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FinancialManagement

Plus:

Where do theworlds rihest

people live? p4 wys to... nethe ost o IT

projetsp36

www.fm-magazine.com March 2013

Prince Ko Amoabeng, CEO o UT Bank, on Aricas challenge

Coca-Cola Enterprises CEO John Brock on global sustainability

The FTsJonathan Guthrie on the integrity o company accounts

The valueo data

How eective analysis o your datacan help your organisation make

better decisions and drivestrategies or growth

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3Financial Management | March 203

During my recent trip to India,I had the privilege o attending

the 54th annual conerence othe Institute o Cost Account-ants o India (ICAI). This was arst or me, but CIMAs relation-

ship with the ICAI is well established.The ICAIpresident, Shri Rakesh Singh, declared that CIMAis its sister institute, its big sister, and would likeus to share our knowledge with it and its col-leagues in Pakistan and Bangladesh. This senti-ment was underlined by the act that CIMA wasgiven top billing as knowledge partners andwe were ted as honoured guests. It was a hum-bling experience.

The conerence had some excellent speakers,

but what I enjoyed most was the sense o com-munity and mutual support.

As I know all too well, this goes a long waywhen you are struggling to get your career going.My journey to become CIMA president was arrom easy and without the support o my amily,the institute and ellow members, it would havebeen impossible.

During my ICAI conerence speech I wantedto inspire those who are eeling the pressure owork and their CIMA studies by using myselas an example. Like many others, I had to workhard on a meagre wage to eed a young amily.

I studied the CIMA syllabus in the small hourso the morning and, on more than one occasion,had to re-sit exams. This determination evidentlystruck a chord with the audience.

But the point I would like to make is that wecan all inspire each other. The input o CIMAmembers is absolutely vital in making theinstitute even better than it is already. Ourresearch and thought leadership material sup-ports CIMAs position as the leading body ormanagement accountancy.

The ICAI is keen to have access to this material,but there is much we can learn rom our riends

Gulzri Bbber, FCMA, CGMACIMA president

A wod om the pesident

Illustration:MasaoYamazaki/DutchUncle

CIMA LinkedIn

roup: http://

tinyurl.o/hxyod

The more we all putinto our membershipthe more we take out

in India. Its members enormous enthusiasm orknowledge and learning was inspiring. Despite

the expense and vast distances, more than 500people travelled many miles to attend the two-day conerence.

I was ortunate to be involved in a vibrantICAI event and the pleasure that its memberstook rom it was clear. CIMA aims to provideas much support to its members and studentsas possible. But one o the best motivations or

career development comes rom members shar-ing their insights and experiences together.CIMA branches, where resh ideas and knowl-edge-sharing are always welcome, exist across theworld. Thanks to modern technology, membernetworking can also be done on a worldwide

scale through the community discussions onthe CGMA website, while students and mem-bers can network together on CIMAsphere andthe CIMA LinkedIn group. These are hugelyvaluable resources and are vibrant sources odiscussion and debate.

I would also like to encourage our membersto become involved in CIMA activities. This canbe done in many dierent ways: through virtualnetworks, attending CIMA events and takingpart in its surveys and roundtable discussions.Members should also consider participating inthe institutes thought leadership development

and governance activities.CIMA is currently researching two topics: man-agement accountants in leadership and how man-agement accountants are gaining insights romdata. I you would like to learn more about howto participate in this research, email [email protected]

Our members oten look to us or guidance andcareer development, but it must not be orgottenthat the institute itsel can gain much value romits community o members and students. Work-ing together will take management accountantsto ever-greater heights.

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4 5Financial Management | March 203

At a glance

Font 3-18

Featues 20-37

Study notesC39-49

Technical 50-56

Back 57-66

A word rom the presidentGulzari Babber p3

Update p913Digest o the latestdevelopments in management

accountancy and beyond.Hot potato Your ethicaldilemmas resolved.Book in brieMakers: The

New Industrial RevolutionGen Y Gamication.

worked on...Delivering a humanitarian projectn India p6

The dataThe worlds billionaires in 202 p4ForumBlogs, polls and discussion p6Opinion

onathan Guthrie o theFinancialTimes on market reorms p

A look at the...Strategic cost optimisationMastercourse p57

CIMA eventsThe calendar o CIMA events p6The InstituteThe view rom Proessional Standardsand the 203 Council results p63CIMA CEO columnCharles Tilley p65CIMA versus... p66

CIMAisthe

Chartered Institute

oManagement

Accountants

26 Chapter Street,

LondonSW1P 4NP

0207663 5441

www.cimaglobal.com

PresidentGulzari Babber, FCMA, CGMADeputypresident

Malcolm Furber, FCMA, CGMAVice president

Keith Luck, FCMA, CGMAChieexecutive

Charles Tilley, FCMA, CGMA

Director oprole and

communications

Victor SmartFinancial

Management

is published or CIMA bySeven, 3-7 Herbal Hill,London ECR 5EJ.

GroupeditorJonWatkinsEditorLawrie HolmesGroupartdirectorSimon CampbellJunior designer

Josh Farley

Creative director

Michael BoothEditorialdirector

Peter DeanChiesubeditor

Steve McCubbinSenior subeditor

Graeme Allen

An organisations biggest asset is its data, is astatement that is being increasingly heard. As themeans to mine valuable inormation rom databecome available, so too do the strategicopportunities. But the degree to which organisationscan exploit that inormation is determined by amanagement teams know-how and the toolsavailable. With this in mind, the signicance obig data is considered in this months cover story.

When it comes to the inormation that corporatesgive out, there is a growing debate about how youcan ensure that they are correct. Jonathan Guthrie,city editor o the Financial Times, says that arotation o auditors is not required, but that aundamental search or the truth in corporatenumbers should be a priority.

Were also adding a new eature Gen Y inwhich exponents o leading-edge managementphilosophies rom generation Y discuss ideasthat are beginning to lter into the mainstreamcorporate lexicon. This month were eaturinggamication, which looks at video games andthe inuence they have in shaping everydayinteractions, an idea that may well determineuture corporate decision-making.Lawie Holmes

Please send your comments and ideas [email protected] or join the FMfeedback group on CIMAsphere atwww.cimasphere.com/groups

Head opictures

Martha GittensActing picture editor

Louise FenerciPictureres earcher

Alex RidleyProductionmanager

Michael Doukanaris

Aount ner

David KershookGrouppublishingdirector

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director Hilton YoungAdvertising manager

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Email: [email protected]: 020 7775 577Managing director

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Thecontentso thispublication aresubject

toworldwidecopyright protection and

reproduction in wholeorin part, whether

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orbidden without thepriorwritten

consent o CIMA/Seven.

Allrights reserved.

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Tel: 050 34

45(UK),54 (Europe),72(resto world).Back

issues:7.50(UK)0(rest oworld)including

postage,subjecttoavailability.All payments

shouldbeinsterlingdrawnonaUKbank.

Editos note

Prince Ko AmoabengThe chie executive o UT Bank, Ghana

n his hopes or Arica p20

The value o data How technology candrive strategies and growth p26

A bright idea Coca-Cola EnterprisesCEO John Brock on sustainability p32

Prime number Top 0 global M&A dealsrom 200 to 202 p35

ways to...Manage the cost o IT projects p36

Getting to grips with the adjustedvalue method o appraising

investments and ratio analysis

The ast track to better, more

protable IT and how to make themost o patent opportunities

www.cimaglobal.com

26

20

36

Financial Management | March 203

Cover illustration

Rob Pybus

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studied or my CIMA exams when Iworked or local government in

Wexord, Ireland, as I thought this woulde ideal or working overseas in the

development sector.I began working or the Irish

humanitarian organisation GOAL in003 in Kosovo, ollowed by roles in

Ethiopia and the Horn o Arica. In 35ears, GOAL has spent more than 720mn humanitarian programmes across

more than 50 countries, employingmore than 2,00 international sta

nd thousands o local sta.In 2009, I was oered the role o

ountry director, India, working inKolkata, where the organisation wasormed in 977 in response to a major

I woked onA humanitaianpoject in India

6 7

Ne:LouiseORourke

Role:Countrydiretor

Industry:NGO

Lotion:Kolkt,Indi

CIMAqulied:2000

trtdteAuust2009 EnddteNoveber2011

i

F ina nc ia l Man ag em ent | Ma rc h 20 3 F ina nc ia l Man ag em ent | Marc h 20 3

amine. GOAL has since expanded intoWest Bengal, working with local

organisations in rural and urban relie,rehabilitation and development. GOALhas an integrated programme to improveaccess to education, healthcare andlivelihoods, with a strong ocus onchildren, and to improve empowermentand protection.

The Indian government has manyschemes or the poor, but access is a keyproblem. GOAL, in liaison with localauthorities, creates awareness andhelps communities to access theirentitlements, such as schooling. Itprovides inrastructure as part o itssupport, including the rehabilitation orural schools and the provision o water

and sanitation acilities with a ocus ongirls schools in Kolkata. It also provides

guidance on how to raise hygienestandards, and builds health andeducation centres or children andadolescents in the notorious brick kilnsand municipal dumps. Children get theopportunity to learn how to read andwrite, as well as other skills that maygive them better work opportunities.

