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.”

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.

 

 

An artificial but beating heart

Review of Alita: Battle Angel

Directed by Robert Rodriguez; starring Rosa Salazar and Christoph Waltz

One cannot but approach Alita: Battle Angel with a certain amount of apprehension. The original anime, made by Yukito Kishiro, was not short of cybernetic action but at its heart was a surprisingly tender love story. The new version is twice as long, incredibly expensive, and directed by Robert Rodriguez (Sin City, El Mariachi), a fellow not known for subtlety. The movie’s trailers hint at a series of spectacularly pointless CGI fight scenes. Even more, Hollywood’s last attempt to make a blockbuster out of an anime, Ghost in the Shell, was an extended exercise in largely missing the point.

Alita #1But as it turns out Rodriguez (overseen by producer James Cameron) does a pretty good job of keeping the essence of the source material while adding the best that modern technology has to offer. Rosa Salazar, who has previously appeared mainly in supporting roles in so-so films, turns in a solid performance, although with CGI-enlarged eyes and a metallic body she does not always have much to work with.

The cyborg Alita, or at least a small part of her, is rescued from the scrap heap by compassionate Doctor Ido (Christoph Waltz), and while her memory is gone she soon reveals the talents of a super soldier. This allows Rodriguez to stage a succession of truly remarkable fights and races, and there are plenty of villains – uber-sleeze Mahershala Ali, smooth-talking Ed Skrein, and snarling Jackie Earle Haley – to contend with. There is also Jennifer Connelly, who was grown out of her pretty-girl looks into an interesting character actress – although here she comes to a very unpleasant end. Salazar manages to balance Alita’s cybernetic strength and human frailty as she struggles to define herself. There is even some fun along the way, such as her first encounter with an orange, and later with chocolate.Alita #6

And the visual look of the movie is undeniably stunning, whether it is the background details of Iron City or the hi-tech savagery of the Motorball stadium. In a tiny but beautiful scene, Alita slices a tear in half as it falls. There is a note at the end of the credits that the movie required hundreds of thousands of hours of work, and that sounds credible.

The weakest point of the movie is Keean Johnson, as Alita’s crush interest Hugo. He is hunky but rather bland; the character in the anime version had more depth, and his obsession with reaching the sky city of Zalem made sense. With Johnson it feels more like a plot device, a sudden change of mind to provide a conclusion. In fact, the whole movie begins to struggle in its final stages, perhaps because of the need to provide a pathway to the inevitable sequel.

Alita might not be the triumph that its makers wanted but it is still a success, and it is good to see another movie (after, for example, Bumblebee) in which it is a complex young woman who does the rescuing and the sacrificing, the fighting and the thinking. Hollywood does not always get the emotional tone right but in Alita Rodriguez and Cameron did not get it wrong, either.

Alita

Alibaba Opens the Datafication Door

Appearing on site In the Black Digital, February 2019

 

In the Digital Age all successful companies use high-level technology but the Chinese giant Alibaba might be the one which has taken the underlying principles of e-commerce the furthest, with a model based on machine learning and the comprehensive datafication of customer interaction.

Ming ZengAlibaba, founded in 1999 by tech-entrepreneur Jack Ma, recorded a net income of 61.41 billion yuan, approximately US$9.6 billion, in the year ending 31 March 2018, and its market cap puts it firmly in the global top ten. A new book by its Chief Strategy Officer Dr Ming Zeng explains how Alibaba’s model was developed and how it keeps the company on a growth path.

In Smart Business: What Alibaba’s Success Says About the Future of Strategy*, Dr Zeng notes that Alibaba is sometimes compared to Amazon but he believes that the comparisons are incorrect. Whereas Amazon is a retailer, Alibaba is a portal to link customers to sellers (although it is now highly diversified, involved in everything from banking to film finance). Its strategy has been to apply technology to every part of the purchase chain, from advertising to delivery.

“Alibaba today is what you get if you take all functions associated with retail and coordinate them online into a sprawling, data-driven network of sellers, marketers, service providers, logistics companies, and manufacturers,” says Dr Zeng. “Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish.”

Ecosystem

Despite his key role Dr Zeng was not a part of the company at its inception. At that time he was working as an academic at Europe’s top business school, INSEAD, after completing his PhD in the US. He was teaching a course on Asian business when Alibaba caught his attention.

“It had no Western counterpart so it was a perfect case for MBAs,” he says. “I contacted the company and management agreed to let me study the firm and conduct some interviews. I met Jack Ma for the first time in 2000 and I later worked as a strategy adviser for Alibaba Group. In 2006 I was finishing my first book in English, Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition**, about emerging multinationals from China. I got a phone call from Ma asking me to join the company, which I accepted.”

