher margins, so we are keen on developing this channel,” says Yang.

Yang, who is still very much involved in ABBYY’s long-term strategy, says it was the best decision he ever made to step down from his management position in 1998.

Not only did this allow him to personally continue to innovate along other lines (among his most recent ventures is iiko, an automated restaurant management technology company), it also helped give ABBYY’s managers more breathing room and an opportunity to put their own ideas to the test.

“It was difficult to give up control but very important that I did,” Yang recollects. “It’s just like with parents: if they don’t set their children free, allow them to make mistakes and come into their own, the children will never be independent thinkers. ABBYY became much more mature without me, and still has a long way to go.” E

Filling the skills gapFor years, Russian IT firms have struggled to find enough skilled and experienced computer scientists from within Russia to hire. Many still do, but not ABBYY. Not since 2006, when the software company working in the field of artificial and linguistic intelligence partnered with the Moscow Institute of Physics and Technology (MIPT) to found the Department of Image and Text Processing.

The department’s artificial intelligence program for both bachelor’s and master’s students is tailor-made to satisfy ABBYY’s specialized recruitment needs. With most courses taught by ABBYY specialists at the company’s own Moscow headquarters, the students are able to, and expected, to take part in the company‘s R&D projects, thereby gaining valuable hands-on experience in the field.

Yang says that the program, financed almost entirely with company funds, has proved to be an invaluable resource and safeguards against a labor market deficient in the type of specialists they need. Last year, more than 25% of ABBYY’s new computer science and engineer hires were graduates of the department.

Widex introduced the world’s first truly digital hearing aid in 1995

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Originality, perseverance and reliability: these are the values that have helped Danish hearing

aid manufacturer Widex to make the transition from small family business to industry leader with a presence in 100 countries worldwide.

Founded in 1956 by Christian Tøpholm and Erik Westermann, Widex is now run by the second generation of the founding families, with Jan Tøpholm as CEO and brothers Anders and Søren Westermann as Executive Vice Presidents. Thanks to what Anders Westermann describes as the “thick engineer blood” in the two families, Widex’s focus has always been on producing high-quality hearing aids that make a real difference to people’s lives. The company has a long history of innovation, having launched the world’s first digital hearing aid in 1995 — years ahead of the rest of the industry.

For Anders Westermann, Widex’s success in launching the digital hearing aid market was down to originality — “always having a drawer full of ideas that the market hasn’t seen before” — and perseverance, which meant waiting until digital technology was sophisticated enough to be used in the industry. With reliability as its watchword, Widex has now reached the fifth generation of its digital technology, each time improving and broadening its product range. By investing between 12% and 15% of its resources in research and development, Widex now ranks among the “big six” players in the global hearing aid market, of which it takes a 10% share.

“The most important thing is to make the company an attractive place for the best and most creative engineers to work,” explains Søren Westermann. This means providing cutting-edge technology in a challenging environment — a strategy whose success is borne out by the company’s low staff turnover. Widex has several innovations in the pipeline, with a particular focus on creating wireless connectivity between hearing aids and devices such as mobile phones, television and radio. It also has a specialist team of audiological researchers; one of their current projects is to explore ways to improve the lives of children and young people who suffer from hearing problems.

Widex’s growth is due to more than its manufacturing expertise, however. As

Sound decisionsHow a commitment to quality and an international outlook have helped Danish hearing aid manufacturer Widex to maintain its leading market position

“The most important thing is to make the company an attractive place for the best and most creative engineers to work”

› › Family-run firms, like all businesses, can find it challenging to deal with the complex issues around tax planning. Effective tax management depends on adopting a forward-thinking strategy and establishing positive working relationships with both local and international tax authorities.

Succession planning can be a contentious issue and is further complicated by the potential for incurring high tax costs. However, there are certain provisions in Danish tax law that allow family businesses to transfer assets from one generation to another without the tax burden being prohibitively high. By investigating all the options, company leaders can organize a tax-efficient takeover of their business. For example, they could make sure that shares are held through a holding company rather than through individuals. It is vital to start planning for succession early to increase flexibility and avoid facing unnecessary tax.

International expansion is another area in which tax planning is crucial. Family businesses that are keen to expand abroad need to think about the most tax-efficient way of entering new markets, particularly now that transfer pricing regulation has tightened. The key is to cooperate with domestic tax authorities so they can serve as an ambassador in the foreign market and help negotiate a favorable transfer pricing agreement. Having a good relationship with local tax

authorities is also invaluable in the event of tax controversy, as they may be able to help you handle the dispute quickly, reducing litigation costs or penalties.

When entering new markets, family-run firms should make sure that they have set up the right structure before venturing abroad, as changes that take place at a later date may have tax implications. Here, the benefits of having a tax advisor with a global as well as a local view are clear, especially in small domestic markets such as those in the Nordic region, which tend to rely on exports for a large proportion of their profits.

Options for avoiding tax on salaries are limited, if they exist at all, although this does depend on the country in which the employee works. Rather than

looking for tax loopholes in order to attract talent, firms should consider non-financial benefits. Family-run firms often have loyal employees who are prepared to sacrifice financial compensation for the long-term growth of the business.

As with most privately owned companies, family firms tend to be able to make decisions quickly because they are dependent on the agreement of fewer stakeholders. This flexibility can be an asset when it comes to responding to challenges or controversies arising from tax issues. However, it is the long-term perspective that characterizes family-run firms that is most important in helping them to minimize their tax burden, both at home and abroad.

