PAIB Articles of Merit Award Program for Distinguished Contribution

PUTTING STRATEGY INTO THE BALANCED SCORECARD

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PUTTING STRATEGY INTO THE BALANCED SCORECARD Peter Brewer

alk to any balanced scorecard consultant, and you�ll find that the most important step in creating a balanced scorecard is defining your

strategy. While that sounds like an easy thing to do, it�s surprising how many companies struggle to define their strategy clearly, embed it into their balanced scorecard performance measurement system, and communicate it effectively throughout their organization. (See sidebar �The Balanced Scorecard at a Glance.�) The problem: Companies don�t have access to structured approaches to translate high-level strategy statements into specific scorecard measures. The result: a disconnect between strategy and performance measurements.

The changing nature of value creation complicates the performance measurement process as well, especially since the New Economy has stood the world of value creation on its ear. In 1978, the average U.S. company had a book-value-to-market-value ratio of 95%, but by 1998 the ratio had plummeted to 28%! In fact, numerous highly successful companies such as AOL Time Warner, Cisco Systems, Amazon.com, Coca-Cola, Microsoft, General Electric, and Charles Schwab have all had book-value-to-market-value ratios in recent years of less than 10% and, in some cases, even less than 5%! Why? Intangible assets! Though Wall Street understands the value of intangible assets, the traditional financial accounting model is mired in the world of physical and financial assets that dominated value creation 20 years ago. For managers trained in Old Economy finance, the New Economy forces them to stretch their mental model of what constitutes a sustainable business model.

The VDF Framework So how do you translate strategy into measures? The Value Dynamics Framework (VDF), shown in Figure 1, is a tool that can help companies interested in bridging the gap between strategy statements and balanced scorecard implementation. It enables them to disaggregate broad strategy statements into the underlying assets that are being used to deliver value to customers, thereby helping them focus the balanced scorecard metric selection process on the assets that are critical to achieving strategic objectives. The VDF recognizes that, in today�s economy, physical and financial assets aren�t the only types of assets used to create wealth but acknowledges that customer, organizational, and employee/ supplier assets are also important. Consider how some of the assets of AOL Time Warner, Starbucks, and DaimlerChrysler AG never appear on the balance sheet.

Subscribing customers are an asset for AOL, not in terms of their subscription revenue but in terms of their ability to generate advertising revenue. Numerous companies pay AOL to gain visual exposure to the millions of customers relying on AOL for Internet access. Despite the revenue-generating ability of AOL�s customers, they don�t show up on AOL�s balance sheet.

When Starbucks introduced its gourmet coffee-flavored ice cream, it became a best seller in the United States within three months, thanks to the company�s brand image. While brand is an organizational asset in the VDF framework, the value of Starbucks� brand isn�t reflected in its balance sheet.

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PAIB ARTICLES OF MERIT 2003

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DaimlerChrysler AG views its relationships with suppliers as a critically important asset, yet the value of its supply chain relationships in terms of improved product quality, time compression, and lower costs isn�t depicted on its balance sheet.

How Can I Create a VDF? You can break the process of creating a Value Dynamics Framework into four steps. First, create a list of assets that supports your strategy. Include physical and financial assets such as office buildings, desks, computers, cash, and accounts receivable only if they differentiate your company from its competitors.

Second, explain how the assets in the VDF interrelate to deliver customer value.

According to strategy expert Michael Porter, a competitive advantage is created when your company�s activity system is difficult to replicate. Therefore, it�s the combination of assets depicted in the VDF that works in unison to create an activity system leading to a competitive advantage.

Third, identify the strengths, weaknesses, opportunities, and threats (SWOT analysis) underlying the VDF. The future may hold unexploited opportunities and unforeseen threats that render a current VDF and its associated activity system obsolete. Hence, the VDF is an evolving business model, not a stagnant one.

Fourth, define the critical success factors underlying the strategy, and identify particular combinations of assets as being supportive of each critical success factor. Creating a VDF in this manner will focus your balanced scorecard metric selection process on the assets and critical success factors most important to achieving your strategic objectives.

Building Dell’s VDF To illustrate the application of the VDF, I�ll use Dell Computer Corporation. Dell�s mission statement, which appears on its website, is �to be the most successful computer company in the world at delivering the best customer experience in markets we serve.� While this mission statement provides a high-level expression of Dell�s strategy and goals, it doesn�t specify the combination of assets that Dell relies on to meet customer expectations. It would be a substantial leap of unstructured thought processes to jump directly from this mission statement to the process of choosing measures for a balanced scorecard. Here�s where the VDF can help.

The Balanced Scorecard at a Glance

The balanced scorecard offers an alternative to organizations that have historically overemphasized short-term financial performance. It measures performance from four perspectives: customer, process, learning and growth, and financial, recognizing that long-run financial success is driven by an organization�s ability to continuously learn and grow and to manage the processes that deliver customer value.

A balanced scorecard should have 15 to 25 measures that support a company�s strategy and are linked together in the form of cause-and-effect hypothesis statements. Forming these linkages encourages a company to specify how investments in learning and growth will drive continuous process improvement, increasing customer satisfaction and financial prosperity.

The balanced scorecard measures should cascade across divisions and down through the levels of an organization so that all employees are evaluated and rewarded using action measures that are connected to the scorecard.


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Figure 2 provides a VDF for Dell. It breaks down Dell�s high-level mission statement into the assets that drive the attainment of strategic objectives. Dell�s two biggest assets are classified under organizational assets, namely the leadership of Michael Dell and the business processes underlying the direct business model. Other organizational assets include: � Patents related to Dell�s direct business model,

� Corporate consumers� perception of brand stability,

� Individual consumers� perception of first-to-market technology leadership, and

� A segmented organizational structure that enables managers to get intimately acquainted with customers� needs within a business segment.

Dell�s physical assets provide a classic example of �less is more.� As a result of bypassing distributors and selling directly to customers, Dell minimizes the need to maintain inventory. Also, Dell maximizes its flexible-response capabilities by outsourcing component-part manufacturing. Dell doesn�t have substantial resources tied up in physical facilities dedicated to winning the first-to-market battle for each successive generation of technology. But Dell invests in the information technology infrastructure that supports real-time communication among its customers, its own manufacturing facilities, component suppliers, and airfreight carriers.

The policy of outsourcing component manufacturing leads to a discussion of supplier and employee assets. By maintaining partnerships with as few highly reliable suppliers as possible, Dell streamlines its operations and relies on its computer monitor suppliers to ship directly to the customer. As long as a supplier retains its leadership position, Dell will collaborate with it to achieve mutual success, but if a particular supplier loses its edge, Dell has the flexibility to respond quickly. Another asset? Employees. Direct salespeople, help-desk operators, engineers, and the like all have to be knowledgeable and customer focused to ensure Dell�s continued competitiveness.

For More Insight Many books and articles provide information on issues related to the VDF. The book Cracking the Value Code: How Successful Businesses Are Creating Wealth in the New Economy offers a wealth of information on the VDF framework. Michael Porter�s article, �What is Strategy?,� in the November-December 1996 issue of the Harvard Business Review provides a deeper understanding of strategy.

If you�d like insight on inter-organizational, supply chain-oriented balanced scorecard performance measures, see the article, �Using the Balanced Scorecard to Measure Supply Chain Performance,� which appeared in the Spring 2000 issue of the Journal of Business Logistics, and �Adapting the Balanced Scorecard to Supply Chain Management� in the March-April 2001 Supply Chain Management Review. Both articles were written by Peter C. Brewer and Thomas W. Speh.

To learn more about customer intimacy and operational efficiency as value propositions, see Michael Treacy and Fred Wiersema�s article titled �Customer Intimacy and Other Value Disciplines� in the January-February 1993 Harvard Business Review. And to obtain further information on how these value propositionsrelate to the balanced scorecard, read Robert S. Kaplan and David P. Norton�s book titled The Strategy- Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment.


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In addition, customers are critically important assets to Dell. When Dell introduced the direct model, all of its competitors were selling computers to end consumers via distributors and detaching themselves from end consumers. Dell, on the other hand, sells directly to consumers and is continuously communicating with them and benefiting, especially in two areas: seeing sales trends and learning about unmet customer needs.

The sales trend data helps Dell match supply with demand, and information related to unmet customer needs translates into opportunities for innovation of products and services. The company also relies on customers� knowledge of what they want to purchase and when they want to complete the transaction to drive the direct business model. Dell leverages this source of customer knowledge by making it as easy as possible for a customer to place a customized order electronically. In fact, Dell has set up about 7,000 customized versions of dell.com for various customers. Electronic ordering is hassle free for the customer and cost effective for Dell.

Finally, financial assets appear in the VDF. The primary financial assets for Dell include minimal accounts receivable and a strong cash position. Dell�s cash conversion cycle (e.g., days accounts receivable outstanding + days inventory on hand � days accounts payable outstanding) is minus five days, which means customers pay Dell before it has to pay suppliers. This minimization of working capital provides not only a cost advantage, but cash availability to support necessary investments to stay on the forefront of technology.

Linking Dell’s VDF to the Balanced Scorecard Dell�s Value Dynamics Framework provides a richer body of information to support the balanced scorecard metric selection process than the mission statement alone because it specifies the assets that deliver customer value and profits. It provides a structure that facilitates the underlying thought process involved with transitioning from the high-level mission statement to selecting measures for each of the four balanced scorecard perspectives: learning and growth, process, customer, and financial.

Let�s look at Dell�s assets that relate to its customer intimacy and operational efficiency value propositions. Figure 3 suggests that Dell�s leadership, structure, customer, brand, and employee assets play a pivotal role in delivering on the customer intimacy value proposition. Likewise, Figure 4 suggests that customers and employees, as well as the remaining assets from Dell�s VDF, support its operational efficiency value proposition. Here�s an analysis of the underlying logic of the links between Dell�s customer intimacy assets and the balanced scorecard measures shown in Figure 3.

The Customer Intimacy Value Proposition Michael Dell says his most important leadership responsibility is looking for �value shifts� in his company�s customer base. To identify the shifting needs of customers, he has to stay in close contact with them. The segmented organizational structure and the employees who work within that structure are two other assets that enable Dell to focus on building intimate relationships with its segments of customers. To build customer intimacy and loyalty, Dell


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leverages its customers� knowledge of their own unmet needs. Dell�s brand image was and is shaped by customer feedback.

Identifying this linked set of assets enables Dell to select strategy-focused, asset-based balanced scorecard measures that support the customer intimacy value proposition. For example, the balanced scorecard�s learning and growth measures might include: � Training dollars spent per full-time equivalent by

customer segment to ensure that well-educated business segment managers provide state-of-the art advice to customers.

� Number of collaborative customer-solution teams that motivate Dell to collaborate with its customers and jointly create technology solutions that fulfill any unmet customer needs.

� Number of emerging technologies evaluated inspires Dell�s leaders to stay abreast of technology threats and opportunities that may alter the competitive landscape in the future.

Business process measures might include: � Percentage of total hours spent in contact with

the customer,

� Number of customer-initiated product innovations, and

� Average customer idea ramp-up time.

The first measure � hours spent with the customer � would be evaluated at the executive as well as managerial levels. This would motivate Dell�s highest-level leaders, as well as its segmented management teams, to stay in touch with the customer. The second business process measure � customer-initiated product innovations � should motivate Dell employees to listen to and collaborate with customers. The first two measures from the learning and growth perspective would support this process-oriented measure. The third measure � ramp-up time � assesses how long it takes Dell to translate a customer�s idea into

reality because creating innovative ideas is one thing, but delivering results in a timely manner is another.

The three customer measures are customer perception of customized response capability, customer perception of stability and first-to-market capability, and customer retention. If the learning and growth and business process outcomes are being achieved, then as the first customer perspective measure suggests, customers should perceive that their individual needs are being met in a timely manner. The second measure focuses on brand image. If Dell stays in touch with customers and delivers solutions consistent with their needs, then its brand image of stability in the institutional segment and �first-to-market with the latest technology� in the consumer segment should remain strong. Finally, if customer perception regarding the prior two measures is positive, Dell should be able to retain customers and grow the business.