Dr Zeng and Jack Ma realised that they had to think of the company as an ecosystem if they were to realise its potential. The strategic imperative was to make sure that the platform provided all the resources, or access to the resources, that an online business would need. The emerging technology of algorithms and machine learning, together with the decreasing cost of computing power, made it possible.

Dr Zeng says: “The formula for smart businesses can be summarized in a simple equation:  Network Coordination + Data Intelligence = Smart Business. That equation represents what is behind Alibaba’s success and captures everything you need to know about business in the future.”

C2B model

The technology allows the company to put customers at the centre of business, constantly collecting data on them and their purchase choices in real time. Dr Zeng calls this the customer-to-business (C2B) model, using feedback loops to drive machine learning. Now, when customers log on they see a customised webpage with a selection of products curated from the billions offered by millions of sellers.

The model requires several connected elements: a network that can dynamically adjust the supply and quality of service offerings, an interface where customers can easily articulate their needs and responses, a modular structure that can grow from an initial beachhead, and purchasing platforms than can provide agility and innovation. Every customer exchange supplies more data, which goes into the feedback loops required for machine learning.

This system requires that a large number of actions and decisions are taken out of human hands. Algorithms automatically make incremental adjustments that increase systemwide efficiency. Alibaba even uses AI-based chat-bots to handle a wide range of customer inquiries and complaints without any human interaction at all.

Facilitating the loop

Dr Zeng puts forward four steps as the basis for creating a smart business: creating datafication processes to enrich the pool of data the business uses to become smarter; using software to put workflows and essential actors online; developing standards and APIs to enable real-time data flow and coordination; and applying machine-learning algorithms to generate business decisions.

In this new environment, leaders no longer manage. Instead, they enable workers to facilitate the feedback loop of user responses to help the company along its evolutionary path.

Dr Zeng is adamant that the C2B model represents the future for all business.

“We live in a time of exponential change,” he says. “Everything I have described in Smart Business will soon be conventional knowledge. Change will be disruptive. But it will also bring massive opportunity.”

 

* Smart Business: What Alibaba’s Success Says About the Future of Strategy by Ming Zeng, Harvard Business School Press.

** Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition by Ming Zeng, Harvard Business School Press.

Christmas Quiz: Accountants in the movies

Appearing in In The Black magazine, December 2018

 

  1. Which Australian-born actress explains financial terms while in a bath, drinking champagne? What is the movie?

2.  In what movie does Cher play an accountant? What is the opera that she and Nicholas Cage see?Cher and NC

 

  1. In the movie Midnight Run, why is Jonathan “The Duke” Mardukas, an accountant played by Charles Grodin, on the run?

 

  1. The movie Other People’s Money features Danny de Vito as corporate raider Lawrence Garfield. What is his nickname? To what does he compare the products of the company he is trying to take over?

 

  1. In the television series Ozark, how much money does the crooked financial planner have to launder in order to avoid a grim fate?

 

  1. In a galaxy far, far away, why has turmoil engulfed the Republic? To what movie is this the background?

 

  1. In which movie does an accountant say: “The funny thing is, on the outside I was an honest man. I had to come to prison to be a crook.” What is the name of the accountant?

 

  1. In the 1967 movie The Producers, accountant Leopold Bloom comes up with a scheme to make money by producing a stage show that will fail and then become a tax dodge. Who plays the accountant? What is the name of the stage show?

 

  1. breaking bad   In the television series Breaking Bad, what business do the perpetrators buy to launder drug money?

 

  1. What is the English title of the 1987 Japanese movie in which a tax auditor investigates a chain of love hotels?

 

11. In the movie The Untouchables, for what crime is gangster Al Capone sent to jail?Untouchables

  1. In what movie does a forensic auditor, played by Will Ferrell, hear a voice narrating his life and approaching death?

 

  1. In the movie The Accountant, what is the affliction of the character Christian Wolff CPA, played by Ben Affleck?

 

  1. What is the name of the central character in the 2008 movie – described as a story about “love, lust, blackmail and revenge” – The Dueling Accountant?

 

  1. In the Monty Python sketch ‘Chartered Accountant’, to what profession does the accountant hope to transition to?MP accountant

 

 

 

 

ANSWERS

 

  1. Margot Robbie. The Big Short.
  2. Moonstruck. La bohème.
  3. He embezzled $15 million from his gangster bosses.
  4. Larry the Liquidator. Buggy whips.
  5. $500 million
  6. The taxation of trade routes to outlying star systems is in dispute.
    Star Wars, Episode I: The Phantom Menace
  7. The Shawshank Redemption. Andy Dufresne.
  8. Gene Wilder. Springtime for Hitler.
  9. A car wash.
  10. A Taxing Woman. The Japanese title is Marusa no onna.
  11. Tax evasion.
  12. Stranger Than Fiction.
  13. He suffers from high-functioning autism.
  14. Mungo MacDiamond.
  15. Lion tamer.

