PwC Edge �

Volume One 2006PwC dge e

*connectedthinking pwc

Managing Complexity in Globalisation*

PwC Edge

Managing Complexity in Globalisation

Editor’s Note

What keeps you up at night with excitement or fear? Never before are there more opportunities for CEOs of both large and small

companies to grow their business as a result of globalisation of the world’s economy. Globalisation in a business context when properly managed brings success and exhilaration the obverse of which is complexity and crisis. Gautam Banerjee takes us through the findings of the PricewaterhouseCoopers’ (PwC) 9th Annual Global CEO Survey and reveals that the search for new customers and markets ranks as top priority along with the challenge of managing complexity.

China’s appeal to the West dates back 700 years when Marco Polo returned to Venice. Did he tell a million lies then about the Middle Kingdom? Foreign business people have since returned to China bearing witness to the fantastic opportunities: Technical brains equal to the best in the world! Millions of workers willing to work for peanuts! Hundreds of million of consumers hungry for the latest consumer goods and to watch the next blockbuster movie from Hollywood! Many have found success in this vast and bewitching country and many more found dreams of success in China to have no reality by day.

India, the world’s largest democracy by population, has been pursuing various reforms to attract FDI. These reforms have gained momentum and found success. Like China, it has a huge population of willing low cost workers and a burgeoning middle class hungry for the consumer goods like their counterpart on the other side of the Himalayas. Are dreams of the global CEOs more likely to be realised in India?

My colleagues, Amitava Guharoy, Ng Jiak See and Karen Loon share their perspectives on opportunities and pitfalls in these vast markets. While cost reduction is not the chart topper of the global CEO it is not far away. Both China and India are popular destinations for offshoring. Mark Jansen in his piece Offshoring: Balance redefined reviewed the PwC and The Economist Intelligence Unit’s recent survey and the findings are interesting to say the least.

Kyle LeeManaging Editor

PwC Edge

The issues of growing foreign revenue, to name but three are complex operations, taxation, and foreign posting for your best and brightest.

Complex supply chains is the norm in the global economy, have you considered the tax issues arising from such business arrangements? If not, Speed towards global supply chain structuring by Nicole Fung and Sunil Agarwal is a must read.

In The magic of IT, Tan Shong Ye and Thyag Venkatesan share insights on reducing complexity of your global IT systems and how to improve business performance in the process.

Imagine mishandling your most valuable and mobile assets, your people. When a foreign assignee returns to corporate office he promptly walks across the street to join your competitor because he is unsure of his future with your company. Mario Ferraro talks about Overseas posting: Opportunity or threat and addresses this hypothetical but common scenario.

The Enron saga is drawing to a close following the conviction of the key players Kenneth Lay and Jeffrey Skilling. Their conviction book-ends a five year period of extremes in corporate frauds which in addition to Enron are Tyco and Worldcom are examples and extremes in corporate regulations, of which the 2002 Sarbanes-Oxley Act is an example. Would a check-the-box approach help to reduce corporate frauds? Not according to Subramaniam Iyer et al in Managing the risks of white collar crime. If all else fails, and investigation ensues, Tan Shong Ye and Peter Viksnins tell us how forensic technology can help to crack the most complex cases in Navigating the data minefield.

The fraud at Enron is arguably the most complex in recent corporate history; many believe that it’s the complexity of global businesses which provided the opportunity for widespread frauds. Such flaws are not best addressed by a sledge hammer approach adopted by legislators but by activism at boardroom and shareholders meetings argue Keith Stephenson and Patrick Jourdain in their contribution on Can you afford not to have good governance. Find out how you can embed and culturalise good corporate governance.

Whether your main concerns today are growing revenue or managing complexity which my colleagues have addressed in this issue, I think you’ll find their ideas thought provoking and there is value in challenging convention wisdom.

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Globalisation and complexity: Inevitable forces in a changing economyAlong with global trends, over 80% of Asia Pacific-based CEOs rank finding new customers and markets as their primary goal over cost-cutting followed by serving existing customers better in globalisation, reveals PricewaterhouseCoopers’ (PwC) 9th Annual Global CEO Survey.

From interviews with 1,410 CEOs around the world, including 331 CEOs from Asia Pacific, the findings show that nearly two-thirds of these CEOs are confident about the positive impact of globalisation on their businesses over the next three years. This enthusiasm is bolstered by opportunities in the BRIC (Brazil, Russia, India and China) economies, which are regarded as the epicentre of globalisation efforts. Over 70% of the global CEOs plan to do business in at least one of the BRIC countries over the next three years. Closer to home, more than 90% of these corporate leaders are excited about the investment opportunities Asia Pacific has to offer over the next five years.

Optimism notwithstanding, the CEOs are also aware of the obstacles on the road to globalisation. Barriers cited are overregulation (64%); trade barriers/protectionism (63%); political instability (57%); social issues (56%); terrorism (48%); and organised opposition to globalisation (21%).

In relation to the financial stability in Asia Pacific, the global CEOs are concerned about non-performing loans (60%), fluctuating foreign exchange rates (46%) and high level of public debt (43%). But while BRIC can provide competitive advantage, they can also be a source of competitive threat. China and India are regarded by these global head honchos to pose the most competitive threats to other markets. Seventy-four per cent (74%) of Asia Pacific-based CEOs expect serious contenders to emerge from China in the next three years; lesser (42%) anticipate the same from India. In fact, 75% of global CEOs believe that China is likely to become one of the region’s leading foreign acquirers. However, 77% of them believe that poor risk management and internal control of some Chinese companies will become a major barrier to China’s overseas expansion.

Gautam BanerjeeExecutive Chairman

Setting the scene - A foreword by Gautam Banerjee

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Complexity: Managing the inevitable

An inevitable by-product of pursuing a global strategy is increased complexity. Seventy-seven per cent (77%) of the CEOs globally say that the level of complexity in their company is higher than it was three years ago, and 27% believe it is much higher. Along with global trends, Asia-based CEOs identify the following activities that contribute to increased complexity: extending operations to new territories (45%); mergers and acquisitions (35%); launching new products and services (35%); and forming strategic alliances (27%).

Outsourcing functions to third parties causes the least amount of complexity. External forces that significantly increase complexity include national and international laws and regulations, actions by competitors, and changing customer requirements.

While 77% of CEOs globally agree that managing complexity is a high priority, these findings suggest they are not managing complexity well. Only 4% of CEOs globally say they are very good at measuring complexity, and only 5% say they have a corporate-wide framework for managing complexity.

In terms of capabilities to combat complexity, CEOs view the following as extremely important, and they are ranked as follows: highly capable employees (55%); effective communications (45%); the ability to identify activities that create value (41%); the ability to identify activities that are destroying value (43%); the alignment of IT with business processes (32%); a corporate-wide framework for managing complexity (17%); and the ability to measure complexity (16%).

Ironically, the capabilities CEOs deem most critical for managing complexity are those which they feel their companies are performing the worst. For example, there is a 38% point gap between CEOs who rate having highly capable people as extremely important, and CEOs who rate their performance in this capability as very good. This and other “capability gaps” range from 38% points to 12% points. This suggests that the more important the CEOs perceive the capability, the greater the capability gap.

On the other hand, CEOs who believe that their organisations perform very well in certain areas of complexity management, also believe they perform well in others. For example, on average, across all seven capabilities, only 11% of the 1,410 CEOs rate their organisations as “very good”. However, this average is far higher for CEOs who say they are “very good” at measuring complexity (58%). This suggests that what gets measured in complexity gets managed.

Choice destinations for expansion by Asia-based CEOs:

i) China – 75%ii) India – 45%iii) Russia – 21%iv) Brazil – 15%

Intended range of activities in BRIC by order of preference:

i) forming alliancesii) opening new officesiii) developing unique productsiv) outsourcingv) mergers and acquisitionsvi) offshoring

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Issue of complexity has to be addressed

Based on findings from another regional survey, “Enhancing Value in Asia: Exploring the relationship between Finance, Governance and Growth” by PwC and CFO Publishing Corporation, empirical evidence points to the critical need to manage complexity:

seventy-six per cent (76%) of Singapore respondents (57% in Asia Pacific) say they cannot complete their budget exercises within two months;

CFOs feel that more can be done to improve planning, budgeting and forecasting (3.7/5 for Singapore); and

across Asia, 30% of CFO have disjointed information systems; 25% poor data quality and 19% struggle with complex accounting rules.

At the same time, the survey reveals a high degree of agreement where desired business outcomes are not achieved due to rising complexity that is value destroying.

Some key reasons for project failures are poor project management; lack of clear definition of project objectives; invalid business care; failure to manage change; projected business outcomes not measured; lack of follow-up post completion of project; and poor training.

Managing complexity

Managing complexity is not an unattainable task. CEOs who lead with a corporate-wide framework and devise appropriate tools to measure complexity have reported success in managing complexity. Being proficient in these two capabilities can increase the likelihood of being good at other capabilities necessary to effectively manage complexity. By measuring complexity and eradicating it where it reduces value, CEOs can create strategic advantage in the global economy. Start by differentiating between value-creating and value-destroying complexition. Next, maximise value-creating complexity through simplifying and strengthening controls governance and managing complexity positively in audit committees. Then, minimise value-destroying complexity through demystifying complexity surrounding C-suites. Finally, identify your risks.

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“Managing complexity is not an unattainable task... By measuring complexity and eradicating it where it reduces value, CEOs can create strategic advantage in the global economy.”

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Contents PwC Edge Volume One 2006

PwC Edge

Can you afford not to have good governance 2-7 Globalisation is driving convergence of corporate governance mechanisms. However, apparition of rules and regulations can develop a tendency towards “box-ticking”, with compliance in mind rather than performance. Keith Stephenson and Patrick Jourdain discuss why governance should be on every Board’s agenda.

Banking for growth in M&A 9-12 Spurred by the promise of market liberalisation, mergers & acquisitions (M&A) among financial institutions in Asia are expected to gain momentum. Karen Loon looks at what lies ahead for the M&A space in the banking industry. Speed towards global supply chain structuring 14-18Given the growing importance of globalisation, it is increasingly crucial to create integrated models of global supply chains that take into consideration all the key aspects of operating in the global economy. Nicole Fung and Sunil Agarwal shed the light on traditional supply chain structures and how companies around the globe are restructuring their supply chains to minimise tax costs and maximise shareholders’ wealth. Cross-border transactions in emerging economies: India and China M&A 20-25The mergers and acquisitions (M&A) transactions environment in emerging economies has rarely been as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in an emerging economy. Amitava Guharoy and Ng Jiak See share the issues, opportunities and challenges surrounding deal-making in these emerging economies. Offshoring: Balance redefined 27-30Offshoring is here to stay and it will only increase in complexity over the years. Mark Jansen provides an insight into the challenges awaiting companies who want to tap into the benefits of offshoring. He also shares why organisations must work towards calibrating their balance to get the most out of offshoring.

Overseas posting: Opportunity or threat 32-35In the past, employees view overseas posting as the golden ticket to career progression. Today though, employees are thinking long and hard before accepting an international assignment. Mario Farraro examines why.

Navigating the data minefield 37-40In today’s electronic environment, many high-profile fraud cases have been solved through forensic searches of computerised media and experienced electronic discovery professionals are now in great demand. Tan Shong Ye and Peter Viksnins explore the role of IT as a double-edged sword in solving economic crime. The magic of IT 42-45Whether you are considering an acquisition, forming a strategic alliance, developing new products, or seeking markets to grow your company, the complexity of your business will inevitably increase with time. If complexity is not properly managed beyond a certain point, it can negatively impact your bottom line. Tan Shong Ye and Thyag Venkatesan show you the possible measures you can take to reduce the complexity of your IT systems and improve business performance.

Managing the risks of white collar crime 47-52Corporate scandals drawn from today’s headlines are forcing executive management worldwide to take a closer look at the policies and procedures they have in place to control and mitigate incidents of fraud. Subramaniam Iyer, Chan Kheng Tek and Peter Viksnins highlight the importance of a fraud risk management programme to effectively battle economic crime.

