Issue 3 – 2014 Driving Innovation in Management Accounting

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• Tips on managing your team and yourself as the role of finance evolves 7

• Pricing: Inside the heads of consumers 16

• How 3D printing, wearables, and drones are being put to work 27

• CGMA Fall 14 Cover FINAL_CGMA Masthead Design 9/26/14 8:55 AM Page 1

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CONTENTS

How to Thrive in Changing TimesOrganisations are turning to the finance function to help deal with changes,complexity, and disruptive ideas. Four prominent CGMA designation holdersoffer tips on thriving in today’s marketplace.

The Value of EmotionsWe think we can rationally assess the true value of something, but we are stronglyinfluenced by our emotions and the comparative price of other goods and services.By understanding such behavioural science, businesses can maximise profits.

The Future Is NowEmerging technologies are making the stuff ofscience fiction show up in everyday life. 3D printers,wearable technology, and unmanned aircraftare just a few of the developmentspoised to have profound implicationsfor companies and innovators aroundthe world.

6 – Guide toCGMAMagazine.orgSee what’s available at theonline home of CGMAMagazine.

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About the CoverTo make our cover pop,we designed a 3D imageof the text and sent the fileto a design firm, whichprinted it on a desktop 3Dprinter. While it merelyyielded words for us, thetechnology is creatinglucrative opportunities for businesses. Find outhow on page 28.

TofC CGMA - Nov14_Layout 1 10/1/14 7:42 PM Page 1

High-Voltage StrategiesSurveys by the American Institute of CPAs and Accentureshow that complexity is a growing issue for the modernCFO in maximising business performance and efficiencies.

Getting Back Up to SpeedYears of declining revenue created a challenge forInternational Speedway Corp.: how to manoeuvre out ofthe pits and back into the lead. At the centre of thestrategy is Dan Houser, CPA, CGMA, who is guiding thecompany back to growth.

Take Two: Reinventing Culture After an AcquisitionWhen John Mahtani, ACMA, CGMA, partnered to acquire a film processing lab, one of his first prioritieswas to change the company’s strategy. He describes the steps he took to inspire a sceptical workforce.

Keeping the Talent Pipeline FlowingFostering loyalty amongst early-career professionals is a key concern for businesses across the world. MattMiller, ACMA, CGMA, explains how BAE Systems develops and retainshigh-calibre talent.

Developing a Plan for Better PlanningThere is no one-size-fits-all planning module. Different organisations, atdifferent stages of their business life and with distinct goals, requiredifferent levels of planning. Gary Cokins and Michael Coveney offer tipsfor taking planning to the next level.

Use Predictive Analytics to Thrive — and SurvivePredictive analytics have the potential to deliver competitive advantage. Casein point: Nissan Motor Co. Ltd., where knowledge of the supply chain —fuelled by predictive analytics — led to quick recovery after Japan’searthquake and tsunami. John Wilenski, CPA, CGMA, explains how.

6 Tips for Integrated Thinking Nick Topazio, ACMA, CGMA, explains how companies can adoptintegrated thinking and decision-making processes that are fundamentalto the creation of an integrated report.

5 Minutes With: Antonio G. “Jumbing” de RosasUnderstanding people is just as important as mastering the numbers,says Antonio G. “Jumbing” de Rosas, CPA,CGMA, the CEO of Pru Life UK in thePhilippines.

Budgeting, Planning & Forecasting:What’s on the Horizon?A survey of CGMA designation holders offersinsight into the state of corporate budgeting,planning, and forecasting.

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23 – CGMA CompetencyFramework: Skills for Business TodayTo succeed in a rapidly changing businessenvironment, today’s finance professional needs astrategic skillset that is market-relevant and well-balanced.

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November 2014

Organisations are turning to the finance function to help deal with changes,complexity, and disruptive ideas. Four prominent CGMA designation

holders offer tips on thriving in today’s marketplace.

BY cHarles tIlley, Fcma, cgma, AND Jack Hagel

How to tHrIve In

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Carol Calandra,CPA, CGMAGroup CFO —Markets, EY

wHenmanagIngcHange,communIcatetHe “wHy”.It always helps for peopleto understand why you’redoing something andexplaining how the team or organisation will benefit from thechange. If you don’t explain the “why”, people are left to theirown devices to guess. So it’s about explaining, beingtransparent, and understanding, and leading them through achange. Change is hard, and we need change leaders to helpus through whatever change we are trying to implement.You have to keep talking about it, keep addressing it, keepreinforcing it, and provide the burning platform for the change.

buIld your toolkIt. I always talk to our teamsabout expanding their toolkit. Constantly pick up new things.Expand broadly what your remit is, so that you learn. Sowhen that job opportunity comes, you’re ready for it. You’rebetter prepared because you haven’t just been doing your job;you’ve been picking up other experiences along the way.Seventy per cent of learning is through experientialdevelopment. You don’t have to talk in front of Parliament orCongress to be better at presenting, for example. You canchair a meeting. You can lead a discussion group and, little bylittle, get comfortable with presenting. And then, when you’rein a job that requires presenting in front of people all the time,you’re much more developed in the skillset.

volunteer. Volunteer for everything that you canhumanly volunteer for. Because you’ll grow, you’ll continue todevelop, and along the way, you’re going to meet some reallyinteresting people, and you’re going to help them, and theywon’t forget that, which will provide interesting opportunitiesdown the road.

Tony Chanmugam,FCMA, CGMAGroup FinanceDirector, BritishTelecom Group

look aFteryour people,and tHey wIlllook aFteryou. The quality ofyour people is essential.We limit the use ofconsultants where possible so that we encourage and growour in-house expertise. Nurture your talent, and your teamwill become the catalyst for growth — for driving down thecost base, improving efficiencies, and driving long-termsustainable success. We also encourage our people to learn thedifferent parts of the business. My experience as a COO hasallowed me to be a successful CFO. If you understand theoperational side, you will have a better understanding of thefinancials.

play a Full role In busIness strategy.Management accountants have never been at such a highpremium. Management accounting skills are vital to oursuccess. We need the right people, but they need the righttools, knowledge, and skills to work efficiently. You needeffective decision-making, and you want people brave enoughto make those decisions. This may mean that someone makesten decisions, gets eight correct, and makes two mistakes. Buthe or she learns the most from those mistakes.

remember tHat InnovatIon FuelsgrowtH.When we rolled out our fibre-optic network[beginning in 2009], it cost us £2.5 billion ($4 billion). Therewas a high degree of concern about cost and take-up, but wewere bold and had a reasonable confidence we could meetmarket expectations. We look to safeguard such investmentswith contingency plans. Be aware of the pessimistic, and try tocounter that. You cannot afford to stand still and must alwaysbe looking to achieve that next set of aims.

n a climate of constant uncertainty, onething is certain: Organisations areturning to the finance function to helpdeal with complexity and disruptive ideas.This puts finance professionals in a

position of influence — and change.Finance executives increasingly find

themselves focused on talent management, risk management,

strategic planning, accounting information systems,cybersecurity, corporate governance, and legal andcompliance initiatives. They’re also becoming critical playersin the communication of performance and changes in strategy. These prominent CGMA designation holders, who are to

discuss thriving in disruptive times during a panel at this year’sWorld Congress of Accountants (WCOA) in Rome, offeredthese insights during recent interviews with CGMA Magazine.

I

Changing Times_WCOA_ Hagel_CGMA_Nov14q8_CGMA 9/29/14 8:19 AM Page 2

CGMA white papers and briefings on key business topicssuch as the impact of changes to the workforce onperformance, risk and decision-making, ethics, Big Data,and integrated reporting are scheduled to be released at the

World Congress of Accountants in Rome and in the weeksleading up to the event. Visit CGMA.org to download thereports during and after the event, which runs fromNovember 10th–13th.

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November 2014

Simon Henry,FCMA, CGMACFO, Royal DutchShell

look aHeadand avoIdcomplacency.The danger ofcomplacency is always arisk. Falling back totraditional modes ofbehaviour is somethingwhich executives have to consistently be conscious not toallow. Management accountants, with their focus on forward-thinking and sustainable business, are therefore vital to therisk-management process. Shell is clinical in understanding itsrisks, and the company has a well-structured process forensuring that all risks are addressed at the executive ormanagement level. Although there are certain events thatsimply can’t be planned for, it is crucial to have an establishedprocess in place to deal with any eventuality.

be a good corporate cItIzen. Being a goodcorporate citizen is not just a necessary core competency forevery organisation, but also is a competitive advantage inmany sectors. Industries and organisations must not just waitfor regulations to be applied, but get ahead of the curve andbe reactive to financial, environmental, technological, andeconomic change. If you have the correct approach to the roleof responsible business by acting in a sustainable way, you cancreate different regulatory environments in which you canthen do better business.

be curIous. Part of being a professional is understandingwhat is required of you and making sure that you get thejob done. But being an effective finance leader doesn’t stop there.Having the curiosity to understand exactly your organisation’sbusiness model and risks — that is what will catapult you andyour business forward. Understanding everything from financeto organisational effectiveness and allocation of resources —coupled with expertise in other parts of the business — can proveto be an extremely powerful asset in the effective managementand development of a company’s finance function.

Ken Goldman,CPA, CGMACFO, Yahoo

to stay aHeadoF dIsruptIvetrends, read upand HIreyoung. Bring innew blood, freshly out ofschool, that really are ontop of some of the newtrends. Another thing wedo is acquire companies that are very involved with someemerging trends and use those as leads to what we’re trying todo. Read a lot, and really watch what’s going on. A lot of thenew ideas come from people starting companies, so stay veryinvolved with that. Another thing: Network a lot. You have tohang with people who are involved.

grow and nurture talent FromwItHIn. The recruitment of talent is probably the biggestchallenge currently in technology today. Talent is in thecritical path of us being able to be successful. I try to hire asmany people as I can right out of [university] and train themourselves and grow them and mentor them and then developthem as managers. In Silicon Valley, the finance challenge isextreme, as it is for other functional areas, so I find the bestway to do it is just to develop your own when you can.

Focus on experIence FIrst. Good schooling is the requisite, as is understanding the functional areas ofaccounting. People underestimate how important it is toreally understand accounting and stay up with it. Part of it is working hard, staying involved and engaged. It’s moreimportant to get experience and learn. Don’t worry aboutyour title or your salary. It’s all about good experience. Theability for finance to really understand fledgling businessmodels is important to understand if it’s sustainable or “areyou kidding yourself?” �

Charles Tilley is chief executive of the Chartered Institute of ManagementAccountants. Jack Hagel is a CGMA Magazine editorial director.CGMA is the WCOA imperial sponsor.

cgma tHougHt leadersHIp

Changing Times_WCOA_ Hagel_CGMA_Nov14q8_CGMA 9/29/14 8:19 AM Page 3

Less complex

1%

No change

5%

Morecomplex

94%

Business complexity

expected in the next three

years*

Increasing complexity has expanded the role of the CFO*

Signifi cantly

Moderately

No change14%

22%

Slightly 25%

39%

Executives the CFO partners with to drive transformational change

Chief executive offi cer81%

Chief operating offi cer46%

Chief strategy offi cer39%

Chief information offi cer25%

Chief procurement offi cer24%

Chief risk offi cer24%

Chief marketing offi cer21%

Chief human resources offi cer21%

HIGH VOLTAGE

Managing the complex needs of stakeholders

GREATEST CHALLENGES FOR SENIOR FINANCE EXECUTIVES

Complex legacy systems and environment

Managing complex fi nancial, business, and operational risks

Recent surveys by the American Institute of CPAs and Accenture show that complexity is a growingissue for the modern CFO in maximising business

performance and effi ciencies.

STRATEGIES

2011 2014

55%38%

48%39%

46%39%

SOURCES: Those noted with an asterisk (*), AICPA. All others, Accenture Strategy 2014 High Performance Finance Research, The CFO as Architect of Business Value: Delivering Growth and Managing Complexity.

