Building negotiation skills

Appearing On In The Black Digital site, October 2019

 

Everyday, we act as negotiators. But we seldom think about the skills required or the processes we must follow to negotiate successfully, according to Chas Savage, CEO of Ethos CRS, a company that specialises in customised capability training in communications, regulation, policy, and leadership. In his CPA Congress address, ‘Mastering Negotiation Skills’, he examines the requirements of successful negotiations, especially in business.
“The negotiating process is about how you can create and increase value,” he says. “Ideally, it involves a conclusion that involves everyone walking away satisfied.”
There are two types of negotiations. The first is transactional. One side gains while the other side loses, at least in the short term. The zero-sum nature involved means that this type of negotiation is not well-suited if there has to be a long-term relationship between the parties.
The other type, collaborative negotiations, is one in which both sides maximise their gains and minimise their losses, because they work to realise common objectives.
negotiation“It is important that you don’t mistake one for the other,” says Savage. “Any negotiation requires clarity of mind – and a lot of homework. You must understand what the other side wants, both the practical elements and the psychological needs. Yes, negotiation is a form of manipulation, but that does not mean that it cannot work out to the benefit of both parties.”
As an exercise, Savage asked the audience to put themselves in the position of the North Korean negotiators dealing with the US team and President Donald Trump, trying to reach an agreement over nuclear weapons. This helped to understand how to assess the needs of those on the other side of the table.

Planning needed

Much of the hard thinking has to be done even before negotiations begin. What is your real objective? What are you willing to do to achieve it? What do you think the other side is trying to achieve, and what will they give up? What is the anticipated outcome, your minimum acceptable outcome, and your ideal outcome? Is no deal better than a bad deal?
A critical part of this is knowing what you will do if negotiations fail. This is called the Best Alternative To a Negotiated Agreement, or BATNA. The key is to establish and expand the areas of agreement. This is the Zone of Possible Agreement, or ZOPA. The larger the ZOPA the more the two sides will seek to collaborate.
“Business negotiations are generally done by teams,” Savage notes. “And everyone in the team must know what their role is and who is leading the team. The last thing you want is your own people contradicting each other or not having required information to hand. The good cop/bad cop tactic, where one member of the team makes extreme demands and another one offers a more moderate position, can be useful, but everyone has to know exactly what they are doing.”
Depending on the nature of the negotiations, it can be very useful to conduct a test run, with an ‘opposing’ team. Gaming can reveal potential problems and weaknesses, which can be addressed before the real thing starts.

Tactics and trust

Good preparation makes for good negotiations but across-the-table tactics are also crucial. A solid start is to cite standards, precedents, and the benefits of an agreement. This will provide a framework for discussion. From here, it should be possible to divide the negotiations into small steps, to minimise risks and misunderstandings. However, there has be a clear focus on the overall objective, and disputes on unrelated issues should be closed down immediately.
“There needs to be an element of trust,” says Savage. “That doesn’t mean you have to like each other. It just means that you have to know the other side can and will deliver on their commitments, and they know that you can and will deliver on yours.”
A useful idea is to draft an agreement document as soon as possible in the process, to give discussions a focal point. But ensure that there is only one copy in circulation at a time. The two sides having different documents is a recipe for conflict, and an undermining of trust. Do not, Savage emphasises, allow the other side to draft the document.
“In the closing stage, look for things like fading counter-arguments, body language suggesting fatigue, and converging positions,” he says. “The end is then in sight. Once there is an agreement, follow up promptly on the commitments you have made.”
Savage makes the point that the negotiation process can be intellectually and physically demanding. Complex negotiations require a high level of concentration over an extended period.
“Make sure you are healthy and relaxed,” Savage suggests. “There should be planned time and resources for rest and recovery. It’s hard work, after all.”

AAT minefield

Appearing in In The Black magazine, November 2019

 

Registered tax agents should think carefully before representing a client on a tax dispute at the Administrative Appeals Tribunal, as many of the rules are unclear and the issues are poorly-defined. It is entirely legal for accountants to appear for a client at the AAT – in fact, the Tax Agent Services Act expressly allows registered tax agents to do so – but that they can does not automatically mean that they should.
According to figures provided by the AAT in its submission to the review of the Tax Practitioners Board, last year about 30 per cent of people who took a tax dispute to the AAT were represented by their accountant/tax agent, or 198 of the 316 cases in the Taxation and Commercial Division. In the other cases, the appellant was represented by a lawyer.
The AAT is not a court but an administrative body that reviews specific decisions of other government agencies, including the Australian Tax Office. It considers whether, on the facts presented to it, the correct or preferable decision was made in respect of the applicable law, rules and government procedures. Its own decisions are judicially reviewable.
Despite the administrative status of the AAT, many issues put before it involve questions of statutory interpretation and close reading of rules. This raises a critical question for accountants: where is the line that separates appropriate tax advice to a client from unqualified legal advice?
Melbourne barrister and part-time Deputy President of the AAT, Frank O’Loughin QC, notes that when tax agents present cases in the AAT on behalf of their clients they are involved in work that includes both legal and factual elements.
“Applying taxation laws to the facts of a taxpayer’s case is always legal work,” he says. “Registered tax agents are permitted to represent their clients in undertaking this work. Different aspects of Australia’s tax system call for deployment of different types of skill and knowledge. Some aspects of the work in the AAT lend themselves to the skills of accountants, others lend themselves to the skills of lawyers. Other aspects are common to both.”