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Can you afford not to have good governance

Globalisation is driving convergence of corporate governance mechanisms. However, apparition of rules and regulations can develop a tendency towards “box-ticking”, with compliance in mind rather than performance. This attitude can contribute to value-destroying complexity. Good governance, by clarifying roles and responsibilities, can help organisations resolve the complexity created by the new compliance requirements. Business leaders who understand the benefits of good governance and take this to a cultural level can participate in releasing the ultimate value-creation driver for their organisations as well as their stakeholders: the value of trust.

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BY KEITH STEPHENSON AND PATRICK JOURDAINPerformance Improvement

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Globalisation: A local phenomenon

Events happening on the other side of the globe translate into fundamental shifts at our doorsteps, prompting changes in the way we live and work. The responses to the challenges of globalisation are, however, influenced by local cultures and practices. In the corporate governance arena, the attitudes taken by governments, accounting boards, stock exchanges and other regulatory bodies all seem to converge with the creation of complex and demanding pieces of regulation. While organisations around the world are navigating a host of new standards and stakeholder expectations, they are challenged to do so in a way that truly supports performance objectives and effectively sustains value.

Clearly, there are advantages for companies that are prepared to go beyond “box-ticking” compliance where corporate governance is concerned. One of the benefits is sustainable growth. Once companies appreciate the value of good governance and truly embrace it in all facets of their corporate goals and mission, corporate governance can be a real performance driver for any organisation.

Value-destroying complexity unmanaged

In theory, while good governance is universally recognised as a performance driver, many organisations are not prepared to efficiently address the potentially value-destroying complexity increased governance can result in.

Significantly, only 4% of global CEOs say they are good at measuring complexity�, and only 5% have a corporate-wide framework of managing complexity. All organisations are affected by the complexity generated by the convergence of the three elements of Governance, Risk and Compliance (GRC). Although some organisations have had positive experiences in coordinating an approach to address their GRC elements arising from the convergence of global standards, almost all we speak to are

uncertain about their ability to sustain value from current efforts.

Compliance efforts with recent governance regulations such as Sarbanes-Oxley have resulted in fundamental changes in the way organisations operate, in particular, their finance functions. It has also exposed Boards to a degree of complexity that hitherto did not have their attention. In this respect, the findings of a recent survey of 400 CFOs and senior financial executives from 13 countries in Asia�, conducted jointly by PwC and CFO Asia, are of particular significance here. Amongst the worrying signs of value-destroying complexity is the fact that the majority of companies take two months or longer to complete their annual budget exercise (57.3%). Moreover, 30% of CFOs surveyed acknowledge having disjointed information systems, 25% report poor data quality and 19% struggle with complex accounting rules. While the CFOs surveyed are still reasonably satisfied with the accuracy of transaction processing and monthly results, as well as the adequacy of internal controls, they agree that more needs to be done to improve planning, budgeting, forecasting, and performance management, all of which are key areas that support sustainable growth.

Apart from this survey, recent research also validates the link between good governance and performance. A benchmarking analysis and research by the General Counsel Roundtable found that each additional dollar of compliance spending saves organisations, on average, US$5.�� in heightened avoidance of legal liabilities, harm to the organisation’s reputation and lost productivity. Taken as a whole, these findings point to the increasing importance of good governance to an organisation. However, are productivity and reputation the only elements that justify good governance? Can a better case be made for the dire need to adopt good governance?

Good governance is the core of value-creation

The answer lies in value-creation. Good governance is the core driver of value-creation because the transparency it creates helps identify the layers of value-destroying complexity. The added transparency brought into an organisation by governance sows the seeds of trust. Governance

�Source: PwC’s 9th Annual Global CEO Survey

�Source: “Enhancing value in Asia: Exploring the relationship between Finance, Governance and Growth” regional survey by PwC and CFO Publishing Corporation

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creates an environment where good practices and ethical behaviours are codified. With this, business leaders find the right people to help them achieve sustainable growth.

Better governance creates greater transparency and is achieved by key investment initiatives which address all of the stakeholders of an organisation. With this focus business can achieve improved value.

To unlock the full value of good governance, organisations must invest in key initiatives that engage all their stakeholders by:

taking a broader view of strategic stakeholder constituencies;

developing a deeper acknowledgement of the importance of good governance; and

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turning this view into a strategy that drives value throughout the organisation.

The benefits for the organisation will be magnified by taking an integrated approach that drives sustainable performance rather than a “box-ticking” compliance one. META Group research� supports the view that an integrated approach to GRC is a value driver that provides competitive advantage while managing risk. In this study, respondents noted that an integrated approach can enhance the following performance dimensions:

reputation value by 23%;

employee retention by 10%; and

revenue by 8%.

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“Good governance is the core driver of value-creation because the transparency it creates helps identify the layers of value-destroying complexity.”

�© 2003 META Group, Inc., Stamford, CT, USA.

Source: Integral Business – Integrating Sustainability and Business Strategy 2003, PwC.

Stakeholders

Customers

Service levelsQuality assuranceFlexible termsCustomer engagementConsumer rights and interestsProduct/service safety

Employees

Childcare facilitiesFair wages and benefitsRecruitment, training and developmentWorkplace safetyEmployee engagementDiversity and ethics

Society

Waste managementAestheticsEnviromental risk reductionEnergy conservationInfrastructureEnviroment rehabilitationGood neighbour

Partners

Co-brandingFavourable termsPartner engagementFair trading practicesMutual accountability and transparency

Exam

ple

Inve

stm

ents

Payo

ff Enhanced asset utilisation

Increased sales revenue

Increased productivity

Reduced costs

Reduced risk of litigation

Asset quality

TrustLoyalty

Motivation

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STAKEHOLDER EXPECTATION

Corporate governance as the platform for an effective finance function

Truly effective governance drives improved financial effectiveness, which itself supports business growth. But this happens only when it establishes a bond of trust between the Board and the Finance Department. Have we failed to see the link between governance and financial effectiveness? Ask any CEO or Board member and they will tell you that finance is probably the function which has been most impacted by the recent developments in the GRC space. Coincidentally, if the finance function works well, it can support the Board as well as the entire organisation by relieving them of a large portion of their worries. If it does not work well, you will find the company stumbling around aimlessly, lacking the glue that holds it together.

“Truly effective governance drives improved financial effectiveness, which itself supports business growth, but only when it establishes a bond of trust between the Board and the Finance Department.”Indeed, corporate governance can act as a platform for a more effective finance function. The PwC-CFO survey demonstrates the strong link between value-adding corporate governance and financial effectiveness. But for this to work, there needs to be a mechanism to tangibly create the bond of trust between finance and the Board. We find the existence of a Corporate Governance Statement a key part of creating the trust. Through its preparation, both sides can expose their views on key risks and understand how to address each other’s concerns.

Effective integration of Governance, Risk and Compliance (GRC)

Source: Integrity Driven Performance: A new strategy for success through integrated governance, risk and compliance management 2004, PwC.

ETHICAL CULTURE

______ Extended Enterprise & Value Chain ______

Setting objectives, tone, policies, risk appetite and accountabilities. Monitoring performance.

Identifying and assessing risks that may affect the ability to achieve objectives and determining risk response strategies and control activities.

Operating in accordance with objectives and ensuring adherence with laws and regulations, internal policies and procedures, and stakeholder commitments.

ENABLING

CUL

TURE, P

ROCESS & TECHNOLOGY EMERGING STANDARDS & NEW REQ

UIREMENTS

Governance

EnterpriseRisk Management

Compliance

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Does it work?

But how effective is the Corporate Governance Statement? Four of ten CFOs who say that their company has issued a finance governance statement keep the cost of the finance function below 1% of total consolidated sales – the global benchmark. Only 30% of respondents who do not have such a statement say the same. For those organisations that have implemented a finance governance statement, the survey also identified stronger financial effectiveness in 15 key areas, some of which are:

improved accuracy of financial forecasts and more rigorous processes to review results against budgets;

more effective tax planning mechanisms;

getting better value from organisational policies and procedures manuals; and

clearer documentation in segregation of duties and delegation of authority.

The same study also reveals that finance departments in Asia are supporting corporate growth through better financial effectiveness. It appears that nearly half the CFOs spend 50% or more of their time on decision support to management4, which can be considered to be a proxy for the finance function’s role to support corporate growth.

Aside from decision support, CFOs are also expected to take the lead in emphasising transparency, integrity and ethics in business dealings, act as the main agent of control within the company, and play a key role in enterprise risk management (ERM). In an integrated approach to GRC, ERM delivers value by focusing the right efforts on the right risks and at the right time.

However, this works well only when a bond of trust exists across the organisation, such that the true risks are reported on an accurate and timely basis. It is important to note that an organisation committed to integrity-driven performance is not risk adverse. Rather, it understands risk and

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takes a transparent, measured and disciplined approach to risk management. Such an organisation monitors and measures the performance of its GRC activities, recognising that informed risk-taking when aligned with the organisation’s values policies and standards, is integral to an entrepreneurial spirit. An integrated approach to GRC reveals the importance of culture, integrity and ethics, which are the true foundations of sustainable value-creation. This has prompted leading organisations to implement fraud management programmes to ensure they are proactive in their monitoring of potential fraud triggers.

Why are leading organisations now supporting good governance? They recognise that when they move away from “box-ticking” compliance and progress towards the path of a more meaningful corporate governance framework, they are actually creating value for their internal and external stakeholders. However, for this to really happen, there must be a culture of trust, which, when it really works, acts as the glue sticking the organisation together around its strategic objectives. As we have noted, added transparency drives better financial effectiveness, which in turn drives sustainable development.

Quantifying benefits of governance

Quantification of the added value generated by true performers of good governance will always be difficult to analyse independently of other factors. As an initial step, such an attempt was made by the the Association of Chartered Certified Accountants (ACCA) in the UK in January 2006 by looking at the FTSE4Good Index. The FTSE4Good index aims to expose investors to companies that meet globally recognised corporate social responsibility (CSR) standards.

According to the report, investors are likely to be better off, or at worst, neutral investing in CSR-embracing companies. Indeed, the report states that since its launch in July 2001, FTSE4Good has gained higher financial returns with less risk relative to other indices. Initiatives to publish company rankings assessing the quality of corporate governance using such key criteria as Board composition or the quality of disclosures are appearing globally. The Globe and Mail Report on 4However, whether this is fully sustainable given the limited resources

many such departments in the region have, remains to be seen.

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Business Corporate Governance in Canada or the Business Times’ Corporate Transparency Index in Singapore are good illustrations of heightened expectations of good governance happening globally. These various initiatives, in the UK, Canada and Singapore, are all indicative of a trend of converging governance into a globally consistent process. This falls in line with the findings of our recent 9th Annual Global CEO Survey which showed that 57% of CEOs expect corporate governance standards to converge to a large extent.

As summarised by Sam DiPiazza, Global CEO of PricewaterhouseCoopers, “Leading companies build sustainable businesses by embedding strong governance and corporate responsibility into their strategies and culture. By earning the trust of their employees, communities, trading partners and the capital markets, companies with a culture of corporate responsibility are able to generate value where others cannot.”

“Leading companies build sustainable businesses by embedding strong governance and corporate responsibility into their strategies and culture. By earning the trust of their employees, communities, trading partners and the capital markets, companies with a culture of corporate responsibility are able to generate value where others cannot.”

– Sam DiPiazza, Global CEO of PricewaterhouseCoopers

About PricewaterhouseCoopersPerformance Improvement

PricewaterhouseCoopers Performance Improvement helps clients attain increased performance by improving the efficiency and effectiveness of key business processes. Our in-depth industry expertise and understanding ensures tailored solutions for our clients.

We focus on Financial Effectiveness, IT Effectiveness and Governance, Risk and Compliance business processes and deliver this through key enablers such as Change and Programme Management, Data Servicesand Technology.