EF267 Complexity_Infographic_AW.indd 2EF267 Complexity_Infographic_AW.indd 2 29/09/2014 10:4229/09/2014 10:42

Risk management (67%)

Strategic business planning (58%)

Accounting information systems (55%)

Management & corporate governance (46%)

Legal & compliance (44%)

Tax strategy & planning (43%)

Pricing & cost analysis (41%)

HR (39%)

Stakeholder relations (22%)

Macroeconomic analysis (12%)

NEW AREAS OF FOCUS

2014*

TIME TO COMPLETE

QUARTERLY CLOSE

55%8–35 DAYS

2%36+ DAYS

43%1–7 DAYS

20142011

SATISFACTION WITH THE FINANCE FUNCTION‘S

PERFORMANCE

88%

85%

83%

83%

83%

82%

76%

74%

70%

66%

68%

67%

64%

71%

58%

51%

Effi ciency of the fi nance function

Contributing to the strategic direction of the enterprise

Finance workforce effectiveness

Managing risks

Flexibility/ability to rapidly change

Addressing regulatory/compliance issues

Capitalising on M&A opportunities

Addressing sustainability issues

69%Strategic business planning

52%Risk management

and internal controls

50%Management reporting

and analysis

41%Change management

38%Communications

34%Driving performance

29%Project management

26%Business relations

10%Macroeconomic analysis

Essential fi nance skills in the next three years*

58%

50%

45%

28%

28%

24%

Profi tability

EBITDA

Cost of fi nance as a percentage of revenue

Revenue growth

Return on equity

Return on capital/invested capital

Metrics used to measure CFO performance

39% Total shareholder return

34% Earnings per share/net income

32% Cash fl ow

30% Operating income margin

EF267 Complexity_Infographic_AW.indd 3EF267 Complexity_Infographic_AW.indd 3 29/09/2014 10:4229/09/2014 10:42

CGMAMAGAZINE.ORG

or more than a decade, InternationalSpeedway Corp. couldn’t lose.

In the late 1990s and most of the2000s, International Speedway cruisedto year-over-year revenue gains as auto-racing fans filled the company’sstoried venues, including Daytona

International Speedway in Florida and TalladegaSuperspeedway in Alabama.

But then came the financial crisis. As the US economyfell, so did attendance at the company’s 13 racing properties.What followed were years of declining ad sales, ticket sales,and concession sales — and a challenge: How to manoeuvreout of the pits and back into the lead.

At the centre of that strategy has been Dan Houser, CPA,CGMA, the company’s CFO since 2008.

For the first time since 2007, the company is on pace togrow revenue for two straight years. The turnaround storyends with the financial statements. But it starts on the track.

Houser has kept International Speedway revved up byworking to improve the company’s cash position, allowing itto invest in new opportunities amid a tight lending period.The company also has been tinkering with seating supplyand ticket prices to spur demand. It has instituted advance-purchase programmes to increase the likelihood that tracksearn money in the event of inclement weather. And thecompany is working to maximise the value of its real estateby entering into joint ventures, including one with a gaming

CGMAMAGAZINE.ORG

Dan Houser, CPA, CGMA, is helping shift International Speedway Corp. into higher gear.

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company that is running a casino overlooking its speedwayin Kansas.

The most obvious changes are coming at its flagshipproperty: Daytona.

a GRowinG, then SpUtteRinG, SpoRtThe National Association for Stock Car Auto Racing(NASCAR) is the main sanctioning body of stock car racingin the US. Its top circuit, the Sprint Cup, a series of races attracks around the country, is a big television draw. Amongsports in the US, it is second only to the National FootballLeague in TV ratings. It is known for drivers such as DaleEarnhardt Jr., Jimmie Johnson, and Danica Patrick as muchas it is for its abundance of advertising — with cars, racingsuits, and post-race interviews sprinkled with logos andproduct mentions.

Formula 1 racing has a similar sponsor-driven model — butit is more global and high-tech, with 19 races on fivecontinents and cars that don’t resemble the ones driven inNASCAR, with less surface area for large advertising.Formula 1 has likewise suffered attendance drops at certainstops on its circuit.

NASCAR, which has traditionally been popular in thesouth-eastern US, expanded to reach other parts of the countryand had substantial growth between the mid-1990s and 2007.

Daytona International Speedway is the epicentre of thesport, home to NASCAR’s season-opening Daytona 500, theso-called Super Bowl of stock-car racing, where 43 cars zoomaround a 2.5-mile tri-oval for 500 miles in search of a covetedvictory, which equates to more exposure for sponsors. Therace, which is broadcast in 150 countries, attracts the sport’slargest TV audience and earns the highest ticket prices andcorporate partnership dollars.

International Speedway owns 12 tracks that have acombined 20 race dates in the Sprint Cup season, which runs36 events from February to November. Daytona also has aSprint Cup date over the Fourth of July holiday weekend. 

When the US economy began to flag in 2007 and joblosses started to mount, consumers began spending less freelythan in the days when a red-hot housing market gave themconfidence. Rising petrol prices also contributed, as peoplewho previously travelled to numerous events cut back oreliminated trips to weekend races. Furthermore, the averageNASCAR fan, with median income slightly lower than the USaverage, was more adversely affected by the economicdownturn and remained less confident in the economy,according to Morningstar analyst Jaime M. Katz.

The downturn was evident in the patches of empty seats atmany NASCAR venues, including International Speedway’stracks from California to Florida to New York. Starting in2007, International Speedway had six consecutive years ofadmissions revenue decreases, although TV revenue from anew contract helped offset those losses.

The company’s overall revenue dropped each year from2008 to 2012 before rising slightly in 2013, from $612 millionto $613 million (see Figure 1). As of July, InternationalSpeedway was anticipating revenue of between $635 millionand $650 million for the 2014 fiscal year, which endsNovember 30th. Even the lower end of that range wouldrepresent an increase of 3.6% from 2013.

To reverse its revenue slide, International Speedwaystreamlined — reducing its workforce and centralising somefunctions that had been handled by individual tracks. In2012, at the low point of the revenue retreat, InternationalSpeedway reported $507 million in expenses, down 12% from2007. General and administrative expenses fell 13% to $103million during that period.

impRovinG the Fan expeRienceThe company hasn’t just been in cost-cutting mode. Instead,it has focused on getting race fans back into its seats. Onestrategy, a project called Daytona Rising, is ongoingconstruction scheduled to be complete in time for the 2016Daytona 500. The plan is to reduce capacity, which was onceabout 143,000, to 101,000, taking out seats that had less-than-ideal sightlines and making each seat wider, going from18 inches to 20 or 21 inches.

FIGURE 1: inteRnational SpeedwaY coRp.

RevenUe

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600

500

400

300

200

100

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� Annual revenue in millions of dollars � Projected revenue in millions of dollars

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ISC Dan Houser_Amato_CGMA_Nov14q8_CGMA 10/1/14 7:44 PM Page 2

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The project, which is expected to cost up to $400 million,will improve accessibility and the trackside fan experiencewith 40 new escalators and 14 lifts, what the company calls“vertical transportation.” Among other amenities areimproved sightlines and social connectivity. It’s all part of theplan to have a brighter revenue picture in the future.

The casino in Kansas and One Daytona — a developmentthat will feature shops, restaurants, a theatre, and hotel roomsacross from International Speedway’s flagship venue — aretwo examples of the strategic development opportunities thecompany undertook even when core business revenuenumbers were under pressure. The company is managingrisk through the partnership structures. The One Daytonaproject, for instance, is a joint venture with an established realestate developer.

“What we’re trying to do is unlock the value of our realestate,” Houser said.

The strategy of improving the product is about pleasingthe customer and focusing on the next sale. In all the cost-cutting, the company’s cardinal rule was that any changesneeded to be invisible to the consumer.

“It wasn’t acceptable to reduce the number of gates openon race day, or have fewer trams to the parking lots, or closehalf the concession stands,” Houser said. “You wanted thepeople who are making their own tough capital allocationchoices … to have a great experience. You can come here and

have a great time, but if you have to sit for two hours in theparking lot, that’s what you’re going to remember.”

Seat reductions are taking place throughout NASCAR,including at the company’s Talladega Superspeedway, whichonce had a capacity of nearly 150,000. Most of the sectionsbeing removed are along the backstretch of the tracks, awayfrom the more popular pit road, where cars return for fuellingand tyre changes, and where fans can get a glimpse ofteam strategy.

“Growing the fan base is essential to our business,”Houser said. “When the fans come, the corporate sponsorsand TV follow that interest. That’s sort of at the centre ofthe bull’s-eye.”

SUpplY-demand tenSionReducing the overall capacity can help create demand fortickets. And, as the overall economy improves, Houser saidthe company is seeing more early ticket purchases and ahigher average ticket price.

“We’ve been reducing capacity to get back down into thesupply-demand tension, which has been very important for usin the past,” Houser said. “We always built to demand backthrough about 2008, when the economy started to decline,and then we had excess capacity.

“Then fans start waiting later to buy tickets, and if you’vegot rain or anything otherwise in their lives that changes, theydelay their purchase decisions. When you start to get supply-demand tension back in there, the first thing they do is makeearlier purchases. Then, when you’ve kind of gotten back ontop of that balance, you’ve got opportunities to influencepricing and also to drive demand to support events,”including Friday qualifying for Sunday’s race and minorleague races on Saturdays.

Daytona Rising is all part of the strategy to improve theexperience for the customer coming to the speedway to hearthe roar of the engines.

Houser’s role in the project was, first, securing thefinancing, and second, briefing International Speedwaystakeholders on the value of Daytona Rising. The companywas able to refinance its debt, pushing out the maturation dateon certain debt issues and converting to a lower, fixed interestrate. He also played a role in winning the support of seniorleadership and the board.

Houser knew that the initial questions about the projectwouldn’t be about the colour of those new, wider seats or theheight of the escalators. The main question would be, “Howare we going to pay for this?”

“You really couldn’t talk to the board about what greatthings you could do with Daytona Rising and how that wouldreinforce the long-term Daytona brand until you had gottenthem comfortable with the long-term financial stability,” hesaid. “Once they’re comfortable with that, then you start totalk about the attributes of the project itself.” �

ISC Dan Houser_Amato_CGMA_Nov14q8_CGMA 10/1/14 7:44 PM Page 3

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We think we can rationally assess the true value of something, but we are strongly influencedby our emotions and the comparative price of other goods and services. By understanding

such behavioural science, businesses can ensure they are maximising their profits.

BY Rowan moRRison

The Value of

emoTions

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ehavioural scientist Ayelet Gneezy is anexpert on how we assign value to goodsand services. One of her starkest insightsinto just how inconsistent we are whenwe do this came not in a study shedevised, but when her mother-in-lawwas diagnosed with cancer in Israel.

After spending time uncomplainingly in a barelyacceptable public-sector hospital, Gneezy’s mother-in-lawwas moved to an expensive and far more luxurious privatehospital. “Within 20 minutes of checking in, she startedcomplaining even though objectively everything was better,”Gneezy said. “She had good food, a clean room, andprivacy, but she was essentially happier at the first place,which was free but not that great.”

It is a reminder that we are not the purely rational actorsof economic models. Notions around how we attribute valueto something and make decisions around price have been

transformed in recent decades by behavioural economics andbehavioural psychology from the likes of Gneezy, an associateprofessor at the Rady School of Management at theUniversity of California, San Diego.

Behavioural science has revealed the extent to which wenegotiate a world of complex and conflicting information byusing mental shortcuts (often using unconscious processes) tomake decisions that are often highly relative or emotional.Because of this, we are suggestible and subject to influence inthe decisions we make.

“We like to think we know what price is the right one, butthe fact is that we make relative comparisons,” said BillPoundstone, author of Priceless: The Hidden Psychology of Value.“Behavioural economics has found that perceptions of priceare like those of physical quantities, like dark or brightnessand heavy or light. If you don’t have a benchmark for price,your willingness to pay is fluid and contextual, which issomething companies can use.”

