championing change

Championingchange Championingchange

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MARCH 2009 $5.50

FOR STRATEGIC BUSINESS IDEAS

Communication training l Performance planning l Strategic advantages

Dan Clarke, CMA, president,Helly Hansen Canada Limited

Managingcustomer value

Budgeting innon-profit

organizations

For Dan Clarke, CMA, life is all aboutthe journey, not the destination. For Dan Clarke, CMA, life is all aboutthe journey, not the destination.

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Andrea CivichinoEditor-in-Chief

Managing costs In today’s rapidly-changing business environment, many companies arerecognizing that, to achieve and sustain competitive advantage, they must focusmore attention on the customer. As a result, many have changed theirstrategies, structures, and processes, leading to a dramatic increase in customersatisfaction. Although these companies may now have a better understanding onhow to provide value to their customers, they are far less effective in derivingvalue from them. According to authors Marc J. Epstein, Michael Friedl and KristiYuthas, most companies have great customer diversity, with some customersbeing highly profitable to the company and others being enormouslyunprofitable. The recognition of differences in customer profitability by seniorfinancial managers and the use of available tools are critical to a company’sability to derive value from its customer investments. Epstein, Friedl and Yuthasjoin Management this month with their article “Managing customer value” —based on a recent Management Accounting Guideline (MAGTM) available atwww.cma-canada.org.

Business managers continue to hear about the changing and maturingCanadian workforce and are challenged to seek new ways to attract, train, andengage a demographic that includes highly trained foreign professionals. TeresaMcGill joins Management this month with a look at how hybrid communicationtraining for foreign-trained professionals is becoming a popular approach forcareer development. Often, foreign-trained professionals miss out on leadershipopportunities and career advancement, despite their significant attributes. As aresult, frustration sets in, and companies often lose the people they need most.McGill discusses how employers can resolve this dilemma by combining linguisticand interpersonal-skills training.

For the past few months, the business community was hoping the IT industrymight be spared of the credit crunch fallout on the basis that technology is avital link to customers, business partners, and ultimately, a company’s bottomline. Given the economic climate, business leaders are now facing increasedpressures to reduce their IT costs. As Jacob Stoller explains in “A leaner IT —seven targets for waste reduction,” a sensible approach is to identify andeliminate the waste in a company’s IT department. This includes findingactivities that don’t add value to the company and eliminating them. Whilecutting costs is one of the first actions to take during economic uncertainty, it’simportant to look at the cost/productivity equation — how to reduce costswhile increasing operational efficiently and competitive advantage.

Volume 83 Number 1from the editor

CMA MANAGEMENT 3 March 2009

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CMA Management is published monthly, except December-January and June-July,August-September (combined issues), by CMA Canada. If you no longer wish toreceive this publication, please contact CMA Canada.

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Features

32 How risky is your pension fund?Pensions are definitely risky, and accountants should be concerned.The stock market now views pension liabilities as a form ofcorporate debt. It’s an accountant’s worst nightmare whenfluctuating pension values feed right into fluctuating firmvaluations.By Margaret Woods and Kevin Dowd

36 PROFILEChampioning changeFor Dan Clarke, CMA, life is all about the journey, notthe destination. By Andrea Civichino

22 Planning and budgeting in non-profit organizations Unless the process is supported by well-defined policies andguidelines, clear strategic goals and operating priorities, it canbecome quite chaotic and confusing. By Michel Piché, CMA


Cover Photo: Marvin Moore

28 Managing customer valueSome customers are more profitable than others. Conversely,some are downright unprofitable. Knowing “which is which”is the all-important question.By Marc J. Epstein, Michael Friedl and Kristi Yuthas

48 Global view Clean coal and carbon capture — the nextKyoto battleground. Carboncapture may prove to bebeneficial in the fight againstcarbon dioxide and globalwarming and help cut down onair pollution.By Peter Ion


8 News and viewsNew and noteworthy information youcan use

l Four in 10 Canadian companies planning reductions and revisions

l Global accountancy leaders address credit crisis

l Expanding role of internal audit increases need for specialty skills

Columns

Departments

12 Human resources Like a crossover vehicle, hybrid-communication training addressesmulti-faceted needs. A multi-cultural workforce requires a multi-pronged approach tocommunication-skills training. By Teresa McGill

6 Media bitesLearning and improving

l The Red Rubber Ball at Work

l Chasing the Rabbitl Taming the Search-and-

Switch Customer

Next issue:

18 Business strategies The future is now: affordable strategicadvantages for sale. Companies thatare highly leveraged and struggling intoday’s tight capital markets represent acompetitive edge for purchasers.By Christopher Porter

42 Information technology A leaner IT — seven targets forwaste reduction. Decision makershave to look everywhere for ways tocut costs. One approach is to identifyand eliminate waste — much the waylean methodology is applied tomanufacturing.By Jacob Stoller

40 Money management Asset-based financing: A potentialsolution to the credit crunch.Companies can tap their assets togenerate cash flow through asset-based loans or through factoring. By Christian Kokorian, CMA

45 Legal notesTax-exempt status preserved despitesophisticated operations. A recent Tax

Court of Canada decisionconfirms that not-for-profit organizations canadopt the goodpractices, efficiencies

and activities of a well-run business withoutjeopardizing their tax-exempt status.By Greg Richards

15 Management trendsDriving performance enterpriseplanning. Continuing deregulation,advances in technology, new disclosurerequirements, and wary investors, createsboth challenges and demands foraccurate business planning and forecasting. By Doug Barton

l Travel trends l Creating shareholder value in turbulent

times

The Red Rubber Ball at Work In The Red Rubber Ball at Work,Kevin Carroll shows businessreaders how to apply the sameskills they used when theyplayed as kids to invigorate fivekey hot-button issues in theworkplace — innovation,results, teamwork, leadership,and curiosity. He includes over30 “play profiles” fromsuccessful business peoplewhose success comes from

embracing a sense of play at work. Each part ends with anaction plan that encourages readers to invoke play in eachspecific topic, including exercises and other mental activitiesthey can use to stretch their play. The Red Rubber Ball at Workalso shows how the most enjoyable and beneficial elements ofchildhood play can actually solve some of the biggest problemscompanies face. Where other management books call for play-like activities away from the office in the form of company-sponsored sporting events, off-site bonding meetings, andisolated brainstorming sessions, Carroll acknowledges that playand work can be used to achieve the same.

Kevin Carroll. McGraw-Hill.

Chasing the RabbitWith news headlines ofbankruptcies, layoffs, andacquisitions, today’s businessleaders are under pressure tomaintain and increaseperformance. Although one of thefirst “success factors” scrutinized isrevenue, it’s imperative to alsolook at how a company ismanaged and if its structure andoperating procedures stimulateprofitability.

In Chasing the Rabbit, Steven J.Spear argues that business leaders

need to realize that discovery and self-improvement are themost valuable assets a business can have — attentiveness toquickly solving and circumventing problems, sharing learned

knowledge and instilling effective management operations areparamount importance for helping companies to not just stayafloat, but to excel. Having recognized Toyota as a “rabbit”organization that steadily increases its lead in the competitiveautomotive industry, Spear spent many months workingwithin the company, learning its processes and dissecting itssuccess into an understandable format that other companiescan implement in order to achieve a “high-velocity” position.Chasing the Rabbit relays these lessons from Toyota, as well ascase examples of many other organizations such as the U.S.Navy, NASA, Alcoa, Intel, Intuit, Institute for HealthcareImprovement, and others.

Steven J. Spear. McGraw-Hill.

media bites

Learning and improving

Taming the Search-and-Switch Customer

Jill Griffin has spent hercareer consulting withbusinesses on how to get andkeep loyal customers. Herbook, Taming the Search-and-Switch Customer offerspractical advice for winningcustomer loyalty. Griffintakes a close look at whycustomers are compelled tosearch for new options andthen switch them. She also

examines the new rules for building good brandperception, explains how to build trust, and how to beand stay different in the eyes of customers. The book alsoincludes the buyer’s “worth-it test” — a short list ofquestions that will help companies figure out how theircustomer perceives them and whether they are, in fact,considered more “worth it” than their competitors.

In order to ace the test, Griffin suggests companiesconsider the following: make sure front-line staff is all“worth-it” makers; routinely deliver the unexpected; andearn favourable product ratings and reviews and thenshowcase them.

Jill Griffin. Jossey-Bass.


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Densigraphix & SYSPRO: A World of Opportunity

In today’s increasingly rapid and competitive business environment the ability to com-municate and share relevant information

across the entire enterprise, as well as up and down the supply chain, is critical to address the demands of an increasingly demanding marketplace. To achieve this goal requires an ERP system with a flexible open-architecture. Densigraphix Kopi Inc. is one such company that is leveraging the open architecture of the SYSPRO ERP system to refine and extend their business processes to sharpen their competi-tive edge.

Densigraphix was founded in 1979, in Montreal, Quebec, by Camille Cotran, who perceived an opportunity to provide copier dealers with a lower cost alternative to OEM electrostatic copy paper. As the company’s dealer base migrated to selling and servicing the first generation of Japanese plain paper copiers, Densigraphix introduced generic toner, to lower the cost per copy and increase the dealers’ profits. In 1989, Densigraphix saw the potential of the fledg-ling laser cartridge remanufacturing business. Ten years later, Densigraphix acquired Sel-Drum Corporation, a company which targeted the same customer base as Densigraphix, but focused on replacement copier parts such as drums, blades and fuser rollers. With the acquisition, Densigraphix has given its cus-tomers the ability to one-stop shop for both toners and copier parts.

In 2000, Densigraphix implemented SYSPRO Enterprise Resource Planning (ERP) soft-ware. Since the introduction of SYSPRO 6.0, Microsoft®.NET component architecture and XML standards have been leveraged to deliver “e.net solutions,” an open framework that pro-vides users with a standardized method for directly accessing SYSPRO’s business function-ality.

SYSPRO e.net solutions is predicated on “busi-ness objects”; componentized modules of code that can be independently accessed to perform specific business functions and pro-cesses. Business objects also allow external applications to interact and communicate with SYSPRO, using functionalities such as Web Services.

Through the use of business objects, in-house applications can be created to enhance, sim-plify and extend SYSPRO functionality onto websites, into warehouses, and onto the shop floor. Since business objects use the core system’s security, third party developers are relieved of the burden of duplicating SYSPRO security settings in their external applications.

Furthermore, since business objects are sepa-rate from SYSPRO source code, external appli-cations will continue to work after upgrades to future versions of SYSPRO.

Enter Robert Cotran, Densigraphix’ VP Technology, a man with a talent for “object-oriented” programming. Cotran has used SYSPRO’s business objects for a variety of tasks, allowing Densigraphix and its supply chain partners to streamline business pro-cesses across the Internet, and facilitating the construction of interfaces that simplify and extend SYSPRO’s functionalities.

Since 2001, Densigraphix’ B2B eCommerce website has allowed supply chain partners to place orders, view their order history, and track the status of their orders online. “Our B2B web-site has greatly improved the quality and accu-racy of business information at our customers’ disposal,” says Cotran. “In turn, that allows us to improve delivery times, and provide our customers with a higher level of service.”

B2B integration facilitates the transformation and exchange of information between SYSPRO ERP and other applications, including legacy systems. Densigraphix’ partners and custom-ers can order, query and update their infor-mation, regardless of the conversion require-ments and data formats used. “Our Internet applications write orders to SYSPRO using business objects,” says Cotran. “That enables us to quickly establish and manage Internet relationships with other organizations. It also makes it possible for us to automate document interchange effortlessly.”

While eCommerce provides an important com-petitive edge, for Cotran, it’s only the tip of the business object iceberg. While the vast major-ity of SYSPRO users run it “straight out of the box,” Densigraphix has created some 50 com-pany-specific software applications. “We refer to a group of them as our suite of Predictive Operations Management (POM) interfaces,” says Cotran. “It’s the use of business objects in SYSPRO that has allowed us to do this.”

Utilizing business objects and SYSPRO, Densigraphix has taken advantage of an open architecture to optimize its IT investment. Says Cotran: “For many businesses, SYSPRO ERP works right out of the box, but for com-panies that are actively involved in refining their business processes, SYSPRO’s focus on flexibility and integration can open up a world of opportunity.”

For more information on Densigraphix, please visit their website, www.densi.com.

“For many businesses, SYSPRO ERP works right out of the box, but for companies that are actively involved in refining their business processes, SYSPRO’s focus on flexibility and integration can open up a world of opportunity.”

Robert Cotran, VP Technology, Densigraphix


As the global financial crisis takes a tightergrip on the economy, some Canadianemployers are bracing themselves for thelooming economic slump. More than fourin 10 companies have either made orplanned layoffs or reductions (44 per cent)and revised merit payments (42 per cent)over the next year. According to the surveyconducted in November 2008 by WatsonWyatt, a global consulting firm, employersare also increasing employeecommunications and halting new staffing.The survey also indicates that while manycompanies are considering changes, lessthan 20 per cent consider such changes tobe significant.

The survey of 138 Canadian-basedcompanies from various industry sectorsfound that 42 per cent are revisiting meritand other increase budgets for 2009. Theseorganizations anticipate that merit budgetsfor 2009 will decrease by an average of 39per cent (from 3.3 per cent to 2 per cent).From an overall perspective, the net effect of these anticipatedreductions will result in a revised merit budget of 2.9 per centwhich represents a significant decrease from previousprojections of 3.5 per cent. The revisions to merit and othersalary increases are more prevalent among companies withinthe financial, professional business services, andmanufacturing sectors. Additionally, 41 per cent ofrespondents have already stopped or will freeze new hireswhile nearly one third (31 per cent) confirmed they havealready made or will be going through organizationalrestructuring.