Keith Stephenson, Advisory Partner and Asia Pacific Leader for Performance Improvement can be contacted attel • (�5) ���� ��58e-mail • keith.stephenson@sg.pwc.com

Patrick Jourdain, Performance Improvement Senior Manager can be contacted attel • (�5) ���� ��8�e-mail • patrick.ml.jourdain@sg.pwc.com

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Banking for growth in M&A

Spurred by the promise of market liberalisation Mergers & Acquisitions (M&A) among financial institutions in Asia is expected to gain momentum. Many financial institutions in the region are now hunting for deals within Asia, particularly in China and India.

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BY KAREN LOONBanking and Capital Markets Industry Group

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In 2005, M&A in the financial services sector in Asia totalled US$�8.� billion according to M&A Asia. Inbound M&A replaced domestic activity in 2005 as the larger source of M&A in Asia on a value basis.

A recent survey of 130 senior executives in Asia’s financial services industry commissioned by PricewaterhouseCoopers (PwC) and conducted by the Economist Intelligence Unit (EIU) suggests that the trend towards cross-border M&A will gather momentum in the coming five years, despite continuing obstacles posed by regulatory environments and corporate cultures.

Of the survey respondents, 68% predicted that their organisations would undergo significant M&A activity in the coming five years and an equal number felt that joint ventures and partnerships would be key to their expansion plans in Asia. In most areas of financial services, the wave of expansion is powered by a strategic imperative to seek out new, under-served markets, and to meet a rising tide of competition from both domestic and foreign players. In other sectors, the opportunity for buyers lies in leveraging their skills to help acquisition targets improve their business models and boost growth.

The strongest evidence that market barriers are no longer defining the M&A landscape is the financial services industry’s focus on China, despite ownership restrictions on foreign investors. The prospect of access to the Chinese market has given foreigners a keener sense of urgency to develop a “China strategy”. It would seem that in their pursuit of growth, executives regard regulatory uncertainty as merely another cost of doing business. Foreign banks intent on making strategic investments in India may have to adopt a similar attitude. Nevertheless, the depth of market liberalisation in Asia’s banking and finance industry varies—sometimes markedly—from country to country.

China is likely to remain the major target for M&A in the region, with almost 52% of survey respondents indicating that they would conduct M&A in China in the coming five years. India was the next most likely target, cited by 36% of respondents. No other country or region was chosen by more than 20% of respondents. Predictably, India ranked at the top of countries where financial services companies will most likely set up outsourcing arrangements. Other

potential outsourcing countries included China, Singapore, Malaysia and Hong Kong.

The results of our survey were striking in the way respondents’ answers clustered strongly around six primary themes. Financial services executives in Asia today face growing pressure to satisfy shareholders, please customers and capitalise on their successes.

• Competitive pressures define today’s financial services industry, and institutions must be prepared for larger, more aggressive M&A, joint venture and partnership deals.

A certain amount of consolidation is to be expected in a market as fragmented as that of Asia. But the trend today is given added impetus by the many financial market opportunities in the region that are all waiting to be tapped, both in terms of geography and products. The ongoing erosion of regulatory barriers has already emboldened larger financial institutions, which have made inroads into countries and market segments that until recently, were considered impenetrable to outsiders. This, in turn, has led smaller, more specialised firms to court these giants in their quest for foreign direct investment, management talent, product and market expertise, and other resources. Sixty five per cent (65%) of our survey respondents cited the need to expand geographical and regional coverage as a growth-related objective that is most likely to drive M&A and other restructuring, while 58% pointed to the need to expand product/service offerings. The competitive landscape that has emerged is extraordinary.

• Organic growth offers advantages, but it is not enough, or even possible, in many markets.

While survey respondents believe that organic growth is the best strategy to meet objectives such as maintaining a focus on core businesses, meeting evolving regulatory requirements and managing risk, such growth alone is unlikely to meet all needs. The survey findings point to an increasing emphasis on M&A — 38% of respondents said that M&A would be the primary focus of their organisations’ restructuring

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activities over the next five years, with 40% saying that M&A is the best strategy for increasing market share. In reality, the intense competition in Asia combined with remaining regulatory barriers means that financial institutions must use multiple channels of investment to achieve their objectives.

• Regulatory obstacles are transitory and should not dictate strategy.

While regulatory barriers still factor heavily into all expansion scenarios, they elicit far less fear and loathing than they previously did. Intrepid and calculating, today’s financial executive has learnt to look beyond a target country’s regulatory environment, and to consider long-term political opportunities, demographic and macroeconomic trends, and opportunities to leverage core strengths in new areas and markets. Smart institutions are anticipating situations where regulatory changes will be to their advantage and indeed are attempting to drive regulatory thinking.

As market windows begin to open earnestly across Asia, waiting for regulatory hurdles to be dismantled could mean missing out on opportunities. Competition for assets is intensifying. It makes little sense to allow regulatory issues to dictate M&A strategy. Financial institutions would do better to identify areas of growth in terms of service offerings, market segments, and geographical specialities and use these as the foundation of a restructuring strategy. Negotiating regulatory hurdles has become just another cost of doing business.

• Focus must be maintained and M&A applied to hone competitive edge.

The sheer size of the region’s financial services market dictates that any player should possess a keen and objective understanding of its own peculiar strengths, and then capitalise upon them. However, the regulatory climate in some countries, combined with the expansion imperative, can mean that buyers will have to take on operations that do not strictly conform to their core competencies in order to secure the assets they really want. In the end, a balance between adherence to core competencies and

pragmatism must be struck. In some markets, financial services firms cannot offer their complete product range without some form of local alliances.

Of our survey respondents, 40% of them specified M&A as the best strategy for increasing market share. At the same time, 67% of them plan to expand their outsourcing activities in IT infrastructure and applications. Here again, a true understanding of core competencies is critical to identifying exactly which of these operations can be effectively outsourced.

• Economies of scale are the Holy Grail, but

What will be the main goals of your organisations’ M&A restructuring activity over the next five years?

Entering new geographic markets -

Entering new product markets -

Securing distribution -

Increasing market share -

Increasing shareholder value -

Reducing costs -

Improving customer service -

Focusing on core business -

Improving capital efficiency -

Managing the organistion’s risk profile -

Meeting evolving regulatory requirements -

Accessing new talent -

None of the above. We do not expect to undergo significant M&A or restructuring in the next five years -

Other, please specify -

0% 20% 40% 60% 80% 100%

2%

6%

5%

5%

9%

9%

8%

18%

13%

39%

45%

17%

36%

48%

“Without scale and the efficiencies it brings, growth accomplishes little. Economies of scale should be the Holy Grail of M&A,or any form of restructuring, for that matter.”

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difficult to achieve in Asia.

Without scale and the efficiencies it brings, growth accomplishes little. Economies of scale should be the Holy Grail of M&A, or any form of restructuring, for that matter. But such economies can be particularly difficult to achieve in Asia, where multi-channel strategies involving a combination of direct investments, equity stakes and joint ventures are often necessary.

Economies of scale require that processes be harmonised and streamlined, non-strategic operations pared back or eliminated completely, and all means of producing more for less be explored. Investors who are restricted from taking significant equity stakes are unlikely to form the type of true partnership that would enable such activities.

Regulations are not the only barriers to achieving economies of scale. Differences in corporate culture and defensiveness by owners or managers of the acquired company, and by politicians when jobs are threatened could be met with stiff resistance, if not outright hostility.

• Opportunity abounds but there are risks as well.

Financial institutions embarking on M&A in Asia are in many cases buying an interest in future high growth. But there are risks associated with this strategy. Many of the acquisitions of controlling interests in the region will result in increased revenues but few cost synergies — most acquisitions are into new markets and/or business lines and in practice, integration may be difficult because of unforeseen factors such as cultural resistance to retrenchment. Expected economic growth may also be blunted by global shocks such as Avian flu.

What growth-related objectives are likeliest to drive M&A and restructuring activity at your organisation?

Need to expand product/service offerings -

Need to expand distribution channels -

Need to expand geographic/regional coverage -

Need to acquire certain technologies -

Need to reposition organisation to exploit regulatory changes -

Need for personnel to acquire certain skills -

Need to access sources of funding -

None of the above. We do not expect to undergosignificant M&A or restructuring -

Other, please specify -

0% 20% 40% 60% 80% 100%

2%

6%

16%

14%

18%

11%

64%

42%

58%

About PricewaterhouseCoopers Banking and Capital Markets Industry Group

As a leading professional services firm in Singapore,PricewaterhouseCoopers Singapore’s dedicated Banking and Capital Markets Industry Group (www.pwc.com/sg/banking) has a team of multidisciplinary professionals with specialist knowledge, in-depth local market knowledge and proven expertise that enable us to address our clients’ specific needs, coupled with insights into market place developments and global opportunities.

Karen Loon, Banking and Capital Markets Industry Group Partner can be contacted attel • (65) 6236 3021e-mail • karen.loon@sg.pwc.com

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14 PwC Edge

Speed towards global supply chain structuring

Given the growing importance of globalisation, it is increasingly crucial to create integrated models of global supply chains that take into consideration all the key aspects of operating in the global economy. This article discusses the traditional supply chain structures and how various companies around the globe are restructuring their supply chains to minimise tax costs and maximise shareholders’ wealth.

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BY NICOLE FUNG AND SUNIL AGARWALCorporate Tax

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Global markets today are fiercely competitive. To survive in today’s market place, businesses have to achieve greater cost efficiencies, deliver more efficiently and constantly innovate to maximise value to their various stakeholders.

Supply chain management is one of the key functions of management today. Given the growing importance of globalisation, it is increasingly crucial to create integrated models of global supply chains that take into consideration all the key aspects of operating in the global economy.

Traditional supply chain model

The traditional supply chain model consists of domestic and single-country supply chains. In the traditional model, the domestic subsidiaries of a multinational parent are responsible for multiple functions in each of their respective countries, such as:

sourcing raw materials (procurement function);

converting raw materials into finished goods (manufacturing function);

supplying the finished goods to customers (distribution function);

providing the necessary after-sales services (sales functions); and

undertaking the in-house functions of accounting and debt collection (administrative services function).

Essentially, each country assumes all the risks and rewards of undertaking the above functions. The profits of the multinational group are thus captured in the various local countries of operation, some of which have high tax rates. Therefore, the traditional model is not optimum from a tax viewpoint and will not be cost efficient.

Since the traditional supply chain model is locally driven in today’s global economy, the traditional supply chain structures can result in the following disadvantages:

higher production costs as a result of fragmented manufacturing;

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higher warehousing costs and inefficient inventory management where the industry has volatile demand patterns;

greater costs and operational inefficiencies as a result of duplication of functions in each local country;

higher effective tax rate as a result of profits residing in high tax jurisdictions; and

greater management time and costs (e.g. IT infrastructure) incurred by parent entity for servicing multiple locations.

These issues have challenged companies to speed towards an integrated model of restructuring.

“An optimised supply chain regards the whole world as one territory with no boundaries and is structured in a manner where the maximum functions and risks are centralised in one location.”

Optimised supply chain model

Optimum supply chain model should be designed as a world without boundaries and structured such that maximum functions and risks are centralised, as much as possible, in a single location. Each activity (e.g. manufacturing or shared services) should ideally be undertaken in countries which offer the highest cost and location advantages.

Typically, a tax and operationally optimised supply chain model comprises the following elements:

“entrepreneur” or a “principal” entity;

toll or contract manufacturing entity;

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sales agent or a stripped-risk distribution entity;

central or regional warehousing centre; and

shared service centre & call centres.

The optimised supply chain structure is diagrammatically represented below along with brief discussions on each of the elements.

EntrepreneurThe optimised supply chain model involves the establishment of an Entrepreneur entity, which will assume all the major risks of the group such as credit, inventory, product liability, market risks and more. The Entrepreneur will be the focal entity in the group liaising with manufacturers, distributors and customers. It should also own the intellectual property and other intangibles to the extent possible. Since profits follow functions and risks, the Entrepreneur entity will derive the maximum profits from the group’s operations and is thus typically set up in a jurisdiction which offers superior infrastructure coupled with relatively low taxes to achieve operational and tax efficiencies (e.g. Switzerland, Singapore or Hong Kong).