Minimizing the tax burden on family businesses

Niels Josephsen, International Tax Services Leader, Ernst & Young Denmark

Viewpoint

More informationTo learn more about Ernst & Young’s personal tax services, please email Niels Josephsen (Nordics) at [email protected], Marnix van Rij (EMEIA) at [email protected], Chuck Kowal (Americas) at [email protected] or speak to your local Ernst & Young contact.

“Start planning early to avoid facing unnecessary tax”

Anders Westermann, Executive Vice President of Widex, left, with a technician

Anders Westermann says, it has “been an international company almost since day one” and has grown through a series of strategic ventures into foreign markets. In the company’s early history, it successfully targeted the UK, Sweden and the US as areas for business development; today, it is a global enterprise that employs about 2,400 people in 100 countries.

As Widex has moved into new markets, it has increasingly focused on distribution as well as production. While it initially outsourced its product sales to local distributors, it soon needed a broader range of distribution channels and began taking over distributors and setting up daughter companies. Greater flexibility meant greater profitability, and the company’s international growth is now driven by its 30 daughter companies.

From manufacture to distributionWidex’s growing interest in retail channels reflects a broader industry trend for moving down the value chain from manufacture to distribution. With six major players dominating the hearing aid industry, competition is aggressive and price pressure is high, so the only way to increase market share is to take it from a rival. “We had to go into the retail business on the defensive, because otherwise our competitors would have beaten us to it,” points out Anders Westermann.

Today, Widex’s most profitable markets are the US, Germany and Japan, and its growth plans are targeted at emerging markets such as China, where it has a daughter company, and Brazil, where it has an independent distributor. Anders

Westermann says that further expansion will be a process of “evolution rather than revolution” but that, as long as the company has the patience to work closely with new markets, there is real potential for growth. Widex tends to recruit its managers locally, he adds: “The challenge is to find the right person to run the business, give them the benefit of our experience through close dialogue and then let them take things forward with their own team of specialists.”

Delegating responsibility outside the central management team can be particularly challenging for a family-run firm, admits Søren Westermann, but Widex’s method of governance is relatively equitable, with 10 vice presidents each in charge of a different area of the business. While it is not yet clear how involved the third generation of the two families will be in running the business, Søren Westermann is convinced that, whoever takes the reins, Widex’s aim of achieving “significant growth while keeping bureaucracy to a minimum” will remain possible.

Widex’s status as a family business lends it certain advantages when it comes to making long-term decisions. “Unlike large corporates, we don’t always feel that we have to perform within the next quarter, which means we can enter into longer-term investments,” explains Anders Westermann. So, although Widex forecasts a decrease in profit before tax in the current financial year, it expects to gain market share over a longer period through continued product development. Clearly, Anders Westermann speaks for the whole family when he says that Widex is here to stay.

Widex


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Talaris


The past two years have been busy ones for UK-based cash management solutions company Talaris. First came a £360m

(US$517m) management-led buyout from security printing business De La Rue, backed by private equity company Carlyle Group. Keen to capitalize on this momentum, the company has since expanded into new territories and looked to cut costs, driving performance in the face of difficult market conditions for its financial services sector clients.

En route, Talaris — a specialist provider of bank branch teller automation solutions, cash dispensers, and desktop cash and coin counters, sorters and validators — increased sales by 12.2% to £321.5m (US$462m) for the year to March 2009. Operating profit increased to £53m (US$76m). To cap it all off, the company secured the 64th spot in The Sunday Times’ Top Track 250 league table of Britain’s leading private mid-market companies.

Throughout, Talaris, which takes its name from the winged shoes worn by Hermes, the Greek god and patron of commerce, has had to fly in the face of the oncoming economic storm. “The environment has been tough and different from what we expected,” acknowledges Chief Financial Officer Mike Wilson. “Our main customers are large financial institutions, so it has been a challenging market. But while our

top line has come under pressure recently, we’ve been able to move further and faster in terms of improving efficiencies than we originally anticipated.”

There has, Wilson concedes, been some headcount reduction since the MBO, while the streamlining of Talaris’s European operations has also helped to reduce outgoings. Nevertheless, the company’s growing profitability reflects more than mere cost cutting. Talaris has expanded rapidly since its MBO.

“When we exited De La Rue, we had a presence in 15 countries — mostly in Europe but also in the US, China and Australia,” Wilson explains. “It took the business 40 years to reach that point. In less than two years, we’ve increased that total to 21 countries and we’ve entered several new rapidly growing markets, including Brazil, Colombia and India.”

Having served as Finance Director of De La Rue’s security printing business before assuming the same role in the company’s cash systems business two years before the MBO, Wilson is well positioned to reflect on how things have changed. “Our new structure enables us to move more quickly,” he explains. “While we continue to exercise strong discipline, we also have a much shorter decision-making chain. That allows us to act more decisively.”

But that doesn’t mean that Talaris opts for a one-size-fits-all approach with

CFO Mike Wilson says that Talaris’s new structure allows the team to act more quickly

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On the moneyFormed after a 2008 MBO, cash management solutions company Talaris has faced a baptism of fire. But, as CFO Mike Wilson explains, growth is still top of the agenda


Talaris

› › CFOs face a number of new challenges in the wake of an MBO. For companies who are no longer part of a well-established group, there is a need to create new processes and support systems. Transition service arrangements often exist for about six months post-deal and help to achieve this. Yet the CFO still has to focus on servicing debt requirements in a far more leveraged situation, establishing new legal and tax structures, and coping with the complex group structure established during the MBO.