“Although there is a high level of uncertainty in the market,employers are cautiously moving forward to deal with thechallenges of the economic downturn,” says Liz Wright,compensation practice leader, central Canada at WatsonWyatt Worldwide. “However, while measures such asworkforce reduction and cost controls may be necessary insome instances, companies should maintain a balancedapproach that includes actions such as enhanced employeecommunications to retain critical talent and boost employeemorale and confidence.”

Additional survey findings in other HR-related areassuggests the majority of companies surveyed are keeping thestatus quo and are not planning significant changes over thenext 12 months.

New and noteworthy information you can use

Four in 10 Canadian companies planning reductions andrevisions

Anthony Atkinson, CMA, FCMAProfessor, University of Waterloo, Waterloo, ON

Pierre-Jean Dion, CMA, FCMA, M.Sc.Executive Consultant andAssociate, Optima ManagementInc. and President of the CMAObservatory of Management Accounting Practices,Montréal, QC

Clare Isman, CMA, FCMAChair, Saskatchewan PublicService Commission, Regina, SK

Lynda Kitamura, CMAVice-President, Finance &Administration, and CFO,Hewlett Packard (Canada) Co.,Mississauga, ON

Glen LeBlanc, CMA, FCMASenior Vice-President and CFO,Aliant Inc., Halifax, NS

John Mould, CMA, FCMAOmbudsman, HSBC Bank Canada,Vancouver, BC

Editorial Think Tank

Survey results from the IFAC’s (International Federation ofAccountants) 2008 Global Leadership Survey suggests thecredit crisis is bringing attention to the value of professionalaccountants and the services they provide. Chief executivesand presidents of 110 accountancy organizations worldwideresponded to the survey. The majority of these organizationshave been actively engaged, like IFAC, in identifying andexecuting appropriate responses to the crisis, supportingtheir members in understanding applicable internationalstandards, and working with regulators, business groups andothers to find solutions. Many of these initiatives arefeatured on IFAC’s website www.ifac.org/financial-crisis/

“It is now up to the profession to continue to meet theexpectations of those that depend on our work and tocontribute to rebuilding confidence in financial markets,”Ian Ball, chief executive, IFAC, says.

Leaders of accountancy organizations reported anincreased trend in the need for services that are related insome way to the crisis. For example, in the coming year,they expect their members in public practice to be moreinvolved in corporate recovery and insolvency services,assurance services (other than audit), as well as risk andcompliance related work. Members employed in businessand industry are also expected to be more involved in riskmanagement, as well as in the areas of corporate socialresponsibility and sustainability, internal control, andgovernance and compliance work.


Global accountancy leaders address credit crisis

Correction notice

On page 3 of the February 2009 issue of CMA Management, Mr. Anthony A. Atkinson, FCMA, was wrongfully referred to as Mr. Anthony A. Atkins, FCMA. CMA Management regrets the error.


Expanding role of internalaudit increases need forspecialty skillsInternal auditors face new opportunities and agrowing skills gap as management increasinglylooks to them for business improvementrecommendations and coverage of a broader rangeof strategic and operational risks, according to theErnst & Young 2008 Global Internal Audit Survey.

“Difficult economic conditions and heightenedshareholder expectations have put pressure onexecutive management and audit committees toimprove risk management and deliver greatervalue,” Neil Aaron, global leader for internal audit atErnst & Young, says. “As a result, internal audit’srole is clearly evolving and becoming moreconsultative. Regulatory compliance continues to beimportant, but management now expectsperformance improvement recommendations andinsights into emerging risks, in addition to coverageof a much broader range of risks.”

The survey of 348 internal audit executives in 35countries shows a need for greater focus onoperational risks over the next two years, with 75per cent of respondents citing focus on IT, 61 percent on mergers and acquisitions, 53 per cent onmajor capital programs, 45 per cent on performanceimprovement, 44 per cent on information security,and 39 per cent on fraud. Yet, only 69 per cent ofrespondents are at or above 90 per cent ofbudgeted headcount, with 64 per cent indicatingthat recruiting and retaining subject matterspecialists in these areas is a challenge.

The survey finds that internal audit’s traditionalcompetencies don’t fully meet the needs of today’sorganizations. This lack of resources with relevantexperience and knowledge hinders the ability toconduct an effective risk assessment. Only 17 percent of respondents rated their risk assessmentperformance as “very competent.”

The full report is available at www.ey.com.

Respondents believe that the most important issuesfor the accountancy profession in the coming year are:l Addressing the needs of small and medium

enterprises (SMEs) and small and medium practices(SMPs);

l Meeting expectations to identify and prevent fraud; l Dealing with the changing regulatory landscape; andl Transitioning to International Standards on

Auditing.They also believe it is increasingly important to

address the transition to International FinancialReporting Standards, auditor liability issues, the use ofnew technologies like XBRL, and corporate socialresponsibility issues.

Recently-appointed IFAC president, Robert Bunting,has indicated that addressing the needs of SMPs andSMEs will be a priority for the IFAC over the next twoyears.

“The survey confirms that meeting the needs ofSMPs and SMEs is a global concern and a global goal.These entities are among those likely to suffersignificantly from the current financial crisis yet they areamong the least at fault. We must look for ways tomitigate the effect of the crisis on SMPs and SMEs,” hesays.

Other survey results point to an increase in theattractiveness of the profession to students. According tosurvey respondents, the factors positively influencingstudents are the career options available and earningpotential. However, leaders of accountancy institutesindicated that the two factors having the most negativeimpact on the attractiveness of the profession are work-life balance and legal liability. Most respondentsindicated that they have initiatives in place to addressthese issues.

We welcome your comments andarticle ideas.Please write to the Editor,

CMA CanadaMississauga Executive CentreOne Robert Speck Parkway, Suite 1400Mississauga, Ontario, Canada L4Z 3M3

Fax: (905) 949-0888email: [email protected]

As we use both sides. Our strategic management approach means with a CMA you’re getting more than just the numbers – you’re hiring a businessperson who understands there’s always more than one side to the story. To learn more visit CreativeAccountants.org


tactical soft skills for interacting in meetings — ways to interrupt,ask for clarification and verify understanding. Second, Tamrequired core language skills to increase his comprehension,fluency and accuracy, enabling him to enter the fray of a livelydiscussion with greater confidence and ease. Finally, Tam requiredcoaching on Canadian culture to grasp the simple fact that here,unlike in China, it is not an insult to ask one’s manager forclarification. Based on our recommendations, Tam’s managerarranged appropriate training and several months later, Tam’scommunication comfort level greatly improved.

Like a crossover vehicle, hybrid-communication training addressesmulti-faceted needsA multi-cultural workforce requires a multi-pronged approach tocommunication-skills training.

By Teresa McGill

Managers working with internationally-trainedprofessionals (ITPs) frequently face situations whereno single type of training seems quite right. Thesolution may be three-in-one hybrid training thatintertwines soft-skills strategies with English languageskills and intercultural awareness.

Recently, an engineering project managerdescribed a meeting in which her newest staffmember “Tam,” a senior engineer, and his colleagueswere exploring solutions to a difficult productionproblem. While most members of the team hadbecome animated and enthusiastically debated variousoptions, Tam was silent and withdrawn;characteristics he had not previously exhibited.

The engineering project manager explained thatshe had hired Tam, a relative newcomer to Canada,partly because of his reputation as the person acompany could call on to solve complex technicalproblems. In addition, Tam’s first Canadian employerhad commended his ability to initiate innovativeideas, his warm sense of humor and deftness atdefusing tension. Within weeks of hiring Tam, hehad successfully demonstrated these attributes;however, within time, Tam’s contributions to theteam started to diminish.

After probing the issues with Tam, it wasdiscovered that he had actually encountered a similarproduction issue at his previous job, and was eager torecommend a solution. However, he was simply toooverwhelmed by the fast-paced conversation of thisparticular meeting to contribute his suggestions.

As Tam elaborated on the details of hiscommunication struggle, it became apparent that theissues were threefold. First, he needed guidance on

human resources

human resources


Balance needed between technical and communication skills

In a workplace with increasing numbers of ITPs,many employers are discovering an imbalancebetween team members’ highly developed technicalskills and their less-advanced communicationabilities. Many newcomers experience challenges inadapting to Canada’s business communicationenvironment.

As a result, many gifted ITPs are frustrated tofind themselves assigned a narrow range of workduties, excluded from direct customer contact, andmissing leadership and career advancementopportunities. This is a serious issue from theperspective of engagement, productivity, retentionand career mobility.

Take for example, “Marjana.” A competent anddiligent IT professional, she had lived and worked inCanada for almost five years. But when she wasdesignated to oversee an important project, Marjanasoon found herself excluded from meetings with theclients. Her colleagues feared her abrupt speakingstyle would jeopardize client relations. Her companymissed having its most knowledgeable person at thetable; Marjana felt excluded and unappreciated, hercontributions marginalized. She began to considerseeking new employment opportunities. Fortunately,her organization’s training manager intervened andwas able to recommend appropriate communication-skills training. A year later, Marjana has become ahighly regarded team leader.

Hybrid training trumps single-prongedapproach

Tam and Marjana (both pseudonyms forconfidentiality) typify the many thousands of ITPsnow working for Canadian companies. With highlevels of formal education and valuable internationalexperience, they are ambitious, well-paid and eagerto continue learning and advancing. However,managers who want to support and encourage themin their communication-skills development are notalways sure how to select appropriate training.

Soft-skills training is often the first solution thatcomes to mind. It’s not unusual to find ITPs

sidelined in workshops on presentation skills, business writing,leadership, team communication and the like. Unfortunately, genericsoft-skills courses usually miss the mark for the new Canadianaudience since neither the curriculum nor the facilitator is equippedto address underlying language and culture issues. It’s fine to advise aparticipant that active listening includes clarifying tactics, but it’s alsoessential to reveal and rehearse the actual English phrases —grammatically correct, clearly pronounced and applied in a culturallyappropriate way. For ITPs, this level of granularity is crucial.

English as a Second Language (ESL) programs are anotheroption. While core language skills (grammar, vocabulary andpronunciation) and conversational fluency are important in business,the core-language curriculum is vast, and not all of it relates to aworkplace context. Moreover, most highly educated professionalshave already been exposed to their fill of “traditional” English classesand are ready for something better suited to their professional status.

Intercultural communication training is a third alternative.Undoubtedly, gaining insight into the subtleties of office politics is abenefit to new Canadians, but without a complementary languagecomponent, the practical benefits of this approach are limited.

Clearly, no single approach is sufficient. Innovativecommunication training firms begin with an analysis of a client’sneeds from a business perspective — soft-skill strategies and tacticsneeded to navigate daily work-related interactions. In a case such asTam’s, clarification tactics were crucial; for Marjana, diplomacy andrapport-building were key.

Effective communication skills convey confidence and capability.By combining, rather than isolating the three key areas ofcommunication training, employers who hope to attract, develop,retain and promote top talent of international origin can enable theirnew Canadian professionals to fully contribute to the workplace. n

Teresa McGill ([email protected]) is the president of Gandy Associates.

Unfortunately, generic soft-skills courses

usually miss the mark for the new Canadian

audience since neither the curriculum nor

the facilitator is equipped to address

underlying language and culture issues.

Honouring innovative thinking and celebrating excellence in public sector

www.comptrollershipaward.com


management trends

By Doug Barton

For private companies, better planning is acompetitive necessity, while in public companies,poor planning has a direct bearing on shareholdervalue.

Studies show that the markets consistentlypunish companies that do not accurately forecasttheir financial performance, even if thatperformance is objectively good. By contrast,companies that can consistently deliver forecastedresults are rewarded with a premium in theirmarket capitalization. Business leaders, analysts,and other business watchers have pointed out theneed to manage company-wide performance moreeffectively. Planning is a key element of thisperformance management (PM) approach. Smartorganizations are winning through an integratedstrategy for PM. They drive enterpriseperformance through planning; they monitorperformance through scorecarding, andunderstand performance through reporting andanalysis.

Introducing Enterprise Planning

What is the right solution for enterprises seeking ahigher level of execution? Is it budgeting andforecasting? Performance measurement? Financialreporting? Management scorecards? The fact is —taken separately — these initiatives are only partialsolutions.

True enterprise planning emerges wherebusiness planning, business intelligence andbusiness analytics intersect. The cornerstone isplanning. Performance must be planned in acoordinated way that integrates the manyplanning, reporting, and analytical processesunderway at a given time in a large enterprise.

Driving performance enterpriseplanningContinuing deregulation, advances in technology, new disclosurerequirements, and wary investors, creates both challenges and demandsfor accurate business planning and forecasting.

Enterprise planning is a multi-phased discipline that combines people,process, and technology in a rich, continuous, broadly collaborative cycle. Itprovides useful insight into past, current, and future operating performancein time to identify opportunities and affect outcomes.

Enterprise planning means articulating what you want to achieve, and howyou will achieve it — through a hierarchy of cascading plans, measures, andreports that flow from corporate objectives to tactical plans acrossdepartments, divisions, and locations. It relies on input of hundreds orthousands of people who must execute. And it stays up-to-date through real-time visibility and focus on the value-driving activities that affect performanceagainst stated goals.