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Toll or contract manufacturerThe contract manufacturer will typically be set up in a country with very low labour costs (e.g. China, India or Indonesia) to achieve cost efficiencies and it will manufacture goods on behalf of the Entrepreneur. The manufacturer may or may not own the raw materials, depending on whether the set-up is toll manufacturing or contract manufacturing. The contract manufacturer does not face any direct “market risks” and is guaranteed a minimum return from the Entrepreneur for undertaking the manufacturing activity.

Stripped risk distributors or marketing agentsAs a general rule, the selling companies are located close to their customers, often in high tax jurisdictions. As such, the optimised supply chain model should ideally try to ensure that majority of the assets (e.g. marketing intangibles) and risks (credit and market risks) are shifted to the Entrepreneur entity, so that only a minimum profit margin can be retained in the stripped risk distributor entity.

Material flows

Information flows

Legal title flows

Web sales(e-markets) Principal /

Entrepreneur

Suppliers

Toll/contractmanufacturing

Central/regionalwarehousing

raw

mat

eria

ls

finished goods

finished goods

Shared servicecentre

Customers

Call centre

Marketingagents/commissionaires

Sales force

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Shared service centresTo avoid duplication of services and achieve greater operational efficiencies, all the administrative functions such as accounting, invoicing and debt management should be centralised in one entity. The shared service centre entity will be remunerated on a cost-plus basis by the Entrepreneur entity. The shared service entity is typically set up in a location that offers good infrastructure facilities, good legal framework and tax advantages (e.g. Malaysia, India, Philippines or Singapore).

Research and Development (R&D) and other functionsThe other functions of the group such as key management functions and R&D can be centralised in the Entrepreneur entity to create more substance in the Entrepreneur entity. Alternatively, R&D can also be sub-contracted to another entity, with the necessary intellectual property residing in the Entrepreneur entity.

Benefits of the optimised supply chain model

By restructuring the supply chain model on the above basis, the whole globe or region is regarded as one territory. With it, the economies of scale and rationalisation of functions result in great operational benefits to the multinational group. Structuring the operations as contract manufacturing and stripped risk distributors also enable the multinational companies to identify “portable profits” to be shifted to the Entrepreneur.

In summary, an optimised supply chain model can offer the following benefits to a multinational group:

reduced inventory levels through centralised inventory holding in the Entrepreneur;

lower raw materials costs and manufacturing costs through centralised production and manufacturing;

improved customer responsiveness;

efficient and lower cost distribution network;

higher operational and cost efficiencies; and

lower effective tax rate.

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“The restructuring of the supply chain model has to be first driven from a business and operational perspective followed by consideration on tax advantages.”

Practical challenges

However beneficial it may be to realign the traditional model with a more robust modern value chain model, there are difficulties and challenges in the implementation. Typically, these challenges emerge in the following arenas:

people and culture;

process re-engineering;

restructuring; and

IT related issues.

Recognising these challenges and undertaking steps to manage these issues will require sustainable change.

Whatever the challenges, the benefits substantially derived from restructuring supply chain can be magnificent. However, there is no “one-size-fits-all” type of model.

Each of the businesses will have to carefully evaluate their own industry issues, operational challenges, organisational culture, customer demands, costs and benefits analysis to develop a customised supply chain model that will achieve efficiencies to the whole group. The restructuring of the supply chain model has to be first driven from a business and operational perspective followed by consideration on tax advantages. In today’s global environment, an optimised supply chain model with effective implementation can definitely help organisations enhance shareholders’ value.

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People and Culture ReasonsLack of management support/sponsorshipNo perceived need for changeBenefits drivers not understoodInsufficient training

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Restructuring ReasonsUnrealistic vision of new organisationEmployee opposition Poor people issues managementInsufficient employee involvementInsufficient understanding of current organisation

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IT ReasonsMismatch between structure and IT infrastructureWorking across national boundaries not understoodReluctance to embrace new IT

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Process Re-engineering Reasons

Lack of employee involvement Lack of management support for new processesWorking across national boundariesTasks falling “between the cracks”

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These reasons are summarised below:

About PricewaterhouseCoopers Tax

PricewaterhouseCoopers Tax practice is among thelargest in Singapore. With more than 250 taxprofessionals and directors, we help individuals,businesses, both public and private organisations, with tax strategy, planning and compliance. From financial services, treasury, fund management, mergers and acquisitions, intellectual property, international tax planning (inbound and outbound) and Goods and Services Tax (GST) to transfer pricing, our tax professionals will provide you with the ideal tax solution.

Nicole Fung, Tax Partner can be contacted attel • (�5) ���� ���8e-mail • nicole.fung@sg.pwc.com

Sunil Agarwal, Senior Manager for Tax can be contacted attel • (65) 6236 3847e-mail • sunil.agarwal@sg.pwc.com

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20 PwC Edge

The mergers and acquisitions (M&A) transactions environment in emerging economies has rarely been as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in an emerging economy. In this context, China and India deserve special mention having changed the landscape for cross-border transactions in emerging economies.

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BY AMITAVA GUHAROY AND NG JIAK SEECorporate Finance

Cross-border transactions in emerging economies: India and China M&A

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The mergers and acquisitions (M&A) transactions environment in emerging economies has rarely been as buoyant as it currently is. Hardly a day passes without some reference to a M&A transaction in an emerging economy. In this context, China and India deserve special mention. Even a couple of years back, most of such transactions in these two countries were inbound transactions into the country. In recent times, there have been a number of very high profile transactions where Indian and Chinese corporates have made big ticket acquisitions abroad.

The pertinent question that arises is why emerging economies like India and China are becoming such important M&A drivers. The value of cross-border M&A in India and China more than quadrupled to US$21.4 billion and US$25 billion respectively in 2005 as companies sought to capitalise on the economic boom. The general air of expectancy in almost all industries has played a significant role in corporates seeking to expand in scale, acquire new technologies or markets, develop new competencies or wanting to take advantage of new opportunities that emerge. However the most significant development in the last couple of years has been the large overseas acquisitions by corporates like the Tatas, Dr Reddy’s, Mahindra & Mahindra, Bharat Forge, Lenovo, China National Petroleum Corp, Shanghai Automotive, to name only a few. While foreign companies seek to benefit from the rapidly growing Indian and Chinese markets driven by increasing disposable incomes, a young population, change in spending patterns and a general “feel-good” factor, Indian and Chinese corporates are also seeking to expand overseas and become truly multi-national companies.

Overview of deal activities in China and India

China

There were ��� cross-border transactions completed in China over the last � years with announced deal value of over US$�8 billion, according to Bloomberg. In 2005, there were 215 completed inbound deals with announced value of close to US$20 billion. There is also a trend where more Chinese companies have emerged as strong buying forces in the international M&A market, in line with the Chinese government’s “Going Out” policy to

Inbound deals by target industry sector in terms of number of the deals

Others 5%Utility 2%

Technology 6%

Industrial 22%

Financial 13%Energy 1%

Consumer 31%

Communication 12%

Basic Materials 8%

Source: Bloomberg, 4 April 2006

grow PRC companies as competitive global players in major industries.

Leading sectors for inbound transactions in China were consumer, industrial and financial services. Some examples of the mega deals in these sectors are:

Consumer sector Belgian brewer InBev, the world’s largest beer

producer, has struck a US$730m deal to acquire Fujian Sedrin in early 2006. InBev has already acquired three other Chinese breweries – Jinling Beer, KK Bear, and a 24% stake in Pearl River Beer. The purchase of Fujian Sedrin would make InBev the second-largest brewer in China. InBev is confident that China will account for half of global beer demand within ten years.

Iron/Steel sector Mittal Steel, acquired 36.67% of Hunan Valin

Steel Tube & Wire Company (Hunan Valin) for a total consideration of US$338 million in 2005. Hunan Valin is one of the largest steelmakers in China with annual steel production capacity of 8.5 million tonnes. It is listed on the Shenzhen Stock Exchange. Lakshmi N. Mittal, Chairman and Chief Executive of Mittal Steel, said, “This is a key strategic transaction for Mittal Steel as it marks our first step into China, the world’s leading steel market. It is our intention that this acquisition should create a platform for Mittal Steel’s future investments in the country.”

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as “the dawn of a new era in China’s M&A market” and a “milestone in China’s integration in world business”. This deal has successfully pushed up Lenovo’s status to be one of the top three global PC suppliers.

One of the largest cross-border deals in 2005 was the acquisition of PetroKazakhstan Inc by China National Petroleum Corp (CNPC) with transaction value of approximately US$4.18 billion.

India

There were 436 cross border transactions completed in India over the last � years.

Similar to China’s M&A landscape, leading sectors for inbound deals were consumer and industrial, which constituted 50% of the total completed transactions in terms of number of the inbound deals. Technology and communications are also two active sectors, especially the telecom sector, which was the hot favourite for foreign investors in 2005. Some of the recent notable inbound deals in India were:

• Acquisition of a minority stake by Vodafone Plc, in Bharti for US$1.5 billion in late 2005. It was one of the largest foreign investments in India.

• Maxis Communications Bhd of Malaysia has announced that it is on track to complete its US$1.08 billion acquisition of Aircel Ltd, a cellular service provider operating in the Chennai and Tamil Nadu circles. On completion of the

• The acquisition of Hunan Valin is one of the most significant transactions in China where a foreign investor has been approved to acquire A-share PRC listed companies.

Financial sectorRoyal Bank of Scotland led a team including a unit of Merrill Lynch & Co. and Hong Kong billionaire Li Ka-shing in investing US$�.� billion to buy 10% of Bank of China in August 2005. In early 2006, Temasek Holdings paid US$1.5 billion for a 5% stake in Bank of China. Global investors are eager to tap into China’s US$1.6 trillion in personal bank savings with products and services ranging from credit cards to home insurance, ahead of the full opening of the Chinese banking industry to foreign players at the end of 2006.

Fierce economic competition and declining domestic revenues, combined with government encouragement and financial support, is pushing Chinese firms to globalise in order to establish global sales and distribution networks, secure access to raw materials and natural resources, and acquire technology, cutting-edge manufacturing know-how, and global brands. Based on the chart above, outward investments made by Chinese companies were concentrated mainly on consumer, communication and energy sectors like oil & gas, coal, mining, telecommunications, software, home appliances and home furnishings.

The US$1.75 billion acquisition of IBM’s PC business by Lenovo in 2004 was seen in the market

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Source: Bloomberg, 4 April 2006

Outbound deals by target industry sector in terms of number of the deals

Others 1%Utility 11%

Technology 14%

Industrial 8%

Financial 5%

Energy 14%

Consumer 29%

Communication 14%

Basic Materials 4%

Inbound deals by target industry sector in terms of number of the deals

Others 7%Utility 1%

Technology 13%

Industrial 18%

Financial 9%Energy 2%

Consumer 32%

Communication 12%

Basic Materials 6%

Source: Bloomberg, 4 April 2006

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acquisition, Maxis will have 74% equity stake in Aircel, of which 65% will be direct stake with an investment of US$702 million and 9% indirectly through Deccan Digital Networks Private Ltd (DDN). DDN is a joint venture between Maxis and the Reddy family of the Apollo Hospitals Group. Aircel has announced an investment of $500 million over 2006-2008 to expand coverage to 10 new circles in India.

• Singapore Telecom has increased its equity holding in Bharti from 26.96% to 32.81% for an aggregate cash consideration of $�5� million in mid 2005

One key feature of Indian M&A activity is the active overseas acquisitions by Indian companies. There were 89 transactions completed in 2005. Indian companies largely went for consumer, technology, basic materials, industrial and communications sectors.