Other priorities include amending management information to reflect new key performance indicators — especially in working capital management, cash generation and covenant reporting — and establishing new corporate governance structures. Meanwhile, it is essential to understand the information requirements of new stakeholders such as private equity backers, bankers, credit insurers and new independent directors.

The CFO and management team often use “100-day” project management tools to prioritize actions during this period of rapid change. Pressures are intense and a new finance team structure is often created, adding further change management challenges for the CFO.

For MBO teams, excellent project management skills and team working are key requisites for CFOs during these

first months post-MBO. Strong feedback and monitoring processes are vital and enable progress to be reliably measured. Excellent communication skills are essential throughout.

Following on from the immediate aftermath of the MBO, businesses face further strategic challenges. The move to being independently owned can result in major changes to products, services and general market positioning. These changes are vital if the business is to position itself for a successful exit in

future. Considerable CFO time may therefore be spent working as a “business partner” to the CEO and other members of the management team.

Balancing this with a CFO’s day-to-day responsibilities, such as managing

the business’s financial health is an interesting challenge. The best way of working will differ from individual to individual.

Appointing a support network of financial controllers and country finance directors with relevant skills is vital, as is ensuring that there are no weak links in the network. Additional pressures are put on the team and new members often have to be recruited, with new balanced scorecards set to reflect different priorities.

Overall, it’s a testing time for any Chief Financial Officer, but also a satisfying and fulfilling one.

The CFO’s role in an MBO

Andy Glover, Partner, Ernst & Young UK LLP

Viewpoint

More informationErnst & Young is soon to publish a groundbreaking study into the DNA of a CFO. To register your interest in receiving a copy of the report, please email Emma Dowding at [email protected] or speak to your local Ernst & Young contact.

“Excellent project management skills and team working are key requisites for CFOs during the first few months post-IPO”

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Talaris has a program of “continuous innovation” in place to perpetuate growth

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“ As CFO, you have to take on full responsibility for tax and treasury matters, accounting affairs and legal issues”

regard to international expansion. “You have to be pragmatic,” Wilson says. “First, we identify markets that are appealing, then we consider how best to make an entrance. In some countries, we may decide to set up a local base and manage everything ourselves. In less familiar territories we will, instead, use specialist local distribution channels. Each country has its own unique business culture and practices. It just doesn’t make sense to try to do everything by yourself.”

The Talaris relationship with the Carlyle Group also helps. “Carlyle has a global team of more than 400 investment professionals and they provide invaluable local knowledge and experience across the major regions,” Wilson says. “They know their markets extremely well and have good contacts with local advisors and distributors, and that is obviously a big benefit.”

Long-term, further international expansion remains a key part of Talaris’s strategy. “The concept of bank teller automation is in its infancy in many countries,” says Wilson. “Banks in the UK have already realized that it can increase security, improve cash handling efficiency and provide members of staff with extra time to interact with and sell to customers. That’s a compelling proposition and one we think financial institutions around the world will begin to capitalize on.”

There are other plans for growth, too. “Talaris already holds market-leading positions across the majority of our portfolio and this brings with it opportunities for growth and expansion,” Wilson explains. “We are committed to remaining the partner of choice, and to achieve this we have in place a program of continuous innovation, development and

expansion across our product, software and support solutions.”

This year has already seen enhancements to the company’s teller cash recycler, Vertera, and the launch of its new teller connectivity software, CashInsight Assure. Wilson says that, while the majority of research and development is handled internally, Talaris is open to the benefits of acquisition and partnership opportunities.

Changing rolesOn a personal level, he admits that the past two years have been challenging. “When the separation from De La Rue was decided, my role was to assist with the sale,” he explains. “I had to help attract potential buyers and provide them with all the information they needed. As we started to investigate the possibility of an MBO, things changed. There was obviously the potential for a conflict of interest, so we had to ensure the right processes were in place.”

Once the MBO was completed, the real work began. “Following a divisional buyout from a larger group structure, there were a number of changes to my role,” Wilson states. “Previously, I was responsible for one division, but there was a group structure above me. As CFO, you sit on the board, run key committees and are responsible for ensuring the correct processes are in place. You have to take on full responsibility for tax and treasury matters, accounting affairs and legal issues. You also have to build relationships with your lenders and investors and understand what they expect from you. This is all in addition to keeping your finger permanently on the pulse of the business.

“But the biggest challenge lies in reconciling the multiple priorities and initiatives that emerge from our four business units operating across 21 countries, with the overall business strategy and need to deliver consistently,” he concludes. “When my commercial colleagues come forward with new ideas, which they do frequently, my role as CFO is to ensure that things are planned and executed properly. That’s not always easy, but my team has been absolutely fantastic in helping me achieve it so far.”


KAUST

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Michael Hasbani, Performance Improvement Services Leader, Ernst & Young Middle EastOpportunity knocks

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With KAUST, a new graduate-level university in Saudi Arabia, the Middle East has a chance to accelerate innovation and entrepreneurship

Try to imagine being a student again. You’re working with the world’s brightest young men and women at a brand new eco-friendly coastal campus, taught by some of academia’s sharpest thinkers, and with access to US$1.5b worth of the latest technology — including Shaheen, one of the world’s fastest supercomputers. Together you’re tackling the biggest issues facing mankind,

such as clean fuels, computational bioscience and water reuse. If it sounds like a haven of intellectual curiosity, it is. Now open your eyes: you’re in Saudi Arabia.

