The Eurozone Crises and its Scenarios. What does this mean to your business?

Eurozone (Photo credit: slolee)

The chances of Greece departing the Eurozone are rising sharply so what chances are there that Grece will remain in the Euro as a compromise? Spanish banks are still holding an estimated Euro 600bn of mortgages at full value on their books so Spain will be the next big test for Europe. Spanish and other Eurozone banks are going to require hundreds of billions of Euro recapitalisation in the next 12 months.

On January 2012, Congressional Research Services looked into possible scenarios regarding the Eurozone and their impact on US economy. Latest indicators from the US are mixed and patchy but this economy is out-performing the Eurozone. CEEMEA’s central outlook remains 3-5 years of sub-par economic growth, continuous Eurozone crises and tough global business conditions. PwC also provided four scenarios, including one where Greece would exit the Eurozone.

What does this mean to your business?

The risks for a worse outlook have intensified since March/April and Eurozone restructuring has the potential to create significant change and disruption to the operations of many organisations. Global companies (both headquartered in the Eurozone and ones with extensive links with it) will be impacted across their whole value chain.

There will be:

• Treasury changes (e.g. liquidity and financing, security over banking arrangements);
• Operational changes (e.g. documentation, pricing arrangements, customer payment mechanisms);
• IT changes (e.g. systems configuration, payment and billing systems changes, master data, transaction data migration, package applications and support arrangements);
• Planning, benchmarking and forecasting (e.g. contingencies, restatement of historical data, costs to implement the Eurozone restructuring);
• Challenges in communications to shareholders, stakeholders, customers and suppliers regarding organisational impact and arrangements to manage the impact.

How one can cope with all these challenges? Here are some suggestions:

• Evaluate your supply chain risk, particularly where raw materials become expensive for suppliers no longer in the euro-zone;
• Develope business cases / risk analysis to take advantage of potential new sourcing opportunities and provide delivery support to realise these benefits;
• Run rapid diagnostic tools that can be deployed simultaneously across Finance (EPM Blueprint, Finance Effectiveness);
• The break-up of the Eurozone may even give rise to opportunities from a tax perspective: identify them and work to build them into existing contingency plans should the right commercial fact patterns arise in the future.

Other suggestions?

Where are the biggest opportunities for business and government to work together?

As companies globalise, they face a growing body of diverse and complex regulations. The global regulatory environment is changing faster than companies can absorb. This is why CEOs consistently report overregulation as a threat to business growth. And it’s not getting any easier; according to the CEO Survey, only 31% of CEOs believe that regulations will be harmonised among governments. However, the successes of the private and public sectors are increasingly intertwined. Effective partnership models are emerging around the world, ranging from improved communication and better coordination to true collaboration, depending on the market.

71% of CEOs plan to increase investment in an area they also believe is one of the government’s top-three priorities: developing a skilled workforce. And increasingly, governments are making this a top priority. Countries as well as companies are competing for talent, and some governments are investing a lot to make their workforces more competitive. For example, the Singapore government partnered with a local university to launch a talent development programme, bringing together professional services firms, universities and business schools.

Workforce skilling is just one area of focus. Intellectual property, health care, energy, infrastructure, immigration, tax, financial sector convergence… these are major areas in which leaders from both public and private sector organisations say they can work together more effectively to achieve common goals.

Guide on transfer pricing requirements around the world

International Transfer Pricing 2012, now in its thirteenth edition, is an easy-to-use reference guide covering a range of transfer pricing issues in nearly 70 countries worldwide. It explains why it is vital for every company to have a coherent transfer pricing policy which is responsive to the rapidly changing markets in which they operate. The book not only shows why sound transfer pricing policies should be developed, but also why such policies need to be re-evaluated regularly. It offers practical advice on a subject where the right amount of effort can produce huge benefits in the form of a competitive and sustainable tax rate, and leave the company well positioned to defend against aggressive tax audits.