• Iron & Steel sector India’s steel giant Tata Iron and Steel completed

its acquisition of NatSteel Asia, Singapore’s steel miller, for US$303 million. Tata intends to leverage on NatSteel facilities and brand in the Asian markets to further expand its reach in the region.

• Telecom sector Videsh Sanchar Nigam Ltd (VSNL)’s US$239

million acquisition of Teleglobe International Holdings complemented its takeover of Tyco

Outbound deals by target industry sector in terms of number of the deals

Others 4%Utility 1%

Technology 21%

Industrial 11%

Financial 3%

Energy 2%Consumer 40%

Communication 8%

Basic Materials 10%

Source: Bloomberg, 4 April 2006

Global Network (TGN), turning into a global player. With TGN, VSNL got an undersea cable link of 60,000 km. With the buyout of Teleglobe, a carrier, it now has access to network capacities in 240 countries. Analysts believe that what VSNL gains most from this buyout is the fast-growing voice over internet protocol business which, although accounting for just 15% of the global market currently, is growing at two to three times the pace of the voice market.

• Pharmaceutical sector Dr. Reddy’s Laboratories paid Euro 480 million in

its acquisition of 100% of Betapharm Group, the fourth-largest generic pharmaceuticals company in Germany. Satish Reddy, chief operating officer, Dr. Reddy’s Laboratories, said, “The strategic investment in Betapharm is a step forward towards realising Dr. Reddy’s strategic intention of building a global generics business with strategic presence in all key markets”.

“The general air of expectancy in almost all industries has played a significant role in corporates seeking to expand in scale, acquire new technologies or markets, develop new competencies or wanting to take advantage of new opportunities that emerge.”

Challenges

Some typical challenges that one may need to consider in any cross-border transaction, particularly in emerging economies, include:

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Regulatory

Foreign investors investing into China should consider, inter alia, the following:

• Catalogue for the Guidance of Foreign Investment Industries

Catalogue for the Guidance of Foreign Investment Industries shall be the basis for the guidance of examination and approval of foreign investment projects and for the policy application of foreign investment enterprises. Foreign investment projects shall be classified into four categories: encouraged, permitted, restricted and prohibited projects.

• Administrative Measures on Management of Strategic Investment of Foreign Investors in Listed Companies

The China Securities Regulatory Commission (CSRC) released the Measures for the Administration of Share Capital Segregation Reform of Listed Companies in August 2005, aiming to convert the RMB�.� trillion in non-tradable A-shares currently tied up in listed companies (many of them are held by the state) into tradable A-shares. Further, new regulations published on the last day of year 2005 permit foreign investors to buy A-shares both in listed local companies which have completed shareholding reform and in newly-listed firms.

• State Administration of Foreign Exchange (SAFE)

Foreign investors who need to set up offshore joint venture vehicles with PRC domestic residents will need to be familiar with the provisions of Notice �5 issued by the PRC State Administration of Foreign Exchange (SAFE) in November 2005. Under Notice 75, which replaces the two notices issued in early 2005 and allows domestic residents to establish offshore entities to invest in wholly foreign owned enterprises in China, provided that certain prescribed procedures are followed. Such structure was often used by venture capitalist and private equity funds as well as Chinese seeking listing outside the PRC.

Cultural Differences

Organisations from different countries typically have very different cultures and values. It is highly likely that conflicts may arise, resulting in higher integration costs which may erode the benefits expected from the merger. For example, the way of doing business in China can be very different from how business is conducted in the west. One needs to be open-minded, understand how and why certain practices are followed. It is important to build strong relationship with the Chinese party. A good mix of management participation between the two entities post merger may be necessary. It is also important for the top management team to cultivate a common value system so that the acquirer does not start to lose key talents from the merger.

Opportunities and outlook going forward

Looking ahead, the fundamentals for sustained M&A activities remain strong in China and India. Deals in the consumer, industrial, technology and financial sectors are expected to continue, both large and smaller ones.

With the relaxation of regulatory barriers of entry to service industries as part of China’s World Trade Organisation’s (WTO) accession agreement, one can expect more M&A activities in sectors across financial institutions, logistics, education, telecommunication, professional services and other service sectors over the coming years. With the Indian economy exhibiting sustainable growth rates in excess of 6% to 7% in the short to medium term and the continuance of the reform and liberalisation process cross border M&A will continue to remain extremely active.

Conclusion

In conclusion, while cross border transactions in emerging economies have their own unique challenges, such transaction will continue to remain buoyant in the near future. And if one is a M&A practitioner, India and China are the countries to focus on.

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About PricewaterhouseCoopers Corporate Finance

PricewaterhouseCoopers Corporate Finance Pte Ltd’s (PwCCF) team of dedicated corporate financeprofessionals with diverse expertise are well-qualified to provide strategic and financial advice to companies that look to Mergers & Acquisitions as progressive moves to the next stage of their growth. Our international network of Corporate Finance Services professionals well-positions us to serve our clients effectively in any part of the world. With access to market intelligence facilities, local and global resources, coupled with an internationalclient and consultant base, we are able to efficientlyidentify targets, undertake fund-raising activities andcapitalise on opportunities across the globe to help you maximise the value of your local/cross-bordertransactions.

Amitava Guharoy, Managing Director of Corporate Finance can be contacted attel • (65) 6236 4118e-mail • amitava.guharoy@sg.pwc.com

Ng Jiak See, Executive Director of Corporate Finance can be contacted attel • (�5) ���� �9�8e-mail • jiak.see.ng@sg.pwc.com

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Offshoring: Balance redefined

Whilst offshoring may be the latest “buzzword”, financial services organistions are increasingly faced with new challenges when managing a cross-border workforce.

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BY MARK JANSENBanking and Capital Markets Industry Group

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Mention work-life balance to those managing or dealing with offshored locations on a regular basis and you are likely to be met with a muted response. The reality of the pursuit for cost reduction, greater efficiency and global cohesion is that, people tasked with this collective objective are often required to be available “twenty-four-by-seven”. While the official expectation may be different, the reality for many is that the concept of “work-life balance” sadly remains a concept.

This story holds true across many financial institutions. As revealed in PricewaterhouseCoopers’ (PwC) and the Economist Intelligence Unit’s (EIU) recent survey “Offshoring in the Financial Services Industry: Risks and Rewards”, the offshoring trend is expected to continue, implying hence that the issue of imbalance work-life is unlikely to disappear.

According to the PwC/EIU survey, organisations that benefit most out of offshoring are likely to be those who put in the greatest effort into planning at the outset, and those who look towards leveraging global talent pools, but beyond the initial cost savings. However in many instances, these are not easily achieved as reflected by the responses from the survey.

One of the difficulties faced as organisations seek to leverage global talent pools, is the ability to ensure that the offshored location cohesively integrates with the global operations. This has become the job of many managers today, who have become the “glue” that helps to build this cohesion. These managers understand the global strategic objectives and are tasked with integrating them with offshored offices.

The nature of such a role however, requires these managers to be available almost round the clock due to the time difference in global conference calls and requirements for travel. This is also experienced by managers on the other end of the offshored operations and those who have regular cross-border dealings. More often than not however, the burden is greater at the offshored locations. Increasingly, it becomes not a case of who can do the best job, but rather who can sleep best on the plane and perform at work the next day.

Yet, the time and commitment put in by these key managers to provide firm-wide global cohesion is not

always fully appreciated and/or recognised. While these managers expect rewards and advancement for the type of lifestyles required to get their jobs done, “traditional” rewards often do not provide adequate recognition or compensation vis-a-vis the impact on the managers’ well-being arising from such lifestyles.

Therein lies a new key risk for organisations relying on offshore operations - talent management. Such a talent management issue is not at the process level where organisations face as a firm-wide challenge. Rather, the challenge lies specifically in managing the key individuals tasked to lead offshore operations.

Many sleep studies have shown that sleep deprivation has effects similar to excessive alcohol consumption (�� hours of wakefulness is the equivalent to a blood alcohol level of 0.05%) – impairment in judgement, the ability to handle stress and maintain a healthy immune system. By working continually for long hours and travelling across time zones, it is not always possible for people to maintain the required amounts of sleep necessary for effective work performance. As a result, the effectiveness of people will diminish leading to lost productivity and possibly business opportunities. Whilst there is no definitive causal link, those who are sleep deprived definitely feel its negative effects.

Since the trend of offshoring is likely to continue, the challenge is to effectively manage key talent and understand the link between personal effectiveness and the bottom line. Ensuring staff maintain their competitive edge requires human capital to operate at, not below, capacity. Take for example an organisation that is seeking to further expand its offshored operations in Asia. Core to this process is in ensuring that global expectations are met with regard to cost savings, timelines and efficiency. This requires an initial investment in time to properly recruit and train staff to be effective.

Further, at least in the medium term, there is often a need for increased oversight by an experienced staff (i.e. fly-ins). Fly-ins are often required not because of the unavailability of local staff but rather, their presence help to set the right tone, provide a link to global objectives, and at the same time allow them to share their experiences. As these people are

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instrumental to the success of offshored operations, care is required in recognising the unique demands of the roles for both fly-ins and local staff alike. These demands whilst sometimes seemed short term, are in reality, present on an on-going basis. While some people are able to adapt, meet such demands and still deliver, the question is if this is sustainable going forward.

As seen by the recent PwC/EIU Survey, turnover is yet another major concern. Whilst much are being done at operational levels, the topic appears to be taboo at the senior management level.

Organisations need to consider the importance of culture, behaviours and norms so as to provide the right environment for staff. It is certainly not realistic or possible to cancel conference calls or business travels, since these are powerful tools in linking offshored operations with their global counterparts. However, some consideration can be given in terms of better planning or scheduling so as to avoid too many disruptions to the managers’ lives after work.

Furthermore, reward structures for people impacted need to be reconsidered. In many cases, while increased bonuses and other monetary rewards are important, they rarely reduce the dissatisfaction other than provide a momentary stay of execution. Organisations need to consider new options such as:

• Structure: Sharing of the work load across key individuals to reduce key man dependence and provide additional flexibility.

• Infrastructure: Recognising the need for time saving through the provision of communication tools such as the “Blackberry”. Further consideration is required with regard to the flexibility and comfort of travel arrangements to minimise the impact on productivity.

• Time: Provision of time in lieu that can be extended to those impacted by travel and long hours, to allow for sufficient recovery time at the appropriate periods.

• Succession planning: Clearly defining role requirements, time frames and outcomes, whilst actively grooming replacements that are ready to accept the challenge going forward.

• Proactive negotiation: Contract negotiation needs to be considered on a proactive basis to actively identify the additional needs or flexibility key staff require. Organisations need to be upfront in the recognition of the impacts and be careful not to be reactionary.

Such steps are important to help foster long-term commitment and productivity.

Ultimately, a balance approach is key. It is also important that senior executives lead by example and not just talk rhetoric. Simple steps such as no conference calls on Friday evenings and limiting the amount of travel on weekends help in alleviating some of the pressure. However, most important of all, it is recognising that all of these do take its toll on the managers’ lifestyles, and that even the best are not able to take the challenge without some kind of compromise.

Organisations need also to be clear and assess the sort of contribution they want from their staff. To recruit and retrain is expensive; therefore it is imperative that companies consider how to retain key staff. It should be recognised that in some instances work-life balance need not be key, in particular where there are large supplies of eager staff willing to out do each other in an effort to make an early impression. However when it comes to more senior staff, greater care is required.

Organisations need to remember that the managers whom they have appointed to take on leadership roles and to act as the glue between offshored functions and major transacting locations, were selected precisely because they are the best and most qualified. The organisations are relying on them to meet their long-term goals. Increasingly however, these individuals are becoming more time-poor, and this has negatively impacted their capacity to deliver the results they so desire.

Ultimately, as summed up by the PwC/EIU survey, finding and retaining people of the right quality are amongst the most prominent risks facing offshore managers. The best way to tackle rising rates of attrition, deliver sustainable improvements to performance and ensure that the firm’s brand and reputation are consistently maintained around the world, is to treat offshore staff as you would towards people in your home market.