The King Abdullah University of Science and Technology (known as KAUST) opened near Jeddah in September 2009 with unusually lofty aims: to spark a wave of innovation that will allow the Middle East to compete globally in science and technology, benefiting “the region and the world.” Saudi welcomes the entrepreneurial boost that it will bring.

Various trends have set alarm bells ringing in the Middle East recently. First, there’s

KAUST’s campus at Thuwal on the Red Sea

KAUST


How much KAUST has invested in technology

$1.5b

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Guests view an exhibit at the KAUST Museum of Science and Technology

demographics. According to the Economist Intelligence Unit, 50%–60% of the population of the Gulf States will be under 25 by 2020. Together with the rise in the number of women graduating and seeking jobs, this is creating tremendous employment pressure. If the Middle East is to continue on its current economic trajectory to that point, it needs to create 100 million jobs.

The region can’t do that by simply relying on the arrival of more foreign companies or on its fundamental economic drivers of oil and gas. It needs to diversify into other industries by creating an environment in which entrepreneurship can prosper.

But the entrepreneur as a breed has been found wanting. Take the number of

“King Abdullah believes education can help entrepreneurship soar, nurturing and protecting freedom of research, thought and discourse”

Saudi Arabia’s King Abdullah at the KAUST groundbreaking ceremony

opportunities presented by an institution that empowers people to innovate and that rewards them for original thinking.

Hothouse for innovationThis is where KAUST comes in. The graduate-level university provides the perfect breeding ground for entrepreneurial talent on a scale of ambition that is breathtaking. It schools students in research that applies science and technology to problems of human need, social advancement and economic development, pioneering research into clean combustion, alternative energy science and water desalination.

Its founders have recognized the need for pedigree — matching its lavish investment in buildings and infrastructure with a commitment to developing an enviable intellectual base. To this end, It is engaged with faculty from leading universities such as the Massachusetts Institute of Technology, the University

of California at Berkeley and Stanford University, and a host of other world-class institutions of a caliber that can truly nurture local innovators.

KAUST’s methods are geared towards fostering entrepreneurship. Its first 400 students are a roughly even split between Middle Eastern, Asian and South American. All classes are taught in English and, unlike the country’s traditional education establishments, the institution will benefit from a merit-based, gender-blind recruiting policy. Then there’s the US$1.5b of state-of-the-art equipment: Shaheen is one of the fastest supercomputers in academia, named after the Arabian falcon famed for its swiftness of flight.

For his part, King Abdullah has shown his belief in how education can help entrepreneurship soar, stating that the university must keep “nurturing and

protecting freedom of research, thought and discourse” as a primary aim. And he has given the project not just a US$10b endowment but his full political backing, bypassing his own education ministry to hire the state-owned oil giant Saudi Aramco to develop

the campus and its organizational and academic management.

KAUST’s president Choon Fong Shih has described the university as “the opportunity of a generation,” a world-class institution that will “pursue scientific excellence to benefit humankind.”

It’s certainly an awe-inspiring start. Hopefully it will inspire more states across the region to invest in educational projects at a similar scale of ambition. Education is important in and of itself, but it’s also a means of overcoming the Middle East’s biggest challenges. Getting it right is a major factor in fostering entrepreneurship and economic prosperity. E

patents registered in the area: in the years 1980–99, South Korea registered more than 16,000 patents; the Middle East had only 370. It’s no surprise that

the World Economic Forum recently singled out entrepreneurship one of the key areas of high risk for the region.

Entrepreneurship relies on independent thinking, drive and a willingness to dust yourself down and learn from mistakes — all character traits that are more likely to grow in a sympathetic learning environment. As such, entrepreneurship is intrinsically linked to education. And that was another area highlighted by the World Economic Forum as a serious challenge for the area.

In 2006, the University of Cairo was the only university in the region to feature in the QS World University Rankings of the planet’s top 500 universities. Against such a backdrop, it doesn’t require a huge leap of imagination to see the tremendous

More informationErnst & Young has produced publications including Doing business in Kazakhstan, Taxation in Ukraine and Doing business in Russia. Another report, Russian business outlook 2010–2014, sees Daniel Thorniley, President of DT-Global Business Consulting, give his opinion on Russian economy and business trends. To receive a copy of any of these publications, please email [email protected]

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aCIS fact fileFounded: 1991Members and participants: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, UzbekistanPopulation: 268.4 million (2009)GDP (PPP): US$2,889b (2009)

Regional focus


Kazakhstani Government introduced a stimulus package aimed at: ensuring the sustainability of the financial system; supporting the real estate and construction sector, small and medium enterprises and agriculture; and investing in innovative projects and infrastructure. The goal is to not only stabilize the existing financial and business sectors, but also create fertile ground for foreign investment.

Tax laws in Kazakhstan have changed regularly in recent years. Corporate and individual income tax rates in Kazakhstan are low by international standards, but penalties for non-payment and non-reporting, intentional or not, are high. Moreover, Kazakhstan has a unique position with regard to transfer pricing: transfer pricing control potentially applies to all cross-border transactions, regardless of whether the parties are related or not.

Establishing close personal contacts is key to all business dealings in Kazakhstan, so do accept an invitation to dinner, as hospitality is one of the most important parts of Kazakh culture. Kazakhs are famous for their love of discussion and debate, so negotiations can be animated, but be careful to respect and not contradict senior management.