Safe harbour

The TASA provides a ‘safe harbour’ for registered tax agents against the prohibition on legal advice. This is a provision in a law or regulation that affords protection from liability or penalty under specific situations, or if certain conditions are met. The safe harbour concept is used in several areas of law, including taxation.
Stormy harbourA difficulty is that it applies only when an accountant is doing the ordinary, ‘bread and butter’ work of an accountant, including advising on general Commonwealth tax issues.
Chris Wallis, a barrister who has published a number of articles on the subject, believes that many accountants do not really understand the limits of the ‘legal advice’ safe harbour. He also questions a key decision known as the Felman Bubble.
The Felman Bubble concept is derived from the decision in Felman v Law Institute of Victoria [1998] 4 VR 324; (1997) 142 FLR 383, where Kenny J said [at pp.383-4]
… a tax agent who gives advice, as to income tax matters … does not give what is ordinarily understood as legal advice …

“Accountants have long believed that they are entitled to give advice, including legal advice, about the operation of the tax laws more generally,” he says. “But there is no legal basis for this belief, even if the advice is provided in relation to the preparation and lodging of a tax return.”
Wallis cautions that the Felman Bubble does not extend to work in relation to state taxes or superannuation (other than in the context of income tax).
He sees no real difference between ‘engaging in legal practice’ and providing legal advice, a distinction sometime made in the literature and legislation. He believes that accountants’ training simply does not extend to commercial law, legal personality, equity or rules of evidence.

Issues with TASA

John Morgan, a Melbourne barrister highly experienced in the tax field, likewise sees the weakness of the Felman decision, and argues that a registered tax agent must know not only the tax law but the general law as well, and so must have comparable skills to a legal professional.
“Tax agents are allowed to give ‘advice’ about ’taxation laws’ because it is a ‘tax agent service’ under s90-5(1)(a)(ii) of TASA 2009, and a Federal law overrides the State and Territory laws that prohibit unqualified legal practice,” he says. “Whether this protects non-lawyers from any advice they give that culminates in a tax liability has not apparently been not tested. It may be that a Court would ‘read down’ the TASA protection, in cases where the ‘public interest’ was not served, because of the complexity of the general law.”
There is also the possibility that the TASA may be unconstitutional in attempting to give non-lawyers the right to ‘give advice’ on general law matters, or on ‘liabilities under taxation laws’, at all.
“In any event, registered agents must comply with the TASA requirements, including the Code of Conduct,” Morgan notes. “This includes an obligation to do this, amongst other things, ‘competently’. Often this will be difficult without legal training.”
Morgan also points out that providing legal documents to a client is fairly clearly outside what tax agents are permitted to do. A breach of the Code of Conduct can lead to disciplinary action by the TPB, resulting in suspension or cancellation of registration.
There is also legislation in each state and territory that prohibits an unqualified, uncertified person from engaging in legal practice, and substantial penalties are involved, with similar carve-out arrangements impacting accountants.
And just because a matter relates to tax does not mean that it qualifies for the carve-out: it can depend on the particular circumstances of a case.

Serving the client

Another issue that Wallis raises is the potential for accountants to unwittingly engage in legal practice when they choose to represent a client at the AAT. He believes that many accountants who go to the AAT do not understand the breadth of the issues that can arise and whether the Felman Bubble, while it applies to the representation in the hearing, can be stretched to the research and other work required to prepare for the hearing.
“An accountant before the AAT is almost always appearing to defend a client in relation to work undertaken by the accountant,” he says. “If the accountant submits that the client had provided everything that was needed the accountant has implicitly advised on evidence rather than tax. Similarly, if the accountant concludes that the client did not provide everything that was needed they are advising on evidence.”
He also takes the view that it might be appropriate to require registered tax practitioners to undertake relevant continuing professional development in this area to qualify for the safe harbour provisions.
John Morgan emphasises that in the objection process there is a need to inform the client of the available options, including independent advice, representation by a lawyer and the choice between the AAT and the Federal Court.
“Strange as it sounds, there have been accountants who go to the AAT without their client’s knowledge,” he says. “Perhaps they are trying to defend a mistake they have made. In any case, it is hard to see that it meets the standards of the Code of Conduct.”
Chris Wallis emphasises that the protective strength of the Felman Bubble, which applies in Victoria but not necessarily in other states, is untested.
“From a tax practitioner’s point of view, a prohibition without a bright line test is a disaster waiting to happen,” he says. “The lesson is: if you go to the AAT, be very sure about the scope of the task you are undertaking and why you are doing it.”