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“Ultimately, a balance approach is key. It is also important that senior executives lead by example and not just talk rhetoric.”

Four out of five respondents point to training and career development as the most effective way of keeping best performers.

Having said these, the survey findings also led to the conclusion that while labour arbitrage can deliver substantial savings, many of the long-term gains from offshoring come from smarter ways of doing things, from improved processes to knitting together a number of offshore centres, some in low-cost countries and others in high-cost ones, into single, cohesive activities. A summary of the findings is enclosed.

Key messages from PwC/EIU Survey

• Current offshoring activity in financial services is at the tip of the iceberg – 36% of those surveyed currently have over 10% of their headcount offshore. In three years, more than 64% expect over 10% of their headcount to be based in offshore centres.

• Cost saving objectives fuel almost 80% of offshoring projects. Improved quality of service, as well as the ability to focus on core competencies, are also significant drivers.

• Fifty-six per cent (56%) experienced an increase in costs or no change in the first year of their offshoring project.

• “Higher-value” activities such as knowledge-based activities (e.g. financial research and modelling and customer contact activities involving inbound enquiries as opposed to scripted sales calls), will increasingly move offshore over the next three years.

• Financial services firms who get the most out of offshoring are likely to be those who put the most into planning at the outset and who look beyond the initial cost savings and towards leveraging a global talent base.

About PricewaterhouseCoopers Banking and Capital Markets Industry Group

As a leading professional services firm in Singapore,PricewaterhouseCoopers Singapore’s dedicated Banking and Capital Markets Industry Group (www.pwc.com/sg/banking) has a team of multidisciplinary professionals with specialist knowledge, in-depth local market knowledge and proven expertise that enable us to address our clients’ specific needs, coupled with insights into market place developments and global opportunities.

Mark Jansen, Banking and Capital Markets Industry Group Senior Manager can be contacted atTel • (�5) ���� ����Email • mark.jansen@sg.pwc.com

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Overseas posting: Opportunity or threat

Organisations around the world are stimulating international mobility by focusing on financial incentives rather than staff development and career progression for their employees. It is not surprising that employees are thinking long and hard before accepting an international assignment.

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BY MARIO FERRAROHuman Resource Services

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Look at any organisation’s mission statement or Annual Report, and you will probably find a sentence labelling their employees as their “most valuable asset”. Whether or not organisations truly live up to this statement, the fact remains that in many industry sectors, employees are a very costly asset to acquire and maintain. They represent an investment against which stakeholders expect to see measurable returns. The care and attention that goes into this investment is also reflected in the rigorous assessment and selection of the candidates before they are hired, a process often supported by sophisticated profiling models and techniques. Once hired, employees usually enter a career development framework, which involves the investment of hundreds of business hours to ensure that the resources are developed and the return on investment maximised.

And if employees represent a costly investment, expatriates can be three times more expensive, when allowances, logistic arrangements and the effect of taxation are factored in. This huge expenditure on international assignments is often justified by the business objectives that the organisation needs to address abroad. In fact, to compete in today’s global and fast-paced economy, organisations must be able to deploy staff on overseas projects quickly and affordably. However, a close look at how many organisations handle their international assignments reveals that despite their best efforts, the vast majority of organisations still face a number of challenges which can rapidly erode the return on investment, shareholder value and employee morale, if left unresolved.

What employees want

A recent study titled “Understanding and Avoiding Barriers to International Mobility” conducted by PricewaterhouseCoopers (PwC) and Cranfield School of Management (UK) reveals that many of these issues are the result of a misalignment between what the employees are looking for and what their employers typically provide. The study suggests that the international assignment policies of many organisations place too much emphasis on areas that are of little concern to the employees while neglecting some of the factors that employees consider are more important. Let’s have a closer look at some of these interesting gaps.

Most organisations address their international mobility needs through corporate policies that provide reassurance and motivation for employees considering an overseas posting. Typically, a lot of effort goes into the planning of the assignment, and in finding the right “package” for the employee. Much of the focus is usually on financial considerations, particularly if the employee has a working partner who would need to give up his or her job and income to move abroad. The tendency is therefore to motivate prospective assignees through compensation and benefits. But while financial considerations are obviously important to the employees, recent research suggests that their real concerns are more focused on long-term issues: how will the assignment enhance their skills? Is the assignment really an opportunity for career progression, or will it be detrimental to it? Will it enhance their leadership potential? How will the assignment affect their work-life balance? Interestingly, even the most comprehensive corporate policies are often rather vague, or downright silent, on these points - which are of greatest concerns to the employee.

The employees’ concerns are certainly not unjustified. The recent study conducted by PwC reveals that while 85% of organisations recognise the importance of re-integrating employees who return home from an international assignment, only 25% of organisations feel that they are doing it well. Furthermore, statistics show that only 27% of companies provide a guarantee to the employee that they will still have a job back home when they return from an international assignment, and the percentage of companies guaranteeing a role at the same level is as low as 15%. This means that at the point of repatriation, the employees should consider themselves lucky if they still have a job, and should certainly not expect to go back into a higher position, compared to the level they occupied during the assignment. The research reaffirms this point, showing that only about one-third of international assignees are promoted as a result of an international assignment, whereas the majority remains at the same level, and one in ten is actually demoted.

What these numbers show, effectively, is that once an employee embarks on an overseas posting, there is a good probability that nobody within the

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organisation has the slightest idea as to what he or she will be doing upon returning home – the grim reality that there is usually little or no long-term planning involved at all. To add fuel to fire, the pace of change is too fast in today’s organisations to make any firm commitment to assignees who are due to return “home” in two, three or five years’ time. With such prospects ahead, it is not surprising that employees are thinking long and hard before accepting an international assignment. Rather than seeing it as an opportunity, they may look at it as a risky career move.

The case in Singapore

As HR consultants, our experience suggests that some local organisations find it hard to overcome the employee’s concerns regarding career progression when proposing an international assignment. This is particularly true when the proposed overseas job posting is to another Asian location and is less of an issue when the proposed assignment is to European or US locations. This trend suggests that employees foresee better career opportunities if they remain closer to the regional or global headquarters (HQs). Similarly, career concerns and proximity to global HQs can represent a potential barrier to attracting senior management employees from overseas locations to Singapore and Asia.

Many of our clients have commented that it is not always easy to attract Singaporeans to take up positions abroad. In line with the survey results, attracting employees at the start of their career to take up assignments is a lot easier. In the Singapore context, this scenario is more pronounced for single employees who have fewer family commitments. Singaporeans who have studied abroad and who have had positive experiences from their years abroad are also generally easier to attract for foreign postings.

Yet, it is important to note that most Singaporean families are also dual-career families. In such cases, the career uncertainties mentioned above would concern both partners. The potential loss of spousal income may represent an additional barrier to mobility. Married couples with children of school-going age are even more difficult to attract. Most parents are also concerned about taking their children out of the Singapore education system

(especially choice schools) for a few years and having to reintegrate them at a later stage. Other family commitments such as caring and supporting an extended family also affect the assignment take-up rate among Singaporean executives.

The biggest threat

When all these considerations are taken together, it becomes clear that while many organisations are trying to stimulate international mobility by focusing on financial incentives for the employees, what appears to be lacking is a solid framework that brings the overseas postings in the bigger context of staff development and career progression.

It is possible that the continued pace of globalisation and the ensuing war for talent may result in some international assignment policies shifting the focus towards issues that are most important to the employees. Extending career management and mentorship programmes to staff while they are away from their base office will increasingly be means to reassure assignees that they are not being forgotten or neglected as the organisation evolves. However, unless companies find ways of addressing the varying motivations and concerns of individuals considering an assignment, the ability to deploy staff on international projects quickly may be impaired, with a resulting loss of competitive edge.

As much as international assignments are considered a costly investment in the “company’s most valuable assets”, it pays to factor in a framework that addresses the long-term career goals of employees. If you are even thinking why, just imagine: your most valuable assets upon returning from an assignment richer in experience, knowledge and networks, eventually realise the many uncertainties surrounding their position, and decide to take career progression into their own hands – by joining the competition.

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“Just imagine: your most valuable assets upon returning from an assignment richer in experience, knowledge and networks, eventually realise the many uncertainties surrounding their position, and decide to take career progression into their own hands – by joining the competition.”

About PricewaterhouseCoopers Human Resource Services

With more than 5,000 HR professionals, the HumanResource Services (HRS) arm of PwC is one of thelargest human resource consulting practice globally.Through the use of selective human capital interventions and our wide array of solutions relating to people, process and culture, we collaborate with clients to develop holistic and practical solutions to address both tactical and strategic human resource challenges to achieve bottom-line results. Some of the key advisory services we offer include Human Resource M&A, strategies and processes alignment, job evaluation and job redesign, HR functional effectiveness review, human capital benchmarking, compensation and benefits review, change management and executive search.

Mario Ferraro, Associate Director, Human ResourceServices can be contacted attel • (�5) ���� �8��e-mail • mario.ferraro@sg.pwc.com

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Navigating the data minefield

In today’s electronic environment, many high-profile cases have been solved through forensic searches of computerised media, and experienced electronic discovery professionals are now in great demand. Forensic technology can provide investigative teams a roadmap through the deluge of data. Investigative teams should, however, remember to use electronic discovery in the context of an overall document search, focusing on subject matter and investigative targets rather than purely on the discovery methodology. If improperly employed, electronic discovery procedures can create difficulties, overwhelming investigators with truckloads of irrelevant data that may hamstring an investigation.

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BY TAN SHONG YE AND PETER VIKSNINSPerformance Improvement

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Scope of search determines search types

In general, investigative teams are usually composed of internal and external legal counsel and internal and external financial experts. Once these professionals have determined investigative objectives and identified investigative targets and subject matter, they must make a decision as to the scope of the search for relevant documents. In certain instances, a “rifle-shot” approach may be best, where investigators search for documents in the possession of one investigative target or in one area.

There is the “concentric circle” method. With this method, investigators use an iterative process, beginning with the “rifle-shot” and expanding as results are analysed, providing leads to wider areas of investigative interest.

In other cases, investigative teams may decide to adopt a “no-stone-unturned” approach. Usually, the more comprehensive searches take place in environments where a corporation is trying to prove that a certain action did not occur or that a certain problem does not exist within the corporation. We have found that the broader document search is useful when assisting legal teams in their response to regulatory agencies that may need to be convinced that exhaustive investigative procedures have been performed. These types of searches have been seen in Foreign Corrupt Practices Act (FCPA) investigations, due diligence reviews and/or in responding to bank regulators on potential compliance issues.

Documentation is key in discovery planning

After the team has determined which search type to employ in pursuit of investigative objectives, investigators will need to perform some preparatory procedures. These procedures should include the identification of document retention policies, including hard copy, microform (microfilm and microfiche), and electronic documents. Investigators should identify all possible document storage locations, including on-site and off-site archives, e-mail and other data storage servers, hard drives, desk files, diskettes and other portable electronic media, and backup tape storage locations.

Usually, computer forensic experts will need to be able to document the electronic infrastructure architecture at a corporation, and describe the electronic data storage options available to investigative targets and the relevant data retention policies. It is also important to maintain unaltered copies of all data retrieved – the expert should work with a copy of the unaltered original drive for two reasons. The first is to preserve a “chain of custody,” which is especially important in criminal cases, and demands that evidence not be altered. The second is to preserve an audit trail, in case the expert needs to defend, modify, or re-perform procedures.

Systematic data streamlining

Once the data gathering phase has ended, electronic discovery personnel and investigators should begin to “filter” data to determine what data is potentially relevant to an investigation. There are several procedures that will reduce the amount of data that investigators need to review manually. First, if data has been collected from multiple sources (live servers, backup tapes, desktop and laptop computers), the data sets can be merged and sorted to eliminate truly duplicative files.

There are a variety of ways to accomplish this “deduping” process. One popular method is to use the computer to “hash” the files and produce a mathematically unique value for their contents. This value can be compared to the values of all of the files collected in an investigation. If the hash values of two files match, the files are identical.