Pursuing the value proposition of customer intimacy should lead to revenue growth, so the financial measures are revenue growth by segment and gross margin by segment. Since the growth needs to be profitable growth, gross margin is included as a financial measure to ensure profitable growth.

Key to Success Bain & Company�s research suggests that 50% of the Fortune 1,000 and 40% to 45% of larger companies in Europe use the balanced scorecard. Many more companies, large and small, are likely to implement the balanced scorecard in the near future. The Value Dynamics Framework is the key to balanced scorecard success because it helps


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translate broad strategy statements into strategy-focused, asset-based measures.

Peter Brewer is an associate professor in the department of accountancy at Miami University in Oxford, Ohio. This article appeared in the Institute of Management Accountants published journal Strategic Finance in January 2002.


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CUT DOWN ON CONTRACT STRESS

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Automating a critical process can make your business work better. Eric Laursen

ay a company signs a contract with a long-term customer for an item the customer expects to buy over an extended time period. The contract

specifies a base price that will drop or increase depending on whether the customer buys more or less of the item than expected.

How can the company�s financial managers be sure that accounts payable is keeping track of how much the customer owes and is billing accordingly? Creating a central repository for all of a company�s contracts is one way to keep all the details straight. By automating their contract management systems, corporate CPAs and companies can cut expenses, increase revenue and manage business risks.

Automated contract management systems are network-based software platforms that make contract terms accessible to every person within an organization who needs to know; customers and suppliers also can be brought into the loop. Mary Barth, CPA, the Atholl McBean professor of accounting at the Stanford Graduate School of Business,

says the contract management function has two underlying goals: �It should ensure the promises a company is making and the obligations it is taking on are always visible to the right people in the organization. Second, it should allow top management to see that what the sales staff is promising is acceptable.� The fundamental purpose of contract management, says industry spokesperson Neil Couture, director of development at the National Contract Management Association (NCMA), is to fully integrate the contract management process and the rest of the company�s operations.

Implementing the Software Automation will embed any contract within the company�s operations using technologies such as e-mail, electronic document exchange and instant messaging. The process of installing and implementing automated contract management systems is �no more complicated than putting an enterprise resource planning (ERP) solution into place,� says John Miles, a senior manager at Andersen, who helps clients

implement technology. The level of difficulty depends on the volume and complexity of a company�s contracts and the variety of modules or functions the vendor offers and the client selects. Modules may range from rebate

management to financial reconciliation, adjudication of incentive or chargeback claims from a trading partner to payment services (following through on payments due the company through the life of the contract).

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Contract Software Has Appeal Corporate spending on contract-

and trade-management applications will grow at an 80% compound annual rate, reaching

$3 billion to $5 billion in five years. Source: 2001 survey by Credit Suisse First Boston.

www.csfb.com.


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Executive Summary

• Automated Contract Management Systems are network-based software platforms that make contract terms accessible to every person within an organization who is affected by them. Customers and suppliers can also be brought into the loop.

• The Actual Level of Difficulty for implementing an automated contract system depends on the volume and complexity of a company�s contracts and the variety of modules or functions offered by the vendor and selected by the client.

• Automation May Reveal Ways to streamline the entire contract management process, but not immediately. A year after implementing a new system, companies need to assess where things are and what opportunities exist for reforming or simplifying procedures.

• Contract Management Systems Tie executives directly into the negotiating process, give negotiators access to standard contract language and then set up a process that ensures the terms of the deal are carried out in a timely manner.

• When Companies’ Automated Contract Management systems don�t run smoothly, it�s usually not the software causing the problem but the workflow process it was built into. It is crucial to bring all the departments that will be affected by the new system into the implementation process.

Most vendors offer automated contract management systems with this modular structure, and as the products have matured, they can be more easily tailored to the needs of individual client companies. The result is most systems can be adapted to the needs of companies ranging from small or midsized to those in the Fortune 500.

Here�s one company�s implementation experience: Red Gold, a large, privately held agricultural processing company in Orestes, Indiana, has 960 employees across the state. It supplies grocery stores with private-label and brand-name tomatoes and has been using an automated system for two years supplied by I-many, a Portland, Maine-based software provider. The system allows Red Gold to better track clients� deductions and cash discounts. Linking directly with the terms of the contract itself, the system accumulates documentation in an orderly manner �so that if the company wants to dispute a discount, it has the evidence to do so,� says Mitch Rader, CPA, vice-president of finance at Red Gold.

Under its previous, paper-based system, the company was only partially successful in pursuing invalid cash deductions and would get the money back infrequently because it was difficult to pull the documentation together. Rader notes that last year, using its new automated system, Red Gold was able to trace documentation to original invoices in 97% of cases. As a result of these efficiencies, the software paid for itself within a year.

Red Gold chose I-many because other companies in the food industry used this vendor, it liked I-many�s procedures for tracking and resolving discount and deduction issues and found it could easily integrate I-many�s product into its existing ERP system. Red Gold needed only two months to get up and running with its new software. Rader credits this partly to the assistance of I-many�s customer support team, who were available off-site to answer questions, and partly to the procedural steps in Red Gold�s manual contract management system, which closely paralleled those in the new system. Red Gold also had previous


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experience installing other companywide automated systems.

Rader found a consultant who had installed the system at another company. She helped Red Gold to diagram the workflow it wanted to direct through the new system and oversaw the implementation from beginning to end. Having someone aboard who had already gone through the process helped Red Gold complete its implementation without missing any important elements, so that about a year later, when the company reviewed the procedures that were in place, it did not need to make any major changes. By that time, Red Gold�s staff had enough experience with the system that they were able to make needed modifications � mainly to create more reports for management � without bringing the consultant back or asking I-many to make the changes.

Here’s How Although the details will vary, Rader breaks down the process of implementing an automated contract management system into the following steps: • Identify the transactions your contracts need to

cover. Determine the key elements your agreements need to track. In Red Gold�s case, the critical items were deductions customers are entitled to take on the company�s pricing and those they are not.

• Input your company’s present contract archive. Scan in all paper-form contracts. Red Gold also scanned in check remittances, proofs of delivery and other documentation to create PDF files to attach to e-mails to correspond with clients about deductions or other matters. In each case, Red Gold had to decide how far back it wanted to go � issues involving discounts or deductions more than six months old are difficult to resolve, Rader notes. Scanning documents is now an ongoing practice at Red Gold.

• Integrate existing systems. Establish Internet (or Intranet)-based links between your contract

management system and other relevant in-house systems, especially ERP and CRM (customer relationship management).

• Set up workflow. Determine to whom various contract terms must be routed and how long each stage of the process must take. This may be a critical step since it can turn up internal procedures that need fine-tuning, for example, ensuring that the sales force, offices in different locations and clients are uniformly aware of how often certain problems occur and the amounts of money involved.

• Design reports for key functions. Determine what types of reports the system must generate to measure your company�s performance and how to customize them for certain situations, such as resolving pricing disputes quickly and successfully.

• Take a step back. Assess where things are and what opportunities exist for reengineering or simplifying procedures a year after implementing a new system. Automation may not immediately reveal ways to streamline the entire contract management process. Red Gold found it wanted to tweak the aggressiveness of its timetables after learning some clients needed more or less response time to notifications before another area in the company took over the matter.

According to I-many�s Mark Christiansen, executive vice-president of marketing and strategy, the vendor�s most complex program, which tracks rebates and chargebacks, can take anywhere from three to nine months to implement because it must be tied into electronic data interchange links with the client�s distributors. Tasks include importing and modifying contracts, training contract management staff, resolving errors and creating interfaces with the company�s existing ERP and CRM data systems. �Some of our customers have 10,000 contracts covering 50,000 products with different prices,� says Christiansen. �The really daunting thing is to make sure that the 100,000 orders against that contract are being executed on time, without fail.�


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Rochelle Rubin is manager of the strategic legal solutions practice at Deloitte & Touche in Chicago, which offers information technology consulting � including implementation of automated contract management systems � to the law offices of large corporate clients. She notes that the actual size of the client has little to do with how complicated an implementation turns out to be. �It depends mainly on how much of the operation and how many locations are involved,� she says. �If it�s only one small department, it could take as little as a month and a half; if it�s a huge department that handles everything from claims litigation to intellectual property, implementation can take up to a year.�

Better Than Spreadsheets Persistence Software, a San Mateo, California company, uses automated contract management software from diCarta to manage its support and maintenance agreements. �I can�t emphasize enough the importance of support and maintenance revenue,� says Persistence CFO Christine Russell. �It�s great to go into a quarter knowing that a certain amount of your revenue is already achieved because it�s defined by those agreements.�

For a long time, the most sophisticated software used in contract management was an electronic spreadsheet, which Russell found wasn�t the most efficient way to monitor contracts. �The new system tracks renewals of these agreements and can even indicate when contracts concluded by different Persistence offices can be modified to terminate simultaneously, further rationalizing the company�s contract management process,� observes Russell. This means Persistence finds it easier to handle multiple contracts covering each of a

client�s different offices, sometimes as many as 20 for a single client. Now Persistence can send out renewal notifications which automatically offer to adjust the contract end dates to make them all conclude simultaneously. Clients can accept by visiting a Web site the vendor maintains for Persistence. The result, Russell says, is to consolidate more of the billing for each client. �All of this eliminates a major drain on the time and energies of the company�s sales force, allowing it to concentrate more on developing new business,� she says.

Get the Right People Involved Making sure all the appropriate people are involved in choosing the vendor, structuring the workflow and deciding which functions to include in the automated system are crucial to a successful implementation. Donna Ireton, director of acquisition management consulting and training at Advanced System Development (ASD), an Arlington, Virginia, consulting firm that provides information management and technical support, including contract management processes, says, �You get problems when important people were not part of the selection or implementation processes, sometimes resulting in the purchase of an out-of-date system or one that does not meet all the right people�s needs.�

A company should form a committee including a senior official from each department affected by the new system, such as finance, technology, property/inventory and supply, �plus a couple of worker-bee types to make sure it all works on a practical level,� Ireton says. They should then pick an implementation team and decide how many people to interview in mapping out the new system, who should be responsible for


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getting or inputting information, and who should work with the vendor on design. Ireton stresses not to leave too many tasks to the �techies,� who may have the technical knowledge but may not be familiar with the work processes the software package must serve. A company�s contract management team � those who are in charge of tracking, filing and issuing notifications based on the company�s contracts � has a vital role in communicating the committee�s decisions to the implementation team and making sure its work consistently reflects those decisions.

What’s Out There? Software developers offering contract management applications range from large diversified vendors to a few smaller companies that concentrate exclusively on this area. ERP and CRM software vendors such as Oracle, SAP, Siebel and i2 offer programs containing some portion of the contract process. A few smaller companies have also emerged that concentrate entirely on this area, including diCarta, I-many and MyContracts.com. Large and small, each of these vendors pays a great deal of attention to what features and services its rivals offer and strives to equal or outdo them. �Rapid evolution is going on in this marketplace,� says Rick Ressler, CPA, partner in the risk consulting group at Andersen in Houston, �so I don�t like to say there�s one vendor out there that�s better than another because that might change tomorrow.�

MyContracts.com, a Web-based vendor, focuses on buy-side contracts. Redwood City, California-based diCarta concentrates on both buy- and sell-side contracts, including supplier and service level agreements. �Say a certain type of company is being investigated by the SEC,� says Ressler, who is now implementing a diCarta

system at Andersen, �and we want to do a review of all our legal agreements with that type of company. In the past we couldn�t because our contracts were not centralized for all of our firm�s offices. This situation will no longer be a problem with the new system.�

The modular structure is a plus for firms that want to automate contract management piece by piece, rather than by adopting a single comprehensive system, points out ASD�s Ireton. �Not everybody will need an auction system or an order aggregation system all at once,� she says. �As you integrate more capabilities, look around and see what more you can use.� ASD does not select vendors or implement automated contract management systems for its clients. Ireton says some clients have started out by creating automated, pre-approved catalogs for routine purchases that they can update electronically and integrate with their accounting side.