Realistic assessment

Accountants who appear at the AAT should be aware of the indemnity issues, although Director of Fenton Green, CPAA’s Insurance Broking partner notes that not all PI Policies provide complying cover for accountants. “The Professional Indemnity policy coverage needs to provide cover for CPA By Laws as well as all usual professional activities an accountant would undertake. That would include going to the AAT for a review.”
He goes on to suggest that accountants representing their clients at the AAT should keep clear records relating to verbal advice and always reiterate verbal advice in writing. “Do not stray from providing factual and verifiable accounting advice for taxation and bankruptcy,” he says. “Peripheral and personal advice should be highly avoided.”
Deliberately committing an offence invalidates the policy through a ‘fraud and dishonesty’ exclusion. There is a ‘write back’ provision for innocent partners in a practice.
Fenton advises that taking a case to the AAT can involve significant time and effort.
“This decision really needs to be made jointly through consultation between accountant and client,” he says. “Part of that discussion should be to identify the possible benefits as well the chances of success. You have to be realistic in your assessment.”

Checking the checkers

Appearing in In The Black magazine, October 2019

Auditing faces an uncertain future

Independent auditing has long been one of the foundation-stones of business but the profession, in Australia and globally, is facing unprecedented challenges – as well as emerging opportunities. No-one can say with certainty where the path is leading but there is a sense that auditing as a profession and a process is under pressure.

Much of the current concern has been driven by events in the UK, after a series of business collapses, most notably the BHS and Carillion failures, following sign-off of the accounts by one of the Big Four audit firms – PwC, KPMG, EY and Deloitte. Regulators are now pushing the firms to clearly separate the audit and non-audit services they provide to clients, even to the extent of splitting off a separate company.

Speaking recently to a UK parliamentary committee, the heads of PwC, KPMG, and EY indicated that they would cease providing non-audit work for large audit clients within a year. PwC UK has been the first to make serious moves in this area, announcing in June that it will have one business to focus on external audits and another to deal with internal audits and issues such as cyber-security and technology risk. It also plans to recruit more than 500 auditors, introduce new training and technology initiatives, and increase the number of specialists in its audit quality control section. This will cost about £30 million a year, which is a good indication of the seriousness of the issues.

“Globally, the UK is leading efforts to improve Auditing 2audit quality and avoid conflicts of interest,” says Professor Ian Gow, Director of the Melbourne Centre for Corporate Governance and Regulation at the University of Melbourne, and co-author of the book The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly*. “But in South Africa, India, and Ukraine, there have also been cases of Big Four firms being excluded from audit work due to sloppy practices.”

This raises the question of how auditing is faring in Australia, especially since the Big Four handle audits for over 90 per cent of the companies listed on the ASX. It appears that, generally, the situation does not directly compare with the UK. A survey recently released by the Auditing and Assurance Standards Board, Audit Quality in Australia: The Perspectives of Professional Investors, found that 93 per cent of respondents indicated that they saw audit quality as “average” or “above average”.

Related to this, a Financial Reporting Council survey, Audit Quality in Australia: The Perspectives of Audit Committee Chairs, revealed a high degree of satisfaction with the quality of external auditing, with 92 per cent of respondents rating them “above average” or “excellent”.

“We were very pleased to see these results but we can never be complacent,” says Matt Graham, Managing Partner, PwC Assurance. “For some time we have felt that the audit quality debate in Australia could be broader, more balanced and aided by increased transparency. This is why we released the country’s first-ever balanced scorecard on audit quality recently. That scorecard showed audit inspection results along with other key measures of audit quality such as internal inspection findings, restatement rates and adjustments to financial statements. We plan to release data like this on an annual basis.”

The corporate regulator supports greater transparency and is considering whether to publish individual firm inspection results in its next public report. ASIC is also continuing work on possible additional audit quality measures to complement inspection findings. Doug Niven, ASIC’s senior executive leader, financial reporting and audit, notes that ASIC’s audit inspection report for the 18 months to 30 June 2018 found that in 24 per cent of the key audit areas that were reviewed auditors did not obtain reasonable assurance that the financial report was free of material misstatement. This is slightly better than the figure of 25 per cent for the 18-month period ended 31 December 2016.

“Sustainable improvement requires a focus on culture and talent in firms,” says Niven. “Our inspection findings suggest that further work and, in some cases, new or revised strategies are needed.”

But he is wary about splitting large accounting firms into audit-only firms, believing that it could adversely affect audit quality.

Graham notes that PwC in Australia has no plans to hive off its audit business (and none of the other big audit firms have signalled intentions to do so). He sees the business and regulatory environments in the UK and Australia as very different, and believes that the discussion in Australia should be more broadly aimed at audit quality, independence, conflicts of interest, and the needs of businesses and their shareholders.

Professor Gow is pleased to see moves like PwC’s scorecard although he wonders where it will lead. He notes that all of the Big Four firms have recently started to reveal new information. “Clearly the incentives to reveal more are stronger if your numbers look better,” he says. “I suspect that this wave of disclosure will prompt some tweaks to the inspection process to make the numbers more meaningful. An issue with the reported numbers is that audits are selected for inspection because they are perceived to be ‘risky’ audits, which makes it difficult to draw general conclusions. But overall it seems to be a healthy conversation to have.”