The book is also available online as PDF summary for each of the 70 countries at http://www.pwc.com/internationaltp?WT.mc_id=email_2-12_GOU-ITP.2012

Profitability risks after the acquisition of informal players

McKinsey has a nice example from Brazil, but not only – Russia also has similar examples – where formal supermarkets have found that they can’t profitably acquire informal players, because of the unearned cost advantage. Although supermarkets could increase the productivity of the acquired businesses, their net margin goes to zero once tax obligations are paid:

They also show that in Turkey dairy processors enjoy informality-related cost savings of almost 20%, so these companies survive despite their low pro-ductivity. Informal software companies in India appropriate innovations and copyrights without paying for them. If software piracy rates fell to US levels, the industry’s productivity and profitability would soar by nearly 90%.

Are tax amnesties a solution during crisis?

Tax (Photo credit: 401K)

Many governments in emerging markets mistakenly believe that they can reduce the level of informality by forgiving past tax debts of companies that come forward. Turkey, for instance, has had ten tax amnesties since 1963—one nearly every four years—and five social-security amnesties since 1983. Their provisions included the right to base the payment of past taxes on historical values of Turkey’s currency, the lira. Given the country’s high inflation rates, this approach greatly reduces the amount businesses have to pay. A McKinsey study shows that governments make ongoing enforcement more difficult with such measures, since companies wait for the next amnesty before coming clean.

In developed countries, the penalties are usually two to three times the amount of the evaded taxes, coupled with imprisonment if the evasion is persistent or involves more than a set amount. Tax evaders in emerging markets often get by with a slap on the wrist; in Turkey, for instance, the fine for VAT evasion is less than $20.

Probably corruption has also something to do with how evasion is considered in emerging economies. What do you think?

World economy: what’s to be expected?

Image by Wim Hazenhoek. via Flickr

The world’s largest economy, the US, is still spluttering along, the eurozone is trying to avert a sovereign debt crisis and Japan has lapsed back into recession after a devastating natural disaster.

The slowdown in some key developed markets and the tightening of monetary policy in emerging markets has impacted negatively on global trade and industrial production volumes. In a recent study, PwC expects this is evidence of a temporary blip and not a permanent dip – volumes will recover, but with an ever increasing focus on emerging markets as customers and not just producers.

Tensions over currencies have been off the front pages in the first half of 2011, but there is potential for another flare up in the near term, as the underlying causes of the contention have yet to be resolved.

The extent of the economic damage caused by the Japanese earthquake took some time to become apparent. The scale of the disruption caused to the supply chains of manufacturing firms was larger than expected (particularly in the automotive sector), which plunged the economy back into recession in the first quarter of 2011.

The US economy has also experienced a slowdown in recent months, with the economy expanding well below trend in Q1 2011, and there has been soft data emerging from the US labour and housing markets and the manufacturing sector since the start of the year.

The main body of the reconstruction phase of the response to the recent Japanese earthquake will help boost world GDP growth to 3.6% in 2012. The general upswing in growth in 2012 is expected to be driven by improved growth performance in some of the G7 economies such as Japan, US, UK, and the Central and Eastern European countries like Russia and Poland. These countries are expected to be boosted by increased global trade, recovering consumer spending and lower levels of uncertainty surrounding global economic prospects.

You can see the full Global Economy Brief report here.

Competitive intelligence: a real value or a buzzword?

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“What competitive intelligence? We are in the middle of a crizes, we need to survive!” That may be the statement of many executives today, and it seems that competitive advantage is nothing but an elusive goal. The results of a recent McKinsey survey suggest one reason: just 53% of executives characterize their companies’ strategies as emphasizing the creation of relative advantage over competitors; the rest say their strategies are better described as matching industry best practices and delivering operational imperatives. In other words – this is nothing but a buzzword for stakeholders to make them feel safe.