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In formulating a pricing strategy that takes account ofinsights from behavioural science, Leigh Caldwell, author ofThe Psychology of Price and a partner at the UK’s TheIrrational Agency, recommends:

Ask what your customers really want. Whatare their desires, needs, or wants, and whatvalue do they put on satisfying those needs?

You can determine the answers either through a marketresearch process or simply by talking to them, andthrough approaches such as laddering — when they statewhat they want, simply ask why they want that, andrepeatedly go to the next level until you understand thedeep, fundamental need that they are trying to fulfil.

Ask how your customers think. Whatare their mental strategies for satisfying thoseneeds? We all have limits on how much

thinking we are willing to do in a given situation, so weuse heuristics to find good-enough solutions in acomplicated world. By talking to and empathising withyour customers, and by using data produced by GoogleAnalytics, for example, you can understand how theythink about their needs or problems and how they findsolutions for them. You can also use psychological teststo learn about their thinking style, which affects howmuch they use reflective, cognitive processes versusrelying on instinct, emotions, and gut reactions.

Ask how they make their final choice ofproduct. This is where some of thepsychological heuristics and biases come into

play, especially the following concepts:� Anchoring: This is the human tendency to rely too

heavily on the first piece of information offered whenmaking decisions;

� Decoy pricing: This involves coming up with additionalproduct options to create different price points whilesubconsciously telling customers which option is the“best value”; and

� Goldilocks pricing: This is also known as the“compromise effect”, which exploits the fact that peopleget tired of making mental trade-offs between products,so if customers are presented with three products withno clear best choice, they are likely to settle on the“middle” option. This stage of the decision is all aboutcomparison and judgement, i.e., comparing a smallnumber of options and judging which one is best.

At each stage of this process, you can apply the discoveriesof behavioural science and carry out research with yourcustomers to get a clear picture of how they make decisions.

The key outcomes of this process should be:� Knowing what comparisons your customers make

and therefore who your real competitors are. Forexample, what is the value of a luxury watch? Forsome customers, what they want from a watch is totell the time, so the competitor to the watch is anotherwatch, and the value is mainly influenced by the priceyour competitors charge for their watches. For othercustomers, what they want from the watch is toimpress people — in which case the real competitormay be a BMW, and the value and price of the watchcan be set accordingly.

� Knowing how to set and communicate your prices.By knowing how much information your customerswant to process, you will know whether to simplifyyour pricing and your marketing or to include moredata to answer all the possible questions. This willalso tell you whether to wrap up your prices intosimple bundles or break them out into many differentline items that tell customers exactly what they’repaying for.

� Knowing the exact level — or levels — of price tocharge. If you understand the decision-makingprocesses of your different customer groupsintimately, you will know how to offer them a set ofdifferent prices for different product options. In nearlyevery case, you should be offering at least three levelsof product or service so that customers can self-segment into high, medium, and low spenders. Yourresearch process will tell you the right number foreach of these three prices based on customers’ needsand the comparisons they make.

It’s key not to lose sight of the bigger picture while puttingin place a structured framework. While behavioural economicscan give businesses potential influence over what theircustomers are prepared to pay, it is important not to alienatecustomers by creating the impression they are being exploited.

Although customers use imperfect shortcuts to assess thevalue of something, it does not mean businesses should assumethat they are stupid or endlessly suggestible, Caldwell said.

“Companies that will succeed in the long run are thosethat understand how the brain works and help people get themost value by guiding or going along with those unconsciousdecisions rather than going against the grain and forcingthem to do something they don’t want to do,” he said.

The RighT PRice? iT’s all in The cusTomeR’s head

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The small but growing number of specialist pricingconsultants using behavioural economics theory suggests itis becoming a new area of competitive advantage. But forthe most part, businesses are not yet working tosystematically apply these lessons and insights, nor arethey making the most of the increasing amount of pricingdata available.

All too often they use conventional and sub-optimalways to set prices. “Common rules of thumb such as ‘x percent over cost’ do not consider what the customer is willingto pay or what they are thinking,” Poundstone said.

Part of the reason for this lack of engagement withbehavioural economics is that creating pricing strategiesthat are informed by its insights requires a cross-disciplinary approach between finance and marketing, saidLeigh Caldwell, author of The Psychology of Price and apartner at the UK’s The Irrational Agency. “Only bycombining those two sets of expertise can you really usecustomer psychology and understand the numbers that youshould set.”

Gneezy added: “Anyone involved in pricing has tounderstand people. It is wrong to think about pricing as anumber discipline. It interacts with people, so if you don’tunderstand how they think, what bugs them and makesthem happy, then you can’t make them buy.”

Gneezy offers the findings of a pricing study sheconducted at a California winery as an example. Itinvolved two bottles of wine — a high-quality wine and alow-quality wine. Increasing the price of the low-qualitywine from $10 to $20 increased profits by 3%. But profitsfell 10% when the price of the same bottle was increased to$40. For the higher-quality wine, a price increase from $10to $20 boosted profits by 11%, while increasing the pricefrom $10 to $40 resulted in a 5% increase in profits. Thestudy enabled the winery to generate extra revenue thatovercame demand cannibalisation of its other wines,resulting in an overall profit increase.

The potential to improve performance by usingbehavioural tools is immense, said Enrico Trevisan, apartner with pricing strategy and marketing consultantSimon-Kucher & Partners in Munich and Milan and authorof The Irrational Consumer and Value Pricing. “Using or notusing a behavioural approach can change revenues orcross-selling levels by 20 to 30%,” he said.

A pricing study Trevisan recently conducted for a banktested customers’ willingness to pay (or not) for a currentaccount product, comparing offerings with increasing levelsof service and extras such as overdraft protection and debitand credit cards.

With only two choices — the free account and the €2account — 60% of those surveyed opted for the freeaccount. “When we introduced a third product for €4, weobserved that people wanting the zero product decreased

dramatically, and the people wanting the €2 productincreased,” Trevisan said. “When they were also offered a€6 product, the preference distribution moved againtowards the more expensive products, and the zero productlost market share. Every time we added a new productpreference, they moved towards the more expensiveproduct.”

The test raised the average price of the product portfoliowithout risking the loss of volume because the bank didnot take away the zero-priced product.

The insights of behavioural economics cross borders,markets, and cultures. They apply to old and young, richand poor, women and men alike, Trevisan contends. “Ourbrain machinery works in a similar way whoever we are.”

Behavioural economics-driven insights can offer a low-risk and rapid route to better sales and profits. Very often,clients will assume that such testing requires in-depth,lengthy, and costly market research. Not so, said Trevisan.

Preliminary testing and then small-scale trials can helpidentify optimal prices that generate higher profits withouttaking any big risks. “We usually have a sound hypothesisof what will happen, and the risks of a bad impact aresmall. You may not need to test your ideas with 3,000people; maybe 300 will do.” �

TiPs foR conducTing PRicing TesTsBehavioural scientist Ayelet Gneezy, a professor at theRady School of Management at the University ofCalifornia, San Diego, offered these tips for setting up abehavioural economics pricing test:

� Make sure there aren’t any discrepancies in yourstudy. For example, take into account the day ofthe week. Maybe people are willing to pay moreon Sundays. So you want to test on different daysand times. Avoid holidays.

� Try as much as you can to avoid contamination.Test subjects must not know other people receivedsomething else or paid a different price.

� The price should be the only thing the test subjectsare told. The only thing that should change is thenumbers, not the packaging or the words.

� Keep the testing as simple and efficient aspossible. Collect data to allow you to control thetests. Make sure you understand factors such ashow people pay and their gender, age, andnationality, for example.

Behavioural Economics_Morrison_CGMA_Nov14q8_CGMA 9/24/14 2:49 PM Page 4

hen you take over a company with a longhistory and entrenched management style,how do you engage the workforce andpersuade them to buy in to your vision forthe future of the business? This was thechallenge John Mahtani, ACMA, CGMA,and his partners faced when they bought

Cinelabs London, a niche film lab that had been owned and runby the same person for more than 30 years.

Establishing the right culture at the company wasparticularly important to Mahtani, who, as an executive atWarner Bros. Pictures International, witnessed a culture clashbetween Time Warner and AOL staff after the companies’2001 merger.

But establishing the right culture amid change is nevereasy. And the Cinelabs London story is rife with change: achanging company in a changing industry with a change inownership. Mahtani found that communicating the vision andcreating an environment conducive to innovation were criticalto managing that change.

a new sTRaTegyAs the major players in the film world, such as Technicolor andDeluxe, have transitioned to digital processes, Mahtani and hispartners saw a gap in the market for a niche photochemicalprocessor. Many directors, Quentin Tarantino included, still liketo shoot on film. And the new owners of Cinelabs wanted tocontinue serving that pocket of the market.

When John Mahtani, ACMA, CGMA, partnered to acquire a film processing lab, one ofhis first priorities was to change the strategy and improve the company culture. Mahtani

describes the steps he took to engage and inspire an initially sceptical workforce.

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But to ensure that Cinelabs London would endure even asfilm fades, an overhaul of the business model was necessary.The company did two key things.

First, Mahtani and his partners broadened the portfolio byoffering a range of new services, including film scanning anddigital mastering. Restoring and digitising film archives sothey can be accessed and leveraged on digital platforms isanother revenue stream with great potential. Photochemicalwork now accounts for just 25% of revenue, compared with85% at the time of the acquisition.

A new quality-control process was another feature of theoverhaul. Mahtani had worked on a list of blockbustersincluding 300, Superman Returns, Man of Steel, Inception, The DarkKnight, and all eight Harry Potter films while at Warner Bros.And he was keen to replicate the high standards he hadobserved there.

Once this new vision had been created, it was critical formanagement to communicate it to the workforce and securebuy-in.

CommuniCaTing The visionSome of the longest-serving staff members were apprehensiveabout the new owners and feared they would be dismissed.Evaluating the acquired team was therefore an urgent priority.

While some roles did not fit in with the new businessstrategy, the adaptability of each staff member was explored.Fourteen of the 23 staff were retained, and Mahtani sought todemonstrate to them that he valued their technical know-howas well as their knowledge of the company’s history, services,and clients.

Mahtani believes communicating the company vision takesmore than a one-off event. “To build a line of trust, it’simportant to ask everyone individually, on a regular basis,‘How are you getting on?’ ‘What’s your core focus?’ ‘Whatchallenges are you facing at the moment?’ ‘How can we helpyou?’” he said. “If you take the time to identify their strengthsand get them to build upon that, they flourish.”

One-to-one sessions are something Mahtani particularlyenjoys. “I talk to everyone about the vision of the company,the role they play, and how important it is,” he said. “At theend of the day, an organisation will only grow if everybodybuys in to that cohesive value chain.”

The dialogue continues at a fortnightly barbecue socialhosted by the management team to thank staff for theirefforts.

Mahtani believes that sharing some of the value a businesscreates with employees generates a much greater level ofengagement. “I always say, ‘It’s not my business, it’s ourbusiness,’” he said. “Rather than draw lines between people, ifyou seek unity and collaboration, you start to really see adifference in the way people respond.”

Room foR TRial and eRRoRAn important aspect of the Cinelabs culture is the space toexperiment.

“Innovation comes when people feel they are in a safeenvironment, safe from aggression, bullying, intimidation,”Mahtani said. “We make the team aware that, as long astheir intentions are right and they put in their best effort,we accept that mistakes happen and things go wrongsometimes. The key is: What can we learn from that?

“We want people to feel that they have autonomy andthey are accountable for the area they are looking after.”

For example, a new lab manager was unhappy with thechemical mix being used and wanted to look atalternatives. He ran a controlled experiment using testnegatives to ensure there was no damage to any originalstock, and the results were fabulous, Mahtani said.

Mahtani also strives to eliminate fear and empower staffto make their own decisions. “Initially, people came to mewith so many questions,” he said. “I would ask them:‘What would you do in that situation? Talk me through thethree options. Which one do you like best? OK, do it.’ Bythe time they see me for the fifth time, they realise theyhave the answer. Now, rather than ignore a problem,people start coming up with solutions.”