Focus shift

Discussions on ways to improve audit quality are important but there is an even more crucial question: in the current environment, what is auditing actually for? In an era when Big Data allows for real-time tracking of all of a company’s transactions, does the idea of checking and re-checking historical financial data make sense anymore?

Auditing 1Professional investors and audit committee chairs may be reasonably satisfied with the work of auditors but there are other stakeholders in the mix as well. There is certainly a bloc of investors who are concerned with a company’s non-financial performance as well as the traditional metrics.

While Big Data has the potential to take over many of the mechanical, repetitive tasks associated with auditing it is likely to push the profession into non-financial fields and towards predictions and business analysis.

Matt Graham says: “The industry has to evolve the audit in line with market demands, as well as engaging more effectively with stakeholders along the way. For example, should an audit include new levels of coverage such as fraud, going concern and cybersecurity? Could it provide assurance over non-financial measures such as culture, sustainability and the control environment? Should it look forward as well as back and provide comfort over forecast information?”

In this context it might be noted that the Australian Accounting Standards Board and the Auditing and Assurance Standards Board recently released a Practice Statement, Climate-related and Other Emerging Risks Disclosures: Assessing Financial Statement Materiality. The Practice Statement is not mandatory but it points auditing towards an integration of financial and non-financial data.

A key problem with this is that auditing financial statements is largely about providing assurance that the statements were prepared in accordance with accounting standards. When auditing begins to look at issues such as the environment, fraud and cyber-security there are no widely-accepted standards that can be used to assess and check performance, and even if there were it is not clear that understanding accounting standards provides a basis of relevant expertise.

“The Big Four firms are definitely trying to claim a future stake on auditing things such as sustainability, environmental risks, and even privacy,” says Professor Gow. “But skills-wise it is a real stretch. Auditors still graduate with accounting degrees that focus on standards and the like. The auditor of the future is likely to be someone who is comfortable with advanced data analytics.”

Doug Niven counsels caution about moving too quickly into the non-financial field. “Investors and other users of annual reports may benefit from independent assurance over non-financial information in an operating and financial review, integrated reporting, sustainability reporting and climate change reporting,” he says. “But at present, there are no detailed reporting frameworks to audit against and many of those promoting innovation by companies in non-financial reporting suggest that independent assurance is premature.”

Competition pressure

Another issue relates to competitive pressures. Professor Gow points to his current research showing that audit fees generally increase slightly over time, and then often decline markedly when a new auditor is appointed. This suggests that some audit appointments are based on price.

“This could be a concern,” he says. “I suspect that the Big Four would rather compete on quality. The problem is that audit quality is very difficult to measure, so it is hard to prove that you are adding sufficient value to justify the costs.”

There is also the possibility that competition may come from smaller, more nimble firms that can offer quasi-auditing services in non-financial areas.

So what might the future of auditing look like in Australia? In short, while financial review is likely to remain at the essential core of auditing practice it might cease to be the reliable source of revenue that it has long been for the large firms. Regulators and stakeholders are likely to demand greater division between audit and non-audit functions, although pressure for complete separation is unlikely. Auditing firms will have to go further into non-financial issues, requiring a significant change in corporate culture. At the same time, they will face increasing competition from new entrants, especially in fields such as the environment.

“One is always hesitant when trying to predict the future, as so many past predictions turned out to be wrong,” says Professor Gow. “But one thing is clear: it’s going to be a very different profession from what it is now.”

 

* The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly by Stuart Kells and Ian Gow (LaTrobe University Press, 2018). This book won the 2018 Ashurst Australian Business Literature Prize. A copy of the book is available at the CPA Library.

https://www.auasb.gov.au/admin/file/content102/c3/InvestorSurveyReport.pdf [Audit Quality in Australia: The Perspectives of Professional Investors]

http://www.frc.gov.au/documents/publication/audit-quality-in-australia-the-perspectives-of-audit-committee-chairs   [Audit Quality in Australia: The Perspectives of Audit Committee Chairs]

https://download.asic.gov.au/media/4990650/rep607-published-24-january-2019.pdf [ASIC Audit inspection program report for 2017-18]

https://download.asic.gov.au/media/1338902/info184-published-19-August-2013.pdf [ASIC Information Sheet – Audit transparency reports]

https://www.auasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_May2019.pdf [Australian Accounting Standards Board and Auditing and Assurance Standards Board Practice Statement]

Teams provide energy boost

Appearing on In The Black Digital website, September 2019

Red Bull carves an unorthodox path

Many companies are not gaining the efficiencies and productivity levels they hope for from their teams, because their focus and resources are not invested in the right places. Even the most advanced tools and systems tend to fail if the underlying processes do not work as designed; and even the best processes will fail if people responsible for them do not perform their work with integrity.

To avoid this common pitfall, energy drink company Red Bull has been taking inspiration from the work they do with elite athletes, and translating these learnings into “traditional” departments, such as Finance in North America.