What I even find more interesting is that only 33% say their companies’ strategies rest on novel data and insights not available to competitors, rather than widely available data. We are more or less used to see companies (especially the big ones) as having some “CIA” teams in charge with competitive intelligence but it seems that this is only true in some of them. What we don’t know from McKinsey’s survey is how many of those 33% are large multinationals and how many are not.

However, there may be one likely explanation of this fact that wouldn’t be affected by the size of the company or the existence of such intelligence units: the widespread availability of information and adoption of sophisticated strategy frameworks creates an impression that “everyone knows what we know and is probably analyzing the data in the same ways we are.” Yet if strategists question their ability to see something that no one else does, the question that raises is how reach are the powerful insight that are most likely to differentiate them from competitors?

Another astonishing result: only 12% of surveyed executives place novel insights in strategy among the top three influencers of financial performance. The financial crisis of 2008 and the recession that followed revealed weaknesses in many strategies and forced many companies to confront choices and trade-offs they put off in boom years. Not surprisingly, 56% report that their companies are making strategic decisions more frequently than before. This increased speed may make it difficult for some companies to analyze each decision in detail. However, a shift toward shorter planning cycles only increases the need to focus on the timeless aspects of strategy that can drive competitive advantage.

And this brings us back to our main question: is competitive intelligence a buzzword or does it bring a genuine value to the company and its financial performance?

52% of executives said their company will increase security spending over the next year

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According to the 2011 Global State of Information Security Survey (conducted by PricewaterhouseCoopers in conjunction with CIO and CSO magazines), out of 12,800 executives from 135 countries, 52% said their company will increase security spending over the next year. Yet many executives said their company’s business partners (52%) and suppliers (50%) have been weakened by economic conditions, a substantial increase from 43% and 42%, respectively, in 2009.

Security executives said their companies also have been impacted by spending restraints, often resulting in the stalling or degradation of some fundamental security capabilities such as conducting personnel background checks and the use of vulnerability scanning tools. Additionally, 47% of respondents said their organization had reduced security-related funding for capital expenditures and 46% said their company had reduced security-related operating expenditures.

The top factors driving information security spending this year are economic conditions (reported by 49% of respondents), business continuity and disaster recovery (40%), company reputation (35%), internal policy compliance (34%) and regulatory compliance (33%).

The only spending driver to show substantial increases this year is “client requirement,” the study found. Client requirement moved up from the bottom of the list in 2007 to near parity with the top-ranking legal/regulatory environment. The rise of client requirement demonstrates the continuing strategic importance and integration of the security department to the business.

Not surprisingly, due to the cost-cutting initiatives taken by most global actors, the 2011 Global State of Information Security Survey also found a significant shift in the ongoing evolution of the CISO’s reporting channel, which has moved away from the CIO in favor of the company’s senior business decision-makers such as the CFO and the CEO.

Risks of social networking and a new role for insurance

The 2011 Global State of Information Security Survey revealed that many companies are unprepared to deal with the potential risks of social networking and other Web 2.0 applications: 60% of respondents said their organization has yet to implement security technologies supporting Web 2.0 exchanges such as social networks, blogs or wikis, according to the survey.

Additionally, 77% of respondents said their organization has not established security policies that address the use of social networks or Web 2.0 technologies. This lack of action on social networking and Web 2.0 technologies can expose organizations to a variety of risks, including loss or leakage of information, damage to the company’s reputation, illegal downloading of pirated material, and identity theft.

The survey also found that many companies are using an additional tool (insurance) to protect the organization from theft or misuse of assets such as sensitive data or customer records: 46% of respondents said their organization has an insurance policy. Additionally, 17% of respondents said their company has made a claim and 13% said their company has collected on a claim.

In Europe, the focus on information security is far more muted, the survey found. Europe now trails other regions in maturity across many security capabilities. Like North America, Europe continues to suffer poor visibility into security events and, as a result, may be unaware of the true impact of events on the business. While 68% of European respondents say their organizations place a high level of importance on protecting sensitive customer information, the responses from other global regions are higher, including Asia (80%), North America (80%), and South America (76%).