Enterprise planning generates discrete plans and budgets for every relevantemployee and external partner and communicates those plans, and the actionsrequired, to those who need to know. It provides real-time feedback, realignsplans as the situation evolves, and simultaneously ensures performance plans


and forecasts are coordinated across functional and geographical silos, providing aconsistent, enterprise-wide understanding of how to execute the game plan.

Seven steps to best-in-class performance

1. Establish the game plan: model

The first step in any enterprise planning initiative is to start at a very high level toassess and define what best-in-class performance means to your organization. Thisincludes the metrics that define success in your markets and ways to maximize anorganization’s potential.

To get the full range of options, first determine what your key assumptions are:desired growth rates, market share, and productivity metrics. Once you’ve made thesedeterminations, you can create a model that properly links your drivers to outcomes.It is an iterative process that can range from strategic change — such as new ideas, ortechnologies — to operational change-such as daily updates of performance data forrapid assessment/adjustment. This is the ideal time to explore other options — forexample, what happens if you acquire or divest business lines?

2. Align the enterprise: plan

Once you have identified a strategic direction that enables competitive advantage, youneed to work with the rest of the team. This means cascading targets from top tobottom across the organization and exploring/validating those goals. When you alignthe enterprise, you solidify a corporate plan. You can ensure individual targetsproperly reflect the plan and that individual actions, decisions, and processes —enterprise execution — are synchronized and rewarded.

3. Communicate, coordinate, and commit: budget

Once you have defined the targets, you are ready to make the plan operational bybreaking it down into the activities, decisions, and initiatives needed to achieve yourgoals. In this phase, you distribute the individual plans and reach out into yourorganization to get bottom-up input from people who are on the front lines in everyimportant area of the company-such as sales representatives, production managers,marketing directors, and HR executives.

Their role is to validate your model and plan by providing bottom-upcontributions specific to their own areas of responsibility — what do they think theycan achieve? You need to gain their commitment and ensure their plans are alignedwith enterprise objectives. Individual contributors possess clearly defined objectivesand targets specifically related to the strategic goals of the organization. For example,engineers understand that competitive R&D spending trends will dictate theirbudgets. Virtually every engineer believes they can build better products for lessmoney than competitors.

4. Avoid surprises: monitor

After you’ve identified performance goals, created a game plan, and translated it intoactionable plans and budgetary parameters, you need to track progress and monitorday-today operational performance. As part of enterprise planning, you create a setof interconnected performance indicators that make goal driven metrics available tothousands of employees across your organization. Such metrics are easily understoodand clearly outline how individual decisions and actions fit into the strategic plan and


contribute to meeting operational goals. Accountability is enhanced as well, becausethere’s no doubt about organizational priorities — who is responsible for what andwhen.

5. Understand breaking news: analyze

In many organizations, this step is where enterprise planning often ends — and itshouldn’t. Ideally, all of these detailed, cascading plans should be “living documents”that are regularly updated based on analysis of your current operating performance.Forecasts should be refreshed on a continuing basis, becoming rolling forecasts thatgive a recurring 12-18-month window into future activity. An important part of thisrefresh cycle is analyzing results and fine-tuning your plans and forecasts. You canchange the game plan, if necessary, to achieve greater accuracy in meetingperformance goals.

6. Manage the gaps: report

Naturally, there will be gaps between corporate goals and individual opinions aboutwhat can be reasonably achieved. Are the targets wrong — or do contributors need tomodify their submissions? Through reporting, analysis, and planning iterations, youcreate detailed performance plans that support and align with the strategic goals of theorganization. And you can do this in a cross-functional way — not in silos.

Once those contributions are complete, higher-level managers review thesubmissions. Traditionally, review cycles have never been an optimized step in theoverall planning process. However, communication from the top down is thefoundation of enterprise planning and when executed well, a review cycle is extremelybeneficial to the process. A key reason for “review failure” has been the absence of atechnology platform that integrates all plans so that as one plan changes, itautomatically consolidates into the total plan-and aggregates “sideways” to all theother plans it affects.

As a result, most organizations’ review cycles are dictated by aggregation cycles —batch-oriented and the periodic collection of data about business outcomes (revenue)or resource requirement (expenses or capital requests). Individual managers andsupervisors must work according to a standard schedule instead of one optimized totheir own business needs. Aggregations can’t be performed until the last person doeshis or her work, which naturally causes many contributors to wait until the last minuteto complete their submissions. It also drives a fixed number of review cycles — whichmay be too many, or too few for individual groups.

7. Realign and re-focus: re-forecast

The final step ... is also the first step. Using your analysis and reports, you can alignwith the changes in your business environment. You can achieve a simple, but elusivegoal in planning and performance management — the rolling forecast. Bysupplementing-or even replacing — your annual budget with a rolling forecast, youreinforce planning as a core competency in the organization, a key management skillto be respected and honed through frequent application. In turn, you benefit fromincreased accuracy and the earliest possible visibility to future operating performance.It allows you to explore corrective actions where necessary, and keeps you aligned withyour corporate objectives. n

Doug Barton, MBA, CPA, is the vice-president, product marketing, financial performance management, at Cognos, an IBMcompany.

business strategies

The future is now: affordablestrategic advantages for saleCompanies that are highly leveraged and struggling in today’s tightcapital markets represent a competitive edge for purchasers.

By Christopher Porter

The grapevine is working overtime these days.Unpredictable stock markets and a globalrecession have transformed us into news junkies.We all want to know who’s doing well and who’sstruggling.

For small and mid-size businesses withambitious growth plans, this is a good time to stayclose to that grapevine. If your organization hascash, borrowing room or unencumbered assets, itcould reveal some timely opportunities to shop forstrategic advantages.

Companies that are highly leveraged andstruggling in today’s tight capital marketsrepresent a competitive edge for purchasers:critical mass, geographic expansion, productdiversification, a long-term customer base,intellectual property, a skilled workforce, arespected brand and others.

Well capitalized small and mid-size businesseshave another advantage over larger organizationsin today’s market — they tend to be agile, able tomake timely decisions and complete deals quickly.This is necessary when acquiring a company withliquidity challenges. While purchasing such abusiness obviously carries risks, many of these canbe managed through the appropriate transaction

structure and process. If you are looking for affordable strategicadvantages, here are some suggestions to keep in mind.

Quick decision making

It’s important to be aware that the acquisition process will likely becompressed and may be opportunistic. When an organization is


When an organization is

struggling to remain afloat

financially, decisions must be

made without delay.

struggling to remain afloat financially,decisions must be made without delay.Thus, it’s important to clearly definegoals before initiating an acquisitionsearch to readily determine whichbuying opportunity may achieve them.

It’s also helpful to plug into thatgrapevine and find out howcompetitors, suppliers, customers orothers in the industry are faring. If apurchaser prefers to maintain a lowprofile while doing so, transactionadvisory professionals can doconfidential inquiries on the buyer’sbehalf to determine whether acompany may be interested in selling.This approach can also help to preventa sale price from escalating insituations where a potential vendorbecomes aware of the identity of aprospective purchaser.

Often, due diligence will also haveto be conducted quickly for apurchaser to mitigate weaknessesarising from an acquisition’s escalatingfinancial challenges. But it’s stillessential to complete the necessaryreviews. A lawyer and financial advisorexperienced with mergers, acquisitionsand insolvency proceedings can ensurethis happens. A financial advisor caneven sign a confidentiality agreementwith the vendor and build arelationship to focus on the areas ofthe prospective acquisition that are ofmost interest to a buyer.Thisindividual can meet with management,investigate financial statements,customer relationships and financingarrangements and conduct a searchunder the Personal Property SecurityAct to determine which parties havetitle, security or claims on assets.

Under the restrictions of aconfidentiality agreement,

professionals would not be able toprovide a prospective purchaser withdetailed information about the vendororganization; however, a buyer couldhave a level of comfort regardingwhether the opportunity would beworth pursuing. If the purchaser thendecides to move forward, much of thedue diligence would have already havebeen completed and purchaser andvendor could focus on the mostimportant issues such as theintegration of the businesses.

In fact, effective integration is key tothe success of most businessacquisitions. It’s vital to look at thenature of both organizations andidentify where and how they need tobe integrated. Some of the mostcommon challenges relate to theworkforce, customers, products andbrands.

Since financially-challengedcompanies are often leaking cash andare unable to secure additionalworking capital, purchasers usually

business strategies



business strategies

want to minimize assumed liabilities. A variety oftransaction techniques can be used to limit andcontrol risk. These include purchasing assetsrather than shares and/or using an insolvencyprocess to disengage liabilities from assets.

Most vendors prefer to sell shares since thisgenerates capital gains. These have a lowereffective tax rate and vendors may be able to usethe lifetime $750,000 capital gains exemption. Aswell, some purchasers prefer to buy shares inorder to utilize tax loss carry forwards. When acompany is experiencing financial difficulties,however, most buyers will opt to purchase assetsin order to avoid creditor or employee claims orlitigation. There are a number of ways toseparate liabilities from assets. A purchaser canacquire the assets through a “vesting order” fromthe court as part of an insolvency proceeding, forexample, which provides a buyer with the rightsto assets free of liability to unsecured creditors.

When purchasing assets, a buyer must complywith the Bulk Sales Act. This legislation protectscreditors when a company disposes of its assets:buildings, inventory, equipment, fixtures, etc.The legislation is intended to prevent ownersfrom pocketing the proceeds from the dispositionof these assets and leaving creditors emptyhanded. Compliance requires the vendor to paycreditors at closing or to demonstrate to thecourt that creditors will be paid. If the proceedsof the sale will not be sufficient to pay creditors,they must be paid to a receiver or a Bulk SalesAct trustee. If a purchaser completes atransaction without bulk sales compliance, thebuyer may be responsible for creditor claims.Purchasing through an insolvency proceeding is acommon way of dealing with the Bulk Sales Actissue.

Some vendors and purchasers also make use ofthe Companies’ Creditors Arrangement Act

When purchasing assets, a buyer

must comply with the Bulk Sales

Act.

(CCAA) in order to restructure a financially-challenged businessand sell it as a going concern. By filing for protection under the Actor by issuing a Notice of Intention to make a proposal under theBankruptcy and Insolvency Act, a company may be able to staycreditors long enough to close the transaction. A financial advisorexperienced with insolvency proceedings can help the vendoroperation maintain cash flow until this happens. If there is a delayin closing the deal, the purchaser can sometimes enter into amanagement agreement to operate the business until closing.

An insolvency proceeding can also allow a company torestructure prior to a transaction. The organization might shutdown unprofitable divisions, disclaim leases, adjust employmentlevels, or dispose of redundant assets to make the business viable.

Standard purchase and sale agreement

While structuring a transaction appropriately can limit apurchaser’s acquisition risks, it’s also important to be realistic aboutthe limitations of representations and warranties. In a standardpurchase and sale agreement, these terms are usually extensive,specifying the rights and obligations of vendor and purchaserrelated to a range of issues: capitalization, financial statements,accounts payable/receivable, inventories, condition of properties,withholding taxes, undisclosed liabilities, intellectual property,contracts, litigation, insurance, employee benefit plans, and more.

Given the financial situation of a business in financial distress,however, reps and warranties would be limited. Many suchbusinesses are sold on an “as is basis.” An experienced insolvencylawyer can help a buyer achieve a comfort level with the scope ofpossible representations and warranties.

Like much in business life, purchasing any company is a leap offaith. If we thought too long about these decisions, we’d probablynever make them. Purchasing a struggling business, however, offersopportunities to accelerate long-term plans. One service company,for example, recently purchased the assets of a business, whichincluded an office location and most of the sales force andemployees. The purchaser was able to expand its productdistribution into new markets within weeks. If that buyer hadinstead recruited, hired and trained a team of this size, months ofintensive effort and a substantial investment would have beenneeded.

With defined goals, professional support and decisive decisionmaking, you may be able to accelerate your own future plans bypurchasing cost effective strategic advantages today. n

Christopher Porter ([email protected]), MBA, CA•CAIRP, is an associate in the transaction advisoryservices practice of BDO Dunwoody Ltd.


Planning and budgeting innon-profit organizations


By Michel Piché, CMA


Although it’s often seen as a cumbersome process bymanagement, planning and budgeting is an essentialactivity for any organization. Most accountants dreadthis time of the year almost as much as the traditionalyear-end closing and audit marathon. It sets manageragainst manager, program against program, witheveryone having to justify existing resource levels orrequests for new funding.

The alignment of strategic goals and budgets forpublic and non-profit organizations can take manytwists and turns. In participation with l’EcoleNationale d’administration Publique, the Secretariat inPublic Fund Management (SPFM) has put together“best practices” for planning and budgeting in thesetypes of organizations. These policies incorporateorganizations’ formal and informal practices andadvocate a goal-driven approach to budgeting, whichspans the planning, development, adoption, andexecution phases of the budget process. The ISPFM’swork emphasizes that budgeting must have a long-range perspective and not simply be an exercise inbalancing annual revenue and expenditures.

CASE STUDYThe Humanitarian Organization

A chief financial officer (CFO) started with TheHumanitarian Organization in the midst of theorganization’s planning and budgeting cycle. He hadthe immediate task of issuing budget guidelines tomanagers in order to start the process. Although hedidn’t know much about the organization and itsprograms, he spent considerable time gatheringinformation on strategies, operating plans, investmentprojects, financial policies, etc., including a detailedreview of the previous year’s budget document.