“We are using proven methods of driving the performance of our teams and to help our colleagues be at their best every day,” says Tomasz Nowakowski, Vice President – Finance, Red Bull Distribution Company. “When we say ‘high-performance teams’ we don’t mean any special kind of structure or membership. Our approach is based on making the existing teams across the organisation as effective, efficient, and focused on achievement, as possible.”

Looking for mindsetTomasz Nowakowski

Everything starts at the recruitment stage. The company looks for what Nowakowski calls a ‘growth mindset’, a concept popularised by Dr Carol Dweck. Technical skills and relevant functional experience are important but right attitude is really the key.

“We look for diversity of thought. New ideas and approaches are crucial for responding to long-term challenges. Where we look for cohesion is around our leadership code and values, which are Professionalism, Responsibility, Passion and Focus,” he says. “We expect that everyone we hire embraces those core values. Authenticity is at the heart of our leadership code, and that facilitates people being more direct with each other.”

Team leaders are encouraged to assume positive intent and not take themselves too seriously. That reduces many misunderstandings and helps the faster resolution of internal conflicts.

Another concept embraced by Nowakowski’s team is Shin Gi Tai, which comes from Eastern philosophy and is followed by many martial arts practitioners. It represents a unity of body, mind and skill.

“I was first introduced to it when we had a training session at Machida Karate Academy in Los Angeles,” he explains. “We learned that having the highest level of skill or the best technique is usually not enough to win consistently. Our body needs to be taken care of well. The competitor must be healthy and adequately conditioned in order to be able to use their skills. In the end it is strong mind and spirit that will drive the fighter to keep pushing and never give up.”

Translating this into the workplace means showing employees how to take care of their health and physical wellbeing. Nowakowski connects this to the strong mind, grit and mindset that the company seeks and expects from its people. These qualities are also fostered through the company’s senior management, who are expected to lead by example.

Dealing with adversity

Of course, there are always unexpected setbacks. The issue is how the organisation and its people respond to them.

There is an important concept Nowakowski learned from one of world’s leading experts in this field, Dr Eric Potterat, called ‘adversity tolerance tactics’. Human beings often respond to setbacks or highly stressful situations with our primal ‘fight or flight’ mechanism. This makes them lose conscious control over their performance.

Everyone has a way of dealing with adversity but there is no single method that can guarantee that people can continue performing at a high level after a major reversal. Nowakowski says: “I learned from Potterat that high-performing teams, such as special forces and professional sports teams, tend to use sets of multiple tactics. These range from pre- performance and post-performance routines, meditation, and visualisation, to more advanced tools such as compartmentalisation and a very high degree of self-awareness.”

He believes that by knowing, combining and understanding these tactics, people can begin to incorporate them into their personal battles, which will improve performance, step by step.

Results on the board

Nowakowski believes that the company’s approach to team-building underpins the speed with which it has been able to take over energy drink sales and distribution in a new markets in the US.

“Many of our expansions would not be remotely possible in the timeline they happened in if our teams did not operate with growth mindset. It’s almost in our DNA right now,” he emphasises.

“Red Bull is not just a consumer packaged goods company but a powerful brand involved in the media world and in various global sports, including football, Formula 1, Moto GP, World Rally Championship and many others. The brand is our asset, and it has been our teams and the culture we have developed that have driven it forward.”

 

Good budgeting leads to bold plans

Appearing on In The Black Digital website, September 2019

New thinking for budgeting

It was Churchill who said that the future is just one damn thing after another. Anyone in business who has the job of looking ahead knows how true this is, but there are methods that can provide a road-map of the path ahead and help finance professionals avoid the dead-ends and pot-holes.

Prabhu SivabalanThe place to start, according to Dr Prabhu Sivabalan, a Professor of Accounting and Associate Dean – External Engagement, at the UTS Business School, is to re-think the process of budgeting. He believes that most organisations struggle with budgeting because the future is always hard to predict, and managers generally do not want to make firm, on-the record forecasts.

“There are two intrinsic weaknesses,” he says. “First, there is the inherent difficulty in predicting how the real world will impact the organisation in the future. Second, there is the issue of getting managers and employees to engage with this process in an authentic way. Usually, it is a bit of both.”

Quantifying goals

The most common form of budgeting in Australia is the annual budget, usually structured in a traditional way and broken down through divisions, business units and even teams. Monthly and quarterly rolling budgets are often used alongside annual budgets in larger organisations.

By and large, a budget is the expected financial quantification of a company’s goals, hopefully based on a considered reflection of an organisation’s circumstances. It is then used as a tool to hold managers accountable for a level of performance. In being used to evaluate performance, however, it sets off a chain of incentives that lowers its utility for planning and resource allocation.

“The main weakness is the unyielding focus that managers and staff have on over-specifying the use of a budget as a performance evaluation device, while missing its value as a planning and management device,” says Professor Sivabalan. “These are related, but by over-emphasising the evaluation we ruin planning. Emphasise planning, and you reduce the negativity associated to evaluation.”

Telling employees at any level that their performance assessment, including bonuses, will be judged on an adherence to a set of numbers can induce pressure. If targets are too difficult, they naturally discourage creativity and innovation. But the same budget that constrains can also enable. If a looser, more generous R&D budget is given, for example, it emboldens the creativity of staff.