Staff are encouraged to take responsibility for their owndevelopment and build their skills in other areas of thebusiness, such as developing, printing, and maintenance.This not only provides a good crossover of skills amongthe workforce, it enables employees to move acrossfunctions within the company if they wish.

woRk in PRogRess Cultural change is not like switching on a light bulb. It cantake months or years. “But the quicker you start to focus onit, the more likely you are to impact change,” Mahtani said.

He added: “If you have a happy workforce, productivitycomes on its own. Innovation comes on its own. That for meis the key driver. The atmosphere is just so much morepositive and engaging, people are so much more responsive.”

All of this is reflected in the level of attention to detailand service that clients receive, he added. “Last month wasour strongest revenue month yet, so we must be doingsomething right.” �

21

While acquisition strategies often focus on what toshed, many companies can overlook strategiessurrounding what to keep. Retaining the right peopleis critical. Read more at tinyurl.com/nbzc8v3.

RelaTed ResouRCes

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CGMA® COMPETENCY FRAMEWORK

CGMA® MAGAZINE EXCLUSIVE REPORT

Businesses around the world seek finance staff with the skills and competencies to address the challenges and opportunities in today’s complex business landscape.

The CGMA Competency Framework is designed to help finance staff at all levels understand the competencies needed to drive successful business.

It helps management accountants assess their current skills and identify which

skills to build to enhance their careers. It helps employers and managers hire staff with the right capability, benchmark staff performance, and train their teams.

The framework defines what finance leaders expect of their teams – from traditional finance and accounting activities to leadership skills such as communication, building influence, and strategic management.

To succeed in a rapidly changing business environment, today’s finance professional needs skills that are market-relevant and well-balanced.

SKILLS FOR BUSINESS TODAY

CGMAMAGAZINE.ORG

THE CGMA® COMPETENCY FRAMEWORKThe framework is composed of four knowledge areas: technical skills, business skills, leadership skills, and people skills. It is underpinned by ethics, integrity, and professionalism, and a commitment to continuously acquire new skills and knowledge.

PROFICIENCY LEVELS

Each competency can be performed at four levels of proficiency. In some cases the proficiency levels are linked to levels of the organisation’s hierarchy.

Foundational (staff/entry level) Foundational staff members are responsible for achieving results through their own actions rather than through others.

Intermediate (supervisor/manager) Intermediate staff members have limited or

informal responsibility for colleagues and/or need to consider broader approaches or consequences.

Advanced (senior manager) Advanced staff members have formal responsibility for colleagues and their actions, and their decisions have a wider impact.

Expert (executive/C-suite) Experts have formal responsibility for business areas, and their actions and decisions have a high-level strategic impact.

TECHNICALSKILLS

BUSINESSSKILLS

LEADERSHIPSKILLS

PEOPLESKILLS

CGMA® COMPETENCY FRAMEWORK

ETHICS, INTEGRITY, AND PROFESSIONALISM

To influencepeople

In the context of the

business

Apply accounting and finance

skills

And lead within the

organisation

COMPETENCIES FOR FINANCE PROFESSIONALS

Finance and accounting work is the foundation of entry-level management accounting. Two basic types of accounting work exist: systems of record and systems of engagement.

Systems of record This involves using systems of record to process and record transactions. Providing basic reporting requires accounting and finance, IT, and process management skills.

Systems of engagement Using systems of engagement, planning, and control to interact with and influence key stakeholders inside and outside the organisation involves preparing and communicating management information, external reporting, and other services such as internal audit, treasury, corporate finance, and tax management. This requires technical accounting and finance, IT application, process improvement, and people skills.

Additionally, CFOs and other senior finance professionals require leadership skills to manage the finance function to enable it to contribute to the success of the organisation.

Finance professionals are expected to apply accounting and finance skills, in the context of the business, to influence the decisions, actions, and behaviours of others and lead the organisation at different levels.

November 2014

Technical skills

Technical skills enable finance professionals to collect, store, process, and analyse information to be shared with various stakeholders. These include the preparation and dissemination of external and internal reports per the professional accounting standards.

Business skills Business skills enable finance professionals to use their knowledge of the business and its environment to transform data into insight that enables organisations to evaluate their strategic positioning, alignment of their business models to their strategies, performance, and opportunities for the future.

People skills Particularly in communication, people skills are used to influence the decisions, actions, and behaviours of decision-makers and others throughout the organisation and its stakeholders.

Leadership skills Leadership skills take place at various levels. Three types of leadership can be identified as peer, functional, and strategic. Peer leadership involves leading peers in and out of the finance function on issues that require an understanding of the financial implications of events and issues in the organisation’s internal and external operating environments. Functional leadership refers to the leadership that ensures that the finance function delivers its objectives to the organisation. It takes place from the intermediate level onward, but mostly at the advanced level. Strategic leadership is exercised at the expert level. Experts join with leaders in other functional areas to define, formulate, and oversee the implementation of the organisation’s strategy.

CGMAMAGAZINE.ORG

EXPLORE THE FRAMEWORKWe encourage you to explore and use the Competency Framework as a tool to remain relevant in your role and enhance your development and career – whether for you or for your business.

To explore the full CGMA Competency Framework, visit cgma.org/competency-framework.

Round-table meetings were held in 13 countries, and an online survey was conducted of nearly 3,400 accountants, students, and academics, validated through outreach with employers and finance professionals.

Who is it for?

• Employers can use the framework to identify the skills required when hiring finance staff.

• Managers can use the framework to train staff and benchmark performance goals.

• Individuals can use the framework to keep track of their own professional development, maintain relevance, stay ahead of the curve in the marketplace, and ultimately enhance their careers.

SUCCEED IN TODAY’S MARKETPLACE The development of the framework was employer-driven, guided by insight from over 60 organisations around the world including IBM, Unilever, Microsoft, and Shell.

GLOBAL MANAGEMENT ACCOUNTING PRINCIPLES©

Effective management accounting requires the best people applying the right processes. For this reason, the AICPA and CIMA are also developing a set of Global Management Accounting Principles. The principles set out the fundamental values, qualities, norms, and features of management accounting. They were informed by research across 20 countries on five continents with input from more than 400 executives, academics, and other professionals. Their purpose is to improve decision-making in organisations by ensuring relevant insight and analysis is applied and communicated. For more information, visit cgma.org/principles.

TheFuTure isnoW

f you’d been asleep for 20 years and woke up tosurvey today’s global business environment, you’dbe convinced that you had been cast in a science-fiction movie:

� Digital scanning and 3D printing devices are helpingeverybody from manufacturers to confectioners createalmost anything using material that can range from plasticto chocolate.

� Employees at companies worldwide are wearing sensorsthat track how far they walk in a day, and sports teams arefitting athletes with monitors that track their movement andperformance. Meanwhile, companies are researching usesfor Google Glass eyewear, which gives users the ability touse voice commands to record video and surf the internet.

� Unmanned aircraft are being developed for use insurveillance and photography, and companies such asAmazon and Google are experimenting with technologythat may one day result in drones delivering packages toyour door.

These developments can have profound implications forcompanies and innovators around the world. The only limit totheir ability to transform business — aside from safety andprivacy regulations — is your imagination.

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ast-emerging 3D printing, also known asadditive manufacturing, uses a computeriseddigital model to fabricate virtually any kind ofobject one can imagine. Its popularity isincreasing as engineers and designers find ways

to use it to make parts and prototypes that often were moredifficult and costly to produce by different means.

“It’s definitely going to be a disruptive technology,” saidRobin Hirsch, FCMA, CGMA, a consultant with KingdomTechnology partnership in the UK. “It’s going to make a hugedifference to an awful lot of industries.”

Global technology market analyst Canalys projected thatthe size of the global 3D printing market, including 3D printersales, materials, and associated services, will expand from anestimated $2.5 billion in 2013 to $16.2 billion by 2018.

The technology has the potential to transform supplychains and manufacturing processes and enable productcustomisation that could change consumer habits.

uses in manuFacturing3D printers facilitate the easy creation of three-dimensionalobjects out of whatever material the printer supports, be itplastic resins, a paper and glue mixture, or even chocolate. Itoften works like this: A user scans an object using a 3Dscanner. The image is used to create a computer-aided design

(CAD) file. The file is sent to the printer, which thensystematically layers tiny amounts of material in the formdictated by the file.

But here’s the game-changer, according to experts: Userscan download existing CAD files from the internet and skipall the scanning and programming. In the future, consumersmay be able to purchase, say, an out-of-stock part for an oldercar. Under that scenario, consumers would be able to buy theCAD file online — in other words, purchasing the intellectualproperty — and simply print it out.

Imagine that on a larger scale and one can understand why3D printing has the potential to profoundly affect supplychains. US-based manufacturer General Electric estimates thatby 2020, 100,000 parts will be manufactured through 3Dprinting processes in its aviation division alone. Already, morethan 300 3D printers are in use across GE.

The aviation industry has become fertile ground for 3Dprinting. In the developing world, 3D printing may makedevices for critical services such as water testing andsanitation more readily available and less expensive forpopulations in need.

“We’re roughly at a tipping point for 3D manufacturing,”said David Cieslak, CPA/CITP, CGMA, a consultant withArxis Technology, whose clients include a 3D systemscompany in California. “And that has to do with the cost of

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emerging tech: 3D PRINTING

OppOrtunities anddisruptiOns in

3d

3D printing technology presents chances for businesses — and their competitors — to create innovative, custom-designed products.

A desktop 3D printer creates thetext used on our cover.

Emerging Tech_3D Printing_Tysiac_CGMA_Nov14q8_CGMA 10/1/14 7:47 PM Page 1

November 2014

the equipment, it has to do with thespeed of the equipment, it has to dowith what materials can be handledby these 3D printers. All of thesethings are evolving and very rapidlymaking 3D printing an option or areality for manufacturers at somelevel of scale.”

Initial uses have often been inprototyping and in custom-designingproducts or parts for customers, rather thanmass production. Some of the uses include:

� Biotechnology: 3D creations have beenused for prosthetics, splints, and stents for airways,arteries and veins, and bones damaged by trauma ordisease.

� Aerospace, automobile, and appliances: Joe GibbsRacing, a US auto racing company, needed a custom-built duct outlet for one of its cars in a matter of days.A 3D printing company got the part made in time forthe next race.

� Food: UK-based Choc Edge is integrating 3D printingwith chocolate to help confectioners develop moreintricate designs. US candymaker Hershey has amultiyear agreement with a 3D printing company tocreate and develop edible treats.

� Art and architecture: 3D printers allow artists to makesculptures out of a wide variety of materials. Techspecialists such as London-based Lee 3D provideprinting services for architects and engineers. And inNew York, the Metropolitan Museum of Art recentlyinvited digital artists to spend two days scanning objectsat the museum for conversion into 3D images.

cOnsumer FOcusThe chance for consumers to order and custom-designproducts presents a new dynamic that businesses need toconsider. Will a soccer fan in the UK want all his or herkitchen drawer handles moulded in the image of theManchester United crest? That’s a question with businessimplications for the manufacturers of kitchen drawer handlesand for Manchester United.

Shipping and logistics companies, meanwhile, may beaffected if custom-made products can be printed out in thehome, because CAD designs can be transported over theinternet for no cost.

“Let’s say there’s a clever designer in India,” Hirsch said.“They can customise a design for you, and you print it out onyour printer. You don’t then need all that logistics to send allthat stuff across the world.”

3D printing presents opportunities for innovation, and alsofor competitors or even consumers to innovate in ways thataffect your business.

A recent report by management consulting companyAccenture says that business leaders need to think about theadvantages that 3D printing can provide to their processes —and to their customers. The report advises that businesses:

� Consider ways 3D printing could allow them — orcompetitors — to put more power to customise productsin the hands of their customers.

� Contemplate how 3D printing can be used forimprovements at any point in the supply chain.