Doing business in UkraineUkraine produces some of the world’s largest aircraft and actively participates in the international space program. As a result, it has a highly skilled engineering workforce and large manufacturing capability.

Doing business in Ukraine can be complex, as it has a complicated tax and regulatory system. But Alexei Ivanov, Head of Strategic Growth Markets at Ernst & Young in the CIS, says that the Ukrainian Government has made some pro-business changes to tax law. “It’s good that there are some positive trends to simplify the tax regime in Ukraine, but it depends on the industry,” he says. “For example, in January 2010, Verkhovna Rada [Ukraine’s parliament] passed a law that gives aircraft manufacturers six-year tax holidays for land tax and, partially, VAT.”

He points to Ernst & Young’s recent survey, Impact of the economic crisis on Ukrainian companies. “The five major problems that companies faced in 2009

remain the same: local uncontrolled currency devaluation, reduction in sales and delayed payments by partners, and lower demand for products or services,” he says. “Despite this, there are many untapped opportunities in Ukraine, particularly given its proximity to markets in Europe, Asia and the rest of the CIS.”

A network of business contacts is key to getting the job done. Similar to other states in the Commonwealth, personal relationships are key to building trust and Ukrainians love to host and entertain.

Doing business in RussiaIvanov believes that Russia has also made significant steps to improve its business attractiveness and public image. “The Russian taxation and legislation system is continuing to develop and improve,” he says. “That was the general perception of participants of our tax survey 2009.”

The corporate profits tax rate, for example, was reduced from 24% to 20% (of which 2% goes to federal and 18% to regional budgets) in January 2009 — it was one of the first anti-crisis measures taken by the Government. The regional authorities may also reduce their component of the tax rate to 13.5%, making the lowest possible total tax rate 15.5%. And some regions have effectively adopted a reduced rate for certain categories of taxpayers.

Recently, the Russian Ministries of Finance and Economic Development have agreed on and formalized the plan for transfer pricing (TP) reform. This document sets out the rationale for TP reform and, broadly, how the amended legislation should look. It is expected that the amended TP rules will be more aligned with the OECD’s transfer pricing guidelines.

Foreign companies may operate in Russia by establishing a branch or a representative office. However, a limited liability company (LLC) with the minimum charter capital

of about US$320 still seems to be the most popular corporate form in Russia, as its registration procedure is rather simple. It was strengthened by the latest amendments to the LLC law effective as of July 2009, which have significantly enhanced the safety of title to equity shares and have given more transparency to that issue. Taking into account that the right of withdrawal of participants in an LLC has now been abolished, LLCs may become more popular for joint venture vehicles.

Again, personal relationships are key in an environment where contracts can be challenged or overruled. Economic volatility has also led to a shorter-term view of business opportunities, with pressure to deliver returns on investment quickly.

Imports and customsThe Russian Customs Code contains similar provisions to those of the EU Customs Code. Imported goods are generally subject to import customs duties and import VAT, with customs duty rates varying from 0% to 20% of the customs value of goods.

A more integrated Customs Union of Russia, Belarus, Kazakhstan, Kyrgyzstan and Uzbekistan was established in 1995. Goods exported from Russia to these countries are not subject to export customs duties; however, other provisions have not been established. Now, Russia, Belarus and Kazakhstan have taken further steps toward a Customs Union with a unified customs territory and unified tariffs. E

Doing business in the Commonwealth of Independent States (CIS), as in any developing market, offers both

risks and rewards. But with vast natural resources and a highly educated workforce, some members of the CIS are considered to have tremendous growth potential.

There are still challenges to overcome before the region becomes truly attractive to businesses, however. One of the most pertinent issues is reducing administrative barriers to business activity. With less bureaucracy to get through, companies will have to spend less money and time on meeting administrative and regulatory requirements, and more time concentrating on core or value-added activities.

In this article, we look at facets of doing business in a selection of CIS countries.

Doing business in KazakhstanAn abundance of natural resources and agricultural products has helped Kazakhstan’s economy immensely. They have not, however, been immune to the economic downturn. In response, the

Doing business in... the CIS

Companies looking to enlarge their global footprint are increasingly looking to the emerging markets. In the first of a new series, we look at the Commonwealth of Independent States

Alexei Ivanov Head of Strategic Growth Markets, Ernst & Young LLC

Linet Linet designs andmanufactures hospitalbeds, which it exports

across the world

Czech entrepreneurZbyněk Frolík explains

how Linet is makingpatients’ lives more

comfortable throughits innovative hospital

bed designs

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A political system that quashed individuality and entrepreneurial spirit wasn’t enough to discourage

Zbyněk Frolík. In the late 1980s, he tookthe only legal way to earn extra income — growing flowers — and turned it into one of the largest private garden shops in Czechoslovakia. The next two decades brought enormous growth to the post-communist country, which is now the Czech Republic. Frolík has kept pace with his company, Linet, which manufactures hospital beds. After studying technical cybernetics and working for the Czech Academy of Sciences, Frolík became head of the technical department at Prague’s largest hospital. There, he noticed how difficult it was to find good beds. “Hospitals in Czechoslovakia were poorly equipped and I saw great potential for launching a successful company,” he says. And that he did, using an initial US$10,000 investment and an old farmhouse that he converted into a manufacturing hall.