Getting ahead of the curve

“It is just human nature to stay with the safe and the known if you are rewarded for doing so,” Professor Sivabalan notes. “What we need is a wider range of performance incentives to take the pressure off budgets as the sole determinant of performance evaluation. My research shows that a lot of companies have a range of financial and non-financial KPIs but they do not actually walk the walk when bonus determination time arrives. Inevitably, staff are rewarded if they hit a financial number, with a cursory acknowledgement of their non-financial outcomes.”

At the same time the organisation’s executive team needs to be able to look at the larger picture on the forecasting side. This means developing an understanding of trends within the industry and the broader economy, emerging technologies, and social issues so that the longer term objectives of the organisation is met, and not only its annual profit target. Resources can then be allocated through the budget process to those areas of the organisation most likely to face challenges, or to where there are opportunities to get ahead of the curve.

This can be disruptive, compared to the steady-as-it-goes mentality often associated with traditional budgeting.

“It requires bold leadership, a special kind of executive,” Professor Sivabalan says. “You can’t blame most C-suite executives for not taking this on. You initially rock the boat when you incentivise staff based on factors other than budget adherence.”

Choosing metrics

Forecasting methods are sure to vary across industry sectors and the team responsible for looking ahead has to choose the right metrics and the most appropriate time-frame. Financial institutions, for example, will need to look at future interest rates and the economic framework with a long horizon. In the retail sector, forecasts are better made on a weekly or monthly basis. But the fundamental principles of taking a broad view, considering a range of data, and acknowledging uncertainty are universal.

Professor Sivabalan notes that there are some software tools that can help with forecasting but they are no substitute for a strategic mind.

“No software explains uncertainty,” he says. “We have all the technology we need. What is in short supply is a willingness to embrace uncertainty. When you determine budget numbers at the start of a period, you know they’re likely to be wrong. If you are able to accept this and work with it, you’re ready to start thinking about smarter ways of benefitting from a budget.”

Professor Sivabalan argues for a pragmatic, planning-based perspective.

“We need to turn budgeting into a forward-looking process where managers adapt to uncertainty when it arises, and not game around it before a period starts by arguing for easy numbers so they get a larger bonus later.”

Fast boat from China

Appearing in In The Black magazine, September 2019

 

Chinese giants like Haier, Tencent, Baidu and Alibaba are now counted as global players, welding technological innovation to marketing know-how and entrepreneurial drive. But the size and rapid growth of these pioneers can obscure the emergence of thousands of smaller companies developing in China’s commercial hothouse. They are supported by a dynamic venture capital sector and an expanding domestic market. New research shows that all of them look, or will soon look, to overseas markets, and many of them are successfully competing against multinational firms operating in China.

“This new generation is looking beyond boundaries and cultivating a disruptive mindset,” says Professor Mark Greeven, one of the authors of a comprehensive study* into Chinese business innovators. “If one Alibaba can shock international stock markets and disrupt traditional industries we can only imagine what tens of thousands of under-the-radar tech-based entrepreneurs will do.”

To see the ground-level picture Professor Greeven and his colleagues interviewed hundreds of executives, entrepreneurs, and investors in China, and studied more than 200 companies. Beyond the established giants they identified three sets of Chinese innovators: hidden champions, tech underdogs, and change makers. Each represents a different set of challenges for competitors.China book

Hidden Champions

Usually, ‘hidden champions’ are midsize innovators in niche markets. Professor Greeven classifies them as having annual revenue of less than US$5 billion – very significant to Australian companies but not that much in Chinese terms. Their strategy is based on long-term growth driven by R&D investments to expand within their niche or into closely related areas.

The research identified more than 200 hidden champions in sectors ranging from machinery and chemicals to materials and electronics.

A company that illustrates this group is Hikvision, which was launched in 2002 with an innovative video compressor card for computers based on MPEG-4 technology; it has followed up with a stream of products in the field, often releasing several new products or upgrades in a year. Nearly half of the company’s employees work in R&D and about eight per cent of revenues are invested in the area.

The company began a global expansion program several years ago and is already a leading player in this field of technology. It has developed partnerships with Western companies, to the point that half of its revenues now come from outside China.

“A surprising feature is how quickly hidden champions can grow,” Professor Greeven says. “Many became domestic and global market leaders in about a decade. It is dangerous for multinational companies to underestimate the speed and flexibility with which these new competitors can emerge, make decisions and expand.”

Change Makers

While hidden champions seek to dominate an industry niche ‘change makers’ aim for the mass market, seeking benefits from digital disruption and often taking advantage of China’s high level of mobile Internet use.

These companies are able to find start-up funding from China’s large venture capital market. Toutiao, a media platform which uses AI to provide customised news through mobile phones, was supported by more than US$3 billion in venture capital after it was founded in 2012. In July 2018, the company had more than 120 million daily active users and was valued at more than US$11 billion.