Traditional ERP or CRM programs do not generally include a contract repository or modules for monitoring pricing, rebates and chargebacks or compliance with the revenue recognition rules of the SEC�s SAB 101 (see �Automated Contracts Make Revenue Recognition Easier�). Goldman Sachs estimates ERP systems cover only 20% to 30% of the needs of most enterprises. �What�s evolving now is much more customized to individual company needs,� says NCMA�s Couture, �and not just an add-on to ERP systems.�

Pricing varies greatly from one vendor to another and depends on the client�s size and the extent of its contract relationships. Vendors generally charge for their products through a licensing fee, which allows the customer to try out elements of different systems. Some providers also offer contract-


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hosting arrangements for midsized and smaller clients that do not want to maintain the hardware and software in-house, a service known as application service provision, which runs the client�s contract data on the host�s own systems for a monthly fee.

I-many, for example, typically charges in the $125,000 to $130,000 range for projects with midtier to smaller companies, while a

large company with a high volume of sales typically pays $1 million to $2 million � and as much as $4 million if it purchased a full set of product suites or modules. DiCarta�s average pricing is roughly in the same range � about $150,000 for a small company with perhaps 10 users to license the software, and as much as $1.5 million to $2 million for a Fortune 1,000 company that plans to use the software enterprise wide. Both companies calculate maintenance costs


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� instances when the vendor makes modifications or adjustments to fix glitches � at about 20% of the licensing fee. I-many also offers �value-based� deals in which the company pays a reduced licensing fee and I-many receives a portion of whatever savings the company achieves by using the system.

Efficiency and Competitive Advantage Automation forces companies to carefully analyze how they negotiate and implement contracts � a process that by itself can help the organization create better, more efficient procedures. Contract management systems tie executives and negotiators directly into the negotiating process and give them access to contract language the company considers standard and acceptable. Negotiators do not have to sit in the same room; they can hash out contract terms in an instant messaging environment. Afterwards, the system can initiate a series of notifications to ensure the terms of the deal are carried out according to the contract�s timetable.

Some companies like their systems to contain �version control,� which allows them to keep multiple versions of the same agreement from circulating while it�s making the rounds, notes Rubin. �If more than one party has access to the contract, you can lock it down so that no one else can make changes while you�re working with it,� she says. �And the system maintains all previous versions, so you can see all changes up to the final version.�

Companies can purchase another modular component, called revenue manager, with the ability to highlight wording that might trigger revenue recognition, such as acceptance clauses, exclusivity and extended payment terms. Some automated contract

management systems make calculations showing the seller when it can recognize revenues under SAB 101. The software can check for specific types of revenue recognition fulfillment, such as whether the seller was able to make a reasonable estimate of the probability of nonpayment.

An automated warning system can also alert a sales rep who may be about to make a deal with one client that disrupts a relationship with another before it�s too late. �A slight change in price could easily cause you to give a new customer a lower price than any of your other customers,� Christiansen says. �You may then have violated a pricing status agreement with another, much bigger client.� An Internet-based link to a company�s library of contract terms and conditions can prevent such a situation from arising as soon as the wording hits the page and before a handshake with the new customer � instead of later on, when your company�s lawyers review the deal and a lawsuit may be coming.

Besides creating greater efficiency, automation may offer a competitive advantage by reducing cycle time to completing the contract negotiations, says Andersen�s Miles. By making the company�s contract library accessible and facilitating messaging and notifications between the negotiator and key executives, automation shortens the cycle. That makes companies that have learned how to do so more attractive as negotiating partners, Miles says, because standard clauses are automatically included in the contract or are available from the contract library. Sales reps and executives can then spend less time wrestling with the basic parts of the agreement.

Several vendors offer a database module that gives sales reps the ability to mine the company�s past contracts using word or


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category searches to compare the terms they are discussing with those used in past deals. The negotiation module contains standard contract clauses the negotiator can use to assemble the contract. Any of these clauses can be tagged so that if one of them is added, the CEO � or another officer � is automatically e-mailed to authorize its inclusion. Instructions can be attached, such as �for negotiation� or �accept/ decline only.� The module can also contain examples of similar language from other contracts the company has signed, noting when and if such language is acceptable.

No Package Is Perfect One of the goals of integrating the contract management process into a company�s operations through automation is to eliminate human error. But these systems can just minimize errors by assuring that each person who needs to approve an aspect of a contract, or make sure one of its obligations is fulfilled, is kept in the loop.

For those who think the software can do everything, it�s possible to build a workflow that is too elaborate, cautions Rubin. �If your system has so many ticklers for so many people that you tickle them to death, they may start to ignore their notifications,� she warns. When companies� automated contract management systems don�t run smoothly, it�s usually not the software causing the problem but the workflow process it was built into. �If a company has no firsthand knowledge of how this kind of system works, a successful implementation will depend on how well the company prepared for it and tailored it for its internal use,� says Ireton. �That�s why bringing all the departments that will be affected by the new system into the implementation process is crucial.�

Automated Contracts Make Revenue Recognition Easier

Contract pricing agreements, like everything else in the business-to-business world, are becoming more complex. While contracts stipulate terms of delivery and acceptance, accounting standards in such critical areas as revenue recognition are tightening and require ever more scrutiny by CPAs. The SEC�s SAB 101, Revenue Recognition in Financial Statements, a set of guidelines that went into effect late last year, specifies when a company can realize revenue on its books from the sale of a product or service. In some situations and particularly for certain industries such as software, instead of booking the revenue as soon as the product is shipped, the seller now must wait until it is installed. To win an exception from such rules, the seller must provide �vendor specific objective evidence� showing why a different standard is appropriate. �That means the price charged must be the company�s price, and not an average price for similar companies,� says Mary Barth, CPA, the Atholl McBean professor of accounting at the Stanford Graduate School of Business, and also a member of diCarta�s board. �The company must be able to show it is already charging the same price to other customers, or that the price is well established and unlikely to change.�

Assembling all the data required to establish vendor specific objective evidence that entitles a company to an exception from SAB 101�s revenue recognition rules would be impossible for many companies unless those data were accessible electronically and linked to specific contracts, observes Barth. �The bottom line is that SAB 101 has put a much higher premium on knowing exactly what terms you�ve agreed to,� says Barth.

Automation helps companies get the most out of their contracts in other ways. With notifications flagged electronically to the right executive when a portion of the deal is subject to automatic renewal, it�s less likely the company will lose revenue by neglecting to invoke this clause. Also timely notifications can prevent the company�s missing a rebate payment � an important consideration, as rebate agreements are becoming a more frequent feature in contracts. Plus, executives know ahead of time when a deliverable is due, leaving less room for a due date to go by which could give a customer grounds to cancel the deal.


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If a company brings in an outside consultant to implement the system, that person�s understanding of the company�s internal procedures will be critical as well, Ireton adds. Otherwise, the company can end up having to retool the basic workflow that the automated system is supposed to follow or add modules that should have been installed in the first place. If the former situation occurs, the additional time and effort can mean refitting the system from top to bottom, at heavy additional cost.

Once an automated contract management system is in place, however, it becomes much like any other piece of software � an intellectual asset over which the company has only partial control. Companies that use them are vulnerable to the vendor�s going out of business and no longer being able to support the software. While no disasters have occurred yet, Rubin says some companies are asking their vendors to place

a copy of the source code for their system in escrow, so that the company can retrieve it should the vendor close its business.

Automation cuts costs and improves revenue. Savings can come from reducing pricing errors, mistaken payments, operating and processing costs and personnel. Revenue rises when companies streamline claims processing and improve vendor and customer relations and compliance, according to �Technology: B2B Software,� a Goldman Sachs report released last February.

Corporate CPAs and financial managers know efficient contract management can be a key to a better bottom line. Automating the process empowers companies and their workers and takes the guesswork out of managing business agreements.

Eric Laursen is a freelance writer in New York City. This article appeared in the American Institute of Certified Public Accountants published Journal of Accountancy in January 2002.


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COST MANAGEMENT: CREATING VALUE

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Peter Kajüter

As a result of more intense competition and the increasing focus on shareholder value creation, cost management has become increasingly relevant in recent years. However, it is no longer enough to cut discretionary expenses in times of declining profits. A strategic approach to cost management is presented. Benchmarking and target costing are discussed, and an explanation is given of how costs change and how they can be managed for products, processes and resources. Introduction A common corporate objective is to increase shareholder value.

To ensure the long-term success of a company, it is vital to meet this objective, because investors only provide capital to those companies that offer an adequate return.

There are various ways of enhancing profitability and increasing shareholder value.

While some measures, such as optimising the capital structure and improving the portfolio of business units, are usually initiated by central functions, others lie within the responsibility of operating units.

These can contribute to value creation not only by increasing sales and reducing the amount of capital employed, but also by realising cost savings.

In practice, however, a negative notion of cost management prevails. In many cases, cost reduction efforts are merely a temporary reaction to declining profits. As short-term improvements are necessary in such circumstances, cost problems are rarely analyzed in detail.

Instead, cost-cutting programs dominate. These often lead to positive results in the

short run, but they do not ensure the long-term competitiveness of the company.

A strategic approach to cost management is therefore needed.

Analyzing Cost Position and Cost Drivers A strategic cost analysis provides the information necessary for effective management of costs. It has two elements: • an assessment of the company�s cost position;

• an investigation of the underlying cost drivers.

In contrast to conventional cost analysis, which is mainly concerned with product costing and variance analysis using internal cost accounting data, a strategic approach to assessing the company�s cost position requires a broad view that considers • the company�s cost structure;

• the cost structure of the company�s competitors and value chain partners (Grundy (1996)).

Figure 1 illustrates this broad view. It identifies two cost management techniques that help in the initiation of cost management efforts: • Cost benchmarking: This is a structured

approach to the determination of the competitor�s product or process costs, and thus the identification of ideas for improving the company�s own products or processes. A common method of assessing the costs of a


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competitive product is to disassemble it and examine its design and materials. The product costs of the competitor can be approximately determined on the basis of the company�s own manufacturing processes and purchasing conditions. This type of benchmarking is called reverse engineering. As the competitor�s processes are more difficult to analyze, management consultants frequently offer their expertise or their neutral role for a process cost benchmarking.

• Target costing: This transmits the cost reduction pressure from the market into the company, and, in a second step, into its suppliers. Necessary cost reductions are identified at an early stage in the product development process by comparing the market-driven allowable costs (the selling price less the profit margin) with the drifting costs (estimated costs) of the proposed product. This analysis enables the company to fix the target costs for the product as a whole as well as for its components. If a component is outsourced, the component-level target cost becomes the price limit for the supplier (chained target costing).

A detailed analysis of the cost position helps to identify needs for cost reduction. It may also provide ideas on how to realise cost savings.

So that we can understand cost behaviour and take appropriate measures, though, it is important that we investigate the cost drivers. These are factors that create costs.

Volume, for example, is a well known driver of direct materials costs. There are also many more factors that affect the cost position. They are usually interrelated in complex ways: • A high manufacturing overhead may be brought

about by marketing and sales decisions.

• A deficient market segmentation often leads to a wide product line, which results in complex manufacturing processes.

This example demonstrates that it is not sufficient just to analyze the cost position. Manufacturing overhead reductions will not

solve the cost problem, because the cause (complexity due to product variety) has not been eliminated.

It is difficult to analyze the interplay of cost drivers in practice. Table 1 overleaf lists some key structural and executional cost drivers.

Although they are not all relevant to every situation, these strategic cost drivers have turned out to determine the long-term cost position in many cases (Shank and Govindarajan (1993)).

Proactively Managing Costs There are a variety of opportunities to manage the cost position proactively on the basis of a systematic cost analysis.