We also help vulnerable amilies inNorth and West Bengal who rely onorestry and tea estates or their income.Many o these estates are closing down,leaving the amilies struggling to survive.As a result, these amilies are otentargeted by labour trackers, who claimto oer work in the city or their children,

but orce them into prostitution ordomestic positions where they can be

abused and exploited. Many are neverseen or heard rom by their amilies again.

Just beore I arrived, GOAL in Kolkatahad carried out a baseline survey on thegeographical locations we worked in, tomake sure the integrated programmewas based on a needs assessment.

A mid-term evaluation wasconducted ater months, whichincluded an area where we didnt work, toascertain the success or otherwise o theprogramme and to take key ndings onboard or the remainder o the ve-yearstrategic plan. The evaluation showed amarked improvement in the health andeducation status o communities. It also

showed that the design o our livelihoodprogramme required more attention.

Ongoing monitoring and evaluation arecrucial to ensure that the programmedesign and delivery meet the needs o thetarget communities and achieve thedesired results. We also instigated theCommunity-led Total Sanitationproject to address the considerableimprovements needed in the areaswhere we worked.

One o the biggest benets o gainingthe CIMA qualication was the strongemphasis it has on overall management,which enabled me to coordinatebudgeting and programme planning withmy team and partner organisations.Organisations in the development sector

are not always good at the coordinationangle o the nance and programme

components. This can result in poordecision-making or delays in takingcorrective action, leading to overspends.It can also lead to underspends, whichmean returning money to donors. This isequally problematic and undesirable.See lso: www..or/innovtion

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Update

Galler

yStock

Global fms must be moe esilient to volatilityGlobal businesses are too easilyspooked by short-term economicuncertainty and must make

themselves less susceptible tomacro-economic volatility. Thosewere the key ndings o a recent CIMAand AICPA survey o business leaderswho hold the CGMA designation.

According to the research, lessthan a third (3 per cent) o businessleaders believe the ongoing US debtcrisis will ultimately push the globaleconomy towards recession. Despitethis, more than hal (53 per cent)expect higher US interest rates,

while 70 per cent anticipate a weakerdollar going orward.

In other ndings, 60 per cent o

respondents said that business is toosensitive to economic crises, while asimilar proportion (57 per cent)agreed that their organisation mustseek new ways to be resilient andless susceptible to macro-economicvolatility.

CIMA chie executive CharlesTilley, FCMA, CGMA, said o thendings o the survey: There willalways be another US debt crisis,Arab Spring or eurozone disaster just

around the corner. This uncertaintysimply cannot drive businessstrategy. These grey swans, as some

business commentators have termedthem, are prompting organisationsto cut spending and investment at atime when innovation is absolutelyvital to our economic health.

Indeed, the seizing oopportunities is key to long-termsurvival and so we must all plot asuitable course between risk andinnovation, managing the approachand mitigations put in place toaddress these uncertainties.

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Cost: $9.99

Cteory: business

Updted: 31 Jnury 2013

Current version: 3.1.3

Size: 16.6Mb

Lnue: Enlish

Developer: Hedliht

Sotwre In

Coptible devies: iPhone, iPodtouh nd iPd. Requires iOS 4.3

or lter. This pp is optiised or

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Our uide to the best online tools

Accessing all the documents you needwhile woking emotely can be achallenge. This app allows you to viewand edit documents om you

companys seve. You can also use it tomove fles saved on you iPad (photos,videos, etc) to the seve while on the go.

Update

Now on

CGMA.ogFor those whohold the CGMAdesignation, theollowing contentis available online:l Five CEO myths and whatevery manager can learnrom them: Have you seen anew CEO excel immediately?

What kind o things did anew CEO do well? A BostonConsulting Group reporttakes a look at someo the myths around howCEOs should act in theirrst 00 days.Visit http://tinyurl.com/atgeboj

l Mervyn King its businessas unusual i you wantto survive: InternationalIntegrated Reporting

Council chairman MervynKing discusses whatmakes a top-notchintegrated report.Visit http://tinyurl.com/aamkkre (login required)

l Inside the head o ahead-hunter: In todays

i

cut-throat job market,working eectively with a

head-hunter could provecritical in securing your nextsenior nance role. Find outwhat a head-hunter looks orin a candidate.Visit http://tinyurl.com/bdq5sjl (login required)

lCompanies invest inemployee training to reduceglobal skills gaps eects:Spending on employeelearning and development isrising as companies attempt

to hire and train new workersand leaders alike to combat aglobal skills gap, according toBersin by Deloitte research.Read about some o the bestpractices in L&D, as well asmistakes to avoid.Visit http://tinyurl.com/av5yl

l Four lessons to learn romhigh-perorming companies:Ernst & Young research hasidentied our areas in which

high-perorming companiesdid a better job handling thechallenges o the harshglobal economic conditions.Find out what lessons canbe learned rom highperormers worldwide.Visit http://tinyurl.com/a5j665

The ormer editor-in-chie oWiredmagazine takes you to the ront line o anew industrial revolution as todaysentrepreneurs, using open-sourcedesign and 3D printing, bringmanuacturing to the desktop. Andersonargues that a generation o makersusing the internets innovation modelwill help drive the next big wave in the

global economy. Here is a synopsis :

Book in bieMakers: The NewIndustrial Revolution

By Chris AndersonRndo House

1. The olletive

potentil o illion

re tinkerers ndenthusists is bout

to be unleshed,

drivin resurene

in Aerin

nuturin.

2. The retion o

physil oeril

produts will benet

ro network

eets where

user o servie or

oods hnds on the

vlue to others.

3. Hot teh strt-ups

n et their

nuturin done

heply usin 3Dprinters nd robots:

wht Anderson lls

the ker

oveent willrete new jobs.

4. The ker

entrepreneur should

i uprket s

instre

oodity produts

will ontinue to be

ss-produed in

the old wy, tkin

dvnte o

eonoies o sle.

5. Soe opnies

nt exhibit the

rpid rowth o

ker strt-up, s

theyre just not

innovtiveenouh.

Illustration:LucasVarela/DutchUncle

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12 13Financial Management | March 203 Financial Management | March 203

in a stronger position toproessionally guide utureaction should a similar

request be made o you.Consider threats andsaeguards within thecompany (see section00.2-00.6 o the code) aswell as options or resolution(00.7-). Misleadingreporting is a clear breach ooverall integrity (0) and inparticular principles orpreparation and reportingo inormation (320).

Remember that once youhave breached an ethical line,it is harder the next time topush back.

Update

Hot potatoThis monthsdilemma:

I have just starting working ora plc and my colleagues havewarned me that my

predecessor was asked toinfate the value o products,as well as to overvalue stock,when reporting. This, Iunderstand, was to benet thedirectors bonus. To date Ihave not been asked todo anything untoward, butwonder how best I canapproach the issue shouldI be put in this position.Our response:At present what you havebeen told is hearsay, so youneed to be sure o any acts.Being new to a post sets you Il

lustration:DenisCarrier/DutchUncle,D

aveMurray/D

utchUncle.P

hotography:GalleryStock

Many aeas o global fnanceemain vulneable

The Financial Stability Board (FSB) haswarned that many areas o global nanceemain vulnerable and has called orprompt action.

The FSB was established in April009 to coordinate the work o national

nancial authorities and internationaltandard-setting bodies at internationalevel and to develop and promote themplementation o eective regulatory,upervisory and other nancial sectorolicies in the interest o nancialtability.

It brings together national authoritiesresponsible or nancial stability in 24countries and jurisdictions.

In a statement issued at its annualmeeting, the FSB said nancial marketshave improved in recent months, but thatmedium-term risks remain due to weakgrowth prospects and high levels osovereign debt in many countries.Accommodative monetary policy bycentral banks poses challenges orinstitutional investors and the FSB saidthat national supervisors would need to

enhance their monitoring o credit andinterest rate risk.

The FSB also used its statement toannounce that it has received updatesrom the heads o the InternationalAccounting Standards Board and theUS Financial Accounting StandardsBoard on their work on convergenceo accounting standards.

The FSB said it has asked the twostandard-setters to set out by the end o203 their plans or achieving convergenceon high-quality standards.

For the ode nd

other online ethisresoures, visit

www.ilobl/ethisTanya Barman, head o

ethics, CIMADislierCIMA does not providelegal, investment, proessionalor career advice. Noresponsibility or liabilitywhatsoever is accepted or anyerror, omission (whetheror not arising out onegligence) or or anyloss or damage sustainedas a result o reliance oninormation supplied orcomments made.

Gition is the next big thing in marketing.Combining the increasing adoption o video gamesacross society and the infuence they have in shapingour everyday lie and interactions, its recognitionthat they can produce a desirable experience andmotivate users to remain engaged in an activity.

Put together, gamication can be dened as theuse o game-like mechanics in non-game scenariosto increase infuence and encourage engagement inan activity. At its heart is the idea that introducingplay to customers and employees will helpcompanies achieve desirable results. The termgamication has been kicking around since 2004,but it was not until late 200 that we heard it in themainstream.

At ThouhtBox we believe that learning can beun. We aim to inspire children to achieve their truepotential by unleashing their curiosity andchallenging them to question the world and its rules.And what better way to do this than through games?