The Humanitarian Organization is a large aidorganization that operates a multitude of programs.The organization depends on donors’ contributions forits funding, but is also involved in many fee-for-serviceactivities to help generate additional revenue. It is

overseen by a complex system of local and nationalgovernance and involves volunteers to set theorganization’s strategic direction, approve budgets, andmonitor performance.

After reviewing documents and meeting with staffand volunteers, the CFO could not understand how theorganization was able to combine all of its programsand projects into a budget document. There was nospecific operating plan that linked the budget to thestrategic goals, budget policies were almost non-existent, guidelines dealt mostly with accountingmatters, performance indicators were nowhere to befound, and the previous year’s budget document readmore like a statement of intent.

The CFO realized that, although the board spentconsiderable time and efforts coming up with a multi-year strategic plan, this plan had little influence on theactivities performed in the field. The Organization’sprograms had been in place for many years andcontinued year after year with minimal changes.Budgeting was essentially a cost review exercise withefforts spent finding new revenue to fund increasingexpenses. It seemed that only a crisis could justifyobjective review and analysis of programs.

Regardless of the challenge, the CFO put togetherbudget guidelines based on more than 20 years ofexperience. He developed basic financial and budgetingpolicies “on the run” to provide for a more rationalbasis to assess ever increasing demands. These policieswere focused primarily on setting expected operatingoutcomes, price and cost increases, and capitalexpenditure limits.

As the budget process moved forward, it becameobvious that extensive negotiations would be requiredto address the managers’ many “wants and needs.”Despite the frequent communication withmanagement, staff, and volunteers, the numbers thatvastly exceeded the organization’s funding capacity.Furthermore, there was minimal alignment of thebudget requests and the organization’s strategic goals.

The CFO quickly realized that his most pressingchallenge was to find a way to impose order in the

Unless the process is supported by well-defined

policies and guidelines, clear strategic goals

and operating priorities, it can become quite

chaotic and confusing.


process while being respectful of the humanitarian culture ofthe organization.

After months of intense negotiations, the CFO thoughtthat he had achieved an acceptable balanced budget withappropriate capital spending. The board’s review meetingwas fast approaching and a final budget document had to becompleted and distributed. Unfortunately, despite theapparent consensus reached with managers, change requeststhat reflected latest economic conditions or additionalprograms’ needs kept arriving.

In order to meet the board’s deadline, the CFO had tomake last minute arbitrary decisions, some of which werenot well accepted. Discussions with managers and volunteerscontinued right up to the morning of the Board of Directorsmeeting.

The budget document was finalized within hours of theboard meeting. It was a balanced budget with acceptablecapital expenditures, but lacked specific operation’s targetsand had minimal alignment with the Organization’s strategicgoals. Although there was a separate operating planpresented to the board, it was generic and could not belinked to the financial numbers.

The Board of Directors did approve the budget documentbut not without concerns. Board members wanted tounderstand how resources allocated to the various programsrelated to the strategic goals.They also wanted to see keyoperating targets and performance indicators that wouldshow whether the Organization was using its resourceseffectively and efficiently.

After this humbling experience, the CFO summarized hisassessment of the planning and budgeting process. He notedthe following:

1. There were few planning and budgeting policies, ruleshad to be made on the run.

2. Budgeting was bottom-up without clear focus, based onlocal wishes.

3. National priorities were neither well understood norcommunicated by the regions, and mostly viewed as ahindrance.

4. There was no overall attempt to align operatingpriorities and strategic goals with resources.

5. There was absence of relevant operating targets andperformance indicators.

6. The operating plan and financial budget were preparedsimultaneously creating confusion with managers.

7. The final budget document presented to the boardcontained mostly financial data with very little strategic,operational, or risk assessment information.

The CFO proceeded to look for a plan and budget modelthat would provide a more effective and efficient process.His research brought him into contact with the Secretariatin Public Fund Management, where he was able to learnabout “best practices” in planning and budgeting.

April

Sessions onStrategic

Orientations

StrategicOrientationsadaptation

Beginning ofthe Fiscal

Year

May

Presentationto the Board

FinancialStatements

September

Tabling ofOrientationsand Action

Plan

November

Confirmationof Orientationsand Action

Plan

Formulationof BudgetHypothesis

Level

Board/Mana-gementCommittee

PermanentPersonnelDivision/Regions

Performancemeasure-ments (KPIIndicators)

June July/August

FirstQuarterlyReview

October

SecondQuarterlyReview

December January February/March

BudgetApproval

Development and Implementation ofStrategic Actions

Budget Preparation

Third QuarterlyReview

Figure 1. Annual Planning and budget cycle

The alignment of strategic goalsand budgets for public and non-profit organizations can takemany twists and turns.


Secretariat in Public Fund Management (SPFM)

Founded in 2005, the SPFM is a non-profit organizationwhose main purpose is the advancement, promotion andimplementation of best management practices in publicand non-profit organizations. The SPFM works closelywith the Government Finance Officers Association(GFOA) in Canada and the United States to developpractical models that can help organizations manage andmonitor the use of public/donor funds.

Best practices

An annual budget cycle should include a broad scope ofplanning and decision making based on four key principles:l Establish broad goals to guide the organizations

decision making.l Develop approaches to achieve these goals.l Develop a budget consistent with the approaches to

achieve the goals.l Evaluate performance and make adjustments.

A good budget process should:l Incorporate a long-term perspective.l Establish linkages to broad organizational goals.l Focus budget decisions on results and outcomes

(budgeting for outcomes).l Involve and promote effective communication with

stakeholders.l Provide incentives to the organization’s management

and employees.As per the SPFM, the budget process must help decision

makers make informed choices about the selection ofprograms and services and the allocation of resources.

The four principles are mapped into an annual planningand budgeting cycle that supports the preparation of acomprehensive budget document covering critical financialand budget policies. An example of the model is presentedin Figure 1.

Financial and budget policies

Having gone through a chaotic planning and budgetingcycle, the CFO recognized the importance of formalizedfinancial and budget policies and turned to the SPFM forhelp.

Through its research, the SPFM developed financial andbudget policies based upon principles recommended by theNational Advisory Council on State and Local Budgeting(NACSLB) and the GFOA.

The SPFM key financial and budget policies aresummarized in Figure 2. They are considered fundamentalto the planning and budgeting process of public and non-profit organizations.

The SPFM financial and budget policies are categorizedin three groups:

Figure 2. Management and financial policies

FINANCIAL PLANNING POLICIES REVENUES POLICIES EXPENDITURE POLICIES

1. Strategic and financial long-range planning. 5. Revenue diversification. 9. Reserve or stabilisation accounts and preparedness

2. Policies validation and investment projects. 6. Fees and charges. in case of disaster.

3. Structurally balanced budget. 7. Use of one-time revenues. 10. Operating / capital expenditure accountability.

4. Asset inventory, their valuation, and sustainability. 8. Use of unpredictable revenues.

BEST IMPLEMENTATION PROCESS

l Strategic planning process (forward looking).l Efficient internal control, audit committee and risk management.l Performance management and evaluation for decision making (performance indicators).l Value management (VM).

BENEFITS

l Financial and budget management oversight. l Improved program management l Enhance techniques and provide clear and relevant l Efficient use of revenues. support and resources allocation. information about effective strategies.

l Better infrastructures. l Greater transparency and citizen involvement.

Having gone through a chaoticplanning and budgeting cycle,the CFO recognized theimportance of formalizedfinancial and budget policiesand turned to the SPFM forhelp.


Planning policies

Financial planning policies help organizations establish amore comprehensive long-term view and create a visiontowards a sustainable future. They comprise:1. Long-range strategic and financial planning.2. Validation and investment projects.3. Structurally balanced budget.4. Asset inventory (and management), their valuation,

deferred maintenance and sustainability.

Revenue policies

Understanding the revenue stream is essential to sensibleplanning. Most of the following revenue policies seekstability to avoid potential service disruptions caused byrevenue shortfalls. The organization needs to developpolicies focusing on revenue diversification, fees andcharges, use of one-time revenue, and use of unpredictablerevenue.5. Revenue diversification.6. Fees and charges.7. Use of one-time and unpredictable revenue.

Expenditure policies

The expenditures of public and non-profit organizationsreflect their ongoing service commitment. Strategicexpenditure planning and accountability helps ensure fiscalstability. It is recommended that organizations adopt debtcapacity, issuance and management, reserve or stabilizationaccounts, and operating/capital expenditure accountabilitypolicies.8. Debt capacity, issuance, and management.9. Reserve or stabilization accounts.10. Operating/Capital expenditure accountability.

The financial and budget policies listed above aresupported by a comprehensive guide developed by theISPFM, which provides details on their use. This guide canbe adapted to every organization following an initialassessment of the entity’s planning and budgeting process.The ISPFM guide is a work in progress that continues to beupdated based on development from various groups,including the GFOA.

The implementation of the ten ISPFM recommendedfinancial and budget policies will help the organization:l Improve its financial management process.l Reassure stakeholders about the administrative and

organizational planning. l Make the most efficient use of resources in achieving

long-term strategic and financial goals. The use of the recommended financial and budget

policies will encourage the development of organizationalgoals and plans to achieve these goals, and the allocation ofresources through a budget process that is consistent withsuch goals, policies, and plans. Given the evolving nature of

good management, budgeting and finance, these practicesare not intended as mandatory prescriptions for theorganization. Rather, they are practices that provide amilestone for the organization to make improvements to itsfinancial and budget processes. Implementation of thesepractices is expected to be an incremental process that cantake a number of years.

After gaining a good understanding of the concepts andapplication of these best practices, the CFO began to applythem within The Humanitarian Organization. He soondiscovered that it was a much more difficult task than he hadinitially expected. Board members and staff could notunderstand why all this work was necessary and whyplanning and budgeting had to be an ongoing process.There were also some internal struggles to understand themeaning of the ten financial budget policies and subtleresistance to the need for increased transparency andaccountability.

It became clear that these policies would have aconsiderable impact on the Organization’s planning andbudgeting practices, but also in many other aspects of itsfinancial and program management. Most importantly, theboard and senior management had to be convinced to adoptthese policies as part of their ongoing governance role.

The CFO spent considerable time selling these “bestpractices” to board members all the way down to operations’managers (including accounting staff). It took many years ofhard work, but in the end, the CFO was able to develop aplanning and budgeting process which provided alignmentbetween the organization’s strategic goals and operationalpriorities, enabled effective allocation of capital and programinvestment resources, and, provided clear performancemeasurement indicators. More importantly, it presented keystakeholders with an objective view of the organization’splanning and budgeting process. n

Michel Piché ([email protected]), CMA, CIA, M.P.A., is a finance and corporateservices executive with 30 years’ experience in public and private organizations. Hespent the last 12 years of his career as CFO in diverse sectors including: aninternational non-profit organization, global mining services group, andtelecommunications service provider.

As per the SPFM, the budgetprocess must help decisionmakers make informed choicesabout the selection of programsand services and the allocationof resources.


hat do companies do once they haveidentified the profitable and unprofitablecustomers? How do they attract and retainthe profitable ones? Should they “fire” the

unprofitable ones? Or are there ways to tweak product orservice offerings to improve profitability across the board?

The AICPA, CMA Canada and CIMA shed some light onthis topic in a published Management Accounting Guideline(MAG) TM, “Managing Customer Value,” which examines newtools and techniques for measuring and managing customerprofitability, retention, and lifetime value.

A large and growing body of evidence indicates that, mostcompanies have great customer diversity, with somecustomers being highly profitable to the company and othersbeing enormously unprofitable. Recognizing differences incustomer profitability is critical to a firm’s ability to derivevalue from its customer investments. Despite enormousvariations in profitability, many companies continueunprofitable relationships with customers, often providingthem with pricing and service levels identical to those receivedby the most profitable ones. Why? In most cases, companiessimply do not know who the unprofitable customers are. Assuch, they are unable to develop strategies to direct marketingor manage costs accordingly.

Swedish automotive giant Volvo has discovered the value ofcustomer profitability information. For years, Volvo used asophisticated method for measuring customer satisfaction forits customers in Sweden. Using this data, Volvo has built anextensive database that allows the company to examinerelationships between products and services provided and

dimensions of customer satisfaction. As a result of a recentstudy, Volvo was able to match customer profits with otherinformation in the database, allowing the company to use thesatisfaction database to predict the future profitability of itscustomers (Johnson and Gustafssen, 2000).

Companies don’t necessarily need a state-of-the-artdatabase or analytics technology to improve customerprofitability. Rather, they can follow a comprehensiveapproach for measuring and managing customer value calledthe “Customer Value Management Cycle,” which isillustrated in Exhibit 1. It is designed to work in a cyclicalmanner, allowing companies just beginning to measurecustomer value to gain insights that can help them enhanceand sustain effective strategies. The Customer ValueManagement Cycle presents a comprehensive model formeasuring and managing customer value — it has fiverecurring steps.

Managingcustomer value

Some customers are more profitablethan others. Conversely, some aredownright unprofitable. Knowing

“which is which” is the all-importantquestion.

By Marc J. Epstein, Michael Friedl and Kristi Yuthas

WCompanies don’tnecessarily need astate-of-the-artdatabase or analyticstechnology to improvecustomer profitability.