Margot Robbie

 

How data analytics is transforming audit

Appearing on In The Black Digital site, 7 November 2018 – https://www.intheblack.com/articles/2018/11/07/data-analytics-transforming-audit

 

Data analytics is allowing auditors to check much larger amounts of information and focus on areas of risk.

 

The auditor of the future will use data analytics to check data of much larger sets of information from a wide variety of agencies, according to Ben Jiang, director – data analytics in the Victorian Auditor-General’s Office (VAGO).

“It once would have been impossible to analyse all of the transactions of a large agency,” Jiang told CPA Congress in October 2018.

“The traditional approach of sampling was necessary in its time but now the volume of transactions is so high that analytics technology has to be the way to go.”

A major advantage of analytics is that the contributing agencies can provide data in almost any format. Clients lodge their data, usually monthly, through a secure portal.

Algorithms for data analysis

Jiang’s team has written a series of algorithms to transform the material into a common format for analysis, as well as run checks for completeness. The aim of the algorithms is to streamline processes that were formerly done manually.

Image result for auditingThe result is a dashboard of aggregated, summarised data relating to each contributing agency. This allows auditors to easily access information and drill down as they need to. The common format allows for easier extraction of data, and also the checking of anomalies and outliers. The analytics program can create “red flags” to draw a matter to an auditor’s attention.

In the VAGO, the system is still in its development phase. The dashboard system will be used in conjunction with traditional auditing methods for a complete audit cycle. The two methods will then be compared and assessed, and any problems with the analytics methods will be identified and addressed.

The first wave of clients involves 35 agencies across the range of government entities, which includes departments, universities, councils and others. Second and third waves are planned, with improvements to the system being made as more experience is gained.

Auditors’ focus on risk

“The aim is to free auditors from mechanical tasks so they can concentrate on what they really need – and want – to do, which is auditing,” Jiang says.

“They can focus in on areas of risk that the analytics have flagged, such as classes of transactions. Ultimately, it will allow for better performance benchmarking and resource use as well as auditing oversight.”

To get the most from the analytics system and the dashboards, additional staff training will be needed. While auditors are generally very pleased with the prospect of not having to perform routine data collection, processing and checking, the new system requires some new skills and a different mindset.

Data analytics requires a large amount of computer processing power, so this led to a rethinking of the IT system at VAGO. Safeguards also had to be built into the IT changes to ensure data security.

Jiang notes that the software packages used to design and operate the new system are Microsoft SQL Server, Qlik Sense and Python.

“We are aware that we are writing the rulebook rather than working through an existing one,” he says.

“Especially in relation to performance auditing, I think we are just scratching the surface. And we take the view that analytics is meant to supplement and improve auditing. Analytics is the first post of auditing, and then human experience, insight and judgement take over.”

 

Looking for shoes and finding a new direction

Appearing in the UpStart section of September issue of In The Black magazine

 

Children’s book a whole new challenge

 

Going from a senior role in corporate risk management to writing a children’s book has been a huge but very satisfying transition, says Naomi Vowels, an Australian CPA who has re-located to Singapore. The company established by Naomi and her sister Frances, Red Shoe Stories, is set for success, with an innovative approach and a lot of energy.

The company’s debut book is called Where Are My Shoes?, aimed at the 0-6 age group. It is about a favourite pair of shoes that have gone missing; the main character recalls what they did that day to try and remember where they left them. A key part of the book is that it can be customised so that it features the child, including their name and with suitable illustrations. It also allows for the choice of an ‘adventure buddy’, and even gives the child the chance to choose the shoes they wear in the story.

Naomi Vowels“Frances’ two children were the inspiration for the book,” said Naomi. “They love hearing stories about themselves and their possessions. Frances had her third child in April – just ten days after the birth of my first son.”

Naomi decided to make the change from the corporate sector to small business owner and author when she and her husband relocated to Singapore from Geneva in early 2017. She had held a number of private sector roles, and worked in the Australian diplomatic service, but her most recent position had been as Vice President at Lombard Odier, a private bank, working in strategy and risk.

“Frances and I enjoyed our former careers but they were never really our passion,” she says. “We always knew there was something more ‘us’ that we could be doing. It just took us a bit of time and courage to get there. We set up our business in Singapore because it is easy to register a business there, there is support given to start-up ventures by the government and the private sector, and our key suppliers are based there.