� Reflect on the chances that, in the long term, productsin their sector could move from low-customisation andmass production to high-customisation and specialisedproduction.

“It’s got a lot of ability to transform what we do,” Cieslaksaid, “and how we do it.”

3d debits and creditsMany companies are exploring uses for 3D printingas they re-evaluate processes for production andresearch and development. Here are three issuesbusiness leaders need to consider with respect to3D printing:

� Reduced inventory costs. Using 3Dprinting for on-demand production of out-of-stock replacement parts for vehicles andappliances has the potential for manufacturersto save money on warehousing inventory.

� Elimination of waste. Because 3Dprinting uses only the amount of materialneeded for the product, it leaves virtually nowaste — unlike many other manufacturingmethods.

� Regulation or certification. 3D-printedproducts in highly regulated industries mayneed to receive regulatory approval orcertification before it is legal for them tobe sold.

3D printers such as this have the potential torevolutionise product design and manufacturing.

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ne of the newest trends for improving theworkplace gets very close to employees — closeenough to be strapped around their wrists,clipped to their belts, or perched on their noses.

Advances in wearable technology havecompanies experimenting with Google Glass eyewear thatenables employees to have their hands free as they use theweb or record video. And some companies have employeesusing wearable technology for everything from monitoringperformance to tracking their progress in wellnessprogrammes.

Although privacy concerns are prompting employers totread cautiously in their implementation of wearable devices,their use is expected to expand. Technology market analystfirm Juniper Research predicts that worldwide revenue fromwearable electronic devices, apps, and services for fitness andpersonal health alone will grow from an estimated $1.4 billionin 2013 to $19 billion by 2018.

Users have included:� UK airline Virgin Atlantic, which has experimented

with outfitting concierge staff with Google Glass’s web-connected eyewear technology to help them providesuperior service and information to passengers. GoogleGlass is equipped with a screen that the wearer can seeand a camera that can transmit images or video of what

the wearer is viewing.� Soccer teams, including the 2014 World Cup-winning

squad from Germany, using devices tracking speed,distance travelled, acceleration, and power of playerswho are training. Team trainers can track theinformation live on tablets.

� US automaker General Motors, which is experimentingwith Google Glass for training new employees andother uses.

The health-care industry is especially fertile ground for useof wearables. Benjamin Harris, CPA, CGMA, chief executiveof US consulting firm BLH Technologies, has many clients inthe health and science sectors and said the wearable marketright now reminds him of the 1970s, when personalcomputers were just starting to gain popularity.

“Its potential is limitless,” said Harris, who uses a watchwith a pedometer on it to monitor his exercise as he manageshis diabetes.

monitorinG FitnessDuring a time of growing health-care costs, one common useof wearable technology by companies across the globe is toentice employees to improve their fitness and health. Humanresources departments eager to improve employees’ health arechallenging employees to wear devices that measure the

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Wearable technology is providing companies with new opportunities — but privacy concerns have employers proceeding carefully.

Warren Forgey, CPA, CGMA, executivevice president and chief administrative

and operations officer for SchneckMedical Center in Indiana, took the

stairs more often and wore a pedometeras part of a company fitness challenge.

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number of steps they take during a day. In some cases,employees form teams that compete for prizes based on thenumber of steps their fitness trackers capture during a givenperiod.

During an eight-week period last fall, 336 employees atSchneck Medical Center in Indiana — nearly 40% of the staffat the time — monitored their movements with pedometersduring a fitness challenge sponsored by the human resourcesdepartment.

The employees walked a combined 153,782,609 steps, or76,891 miles (123,744 km) during that time — enough to circlethe earth three times. But the most impressive number arosefrom the company’s annual health screenings in November2013.

The proportion of employees who said they wereparticipating in regular physical activity rose 24 percentagepoints, according to Kathy Covert, the medical centre’s vicepresident for human resources. And traffic at the company’s24-hour employee fitness centre has increased significantly.The company plans another competition this fall.

“We believe that providing healthy activities such as thepedometer challenge will make employees more aware of theirhealth and the benefits of wellness; leading to happier,healthier employees and, ultimately, lower health-care costs,”said Warren Forgey, CPA, CGMA, executive vice presidentand chief administrative and operations officer for the medicalcentre, who participated in the fitness challenge.

diGital View throuGh GlassSome early adopters are finding multiple uses for GoogleGlass in the medical profession. Shafi Ahmed, a surgeon inLondon, is experimenting with Google Glass for trainingmedical students in surgery and serving patients outside of thehospital.

A doctor wearing Google Glass while performing surgerycan provide an excellent digital view of the operation tostudents who are learning how to operate, he said.

“We’re actually increasing the level of interaction of themedical students, and they appreciate that,” Ahmed said. “Ithink the Glass has taken it to the next level in terms of theway we approach teaching it in the operating theatre.”

Doctors in London also will be experimenting with virtualconsultations with patients through Google Glass. This couldhelp alleviate shortages of hospital beds in London, accordingto Ahmed. The plan is to have a primary-care physician ornurse specialist wear Google Glass while examining patientsand interacting remotely with a specialist at the hospital.

The doctors may decide to admit the patient to thehospital anyway. But in some cases, based on the virtualconsultation, they might be comfortable providing a differentcourse of treatment that won’t require hospital admission,Ahmed said.

PriVaCy ConCernsAcceptance of wearable technology is not universal.

Julia Horwitz, a consumer protection counsel with the not-for-profit Electronic Privacy Information Center (EPIC), saidthe risks of wearables in the workplace include improperdiscrimination based on the activities of employees and dataexposure for employers who don’t properly maintain andprotect data.

It is important for device manufacturers to make sureprivacy protections are built into their products, and foremployers to have procedures regulating the interaction theyhave with the data, Horwitz said. “Technology and privacyneed to coexist together rather than in opposition to eachother,” she said.

Mike Greenhalgh, CPA, CGMA, is CFO of EMI Health,an insurer in Utah whose employees used wearable fitnesstrackers in a recent contest. He said EMI Health’s systems donot store information about individual employees’ fitnesscontest results or about health screenings that are part of thecompany’s wellness programme. He said he has access tosome aggregate company data, but not individual data.

As a CFO, he would love to be able to calculate anamount of return on investment for the fitness and wellnessprogramme. But he noted it’s possible that improved fitnesscould prevent a heart attack that would otherwise cost anemployee his or her life — and that’s a savings that can’t becalculated.

“It’s hard to guarantee or measure,” Greenhalgh said. “Butit’s hard to believe that you don’t stop a heart attack. That’swhere you see the return on investment.”

Warren Forgey, CPA, CGMA, of Schneck Medical Center worethis pedometer as part of a company fitness challenge.

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or much of their history, unmanned aerialsystems have largely been the domain of themilitary. But in recent years, drone technologyhas crept into the commercial arena.Manufacturers and business interests are

pushing forward into unmanned aerial technology, exploringpotential new applications and efficiencies that drones couldprovide. And retailers, including online behemoth Amazon,are testing the technology as a way of delivering products tocustomers.Equipped with sensors that can include cameras, infrared

technology, and spectrum analysis equipment, drones havethe potential to provide valuable information from a newvantage point for many businesses.Concerns about regulation, safety, and privacy may make

them seem like a far-off science-fiction dream. But somecompanies are beginning to live that dream.A Business Insider Intelligence report projects $98 billion in

global spending on drones over the next decade. Althoughmilitary applications represent the overwhelming majority ofthe drone market, 12% of that total is projected to be spent oncommercial applications.“There are many commercial applications for drones,” said

Kendall Carpenter, CPA, CGMA, the CFO of publicly listedUS company Drone Aviation Holding Corp., which operates a

subsidiary that produces helium-filled units that are tethered toa mobile winch on the ground to reduce privacy and safetyconcerns. “Some we know, and some we can only look into acrystal ball and envision in the future.”The commercial uses she envisions for drones include:� Surveillance and security. Drone cameras couldmonitor factories and pipelines that are vulnerable tosabotage, as well as sporting arenas and other placeswhere large crowds gather.

� Search and rescue. At disaster scenes, drones couldprovide rescuers with vantage points they can’t seefrom the ground.

� Photography. Television broadcast crews, for instance,could use drones to provide an aerial view for news.

saFETy, Privacy concErnsFor drone technology to expand in industry, it must clearmany safety and privacy hurdles. Safety is a main reasondrones are highly regulated in much of Europe, said JimEdmondson, president of the Association for UnmannedVehicle Systems International’s (AUVSI’s) UK board.The concerns aren’t unfounded: In 2011, a police drone

reportedly lost battery power and crashed into River Merseyin the UK. And an Australian triathlon competitor reportedlywas injured by a drone during a race in April.

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Unmanned aerial vehicles — also known as drones — may provide opportunities forinnovation for some businesses, but regulatory, safety, and privacy concerns persist.

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Kendall Carpenter, CPA, CGMA, the CFO of DroneAviation Holding Corp., sees vast potential forcommercial use of drones. Behind her is one ofher company's helium-filled units.

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“Something 20 kilos falling out of the sky at500 feet is going to be very painful forsomebody,” Edmondson said.“Something that weighs thesame as a Predator [a USmilitary drone] is going tobe catastrophic.”The key to future safety and

expansion of commercial drones is the developmentof a lightweight transponder that will help small dronescommunicate with other aircraft about their speed, altitude,and intended route, Edmondson said. Drones also create concerns about privacy, with technology

that could inexpensively provide commercial interests or thegovernment with lots of information about unsuspectingpeople on the ground. The not-for-profit Electronic PrivacyInformation Center (EPIC) in the United States has called forthe US Federal Aviation Administration (FAA) to considerprivacy concerns as it creates regulations for drone use.“Low-cost drones, coupled with leaps in camera

technology and cheap data storage, basically create thecapacity for pervasive and indiscriminate surveillance,” saidJeramie Scott, national security counsel for EPIC.

airbornE For Economic growThIn the mid-western US state of Ohio, government officials areteaming with university researchers to create opportunities forstate agencies to use unmanned aerial vehicles. The objective is to harness unmanned aerial devices for

economic growth and development and help make stateagencies more effective and efficient. State agencies haveapplied or are preparing applications to the FAA forpermission to use drones for precision agriculture, firefighting,monitoring water and vegetation quality in parks, bridgeassessment, and prison fence monitoring.“The more time you spend looking at opportunities across

a set of requirements, you really start finding new, innovative,creative ways to apply this as a tool across our businesspractices,” said Dick Honneywell, executive director of theOhio/Indiana Unmanned Aerial Systems Center, a testing anddevelopment complex in Springfield, Ohio, that is operated asa two-state joint venture.Worldwide uses of drones, as reported by the AUVSI,

have included:� Public safety. Drones have been used to rescuemigrants in rough waters in the Mediterranean Sea, forsecurity purposes around soccer matches in Brazil, andfor law enforcement efforts in Germany.

� Scientific research. A micro-copter camera is helpingNational Geographic magazine document wildlife on theAfrican Serengeti Plain, and the Royal Society for theProtection of Birds in the UK is using unmanned aerialsystems to monitor the nests of rare birds.

� Agriculture. Unmanned helicoptersare spraying crops for pest control in Japan,

and an Australian farmer has used drones tomonitor crop nutrients, weeds, insects, and moisture

on a trial basis.� Disaster response. Drones have been used tomonitor radiation at the Fukushima nuclear plant inJapan, to scan flood-hit areas that rescue workers couldnot reach in India, and to study wildfires in Australia.

The possibility for drone delivery in retail, however, seemsmore tenuous. Amazon’s aspirations for a drone delivery fleet,for instance, have been met with scepticism. And despite the hype surrounding a video showing

a successful test delivery by Domino’s Pizza UK’s“Domicopter”, the company won’t pursue the technology inthe near future. “Too many potential issues related to such athing,” Domino’s spokesman Tim McIntyre said in an email.“… So many that we don’t think the idea will ever really(ahem) fly.” �

rEguLaTion, cosTs, Training arEKEy FacTors in DronE DEcisionExecutives may soon find themselves evaluating thebusiness case for drones. Here are some things to consider:

� Is it legal? To protect safety and privacy, manygovernments regulate the use of unmannedaircraft. A review of existing or proposedregulations in your jurisdiction will allow you todetermine whether drone use is even an optionfor your company — and what you need to do toobtain permission to operate drones.