1. Manage customer segmentation. Customer segmentationrefers to the process of dividing customers into groups fordecision-making purposes. Companies naturally segmentcustomers in order to better serve their needs. It is alsoimportant to note that how the company segments itscustomers can have an important impact on companyprofitability as well. Segments are often determined on thebasis of customer similarities, such as personal characteristics,preferences, or behaviors. Ideally, segments should correlateto behaviors that drive customer profitability.

Segmentation allows a company to provide differentialadvertising or value propositions to different customergroups. Segments are continually redefined as the processrepeats and customer understanding is refined. For manycompanies, segments support marketing activity; for example,customers can be grouped based on marketing-related

characteristics such as expected responses to advertisementsor expected purchasing behavior. As firms move towardrigorous measurement and analysis of customer profitability,they may refine segments, or create new segmentationstructures.

For example, a cleaning service company may havethousands of similar customers that could be divided intoresidential and corporate customer segments. It could furtheranalyze subsegments such as size of space being cleaned,frequency of cleaning, and the industries of corporatecustomers. This analysis can lead to a better understandingof both customer needs and profitability and relevantmanagerial actions to improve success.

It is also important to include potential customers into thesegmentation strategy. As companies make decisions aboutproducts and marketing strategies, they focus not only on


markets they currently serve, but also on markets they want toserve. Including potential future customers allows a companyto predict how well the company can meet the needs of thesecustomers, and how they can be managed most profitablyover the long-term.

2. Measure customer margins. Although almost allcompanies have processes for assessing the profitability oftheir products, most are far behind in assessing theprofitability of their customers. Nonetheless, understandingthe profitability of individual segments and customers iscritical to corporate profitability.

Some customers are highly profitable, some are moderatelyprofitable, and some are unprofitable. Many people believethat the 80-20 rule can be applied to customers, whichsuggests that 20 per cent of the customers are responsible for80 per cent of the profits. However, results for manycompanies have been far more extreme.

For example, at Toronto-based Royal Bank, 17 per cent ofcustomers account for 93 per cent of the bank’s profits. All ofthe remaining customers provide only small levels of profit orgenerate losses for the company. So, rather than the 80-20rule, some have suggested that 20 per cent of the customersare generating 150 per cent of the profits, with the remainingcustomers adding little or generating losses that draw profitsback down to 100 per cent.

Clearly, to enhance value from its customer base, acompany must develop the capacity to measure theprofitability of its customers so that it can develop appropriatestrategies for effective management. At a minimum,companies should measure revenue and gross profit by eachcustomer segment.

However, allocating sales, marketing and customer servicecosts brings this analysis to the next level. Selling costs inmany organizations vary significantly between customers and

segments. This disparity could beremedied by simple changes in the salescompensation plan that rewardsprofitable deals more highly than less.

Kemps LLC, a large full-line dairyheadquartered in Minneapolis, found thatone of its customers regularly orderedsmall quantities and required just-in-timedelivery. Other customers regularly over-ordered and returned products. The coststo serve these customers proved higher,and the profits they provided were lowerthan those of comparable customers(Kaplan and Anderson, 2004).

In order to be effective, eachorganization should look at the highestcost line items and determine whetherthere is reasonable basis under which toallocate the costs to customers orsegments.

3. Measure customer lifetime value. “Customer lifetimevalue” (CLV) introduces a new dimension to understandingthe value a customer provides by enhancing margin-basedprofitability calculations, which focus on the profits alreadyrealized as a result of customer purchases. CLV takes a verydifferent approach. It treats customers as valuable corporateassets. Like other assets, customers produce income flows thatare realized in the current period. In addition, these assets canbe expected to produce additional income to the company infuture periods.

The lifetime value of the customer reflects the presentvalue of all expected future flows associated with thecustomer. Companies that use CLV recognize that acustomer’s profitability in one period isn’t necessarilypredictive of profitability in other periods, since revenues andcosts can vary significantly over time. Thus, CLV valuescustomers on the basis of their expected future income-generating potential, rather than solely on their past behavior.

Typically, the customer relationship begins when thecompany invests to attract the customer. Over time, however,acquisition costs and other early investments in the customerrelationship can be recovered. As the relationship matures, thecustomer’s sales volume may grow and becomes moreprofitable. This accumulation should accelerate over time fortwo reasons. First, the cost to serve the customer shoulddecrease as a percentage of revenues because the customer’sknowledge of the company and its products, together withincreasing trust, may lead to reductions in promotion,training, and relationship maintenance costs. Second, as therelationship matures, the customer may be more likely torespond to cross-selling or up-selling initiatives.

Netflix has been using CLV. It identifies five maincomponents of its CLV estimate including forecastingacquisition rate, acquisition cost, retention rate, retentioncost, and change in margin per customer over time. Since

1. Manage customer segmentation

5. Managecustomerprofitability

2. Measure customer margins

3. Measure customer lifetime value

4. Measure customer impact

Exhibit 1: The Customer Value Management Cycle


online subscribers drive Netflix’s revenues, the company isable to report a detailed account of subscriber informationthrough its customer database, allowing it to predict CLVwith reasonable accuracy (Gupta and Lehmann, 2005).

Thus, by expanding the notion of profitability toincorporate profits over the entire lifetime of the customerrelationship, marketers have significantly enhanced theirability to effectively manage customers for enhancedprofitability. Calculating CLV requires an understanding ofcustomer retention rates in addition to purchasing patternsand costs for each segment, then discounting the values to thepresent. Simply put, CLV is the present value of profits overthe lifetime of the customer or segment.

This analysis can significantly impact a company’s view of asegment with small initial purchases, but with a long expectedrelationship, versus a segment with a larger initial purchase,but limited repeat potential.

4. Measure customer impact. The final component of valueprovided by the customer is customer impact. Activity-basedcosting and customer lifetime value have enabled companies tomake great advances in understanding the expected profitabilityof their customers. They can provide excellent estimates of thevalue that each customer and segment provides to the companythrough normal purchasing and usage.

But these approaches often fail to capture some potentiallysignificant sources of value customers can provide to thecompany. Of course, profits resulting from current or futuresales to customers are the most significant source of value formost customer segments. But value can be created (ordestroyed) by customers in many other ways that fall outsidethe reach of CLV.

Two critical sources of hidden customer value are discussedhere — customer influence and customer knowledge.

Customer influence refers to the influence the customer has,either through intentional action or passive behavior, on othercustomers, on employees, or on other stakeholders of the firm.

Customer knowledge refers to the actionable knowledge thatcan be gained by the company, either through analysis ofcustomer behavior or through direct customer input. Throughtheir interactions with the product, with the company and withother stakeholders, customers can affect value in numerousways, ranging from identifying small errors in technical

documentation to significantly influencing the image of thebrand.

Although influence and knowledge contributions will alwaysbe difficult to define and measure, even rudimentary estimatesof direction and magnitude can be valuable. To ignore suchcontributions is akin to assigning them a value of $0, which iscertainly incorrect, and may rob the company of theopportunity of investigating these increasingly importantaspects of customer value.

Over time, companies that think creatively about a full rangeof sources of customer value gradually improve theirunderstanding of these sources, and their ability to assess andmeasure them. Embarking on this process opens new avenuesfor innovation in products and methods, and generates newoptions for maximizing long-term customer value.

5. Manage customer profitability. This is where the proverbialrubber meets the road. All of the information derived from themeasurement of customer value should be analyzed, andactionable tidbits should be derived. This goes far beyondsimple reporting of which segments have been more or lessprofitable. Innovative segmentation and interpretation of theresults can uncover areas where small improvements can yieldbig improvements in value. For example:l A segment where technical support costs are disproportion-

ate could drive improved documentation. l Segments with lower expected customer life could reveal a

lack of attention from the customer service team. l A segment with high revenues but low profits might indicate

the need to retool the sales compensation scheme to shiftincentives to increase focus on profits.

The Walt Disney Company, for example, found that its loyalcustomers were spending only a fraction of their vacationbudget on Disney products and services. Disney responded byexpanding its offerings to include hotels and other services and,as a result, greatly increased the profitability earned from manyof its customers.

By measuring on the profitability of segments and managingcustomer relationships based on customer value, both thecustomer and company win. Orienting an organization aroundmeasurement and management of customer can take placeimmediately, or it can take many periods, implementing thesestrategies one step at a time, and adjusting and refining alongthe way. Over time a company will gain invaluable knowledge,and be able to put it to work for the mutual benefit of allstakeholders.

Because of their unique qualifications and abilities, financialmanagers should take the lead in translating analysis to actionand creating the culture of value. n

Marc J. Epstein, PhD, ([email protected]), is distinguished research professor of manage-ment at Jones Graduate School of Management at Rice University in Houston, Texas.

Michael Friedl, CPA, ([email protected]), is the CFO of Crestwood Pacific Group inNewport Beach, California. He has served on review committees for several managementaccounting guidelines, and has spoken to professional groups about customer relation-ship management and fraud detection.

Kristi Yuthas, PhD, ([email protected]), is Swigert Endowed Information Systems manage-ment chair at Portland State University.

As companies makedecisions about productsand marketing strategies,they focus not only onmarkets they currentlyserve, but also on marketsthey want to serve.


By Ma r g a r e t Wood s a nd Ke v i n Dowd

recent report1 states that, as of July 2007, theaggregate pension deficits and surpluses ofFTSE (Financial Times Stock Exchange Index)100 firms stood at a comforting £12 billion ($21billion) surplus under accounting standardIAS19. Does this suggest that the “pension

crisis” is over? Not quite. The same report also indicates that,the aggregate position then “fluctuated wildly” over the nextyear and, as of mid-July 2008, stood at a deficit of £41 billion($72 billion). The report describes financial conditions in2008 as “brutal” and estimates that these same companies’pension schemes lost approximately £83 billion ($145 billion)this year, thanks to a combination of falling equity marketsand rising inflation. This problem is not unique to the UK —other countries are reporting similar problems.

Recent financial problems put financial risk management atthe top of the corporate agenda. A forthcoming ManagementAccounting Guideline (MAG)TM — “Financial RiskManagement for Management Accountants” addresses thisissue and explains how firms can manage their financial risks.

Before these risks can be managed, however, they have tofirst be quantified, and there are a number of quantificationmethods available. Two of the more important are sensitivityanalysis (sometimes also known as stress-testing orscenario analysis) and value-at-risk analysis (VaR).The results of such analyses can be very useful forboth internal and external risk reporting purposes.

Scenario analysis

Sensitivity analysis involves postulating a “what if?”scenario and then working through its possible effectsusing a financial model (e.g. a spreadsheet model). In apension’s context, a company operating a definedbenefit pension scheme will be concerned about howmuch the present value of its future pension liabilities

might change in response to shifts in key “risk factors.” Thesewould typically include salary growth and the discount rate,amongst others. Consequently, the present value of itspension liabilities is dependent upon the estimates for bothsalary forecasts and the discount rate. Given this dependence,it is important for the firm to gauge how much its pensionliabilities might change in response to changes in these riskfactors.

The table shows that the liability increases byapproximately 12 per cent for each one per cent increase insalary growth. The table also shows that the pension liabilityfalls by approximately the same amount in the face of eachone per cent increase in the discount rate. These figuresindicate that the value of the pension fund is very sensitive tochanges in these key factors and that the pension fund is veryrisky.

A real-world instance, and an example of good practice inthis area, is found in the 2007 annual report for Centrica. Thereport not only discloses the key assumptions on which thepension valuations are based, but also discloses the impact ofchanges to the assumptions. These assumptions relate to therate of increase of salary, the rate of increase of pensionscurrently payable, the discount rate, the inflation rate and


Pensions are definitely risky, and accountants should be concerned. The

stock market now views pension liabilities as a form of corporate debt.

It’s an accountant’s worst nightmare when fluctuating pension values

feed right into fluctuating firm valuations.

A

Present value of pension liability

Discount Rate

Salary Growth 4 per cent 5 per cent 6 per cent

3 per cent $100,449 $90,000 $81,229

4 per cent $113,004 $100,559 $90,184

5 per cent $127,901 $113,004 $100,667

The table illustrates how pension liability might change under differentassumptions.


male and female life expectancies. The report also focuses onthe impact on the valuations of changes of plus or minus 0.25per cent to each of the rates just stated, and changes of plusor minus one year to life expectancy. In the case of Centrica,a change of 0.25 per cent in salaries or a one year change tolife expectancy leads to a 2 per cent change in schemeliabilities, an increase of 0.25 per cent in pensions payable(currently or deferred) leads to a 4 per cent change in pensionliabilities, and a change of 0.25 per cent in either the discountor the inflation rate leads to a 6 per cent change in liabilities.This information provides a good picture of the scheme’sexposure to different risk factors.

The longevity risk factor, how long people will people liveafter retirement, is particularly important. It has becomeincreasingly clear in the last few years that, longevity is notonly rising rapidly, but is also very uncertain. This means thatpension funds are highly exposed to longevity risk and firmswith pension funds need to assess the sensitivity of theirpension liabilities to changes in longevity. An example ofgood practice in this respect is provided by the InvestmentCompany Institute (ICI). In 2005, the ICI reported that itspension deficit of £470 million ($822 million) could in fact be£250 million ($437 million) higher if the mortalityassumption was adjusted to take account of known increasesin longevity. When liability measurements are this sensitive,it makes sense for firms to report pension fund valuationsbased upon a range of variations in mortality assumptions: forexample, as Centrica do, they might disclose the impact of aone year improvement or deterioration in life expectancy onthe present value of their pension liabilities.