Subjects such as maths and science are veryimportant in our day-to-day lives: they oster

strategic and critical thinking, while games unleashcreativity and teach their players how to questionand not take everything or granted.

Children learn through play and experimentation.However, when they start school they are expectedto trust, learn and apply rules and acts that otherpeople teach them. Gameul learning placesplayers back in the driving seat, allowing them toprogress at their own pace and discover inormationand rules by themselves.

At ThoughtBox we believe that maths itsel isstructured as a game because it is challenging, itplaces obstacles and increasingly dicult problemsin ront o us, and it has rules and levels. All o theseare main characteristics o games. However, themain traits that make games un are immediate

eedback and discovery. With the help o technology,dry subjects such as maths and science have equalcapabilities o engaging kids in the same way thatgames do. Technology helps us provide real-timeeedback to players and allows them to discover allthe rules o maths and science by themselves, ratherthan spoon-eeding them inormation.

We believe that gameul learning shouldnt beabout sugar-coating broccoli, it should be abouttrust and respect. We dont try to trick players intolearning by using games. Our products are aboutmaths and science, which are tough, but we trust ourplayers to gure them out and we are helping themby using game mechanics.

How does it work? In an external community,contests and rewards could be used to encouragecustomers to help answer each others questionsand become product champions. This concept issomething that has been widely used or yearsin the traditional gaming world what were seeingnow is that businesses are using externalgamication to best engage with their clients

and uture customers.In an internal employee community, product

development groups could be challenged to helpanswer questions rom the sales team. Sales stacould take part in a competition to see who cancomplete training materials rst.

Where next? We have all seen colleagues bringingtheir own mobile device to work, rom smartphonesto tablets. The new technologies available extend theability to get more people involved inan engaging and rewarding way those sameprinciples that have made social media andgaming so successul.

In the frst o a new column identiying emergingbusiness practices, Cristina Luminea explores howbusinesses can learn rom video gaming

Cristin Luineis ounder and CEO o technology innovation company ThoughtBox

Gition

13

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16

stage o the process as JIT is apull-through system triggeredby a customer order. Everyonein that system must takeresponsibility or ullling thatcustomer order on time and atthe specication required.

Foum

Fom the

blogs

Poll o the month

You asked

We asked

Total means everything andeverybody in the organisationand extends to suppliers. Itputs the onus on eachindividual and group to takeresponsibility or quality.

Quality has ve basictenets: right rst time, zerodeects, customer satisaction,continuous improvement andt or purpose.

Management is about

planning, control anddecision-making.

Send in your own

queries to [email protected].

We will sk speilist

or tutor to provide response.

I an organisation usesthese principles as a basis orplanning and control then it islean in the sense that iteradicates waste rom alloperations and systems.

In applying this to JIT theeradication o inventory is awaste-saving lean aspect omanuacturing. Inventorycosts money to store and tiesup working capital that may be

used elsewhere. This applies atboth the input and output

Please explain tome TQM andits relationshipwith JITand leanmanagement.

Bringing theeconomy to heel

When I few rom snowyNorth Carolina to evensnowier London recently thenews was ull o doom andgloom stories about thecold weather sending theUK into a triple-diprecession.

While waiting or myinevitably delayed fightI got into a conversationwith a ellow passenger aboutrecession indicators, such asthe lipstick eect, wheresales o cheaper luxury items,such as high-end cosmetics,rise. Our budgets might notstretch to Chanel shoes, butthe nail varnish? Thatsanother story...


Source: Survey on m-magazine.com, 203. Total equals 0% due to rounding

Lets not ignore the shoes,though I learned that backin 20 IBM used social media

analysis to test the theory thatthe height o womens heelsrises in a recession.

Leading shoe bloggerswere discussing shoes with amedian height o seven inchesat the height o the 2009recession, but by 20 thishad allen to two inches.

Have you ever tried to goshopping in seven-inch heels?Its a lot easier these days online retailers such as ASOSare booming, with year-on-

year sales rising by 4 per centin December.

And in this weather, whatsa girl to do except stay indoorsand shop on the internet?

Rebecca McCary,

ACMA, CGMA, innovation

specialist at CIMA.

More blogs can be ound at

http://community.cimaglobal.

com/blogs

Only to a point (there are too many other issues to consider): 48%

No: 9%

Dont know: 9%

Can trade agreements resolvedisputes on trade between individualcountries and blocs?

seen as a global passport tosuccess and the proportiono students sitting the CIMAexams outside the UKcontinues to increase.Pass rates in the latest roundo exams, held in November,

were in line with recentexamination sessions, Tagoeadded. Prizewinners andcommendations in individualpapers included studentsemployed by De La RueInternational, Deloitte,Morrison Supermarkets,the UK NHS Institute orInnovation and Improvement,and the Department oBusiness, Innovationand Skills.

The latest round o CIMAexam results reveal theincreasingly global infuenceo the institute, according toNoel Tagoe, executivedirector, education, at CIMA.It is extremely pleasing to seethat there are, once again,some excellent studentperormances rom aroundthe world, he said. Theseresults show that the CIMAqualication is increasingly

Yes: 35%

CIMA news

The latestpass masters

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18

Opinion

JonathanGuthieCity editor, Financial Times

Trust in the published numbers o

businesses can sometimes switcho like an electric light. In 20, theresults o Autonomy looked solidenough or Hewlett-Packard to pay$11.3bn or the UK sotware cham-

pion. But the new leadership o the struggling UScomputer hardware group concluded last year thatAutonomy was terrible, necessitating an $8.8bnwrite-down, $5.7bn o which related to allegedaccounting irregularities.

Autonomy ounder and ormer chie executiveMike Lynch is adamant that there was no impropri-ety, accusing HP o having destroyed value at its UKsubsidiary through its own management ailings.

The row is emblematic o a broader lack o con-dence in the statistical underpinnings o capital-ism. This has its roots in the raudulent accountingo WorldCom and Enron, ollowed by the nan-cial crisis. And, with regulators part-way throughexposing a conspiracy to rig Libor rates, it will makeit harder or the accounting industry to end oreorm such as auditor rotation.

In this context, are our views on the reliability othe numbers too coloured by sel-interest?

Under its ormer chie executive, Leo Apothek-er, HP believed that Autonomy was worth a lot omoney because it needed to. It saw the acquisition

as a way o diversiying out o the competitive hard-ware industry and raising its lowly share rating.At an exit multiple o 34 times, as calculated bybrokerage Peel Hunt, little change was needed inAutonomys modest bottom line to change its valu-ation radically. This change came with the oustingo the earnest Apotheker in September 20. UnderHPs new broom, Meg Whitman, the investmentwas written down, partly because 10 to 15 per cento Autonomys sales were allegedly less protablethan it had claimed. Lynch denies this.

The reputational reasons or the positionsheld by Whitman and Lynch are sel-evident. Butbystanders may well eel that the value represented

by a 34 times earnings multiple or a bon-ish sot-ware business may be ading. The modest multiple

accorded to a mature, cash-generative business

doing something that everyone understands, suchas catering, is robust in comparison.

The accounts that justiy the pricespaid to acquire quoted companiesare rarely challenged publicly aterthe event. Boards o public groupsare more used to dealing with criti-cism o their numbers rom analysts

and short-sellers.Some investment businesses combine analysis

and short-selling. They publish critiques o target

companies accounts with the aim o driving downtheir share prices, thereby making money rom theirown short positions. One o these, US rm MuddyWaters, recently took on Singaporean commoditiestrader Olam, reporting it was close to ailing. Amongits criticisms was the allegation that the companyhad infated its reported prots by booking non-cashgains on the revaluation o acquired businesses.

Muddy Waters pronouncements have carriedweight since its attack on the Sino-Forest Corpo-ration in June 2011 led the Toronto-listed Chinese

timber rm to seek protection rom creditors.The interpretation o a companys numbers by

a short-seller is as distorted by negative bias as theCEOs spin on the same gures is by proessional

optimism. The credibility o bear raiders is also dam-aged by their unwillingness to quantiy their shortpositions. They advocate transparency on the parto their targets, but rarely practise it themselves.

But critical analysis has a useul balancing unc-tion. The main purpose o the wholesale nancialservices industry is to talk up the value o invest-ments rather than challenge them. The objectiv-ity o the equity research o a big investment bankis, or example, compromised by its enthusiasmor doing corporate nance work or issuers. That

damages price discovery and contributes to specu-lative bubbles. The intelligent curmudgeon will addtwo urther questions to how big? when weighing

up a nancial statistic. They are how certain? andhow susceptible to bias?

Reorms could be introduced as authorities look to restorecondence in the nancial accounts o companies worldwide


Soe

businessespublish

ritiques

o tret

opniesounts with

the i o

drivin downshre pries

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arrangements as a result o membership o aunion that we were able to mediate with. I becamemanaging director o the bank, introduced newsotware and wrote o some toxic assets on thebalance sheet. It has taken a couple o years to getto where we are now, which I would say is at thebottom o the leading group o banks in Ghana.

We listed the new entity on the Ghana StockExchange. Roll on three years and the most recentbank to be ormed in Ghana was named Bank o theYear in 20.