The odds were stacked in Linet’s favor. “There is a long industrial tradition in the Czech Republic, a high level of education in the population, relatively cheap labor and the excellent Czech health system as our first customer,” says Frolík.

In 2008–09, Linet posted consolidated

› › The Czech Republic has enjoyed a successful few years since accession to EU membership in 2004. Along with Hungary, it has proved to be attractive to large multinationals — and not just for the tax benefits. The location is also good for central, western and eastern Europe. Inward investment has been boosted by the Czech Government’s incentives, of which multinationals engaged in R&D, manufacturing and so on have taken advantage. The country’s skilled and well-educated workforce is also an attractive asset.

On the back of that corporate influx, the issues of transfer pricing and overall tax compliance has raised its head for any multinational requiring intra-group trading across a number of business units and repatriating profits. The Czech authorities, in common with tax authorities across the world, are stepping up their compliance regime in the wake of the financial crisis in order to ensure that every last penny of the correct tax take is collected.

In the case of the Czech Republic, the tax system is expected to undergo a series of changes, the most startling of which is the currently widely debated increase in the level of personal taxation. On the corporate side, the recent

elections, in which the ruling Social Democratic Party held on to power, have brought the level of corporate tax back under discussion.

The tax authorities believe that there is a need to improve the levels of both understanding and compliance in the area of tax generally, and transfer pricing in particular. Recently, they have expended a lot of time and energy on educating their inspectors and on communicating

with the corporate sector. They have also created special units that focus on transfer pricing.

The goal is to ensure that the Government can collect significant taxes from transfer pricing rather than spending days and days reviewing small items such as travel costs.

With the economic downturn and expected

increases in the overall tax burden, maintaining the Czech Republic’s competitiveness in attracting inward investment will certainly be a challenge for the Government.

And it’s not just that. The World Bank indicated in its recent report that the number of hours a company needs to log in to be corporate tax compliant in the Czech Republic is 130 hours. Compare this with Germany, for example, where it is 30 hours. That is a big difference.

Taxation in the Czech Republic

Libor Fryzek, Head of Tax Services, Ernst & Young Czech Republic

Viewpoint

More informationTo discuss Ernst & Young’s international tax services, please email Libor Fryzek (Central and Southern Europe) at [email protected], Alex Postma (EMEIA) at [email protected], James Markham (Americas) at [email protected] or speak to your local Ernst & Young contact.

Linet


“The issues of transfer pricing and overall tax compliance has raised its head for any multinational requiring intra-group trading across a number of business units”

Zbyněk Frolíkspotted a niche in theCzech market for well designed hospital beds.

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That collaboration has resulted in a column unit for adjusting the beds that has become an international standard, automatic brakes and a range of motion devices that reduce nurses’ physical workload and maximize patients’ mobility and independence.

Twenty years after founding Linet, Frolík is still hands-on with the designs and spends as much time as he can coaching employees: two activities tied to his passions and business model.

“Looking for new ideas — that’s the umbilical cord between me and our technology department,” he says. “Our corporate culture is a model to other companies: we’re obsessed with innovation and the technological process and that’s why we’ve been able to go up against companies with traditions dating back 100 years.” Innovative designs and a successful business model have made Linet the top European hospital bed manufacturer, and have given it high hopes for success in other markets. Linet recently expanded into the US through a subsidiary, Linet Americas, which is competing with two other major players in the largest and most expensive healthcare system in the world.

“The economic crisis has resulted in 90% of hospitals in the US having to take costcutting measures,” says Frolík. “And now, more than at any other time, we feel the need to do things differently.”

The company has a good capital base and is even looking at potential acquisitions, but organic growth remains its preferred method of expansion. While it is aiming for a turnover of US$300m within five years, Frolík remains committed to maintaining the positive work environment and product standards that have allowed such success.

“Our slogan was, and is, to be an object of desire, not merely of choice,” he says. “A customer who desires our products will always find a way to get them.” E

revenues of €81m (US$109m), up 4.6% from the previous year — a good result considering the global economic crisis and the fluctuations of the crown, the Czech currency. Exports account for 78% of sales, a situation typical of companies operating in the Czech economy, where exports account for 77% of GDP.

Worldwide recognition The company has been showered with accolades in the past few years, a testament to its solid business reputation both at home and abroad. Frolík was Ernst & Young’s Czech Entrepreneur Of The Year 2003, Linet has been Czech Company of the Year and its products have received numerous design awards.

Recently, Linet was also placed fourth in the top 100 ranking of the most admired companies in the Czech Republic, an award based not just on financial performance but also on the company’s public image and how well it treats its employees — a practice that Frolík credits for his success. He says that Linet allows its employees “great freedom” but that it expects great responsibility in return.

“It’s like a jigsaw,” he explains. “A business is made up of hundreds of different skills, all of which have to fit together. So far, we’ve been able to piece the puzzle together.”

Freedom has laid the groundwork for continued innovation and a commitment to creating “comprehensive solutions.” Linet’s design team includes not only engineers but also end users, who know at first hand how the beds should function. The company has maintained a long-term and exhaustive collaboration with healthcare professionals to create the best product, and also relies on patient feedback. “For instance, handicapped patients, such as quadriplegics, think about what can be improved, and they’ve been our faithful advisors,” Frolík says.