VaR analysis

Another popular approach to riskquantification is VaR analysis. The VaR canbe defined as the maximum loss on aposition or portfolio at a specifiedprobability level over a specified horizonperiod. For example, a company may own aninvestment portfolio on which the riskmanager estimates the VaR to be $14million, at a 95 per cent probability over a10-day horizon period. This means that, ifno investments are bought or sold over a 10-day period, there’s a one in 20 chance of theportfolio value falling by $14 million. Andone day out of 20, the portfolio is expectedto make a loss exceeding $14 million.

VaR can be a useful tool for helpingmanage the complex risks involved withpension funds. An example of VaR analysisapplied to pension risks is available in arecent article by Mercers.2 In their example,a company sponsors four different definedcontribution pension plans with assetstotalling €1.6 billion ($2.2 billion) and

corresponding IAS19 liabilities of £1.7 billion ($2.4 billion).The estimated VaR for the sponsoring company is about£480 million ($671 million). The VaR is predicated on a onein 20 probability and a horizon of ome year. On one year outof a possible 20, the company can expect to lose more than£480 million ($671 million) through adverse movements inthe variables that affect both its assets and liabilities. Mercersshows how VaR-type analysis can be used to determine thebreakdown in its risk exposures, that is, to identify how mucheach risk factor contributes to the company’s overall VaR.This information is very useful for determining how that riskexposure can then be managed.

Longevity fan charts

In the case of pension risks, there is also a recently developedquantification tool known as a fan chart. This is a plot thatquantifies the uncertainty in a future random variable - in thiscase, future longevity — by showing the different ways itmight evolve in the future. An example is the longevity fanchart shown below3:

The key to understanding the fan chart is the shading - the

35

30

25

20

152010 2015 2020 2025 2030 2035 2040 2045 2050 2055

EFL in 2006 = 19.8

Expected EFL in 2056 = 27.4

90% confidence interval for EFL in 2056 = [23.8 31.4]

Source: Dowd et al. (2008)

A longevity fan chart

The longevity risk factor, howlong people will people liveafter retirement, is particularlyimportant.


darker the shading the more likely the outcome. The darkershading towards the middle of the chart indicates the mostlikely outcomes as projected by the model; outcomes becomeless likely as focus is moved away from the middle of the chartand the shading becomes lighter. This particular fan chartrefers to the expected future lifetime of English and Welshmales aged 65 and tells us that the expected future lifetime ofthese males is likely to rise from 19.8 in 2006 to 27.4 (or by38 per cent) by 2056.

The user/reader can then reasonably infer that the costs ofincreased longevity are likely to rise by a comparablepercentage.

However, the usefulness of the fan chart does not stopthere. In addition, the fan also shows two black linessuperimposed over the green shading. These are the “riskbounds” which shows a sense of the uncertainty in the fanchart projections. In this particular case, the risk boundsindicate that 90 per cent probability can be attached to theactual uncertain outcome — in this case, the expected futurelifetime - falling between the risk bounds. In other words:There is a 90 per cent probability that the expected futurelifetime for 65-year-old males in 2056 will turn out to bebetween 23.8 and 31.4 years.

What is striking about this range is just how wide it is —consequently, besides indicating that the future life expectancyis likely to rise appreciably, the fan chart also indicates thatfuture life expectancy is also very uncertain.

Managing pension fund risks

How do you manage a risky pension fund? The answer dependson the factors the fund is most exposed to. The two risk factorsthat come up continuously as critical in recent assessments ofpension risk are interest-rate risk and longevity risk.

The management of interest-rate risk is, in principle, fairlystraightforward and has been well understood for a long time.4

There a number of strategies available such as various formsof immunisation and asset-liability management. There is alsoa wide range of instruments available to implement suchstrategies and alter a firm’s interest-rate risk exposure.Perhaps the most useful of these are interest-rate swaps —arrangements in which two parties agree to swap futurecashflows. A good example is a fixed-for-floating interestswap, in which one party agrees to pay a fixed rate and the

other agrees to pay a floating rate. Such arrangements allow afirm to change a floating rate cashflow into a fixed ratecashflow, and vice versa. There are also many forms of cross-currency swap, in which one party pays in one currency andthe other in another currency. Swaps are highly flexiblearrangements that can be arranged (and unwound) at low cost.There are a great variety of other interest-rate derivatives,including many forms of interest-rate forwards, futures andoptions, which have many different uses in managing firms’interest-rate risk exposures.

By contrast, the management of longevity risk is verydifferent and much more challenging. The importance of thislongevity risk has only recently become apparent and the toolsfor managing it are still relatively few. However, the numberof tools available is growing rapidly — prominent amongstthese are securitizations (or pension fund buyouts), in whichthe company concerned pays a counterparty to take on someor all of the risks in its pension fund. The most active marketfor these securitizations is in the United Kingdom, where anumber of buy-out funds, such as Paternoster (backed byDeutsche Bank) and Synesis Life (backed by JPMorgan) wererecently set up for this purpose. The last few years have alsowitnessed the birth of a new market in traded mortalityderivatives — including swaps and forward contracts based onunderlying mortality rates. An example is the mortalityforward contract (known as a q-forward) announced betweenJP Morgan and UK insurer Lucida in February 2008. Indeed,this “market in death” is rapidly becoming one of the liveliestmarkets around these days, and no doubt has a long andprosperous life ahead of it.5

References

D. Blake, A. J. G. Cairns and K. Dowd (2008) “The Birth of the LifeMarket.” Asia-Pacific Journal of Risk and Insurance, forthcoming.Centrica, 2007 Annual Report. Fabozzi, F. J. (2000) Bond Markets, Analysis and Strategies. 4th edition.Prentice-Hall: Upper Saddle River, New Jersey.Dowd, K. D. Blake and A. J. G. Cairns (2008) “Facing Up to UncertainLife Expectancy: The Longevity Fan Charts.” Mimeo, Centre for Risk andInsurance Studies, Nottingham University Business School.ICI (2005). Annual Report.Lane, Clark and Peacock LLP (2000) “Accounting for Pensions 2008: UKand International”. Available on the web at www.lcp.uk.com. The Mercers Company. (2007) “Managing Corporate Pensions ExposureGlobally: The Power of Value at Risk.” Available on the web at www.mer-cers.com.

Kevin Dowd is professor of financial risk management at Nottingham University BusinessSchool. Margaret Woods is associate professor in accounting and finance at NottinghamUniversity Business School.

1 Lane, Clark and Peacock (2008, p. 2).2 Mercers (2007).3 For more on the fan charts and their uses, see Dowd et al. (2008).4 Fabozzi (2000) provides a nice overview of this field. 5 For more on longevity risk management, see, e.g., Blake et alia (2008).

There are a great variety ofother interest-rate derivatives,including many forms ofinterest-rate forwards, futuresand options, which have manydifferent uses in managing.


ince joining Helly HansenCanada Limited (HHCL) 11years ago, Clarke has watchedhis career run full circle.

Clarke has worn many“hats” throughout the organization.He began his career with the companyas the accountant/IT manager for sixyears then became the vice-presidentof operations in 2003. In April 2008,Clarke was promoted to president.

“When I became the vice-presidentof operations, it was a formalization ofwhat I had been doing for a couple ofyears,” Clarke says. “I had theopportunity to learn the business fromevery aspect. I’ve unloaded and loadedtrucks, I’ve packed boxes, and I’vemade labels in our plant. I wasafforded the opportunity to indulgemy nosey nature and learn thisbusiness in every aspect.”

When Clarke was interviewed for ajob at HHCL, the owner was lookingfor an individual who could transitioninto a senior role in five to 10 years.

“I actually interviewed for the jobthat I have today 11 years ago, so as apart of my development it was

essential to learn all areas of thebusiness,” he says. “The role aspresident, however, is not thedestination I thought it would be. It isjust the beginning of a whole newlearning experience.”

HHCL is a Nova Scotia ownedlicensee of Helly Hansen Norway. As amanufacturer and distributor of HellyHansen work wear clothing, thecompany employs more than 110Nova Scotians in its 115,000 sq. ft.facility in the Burnside Industrial Parkin Dartmouth, Nova Scotia. Since1998, the company has been ISO 9002registered and has worked to improveits products, service and qualitycontrol. The company’s commitmentto design helped the company achieveISO 9001-2000 registration in 2003.

Personal challenges

When Clarke joined the HHCL teamhe realized that he needed to make achange, both personally andprofessionally.

“I knew that I had a corecompetency around business, but I alsoknew that I lacked the technical skills,”

he says. “Most of it revolved aroundaccounting and finance. Once I startedto get into the CMA program further,I realized how little I knew aboutorganizational design, humanresources, strategy and the wholegamut of being a well-roundedbusiness leader. The CMA programfilled the gaps,” he adds. “Once Iobtained my designation, I feltqualified to sit at a table and createpolicy and actually lead a session withtalented people and put tangible plansin place and make them come true.”

C h a m p i o n i n gc h a n g e

D a n C l a r k e , C M A , i s ap r o p o n e n t o f c h a n g e .

B y A n d r e a C i v i c h i n o

S


He laughs when he remembers being asked if he wantedto obtain the CMA designation in order to become a betteraccountant.

“That’s the last thing I wanted,” Clarke chuckles. “Iwanted to become a better manager and leader and this wasthe designation that would give me the ammunition Ineeded to fight the battle. I have not forgotten thatinstructor because whenever I get too far into the numbers, Iremember all of the wonderful things I’ve learned and itputs me in perspective on what I’m supposed to be doing.”

Adapting to change

Over the past 11 years, Clarke says the company has evolvedfrom an entrepreneurial family business to one withprofessional leaders and managers. Through a culmination

T h r o u g h a c u l m i n a t i o n o f n e wi d e a s , a s t r o n g e r w o r k f o r c e ,i m p r o v e d p r o d u c t s a n d e x p a n s i o n ,t h e c o m p a n y h a s a l s o i n c r e a s e d r e v e n u e f r o m a p p r o x i m a t e l y $ 9 . 5 m i l l i o n t o $ 2 5 m i l l i o n a ye a r.

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of new ideas, a stronger workforce, improved products andexpansion, the company has also increased revenue fromapproximately $9.5 million to $25 million a year.

“We’ve gone through a number of changes and tried toexpand capacity,” Clarke says. “We wanted to get into acertain market so instead of trying to spend millions ofdollars over several years to develop our own product, webought a competitor that was in trouble and we expandedthrough an acquisition.”

The company’s latest challenge is managing day-to-dayoperations through the pains of growth.

“When the company grew three years ago, I found myselfdoing things, like due diligence, that were new to me,” hesays. “Although it was a pretty significant challenge, wenever reached a point where the team couldn’t fix aproblem. I try to get in the middle of things as little aspossible, to be quite honest. I’m all about building a team ofvery competent decision makers and leaders.”

He adds that his involvement with martial arts has givenhim the tools to stay focused during challenging times andbecome a better leader.

“I am learning a lot about teaching, leadership, and theimportance of giving people the opportunity to grow anddevelop. Plus, I strongly believe in work-life balance. It can’talways be about work.”

Clarke says HHCL provides opportunities for employees,including the opportunity to sit on committees, focus groupsand town hall sessions with managers. Employees are alsoprovided with growth opportunities within the business asmany long-term staff has worked in different departmentsthroughout their career. Personal and professionaldevelopment education programs are also available.

“Many of our employees have been with us for over 20years,” he says. “Our director of commercial sales has beenwith us 27 years. We try to provide all of our employees

with a voice. Employee satisfaction is one of the keymeasurables of our balance scorecard.”

Clarke adds that his team’s dedication to their work is astrong testament to HHCL’s commitment to worker safety.

“Since the original company’s inception in 1877 whenfishermen trusted Helly Hansen to manufacture comfortableand safe raingear, our focus has always been on safety,” hesays. “It’s evident in the daily routine of manufacturinggarments that must meet the most stringent of standards.”

Over the years, the biggest change has been the increasein safety standards. Clarke says that a tightening of flameretardant standards and visibility safety standards opened thedoor to improve some of the company’s products.

“Workers’ safety is becoming a big issue and occupationalhealth and safety issues have become stricter with liability,”he says. “By improving our products, we’ve opened up newmarkets to provide worker protection.”

Clarke adds that the company will be launching a full lineof flame retardant products this year and a selection ofmarine abandonment suits next year.

He admits that an increase in offshore goods within theindustry has put some pressure on his marketing and salesteam. While competitors are offering similar products at anattractive price point, Clarke says customers need tounderstand that they may be buying a product of lesserquality. In order to increase awareness and education, Clarkeworked with his team of sales managers and the vice-president of sales and marketing to develop a strategicmarketing tool to educate their customers more effectivelyon their products.

Clarke says his managerial style is all about trusting hisinstincts and empowering his team by giving them what theyneed to succeed.

“Every company has job descriptions, rules, and strategies,but when they only rely on those, that’s when they shutdown capabilities. I want people to be willing to contributeto any area of a building and I never want to hear people say‘it’s not my job.’ It’s the job of everyone in the business tomake it successful no matter what.” nAndrea Civichino is Editor-in-Chief of CMA Management.

O v e r t h e ye a r s , t h e b i g g e s t c h a n g eh a s b e e n t h e i n c r e a s e i n s a f e t ys t a n d a r d s . C l a r k e s ay s t h a t a t i g h t -e n i n g o f f l a m e r e t a r d a n t s t a n d a r d sa n d v i s i b i l i t y s a f e t y s t a n d a r d so p e n e d t h e d o o r t o i m p r o v e s o m e o ft h e c o m p a n y ’s p r o d u c t s .