How is UT Bnk trdin t the oent ndwht re your plns, prtiulrly rerdin

expnsion, in the ediu nd lon ter?The two largest investors IFC and DEG invested$20m in the bank in the rst hal o 202 tostrengthen credit lines and the long-term credit wecan oer clients. In the medium term we expect tobe able to oer more and cheaper credit to SMEs andtrade lines or imports. Many o our clients are inthe manuacturing sector so they need longerterm lines.

We are looking to grow the bank rom its currentsize o 26 branches and expect that, in time, it willbecome pan-Arican. It will then be possible totarget countries in West Arica, such as Sierra

2120

Wht is UT Bnk?t started out as non-bank nancial lender Unique

Trust Financial Services in 997, lending to thenormal and SME sectors. It served companieshat dont prepare ull accounts, which made it

harder or banks to agree to nance them. We wereble to deliver a ast service to borrowers thatanks normally shy away rom. I it takes between

hree and six months or companies to raiseapital it is oten too late we committedurselves to delivering cash in a aster time.

We said wed deliver in 4 hours. It requiredmonitoring, advice, partnering and making surewe were there or our customers. We changed the

ystem o banking in Ghana by tailoring lending tondividual needs.

We started with $20,000 in 997 and in 200went public with a market cap o $4m because we

elieved we could compete with the banks aising $27m in return or around 30 pe r cent ohe equity in order to buy a oreign bank.

You led one o Aris rst reverse tkeovers

when UT Bnk quired BPI Bnk in .How diult ws tht to hieve?We were the rst non-bank to buy a bank in Ghana

nd the rst Ghanaian bank to buy a oreignnstitution when we acquired BPI Bank rom its

Malaysian owners. We wanted to keep the bankeparate and keep UT operating as it was. But the

Bank o Ghana wanted us to recapitalise theombined bank to the amount o $60m when at theime its banks ability to capitalise was only $0m.

So we had to bring together two very dierentnstitutions to orm UT Bank. We had thehallenge o bringing together two cultures and

developing a new institution. Sta at BPI werenot motivated, there were accusations that someook bribes, and many had infexible working

Q&A

nterview by Lwrie Holes

Photorphy

by NyniQuryne

Financial Management | March 203Financial Management | March 203

AicanambitionsPrince Ko Amoabeng, FCMA, CGMA,ounder and chie executive oUT Bank, Ghana

It has taken a couple oyears to get where we are,which I would say is atthe bottom o the leadinggroup o banks in Ghana

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Financial Management | May 202

Q&A

23

Leone and Liberia. We are developing a bankingpresence in Nigeria and South Arica through thebanks holding company. We have two banks inLagos, Nigeria, and intend to open a third in Abujaby the middle o the year. In South Arica, we havea branch in Johannesburg and are opening anotherin Pretoria. Once we are able to grow in those twocountries the largest economies in Arica it willbe easier to roll out to other countries.

Zambia, which is surrounded by eight othercountries, is being looked at as a location in whichto open another branch later this year. A ootholdin the Zambian economy will help us set up otherbranches on the other side o its borders.

Wht hve been the hllenes or bnks to

row in Ghn nd Ari s whole?

There is plenty o opportunity or UT Bank togrow because, on the whole, there has been a lacko appetite or risk. Many Arican banks havemoved away rom lending. Theyll only oerbanking to reputable corporates, governmentsand respectable institutions.

There is little enthusiasm or lending to theinormal sector. Even i an SME is 00 years old itwill nd it almost impossible to raise $m in a week.

Some institutions, such as Ecobank (initiallybacked by the Federation o West Arican Chamberso Commerce and now in 32 countries), haveestablished a pan-Arican presence quite rapidly.But I think the problem is that the banking sectorin Arica is dominated by oreign banks.

Banking is a conservative industry and thereis not a lot o demand to change banks. In SouthArica, banks such as Standard and Barclays havedominated or the past 50 years.

In Ghana, most banks are state-owned andbecause they are controlled by politicians theydo not have what it takes to change.

There is also the issue that banks need a lot ocapital to set up. In Ghana, they require $60m,whereas in Nigeria they need around $250m. Thisis partly because institutions such as the IMF andthe World Bank want banks to be more robust.But the consequence is that it becomes dicultor Aricans to set up a bank.

Wht re your expettions or Ari in thenext ew yers, iven the enorous potentil o

the ontinent?

I pray or the day when Arican countries canrealise their potential, but I am not optimistic.

I oten ask mysel: Why is it that Arica is alwaysable to get it wrong? I think there is too muchcorruption in government, because we dontrespect ourselves and are not doing enough to raisethe living standards o our own people. Instead obuilding institutions we are actually knocking themdown. The one Arican country that isnt beset withthese issues is South Arica, but its institutions

werent developed by Aricans.

Wht re the rodbloks to buildin stron

overnne strutures ross Arinovernent, nne nd orportes in

hievin tht developent?

Despite the legal structures in place across Arica,too many people seem to operate above the law.They act as though they are untouchables. We needa government that will say that were all equalunder the law. That ethos must encompass the lawand the police, with the result that everyone paystax and those that transgress should pay nes.

We have all these ideas when people come into

power, but it costs so much to win elections thatthey have to make deals. By the time they come

I pry or thedy when

Arin

ountries n

relise theirpotentil

Q&A

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24

into power they have to look ater these vestedinterests, rather than the people who elected them.I you want to do the right thing you are in theminority. In Ghana, we have Ko Annan, buthe cant do anything about national politics.

We have the third-astest growing country [inthe world] but we are always missing out on theopportunities that are available. Foreigners who seethe opportunity come in, make money and get outagain. One o the problems is that in many placeshere there are no street names or house numbers,so how do you collect taxes rom people? Ghanaianinstitutions are worse now than they were when the

country gained independence 55 years ago.With what I am doing I can put money into the

hands o people who wouldnt have it otherwise. Bydoing this we can create employment and ensurepeople can put ood on the table or their amilies.

Cn CIMA ply n iportnt role in developin

dre ross Ari pble o ipleentin

those overnne strutures?CIMA is a great qualication. We have plenty oCIMA-qualied people in Ghana. But how eectivethey can be depends on where they work. I youtake the CIMA qualication and go into

government you cant tell politicians what to do.The qualication is great, but its eectiveness alsodepends on how you apply it. There is a strongpossibility that CIMA people in government are notreally raising their voices as they are araid o losingtheir jobs. They keep quiet or they quit.

In business, conditions are also dierent inArica compared to elsewhere. You have to bepragmatic. We have had to create structures tobe able to grow our company into a bank. In thisrespect CIMA helps you to be quite realistic andto see what applies best, rather than just taking themethodology o the Western world.

Advanced country solutions do not necessarily

apply. For example, we do not have structures andsystems that are as well developed as they are in the

West. It calls or more ingenuity and bettermanagement o risk. I think that CIMA really helpsin this environment in understanding the issues.The growth o UT Bank had been achieved, in part,by the recruitment o CIMA graduates to keypositions in the bank.

Why ws CIMA the riht hoie or you?

I chose to study CIMA simply because it was theonly accountancy qualication then available inthe capital, Accra, and qualied in 977. Unlike thepost-mortem type o work that you have with otheraccounting bodies, with CIMA you actually makethings happen beore the results are captured.

I didnt want to be a number-crunching accountantat the end o the year, I wanted to be in amanagement position, where the gures are themeans o inorming me what to do.

CIMA training has stood me in good steadthroughout my proessional lie. The CFO positionis generally a sound qualication or the CEO slot,where the nal decisions are made. Running abusiness means that you should be on top o thecomputations that have gone into the options onwhich you have to decide. This is where CIMAcomes into its own, because it enables you tounderstand the options and the choices that youhave to make. So I think CIMA should be bringing

out a lot more CEOs than other accountancyqualications.

Q&A

2010: Became chieexecutive o UT Bank(ollowing takeover oBPI Bank).

1997: LaunchedUnique TrustFinancial Services.

1992-2003:Lecturedat Ghanaian StockExchange.

1982-1992:Financialdirector, Jamhaus,Opeyesco WoodProcessing Ltd; localrep at El Aquitaineo France; investmentconsultant at KKPower; nancialdirector at SchieweLtd.

1982: Let the armyhaving achieved therank o captain aterthe return o thecountry to military

rule.1975: Commissionedas a lieutenant inGhanian army. Whilein the army, won ascholarship rom theMinistry o Deence tostudy the Royal ArmyPay Corps course incost and managementaccountancy atWinchester in the UK.

1975: Graduated romthe University oGhana Business Schoolwith a BSc admin(accounting).

CArEErLADDEr

We have the thirdastest-growing country

but we are always missingout on the opportunitiesthat are available

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hen the UK arm o the global bankCiti set out to investigate thereturn on investment (ROI) romits credit card sales campaigns, itimproved uture marketing ROIby 5 per cent.

With the help o market research companyAcxiom, it divided its database o prospectivecustomers into 52 clusters, dened by their char-acteristics. Next, it analysed the kind o TV, radionewspapers and magazines each cluster was mostlikely to see.

It then pulled together every marketing mes-sage it sent out through each media channel. Sowhen new credit card customers signed up, Citimatched each one against the media that wouldhave encouraged their application.

It helped it to gain an insight into which mediawere working best and ound that local radio ads,which it previously thought were a poor investment, were actually showing good results.