There is certainly no shortage of young people wanting to start a digital-based business in China, whether in media and information, ride-hailing, finance or retail. Professor Greeven notes that the online food-ordering service Ele.me was founded in 2008 by two students from Shanghai Jiaotong University who, the story goes, got hungry while playing video games one night. By 2015, the company’s revenue had passed US$1 billion.Greeven #1

An outstanding feature of this group is that it shapes digital technology to fit consumer demand, not the other way around. Their success, especially among younger demographics, has meant that all business-to-consumer companies operating in China are now expected to have on-demand and mobile capacities.

“These companies can come out of nowhere, continually engaging with users through social media to adapt products and, as necessary, revamp their business models,” explains Professor Greeven. “Unlike corporations with legacy products and business models to maintain, change makers are entirely user-centered. Rather than pushing an existing product line they are willing to venture beyond the industry’s boundaries if they see opportunities there.”

Tech Underdogs

The third category, ‘tech underdogs’, are small and midsize enterprises, usually science- or technology-based, with revenue of less than US$60 million. Professor Greeven and his colleagues identified tens of thousands of these companies across a wide range of emerging-tech fields. The research identified more than 150 companies with significant intellectual property in photovoltaic technology, for example, and 80 health care ventures utilising various forms of AI.

“Many of these companies were founded by people returning to China from overseas, having studied at elite universities in the US or Europe,” notes Professor Greeven. “Unlike innovators in Silicon Valley, Chinese entrepreneurs work collectively to innovate and push technology and market boundaries. Although many of the ventures do not survive, some become viable competitors and even market leaders. The large number of players in any given category in China increases the chances that at least one will be able to break through.”

There have been a number of cases of Chinese companies in this category partnering with Western firms as a growth strategy. One example is Weihua Solar collaborating with German chemical company Merck, with Merck agreeing to supply advanced materials and patented information to supplement Weihua Solar’s internal R&D efforts. This partnership eventually led to the development of a solar cell that is light, flexible, and more efficient than any of its competitors.

But tech underdogs have also proved to be entirely capable of developing advanced technology on their own. The companies are targeting increasingly sophisticated fields, including genetics, cloud technology, next-gen AI, and advanced materials. Royole, a Shenzhen-based start-up, is an innovator in superthin screens and flexible displays, and has introduced the world’s first bendable smartphone, which can be folded like a wallet.

According to Professor Greeven, for non-Chinese competitors the sheer number of ventures in this category is a problem, especially as even successful ones have little media presence.

“It makes it difficult for multinationals to know which local companies represent a threat and which do not,” he says. “Compared with their Chinese counterparts, multinationals based outside China tend to have fewer connections with local companies and investors. As a result, they are not part of the conversation about emerging threats. For the tech underdogs, that lack of visibility can be an advantage that enables them to catch established competitors off-guard when entering new markets.”

Challenges ahead

While Chinese firms in each category have shown remarkable capacity for innovation, the research suggests that structural weaknesses persist.

For the ‘hidden champions’, the danger is that they will themselves be subject to technological disruption. As they become more successful their public profile will grow, which will bring more competition. They are particularly aware of the possibility of new markets entrants from India and south-east Asia, leveraging their own large domestic markets as a springboard for regional and global markets.

The ‘change makers’ face the problem of creating sustainable competitive advantage in a market of fast-moving trends. They are also aware that regulatory changes in China could undercut their business model, and that regulatory systems in other countries could impede expansion.

For the ‘tech underdogs’, there is the problem of commercialising niche technology. Because so much is invested on a single product, failure to launch means there are few, if any, alternatives.

Ways to compete

Based on their research, Professor Greeven and his colleagues have a series of recommendations for companies wanting to compete in China or are concerned about Chinese competition at home.

  1. Expect the unexpected. A Western company might be aware of the main Chinese competitors but there are likely to be others who are keeping a low profile or have not yet made the decision to go global. A good move is to improve knowledge of industry developments within China to include threats that are not immediately obvious, and to assess their strengths and weakness.
  2. Look for collaborative opportunities. Many Western companies have built good partnership relationships with Chinese firms, usually through subsidiaries. Those companies that have been willing to give Chinese subsidiaries more local autonomy than they might offer those in other countries have generally been more successful. Partnership with or investment in a Chinese firm can also help to identify emerging threats and opportunities.
  3. Realise the threat. Companies that have been in a market leadership position for a long time can easily become complacent. They need to continually strengthen their home base, ensure investment in innovation, and focus on their core strengths.

 

“The best advice for Western companies is to understand the challenges China’s innovators pose and consciously develop counter-measures,” says Professor Greeven. “Compete on their strengths, study the way China’s competitors do business, and rethink assumptions about how to innovate successfully.”

 

* Pioneers, Hidden Champions, Change Makers, and Underdogs: Lessons From China’s Innovators (MIT Press, 2019) by Mark Greeven, George Yip and Wei Wei.

Mark Greeven is professor of innovation and strategy at IMD, a business school in Lausanne, Switzerland and Singapore. George Yip is emeritus professor of marketing and strategy at Imperial College Business School in London. Wei Wei is CEO of GSL Innovation, a consulting firm in Shanghai.