� How much will it cost? “There are costsrelated to purchasing, training, operating, andinsuring,” said Kendall Carpenter, CPA, CGMA,the CFO of Drone Aviation Holding Corp. Theseneed to be weighed against the benefits and costsavings drones can provide.

� Who will launch and operate themachinery? Companies must decide whethertheir own personnel will run their drones, orwhether they will outsource the work. “Mostcompanies would have their own employees thatare trained and do this,” Carpenter said. “But thereare other service providers who know how to dothis and could be hired on an as-needed basis.”

� What type of customer support will youget? If you plan to have your own employeesoperate drones, you should know before makinga purchase what kind of maintenance, repair,and technical assistance will be available.

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Keeping the

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CGMA, a financedirector at age 34, is one example of

the success of BAESystems’ investmentin its talent pipeline.

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o understand the state of talentmanagement, look no further than theMillennial. This demographic — generally

defined as those born from the early1980s to around the turn of themillennium — will make up 75% of the

workforce by 2025, according to Deloitte. This workforce seesspending a career at a single company as an anachronism,research shows, and its members are unafraid to switchemployers as often as it takes to get the experience andopportunities they crave.

Employers who fail to deliver career developmentopportunities could face rapid staff turnover, along with anegative impact on productivity and the costs associated withthat. Meanwhile, employees who move from company tocompany too often could cause recruiters to wonder abouttheir commitment, skill level, or ability to get along withothers.

Staying with the right company can have benefits foremployer and employee alike. The question, then, is: Whatcan companies do to engage the workforce of the future andfoster loyalty? Ask BAE Systems, which carefully develops itstalent pipeline.

The defence contractor focuses external recruitment onentry-level positions through its finance leader developmentprogramme. It also is using a new finance apprenticeshipscheme. Through both programmes, BAE demonstrates thatthere are real opportunities to progress within the companyand a defined path to the management levels. New recruitsonly have to look to the board of directors to see the merits ofthis approach; many board members joined the company asapprentices.

Matt Miller, ACMA, CGMA, is proof of the value ofinvesting in the talent pipeline.

Since 2002, when Miller, now 34, joined BAE through thefinance leader development programme, he has held ninepositions, allowing him to gain experience in a number ofbusiness units around the world, all under the BAE umbrella.The skills and deep knowledge of BAE’s operations that hegained along the way have helped him reach his current postof finance director of the company’s combat vehicles unit inthe UK.

This talent pipeline strategy fits into the overarching BAEphilosophy of building the company up from the ground floor.“Instead of hiring new managers, what we want to do is keepfilling up the bottom [entry-level roles] because we’regradually increasing the intelligence of everyone in the u

How to engage Millennials and foster loyalty among this reputedly ficklegroup are key concerns for businesses across the world. Matt Miller,ACMA, CGMA, talks about the initiatives BAE Systems has put in place to develop and retain a steady stream of high-calibre talent.

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organisation,” Miller said. “So you keep creating more andmore roles at the bottom and keep the promotions going.”

The approach is key to the company’s growth plan. Thisphilosophy arose out of a talent pipeline review ten years ago.BAE Systems’ focus on long-term projects — sometimes up to15 years — means the company looks for a specific skillset thatis not easily found when recruiting. Developing homegrowntalent provides a means of generating those skills, as well asre-establishing company culture and internal controls andencouraging staff to be the conscience of the business.

To keep the talent pool going, BAE Systems has graduate andapprentice programmes, with a group of individuals regularlymoving around the business learning cultures and different waysof working, then taking the best of all of those and applying thatknowledge to the next roles that they move into.

“We are now starting to see the fruits of that with so manyhigh-calibre people knocking at the door,” Miller said. “Thenew challenge is how to keep all of these people that we’vedeveloped to such a high standard busy.”

To capitalise on this homegrown talent, the BAE financefunction has a rigorous succession planning process wherebyeach business conducts a functional review of its talent toidentify high-potential candidates. At a UK financedevelopment forum, representatives of each business discusstheir candidates and how they are being developed. Anindependent representative talks to candidates to assess theirskills, potential, and whether they are willing to relocate, aswell as the time frame for their development. As roles becomeavailable, there is a talent pool ready to tap into. The processhas enabled the company to map out succession plans foreach of the top 150 roles.

The approach proves motivating. “Personally, I want tomake sure I’m always on that list of people that can be tappedup for the next role,” said Miller.

the apprenticeShip approachBAE recently extended its apprenticeshipapproach — which has been used to great successin engineering and other areas of the business —to the finance department. This year, Miller’scombat vehicles unit is offering apprenticeshipsin management accounting.

The programme works like this: Apprenticesare offered real jobs and specialised training. Onthe job, apprentices learn about the finance andcommercial business functions through a seriesof six- to 12-month placements as they worktowards their qualifications.

Miller describes a possible scenario: One ofthe apprentices will provide the functional leadswith the information they need to makedecisions on how to reduce the unit’s cost base.He or she will also be looking at the way costingand pricing rates are generated.

Another apprentice will work on taking those hourlyrates and helping to build up prices for new bids and newproposals for customers. He or she will then try to matchthat up with a milestone payment plan to ensure thecompany is as cash-neutral as possible. “We want to getthem involved in business-winning early in their career,”Miller said.

The third apprentice will work in the project accountingteam that helps support the execution of contracts.

All of this involves apprentices working with keystakeholders in various functions. Business partnering is anarea about which Miller is particularly passionate.

After nine or 12 months, the company will swap theapprentices so that they can learn another person’s role. “Ifthe business plan works, in 12 months’ time there mighthopefully be a requirement for another apprentice on theproject team,” Miller said. “Then we can start circulating theapprentices around, and over time develop them into goodproject accountants or cost-base accountants or reportingaccountants, so they get a good grasp of the whole family.”

Miller believes that this training will not only provide astrong skillset for the business in the future, but alsogenerate a long-term commitment to BAE from thecandidates.

Further down the line, the size of the BAE group enablesemerging finance talent to focus on the area or departmentof greatest interest to them. If they wish to take on aplacement outside of the combat vehicles business unit, thatoption is available in the wider organisation.

Once apprentices have completed the three-year trainingprogramme, they can choose to continue to study to becomea CGMA designation holder.

BAE’s three-year apprenticeship scheme could proveattractive to a diverse section of Millennials in the UK,

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where the cost of undergraduate study has been rising andjob opportunities for graduates have been diminishing.Apprenticeship schemes such as BAE’s allow Millennialswho may have been priced out of the traditional higher-education route to receive the kind of professional educationthey need to advance. From an employer’s point of view,professional education for participants younger than 19 isfully funded by the UK government.

Ultimately, the aim of BAE’s investment in the talentpipeline and engagement with Millennials is to createbusiness partners and the management of tomorrow.

To some, that would seem like a sound investment.

Finance leader developmentprogrammeAnother way BAE manages its pipeline is through its financeleader development programme, a five-year graduatetraining scheme whereby participants gain technical andcommunication skills, as well as experience in different areasof accounting, through placements in various business units.

Participants have the opportunity to influence their path,putting forward their preferences at each stage for the postsadvertised by each area of the business. The skills andexperience participants are looking for are matched to rolesaccording to business needs.

Miller’s first placement through the scheme was in theavionics business in Kent. As part of the back-office team, hewas involved in accounts payable, accounts receivable,expenses, treasury, management, and financial accounts.

The next assignment, working on head-up displays for

F-16 fighter jets, gave him an introduction to projectaccounting as well as to the importance of liaising with theengineering and commercial teams.

He then moved to the company’s Hawk SyntheticTraining Facility on the island of Anglesey in Wales. Millerwas the management accountant, project accountant, andfinancial accountant all in one, operating the balance sheet,reporting, influencing, and dealing directly with thecustomer on a regular basis. He describes this as a key rolein his progression because of the broad understanding itprovided of running a small business.

He further developed his project accounting skills on theHawk programme in Lancashire. The understanding hegained over the first two years of the graduate scheme ofhow the balance sheet comes together helped Miller ensurethat robust project execution was in place. The next role, onNimrod, a maritime reconnaissance aircraft, expanded hisproject accounting experience and combined it with cost-base and earned-value management, which were crucial intrying to bring a much delayed project back on schedule.

“I still look at those two years on Nimrod as the definingmoment of my career, as I learnt the most and developedquickest,” Miller said.

Since he successfully completed the programme, Millerhas continued to make swift progress up the career ladder(see “BAE’s Talent Management Programme Pays Off”).

Although he was the first graduate of the company’sfinance leader development programme to reach FD status,Miller is quick to point out that there are a number of othersready to step into top roles as they arise. �

Bae’S talent management programme paYS oFF

Matt Miller, ACMA, CGMA, is the first graduate of BAESystems’ finance leader development programme to become afinance director. Here are the key rungs in Miller’s post-programme progression, and what he learned along the way:

� Financial controller, technical publications,Samlesbury, Lancashire, UK (2008–2010): In thisrole, Miller worked as financial controller of both aninternal and external business that created technicalpublications for various customers. The job involvedbringing the external part of the business in-houseand rebranding it. Ultimately, the decision was madeto close the business, so Miller worked with humanresources on the staffing requirements and plannedhow to transition the remaining work.

� Head of finance, SBDCP, Riyadh, Saudi Arabia(2010–2012): Miller worked on the Saudi British

Defence Co-operation Programme, which has aturnover of about £1.5 billion (about $2.4 billion).The role involved overseeing project accountantsworking on about 40 projects, as well as bidding fornew ones, including a five-year, $15 billion project.Miller sought to bridge stronger projects with weakerones to make sure targets were being met at any onetime. Good project execution was essential as theprogramme was share-price-sensitive.

� Group financial controller, Combat Vehicles UK(October 2012–March 2013); finance director, CombatVehicles UK (current role): In these roles, Miller’s focushas been on improving cash forecasting and the cost base.Now that he has successfully involved the finance team inthe project execution stage, his next goal is to championbusiness partnering right from the bid stage.

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There is no one-size-fits-all planning module. Differentorganisations, at different stages of their business life and with

different goals, require different levels of planning.

BY gary Cokins AND MiChael Coveney

Developing a plan for

Better planning

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lanning is a simple concept to understandand yet can be difficult to perform. Part ofthe reason is its multifaceted nature that,within a business context, can come in arange of types (eg, strategic, operational,financial), functions (eg, sales, logistics,production) and techniques (eg, top-

down, bottom-up, driver-based). Plans include differentcombinations of these areas, depending on the purpose beingserved. As a consequence, it is easy to lose sight of what eachis designed to do, and organisations can end up with amishmash of plans that have little or no connection to whatthey are trying to achieve.

As organisations become more complex and involve manypeople, planning must become better disciplined andorganised. Every facet of the business needs to be considered,whether that means sales and operations, logistics, humanresources, or tax. The company must be organised so thatplans are complete and assembled in a logical sequence. There

are dependencies. For example, there is no point in planningcash requirements unless sales forecasts and supplier ordersare known with some degree of accuracy. To do this requiresan analysis of market trends, competitor activity, andproduction capacity (and cost) of our own setup. Each part ofa plan has the potential to impact another, and some methodis needed to conduct planning in an orderly and efficientmanner.

It is unlikely that an organisation can jump from where it istoday into a full-fledged, continuous planning process. It willrequire a number of incremental steps that introduce changesover time. Because not everyone is at the same stage, we havedeveloped the following maturity model that describes levelsof planning exhibited within organisations today. These levelscan then be used to assess the next steps in developing theplanning process.

planning anD foreCasting MaturitylevelsThe maturity of planning and forecasting processes is drivenby the level of model integration. As models become moreintegrated, they support faster processes that yield greaterforward visibility and reduce uncertainty.