Second, there are certain files that are usually not modified by computer users, and are therefore generally irrelevant to an investigation. Examples are *.exe or *.dll files. However, this approach opens investigators to a risk of eliminating potentially useful files as users can use these extensions for word processing files and spread sheets, as a way to hide data.

Rather than relying on file names, more sophisticated electronic discovery experts use “hash libraries” to identify known files that can safely be eliminated from searches. Hash libraries can also be used to identify other files that may be of investigative interest, such as images of counterfeit currency or stock certificates.

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Electronic discovery experts may also employ key word searches using commercially available software to identify data of particular interest to a given investigation. In this case, the legal and financial teams identify a list of key words, avoiding common terms and computer language if at all possible. In general, the more specific a key term, the more likely search results will contain relevant information. Searching for a term like “income” or “output” in a major corporation will guarantee many irrelevant hits, causing eyestrain and long nights for investigators reviewing search results. Furthermore, investigators retain the option to perform searches within searches, winnowing down the amount of files to be reviewed manually.

“If improperly employed, electronic discovery procedures can create difficulties, overwhelming investigators with truckloads of irrelevant data that may hamstring an investigation.”

Organised review of potentially relevant files

Eventually, however, investigative team members will have to visually review search results. It is useful to identify “hot documents” and disseminate them to team members first, while organised batches of other potentially relevant files are compiled for more systematic review. This process aids the preparation for investigative interviews, as well as determining if additional key term searches are warranted.

Electronic tools have been developed to allow investigative team members to review documents online. It may also be helpful to have team members review potentially relevant documents and briefly summarise the contents of the document for review by the legal team. A spreadsheet with lists of filenames and enter descriptions such as “Correspondence dated XX/XX/XXXX between Jane

Smith and John Doe, referring to income transaction dated XX/XX/XXXX in the amount of $XXX,XXX” would be very useful in assisting the counsel and the forensic expert in determining the document’s responsiveness to discovery requests or relevance to the investigation.

Conclusion

In summary, an organised and systematic approach is vital to the proper employment of electronic discovery within investigative parameters. The marvels of technology can be employed to assist in the implementation of this approach, from preparation of data for searches to the organisation and analysis of search results. Investigators should not hesitate to use electronic discovery methods, provided they have clearly identified their objectives, the universe of data available for review, and the decision process involved in identifying and distributing relevant information to counsel. It is much easier to “second-guess” yourself and your investigative teammates in the privacy of a conference room prior to beginning searches than in a courtroom or boardroom afterwards.

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About PricewaterhouseCoopers Security andTechnology Group

PricewaterhouseCoopers is the global leader ininformation security and privacy solutions, with morehighly trained professionals in the field than any other organisation. Our multi-disciplinary teams help clients effectively identify, assess, implement and manage security and privacy solutions.

Through proven methodologies, best-of-breed tools from our Alliance Vendors and best practice services, we help organisations build and maintain a secure and high-performance business infrastructure. Our service offerings include:

• Security Strategy Services• Threat and Vulnerability Assessments• Managed Security Solutions• Enterprise Application and Control Services• Security Integration Services• Identity Management• Data Management• IT Assessment and Architecture Review• IT Requirements Definition and Analysis• Technology Selection and Implementation Support

Tan Shong Ye, Advisory Partner and Head of Security and Technology can be contacted attel • (�5) ���� ����e-mail • shong.ye.tan@sg.pwc.com

Peter Viksnins, Advisory Manager of Crisis Management can be contacted attel • (65) 6236 4021e-mail • peter.a.viksnins@sg.pwc.com

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The magic of IT

Whether you are considering an acquisition, forming a strategic alliance, developing new products, or seeking markets to grow your company, the complexity of your business will inevitably increase with time. If complexity is not properly managed beyond a certain point, it can negatively impact your bottom line. In this article, we provide some insights on the possible measures you can take to reduce the complexity of your IT systems and improve business performance.

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BY TAN SHONG YE AND THYAG VENKATESANPerformance Improvement

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If you were to list down all the issues that are on your plate at present, chances are that one of the following will surface:

a list of new products or services that you plan to introduce;

plans to introduce operations in a new market such as China or India;

chats with other players to form strategic alliances to leverage mutual synergies; or

plans to acquire another firm.

If you were to implement any of the above, you will increase the complexity faced by your organisation. This view is shared by majority of the 1,400 CEOs who participated in the recent Global CEO Survey – that these are the four issues most responsible for increasing the complexity of their businesses.

As long as you are not actively managing it, the complexity of your business will increase to a point which may negatively impact on your business, giving rise to increased costs and organisational risks, as well as reduced earnings.

We asked the CEOs participating in the survey on the current initiatives in their organisation to reduce complexity. Nearly 70% of them identify the following four areas as the main focus for reducing complexity:

information technology (IT);

organisational structure;

customer sales and services; and

financial reporting and controls.

Let us assume that you decide to focus on one of these areas as well to reduce the complexity in your business. With the possible exception of organisational structure, initiatives in all other areas will impact your IT organisation. Our recommendation is to manage the complexity in your IT organisation first. This will ensure that you have a stronger foundation to leverage upon, when you use IT to reduce business complexity in other areas.

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Measures to reduce the complexity of your IT systems

Examine your IT budget

To reduce the complexity of your IT system, we recommend that you start by examining your IT budget. You can consider your IT expense as purchasing the following four capabilities for your firm:

infrastructure services that support all business applications (e.g. your network infrastructure);

utility services necessary for your business but that may not help your firm differentiate itself (e.g. email and office);

enhancing services that will help your firm perform better than it would have without these applications, or provide your firm with some differentiating capability (e.g. sales force automation and ERP); and

frontier applications that will help your firm change the competitive landscape (e.g. Wal-Mart’s supply chain system, CISCO’s e-business portal, etc).

It will require some work to allocate all the items in your IT budget to one of these four components. While some items can be clearly allocated to one of these four components, others such as staff salaries may require more work to allocate them proportionally to these components. At the end of the exercise, your firm’s IT budget will look similar to the following sample.

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100%

0%

_______ Frontier_______ Enhancing

_______ Utility

_______ Infrastructure

IT B

udge

t (%

)

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If your IT budget has less than 10% allocated to the Enhancing and Frontier components, it is an indication that your IT organisation is tied up in providing essential day-to-day operations. If you are in a highly competitive environment requiring your firm to differentiate itself, you may need to allocate more budget to the Enhancing & Frontier components. In most firms, asking for an IT budget increase to achieve this will not make you very popular. An alternative is to check for opportunities to reduce the cost of the Utility and Infrastructure components.

“Our recommendation is to manage the complexity in your IT organisation first. This will ensure that you have a stronger foundation to leverage upon, when you use IT to reduce business complexity in other areas.”

Identify irrelevant systems and applications

The first step in trying to reduce the cost of these components is to try and identify the reason behind the costs. One way to do this is to start with an inventory of the applications and systems pertaining to these two categories.

Map the business functionality that is supported by these systems as shown in the sample Application Map (see diagram below).

Looking at the “Alignment” column will help your team identify those applications that are no longer relevant to your business. We have seen firms being stuck with systems and applications that were rolled out in the past, but are no longer relevant.

Consider a global leading technology firm with a similar problem. The firm implemented a fancy Internet portal in 2000 in its Singapore offices. This portal aimed to help the firm’s sales organisation track certain interactions with their customers and internal operations. However, the sales staff did not adopt this system as it was considered an overkill. Yet, the firm continued maintaining this system and sinking good money year after year. Does your firm support such systems?

Analysing the data in this column along with the “Cost” column will help identify systems or applications that are no longer relevant to your business needs but are consuming resources. The relevant stakeholders from business, operations, IT and senior management can review these systems and develop the plan to decommission these systems/applications.

Rationalise disparate IT systems

The next step is to try and reduce complexity arising from disparity of the systems in your IT organisation. Take a closer look at “Alignment” and “Support” columns of the map and try to identify

What business functionality does this application

provide?

Application �

Application �

Application �

Application 4

CostAlignment Support

Application Map

How much does this application cost the firm?

What are the IT systems, staff and processes behind this application?

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possible opportunities of reducing disparity. Can the functionalities being provided by some system be provided by other existing systems with similar quality? Is the original justification for maintaining disparate systems still valid? Is the cost involved significant enough to consider rationalising these systems?

“…it is worthwhile to identify the disparities in your IT organisation, understand the rationale behind the disparities and to rationalise the systems where necessary.”

An IT organisation with many disparate IT systems (say, Firm D) will suffer certain disadvantages in comparison to an IT organisation with more homogeneous systems (say, Firm H) as follows:

Firm D may require greater staff strength to develop and maintain applications to deliver the same number of functionalities as Firm H;

disparate systems may lead to difficulties related to inter-operability between systems. Firm D may end up maintaining additional applications just to interface between these systems. This represents expenditure that is not really adding value to its customers or business;

chances are that Firm D will have to maintain relationships with more vendors and paying more license and maintenance fees. There is also the opportunity cost of reduced buying power; and

sometimes, disparate applications will necessitate having to maintain more hardware and peripheral systems than necessary, thus adding to complexity.

Hence it is worthwhile to identify the disparities in your IT organisation, understand the rationale behind the disparities and to rationalise the systems where necessary.

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Reallocate resources

The above mentioned measures may reduce your expense and complexity for the Infrastructure and Utility components while freeing up staff resources. You will be able to reallocate resources to the Enhancing and Frontier components from your existing budget. While these components may help the IT organisation support your business more effectively, they may also help you better manage business complexity in other areas.

About PricewaterhouseCoopers Security andTechnology Group

PricewaterhouseCoopers is the global leader ininformation security and privacy solutions, with morehighly trained professionals in the field than any other organisation. Our multi-disciplinary teams help clients effectively identify, assess, implement and manage security and privacy solutions.

Through proven methodologies, best-of-breed tools from our Alliance Vendors and best practice services, we help organisations build and maintain a secure and high-performance business infrastructure. Our service offerings include:

• Security Strategy Services• Threat and Vulnerability Assessments• Managed Security Solutions• Enterprise Application and Control Services• Security Integration Services• Identity Management• Data Management• IT Assessment and Architecture Review• IT Requirements Definition and Analysis• Technology Selection and Implementation Support

Tan Shong Ye, Advisory Partner and Head of Security and Technology can be contacted attel • (�5) ���� ����e-mail • shong.ye.tan@sg.pwc.com

Thyag Venkatesan, Performance Improvement Manager can be contacted attel • (�5) ���� ����e-mail • thyag.venkatesan@sg.pwc.com

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Managing the risks of white collar crime

Corporate scandals drawn from today’s headlines are forcing executive management worldwide to take a closer look at the policies and procedures they have in place to control and mitigate incidents of fraud. In the aftermath of a scandal, most investigations reveal failures at the internal controls level. What this means is that the internal controls put in place were either ineffective or had been circumvented to allow the fraud to occur. The potential risks were also not detected and assessed to devise appropriate preventive measures. Faced with an ever increasing complexity of business transactions, the white-collared fraudster could well be lurking in the background and waiting for the perfect opportunity to strike. What are the potential gaps that companies should look out for in preventing fraud? And what key measures should be adopted in managing the risk of fraud?

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BY SUBRAMANIAM IYER, CHAN KHENG TEK AND PETER VIKSNINSCrisis Management

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Do a Reuters search on corporate frauds and what shows up within seconds is a trawl of headlines that see companies embattled by economic crime. Around the world, the number of corporate scandals continues to increase. In Singapore, fraud has obviously not left the corporate landscape, and is unlikely to do so in the future. However, what is worrying is that Singapore companies may have become complacent in managing the risk of fraud.