The Citi experience is one o dozens o storiescoming out o companies that are nding ways touse data to win more business value. But there arealso many companies that dont value their data and that have no plans to harness the opportunitythat big data the latest buzzword provides.

When inormation management company IronMountain surveyed 760 European inormationmanagers, it ound that hal had no idea how tomake the most o big data, while one in ve saidthey werent even going to try.

That deeatist attitude wont enable companies

2726

W

Technology

Big data is now oneo businesses mostimportant assets.Peter Bartram setsout how technologycan analyse your datato drive strategies orgrowth and moreimportantly measureits nancial return...

Illustrtionby Rob Pybus

The

value

ofdata

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28

to harvest true value rom their inormation assets,believes Steve ONeill, CFO o EMEA North at EMC,which provides enterprise inormation sotware andservices. I think more companies should try to puta nancial value on their data, ONeill says.

I envisage the concept o return on data becom-ing a key perormance indicator in the same way ROIis, he says. Its about people understanding thevalue o the data and, more importantly, the inor-mation they can glean rom it and the impact thatcan have on their business.

Some companies are already moving in that direc-tion. Research by Dynamic Markets discovered that20 per cent o large companies already quantiy dataas an asset on their balance sheet. For companieswith more than 0,000 employees, the gure risesto 30 per cent.

Companies that quantiy data on the balancesheet appear to have a better grasp and understand-ing o it, its potential to improve their companysperormance and how to manage it well, says Keith

Valder, CFO at SAS UK & Ireland, the business ana-lytics sotware and services company that commis-sioned the research. They are also more condentabout the quality o their companys data.

Four out o ve CFOs in the companies that puta data value on the balance sheet monitor regularKPIs on data quality. That compares to ewer thanthree out o ve in the companies that dont givedata a nancial value. Similarly, the companies thatvalue data are much more likely to have a dedicateddata management division than those that dont.

Whats driving the data issue up corporate agen-das is the growth o big data. But CFOs need tounderstand that big data is not just about havingmore o it.

Its about looking at data in a completely newway. The key to the new concept are the three Vs volume, velocity and variety originally denedby Gartner research vice president Doug Laney. Theproblem the three Vs pose or CFOs is that its notjust the volume o data thats growing so ast by 59

per cent a year according to one estimate but thatit comes at ever aster speeds (the velocity) rom anew range o dierent sources (the variety).

Much o the value rom big data comes rom a

companys ability to identiy what was previouslyunavailable, such as social media content, and har-vest value rom it beore it becomes outdated. Con-sider, or example, a CFO monitoring movements inthe companys own share price and those o its rivals.

Until now, that would have meant keeping aneye on market movements as they happened inreal time. But in January, DCM Capital launched atrading platorm that incorporates a social mediasentiment eed. It enables traders to see whatTwitter and Facebook users eel about shares,indices, oreign exchange and commodities.

The new platorm draws on research romthe US, which shows that opinions about shares

expressed on Twitter precede a price movementon the Dow Jones by three days. Paul Hawtin,


Much o the value rom

big data comes rom acompanys ability toidentiy what waspreviously unavailable

Copnies thtquntiy dt

on the blne

sheet pper to

hve betterrsp nd

understndin

o it

Finnil diretors nd CFOs ould be usin bi dt to ke betterdeisions. Thts beuse the vlue o bi dt lies not in the size o dtbse or its ontents, but in the wy opny n use theinsihts hidden in the rw ures to ke srter deisions ndinrese prots.

The companies that invest in the technologies and skills to tease thosenew insights out o the data will be the ones that drive sustainedcompetitive advantage.

Big data is denitely an idea whose time has come. It exists becausedata storage costs are now alling aster than processing costs. Storageproductivity doubles every year, while processing productivity doublesevery 18 months. The cumulative eect o this dierence creates huge poolso data that companies dont use because they cant work out how to processand analyse it at a easible cost.

So CFOs must nd ways to speed up the time it takes to put the newpools o data to work. I they can do this, they will drive better decisions,de-risk innovation and convert big data into shareholder value.

And one o the best ways to use big data is to answer questions abouthow business decisions change customer behaviour. For example, i wechange the price o a product, will customers Tweet about it and encouragemore people to buy?

To understand cause-and-eect relationships such as this CFOsshould try new ideas in a small part o the business. They can makepredictions based on the results they get rom the tests. Experimenting likethis reduces the pool o data not being used to build prots. It converts bigdata into manageable and analysable data.

And the robust decisions that result quickly create a competitiveadvantage and build lasting shareholder value.Jim Manzi is ounder and chairman o Applied Predictive Technologies. Heis the author oUncontrolled: The Surprising Payo o Trial-and-Error or

Business, Politics and Society.

THUMBS UP...

Jim Manzi believes big data is anidea whose time has come

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more about its customers buying patterns in di-erent stores and at dierent times o the day. Itwasnt always the case when Sir Terry Leahy, whopioneered the use o big data in large-scale retailduring his 14-year tenure as CEO o Tesco, arrivedat the group. He ound little in the way o sophis-ticated research. His introduction o the Clubcard a reward card or customers gave Tesco a highlevel o inormation on its customers and saw thegroup grow rom being the third biggest retailerin the UK to the third biggest in the world. I was

a little surprised when I came into the businesshow subjective it was how people would makedecisions on the basis o no inormation whatso-ever, says Sir Terry.

The bar code came along in the 90s and thatrevolutionised a lot o things. You were getting thebeginnings o a database then on products, and thenthe big breakthrough was when you had enoughcomputing power to gather customer inormationas well as product. It really did make a dierence.

The year the Clubcard was launched was the yearwe overtook Sainsburys to second place in the UK.

Other retailers, such as online ashion houseASOS.com, which has quickly grown to a market

cap o 1.4bn, are reaping the rewards rom usingbig data. Ive had every scrap o inormationabout my customers since day one, says ASOS.com chie executive Nick Robertson. There wasno bigger evidence o that than when we gotcaught up in the Bunceeld re at an oil depotin 2005. I had the names and addresses o everysingle customer who had placed orders so we wereable to contact them to explain the situation. Oncewe were back I emailed all the same customersagain to say we had a bit o stock we needed toclear now because its a re sale, come and shop.We got back on our growth trajectory as a resulto having all that data.

Eurostar International, which has 0,000 sup-pliers, is collecting inormation about energy use

Technology


Peter Brtr

is the author oThe Perect Project Manager(Random House Business Books)

ounder and chie executive o DCM Capital,xplains: Our sentiment signal is derived romeal-time social media data.

We search through billions o messages or keywords that are relevant to the asset we are tracking

some key words have more weighting than othersnd their weighting diminishes over time. All o thecores are then compiled to create an average score between zero and 100. The higher t he score, the

more positive the sentiment.The problem CFOs ace as they try to nd ways

winning more value and business advantagerom big data is what to do rst. In the burgeoningatabases that exist within an organisation there is

ikely to be inormation that could deliver answerso a bewildering array o business problems. The

diculty is ormulating the right questions.One way to get ideas about how to use big data

s to look at what some o the pioneers are doing.Tesco, or example, processes inormation romwo-thirds o the transactions at its tills to learn

I ws littlesurprised whenI e into the

business howsubjetive it ws

Strt with hypothesis ndthen use the

dt to see iit is vlidted

all the way along its supply chain so that it canimprove its environmental credentials and cutcosts. Sustainability data will ultimately developinto a new currency, whereby businesses canmeasure their worth through how well they aremanaging their energy and carbon emissions,says Peter Bragg, head o environment and energyat the company.

Man Trucks uses data collected rom the driv-ing cabs o the trucks it sells to glean inorma-tion about how those vehicles can be driven more

saely and eciently. Trucknology has providedit with a competitive customer proposition thatputs it ahead o its rivals.

The way to harness more value rom data, saysBernard Marr, chie executive o the AdvancedPerormance Institute, is to look closely at yourbusiness objectives and decide what big questionsyou need to answer in order to achieve them. Startwith a hypothesis and then use the data to seewhether it is validated, he advises.

He suggests this is better than looking orrandom trends in the data in the hope that some-thing interesting will turn up.

Marr points out that there is already a wealth

o open-source sotware or a company that wantsto experiment with big data applications withoutincurring heavy costs. The sotware includes GoogleTrends, which provides data on commonly usedsearch terms; Social Mention, a search engine thatexplores social media such as blogs, comments, newsand videos; and Hadoop, open-source sotware thatsupports data-intensive distributed applications.

It is a myth that big data is only or big com-panies with big IT budgets, says Marr.

ONeill believes that the CFO has an impor-tant role to play in delivering big data businessbeneits in a company. But it will mean CFOsadopting a new role. For me, the big thing thatthe CFO can do to help the big data agenda intheir company is become the disruptive enabler

rather than the traditional naysayer.CFOs are traditionally guardians o the budget

and o the data in the companys ERP system sothey understand the levers that drive the businessWere ideally placed to break down silo mentalitieand challenge the status quo by asking outsidein questions rather than inside-out questions.

And it is worth keeping JM Keynes aphorismin mind it is better to be roughly right thanprecisely wrong.