The main categories of cost-reducing measures are shown within the framework of a generic business model in Figure 2 overleaf: • To earn profits and create value, companies have

to meet the needs of their customers. They therefore offer products (or services).

• This requires certain processes to take place. Processes transform an input (material) into an output (product).

• Processes thus consume resources, which exist within the company or are purchased from external suppliers.

Cost management measures can target each step in this value-added process. Therefore product cost management, process cost management and resources cost management must be distinguished (Kajüter (2000)).

Product Cost Management The focus of product cost management has traditionally been the manufacturing stage of


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the product life cycle. This is mainly because most costs are incurred during this phase. These are recorded by the cost accounting systems that provide data for variance analysis.

This approach to cost management does not offer much potential for cost reduction, though, because all the product features have been defined at the manufacturing stage, and the manufacturing processes have been established. Therefore it is essential to focus cost management efforts on the product development stage.

Experience shows that around 70�80% of product costs have been committed by the end of the product development stage, because the materials and design choices have been made (see Figure 3). Thus this phase offers the best opportunities for proactively managing the future cost position.

Many companies have considered this, and have shifted the focus of their cost management activities in recent years.

However, cost management during product design brings with it the challenge of estimating future product costs. Since

traditional cost accounting systems do not provide any data for this, specific cost information systems are needed to support engineering decisions.

Such systems are often called cost tables. They display the costs of materials and labour for various types of material and design choices, on the basis of current purchasing prices or experience gained in former product development projects.

Cost tables are used in combination with target costing. While the former provide estimates of drifting costs (bottom-up), the latter defines market-driven cost targets for the product and its components (top-down).

Target costing also has another advantage: it helps in overcoming the internal technological focus that still prevails in many engineering departments.

By integrating the various functional areas, and in particular marketing and product development, target costing enhances customer orientation and supports the development of products that meet customer needs. Expensive over-engineering can thus be avoided.


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An enhanced customer focus also helps in the management of product complexity, which is an important cost driver in many cases. Product complexity is a result of variety, which has two main forms: • A product has a large number of parts and

components. Such internal variety is often caused by poor communication between engineering departments or a lack of standardization.

• A product range is wide (in terms of the range of colours and designs for example). Such external variety is a result of products for which there is little demand not being eliminated, or various products being offered in order to gain new customers in niche markets.

While a wide variety of parts and components is usually not relevant to customers, product differentiation may provide an opportunity for a business to enter new markets and generate additional sales.

The effects on costs are frequently underestimated in both cases. The variety leads to additional activities (for example there are more parts to be developed, and more parts to be ordered and stored), and it thereby increases indirect costs.

To eliminate such negative effects, product complexity can be managed in three ways:

• Complexity is reduced, for example by increasing the number of commonality or carry-over parts.

• Complexity is transferred, for example to suppliers that assemble parts to components.

• Complexity is controlled, for example by differentiating the product at as late a stage as possible within the manufacturing process.

Process Cost Management Business processes evolve over time. When circumstances change, processes often become inefficient and thus need to be redesigned.

The increasing use of the Internet, for example, has made many traditional procurement processes obsolete, because better ways of designing such processes have emerged.

Process cost management (or activity-based cost management) covers all efforts to improve business processes in order to reduce costs. These efforts should not only be focused on internal processes (for example manufacturing), but also on the linkages that exist between independent companies.


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The procurement and inbound logistics of a company, for instance, interact with the order entry systems of its suppliers, and similarly outbound logistics interrelate with channel activities. Such linkages are a major cost driver. Improving coordination and jointly optimizing inter-firm processes frequently offers opportunities for both partners to reduce costs.

There are two generic process cost management approaches to the degree and frequency of changes in process design: • Continuous process improvements: This

approach is based on the Japanese kaizen philosophy. Continuous process improvements aim at incremental changes that often result in significant cost savings over time (Imai (1986)).

• Process reengineering: In accordance with concepts of process reengineering, a radical new process design may be necessary from time to time if incremental changes do not yield the necessary improvements (Hammer and Champy 1993).

These two generic approaches need to be combined for sustainable results to be achieved. Each of the following three process optimisation measures may be required: • elimination of non-value-added activities :

activities that consume resources but neither directly nor indirectly add value for the customer, for example rework and unnecessary transportation;

• transfer of activities: through outsourcing or insourcing;

• reconfiguration of activities: changes in the order of activities within a process, for example parallelization.

Process improvements reduce the amount of resources consumed. This does not in all cases lead to immediate cost savings, however. In purchasing, sales and administration in particular, most costs are fixed.

For potential cost savings in these areas to be realised, therefore, tasks need to be redistributed among employees, and then the resources freed by the improvement need to be redeployed.

Resources-Related Cost Management A cost structure analysis usually reveals that materials and personnel are the two most important resources in terms of volume. They often amount to about 80% of total costs. It is thus essential to use purchasing and human resources concepts in cost management (Kajüter (2000)).

Relationships with suppliers are the basis for cost management in purchasing. In recent years, the nature of these relationships has changed in many companies, and this has led to closer long-term partnerships with a small number of key suppliers.

As these key suppliers are responsible for entire product modules or systems, there are significant opportunities for cost management in this area. The suppliers should therefore


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be integrated into the manufacturer�s product development process.

Although there are numerous ways of reducing purchasing prices, three approaches are of particular importance: • Continuous price reduction: These are based on

long-term buyer�supplier relationships. Annual competitive bidding procedures are replaced by model-life contracts that usually include continuous price reductions. In this way, the manufacturer benefits from the productivity improvements of its suppliers, which in turn benefit from stable demand.

• Global sourcing: Expanding the scope of purchasing activities from local procurement to worldwide sourcing allows companies to exploit comparative price advantages.

• E-purchasing platforms: Economies of scale in terms of quantity discounts can be realised when several companies bundle their purchasing volume. The Internet plays a key role in this respect because it establishes electronic markets with low transaction costs.

While materials costs are less important in the service sector, personnel costs are a major cost item in both manufacturing and service industries. In contrast to materials costs, which are variable, personnel costs are mainly fixed, and thus do not

automatically decline with decreasing volume.

Specific human resources management measures are therefore needed to adapt personnel capacity to changing market conditions: • Flexible working hours: Companies agree with

their employees a range of hours to be worked in a week or a month. The number of hours actually worked varies within this range according to demand. This avoids idle capacity and the payment of overtime.

• Temporary employment: Employment contracts are for a fixed term. If demand declines, they are not renewed.

• Internal job rotation: Temporary or permanent redundancies and vacancies are balanced out by systematic job rotation within the company. This may be facilitated by an internal employment agency.

The extent to which companies are able to make use of these concepts depends on legal restrictions.

If layoffs cannot be avoided, outplacement services can be used to support former employees in finding a new job elsewhere. Although such services cost money, their effects are often positive (conflict is avoided, the company�s image is enhanced, and so on).

Conclusions Cost management plays a key role in shareholder value creation. It should be based on a thorough analysis of the cost position and its underlying cost drivers.

For cost management to be effective, a comprehensive approach is required that encompasses product-related, process-related and resources-related measures. This broad view considers not only the company itself, but also its relationships within the value chain.


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References �Cost is a strategic issue�, Grundy, T Long Range

Planning Vol. 29 No 1 (1996) 58�68

Reengineering the Corporation Hammer, M and Champy, J (1993) HarperCollins

Kaizen: The Key to Japan’s Competitive Success Imai, M (1986) McGraw Hill

Proaktives Kostenmanagement Kajüter, P (2000) DUV/ Gabler

Strategic Cost Management Shank, J K and Govindarajan, V (1993) Free Press

Further Reading Target Costing and Value Engineering Cooper, R and

Slagmulder, R (1997) Productivity Press

Supply Chain Development for the Lean Enterprise — Inter-organisational Cost Management, Cooper, R and Slagmulder, R (1999) Productivity Press

�Proactive cost management in supply chains� Kajüter, P in Cost Management in Supply Chains Seuring, S and Goldbach, M (eds.) (2002) Springer, 31�51

Contemporary Cost Management Yoshikawa, T, Innes, J, Mitchell, F and Tanaka, M (1993) Chapman & Hall

Peter Kajüter is a Senior Lecturer in the Faculty of Management at Düsseldorf University in Germany. This article appeared in the Institute of Chartered Accountants in England and Wales published journal Management Quarterly in April 2002.


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SHAPING GOOD CONDUCT

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SHAPING GOOD CONDUCT Anthony A. Atkinson and Steven Salterio

The search for more effective systems of corporate governance has created a unique opportunity for strategic financial management professionals.

mproving corporate governance is one of the hottest topics in boardrooms, regulatory commissions, and business newsrooms around the world. Reasons

for this stem from a variety of problems that surfaced in the 1990s, such as well-publicized business failures that have been related to inadequate governance structures, including Bre-X, Livent and YBM, and questions about the adequacy of management in organizations like Air Canada, Moore and Nortel.

Continuing concerns about improving corporate governance have also been voiced in such reports as the influential �Crystal Report on Executive Compensation� by analyst Graef Crystal, which debates whether boards act in the best interests of shareowners, particularly in the area of setting executive compensation.

Statements expressed by securities regulators, such as David Brown, chair of the Ontario Securities Commission (OSC), suggesting that external auditors are increasingly becoming advocates for their clients instead of impartial arbitrators of financial statement disclosure fairness are also influencing decisions pertaining to corporate accountability.

And finally, there has been significant non-compliance with the voluntary recommendations of the Dey Committee, suggesting that TSE registrants disclose their firms� activities in relation to a variety of corporate governance �best� practices (see �Corporate Governance,� by

Bruce McConomy and Merridee Bujaki, CMA Management, October 2000). The joint committee�s recommendations focus on the major issues identified in corporate governance, such as the fiduciary role of the board, yet despite their context in corporate culture change, they are surprisingly focused on form and structure.

The increasing interest in, and the demand for, higher standards relating to corporate governance have created a unique and timely opportunity for management accountants � and other strategic financial management professionals � to align the strategic vision of the profession with the emerging demands for more effective systems of corporate governance.

The Evolution of Corporate Governance Principles Discussions of corporate governance operate at cross-purposes since there are different and potentially conflicting definitions of the concept. Understanding these differences is a first step in supporting an informed discussion about corporate governance and developing a standard definition for it.

The Setting At the aggregate level, corporate governance is about governing an organization. The players in the governance process are the principals or shareowners of the organization, management, board of

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directors, and auditors. The principals hire managers to pursue their objectives for the organization. The managers are expected to act in the principals� interests in managing the organization. While the principals nominally appoint the board of directors to oversee management, the reality of the modern corporation is that management usually appoints the members of the board. Furthermore, while the principals hire the independent auditor who reports on a fairness evaluation of the financial statements and related disclosures, the reality is that management most often selects and determines the compensation level of the auditors. Management can also influence the auditors via their purchase of non-audit services from the professional service firms that public accounting firms have morphed into in recent years.

Suggested Roles for Corporate Governance The setting of corporate governance raises three important sets of issues. The first is that management may operate the organization to achieve management�s interests rather than the principals� interests. Since, in most settings, management appoints both sets of overseers (the board and the auditors) and can offer the monetary incentive of continued employment to both, the potential for moral hazard exists, in that management can bend both the board of directors and the auditors to its will. This is a fiduciary issue since it can result in an inappropriate transfer of organization resources from the organization�s principals to its management. This role may be referred

to as the �internal control role� of corporate governance.

Second, management may act honestly but incompetently in managing the organization�s affairs. This issue elevates the role of the board of directors in evaluating the business and functional level strategies developed and implemented by management. Some observers have argued that the role of the

board of directors is to provide a proactive, comprehensive and independent review of these strategies. Other observers believe that the role of the board is reactive, providing for management succession when the current management has failed. This role may be referred to as the �control role� of

corporate governance.