“Our corporate culture is a model to other companies: we’re obsessed with innovation and the technological process”

Voyageurs du Monde


”We once flew an entire company on the Concorde to Iceland during the white nights”

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France’s Voyageurs du Monde Groupe specializes in tailor-made trips and adventure travel. CEO Alain Capestan reflects on the Parisian company’s journey and ambitious international itinerary

The strangest circumstances often inspire the best ideas. During a late-night stroll in Cairo in August 2000, Alain Capestan chanced on a derelict boat docked on the Nile. It turned out to be the Steam Ship Sudan, built in 1885 for Egypt’s King Fuad, and had been the backdrop for

Agatha Christie’s Death on the Nile. Eight months and US$1.3m later, Capestan

and his associates had restored the vessel to its former glory, preserving the original woodwork and furniture while adding other touches such as china purchased in the souks of the Egyptian capital. In spring 2001, the new and improved version made the first of many cruises run by its owner, the Paris-based Voyageurs du Monde Group.

As with the boat, Capestan and four fellow entrepreneurs sought to create something new when they bought the Voyageurs du Monde tour operator in 1996. All passionate globetrotters with financial backgrounds, they embarked on tailor-made travel, offering adventure-seekers an authentic way to discover a country instead of selling airline seats, hotel nights and prefabricated packages.

“Our idea did not yet exist on the market, but we saw huge potential,” says Capestan, the 49-year-old Chief Executive of the group, whose other brands are Comptoir des Voyages, Terre d’Aventure and Nomade Aventure. Judging by the group’s 2009 sales of €340m (US$421m) and repeated outperformance of the French travel sector, their hunch was correct.

In it for the long haulAlthough adventure and niche travel companies are now everywhere, nobody else has done it on the same scale or with the same success as the French group, whose 400 country specialists plan 130,000 trips a year to 90 destination countries.

“We are capable of organizing trips from the simple to the completely crazy,” says Capestan, who has personally visited 74 countries. “We once sent 80 people to a desert camp for a week, and flew an entire company on the Concorde to Iceland during the white nights. That’s the beauty of what we do.”

Sustainable and responsible tourism are guiding principles for the group, which set up a foundation in 2009 to undertake environmental

Fantastic voyage

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› › For the past several years, France has been the world’s top tourism destination, attracting about 80 million foreign visitors a year. They come to climb the Eiffel Tower, taste the wines of Burgundy and Bordeaux, explore the Loire Valley castles and comb the coasts’ beaches. By 2020, the number of visitors is expected to double, according to the World Tourism Organization. While that may seem like a daunting prospect to many in the sector, it reflects the huge opportunity ahead.

The main immediate challenge for the industry is that it must adapt to changing consumer preferences. There is more competition from emerging countries such as Egypt and India. While it is not for the same kind of tourism, it is competition nonetheless.

In the future, we will also see more last-minute demand for short-term hotel stays, especially those booked on the internet. Paris is fully prepared for that, but on the Riviera it is virtually impossible to book a hotel for two or three nights on short notice in the peak season in July and August. Companies must invest in their website to ensure that it is fully functional and navigable.

In the past, France had a large proportion of American and British tourists, but increasingly we are welcoming visitors from India, Russia, China and even Brazil, which means that there is an onus on both our educational system and employers to teach more foreign languages to our young people, especially those working in services.

This does not mean that they all have to speak Chinese, but we should certainly have the range of languages covered.

Already, many large international hotel chains, such as Accor, Starwood Hotels and Resorts Worldwide, and Marriott International, are ready for the increase in short-term, last-minute stays, so now all they have to do is market themselves and make sure that everybody is aware of their offers. In light of the financial crisis, marketing and sales forces are definitely more important than ever. The crisis has also had a huge impact on independent hotels, which were the first to be hit financially.

However, there is a silver lining in increased demand for financial investors in large chains. France is still very expensive, but there are certainly plenty of investment opportunities for financial groups to partner with hotel companies in owning properties.

The crisis also showed us that there is a lot of room left in the sector for more two-star hotels, or economic hotels, which fall in between super-economic (budget) hotels and three-stars.

Finally, regardless of which way the sector evolves, service will always be of utmost importance to our visitors. Travelers on short-term stays are increasingly demanding more services. This means that in a country where labor costs are expensive, we still have to ensure a high level of service. Even people in budget hotels demand a clean window and other basic things, so that is something we can never sacrifice.

The future of the French tourism sector

Caroline Caron, Senior Manager, Real Estate and Hospitality, Ernst & Young France

Viewpoint

More informationErnst & Young has recently published Hospitality and leisure outlook 2010 for the EMEIA region. For a copy, please email Penny Cooper at [email protected]. For more information on our services for hospitality and leisure clients, please email Christiane Fiack (EMEIA) at [email protected], Rick Sinkuler (Americas) at [email protected] or speak to your local Ernst & Young contact.

Voyageurs du Monde


and humanitarian projects from building schools to restocking forests in developing countries.

The company’s origins go back to 1991, when Capestan and team opened a small agency offering tailor-made trips to the United States, Africa and Canada. Five years later, they bought Voyageurs du Monde, then operating from one Paris office. It would become the group’s flagship brand and springboard for future growth.

Instead of travel agents, the group employs so-called “country specialists” — former historians, linguists and geographers charged with conveying their knowledge and passion to clients. Each must visit their country of focus

at least once a year to check out new hotels, cultural sites and to review host organizations.

Every travel plan starts with the client visiting an office or — in about 35% to 40% of cases — searching on the web. After getting a better idea of the client’s wishes, sensibilities and budget, the specialist comes back with a suggested itinerary within 48 hours. Although nothing prevents customers from walking away from this proposal, few do; in fact, about a third of travelers are repeat customers.