Everything is changing so rapidly that trying

to nd the perect solution that addresses everyeventuality will prove impossible, warns PatrickKeddy, a senior vice president at Iron Mountain

Decide on the inormation o the greatest poten-tial or risk to your business and ocus your timeand resources on harnessing that.

Instedobidt,opniesshouldousonusinbiontexttounderstndslldt.Thtsbeusebidtdesribesthewhtobusinesssitution,butbiontextdesribesthehowndwhy.

Big data is not new, yet many companies seem to be using it as aprediction tool. But the ability to predict behaviour doesnt necessarily leadto better business decisions because big data cannot tell you why somethingis happening, just that it is and will. Businesses should not be looking totrack patterns, but to see the wider context around those patterns.

The brilliance about having access to so much inormation is using it tounderstand why something is happening, how it is happening and what itmeans or the business. Ultimately, every business only succeeds byserving the needs o its end customer, but many companies are losing sighto this by pushing all their resources into big data warehousing.Unortunately, big data oten neglects individuals.

Massive volumes o inormation are pulled together to create trends

that then drive a companys business strategy. At a time when customersare demanding more personalised services, this approach gives them theexact opposite grouping them into a type rather than treating them asan individual.

One chie executive called the big data explosion crippling sometimes when you have too much inormation youre unable to make adecision. The problem is that you need a PhD in mathematics to read theentrails o big data. In many instances, more data rarely results in a moreocused and proactive business strategy because people get too boggeddown in the analysis.

So what is the solution? Start small and work up. By ocusing on aspecic challenge and the associated small data set, you can capture themost important bits o knowledge available the know-how anddisregard unnecessary pieces o inormation that do not add value or thecompany or end-user.Dr Davin Yap is chie executive o Transversal, a company that providesknowledge management solutions. He has a PhD in engineering romCambridge University.

THUMBS DOWN...Davin Yap says its better to understand small data

Tesco processesinormation rom two-thirds o the transactionsat its tills to learn moreabout its customers

The big thing the CFOcan do is becomethe disruptive enablerrather than thetraditional naysayer

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Do you think that corporates the world overan take the lead on sustainability, ahead of

overnents nd onsuers?

John Brock: Sustainability is at the heart overything we do as a b usiness we want to grow ourusiness while using less. We rmly believe thatusiness is moving beyond the traditional concept oustainability as a niche ocus and shiting to be

ight at the heart o what is required to run a busi-ness in the 2st century.

A more sustainable tomorrow is not a destina-ion, but a journey, and one that demands that we

make transormative changes to the way we livend the way we do business. Companies such asurs have a responsibility to lead the way. Oneey tenet o our sustainability vision is to inspirend lead change through the example o what

we achieve in our business and how we workwith our stakeholders.

However, nobody can make the sustain-bility journey alone. The scale o changeequired means that collaboration betweenorporations, governments, NGOs and con-umers is critical. When we made the commit-

Sustainability

3332

to the daily conversations we have with oursuppliers and customers, and the presentationwe make to investors.

Great collaboration can deliver ambitiousaims. Through partnerships with our supplierswe were able to support LOCOGs goal o makingthe London 2012 Olympic Games the greenesin history.

All o our coolers were energy-ecient, whileour drinks were delivered in biogas trucks rom ourenvironmentally riendly local warehouse. Thiscut the carbon ootprint o our distribution systemby one-third. We provided recycling bins aroundthe park and used un, engaging ways to encourage the recycling o every product consumed at the

Olympics. These bottles were then reprocessed atour recycling acility in Lincolnshire and turnedinto new bottles that will be on the shelves in lessthan six weeks.

We have many success stories, but we are alsocommitted to being as open and transparent apossible when communicating our sustainabilityprogress this means sharing our challenges awell as our successes. We know that we dont haveall the answers to be able to deliver our visionThe solutions to todays challenges may not havebeen invented yet. It is only by being honest aboutwhere we need help and input rom stakeholders

that we can respond to these challenges.

Is integrated reporting going to becomeinresinly iportnt?

JB: Over time, sustainability will becomeincreasingly integrated into every area o businessincluding the way that businesses report. Beingable to quantiy the value that sustainabili ty contributes to business, and the contribution thebusiness makes to the wider world and societyis critical. As sustainability becomes truly core tobusiness operations, so integrated reporting wilbecome more o a reality.

We re workin

hrd to driveollbortionthrouhout our

vlue hin,ro the wywe soure rw

terils toenin withonsuers

roundreylin


I believe our ability toprovide leadershipalong the sustainabilityjourney is based, at heart,on great collaboration

Interview byLwrie Holes,editor, Financial Management

ment to reduce the carbon ootprint o the drinkin your hand by a third by 2020, we knew it was ahuge challenge that we could not achieve withoutthe help o our customers, suppliers and consum-ers themselves.

This is why we are working hard to drive collab-oration throughout our value chain, rom the waywe source raw materials right through to engaging

with consumers around recycling. For instance,we recently challenged our suppliers to measuretheir own carbon ootprints and to work in part-nership with us to develop carbon reduction plans.

Governments will play a key role by creatingconsistency and continuity in regulatory rame-works that support sustainability eorts, suchas introducing policies that enable companiesto continue to invest in low-carbon technologiesand transport eciency solutions.

Do you believe there is significant first-over dvnte to be hd?JB: We certainly believe that building a sustain-able business will protect our collective uture,not only protecting our planet and our resourc-

es or everyone, but ensuring that our business canoperate eciently. It is denitely the right thing to

do, but it is also the right thing to do or business.Eectively managing the risks associated with

climate change, resource scarcity and commod-ity volatility are all part o running a successulbusiness, but the leaders will be those who areable to turn risk into opportunity and set the pathor others.

For example, several years ago we introduceda monitoring and targeting system in each o ourplants that allows us to measure the way we useenergy and water. As a result, our plants in GBand France are some o the most ecient Coca-Cola production plants in the world we have

reduced the water we use by 5 per cent over thepast six years, while increasing our productionby 6 per cent.

Another great example is the development oPlantBottle, which aims to reduce our reliance onpolyethylene terephthalate (PET) as a raw mate-rial or our bottles. PlantBottle is the rst-everully recyclable PET plastic beverage bottle madepartially rom plants, which allows us to makeup to 30 per cent o a regular plastic bottle romplant-based materials. We rolled this technologyout across our Coca-Cola Enterprises (CCE) terri-tories in 2011 and theres no doubt it is a great di-erentiator or our business, as well as answeringour need to manage the risk associated with PET.

Some areas, such as technological advance-ment, will drive eciency and oer both short-term commercial benet and competitor dieren-tiation. Other challenging topics, such as changingconsumer attitudes to recycling, will require us toset aside our competitive instincts and ocus oncreating a unied partnership solution.

How important is it that companies are able tocommunicate efective leadership in this area

nd wht or should this ledership tke?JB: I believe that our ability to provide leadership

along the sustainability journey is based, at heart,on great collaboration. From its very inception,our sustainability plan has been based on strongcommunication between us and our stakeholders.We asked them how businesses such as CCE cancontribute to nding solutions and invited themto work with us to nd ways to advance innova-tion and overcome challenges together. Only thispowerul partnership could have produced theroadmap or our sustainable uture.

Sharing what we are doing in the sustainabil-ity space is also important to help inspire others,and to ensure we continue stakeholder dialogue.This is a part o how we do business every day rom the ormal publication o our annualcorporate responsibility and sustainability report

John Brock, chairman and CEO o Coca-Cola Enterprises,says the key to a successul sustainability model iscollaboration. He tells FMhow the global drinks gianthas seen the light on an environmentally riendly uture

A bight idea

GettyImages

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Getty

Images

Sources

:Mergermarket,

E r n s t &

Y o u n g


Pime numbe

Hit-and-miss deals

The ount tht

Chin spent on

outbound developed

rket dels in

2012 ws...

The nuber o Chinese

(inludin Hon Kon)

outbound developed

rket dels

in 2012 ws...

$53.9bn106

The biggest deal between 200 and 202 was the $06,4m dealbetween Philip Morris International and the Altria Group. Thetotal cost o the top ten deals since 200 amounts to $757,03m.However, not all deals go to plan. AOLs $64bn acquisition o TimeWarner at the height o the dotcom boom in 2000 turned sour andTime Warner realised the deal was not in its best interests. AOL

posted a $9.7bn loss or 2002 the largest in US corporate historyat the time. The two companies de-merged in 2009.

35

$106,884mCompletion Date: 31-Mar-08

Philip MorrisInternational Inc

Altria Group Inc(Shareholders)

Value

Target company Bidder company

$57,874m01-Jul-04

Bank OneCorporation

JPMorganChase & Co

$58,563m18-Nov-08

Anheuser-Busch Companies

Inc

Anheuser-Busch InBev

NV

$60,930m30-Mar-07

MondelezInternational Inc

Altria Group Inc(Shareholders)

$60,935m16-Apr-03

PharmaciaCorporation

Pfzer Inc

$65,016m15-Oct-09

Wyeth Pfzer Inc

$71,843m31-Dec-04

Aventis SA Sanof-Synthlabo SA

$89,437m29-Dec-06

BellSouthCorporation

AT&T Inc

$89,964m22-Jul-08

Suez SA GDF SuezSA

$95,637m05-Oct-07

ABNAMRO

RFS HoldingsBV

Top 10 global

M&A dals from1 Januar 2001 to31 Dcmbr 2012

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3736

Too many organisations allow IT costs tospiral out o control because seniormanagers havent agreed on a clear roleor IT. Confict between todaysmanagement accountants and ITdirectors is commonplace, says Colin

Rowland, a vice president at Apptio,which uses its technology businessmanagement expertise to help companiescontrol IT costs.