Asset-based financing: A potentialsolution to the credit crunch Companies can tap their assets to generate cash flow through asset-based loans or through factoring. By Christian Kokorian, CMA

Considering the current economic situation and thetightening of credit, central banks around the worldhave loosened their monetary policy with interest ratereductions to encourage banks to lend. This could nothave been more apparent than on Oct. 27, 2008 in theUnited States, when the Federal Reserve had reducedthe overnight rate to one per cent, driving it to a levelseen only once before in the last half-century.Complementary to these rate cuts, large amounts ofcapital and liquidity have been injected in the marketsaround the world to stimulate the economy andprevent further economic deteriorations. Despite thisinflux of money, some banks (predominantly in theUnited States) are still hesitant in lending money toeach other, which in turn, is preventing companiesfrom having access to cash via loans, as banks want toensure their capital is being allocated appropriately andto the right borrowers.

Companies and customers need credit at somepoint in time to speed up the timing of purchases (aspeople borrow, they are able to pay over a period oftime for an item which they have purchased now). Sowhat are the options available for good companiesthat need working capital to acquire assets to continueoperating and growing in a time where capital isscarce? The answer could very well be asset-basedfinancing (ABF).

ABF for working capital is a margined workingcapital loan based on the specific needs and nature ofa company’s business, as well as the strength andvalue of their accounts receivable and inventory, andnot solely on the company’s balance sheet. Generally,it offers more flexibility than traditional bankfinancing because given the frequent asset evaluation,banks have a more accurate idea on their short termliquid collateral than traditional lending.

ABF can be a potential solution for manycompanies, especially for the ones that:

money management

l Are going through a period of rapid growth. l Are restricted by the limits or covenants of their current borrowing

arrangements. l Have cash tied up in accounts receivable and inventory. l Are highly susceptible to cyclical or seasonal fluctuations putting

increased pressure against borrowing availability. l Require additional capital to fund mergers and acquisitions. l Are undergoing restructuring. l Have strong assets to support their financing requirements.

Some advantages of ABF include:l Increased advance rates against accounts receivable and of

appraised inventory value (traditional operating line is typically 75per cent for accounts receivable and a maximum of 50 per cent forinventory).

l Increased access to growth capital which reduces need ofcapital/equity injection by owners/shareholders.

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l Maximizes the amount of available fundinglinked to current needs and assets rather thannet worth.

l Improve profits by taking advantage ofsupplier discounts.

l Minimal financial covenants: increasecompany’s financial flexibility.

l Lending decisions are also based on thestrength of the company’s assets as well asminimum financial results.

l Provides stability of funding as borrowingcriteria is clearly understood by the borrower.

l Ongoing field exams and inventory appraisalsare conducted which enables banks to betterunderstand the borrower’s business.

l Improve sales by providing extended/more competitive terms todebtors.

Considering that the advantages of an ABF are attractive, a businessthat decides to pursue an ABF must first spend the time and effortpreparing for the reporting requirements of an ABF working capital lineof credit. As ABF lenders lend against accounts receivables and inventory,these lenders need frequent information on the assets they are financing.This requires not only time from the borrower, but there is also a costinvolved in the frequently appraisals of the assets and the administrativework involved for the lender and borrower.

Although both the traditional operating loans and ABF have theiradvantages, a borrower should speak to their financial advisors to seewhich financing vehicle will better satisfy their credit needs. n

Christian Kokorian, MBA, CMA, works as a senior commercial account manager for a major Canadianbank and teaches finance in a graduate certificate program at McGill University.


money management


A leaner IT — seven targets forwaste reduction Decision makers have to look everywhere for ways to cut costs. Oneapproach is to identify and eliminate waste — much the way leanmethodology is applied to manufacturing.

By Jacob Stoller

North Americanorganizations spend over$500 billion annually on IT,making it a prime candidatefor cost-cutting initiatives.Cuts to IT, however, can berisky — no organization canafford to disable the cost-saving functionality that ITprovides, or to compromisesystems that have become avital link to customers andbusiness partners.

A sensible approach is toidentify and eliminate thewaste in IT — much the waylean practitioners attackwhat are called the “SevenWastes in Manufacturing.”While there are fundamentaldifferences between a shopfloor and a data centre, thesame basic principle applies— find activities that don’tadd value, and eliminatethem. Here are some sevensuggested targets:

1) Too many servers. Data centres have grownrapidly in the last decade and many organizationshave accumulated large “farms” of rack-mountedservers. While this modular approach providesconvenient physical boundaries between

information technology

applications, it is inefficient — many organizations have highpercentages — often 50 per cent or more — of unused capacity.Because each machine takes up space, and has to be powered, cooled,and maintained, this results in significant waste.

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Server virtualization technologyallows organizations to consolidatetheir server functionality into a smallernumber of machines whilemaintaining the logical divisionsbetween applications for operationsand security purposes. This eliminatesexcess capacity and significantlyreduces support and operation costs.Organizations report that investmentsin server virtualization quickly pay forthemselves through energy savingsalone.

2) Excessive or inefficient printing.The paperless office that was promiseddecades ago never happened — peopleprint more than ever and controllingprinting costs needs to be a part ofevery IT strategy.

The first waste target here shouldbe local inkjet printers, fax machinesand copiers. These devices are cheapto buy, but expensive to operate —costs per page are three or four timesthat of their larger counterparts.Centralized units that consolidateprinting, copying, scanning, and faxare not only more economical, but canbe leased on a per-page basis, making

it easy to allocate costs to end-users.This helps organizations controlexpenses and promote conservation —an individual might be a little lesslikely to print extra copies of a reportif his or her boss is going to get thebill. Furthermore, a centralizedapproach makes it easier to set defaultsto lower cost modes of printing, suchas black and white or draft quality.

Some organizations are alsoreducing printing costs by equippingusers with dual monitors. With a

roomier virtual desktop, there is noneed to print invoices, spreadsheets,and other documents in order to referto them while creating anotherdocument — they can easily be viewedon a second screen.

3) Unnecessary powerconsumption. The average PCworkstation consumes the equivalentof two 60-watt light bulbs. There’s notruth to the long-standing myth that itis “bad” for computers to be turned offevery night.

The paperless office that

was promised decades ago

never happened — people

print more than ever and

controlling printing costs

needs to be a part of every

IT strategy.

Fit your program to your career goals with the choice of four concentrations.

Get the knowledge to compete with the Sprott MBA.


The same rule can be applied to printers,modems and other electronic devices. Sleep orstandby mode may not do the trick — oftendevices use almost as much power in these modesas they do during normal operation. In a smalleroffice, it makes sense to put these devices on apower bar and turn them off every night at thesource.

4) Unused software licenses. Organizationsoften pay for software licenses that they don’tneed and don’t use. License agreements shouldbe reviewed on a regular basis to eliminate thiskind of waste. This oversight is made easier bysoftware programs that track application usageand calculate how coverage can be optimized.These systems are particularly helpful in largemulti-application environments and whereapplications are licensed on a simultaneous userbasis. They also help prevent license violations.

For many Canadian organizations, MicrosoftOffice represents a significant portion of licensingcosts and this should be reviewed carefully.Going with Office Standard instead of OfficeProfessional may be a better fit for many or all ofan organization’s employees, and in some cases, itmay be more practical to license a singleapplication like Word instead of licensing theentire Office suite.

Another option worth exploring is open-sourceproducts such as Open Office. Compatibility ismuch less problematic than it used to be — OpenOffice can easily read and create Microsoft Officefiles. Larger organizations, however, should becautious, as enterprise applications might havereporting features, for example, that are linked toa Microsoft Office application like Excel.

5) Telecommunications cost overruns.Telecommunications costs are high in Canada,and many organizations are concerned thatthey’re getting out of control. With employeestalking, emailing, browsing, and text messagingfrom a growing arsenal of mobile devices, billsare getting not only larger, but complex. Buyersmay find it difficult to verify that they are beingbilled correctly, that they have the most cost-effective plan, and most importantly, that


employees are not wasting these costly services. A number of products and services are available that help

organizations track telecommunications costs by end-user. This canhelp eliminate unnecessary subscriptions, optimize coverage plans,allocate costs to end-users and promote responsible usage.

6) Obsolete systems. Many companies hang on to older legacysystems because they don’t want to deal with the hassle of migratingthem. Like the old refrigerator in the basement, these hum along in thebackground, quietly taking up space and resources. Data conversiontools have improved substantially in recent years and it’s a lot easier todecommission older systems.

7) High-priced training. It’s vital that IT staff be kept current on thelatest technology, but IT training can be a huge cost drain — whencourse, travel, hotels, time off, and lost productivity are factored in, itcan cost upwards of $8000 to send an employee on a week’s training.

Classroom training can be a very wasteful option for many types ofcontent. Technical details such as commands, screen sequences andsettings can easily be learned in a self-directed, online format, andemployees often find this method better suited to their learning style.Furthermore, generic online courses are available on many subjects andproducts, including courses that lead to certification. For a nominal fee,employees can be given a membership in an organization like ACM(Association for Computing Machinery), which provides unlimitedaccess to hundreds of online courses.

Of course, in many situations, such as advanced courses, it’simportant that employees learn from a subject matter expert, receivefeedback, and interact with peers. Online training, therefore, shouldcomplement, rather than replace, classroom training.

The Bottom line

Cost cutting shouldn’t be a matter of applying the axe, but ofdeveloping a permanent ability to identify and eliminate waste. As withany continuous improvement process, this takes constant vigilance anda significant dialogue with customers — in this case, the end users ofIT. The most important challenge is being able to determine where ITprovides value to the organization, and where it doesn’t. n

Jacob Stoller ([email protected]) is a Toronto-based independent writer and researcher.

Data conversion tools have improved

substantially in recent years and it’s a lot easier

to decommission older systems.


legal notes

Tax-exempt status preserveddespite sophisticated operationsA recent Tax Court of Canada decision confirms that not-for-profitorganizations can adopt the good practices, efficiencies and activities ofa well-run business without jeopardizing their tax-exempt status.

By Greg Richards

A significant income tax advantage — indeed, anexemption — awaits a corporation that cansuccessfully prove it is a not-for-profitorganization within the meaning of paragraph149(1) (l) of the Income Tax Act (ITA). So whenthat not-for-profit status is challenged, the stakesare high and a defence can be essential forensuring the continued operations of theorganization. Such a defence was successful in therecent decision of the Tax Court of Canada inBBM Canada (formerly BBM Bureau ofMeasurement) v. The Queen, 2008 TCC 341(CanLII). The BBM decision highlights that, eventhough sophisticated activities are carried onwithin a not-for-profit entity, the entity maynevertheless be exempt from paying income taxby meeting various tests set out in the ITA.

BBM: Canada’s rating agency

BBM, originally known as the Bureau ofBroadcast Measurement, was established over 60years ago as a non-share capital corporation set

up to provide impartial and accurate audience measurement data to itsmembers. Today, its voting members are comprised of Canadian televisionand radio broadcasters, advertising agencies and representative advertisers,and its non-voting members include universities and government agenciessuch as Statistics Canada. BBM’s functional counterpart in the UnitedStates, A.C. Nielsen, is a for-profit company known for its “Nielsenratings.” BBM has performed this ratings function across Canada sinceBBM’s inception, but significantly, as a not-for-profit entity.

Broadcasters are willing to pay for BBM’s audience measurement datain order to make program decisions and to show the depth and reach oftheir programming in order to sell advertising. Advertisers and advertisingagencies have similar interests, but use the information to help in thestrategic purchase of advertising space. Each sector of the industry wantsto know the size and type of audiences associated with broadcast programs.

In order to win the case, BBM

had to establish that it was both

organized and operated

exclusively for a purpose other

than profit.

Illus

trat

ion:

Sea

n O

’Rou

rke


legal notes

Industry players become members of BBM andpay their annual membership fees to obtain thedata. BBM sets its fees on an anticipated costrecovery basis according to annual budgets set foreach upcoming year. In some years, however,surpluses are earned, while in other years, deficitsare incurred. Surpluses are not distributed to themembers, but used to further BBM’s purposes.

BBM catches CRA’s attention

Audience measurement has always been acomplex activity involving surveys and statisticalanalysis, but with the advent of modern electronicmeasurement tools, the activity has becomeincreasingly sophisticated, capital-intensive andexpensive. In 1996, the tax year at issue, BBMemployed approximately 300 persons andachieved an operating surplus of over $2 million,with income primarily derived from the fees of itsmembers. The organization’s accumulatedsurplus by that point was approaching $7 million.BBM planned to invest these funds in newelectronic measuring equipment in future years.But the operating surplus, and the fact that BBMhad a “for-profit” subsidiary conducting customsurvey work, attracted the attention of CanadaRevenue Agency (CRA). Under paragraph149(1)(l) of the ITA, a club, society or associationthat is not a charity is exempt from payingincome tax if it is “... organized and operatedexclusively ... for any other purpose except profit ...”CRA challenged BBM’s not-for-profit status and

assessed the company for income taxes approaching $1 million. BBMobjected to the assessment. CRA denied the objection and confirmed itsassessment and BBM then filed a notice of appeal to the Tax Court ofCanada. The fight was on.