 

 

10 great TED Talks on careers

Appearing on In The Black Digital site, June 2019

Kavi Guppta presenting his TED talk, The Remote Work Revolution.

Kavi Guppta presenting his TED talk, The Remote Work Revolution.

 

Yes, you can find work that is fulfilling and inspiring, but rethinking your approach is sometimes the best way to get there. The speakers in these 10 inspiring TED Talks share their thoughts on how to have a great career.

1. Scott Dinsmore: How to Find Work You Love

In an era when so many people dislike their jobs, Dinsmore argues that it is possible to find work that will inspire you, if you can determine your true values and goals. He offers a framework for personal discovery through incremental steps and considered risks, pointing to the need to make connections with other people who share your passions, priorities and interests. He says the fundamental question you have to ask yourself is, “What work can you not do?”

2. Marie Claire Lim Moore: Why Asia Needs More Tiger Women – TEDxWanChai

Why are there so few Asian women in senior management positions in most Asian countries when so many do well in university? Marie Claire Lim Moore believes that the key reason is the belief that women’s primary role should be that of mother and wife, coupled with the reluctance of many companies to hire women after a career break.

She looks at the Philippines, which has a high proportion of women in senior roles, as an example of how to change expectations and attitudes.

3. Nigel Marsh: How to Make Work-life Balance Work

The author of Fat, Forty and Fired examines the concept of work-life balance, emphasising that success should be about how you live your life. A good life requires intellectual, emotional and spiritual fulfilment, all of which are unlikely to be achieved by “working long hours to earn money to buy things you don’t need to impress people you don’t like”.

Each person must find balance for themselves and be aware of “the little things” that can, together, make for a full and happy life.

4. Larry Smith: Why You Will Fail to Have a Great Career

Economist Smith examines the many excuses that people offer for not pursuing the passions that will lead to great careers, such as the excuse that great careers are only for eccentric, lucky or highly gifted people.

Smith dissects and dismisses the range of excuses, arguing that any individual can create and develop a great career. It requires courage, self-awareness, hard work and single-minded commitment, but great careers are the means to make the world a better place.

5. Kavi Guppta: The Remote Work Revolution – TEDxUWA

Guppta believes that technology has made remote work viable as a career option in many areas of activity. He advises that people trying to find work on this basis should emphasise their ability to organise themselves, work autonomously, and communicate across cultures.

Companies that want to use remote workers should start small and build up a network over time. While remote working is not for everyone, the number of people who want to take up the option is very likely to increase.

6. Carol Fishman Cohen: How to Get Back to Work After a Career Break

Returning to work after an extended break can be a challenge. Cohen offers a wealth of suggestions for “relaunchers”, from networking to find a job to updating working skills, especially in relation to technology.

She also looks at the intern-like options that some companies are offering to people returning to the workforce. A “testing-out period” can minimise the perceived risk that some employers attach to a returning worker. There can be substantial long-term benefits for both the worker and the company.

7. Jason Shen: When Looking for a Job Highlight Your Ability Not Your Experience

Shen notes that very few people hold jobs that line up directly with their experiences or their academic studies. But he believes that this is not necessarily a problem, if a job applicant can demonstrate relevant and high-level abilities, such as a special mode of problem-solving.

Equally, employers have to be willing to look past traditional metrics to identify people who are a good fit with the company and can bring innovative ways of working and thinking.

8. Susan Colantuono: The Career Advice You Probably Didn’t Get

Many women who want to move into senior corporate positions find themselves stuck in middle management, despite excellent peer reviews and relevant training. Colantuono believes that the missing piece is connecting professional strengths to the company’s strategic goals.

Most career advice that women receive, she says, focuses on personal development. Closing the gender gap at the top will require training and mentoring that make the need for alignment explicit, so that talented people can compete on a level playing field.

9. Susan Redden Makatoa: Flexible Working Should Be the Norm for Everyone – TEDxMacquarieUniversity

In her examination of flexible working, Makatoa notes that Australian legislation theoretically provides the right to flexible work to everyone but in practice it is mainly utilised by working mothers with young families.

This imbalance has created a feeling that this group has special privileges, leading to resentment from others. What is needed, says Makatoa, is a change of mindset so that flexible work rights are utilised by all. Some companies that have done this already have seen productivity enhancements and improvements in employee satisfaction.

10. Angela Lee Duckworth: Grit, The Power of Passion and Perseverance

Duckworth has conducted extensive research on why some people succeed where others fail and concludes that grit – the view that life should be approached as a challenging marathon rather than a sprint – is the determining factor.

Innately talented people often do not follow through on initiatives and fail to reach their objectives. People with grit are more likely to accept occasional failure as the price of learning, a process which often translates into long-term, sustainable career success.

Bonus:

Steve Jobs: How to Live Before You Die

Though not officially a Ted Talk, Steve Jobs’ commencement speech to Stanford University students examines how to see opportunities in setbacks, how to connect apparently disparate events of life, and how to find a career that can be a personal passion.

His concluding message is, “Stay hungry, stay foolish”.