And finally, the third issue is that appearances of propriety can be deceiving in corporate governance. It costs nothing for ineffective boards to mimic the practices of effective boards by complying with structure requirements, but not delivering the expected results of effective corporate governance. Focusing on internal controls does not ensure effective corporate governance if it is construed as effective control of the organization.

While all perspectives on corporate governance agree on the importance of the fiduciary issues in corporate governance, differences arise in the nature and importance of the control role, and how difficult it is for ineffective boards to mask their lack of stewardship.

It is clear that the institutional investment community is

losing patience with the lack of progress exhibited by the various constituencies that have proposed corporate governance principles but

failed to propose and implement effective systems of

corporate governance.


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Alternative Perspectives on Corporate Governance The fiduciary perspective. Traditionally, corporate governance focused on, and reflected, fiduciary concerns. Governance was considered adequate if management took steps to ensure that the organization�s assets were protected from loss or theft. For this reason, good corporate governance was, and in some circles still is, associated with adequate and effective internal controls.

The Toronto Stock Exchange (TSE), reflecting the conclusions of the influential Dey Committee on corporate governance, focused its governance evaluation and guidelines on the organization�s internal control, management information, and risk management systems. According to the TSE, corporate governance means the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business.

While this definition appears to promote the fiduciary and evaluating role of governance and advocates a social responsibility, the TSE current governance guidelines focus almost exclusively on controls designed to ensure board independence and issues relating to managing organization risk. There are no specific guidelines relating to supporting a control role for boards of directors; hence, the perspective is decidedly fiduciary.

This preoccupation with structure (controls) rather than process or results (control) is evident in the criteria that some reviewers have used to rank boards in terms of their governance practices. For example, in the article �Why Boards Matter� (Canadian Business, October 29, 2001) two criteria

were used to rank boards: how well each company adhered to the TSE governance guidelines and evidence of board independence. It is relatively easy for ineffective boards to imitate the practices of more effective boards and thus receive such a seal of approval.

The stakeholder perspective. The stakeholder perspective on organizational governance is based in social equity and welfare principles. This approach advocates identifying stakeholders who have claims on the organization; the rigorous specification of rights and responsibilities amongst those stakeholders; and the development of accountability, reward and punishment systems to support the rights allocations. In this view, the organization is a mechanism that, amongst other objectives, should be a model or tool of social justice. This perspective is evident in the World Bank�s definition of corporate governance, which states that it holds the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally, to require accountability for the stewardship of those resources.

Some writers have addressed the stakeholder perspective from the narrower perspective of the legality of organization activities. Management literature discusses this perspective under the aegis of internal control, ethics control and risk management systems. Some parties have treated ensuring the legality of organizational activities as an element of corporate governance. For example, RT Capital was charged with, and subsequently fined for, high closing activities (stock manipulation) by the OSC, which argued that these activities were taken as a failure of effective board stewardship


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and a lack of effective corporate governance in the firm.

The control perspective. This perspective identifies the primary role of governance as the effective use of assets in pursuing organizational objectives � a significant and important departure from the fiduciary role envisioned by the internal control perspective. The following Organization for Economic Co-operation and Development (OECD) definition of internal control reflects this perspective:

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation... and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

The rights definition. In �Governing the Modern Corporate,� (the Economist, May 5, 2001), the American approach to governance is identified using the concept of shareholder rights. From this definition, good corporate governance exists when shareowners have the ability, through votes at annual meetings or through forceful boards of directors, to overthrow existing management when appropriate. From this view, effective corporate governance is achieved through laws that enhance the ability of shareowners to express their preferences in a democratic way, either by their direct actions or indirectly by having boards of directors reflect their majority preferences.

A comprehensive definition. It is evident that some of the above definitions of

corporate governance reflect elements of internal control and control perspectives. The following definition appears to include key aspects of the above perspectives:

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in a general meeting. (“The Report of the Committee on The Financial Aspects of Corporate Governance,” The Cadbury Report, April 1992).

Outcomes — Not Controls A distinguishing characteristic of many of the perspectives on corporate governance is a focus on controls (rules and structure), rather than outcomes (process or results). This characteristic has provoked comments from sceptical observers that the governance movement, which has been driven primarily by accounting bodies, is riddled with self-denial and window-dressing that do not deal with the underlying fundamentals, nor with thoughtful proposals for improving corporate governance. The preoccupation with controls rather than outcomes is likely the reason that the report of the TSE-CICA Joint Committee on corporate governance entered the world with a thud rather than a bang.

Terrance Corcoran commented in the National Post (March 10, 2001) that �while


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the accountants busy themselves with soft and fluffy �corporate governance� issues... their real business of accounting is falling away.� This commentary is unfortunate for two reasons. First, it reflects a growing lack of confidence in public accounting and the ability of regulators and professional accountants to implement a credible and effective process of corporate governance. Second, it fails to recognize some important developments in the principles of corporate governance that accounting bodies have developed but failed to advocate forcefully both to their own members and to the regulatory community.

The issues that need to be resolved include the following: 1. Should corporate governance include both the

fiduciary and control roles?

2. Whose interests should be reflected by corporate governance principles � only those of the principals�, or those of a broader set of stakeholders?

3. Should the role of the board of directors be proactive or reactive?

A Suggested Course of Action From the commentaries reported above, it is clear that the institutional investment community is losing patience with the lack of progress exhibited by the various constituencies that have proposed corporate governance principles but failed to propose and implement effective systems of corporate governance. The approach undertaken by the TSE to date, and that of the Joint Committee�s interim report, which focuses on controls rather than outcomes, is ineffectual and will not address the concerns and issues that critics of current corporate governance practices have raised.

What is required is an acceptance of the broad view of corporate governance, such as the one proposed by the Report of the Committee on the Financial Aspects of Corporate Governance or The Criteria of Control Board in Canada, recently renamed the Risk Management and Governance Board.

It is unlikely that a view of corporate governance that includes broad social issues would be acceptable in North America, although corporate governance should include controls that ensure that the organization will operate within societal laws and expectations of �good conduct.�

Within this view, the role of the board of directors should be clearly specified. In a provocative article by John Pound, entitled �The Promise of the Governed Corporation� (Harvard Business Review, March/April 1995), the writer argues that boards should be required to undertake substantive and independent reviews of both the organization�s systems of internal control and the efficacy of the organization�s systems of planning and control. This is difficult to achieve as board members are commonly rated on how much of a �team player� they are throughout their careers. Yet, here, they are asked to act as an independent check on the very management that in all likelihood appoints and remunerates them.

Glorianne Stromber, a former commissioner of the OSC, stresses the board�s role of undertaking an independent evaluation of management initiatives. She echoes Pound�s perspective of the importance of understanding the behavioural dynamics involved in the board�s stewardship in her comments on the focus of the Joint Committee on Corporate Governance�s Interim Report:


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“The fundamental reluctance of directors to question management or committee initiatives has all too often undermined and will continue to undermine so many well-intentioned governance measures. This reluctance exists whether the board is chaired by a non-executive chair or by the CEO with a lead director. This reluctance is also likely to taint the frankness and usefulness of assessments of the board’s effectiveness as a whole or of the effectiveness of individual directors...”

The Role of the Management Accountant Within this context, a critical role emerges that reflects the domain and defined territory of management accounting to provide strategic performance information that will allow both management and an independent board of directors to evaluate current management strategies. This information is already present in some organizations in the form of strategic performance measurement systems, such as the balanced scorecard, which requires that management develop, articulate, communicate and monitor its chosen strategies.

Furthermore, management accounting knowledge of how different information needs to be tailored for different decisions and decision-makers could lead to more useful and understandable reports for boards and board committees. This implies that management accountants need to have a greater exposure to directors, so that they can shape directors� information systems. That information system should be responsive to directors� needs via mechanisms, such as secure web sites with relevant and reliable corporate information in a format easy for busy directors to utilize in their monitoring and evaluating roles.

MINI CASE STUDY Changing Its Tune

How the Bank of Montreal changed its corporate governance climate in the 1990s: • Decrease board in size from 29 in 1991 to 15 in

2000. • Clear board responsibilities including:

○ Selecting, evaluating, compensating and replacing the CEO;

○ Shaping, assessing and approving strategic plans and objectives;

○ Selecting directors and evaluating board performance;

○ Overseeing ethical, legal and social conduct;

○ Reviewing the financial performance and condition of the bank;

○ Simple one-page �Charter of Expectations for Directors.�

• Annual peer evaluation in which directors rate each other against the Charter, including such areas as strategic insight, financial literacy, business judgment and accountability, and communication. Participation is mandatory and each director receives a copy of feedback on his/ her performance.

• Annual survey of board members to identify key governance concerns that are used to shape the board agenda for the next year.

• Rigorous continuation of membership policies including retirement at age 70, 75% attendance requirement and automatic tendering of resignation when principal occupation changes.

• Assignments of clear descriptions and responsibilities assigned to each board committee.

• Requirements that every director have a laptop with e-mail capability so that they can receive real-time updates of key company information.

The Bank of Montreal recently received a National Award in Governance from the Conference Board of Canada, and has consistently been recognized for the quality of its disclosures on corporate governance by the Canadian Institute of Chartered Accountants and the National Post Annual Report Awards.


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Management accountants and other strategic financial management professionals who are directors of corporations also have an important role to play. They need to demand from management the information and information systems that will allow them to carry out their roles effectively and efficiently. As independent critical thinkers, management accountants who are directors need to foster a climate on the board that enables directors to feel that it is not just acceptable but necessary that they raise the tough questions about management strategy and initiatives.

The key to corporate governance reform does not lie in specifying controls that are easily mimicked by those companies that prefer form to substance. Although they may

well be necessary conditions, they alone are not sufficient enough to promote effective organizational control. The key to reform lies in creating a climate among a well-educated set of directors that is conducive to openness and questioning of key management assumptions and proposals. This requires that directors serve only on a limited number of boards so that they have the time to devote to board and committee activities; they have or obtain an in-depth understanding of the industry; they are truly financially literate; they have a substantial personal investment in the company; and they are known as independent thinkers. Whether any blue-ribbon commission or regulator can effect this sort of change is indeed an open question.

Anthony A. Atkinson is the associate director of research at the University of Waterloo�s School of Accountancy. Steven Salterio is an associate professor at the same school. This article appeared in the CMA Canada published journal CMA Management Magazine in February 2002.


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HOW BCP AND CRISIS MANAGEMENT THRIVE

37

HOW BCP AND CRISIS MANAGEMENT THRIVE Dr. Josef Eby Ruin

Business Continuity Planning (BCP) and Crisis Management: After Y2K Came September 11th.

The Y2K Hype Everyone would still remember the chaos and paranoia that the date 1 January 2000 brought to the world of mankind that has always been dictated and processed by the digital might of computers and cyber technology. What was that fear of Y2K or �Year 2000?� Simply put in a layman�s term, the fright was that the digits �00� in the Year 2000 would make computer brains not recognise it to mean �Year 2000� but just the plain �0� number or year 1900, since the way computer programming was done previously was to only use the two last digits to denote the year. This was for want of space and convenience, it was said, and at that time only two digits i.e., 52 without inserting �19� would mean 1952. Thus the whole year of 1952 was not programmed, so that a computer programmer just writing down 52 instead of the whole four digits of �1952� on the date field would denote �year 1952.� So then �00� would mean year 1900 instead of year 2000. Thank God it was not the case when the date 1 January 2000 came around. No plane that flew between 11:30 pm on 31 December 1999 and 12:01 midnight on 1 January 2000 crashed. But prior to that, everyone was getting ready for the worst, and the disaster recovery procedures were drilled and rehashed over and over again just in case the Y2K displayed its mischief. On a lighter side, there were some friends that I knew who were hoping to wake up on 1 January 2000 and find that their RM 200 savings balance became RM 2,500,000 a result of someone�s money going into their account because of the haywire that Y2K might stir. They were quite disappointed

though, as nothing occurred. The millions of dollars spent by everyone to address the Y2K debacle were quite mind-boggling. They wanted to ensure that there would be minimal interruptions or losses to their businesses, lifestyles, lifts, cars, billboards, aeroplanes, banks, shipping, refrigerators, digital clocks, and you just about name anything that worked or had some element of computer controls. Consultants, computer systems providers and those who had some kind of solution to offer were having a field day and smiling to the banks especially during the period 1998 to eve of Year 2000 (people started to prepare for the Y2K scare as early as 1998 onwards. I know because my then organisation was preparing for it as early as 1997.)