Rowland says confict arises becauseaccountants are constantly looking to cutIT costs, while IT proessionals puzzleover how to meet increased demands withewer resources. When considering the ITbudget, Rowland says accountants shouldconsider three key questions: Am Ibalancing IT costs with the expecteddemand or resources? Am I delivering aservice that matches or beats those on theopen market? Is this project going toenable long-term growth?

More than a quarter (26 per cent) omanagers responsible or IT investmentsay their biggest barrier is an inabilityto show how the investment will meetthe companys objectives and providereturn on investment, according to asurvey by KCom, a managed servicescommunication provider that numbersBA and Specsavers among its clients.

Lack o board buy-in to IT spen dingis another problem identied in thesurvey. More positively, the survey

reveals that companies are mostenthusiastic about higher IT spendingin areas such as sales and marketing orR&D, which can help drive top-linerevenue growth.

Sally Fuller, KComs director ostrategic propositions, says: Thiseconomic climate is putting pressureon business to justiy IT spend.

Outsourcing to countries with lowerwages is still popular and I expect it togrow, notes Dr Lineke Sneller,proessor o accounting inormationsystems, IT value, at Nyenrode BusinessUniversity in the Netherlands. Thecurrent technical opportunities orconnectivity enable reliable andcost-eective outsourcing, she adds.

Dont be araid to renegotiateoutsourcing deals to improvecommercial terms, says RickSimmonds, managing partner at

Alsbridge, an independent sourcingadvisory rm. Conduct a rapid duediligence review across the whole ITservice portolio to establish whetherthere is a benets case or expandingcurrent levels o outsourcing, sharedservices or oshoring arrangements,he adds.

In my view, cost pressures on IT arevery much related to the proportiono the budget spent on maintenance,says Sneller.

I a company spends 30 per cent oits IT budget on maintenance and 70per cent on renewal, it can innovatevery quickly in good years and do a bitless renewal in dicult economic timeswithout harming the business-as-usual.I, on the other hand, it spends 70 percent on maintenance and 30 per centon renewal, it becomes infexible.

It is not unusual or organisations tohave over 5 per cent o the total spendlocked up in maintenance. In theseorganisations, innovation may come toa stop and saving costs in IT will go atthe expense o the maintenance budget,which will harm the business-as-usual.My advice is, thereore, to alwaysmanage the maintenance budget

actively and control the maintenance-renewal proportions.

Financial Management | March 203Financial Management | March 203

manage the cost o IT pojectsFinance proessionals can easilyall into a number o traps when itcomes to managing the cost o ITprojects. Thereore, it pays to bediligent during every step o theprocess, says Peter Bartram

Identiy a cleaole o the ITbudget

The list

1

3

4

2

6

Think intelligentlyabout outsoucing

Execise fmcontol oveIT pojects

Contol youhigh-cost aeas

Focus IT spendwhee it delivesthe most

Float intothe cloud

ways to...

Illustrtionby Borj Bonque

Cloud email can save as much as 70 percent o costs, says Chadha. Even morewhen you consider all o the hassle andbotheration o looking ater things likeemail servers handling spam andmalware protection, he says.

He advises: Review public cloudemail, such as Gmail, with a large in-boxcapacity, universal user interaces and

In many companies, taking on newlicences is spread around the companyso nobody has an overview. RichardBlanord, managing director o IT

integrator Fordway, says: One5,000-user organisation we workedwith had purchased more than 9,000copies o MS Oce during the previoussix years. They had nearly twice asmany licences or a key businessapplication than they needed.

Another organisation was stillpaying sotware maintenance orbusiness applications it had replacedthree years earlier. Blanordsremedies: look at your total needs,rationalise applications, standardise,centralise control o PC desktops,implement eective control and releaseprocesses.

Traditional ways o measuring IT costsand value include acquisition andimplementation, break-even point,return on investment and total cost oownership, notes Tony Tarquini,director o strategy, nancial services, at

Pegasystems, which provides businessprocess management sotware.But Tarquini says CFOs need to look

at other measures that refect the needso ast-moving business change. Thesemeasures include cost o change andtime to value. He adds: Thinking big,starting small and delivering ast notonly creates value earlier by securingthe break-even and return oninvestment, it also helps to reduce therisk o ailure o an IT project.

7

8

5

Audit use osotwae licences

Measue IT costsealistically

Scope creep is one o the worst causeso burgeoning costs in an IT project.

The biggest reason or scope creep isthat stakeholders who can infuence theproject are not clearly identied and,thereore, might request last-minutechanges, says Thomas Janzen,technology development consultantat Vendigital, which runs perormanceimprovement programmes.

When a project goes o the rails,dont be araid to close it down orreview what needs to be done to bringit back on track, says Peter C hadha,named as one o the top 50 ITcommentators in Britain. Sometimesits not the project thats ailing but theneeds o the business that havechanged, he adds.

Peter Bartram is the author oThe Perect Project Manager

(Random House Business Books)

the ability to virus scan and preservedata or up to 00 years. This issignicantly cheaper than in-house orother outsourced services. You couldalso save around 70 per cent on anti-virus spam management while allowingyour IT manager to do something moreuseul or the business.

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Study notes 39

Notes

Paper F2

Financial Management p46S t u d y

Most past F3 questions requiring can-didates to take the adjusted presentvalue (APV) approach to investment

appraisal have indicated when it iscalled or and I would expect thistrend to continue. But the presence

in a scenario o subsidised borrowing, issue costson new nancing or an increase in debt capacitycaused by a project are all signs that APV cal-culations are likely to be needed. Unortunately,many students struggle with questions concern-ing the weighted-average cost o capital (WACC),never mind more complex matters such as APV.

The APV method suggests that the investmentappraisal process can be split into two distinctparts. First, the project should be discounted at a

suitable ungeared cost o equity. The base-casenet present value (NPV) that arises ignores thebenet o tax relie on debt nance and othernancing aspects. These are calculated separatelyas the present value (PV) o the nancing side-eects. The sum o the base-case NPV and the PVo the nancing side eects is the APV. This isthen used in the same way as an NPV.

The base-case NPV calculation, which assumesthat only equity nance is used to und the project,

Pape F3

Stategy

Financial

By William Parrott

Freelance tutor

The adjusted present value method o appraising

investments is not easy to learn, but any question

involving a project thats subject to signifcant

fnancing issues is likely to require you to use it

In association with

can also be split into two steps. The rst is to cal-culate a cost o equity or a suitable ungeared com-pany (keu). I the project carries the same businessrisk as that o the company, the rms existing keucan be used. I the project represents a move intoa new area with a dierent business risk rom that

o the rest o the company, a keu can be ound usinginormation rom a suitable proxy company thatsalready operating in that eld. You could do thisin numerous ways using the tools at your disposal,some o which I will show in a worked example. Inthe exam youll have to decide which to applyaccording to the scenario. This is a key skill thatyou will hone only by practising questions.

The second step o the base-case NPV calcula-tion is a normal NPV calculation in which the keuobtained in the rst step is used as the discountrate. In the exam this tends to be a airly straight-orward process otherwise, the whole questionwould be at risk o becoming too big.

When it comes to the nancing side eects cal-culation, the main side eect is the tax relie oninterest paid, but many actors may be included,most o which are shown in the ollowing pro orma:

Note $ $

1. Issue costs: 1

Equity (X)

Debt (X)

Tax relie Xi

(X)

2. PV o tax relie on interest paid: 2

Normal-rate loan X

Cheap loan X

3. Cheap loan: 3

PV o interest saved Xi

PV o tax relie lost (X)

X

Total PV o fnancing side eects 4 X

Notes

1. Any issue costs on debt and equity should beaccounted or. Debt issue costs are usually tax

The presene

o subsidisedborrowin, issue

osts on new

nnin or n

inrese in debtpity used

by projet re

ll sins thtAPV lultions

re likely

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allowable, in which case the tax relie should be cal-culated. Unless you are told otherwise in the exam,assume that any debt issue costs are tax allowableand that any equity issue costs are not.2. The PV o tax relie on interest paid should becalculated both or any normal or commercial-rate loan and or any cheap or subsidised loan thatmay be provided by a government or the suppliero the asset, or instance.3. I there is a cheap loan, the PV o the interestsaved compared with the normal commercial ratemust be calculated. This benet is then reduced,because paying a lower rate o interest results in

the loss o some tax relie.4. In order to determine the PV in all o the calcu-lations shown in the pro orma, a discount rate isrequired. The issue o which discount rate to applyremains the subject o much discussion and pastexam questions and other practice questions haveinvolved a number o dierent rates. My advicewould be to use the pre-tax cost o debt unless thequestion indicates otherwise, because this bestrefects the systematic risk associated with thesecash fows. But do not use the keu, because thiswould not be acceptable.