According to PwC’s 2005 Global Economic Crime Survey, only 5% of Singapore respondents believe their organisations will fall victim to fraud in the next five years. In addition, many of the Singapore companies surveyed are satisfied with their existing prevention measures and are reluctant to improve or expand their prevention measures. This type of attitude potentially places the entire organisation at risk of economic crime. With the increasing complexity of business transactions today, the fight against fraud is a constant struggle. Many organisations realise the need for fraud prevention measures only after the business has been a victim of fraud. By then, much of the monetary loss caused by the fraudulent activity would be irrecoverable. Collateral damage arising from loss in reputation and investors’ and other stakeholders’ confidence would already have set in as well.

Clearly, the importance of fraud risk management cannot be over emphasised. While it is impossible to eradicate fraud, efforts can be made to ensure that a company has the proper oversight, strong internal controls, and detection and deterrence procedures – all designed to create an environment where fraud can be mitigated. In our view, there are only two types of companies – those that have been subjected to fraud, and those that will be.

Are existing internal controls really up to mark?

The first step in managing the risk of fraud is to look at a company’s internal controls. From our experience, companies that have suffered fraud would often have had some internal control structures. Occasionally, these controls could have even been described as excellent, and comparable to industry best practices. However, while they look good on paper, they often fail in implementation, or are overridden by management. In many instances,

a thorough examination of those controls, as designed, if compared to what was really required in the actual, changing risk environment, would have revealed significant gaps through which the fraud was driven.

In the same survey mentioned above, Singapore companies appear confident of their internal controls, as 54% of those surveyed indicated that insufficient controls did not account for the economic crime they experienced (compared to 35% globally). Furthermore, 67% of Singapore survey respondents said they were either satisfied or very satisfied with internal controls in practice, as an economic crime prevention method. The obvious conundrum is this – if internal controls are in place, and people are satisfied that they work, why do frauds keep happening?

“While it is impossible to eradicate fraud, efforts can be made to ensure that a company has the proper oversight, strong internal controls, and detection and deterrence procedures – all designed to create an environment where fraud can be mitigated. In our view, there are only two types of companies – those that have been subjected to fraud, and those that will be. “

The “controls gap”

Frauds keep happening because there is a “controls gap”. Controls generally work best where risks are known, static and obvious. Unfortunately, at least from a controls perspective, motivations of human

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behaviour are frequently unknown, dynamic and obscure.

For example, one of the typical internal controls used to combat economic loss is “segregation of duties”. Usually, policies dictate that sensitive actions, such as receipt of cash, deposit preparation, and bank reconciliation be performed by different people to minimise the possibility of one person manipulating the entire process to one’s personal benefit. However, we have seen numerous cases in which the process, out of convenience, was left to a single person, usually trusted and respected within the organisation, who turned out to be the perpetrator of fraud. In such an instance, the control policy did exist, but was overridden through complacency.

We have also seen numerous examples where lack of specificity and clarity with respect to job roles, responsibilities, and reporting lines contributed to loss through fraud. In a recent investigation we conducted, one employee reported that he had no financial oversight responsibilities for the territory in which he worked, while “home office” management assured us that he did. If such responsibilities had been specified more clearly beforehand, the company might have been able to avoid the loss it incurred due to fraud.

In light of the various investigations we have conducted, we have found that it is often easier to mitigate fraud risk when companies have a “controls mindset”, rather than simply a list of policies. This is because potential gaps can and do exist between the best-designed controls and those required by the realities of the changing business environment despite the best intentions of those who created them. We have seen instances where corporations with excellent controls policies were victimised by fraud because their businesses evolved faster than their controls environment, leaving room for exploitation of control weaknesses.

In another recent investigation, a financial controller at an overseas subsidiary of a large public company faithfully filled out his Sarbanes-Oxley sub-certifications and submitted them regularly. These sub-certifications are used by most large public companies to provide some level of assurance to the ultimate signers, the CEO and CFO, that their subordinates are certain of the efficacy of

internal controls and the absence of fraud within their organisations. However, the overseas financial controller told us in an interview that these statements, which he acknowledged were false, were simply formalities, and that he did not really understand them entirely.

The company in question had good controls, on paper, at the corporate headquarters. But it had failed to communicate the importance, or even the existence, of many of those controls. As a result of not setting and communicating the “control” tone from the top, the company became a victim of economic crime and took a reputation beating in its industry.

The point we are driving at is this: a “controls mindset” is far more practical, flexible and beneficial than a set of policies that are set in stone and waiting to be ticked, but in reality do not address the issues of an organisation, or are not executed properly.

Assessing fraud risk on a regular basis

Even with the proper internal controls and the right mindset, fraud can still silently permeate into an organisation. While there is no perfect preventive measure for fraud, it can be mitigated (or detected before the damage is catastrophic) by performing fraud risk assessments and implementing a consistent fraud risk management programme. A fraud risk assessment measures traditional controls, but it focuses on areas where the company faces the greatest potential for fraud. This should not be confused with setting a materiality level for a controls assessment, as the risk for fraud may be greater in the dark corners of the company, away from the light of internal or external audit.

Many U.S. public companies have been forced to implement a form of fraud risk assessment under the Statement on Accounting Standards (SAS) 99 requirements, but companies globally can benefit from the concepts underlying those requirements. One of the real benefits of a fraud risk assessment is that it is typically performed by experienced fraud investigators, whose focus is different from internal or external auditors’. Fraud investigators have seen the effects of fraud and know the hallmarks while auditors have little experience with it.

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“It is easier to mitigate fraud risk when companies have a “controls mindset”, rather than simply a list of policies… A “controls mindset” is far more practical, flexible and beneficial than a set of policies that are set in stone and waiting to be ticked, but in reality do not address the issues of an organisation, or are not executed properly.”

However, it is unlikely that a single fraud risk assessment will provide long-term fraud risk mitigation simply because business environments change. A fraud risk management programme that includes periodic risk assessments and ongoing controls improvements will provide longer-term mitigation and keep these risks more firmly on the company’s radar.

Fraud risk management starts with the fraud triangle

Before you sink every penny into your fraud risk management programme, it is imperative to understand the fraud triangle from a non “controls gap” perspective so as to tailor a holistic programme that addresses every material risk you foresee.

An environment where fraud occurs is generally characterised by three distinct conditions, commonly known as the “Fraud Triangle”, anchored by:

�. incentive/pressure;

�. opportunity; and

�. ability to rationalise/attitudes.

Incentive/PressureOne of the reasons fraud is committed is because the perpetrators are in some form of financial difficulty or need. Some well-chronicled examples are fraudsters who need to feed their voracious gambling appetites. However, accounting fraud can also be sparked by the need to meet loan covenants, produce healthy financial forecasts or meet market expectations.

OpportunityThe fraudster needs to be in the right place at the right time to seize his opportunity. In the case of the traditional fraud, he must generally have access to an account processing function (for example, cash, payables, receivables or payroll).

Accounting fraud, however, is usually committed at a much higher level as it is more complex. The accounting records generated to cover up a fraud need to look genuine enough to hoodwink the auditors. Hence, such a form of economic crime often involves the CEO and/or CFO. Generally, all fraudsters will have a good understanding of the company’s operations, policy and procedures, have access to the company’s books and records, and be in a position to exert requisite authority over relevant controls and procedures.

Ability to rationalise/AttitudesThe often quoted justification for fraud is “I did it for the company, not for myself”. Other rationalisations have ranged from “I deserve the money for my sacrifice to the company” to “I was just testing internal control weaknesses”. It is important that such attitudes are eradicated through regular fraud training and regular reminders.

The assessor’s job

In order to perform an assessment of fraud risk, the assessor must take into account the three conditions mentioned above. This usually involves concentrating on key decision-makers, both to identify the “pressure points”, as well as to locate those with sufficient access (i.e. opportunity) to commit fraud, within an organisation.

A risk assessor also considers attitudes. Fraud investigators are typically skilled interviewers, and frequently glean information from discussions with

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junior staff. Based on our experience, important fraud evidence occasionally starts as “office gossip”, provided the interviewer is sufficiently patient and diligent to winnow out the truth. We often find that the junior staff know the “secrets” that provide a hint of the ability to rationalise, such as who was passed over for promotion and has decided to exact revenge through fraud, or who are living beyond their means or suffering financial difficulties that might motivate them to commit fraud.

In sum, it is important that companies, especially those that feel very comfortable with their controls, remain vigilant and assess their “controls gap” and fraud risk periodically. Companies that are rapidly expanding or changing their businesses need to be sensitive to the new opportunities for fraud that can be created by venturing into uncharted territory. A thorough fraud risk assessment can help identify these gaps, be they business-related or people-related, and close them before they are exploited for fraudulent purposes. Fraud-risk management must become a business process if we are to effectively battle white collar crime.

“It is important that companies, especially those that feel very comfortable with their controls, remain vigilant and assess their “controls gap” and fraud risk periodically… Fraud-risk management must become a business process if we are to effectively battle white collar crime.”

Key messages of the PwC Global Economic Crime Survey 2005

Rising economic crime poses a growing threat to companies, with nearly half of all organisations worldwide being victims of fraud in the past two years, according to the PwC Global Economic Crime Survey 2005. Globally, the number of companies reporting fraud increased from 37% to 45% since 2003, a 22% increase. Specifically, 16% of Singapore companies experienced fraud in the past two years.

Of those who reported economic crime in Singapore, 58% were subjected to asset misappropriation. One third (33%) suffered from false pretences and one third (33%) from financial misrepresentation.

The cost to companies was an average US$4 million in losses from “tangible frauds,” those of which result in an immediate and direct financial loss. This is significantly higher than the global and regional averages of US$�.� million and US$�.� million respectively.

The effect of economic crime went beyond financial loss. Sixty-seven percent (67%) of Singapore organisations suffered damage to reputation and brand; 33% suffered an impairment of relations with other businesses; 100% suffered a “decline in working morale or loss of motivation”.

All fraud perpetrators were male, with 64% between the age of 31 and 40. Sixty-four percent (64%) were employed by the defrauded company, with 72% either in senior or middle management.

Only 5% of Singapore respondents believe they are at risk of economic crime in the next five years.

More than 60% of Singapore respondents were satisfied with existing prevention measures and had a low willingness to increase crime prevention in the next two years.

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About PricewaterhouseCoopers Crisis Management

PricewaterhouseCoopers Crisis Management assists organisations in responding to, mitigating and controlling a range of predicaments from simple problems to complex crises. Our Business Recovery services involves a range of restructuring, rescue and turnaround assistance for companies or stakeholders concerned about the ability to meet changing market demands, and when all theseeffects have failed, we help liquidate these companies.

As for Dispute Analysis and Investigations services, we provide forensic expertise to organisations (and their lawyers) that are facing issues with financial and legal implications, to help them make intelligent, informed decisions whether in the boardroom or courtroom.

Subramaniam Iyer, Advisory Partner and Head of Crisis Management can be contacted attel • (65) 6236 3058e-mail • subramaniam.iyer@sg.pwc.com

Chan Kheng Tek, Advisory Partner can be contacted attel • (�5) ���� ���8e-mail • kheng.tek.chan@sg.pwc.com

Peter Viksnins, Advisory Manager can be contacted attel • (65) 6236 4021e-mail • peter.a.viksnins@sg.pwc.com

PwC Edge �

Managing Editor Kyle Lee ContributorsGautam BanerjeeKeith StephensonPatrick JourdainKaren LoonNicole FungSunil AgarwalAmitava GuharoyNg Jiak SeeMark JansenMario FerraroTan Shong YePeter ViksninsThyag VenkatesanSubramaniam IyerChan Kheng Tek

Design & Layout Yvonne YanCirculation, comments & suggestions Maimunah Asmawi at (65) 62�6 �95� maimunah.asmawi@sg.pwc.comPrinter Image Office Systems & Supplies Pte Ltd MICA(P)���/�0/2005Address 8 Cross Street #�7-00 PWC Building Singapore 048424

This publication aims to provide clients with an update on business trends. No liability can be accepted for any action taken as a result of reading the notes without prior consultation with regard to all relevant factors.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than ��0,000 people in �48 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.

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