These approaches can be broken down into five stages ofplanning and forecasting maturity. A key feature thatseparates each of these stages is the type of driver-basedplanning approach that it employs. Being driver-based meansthat variables affecting performance or resources can berelated to one another. The dependencies between thevariables can be modelled. For example, production costscould be related to volume made, which in turn could berelated to sales success, and so on. As driver-based planningbecomes more mature, organisations can support moresophisticated scenario planning.

Basic PlanningAt this stage, organisations employ traditionalbottom-up budgeting approaches that areaugmented by very basic models. These models

are typically based on financial relationships where a planningline is expressed as a percentage of another line item orperiod. The following are examples of this:

� Sales are expressed as a percentage increase or decreaseover the prior year.

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� Cost of sales is expressed as apercentage of sales.

� Expenses (eg, salaries and travel) areexpressed using either approach.

� Cash flow is expressed as apercentage of receivables andpayables.

The following are some of the classiccharacteristics of these models:

� Any analysis that supports them isoften maintained in offline systemsor spreadsheets.

� Operational reconciliation is done on an ad hoc basis,if it is done at all.

� There is a loose connection between objectives,targets, budgets, and forecasts.

The effectiveness of these models depends on thecomplexity of the business. As complexity rises, thesemodels are not as useful because they are not accurate andthey do not support consensus.

Financial IntegrationThe financial integration stage is one whereorganisations use operationally based drivermodels that estimate how costs behave as

volume and revenue changes. Key features of this approachinclude the following:

� The role of finance is to determine which drivers bestquantify the impact of changes.

� This role often entails summarising operationalplanning models into simpler financial ones.

� The models are typically expressed in terms of costper driver or per unit of output.

� Examples of drivers include the number of orders,customers, products, or shipments.

These models are typically developed for financialplanning and cost-estimating purposes only. Activity-basedcosting (ABC) is the accepted method to proportionatelytrace the consumption of resource expenses such as wages,supplies, or power to outputs such as product costs using acause-and-effectrelationship. Althoughoperations provide inputinto developing themodels, the level ofgranularity of ABC’sactivity-cost pools istypically adequate forstrategic insights because of thehigh cost accuracy, but they maynot be sufficiently detailed to enable operational managers to

make operational decisions.At this stage, many organisations start using

balanced scorecards and other performancemeasurement approaches. However, target-setting, budgeting, forecasting, and scenario-planning processes are only loosely connected.This is primarily because the planning modelsare not sophisticated enough to connect keyperformance indicator (KPI) targets to resourcerequirements.

In organisations that experience little changeor variability, these models can be very effective. However,more complex ones often experience the following:

� Maintaining models can be time-consuming, oftenresulting in models that are inaccurate.

� Embedded operational assumptions are often onlyvalid across a narrow range of scenarios.

� Models often have to be manually updated to examinethe impact of outlying scenarios.

� As a result, organisations can run only a limitednumber of scenarios, thereby exposing them topotentially unidentified risks.

� Scenario planning can be costly, as significant time andeffort goes into validating and reconciling financial andoperational scenario-planning efforts.

Partial IntegrationAt this stage, finance and operations startsharing models and processes in parts of theorganisation. Other parts continue to operate

processes at levels 1 and 2. They do this because it:� Reduces the cost of processes and systems;� Results in greater clarity because there is only one plan;� Supports more effective scenario planning in these

parts of the business;� Provides greater forward visibility into risk as a result

of scenario planning; and � Improves process speed by eliminating non-value-

added activities.This stage of planning maturity can take many forms.

Demand planning is a classic example ofwhere a single model can be used tosupport more effective processes.The manufacturing sector has ledthe way in leveraging suchintegrated models that, at a basic

level, provide the means to connect the number ofunits sold to revenue and average selling price. Beyond that,they enable organisations to:

� Establish more collaborative demand and revenueplanning processes;

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� Automate the analysis of volumeand mix variances on revenueand average selling price;

� Support a more effective rollingforecast process that adaptsfaster to change; and

� Co-ordinate new productdevelopment and promotionplanning into demand andrevenue forecasting.

Manufacturing has also led the wayin developing models that integrateplanning of direct costs or cost of sales.Bills of materials are used to define thecommodities and components of the products they sell andhow they are made. This results in a process thatsimultaneously forecasts:

� Cost of goods manufactured and sold, together withinventory balances;

� Production capacity requirements, together withcapacity constraints;

� Commodity purchase requirements and related cashflow impact; and

� Purchase price and production cost variances fromstandard.

From an indirect perspective, integrated models translateKPI targets, along with departmental volume, into thefollowing:

� Staffing requirements;� Departmental budgets and forecasts; and� Productivity (cost per outcome) targets.Multiple planning models and systems still exist for

organisations at this stage of maturity.

Matrix PlanningAt this stage of maturity, organisations shiftfrom traditional functionally based planningapproaches to more horizontal cross-functional

and outcome-based approaches. To support this, finance andoperations share models and processes across theorganisation. The following are key features of this stage:

� Profit and cash flow forecasting is explicitly linked toKPI and revenue targets.

� Plans are expressed from both functional and processperspectives.

� Budgets and forecasts are expressed in relative terms(cost per output).

� Planning and target-setting cuts across functions andbusiness units.

One of the key reasons that organisations shift to such anapproach is to optimise performance across functions and

business units. In so doing, they are alsorecognising the limitations of traditionalbudgeting processes because they reinforcefunctional silos and thereby sub-optimiseperformance.

Dynamic PlanningOrganisations at this level of theplanning maturity scale employhighly sophisticated models that

integrate all aspects of planning and forecasting.One of the primary motives for doing so is toenable organisations to more effectively managecomplexity, uncertainty, and risk, a KPI

component of which is more effective scenario planning.These organisations also conduct integrated scenario

planning. This includes the ability to simultaneouslyevaluate the impact of different scenarios on all aspects ofperformance.

Four specific capabilities arise at this level of maturity:� Dynamic models that self-adjust to changes in volume

and mix;� Forward-looking (activity-based) product and customer

profitability and cash flows;� Capacity-constrained cash flows, whereby models

forecast capacity constraints, along with their impacton cash; and

� Project and portfolio return on investment, wherebymodels quantify the impact of operational changes onthe cash flow of project portfolios.

As mentioned earlier, the levels of planning maturitydescribed can be used to assess where an organisation istoday and the level at which it needs to be. �

Gary Cokins (gcokins@garycokins.com) is the founder of Analytics-Based Performance Management, an advisory firmin Cary, North Carolina. He was a consultant withDeloitte and KPMG and is the former head of theNational Cost Management Consulting Services forElectronic Data Systems (EDS). He also worked inbusiness development with SAS, a leading providerof enterprise performance management and businessanalytics and intelligence software.

Michael Coveney (michael@stw-consulting.co.uk) is an experienced consultant andcourse leader in corporate performance man-agement. He has been involved in productdirection with software vendor GEAC/Comshare and has written other books onmanaging strategy.

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apan was devastated by the earthquakeand tsunami of March 11th 2011 andthe nuclear crisis that resulted from thenatural disaster.More than 15,000 people died, and

as the survivors began rebuilding, itbecame clear that the impact on the

global economy and Japanese businesses would be immense.After all, damage to businesses in Japan would cause huge

supply-chain disruptions throughout the world. But the predictive analytics John Wilenski, CPA, CGMA,

helped put into place at Nissan Motor Co. Ltd. played a rolein keeping the company strong in the disaster’s aftermath.More than 45 of Nissan’s critical suppliers sustained severe

damage as a result of the disaster, according to research by theMassachusetts Institute of Technology (MIT) and PwC. Butanalytics that had given Nissan comprehensive knowledge ofits supply chain before the earthquake helped the company

42

Predictive analytics have the potential to deliver competitiveadvantage. Case in point: Nissan Motor Co. Ltd., where

knowledge of the supply chain — fuelled by predictive analytics —led to quick recovery after Japan’s earthquake and tsunami.

BY Ken tysiAc

Use Predictive

AnAlytics to

thrive — AndsUrvive

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make good decisions after the disaster.Wilenski, whose ultimate position in seven years at the

company was deputy general manager of global corporatefinance and risk management, had helped develop a multi-factor model to predict the financial health of Nissan’ssuppliers. The model was designed to assist the company inmitigating risk during the financial crisis, and it provedimportant after the earthquake.“Since we’d done our homework and had been doing this

for a period of time, we were able to move quicker than ourcompetitors,” said Wilenski, who was based in Nashville,Tennessee, with Nissan and reported first to the Americasregional headquarters and later to the corporate headquartersin Yokohama, Japan. “It was less of a scramble. We did nothave to search for data. We had it.”Wilenski is no longer with Nissan. Today, he is creating a

predictive analytics infrastructure in the higher-educationindustry. But it was his experience with the automaker that

The 2011 earthquakeand tsunami slowedNissan’s Japanese

operations, includingthose at this plant inYokosuka, shown four

months after the disaster.Predictive analyticshelped the company

manage its supply chainin the recovery.

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John Wilenski, CPA, CGMA, helped Nissan Motor Co. Ltd.develop a predictive analytics model for the company’s globalsupply chain that provided key strategic insight during theglobal financial crisis and following the earthquake andtsunami that devastated Japan in 2011.Wilenski now is building a predictive analytics model in

the higher-education sector. Here is his advice fororganisations implementing predictive analytics:

1 Identify the business objective. Are you trying topredict bankruptcy or default? Mitigate risk? Boostrevenue? Reduce costs? Retain employees? Attract

new customers? A clearly defined goal is a necessarystarting point.

2 Discover sources of data. Once you have definedyour objective, you should have some idea of thetypes of data that could be predictive. Some of those

data could be currently and easily available on company-owned systems such as a general ledger, marketing, orenterprise resource planning. But other data may need tobe purchased from a third party or obtained in a survey.

3 Build at the lowest level of detail. At publishingcompany McGraw-Hill, Wilenski helped build asoftware tool that allowed executives to study

profitability by market channel, state, and country — andeven by individual book title. Establishing data and detailat a granular level can help predictive analytics drivesuccessful strategies. “As you build and create a predictiveanalytic infrastructure, there are things you are notthinking about today that will be important a year fromnow or five years from now,” Wilenski said.

4 Make sure data are accurate, timely, and useful.Data that have been fully vetted — such as auditedfinancial statements — are highly reliable, but

because the reporting and auditing processes are lengthy,the timeliness of the information they contain may not beideal for some predictive analytics models. Inaccurate datawill produce flawed results, and data that are not timelycan drive decisions that are obsolete. If crunching the dataproduces strategies that cannot be operationalised, thenthe predictive analytics process is ineffective.

5 Address data quality concerns. Maybe you have1,000 records, and 11 are missing some data points.Maybe there is a margin of error in a poll. Maybe

one data set contains letters instead of numbers. You may

need to do some “data cleansing” to make the inputsappropriate as they are entered into the model.Comparability throughout a data set is essential inpredictive analytics, Wilenski said. “If you have exceptionshere and there, it slows down what you’re doing,” he said.Where financial statements are being used for comparisons,differences in generally accepted accounting principlesacross countries can be a significant hurdle in thedevelopment of predictive analytics models. This is onereason some global companies are eager and hopeful forIFRS implementation across the world.

6 Determine which data may be predictive. This isaccomplished by testing. “Back testing” throughhistorical trends can be used as a starting point, but

Wilenski said the past does not necessarily predict thefuture. So forward-looking testing is essential. Once youfind a factor that’s predictive, you can combine it withother factors to see if the accuracy of the model increases.“A and B independently may not be as powerful, but whenyou put them together, maybe it’s more powerful, morepredictive,” Wilenski said.

7 Balance automation and the human touch.Machines allow the rapid processing of data, butpeople need to decide what to measure and how to

interpret the data. “You want to get to the point of machinelearning,” Wilenski said. “But at the same time, there needsto be a release valve, a flexibility built in, where humans canget in and make adjustments as needed.”