The 11 September 2001 Paranoia With the Y2K epidemic over, there was comfort and peace of mind. No major topic or �cause for concern� was on the agenda. Solution providers and consultants had a rather dull or lull time, it seems. Any more ideas to stir people from being complacent? Nothing much, it appeared. There was calm. But not for long. Nine months into the Year 2001 came a world-class drama. The world�s pride and symbol of free world enterprises that was epitomized by the New York Twin Towers was destroyed by two innocent commercial aeroplanes mischievously transformed into fuel-laden missiles operated by what many called the �human terrorist heroes� of the century.


38

The Y2K hype and September 11 paranoia truly stemmed fears and concerns everywhere, more so in the entrepreneurial and business world. The two were the main triggers for organisations to spend time and lots of money on developing their business continuity. It is not just talking about computers and system recovery any more. It is more to do with disaster recovery and crisis management so now they appropriately have the so-called DRP or disaster recovery procedures. But, it is not just confined to computers and systems per se; it is to save lives, and protect the business operations for the continued availability of products and services. Thus the term BRP means business recovery planning. But some would say, �the nomenclature BRP is not quite right; we do not want �recovery,� rather it should be �continuity� as we want to be seen to have no interruptions but continuity in our services and operations.� So BCP or business continuity planning it is, and today it is a very, very, very common and loose term to mean �computer recovery and business continuity� at one and the same time for both systems and business to go on uninterrupted. If not recovery or continuity for all the businesses and systems, then at least for all the major and critical systems, business and services of an organisation.

How BCP was born? The history is very much �war and military� in essence. The theoretical concepts of BCP sprang up from the army. For many years military strategists and leaders have been pre-occupied with the need to operate efficiently and continually even when there are disruptions to the normal flow of things

affecting their given personnel, location and situation due, say, to rapid or catastrophic changes.

In the 1960s some individuals involved in American business had the mindset to realise that merely preserving data during disaster was no guarantee that the business would survive the interruption. They argued that for a business to thrive and survive, it has to quickly and effectively recover from, and respond to, any kind of business interruption. From this mindset germinated

the first generation of disaster recovery plans and planners. By the early 80s many practitioners of disaster recovery had realised that to be truly effective, their disaster recovery has to encompass disaster prevention planning. They opined that the smoothest and most productive environment for a

business to operate in would be the one wherein no interruptions occur. Thus emerged a culture of emergency preparedness planning and total business safeguarding. Around this time, many more organisations (especially in the US) had realised the values that disaster recovery and emergency planning exude.

The expansion of commerce and management ideas that evolved with the technology craze of the late 70s bore the ethos of disaster recovery procedures (DRP) and enterprise recovery planning (ERP) to mainland Europe and even Asian organisations. As the hype increased, more new ideas and fresh viewpoints evolved from corporate planners and corporate professionals. This influx of ideas and advocators brought about the development of business continuity planning (BCP) as a field and extension of the discipline from a

“With the craze of Y2K and September 11, the need for corporate owners as well as regulators to take BCP an

extra step further has transformed it to become fully-fledged management

function”.


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few US businesses. Today BCP is a global corporate and organisational buzzword.

Today’s Management Fad It is more a matter of concern and alertness. The Boy�s Scout motto of �Be Prepared� perhaps justifies all the hype, concern and rationale for any organisation�s BCP programme. With the craze of Y2K and September 11, the need for corporate owners as well as regulators to take BCP an extra step further has transformed it to become a fully-fledged management function. It is to take the business continuity ethos and look at every aspect of the business and operations with the mind to actively ensure their continuity so that all systems and processes for major or key operations and support functions remain uninterrupted even during a disaster and crisis.

What is Business Continuity Planning? Business continuity planning or BCP is usually formalized initially as a specific project. But once all the plans, procedures and recovery sites are in place, BCP becomes an ongoing operational process requiring day-to-day ownership of the management.

In a simple layman�s context, BCP aims at having a planned process, procedure or strategy that can assure and provide for the continuity of major and critical services and operations in an organisation despite any crisis event that might or have occurred. The cardinal objectives of BCP are to: 1. Have in place a cost effective contingency

solution that weighs the value of potential losses to the business and assets against the cost of guaranteeing continuity of critical business processes;

2. Impress upon the public (clients and customers) the perception of business survival and continuity, even if the normal service level was affected because of interruption in the business.

What Is Defined As a Crisis or Disaster? The term disaster or crisis brings to mind calamities like typhoons, tornadoes, floods, epidemic diseases like typhoid, cholera, JE, anthrax, microbe attacks, mud slides, hurricanes, earthquakes, hijackings, labour strikes, arson, poisonings, business sabotage, robberies, and fires.

Other crisis or disasters may be smouldering or not very dramatic. A few realistic examples are: 1. a company facility where the bathroom

plumbing overflows over the weekend and some water drains into the data centre;

2. a small central office fire that is remote from the company�s location and disrupting data communications for two days or longer;

3. a new piece of equipment that is installed but works only for a few days and then fails, taking one week to reinstate;

4. a water main breaks on Monday and the organisation�s office is situated on a hill above the break but overall water supply was interrupted for almost two weeks;

5. a computer disc crashed and resulted in a total system failure that was further aggravated by inadequate backup discs;

6. a personal fight or misunderstanding that was only a smouldering event between two people of different cultural origins and backgrounds that transformed into a racial crisis (riot, curfew) in a district;

7. a chemical factory exploded with thick fumes that endangered the lives of residents within a two kilometre radius;

8. a supertanker was seized midway with the pirates demanding RM10 million ransom


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otherwise they would spill the crude oil into the ocean;

9. an armed heist was staged by ex-army personnel, threatening to detonate bombs that would affect a large part of the residential enclave;

10. a airline crashed into the mountain due to faulty instruments and bad weather, bringing with it more than 200 passengers;

11. a child of the company�s chairman was kidnapped and the bandits demanded RM15 million as ransom money.

In reality, to call anything a crisis or disaster, the event or incident need not be dramatic. A crisis or disaster, after all, could be anything that interrupts an organisation�s ability to deliver its products or services to its regular customers for an unacceptable period of time. A disaster is any event that causes a prolonged disruption to the key processes of an organisation. A disaster then need not be of a grandiose event. Anything that prevents a company from operating normally can fall under the above definition of crisis or disaster.

The Eight Main Ingredients of BCP I like the figure �8� or the numeral �8.� �8� to many people symbolizes luck and wealth as literally it translates to just that in one oriental language. Here are eight ingredients that are cardinal for an understanding of any BCP. 1. The Board and Management must render full

involvement (more substance rather than just rhetoric).

2. The BCP documents for the critical and major business and service operations have been developed after the business impact analyses (BIA) are ascertained. The BCP documents mandate what needs to be performed to get on with the operations in time of crisis.

3. The emergency procedures to address safety of lives, properties and assets of the organisation are well understood by employees.

4. The availability of business recovery site (BRS) to house the critical and major business and operations when the BCP is invoked.

5. Available budget needed to furnish the recovery site, and to maintain and conduct regular testing of the BRS.

6. There are regular testing and maintenance of the BCP and recovery site to ensure efficacy. (The analogy of �no use having spare tire in the bonnet if it is flat�).

7. The guidelines for communication and media release. Properly coordinated public relations and press statements not only diffuse tensions but also will position an organisation as having good corporate governance of accountability/ responsibility, openness/transparency, and honesty/integrity.

8. The concept of �excuse me, it is business survival please, not business as usual.�

The Dozen Disciplines of BCP The key disciplines of business continuity as standards for best market practices vary from one advocator to another. However many of the fundamental principles are rather common. Here are twelve activities or disciplines that can steer anyone to conduct and formalize his or her BCP project fairly comprehensively. 1. The BCP project initiative and Board/

Management buy-in

The buy-in of the Board and Management is critical to the success of a BCP initiative and project outline. There has to be a dedicated full-time team or working group that should drive the BCP project. The Team or Working Group manages the project to a successful completion and implementation. Once implemented and concluded, the various sub-activities in the BCP project can be parcelled out to the owners or users to manage. That is, once the BCP project has been completed (including the budget, formalising the recovery site, and testing), the various BCP sub-projects should be handed over to the users (business or service owners to maintain and they have to upkeep the regular


41

testing). The BCP Project Team or Working Group can retire or be disbanded. However the main BCP Coordinator should remain to oversee the coordination and maintenance/ testing. Normally the BCP Co-ordinator, if not a full time placement, is in the person of Risk Manager, IT/IS Head or Chief Operations Officer.

2. The organisation’s BCP policy

Besides the awareness programme and corporate culture for BCP, the Policy is equally an important starting block or sine-qua-non for an effective organisational-wide business continuity project. The BCP Policy specifies what is the stand of the organisation (board and management) when there is a crisis or disaster, steps to be taken, priorities to be initiated, critical and key business operations and services to bring up and continue operating, how disaster is to be managed and met head-on, and the PR and official communication necessary to handle the media.

3. Evaluate risk and identify existing controls

Many organisations nowadays have holistic risk management set up that combines the management of the (i) credit, (ii) market/treasury/liquidity, and (iii) operational risks. Working with the Risk Management Department, the BCP Team can conduct comprehensive organisational risk analysis as a first step to developing the BCP. When evaluating an organisation�s risk environment, it is important that the various existing inherent controls to prevent or mitigate potential losses are assessed. Any deficiencies or shortcomings have to be addressed first. Only after this is done can a good BCP outline be formulated.

4. Awareness, training and testing programme

Nothing can be more frustrating than having an environment that is not conducive to BCP. The buy-in of the power-that-be (board/management) is crucial (refer #1 [in this list]). The atmosphere, that is the mindset and attitude of all the employees of the organisation, has to be right which means that they are BCP-ready, and BCP-aware. For this reason, the starting block of a BCP is preparing and organising first a programme to create corporate awareness and

enhance the skills of all key staff that are required to develop, implement, maintain, and execute the organisation�s BCP.

An untested BCP is an unworkable plan. Period. Organisations that are focused and serious about their business continuity conduct regular tests of their BCP programmes. It can be acknowledged that testing is a labour intensive, time consuming and costly affair, but in a real BCP, the BCP documentation and preparing a recovery site are only the initiatives, while the testing bit is the real or core part of the BCP. We have to be mindful of the cliché that says �a leaking boat is not a rescuing vessel; or a house with no roof is no refuge-place during a hailstorm.�

5. Conduct business impact analysis (BIA)

BIA is in fact the most important initiative in a BCP. It is difficult to know what are critical or major business or operational activity to embark upon in a crisis. Not all business or services can be �up� or can remain operational as �normal� during a disaster. The idea in a BCP set up is to have business survival (the critical and key or major business and services only). It is not business as usual. The BIA will single out what are key and critical business operations, and what are not. BIA looks at a business activity�s vulnerability by way of (i) non-financial and reputational impact as well as (ii) the financial loss impact.

6. Develop business continuity strategies

After the BIA, the BCP Team goes further to ascertain the choices or options for the business recovery strategies. It does so by ensuring that the critical business and operational functions are recoverable within the standard or set time that has been agreed upon, and at the same time to maintain the organisation�s ideal or next best operating performance during the tenure of the crisis.

7. Invoke emergency responses and operations

When and how to invoke or declare an emergency, has to be formalized. Is there a Command Centre identified, and where is the location? Is there a Staging Area to evacuate to, and who is the Crisis Coordinator? Do the employees know who is the Crisis Management Team or CMT? How many types or level of CMT are there, and what are their roles? There


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have to be standard and Board-approved crisis management procedures that need to be developed. These standard procedures are to be implemented in time of crisis. The objective is to subdue and stabilise the crisis incident or event. Emergency Operations Centre or the Command Centre has to be established and managed. This is where the hive of management activity is during an emergency.