The trial of the appeal

In order to win the case, BBM had to establish that it was both organizedand operated exclusively for a purpose other than profit. It submittedevidence concerning the manner in which BBM was established (letters,patent, by-laws and the like) as well as evidence concerning the details of itsday-to-day operations. The Crown argued that an organization cannot beconsidered to be organized and operated exclusively for a purpose otherthan profit if the establishment or operations of the entity are related to thecommercial or business activity of its members or of others. The thrust ofthe Crown’s case was that BBM failed to meet the requirements of the ITAbecause its purpose was to provide audience measurement data to membersthat include industry giants such as CBC, CTV and Global, and the dataassisted the members in furthering their commercial and business activities.The Crown also cited CRA’s Interpretation Bulletin (IT-496) that points toseveral “badges” of a profit-oriented enterprise, including the realization ofprofits, the accumulation of reserves, the entity operating in a normalcommercial manner, goods and services being sold to non-members andthe entity’s operations being in competition with taxable entities. The courtrejected the Crown’s arguments and found it was legitimate for not-for-profit entities to operate in a business-like manner and to avoid waste andcapture efficiencies without becoming a for-profit organization. JusticePatrick Boyle of the Tax Court of Canada made note of a number of multi-million dollar organizations, including the Canadian Bar InsuranceAssociation, the Canadian Medical Protective Association and the realestate boards of major urban centres that are run as not-for-profits. In theend, Justice Boyle’s analysis came down to this key point:

“The operations of not-for-profit entities like BBM lack a significant attribute ofcommercial businesses. There is no opportunity for their shareholders, members, orcontrolling persons to benefit financially by way of profits, distributions, unrestrictedsalaries, capital appreciation of the undertaking or its assets, or in similar fashion.”Justice Boyle allowed BBM’s appeal with costs. The Crown did not appealand BBM’s tax-exempt status was preserved.

Sophistication — but not taxation

The BBM case shows that highly sophisticated activities may be conductedwithin an entity that is run on a not-for-profit basis without jeopardizingthe entity’s tax-exempt status. This allows a non-for-profit entity to devoteall its revenue, net of costs, to its not-for-profit goals and objectives. TheBBM decision helps to preserve this significant tax benefit for those usingthe not-for-profit model. n

Greg Richards ([email protected]) is a partner with WeirFoulds LLP in Toronto.

The court rejected the Crown’s

arguments and found it was

legitimate for non-profit

entities to operate in a business-

like manner and to avoid waste

and capture efficiencies without

becoming a for-profit

organization.

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Clean coal and carbon capture —the next Kyoto battleground Carbon capture may prove to be beneficial in the fight against carbondioxide and global warming and help cut down on air pollution.

global view

By Peter Ion

The economic downturn has beencited as a probable cause forenvironmental issues to take a backseat in the boardroom and the reasonpolitical leaders will likely re-strategizetheir latest green-shift policies.Although consumers are still expectedto account for every gram of theircarbon footprint, the latest methods ofaccounting for our nationalgreenhouse gas budget is focusing onthe real culprits — the heavy emittersof industry. Amongst the mostpromising techniques gainingcredibility are the ones through carboncapture and sequestration (CCS).

As the latest gadget in the Kyototoolkit, the idea of injecting the CO2 that wouldnormally escape into the atmosphere and back intothe ground from where it originated (oil, natural gasor coal) is finding favour. From an accountingperspective, the technique is a potentially ingeniousone whereby a cost, that of an existing powergeneration facility, is transformed into a realopportunity for financial gain.

In terms of the return on investment, the“bridging solution” involves injecting waste by-product CO2 from the burning of coal (orgasification processes) into abandoned oil wells thathave been traditionally classed as too mature to betapped by existing technologies. Canada has a pre-eminence in this technology and is well placed totake full advantage of the win-win opportunitiesgenerated by the use of CCS techniques forenhanced oil recovery (EOR). The world’s largestland-based EOR project has been in operation forover a decade now at Weyburn in Saskatchewan.Last summer, it received a boost as Shell committed

to support thecontinuation of theproject well into the nextdecade. Additional sitesfor CO2 sequestration arealso being activelyassessed in north-eastBritish Columbia.

The U.S. Departmentof Energy estimates thatthere is a potential torecover 43 billion barrelsof oil through EORtechniques. As thecurrent proven reservesin the U.S. are in theregion of 28 billionbarrels, it is akin torediscovering oil all over

again. As the price of a barrel of oil reached US$150 last summer, theestimated value of this additional recovery would be in the region of US$6trillion.

Paving the way for the future

Coal is here to stay, at least for the foreseeable future. U.S. president BarakObama’s administration will include two respected climate scientists as itschief environmental officers. This represents the strongest signal yet thatthe U.S. will commit to joining the party at Copenhagen later this year,when the “new and improved” Kyoto Protocol is introduced to the world.

According to Dr. Fatih Birol, chief economist with the InternationalEnergy Agency, China alone will build 800 gigawatts (GW) of additionalcapacity in the next eight years, 90 per cent of which will be coal fired. Thisequates to the entire power generation build of Europe since the end ofWorld War II. The average lifetime of these new builds is in the region of60 years. Effectively, if Europe were to achieve its target of a 20 per centreduction in emissions by 2020 (similar to Canada’s own unachievabletargets) then the cumulative emissions reduction of those 12 years to 2020would be equal to only 60 per cent of one year of emissions in India andChina.


g lobal view

Clean coal is coal that is burnt and the resultingCO2 captured is buried underground where it staysindefinitely. The proven statistic that a tonne ofinjected CO2 can lead to the assisted recovery ofbetween five and seven barrels of incremental oilmakes the argument for CCS additionallycompelling. At a cost of capture between US$25 andUS$40 per barrel, the process of EOR becomes aninvestment rather than a cost.

So who should pay for this “cost of capture?”Should the taxpayer cover the bill throughgovernment subsidy or should the consumer beexpected to pay through increased utility bills? TheCanadian government, similar to other resource-based economies such as Australia, is going toprovide “matching” grants to industry, parallelingthe contributions of private enterprises that will beresponsible for implementing the necessarytechnologies. The Norwegians, who have beeninjecting CO2 into saline aquifers offshore for manyyears now have been applying a US$50 a tonnecarbon tax to cover the additional costs.

Canada has achieved another world first with itsstrategy of CCS/EOR. Saskatchewan-based HTCEnergy bases it product development centre at theUniversity of Regina. A multidisciplinary complex ofestablishments includes the International TestCentre for CO2 and a coal-fired flue gas pre-commercial scale demonstration plant at Estevan.With laboratory and research experience in carboncapture that now extends to over a decade, thefacility is globally unique.

By diversifying their product offering, they are

well placed to take full advantage of the growth in the CO2-disposal market.This includes carbon-dioxide modeling, design and simulation. Thecompany also holds IP rights for designer solvents, packing materials andprocess-flow designs that increase capture efficiency. Their trademarkedPurenergy CCS CO2 Capture System is pre-engineered, pre-built andmodularly constructed by strategic partners Pinnacle Industrial Services ofRegina and NuVision Industries of Carseland Alberta. The intelligence isembedded in a modular design that can be manufactured, shipped andinstalled at a lower cost than that of a retrofit to an existing facility. Whenthe alternative is the permanent installation of above-ground or buriedpipeline to transport CO2 from source to sink, with costs running into thetens of millions, the ‘modularity’ concept is commercially irresistible.

Their proprietary thermal kinetics optimisation (TKO) process isdesigned to directly reduce the largest single cost of CO2 capture — the useof power plant steam — to a ratio of below one unit of steam required toone unit of CO2 captured. Although the organization makes no mention ofthis, the fact is, the steam that would otherwise be vented to the atmosphereis also a greenhouse gas that contributes to warming.

A Canadian leader

Saskatchewan is proving to be a national leader for CCS technology. In aprovince of uranium production, any new power generation projects will bebenchmarked against the nuclear possibilities, including new power plantspowered by locally-sourced fuel supplies to the north. CCS was part of theequation in the recent rethink about the Boundary Dam proposal in whichthe initial idea of a new build was revised in response to the need toincorporate “CO2 value.” The novel concepts of matching CO2 flow rates(from power generation processes) to CO2 market needs (most likely fromdepleted oil wells in need of rejuvenation ) was largely responsible for acomplete rethink by Saskatchewan Power Corporation in recent months.Clearly, CO2 is now a determinant of design — 15 years ago it would havebeen an insignificant by-product of electrical generation.

With hydrogen-based infrastructure projects still springing up across the

Table 1 — CCS Country Attractiveness Index

Near Term Rank Country Near term Index Long Term Rank Country Long Term Index

1 USA 76 1 USA 712 UK 69 2 China 673 Canada 65 3 Russia 654 Australia 63 3 Germany 655 Netherlands 61 5 India 626 Norway 59 6 South Africa 606 Germany 59 7 Australia 598 France 50 8 Canada 589 Japan 47 8 UK 589 China 47 10 Japan 56

Source : Ernst & Young, energy and environment infrastructure advisory group, 2007.


g lobal view

world, Canada has scored yet another first bypatenting a technology that will make commercialuse of this gas, as well as effectively dealing withthe CO2. Atlantic Hydrogen Inc. secured financingfrom the EnCana Environmental Innovation Fundand the New Brunswick Climate Change ActionFund that will support the CarbonSaverDemonstration Project in Fredericton. Byapplying an electrical charge to natural gas, thehydrogen and carbon can be split to be saved(possibly for hydrogen fuel cell use) and stored (asa carbon solid) respectively. With credit for carboncapture likely to be included as a legitimate processwithin Kyoto’s Clean Development Mechanism(although its progress was stalled at the recentPoznan meeting in December) and hydrogenbeing a high-return fuel feedstock, this is a case oftwo potential revenue streams from one naturalgas stream.

The problem at the moment is that with somuch of this technology still in the demonstrationphase and the long-term fate of the injected CO2

still unknown (other than a handful of sites such asWeyburn in Saskatchewan) for working projects,the risk in trying to regulate undevelopedtechnology such as this is high. The industry buzzphrase is “capture-readiness” (CR) and the generalconsensus is that CR requirements in natural gasplant permits are much too vague.

Dr. Nils Markusson at the School ofGeosciences, University of Edinburgh, commentsthat ‘regulating technology that has not been fullydeveloped is never easy. If you regulate too earlythere is too much uncertainty involved and theproperties of the ready-to-use technology cannotbe predicted. Alternatively, if you regulate too late,when the technology is already on the market,there is a risk that it has become entrenched -locked in - and then it is then very difficult tochange.’ It is not just about having the space tobuild a CCS unit to an existing plant, or to includeit as an integral part of a new design (the Chineseare apparently building a new coal-powered plantevery four days) but it’s all about identifying routesfor transport and storage.

There is also the need for a lot of political willto impose abatement technology — in theEuropean Union (EU), it took years to get high-sulphur coal accepted for use once the necessary

flue gas desulphurisation technology was fitted to the stations. Coal had to be‘clean’ in terms of sulphur long before it had to be “clean” of CO2, and basedon that experience in the 1990s it is likely that the earliest full-chain, full-scaledemonstrations will be operational in 2012. Retrofitting of CR plants couldbe mandated within three years of that date. As an investment opportunity,coal has never looked so bright and promising.

As with most emissions abatement-related initiatives, the Canadians shouldbe, and by most accounts are, looking to the EU for the various possibilitiesfor incentivising the introduction of CCS technologies. There are three majoravenues that should be explored:i) Introduction of a sort of “decarbonized renewable obligations certificate”

(mandating a certain percentage of power generation to come from plantsfitted with CCR technology) that would grant CCS the same level of sup-port as has been made available to offshore wind power generation.

ii) Deriving feed-in-tariffs to guarantee a higher price for electricity generat-ed by CCS (probably at a higher level than the solar and micro-hydro proj-ects that are in place in Ontario at the moment).

iii) Integration within the EU Emissions Trading System (or one of theregional North American geosequestration associations now in existence)to reward the process of CO2 successfully stored underground.

Ernst &Young recently undertook a global survey to determine a “CCSAttractiveness Index,” in which the investment climate for CCS wasdetermined for nations in which coal-burning contributes significantly to thepower mix (Table 1). The weighted index considers regulatory risk, planningand network connection issues (including public acceptability of CCS), accessto finance, power off-take attractiveness, tax climate, grant/soft loanavailability, market growth potential, current installed base, emitting plant ageand the share of fossil fuel capacity (weighting coal higher than oil/gas). Theirindex differentiates between long-term and near-term attractiveness — inwhich the near term describes large scale deployment in the period leading upto 2015. Structural factors are less important for the near term ranking,whereas government loans, subsidies and tax incentives are given greaterweighting. Canada ranks third to the U.S. and the UK in this category whichsuggests a positive investment climate, whereas other countries with moreambitious claims for their generation beyond 2015 rise above Canada.

The case for CCS has received some open hostility from organizations thatmight otherwise have been considered supportive. Greenpeace has been verycritical of the possibilities, labeling CCS a “false solution.” Even theAustralians, who rely on the Chinese as their key coal export market, arefocusing their energies on CCS. Their “Australian of the Year” in 2007, TimFlannery, (similar to Canadian icon, David Suzuki) has talked about coallosing its “social license,” much in the same way that asbestos has already lostits place in society. In reality, it may seem way off yet; however, it does set thestage for the PR battle that clean coal capture and sequestration will have towin in the months and years ahead — Canada is fully engaged in this battleand is very far from losing. n

Peter Ion, M.Sc, MBA, ([email protected]), is a Vancouver-based technical author with specializations inalternative energy, emissions accounting and related business environmental issues.

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