The change in debt capacity caused by a projectis the extra debt inance that a company can

borrow as a result o the project. I the change indebt capacity diers rom the loan actually taken,the total loan on which tax relie is calculatedshould refect the total change in debt capacity,so the normal-rate loan to be used in the calcula-tions would be deemed to be the total change indebt capacity less any cheap loan.

You should assume that the issue costs wouldbe incurred on the total amount deemed to be thenormal-rate loan. These would be on top o issuecosts associated with any cheap loan. The reasonor this is that a project should be credited withthe benet o the tax relie on debt nance to the

extent that the project allows the company to raisemore debt. For example, where the change in debtcapacity exceeds the total debt actually raised,the assumption is that the company will soonutilise any debt capacity that is not immediatelyused because o the tax-relie benet it brings. Theproject that allows the extra borrowing and ben-et to arise should be credited with its value.

I a question does not mention the change indebt capacity caused by a project, you should

assume that the change in debt capacity is thesame as the actual debt raised.

The APV calculation is simply the sum o thebase case NPV and the total PV o the nancingside eects. This gure is then appraised in thesame way as an NPV: i its positive, the project isacceptable, because it can be expected to add tothe wealth o the companys shareholders.

Worked expleFor the ollowing example to be comprehensive,it probably covers more ground than any one ques-tion you are likely to encounter in the exam, but

each o the elements in it could appear.Matu is a well-diversied risk-seeking plc. It

has a gearing (debt:equity) ratio o :3, an equitybeta o 2.25 and a pre-tax cost o debt o 5 per cent.

The company is considering the purchase o anew machine costing $120m, which would enableit to diversiy into a new line o business. Themachine would have a three-year lie, ater whichit would have no residual value. The machinewould generate estimated net cash infows o $52ma year. The supplier o the machine is willing tolend Matu hal o the machines capital cost at a

rate o 3 per cent. The remainder will be nancedequally by debt and equity. The issue costs on the

commercial debt will be 1 per cent and the equityissue will incur costs o 3 per cent.

A rm thats already in the trade o the new pro-ject has a gearing ratio o :4 and a cost o equityo . per cent. Its corporate debt is risk ree.

A government grant o 0 per cent o the initialcapital cost o the machine is available. Matu anti-cipates that this would be received ater one year.

Corporation tax is 30 per cent, payable a year inarrears. Straight-line depreciation on the net costo the machine (ater deducting the grant) is taxallowable. The risk-ree rate is 4 per cent and themarket risk premium is 7 per cent.

You are required to estimate the APV o the pro-posed project.The rst stage is to calculate a cost o equity or

a suitable ungeared company. Because the projectis a new line o business, we need to use the inor-mation given or a suitable proxy company. Theollowing three methods are available to us:lUsing betas. Because we know the geared costo equity or the proxy company only, we need touse the ormula o the capital asset pricing

Study notes 41

Pape F3Financial Stategy

I the hne

in debt pitydiers ro

the lon

tully tken,

the totl lon onwhih tx relie

is lulted

should reetthe totl hne

in debt pity

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42

Pape F3Financial Stategy

model that is, ke = R+ (Rm R), where Rm Ris the market risk premium to calculate thegeared beta (g) o the proxy company as ollows:.% = 4% + (7% x g)Using algebra, we nd that g = 2.04.Next we use the ungear ormula and assume thatthe corporate debt is risk ree (d = 0) to calculatethe geared beta o the proxy company (i a ques-tion provides a geared beta or the proxy company,you can jump straight to this part):u = g (Ve [Ve + Vd { t}])u = 2.04 (4 [4 + { 0.3}]) = .74.Now we can put this ungeared beta into the cap-

ital asset pricing model ormula to calculate asuitable cost o equity ungeared:keu = 4% + (7% x .74) = 6%.lUsing the cost o ordinary share capital in ageared entity ormula. Because the geared costo equity and all other inputs into the ormula areknown, the cost o equity or the ungeared com-pany can be calculated. The gross cost o debt isthe risk-ree rate, as the question states that thecorporate debt o the proxy company is risk ree:keg = keu + (keu kd) (V d [ t] Ve).% = keu + (keu 4%) ( [ 0.3] 4)Using algebra, we arrive at keu = 6%.lUsing the formula for the adjusted cost of cap-ital: kadj = keu ( tL), where Kadj is the WACC andL is the leverage or Vd (Ve + Vd). The WACC orthe proxy company can be calculated as normal:.% x (4 5) + (4% x [ 0.3] x [ 5]) = 5.04%.Hence 5.04% = keu ( 0.3 [ {4 + }])Using algebra again, we come to keu = 6%.

You will probably be given only enough inor-mation in the exam to use one o the above meth-ods, but youll need to be able to identiy which

to use and apply it successully.Now that we have an ungeared cost o equity o

16 per cent, the next stage is to calculate the base-case NPV as ollows:

The tax savings are calculated by taking the netcost o $108m ($120m $12m) and spreading it overthe projects three-year lie. This gives an annualallowable depreciation o $0m 3 = $36m. Theannual tax saving is $36m x 30% = $10.8m. Assum-ing that Matu bought the asset at the start o a taxyear, the rst saving wil l be calculated at the endo year one (T1), but, since tax is paid a year inarrears, it will become a cash fow a year later (T2).

The act that a negative base-case NPV has arisenis not unusual, as the beneit o cheaper debtnance has been ignored in the calculations so ar.

Beore starting the side eects calculation, its

worth ensuring that you understand the nanc-ing package. From the question we can identiy:lDebt nance rom the machine supplier at 3 percent a year: $20m x 50% = $60m.l Commercial debt nance at 5 per cent a year:$20m x 25% = $30m.l Equity nance: $20m x 25% = $30m.

The commercial debt nance and the equitynance will both incur issue costs. Because $30mmust be provided rom both commercial debt andequity to buy the machine, we need to gross up tond the actual amount that must be raised to paythe issue costs and then und the machine.

Because the issue costs on the commercial debt

are per cent, the total raised needs to be $30m x00 99 = $30.30m. And, because the issue costson the equity are 3 per cent, the total raised needsto be $30m x 00 97 = $30.93m.

Using our pro orma, we obtain the ollowing:Note $m $m

1. Issue costs: 1

Equity (30.93 x 3%) (0.93)

Debt (30.30 x 1%) (0.30)

Tax relie (0.30 x 30% x 0.952) 2 0.09i

(0.21)

2. PV o tax relie on interest paid:

Normal-rate loan

(30.30 x 5% x 30% x 2.723 x 0.952) 3 1 . 1 8Cheap loan

(60 x 3% x 30% x 2.723 x 0.952) 1.40

3. Cheap loan:

PV o interest saved (60 x 2% x 2.723) 4 3.27i

PV o tax relie lost

(60 x 2% x 30% x 2.723 x 0.952) (0.93)

2.34

Total PV o fnancing side eects 3.78

Study notes

$m T0 T1 T2 T3 T4Net revenue 52.00 52.00 52.00

Tax @ 30% paid in arrears (15.60) (15.60) (15.60)

Initial investment (120.00)

Grant @ 10% paid ater 1 year 12.00

Tax savings XXXXXX XXXX 10.80 10.80 10.80

Net cash ows (120.00) 64.00 47.20 47.20 (4.80)

16% discount actors 1 0.862 0.743 0.641 0.552

Present values (120.00) 55.17 35.07 30.26 (2.65)

Net present value (2.15)

Further readingAndrew Howarth, Financial Strategy, Financial Management, April 2011 (bit.ly/F3APVApril2011).

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44 Study notes

Because this result is positive, the project shouldbe accepted, but its worth noting that the APV isairly marginal given the large scale o the invest-ment under consideration.

The rtionle behind APVThe APV approach relies on the Modigliani andMiller (M&M) theories o capital structure. TheM&M no tax theory states that, as the gearing oa rm changes, its WACC stays constant. I its gear-ing rises, its nancial risk rises, as does its cost oequity. While the rising cost o equity tries to pushthe WACC up, the increased proportion o cheaper

debt nance tries to push the WACC down. Theseeects are equal and opposite, leaving the WACCunchanged. The lowest level o gearing is wherethe rm has no debt, so the WACC is the same as

the cost o equity at this point: the keu. As the WACCstays constant, it is the keu at all levels o gearing.

Under the M&M with tax theory, the WACCalls as gearing rises. This is because the debt ischeaper than in the no tax theory because o thetax relie on the interest paid. Under the APVmethod, the base-case NPV is calculated usingkeu. This is the appropriate WACC i there were notax. In the nancing side eects calculation, thekey element is the calculation o the benet o tax

relie on interest paid. This benet, which in theM&M with tax theory causes the WACC to all,

is evaluated in absolute terms and added to thebase-case NPV to create the APV. Hence the nalAPV calculated refects the with tax theory. Thisexplanation should help you to understand whythe actual interest paid on the debt is not includedin the calculations.

The M&M theories take no account o the impacto nancial distress when gearing is high, so APVshould be applied only at reasonable gearinglevels. Financial distress is caused by real-worldactors that are ignored by the M&M theories

e.g., the increased danger o bankruptcy, extraagency costs and the risk o tax exhaustion thatmay arise when gearing is high. At high er gearinglevels corporate debt is denitely not risk ree.

Further problems arise with the M&M theoriesailure to account or dierent in

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