8. Develop and implement business continuity strategies and actions

The BCP Team has to drive the BCP project initiatives. It is important to design, develop, and implement the BCP document to provide recovery within the standard recovery time�s objective. Live by the TQM�s adage of �document what you do, and do what you document�.

9. Training and testing programme

A grand BCP outline or document means nothing if they are not tested and put to test to see whether the procedures are practical or could be applied. Testing in fact is the most important step in a BCP project. A BCP that is not tested is as good as no BCP at all. Time and effort has been wasted in developing the BCP on paper if it is never tested. It is very dangerous (and sinful?) to let an organisation hide in the false hope of a grandiose scheme of written or documented BCPs that no one knows how, and what, they are all about.

10. Maintain and continuous re-visit of the BCP

There has to be a document or guideline for maintaining the currency of the BCP. The BCP outline has to be in accordance with the organisation�s strategic direction. It is necessary to verify that the BCP can prove efficacious by comparing it with suitable standards. Any updates or changes have to be made in the light of changes that the organisation has to its existing operations and business processes. Do not forget #3 in this list, where again the evaluation of risk and controls are an important aspect of BCP or pre-BCP initiatives.

11. Coordination with public authorities during emergency

The BCP team has to advise management on how to establish practical procedures and policies for coordinating crisis-response,

continuity, and business-restoration activities with all relevant authorities and governmental agencies. This is not just to ensure compliance with applicable regulations and statutes, but also to enlist their speedy support and assistance during a disaster and emergency. There are the Fire Department, relevant regulatory bodies (Central Bank, SC, KLSE), Police Department, Hospitals and Town/City Hall to liaise and connect with.

12. Public relations and crisis coordination

How is the media to be handled? What kind of news needs to go out? Who is the main spokesman? These are all important considerations for crisis communication and public relations. Wrong facts and information can bring down an organisation. The policy could be that no one other than an appointed person (usually the CEO, Chairman or Chief PR Manager) is allowed to talk to the press.

For safety and survival of the affected victims (staff and customers or members of the public), it is important to develop, coordinate, evaluate, and exercise whatever plan to communicate and provide trauma counselling for victims. Other than the employees, the other stakeholders in an emergency would be the key customers, critical vendors, investors and stockholders, and corporate management, consultants and regulatory agencies. It is necessary to keep all stakeholders informed of the actual happenings and the truth on �as needed� basis.

The 24x7 Service Is No Longer a Luxury or Privilege Providing access to information is now a common 24 hours-per-day, seven days a week, and 365 days-per-year challenge. It is quite rare these days to come across any organisation where its customers do not bother or are not concerned about some mission-critical round-the-clock services. People�s expectations have changed. They are getting more knowledgeable, more sophisticated, more aware of their rights, more concerned about being served every hour (in fact every minute?), and they want


43

the best attention at all times. The organisation that can meet all these human foibles or clients� idiosyncrasies where 24 hours by seven days contact, support/service or assistance are available will indeed outlast its competitors that do not have such 24x7 readiness.

Yes, the 24x7 service availability is not an option anymore. It is becoming a value-added basic requirement because of customers� discerning wants and expectations. Since many people in the business are prepared to provide it, for those that do not want to jump into the 24x7 bandwagon, they have to be prepared to be obscured and wiped out by the sand dust that the �24x7 business wagons� stir along the way. Nowadays it is very common to come across businesses operating in real

time and customers insist on the round-the-clock access to information. Global competition also makes matters more complicated by creating voile business environments that do not tolerate any interruption in the business operations.

How can an organisation ensure that interruptions are eliminated, and the 24x7 service is always there? One way is to have a tested and successful restart programme. Such a programme is a function of a very well architectured IT infrastructure. If information infrastructure is constructed correctly, it can indeed: i. offer high reliability to all mission-critical

systems and

ii. facilitate an organisation�s speedy recovery at minimal expense for crisis recovery.

This is the first of a two-part article by the author. This first part appeared in the Malaysian Institute of Accountants published journal Akauntan Nasional in November 2002. The second part follows this article.


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THE BCP BUDGET AND BUSINESS IMPACT ANALYSIS (PART 2)

45

“… financial institutions and service providers like telecommunications

companies and airlines tend to be generous in their

investment on their disaster recovery or business

continuity.”


The Budget for Cost of Recovery Often the daunting questions that haunt a BCP Manager or BCP Project Team are: 1. does my organisation have a BCP budget?

2. if it does, what is the amount and is it adequate?

3. what does my organisation invest its disaster recovery money in?

4. what is expected of my organisation from that kind of investment?

Total disaster recovery investments are sometimes obscure and hard to identify. The expenses can be hidden in normal production or operation and service support. The human resource cost portions may not be properly tracked, or they are buried in other HR and departments costs. Very often it is not unusual to come across organisations that are not able to meet their �time-to-recover,� data protection objectives or plain business recovery let alone continuity with their current level of BCP expenditure-allocation. As a percentage of their budgets, financial institutions and service providers like telecommunications companies and airlines tend to be generous in their

investment on their disaster recovery or business continuity. Other types of industries may not be that generous or committed. One simple rule-of-thumb gauge may be for an organisation to set aside about 10 percent of its IT budget to be dedicated to its disaster recovery and business continuity programmes.

The Many Costs or Prices of Crisis A surprise power outage can cause organisations to halt operations for an indefinite period of time. Some empirical studies revealed that nine out of ten organisations reported that during a system�s failure they:

1. encounter productivity losses;

2. have bigger incidence of end-user and management dissatisfaction, and

3. are confronted with a deluge of customer dissatisfaction (and this is in fact very damaging for the long-term survival of the organisation).

The costs of a disaster include the cost of: 1. replacing the malfunctioning

equipment or service;

2. restoring the premises/ structural facilities;

3. re-constructing or re-keying in the lost data;

4. productivity loss;

5. opportunity loss or notional income cost;

6. revenue loss;

7. customer attrition due to their dissatisfaction.


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BCP Recovery Strategy Cost Another way of looking at BCP recovery and crisis expenditure is by looking at two levels of cost which are: 1. pre-event costs, and

2. the event (moment of truth) costs.

Pre-crisis event cost These are costs incurred in either: 1. implementing risk mitigation strategies or,

2. allocation of resources and this includes both human, financial and the capital expenditure needed to develop the necessary infrastructure for the BCP recovery strategy.

‘Moment of truth’ or crisis event costs These are expenses incurred during the �moment of truth,� that is, when the crisis actually crops up. They include costs in invoking the BCP and implementing the BCP strategies to address the crisis. These costs are estimations of the probable costs to be incurred if the BCP were to be activated for some definite period, say, one day, seven days, ten days, or three weeks.

These costs can include any or all of the following: 1. activation of service level agreement (SLA).

This is sometimes time cost, plus on-going

expenses until services or products are no longer needed (end of crisis);

2. HR and people�s expenses like overtime, temporary workers and contractors;

3. logistics for transportation and deployment of resources and people, couriers and removers;

4. accommodation costs for hiring HR, leasing of temporary offices, accommodations for staff and relevant personnel;

5. procurement of non-IT resources such as cubicles, desks, chairs, tables, safes, cabinets, photocopiers, stationery items, news and PR releases;

6. compensation payments, and liabilities that are not claimable from insurance;

7. IT resources including faxes, hand-sets, phones, printers, desktop PCs, notebook computers, terminals, scanners, data wiring and cabling;

8. HR costs to train new hirers or other staff to replace victims;

9. other miscellaneous costs like insurance deductibles, security, salvage and repairs of assets, clean up of disaster site, and emergency services costs.

BCP Cost Decision Matrix An organisation likes to look at alternative decisions of: 1. whether it is prepared to accept higher risks with

lower event costs, or

2. lower risk strategy with higher event costs.

In many ways, it is sometimes a �trade-off� between (1) the risks that an organisation is prepared to accept and (2) the justifiable costs. Where two strategies have equal risks and costs, then a third element is brought into the equation. This third element is the so-called �benefit.� The benefit(s) of each strategy are evaluated against the risks associated with the recovery strategy. After that the benefits are further considered in (1) the short and (2) the long-term for the

“Having a good disaster recovery strategy (DRS) for IT/IS systems is half

the battle won for a reliable BCP.”


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“If a business is to survive a crisis, it has

to select the right strategy.”

added-value these benefits accrue to an organisation that operates in a competitive and dynamic market.

The Right Recovery Strategy and Cost After careful debate and analysis, the management and Board usually will implement the BCP with the agreed-to budget. The reality is that there could be a situation where the wrong choice of recovery strategy will actually exacerbate the disaster. This turn of events can cause organisations to go out of business. With a good BCP Team and supported by IS/IT personnel, there is always the favourable outcome of that one right recovery strategy being selected. This reduces the potential exposure to further disaster that can give an organisation a double whammy.

BUSINESS IMPACT ANALYSIS (BIA) Developing the BIA Having a good disaster recovery strategy (DRS) for IT/IS systems is half the battle won for a reliable BCP. Usually the prime question an organisation has to answer when deciding to implement its recovery

programme is �what kind of DRS to implement?� It must be understood that the recovery point objective (RPO) is a key element or characteristic of a credible DRS.

To arrive at an organisation�s RPO the fundamental issues that the BCP Team has to address first would be: 1. how long can our organisation go on without a

computerised environment?

2. how much data can our organisation afford to lose if our organisation encounters a crisis or disaster?

The BCP Team will have clues for the above questions by undertaking the BIA. BIA is tailored to identify: 1. business processes and systems that are critical

to conducting business, and

2. resources essential to supporting those mission-critical functions.

Processes and systems are generally divided into three critical classifications of: a. those that support the product or service delivery

and are essential to the business (mission critical);

b. those that are business-support functions and are necessary to run the core business (major or key activities);

c. and those that are deferrable (need not have BCP documented).

The BIA looks at: 1. operational and intangible impact that revolve

around public confidence, managerial control, image and reputation, and regulatory liability; and

2. financial impacts that revolve around direct financial loss, extra cost of working, and regulatory penalty.

3. Critical analysis of the BIA can help the BCP Team to establish the Recovery Time Objective (RTO) and Data Recovery Objective (DRO) of any business or support functions.


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Business Survival and BIA If a business is to survive a crisis, it has to select the right strategy. Development of BCP strategies starts with knowing the outcome of the BIA studies. A comprehensive BIA:

a. identifies an organisation�s core business and service processes; and

b. maps out critical dependencies like computer systems and information technology; or

c. critical third party service providers.

In BIA, the four key questions often asked by the BCP Team are:

1. What functions are critical to our organisation�s business operations and why?

2. What resources do our organisation�s critical functions employ or resort to when those critical functions are being performed?

3. What is the duration, or how long will be the interruption that these functions can withstand?

4. How much does it cost for our organisation to establish its recovery capability to restore the resources needed by those critical functions in the standard time frame that our organisation has agreed upon?

BCP Strategies for Organisations Table 1 summarises the advantages and disadvantages of each of the BCP strategies that an organisation can adopt or implement.

Addressing Crisis Is Part Operational Risk Management When anyone talks about operational risk management (ORM), there are eight risk areas to study or eight groups where anyone can classify operational risks by. They are: 1. strategic risk;

2. legal and regulatory risk;

3. product and customer service risk;

4. human resources risk;

5. IT/ IS and computer systems risk;

6. crisis management risk;

7. operational errors risk;

8. internal and external fraud risk.

BCP Is Not a Privilege or Luxury Today BCPs nowadays are not an option anymore. It has to be in place if an organisation wants to move forward and prosper. They are a critical and essential subset of operational risk management. As can be seen above, crisis management risk is one of the eight groupings or types of operational risks. Why is BCP a much talked-of topic these days? Simply because for many organisations, the

Table 1 Internal redundancy � Activation is fast, cost can be medium while reliability is good.