8 Communication is critical. “Be able to explainthings in simple terms so people can understand it,”Wilenski said. Methods of gathering data and

calculating may be complex, but the resulting directionand focus need to be clear.

9 Be collaborative and cross-functional. Getting outin the field can help create support for your projectand ensure that data are valid and accurate. “You

can’t do this in a silo or an ivory tower,” Wilenski said.

10 Improvement must be continuous. Predictiveanalytics experts often say that although the initialmodel is useful, it becomes more effective as it

gets refined. Changing conditions also make it necessary toupdate models. Even when data accuracy gets close to100%, there may be ways to make the model more timely orlower the costs involved in acquiring or analysing the data.

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helped him truly see the power of predictive analytics. At Nissan, using audited financial data and information

given by supplier CFOs — sometimes updated weekly oreven daily — Wilenski’s team developed various analyticsmodels for assessing suppliers’ financial health, including:

� A cash flow assessment tool, which proved valuableduring the global cash crunch.

� A stress-test optimising programme, which enabled“what-if” scenario analysis of suppliers.

� A break-even tool, which enabledthe team to perform a scenarioanalysis on what some suppliersneeded to do to break even orbecome financially healthy.

These tools were based on inputsderived from financial data and local andglobal economic data as well asinformation about strategies Nissan andthe suppliers were pursuing.There were occasions when suppliers

— often smaller, private companies —would hesitate to provide Nissan withdata. But non-disclosure agreementsproved helpful.Data from these tools helped Nissan

predict which of its suppliers wouldsurvive the disaster and which supplierswould need help, and the company wasprepared to be agile following theearthquake.“We wanted to know instantly the

current situation [of suppliers after theearthquake],” Wilenski said. “Once thosereports came in, the global team wasready to move forward.”According to the MIT/PwC report,

strong risk management and effectivecountermeasures helped Nissan end 2011with a 9.3% increase in production,compared with a 9.3% decrease across the industry.

PrePAre for some BArriersThis is an exciting time in predictive analytics, as companiesare developing models to enhance their strategies andoperations in areas as diverse as reducing hospitalreadmissions and choosing the right athletes to help sportsfranchises win on the field.“When used appropriately, predictive analytics accurately

provide insight into the future so an organisation can plan,prepare, and take action,” Wilenski said.Despite the potential usefulness of predictive analytics,

Wilenski said implementers need to be prepared to facebarriers and accept limits. For example, the analytics may

uncover some risks that can’t be mitigated at a reasonable cost. It’s also not unusual for predictive analytics to face

resistance from within the organisation. At Nissan, Wilenskisaid, predictions of bankruptcy for certain suppliers duringthe financial crisis were met with natural scepticism. Nissanhad been working with some of these suppliers for years andhad developed long-term relationships with them.In such cases, Wilenski recommends back-testing the

model using historical results versus any other strategicapproach and comparing approaches fora test period to see which would yieldbetter results. At Nissan, analytics gainedfavour after the predictive model’sconclusions about suppliers turned outto be consistent, accurate, timely, anduseful.“It took some pain,” Wilenski said.

“And it took a credible track record.”

oPPortUnities growingNow Wilenski is applying the techniqueshe has learned to a new environment:the higher-education sector.His models will focus on predicting

financial statement results as well asforecasting key performance indicatorsrelated to business strategy andoperational growth.He is excited by how technology is

constantly creating additionalpossibilities for use of predictive analyticsfor business growth and risk mitigation.Wilenski doesn’t advise being an

early adopter of technology for theprideful sake of being on the forefront.He believes it can be better to wait untilthe technology has been thoroughlytested — with bugs resolved — and thecost comes down a bit.

The return on investment may be limited for earlyadopters.“In certain circumstances, I’m a believer that the second

mouse gets the cheese,” Wilenski said.But powerful computing capabilities have reduced the

cost of crunching data, and cloud computing givesexecutives the power to merge and share data in new andinnovative ways.“There are better tools out there,” Wilenski said. “There

are even new applications of statistics. New things are beingfound all the time, new tools to use, and new ways to applydifferent measures in business situations. ... Predictiveanalytics can provide a competitive advantage and drive theright business decisions.” �

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John Wilenski, CPA, CGMA,developed a predictive

analytics model that helpedNissan Motor Co. weatherthe global financial crisisand the aftermath of the2011 earthquake andtsunami in Japan.

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Take advantage of current global managementaccounting news and articles sent directly toyour inbox every Friday.

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I ntegrated reporting encompasses a broad, interconnected,and forward-looking set of information, and promotesmore effective decision-making with a view to developingmore resilient businesses. The concept is relevant in a changing business landscape,

in which intangible assets account for an increasingproportion of companies’ market value, rendering traditionalreporting methods less effective in providing an accuratepicture of performance.

Yet many companies have not adopted integrated or non-financial reporting.

Here are a few ways companies can adopt integratedthinking and decision-making processes that are fundamentalto the creation of an integrated report:

Understand what value means in the context of theorganisation and how its business model createsvalue. A clear description of the business model is

essential. Start by identifying key inputs, activities, outputs,and outcomes. Which financial and non-financial resourcesand relationships are material to the long-term success of thebusiness in terms of value creation? Think broadly, not justabout relationships within your supply chain, but aboutanything you need to maximise customer experience. Forexample, a mobile app provider may have a direct relationshipwith the host platform, but it is also dependent upon thefunctioning of the wider mobile telephony infrastructure. Thisknowledge helps companies understand the potential impactany change in the future availability of these key inputs mighthave on their activities.

Develop a clear explanation of the positive andnegative impact of trends shaping the company’scurrent and future operating environment across the

different types of capital defined by the InternationalIntegrated Reporting Council: financial, manufactured, socialand relationship, intellectual, natural, and human.

Identify non-financial metrics that are significant tothe success of the business, gather reliable data,conduct meaningful analysis, and report this

information to the board as prominently as the key financialmetrics. For instance, a property company may disclose the

size of its portfolio and any property market trends that mightaffect the business in the near future.

Relate non-financial metrics to the long-termfinancial success of the business. Explain why thenon-financial factor being measured is important. For

instance, training of staff — providing motivating careerprospects alongside diversity and inclusion policies — helps topromote a positive working environment that helps togenerate more motivated and engaged employees. Suchemployees are likely to provide a higher level of customerservice, leading to greater customer loyalty, improvedreputation, new customers, and increased revenues.

Demonstrate to the board linkages between strategy,strategic objectives, performance, risk, andincentives across financial and non-financial

information. It’s vital that the whole board, not just theexecutive members, understands how performance relates tothe objectives, how risk relates to performance, as well as theextent to which incentive schemes are geared towardspromoting those strategic objectives, creating a virtuous circle.

Be holistic in terms of what you report, and focus onthe interconnectivity of different elements.Integrated thinking involves gathering and reporting

this information to the board in the first instance. Goodinternal reporting drives better decision-making, which allowsyou to report externally in a more integrated way. Theexternal report should provide highlights of what the boardhas spent its time discussing. �

Nick Topazio is head of corporate reporting research at the CharteredInstitute of Management Accountants.

BY niCk TopaZio, aCMa, CgMa

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For more best practices on integrated reporting,download Integrated Thinking: The Next Step inIntegrated Reporting at CGMA.org.

read The reporT

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48

MinUTes WiTH:

anTOniO G. “JUMbinG” de ROsas

ceO: eMPOWeR PeOPLe

TO acHieVe sUccess

orking as a finance chief gave Antonio G. “Jumbing”de Rosas, CPA, CGMA, the background he neededto run Pru Life UK, the Philippines subsidiary of

British insurance giant Prudential Plc.“The CFO position gets you the knowledge that you need

to be able to drive the company,” said de Rosas, who wasnamed the company’s chief executive in 2010. “But it is still avery big step from CFO to CEO when it comes to peopleengagement.” De Rosas is tasked with growing Pru Life’s business in the

Philippines, where life insurance market penetration historicallyhas been low. Paying careful attention to the people aspect ofthe company has produced favourable results for the CEO.Under his leadership, Pru Life UK, which is not affiliated withUS-based insurer Prudential Financial, has seen its total grosspremium income grow from PHP 7.8 billion (about $178million) in 2010 to PHP 18.5 billion ($423 million) in 2013.That success has come from a simple point of view: “It’s moreabout others than yourself.”De Rosas shared some of his tips for successfully leading

people:

Inspire. The motivational duties of a company leaderbecame abundantly clear to de Rosas as he prepared for hisfirst speech as CEO. He was scheduled to address 2,000agents, and his mission was to encourage them to sell. Hehas a simple formula for such a speech: “I have to touchtheir hearts,” he said.

Speak simply. When addressing an audience, de Rosasspeaks from the heart and with empathy. He relatespersonal experiences where applicable. He speaks in simplelanguage with transparency and considers the employees’

views on the subject matter. “I have credibility to do this,since I rose from the ranks,” he said.

Connect. During the month of their birthday, Pru Life UKemployees are invited to a group lunch with the CEO. Theprogram started as a 20-minute coffee with the CEO whereemployees would ask a few quick questions. It evolved intoa 90-minute lunch during which attendees get to know deRosas and ask deeper questions. A fitness buff, de Rosasalso participates in sporting activities alongside employeesduring summer outings.

Train. Shortly after de Rosas became CEO, humanresources had difficulty getting employees interested in thetraining programs. “Too busy” was a common excuse. Butthe company constantly reminds employees of the benefitsof employee development. The message has gotten through;now there are waiting lists for some training programs.

Communicate. Corporate leaders often comment on howwell the executive team at Pru Life UK is aligned. De Rosassaid this alignment is enabled by constant communicationand well-defined roles. The company’s executive committeemeets at least once a week, and the committee members’compensation is tied to common metrics. So rather thanreporting on what is going on in each division, committeemembers talk about how they can work together so thatthose common metrics are achieved. The meetings areinformal in character and akin to a family having a discussionover a meal, de Rosas said. He also believes in meeting withother executive committee members in person when he needsto talk with them. “I think the leader sets the stage by beingan example,” he said. “And others will follow.” �

W

Although serving as CFO can give you the foundation to succeed as CEO,understanding people is just as important as mastering the numbers.

BY Ken Tysiac

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January 2014

Antonio G. “Jumbing” de Rosas, CPA, CGMA,the CEO of Pru Life UK,

says people skills arecritical to successfully

leading a company.

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L965

ROLLING FORECASTS

INCENTIVE COMPENSATION

SCENARIO PLANNING

55%

54%

43% 53%

20% 24%

37% 23%

OF COMPANIES USE ROLLING FORECASTS

OF ORGANISATIONS DON’T USE SCENARIO PLANNING IN THEIR

PLANNING PROCESSES

Not considered necessary

Lack bandwidth to develop/sustain

Lack necessary skills

Corporate culture that supports the status quo (49%)

Inadequate systems and technology (41%)

Limited skills of staff outside the fi nance function (38%)

Inadequate staffi ng of fi nance function (30%)

Limited skills of fi nance function (17%)

A survey of about 500 CGMA designation holders around the globe offers insight into the state of corporate planning, forecasting, and budgeting.

LENGTH OF FORECAST HORIZON FORECASTS ARE UPDATED

WHY NOT? (TOP REASONS CITED)

BIGGEST BARRIERS TO IMPROVING PLANNING PROCESSES

11

2

3

2

3

4

5

VERY LIMITED/LIMITED VERY LIMITED/LIMITED

MODERATE MODERATE

GREAT/VERY GREAT GREAT/VERY GREAT

INCENTIVE COMPENSATION’S LINK TO ANNUAL

BUDGET

INCENTIVE COMPENSATION’S LINK TO STRATEGIC

GOALS

BUDGETING, PLANNING & FORECASTING

HORIZON?WHAT’S ON THE

12 MONTHS

48%QUARTERLY

46%

MONTHLY

45%

EF258 Forecast_Infographic.indd 1 11/09/2014 11:48

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