“My former colleagues were extremely supportive of my decision. In fact, many of them expressed some jealousy that I was taking the opportunity to step out of the corporate world and pursue something I feel passionate about.”

Support and advice

Naomi believes that the expertise she gained as a CPA has been invaluable – not only the technical skills but also the peers who provided support and advice.

The next step is to get the book into the marketplace. The sisters launched a Kickstarter campaign to help fund the website, which is the means for customers to buy the book.

“The campaign was financially successful but we also saw it as a way to connect with potential customers all over the world,” says Naomi. “On the website, customers are able to personalise their stories and see a flip-book preview of their book. We also plan to exhibit at several book fairs in Asia, Australia and Europe, and we will continue to build our audience on social media.”Shoes book #1

Naomi and Frances have also partnered with the charity Room to Read, which promotes childhood literacy and girls’ education. One book is donated to the program for every book sold.

“We plan to make the book available in languages other than English, and we have started writing our next book,” Naomi says. “We will continue writing books for as long as they are enjoyed by children and parents. It has been hard work but I don’t think I have ever been more satisfied or happy than I am right now, writing and running our business.”

 

Red Shoe Stories Website: redshoestories.com

Social media: @redshoestories

 

The sweet spot in the coffee business

 

Appearing on In The Black Digital site, September 2018, url https://www.intheblack.com/articles/2018/09/07/coffee-club-data-sweet-spot

 

The Coffee Club is using data analytics to understand customers better and stay ahead in Australia’s highly competitive café sector. Here’s how your business can use data to arrive at new solutions.

Behind a simple cup of café coffee lies a highly competitive industry, with a fickle customer base and complex marketing issues. In such an environment, the effective collection and analysis of data has become essential, as the franchise chain The Coffee Club has learned.

“In 2011-2013, The Coffee Club was riding a wave where the café industry was exploding,” says Jimmy Wu, analytics manager at The Coffee Club.

Jimmy Wu of Coffee Club“However, this growth hid a lot of problems. Data strategy at The Coffee Club was vague and ad hoc in nature, and many executives and internal stakeholders relied on summarised reports.”

The measurements were purely financial and not customer-focused.

“In 2014 there was a marked increase in competition from other chains and from independent cafés,” recalls Wu.

This put The Coffee Club brand at the crossroads between its heritage and the premium, value and convenience players in the market.

Using multiple data sources

Wu has introduced a comprehensive data analytics strategy aimed at building a complete picture of existing customers and profiling new ones. Point-of-sale data was collected on the time of day of purchases, the day of the week, other items purchased in the same transaction, and traffic count versus average spend.

Wu notes that the primary transaction data was already available, but it had not been used in the right way.

Unstructured data such as customer feedback, perceptions and behavioural patterns was also incorporated. Another data source was 150,000 active VIP customers, which provided data on their buying patterns through repeat visits.

There was also cross-referencing with other datasets. It was found, for example, that a drizzle of rain on Saturdays would increase traffic in stores, but heavy rain on Sundays would deter customers from shopping centre sites.

Comprehensive profiles on each store were developed, combined with Australian Bureau of Statistics and GIS (geospatial) data, to model the best sites for possible new stores and examine growth options within the franchise chain.

Using data to arrive at new solutions

“We are always on the lookout for better data analytics solutions as this space changes rapidly,” Wu says.

“I am a big fan of Tableau Software because it allows users to discover structured data quickly. There are also other packages that we use for different purposes, such as Power BI, SPSS, Qlik, R, and Python.

“The challenge that most organisations using advanced analytics techniques face is that you reach a point where your traditional data warehouse will not accommodate the sheer size and calculation power needed. To address this, we are moving into cloud infrastructure. This will allow us to not only take advantage of addressing our current 5Vs – volume, velocity, variety, veracity, value – but also explore innovative areas such as machine learning capabilities, and data lake [data repository] and discovery sandpit areas.”

Data-related possibilities for the future include facial recognition technologies and having AI robots answering reservation phone calls, or even having a personalised digital menu based on customer preferences with product recommendation systems built in. Another idea is to leverage AI to enable store-level operational improvements.

“In this business, understanding your customers is crucial,” says Wu. “And it’s an ongoing journey. The moment you think you’re successful is the moment where your competitors start to outperform you.”
coffee

Takeaway coffee

  • Use data to profile existing and potential customers
  • Look to see what information is already held but not used
  • Cross-reference with other datasets
  • Stay abreast of new analysis tools
  • Ensure warehouse capacity