Over the years, the company has added destinations while growing its sales network throughout France, where it now has 15 sales points, or “Cités des Voyages.”

At the same time, it has added brands, creating Comptoirs des Voyages as the budget-travel counterpart to Voyageurs du Monde. Capestan says it was natural to expand into adventure/backpacking travel, through the 2000 purchase of Terres d’Aventure, followed by the acquisition of the lower-end Nomade Aventure.

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Alain Capestan is currently scouting out locations in French-speaking destinations

“Every brand is a company, and every company has its own personality and team,” says Capestan, who estimates that acquisitions account for about a third of growth. “You can see that expressed in the brochures, or on the websites.”

Travel empireTo keep expanding its offering and maintain control over where it sends customers, the group owns multiple local subsidiaries worldwide, from Sénégal sur Mesure SARL to the Icelandic Travel Co. Besides the Steam Ship Sudan, it owns several other unique properties, such as the luxury Villa Nomade riad in central Marrakech and the UNESCO-protected Villa Bahia in Salvador’s historic Pelourinho district — all offering a unique, “whiff of legend” experience.

Some investments in properties and new offices were financed by the 2006 IPO on France’s secondary Alternext market, although nearly 70% of shares remain in the co-founders’ hands.

Now that the group has reached critical mass in France, it is pursuing cross-border growth for its Voyageurs du Monde and Terre d’Aventures high-end brands, for which it opened an office in Brussels last year and is currently scouting out locations in Geneva and Canada.

“We are looking for new opportunities in French-speaking countries that won’t require us to translate our brochures or our website,” Capestan explains. “Once we have gained experience in other markets, we can think about further internationalization, perhaps the United States.”

While that’s a tough market to crack, it shouldn’t pose a major hurdle for this adventure-minded enterprise.

”Once we have gained experience in other markets, we can think about further internationalization”

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Beyond profit

Are you a woman entrepreneur with big plans?Do you have the vision and passion for growing your company? Or do you know a dynamic woman entrepreneur on track to become a multimillion- or billion-dollar enterprise? If you are a woman who owns or has founded a company within the last 10 years, and has achieved at least $1 million in revenue in the last two years, we invite you to competeto become one of the 2010 Ernst & Young Entrepreneurial Winning Women™ in the US.

Become part of an elite business network, including the country’s best entrepreneurs and high-growth companies, to help you scale your company. Connect with the advisors,resources and insights you need to be tomorrow’s market leader.

What’s next?To learn more, obtain an application or nominate a deserving woman entrepreneur, visit: www.ey.com/us/entrepreneurialwinningwomen.

The application deadline is June 30, 2010.

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Shona McDonald is proof that greatness can spring from unfortunate circumstances. Her

daughter Shelly was born in 1982 and was diagnosed with cerebral palsy. The doctors’ advice? Give her up and move on. McDonald is not the only person who’s happy she chose to ignore them.

Instead, her defiance led her to found Shonaquip, a disability training and equipment business. ”There’s nothing better than looking back and realizing that I changed what could have been a disaster for my daughter into something so positive for so many people,” she says.

McDonald, Ernst & Young South Africa’s Social Entrepreneur Of The Year, started out simply by doing the right thing for her daughter. With care options limited by the sanctions placed on her native South Africa at the time, she was forced to conduct her

own research into equipment. By the time Shelly was two-and-a-half, she was testing her first custom-built motorized wheelchair.

McDonald’s influence soon grew, and her projects transformed into a fledgling NGO. She traveled extensively, meeting parents with similar problems and custom-building buggies for them, too. But she soon realized that this wasn’t a charity, but a business.

“Social enterprise belongs in the business arena, not the NGO space,” she says. “We’re less exposed to the whims of backers, who will happily withdraw funding to back something more prominent. Business is simply a transparent and effective tool to drive social change.”

McDonald proved adept at handling that tool. From its start in her garage in 1991, Shonaquip developed into a profitable company that now employs more than 65 technicians, seamstresses and therapists.

Going placesFor Shona McDonald, necessity was the mother of invention

It’s made a remarkable impact. When Shelly was born, she had a choice of only one type of wheelchair that came in three adult sizes. McDonald now offers 80 options that incorporate different posture supports and are suitable for various terrains.

”I had no idea of the massive space I was entering,” she says. “Ten percent of the world has a disability; 2% of this population needs wheelchairs and only 20% of them have what they need. It’s huge.”

McDonald’s passion is still to improve the lot of others, and she now finds herself advising the government on disability policy. But not everyone is so receptive. Get labeled a “social entrepreneur” and the investment world may dismiss you as a “do-gooder,” not a businessperson. “Start asking for millions in overdrafts or growth capital and they panic,” she says.

It’s not surprising. While a social enterprise is driven by positive change, their bank will worry more about the bottom line. “We don’t see ourselves as a high-powered business,” says McDonald. “We’re a social development organization. I’m basically a renegade. And most banks don’t think like we do.”

With Shonaquip now on the cusp of expanding across Africa, its founder is looking to attract enterprise development funding to take on the rapid growth it requires. She’s also started the Uhambo Foundation to support the non-profit areas of the business, moving them into the NGO space to attract broader funding and allow the company to become more competitive.

And so her life’s work rolls on, far beyond its humble origins. “You don’t make a conscious decision to start a social enterprise,” she says, “but I risked everything I have to achieve my goal.” E


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