Industry specific highlights and further regional information are available here

Why confronting corruption makes sense

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Management and staff become distracted and demoralised as they investigate what went wrong and respond to legal, regulatory and enforcement actions. In some recent cases, costs have soared into the billions, significantly affecting earnings.

In addition to the external fallout, as customers and partners distance themselves from a troubled company, there are daunting internal costs. Failing to actively prevent corruption allows employees and third parties to rationalize stealing from the company. Companies with anti-corruption programmes that enable bribe payments are also highly susceptible to theft and financial statement manipulation.

Companies that do not take steps to assess and manage corruption risk stand a greater chance of being caught in the anti-corruption net. With the passing of the Foreign Corrupt Practices Act (FCPA) in 1977, the US took the early initiative in enforcement. Under the act, any company listed on a US exchange or with significant operations in the US is subject to the rules and regulations of the US Department of Justice, regardless of where corruption occurs geographically. More recently, enforcement has become a more global affair, with the US working closely with authorities in other countries. In the last years, at least 20 of the 37 government signatories to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials began one or more investigations into corruption, up from 12 in 2006.

Looked at logically, bribes do not make good business sense. They may not alter the situation in any way and there is no contract to enforce if the services paid for are not rendered. Having paid once, a company also opens the door to future and perhaps larger demands and becomes susceptible to blackmail. “If you pay someone $1,000 for a service, do you think the next time they will only ask for $1,000?” says Albert Wong, head of policy and external relations at Shell International. He tells his staff to avoid this slippery slope by refusing the first demand.

While companies cannot control how governments and competitors behave, there are tools available to help level the playing field. One example is the so-called “integrity pact,” where all parties sign an enforceable agreement not to engage in corruption. Our survey highlights the importance of getting everyone to play by the same rules. Almost 45% of respondents say they currently avoid certain markets or opportunities because of corruption risks and almost 40% say they have lost bids because of corrupt officials.

A global PwC report shows that:

• Almost 80% of respondents say their company has some form of programme in place to prevent and detect corruption, but only 22% are very confident that it identifies and mitigates the risk of corruption.
• Slightly less than half say their programme is clearly communicated and enforced, while 28% say there are problems with either the communication or the enforcement of their anti-corruption programme.
• Rigorous risk assessment, a crucial step in programme design, is overlooked by more than half of those surveyed, and only 25% perform proactive risk assessments or monitoring.
• Only 40% of respondents believe their current controls are effective at identifying high-risk business partners or suspect disbursements.

The potential of corruption may always be present; however, companies can learn from others and set up a robust and proactive anti-corruption programme to mitigate their risk.

You may find more about confronting corruption here.

Restructuring checklist #3

Retaining key talent

• Can you identify your key talent today?
• Are you prepared to put a retention payment system in place to ensure that key talent does not leave your organisation?
• What will be the effect of such a programme on employees who are not covered by it? Are you ready to manage the consequences?

Reward effectiveness

• Is this the time to review remuneration structures and to consider increasing the variable and/or deferred element?
• Have salary sacrifice cost reduction opportunities been fully explored?
• Can you use this opportunity to maximise the financial efficiency of current and future incentive arrangements?

Flexible working

• Should you review flexible working policies to drive down cost and extend the concept for specific areas of the business?
• Would it be appropriate to open up part-time working opportunities to employees who might not qualify under the existing policy arrangements?
• Is this the time to introduce policies for unpaid leave, career breaks and sabbaticals?

HR effectiveness

• Do you need to review effectiveness of your HR function, its restructuring capabilities and future role?
• Do your HR business partners have a clear understanding of the commercial realities facing your business?

You may also want to read:
- 10 guiding questions to help restructuring initiatives
- Restructuring checklist #1
- Restructuring checklist #2