Outsourcing � Activation is fast but cost can vary, while reliability is excellent. The problem sometimes is the �queuing system� since the provider could be extending services to many applicants or subscribers; thus the availability of space and facility could be on a First Come First Serve basis.

Hot site � Activation can be fast but cost is high, though reliability is excellent.

Cold site � Activation is slow, cost is of course rather low, while reliability is quite poor.

Warm site � A halfway point between hot and cold site.

Reciprocal agreement � Activation may be slow, cost is low, while reliability is poor.

Mobile data or recovery centre � Activation is medium, but its cost is low while reliability is good.


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decision to invest in a BCP is being forced upon them through requirements by regulatory bodies like Securities Commissions, Central Bank, etc; or by changing forces in accountability by legislation and other vested parties and stakeholders.

The Recovery or Continuity Phase The three operational recovery or business continuity phases are: 1. To make the scene safe to work in;

2. To preserve evidence in the �scene of crime� place;

3. To get business to continue as �business as usual� or at least the �business survival.�

All aspects of recovery/continuity need to be documented and learned from. Some learning points have to be identified for posterity as well as for �lessons learnt� examples for the sake of posterity in the event that a disaster strikes again in the future.

The ‘Lessons Learnt’ Checklist An organisation can look at these administrative issues so that its BCP awareness environment is in top gear: 1. Ensuring that plans are in place;

2. Ensuring that key data is accessible;

3. Ensuring that the facts are communicated;

4. Ensuring that the hot staff are brought in only when they can work or help, (staff are categorized as hot, yellow and green, with hot being the crucial and needed staff while the yellow and green can stand by);

5. Ensuring the identification and usage of back-up storage;

6. Ensuring the operation of a clear desk policy;

7. Ensuring controls and display of leadership;

8. Ensuring prioritising, focusing and not getting distracted;

9. Ensuring that key or �red� staff do take time off after the initial recovery/continuity process;

10. Ensuring the learning of critical human behaviour and experience from the staff involved.

Generic Recovery Framework The recovery and continuity framework can be in four dimensions, namely:

1. Technical � information technology such as desktop, client/server, mid-range, mainframe and personal computers; data and voice networks.

2. Business � logistics, accounting, human resources and functions.

3. Tactical � peculiar or specific action steps or work processes applicable only to the individual operations or business activity.

4. Global � action steps or work processes that can be applied generally to all the operations or business activities.

Coming to Terms with BCP Nomenclature In discussing any BCP study, it is useful to be at home with two terms and they are:

1. the likelihood of events (disaster/ crisis) happening, and

2. the consequences (impact or effect) when that event (disaster/ crisis) has occurred on an organisation.

The likelihood of an event to happen Rare occurrence: For a disaster/crisis that may occur only in very exceptional circumstances.


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Unlikely to occur: For a disaster/crisis that can occur at some time only.

Moderate occurrence: This disaster/crisis is, or should be, occurring at any time.

Likely to occur: For a disaster/crisis that is, or will probably be, occurring in most circumstances.

Almost certain to occur: This disaster/crisis is expected to occur in most circumstances.

Consequences (Impact/Effect) Of Event (Disaster/Crisis) Minor impact: The consequence or impact is readily absorbed, but management effort is needed to minimize the effect or outcome of the crisis.

Moderate impact: The impact of the crisis can be managed with the appropriate process.

Major impact: The impact of the crisis can only be endured with substantial management involvement.

Catastrophic effect: There will be complete disaster, and the potential to destroy is going to collapse or bring about the demise of any activity or operation.

What is deemed ‘Vital or Critical?’ At one extreme, it could be misleading, if not mischievous, to assert that the impact of any interruption of a business process justifies some initiatives for BCP. At the other extreme, significant impacts need not, on their own, provide sufficient incentive to justify BCPs. The fact remains however that vital business functions do fall within certain categories. Thus many organisations define and see critical areas in their business environment to be those that involve: 1. revenue generation;

2. tarnished image/reputation;

3. customer service; or

4. regulatory compliance.

Areas such as quality control, payroll, or inventory management could also comprise broad groupings of criticality for major operations and business activities, while in some others they may not be really so.

The assessment of criticality or vitality is made by the leadership in an organisation (normally the BCP team with endorsement of Management/Board). Such assessment reflects the perspective of what an unacceptable interruption in a business or operations process would be and is very co-related to the overall business and operational objectives of that organisation.

“BCPs nowadays are not an option anymore. It has to be in place if an organization wants to move forward and prosper.

They are a critical and essential subset of operational risk

management.”

“An organization’s recovery or continuity strategy is developed with the focus on the recovery

of the core business and operations processes. Usually in the event of a disaster/crisis, it

is business survival and not business as usual.”


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Obvious Minefields to Avoid It is difficult, in today�s ever-changing business climate, to justify expensive and long BCP efforts. An organisation�s BCP Team can avoid the more obvious planning minefields by observing the following: 1. The BCP Team should not, at the outset,

anticipate solutions and then slant its investigation to suit them. Be wary that data centre hot sites, work groups and mobile recovery units are all the solutions that are in search of problems themselves.

2. The BCP Team should spend time defining what its organisation�s business issues are. The right solution can emerge out from that definition.

3. The BCP Team must always bring in the business groups in its workshops and discussions. Listen to what the business groups have to say about their operations and business. They know better. Having the business group�s support early and consistently is going to help the BCP Team in the long run.

4. The BCP or recovery strategy tool is not the BCP plan. To spend time and argue on the selection of planning software before the BCP Team has a clear idea of what it wants the tool to do is indeed unproductive, non-focused, as well as premature. The tool the BCP Team needs for the BCP purposes should be familiar and user-friendly to everyone in the organisation. Only after the BCP Team has a plan that is completed in a familiar format can a sensible business decision regarding BCP software be selected.

A Recap and Summary An organisation�s recovery or continuity strategy is developed with the focus on the recovery of the core business and operations processes. Usually in the event of a disaster/crisis, it is business survival and not business as usual. Once an organisation�s board and management has

1. signed-off the BIA report,

2. endorsed the recovery of the recommended core business processes, and

3. prioritized the recovery.

The logical follow up action is for the BCP Team to develop the BCP recovery/ continuity strategies for each of the critical or major/key business and operations processes. Ideally, initiating the BCP recovery strategies ought to include inputs from all the relevant business and operations units, because experienced staff in these units understand many specific and peculiar business management controls and operations processes that are mission-critical. It is useful therefore that the BCP Team get the involvement and commitment of all users and business/operations owners in the workshops to arrive at the risk-consequence model (the BIA or business impact analysis matrix).

Business continuity planning is an ongoing process of ensuring the continual operation of critical business processes through: 1. the evaluation of risk and resilience,

2. the implementation of mitigation measures, and

3. the establishment of a set of tested recovery outlines and strategies.

Business continuity is about (a) protecting the interest of an organisation, (b) ensuring that an organisation is able to bounce back from a disaster in an efficient manner with minimum disruptions to its customers/ stakeholders� needs and expectations, or to recover and resume operations in the shortest time frame possible.


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Dr. Josef Eby Ruin is General Manager/Head of Operational Risk Management for a commercial bank. This article appeared in the Malaysian Institute of Accountants published journal Akauntan Nasional in December 2002.


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Strategic Management Accounting Techniques There is no accepted list of techniques that strategic management accounting consists of. Some authors see it only as relating to external issues; others include some practices that have passed into common usage.

Drury (2001) cited a survey carried out by Guilding, Craven and Tayles (2000) that identified 12 strategic management accounting practices in use by companies. These are, in descending order of usage: • competitive position monitoring;

• strategic pricing;

• competitor performance appraisal;

• competitor cost assessment;

• strategic costing;

• quality costing;

• target costing;

• value chain costing;

• brand value monitoring;

• lifecycle costing;

• attribute costing;

• brand value budgeting.

It can be seen that, although many of these relate to external influences, internal processes are also relevant.

It could be argued that, to carry out many of these strategic management accounting activities, a company also needs to be competent at activity based costing. ABC and activity based management help management by producing decision-focused information looking at the effect of changes in key variables that drive customer account profitability (if it is a market-driven business)

or its product profitability (if such is its strategic focus).

Strategic management accounting, with its focus on measuring the effects of management decisions on the future, would place tools such as the balanced scorecard in the strategic management accounting portfolio. The balanced scorecard helps managers to identify performance measures that are relevant to the critical success factors in the achievement of business strategy.

Performance Measures Business objectives have evolved over the last few decades, from an initial focus on profit, through to a consideration of return on investment (ROI), and, more recently, to a concentration on shareholder value.

The advantage of using the return on investment measure rather than the profit measure was that it made managers consider the capital employed to achieve the profits; the advantage of shareholder value over return on investment is that it also focuses their attention on risk.

SUCCESS THROUGH STRATEGIC MANAGEMENT ACCOUNTING

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Shareholder value models such as economic profit (explained in detail by Minchington and Francis (2000)) recognise that value to the shareholder is created when the business generates an income greater than the opportunity cost of capital to the investor. This is illustrated in Analysis 1.

From Analysis 1, it can be seen that there are three key variables in value creation. Value can be created only if the business is able to do one or more of the following: • make a bigger profit (by offering a product or

service at a higher price or incurring lower costs);

• minimise its capital employed;

• reduce its cost of capital.

Strategic management accounting has a role to play in helping in the management of each of these three variables to achieve a sustainable competitive advantage.

Managing Risk One of the drivers of value is the cost of capital, and the cost of capital relates directly to the perceived riskiness of the business.

Thus one key aspect of strategic management accounting is the provision of information to assist in risk management. This is one area in which strategic management accounting goes well beyond the bounds of traditional management accounting.

From a strategic management accounting perspective, risk is the volatility in returns from a product, customer, or market segment relative to that of its competitors, used as a benchmark. Strategies aimed at reducing the risk in market segments and hence creating value should start with an

understanding of the key drivers of volatility for these products, customers or market segments.

Understanding what drives internal volatility in returns is a major step for an organisation aiming to create value. The market drivers of volatility obviously vary from business to business, but some common factors feature in most companies, for example the strength of the distribution channel, after-sales care and relative quality. In the traditional context of management accounting, the operating leverage (proportion of fixed to variable costs) is another key driver of volatility.

It is important is to understand these drivers, not only in relation to your own business, but also those of competitors. Without this comparative knowledge, it is difficult to determine value-enhancing strategies. Strategic management accounting systems should help managers to measure the costs and benefits of strategies that aim to reduce these business-related risks and thus create value.

For example, once an organisation understands what its core competencies are, it may decide to outsource non-core activities to provide more flexibility in its cost base. Although discussion of outsourcing has been extensive in recent years, not many organisations see outsourcing of fixed expenses contracted out on a variable cost basis as a strategy to reduce risk through a reduced operating leverage.

British Airways, Tesco and BP are examples of organisations that have benefited through the use of this strategy. Success in these strategies requires accountants and management to work together with a clear understanding of the real purpose of


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outsourcing and of the costs and benefits of doing this in terms of the following: • the service received;

• the cost base;

• the volatility in returns.

Valuing Returns Over Time It may be possible to earn super profits in the short term while destroying an organisation’s ability to compete longer term. We know that investors do not judge the performance of a company on the basis of single-period results. Investors expect returns that are above the cost of capital and which are sustainable over a period of time; this is true shareholder value.

Obviously returns in the current period or near future are more valuable to investors than returns in the more distant and uncertain future. This is the concept of the time value of money.

To find out the present-day values of future cash flows, we use the discounted cash flow (DCF) model: the net present value (NPV) of an investment is the sum of the future cash flows, discounted at the cost of capital. The greater the risk of the investment is, the higher the risk adjusted cost of capital is, and hence the higher the appropriate discount rate is. (For further information on net present value, see Parker (1999)).

We can use the net present value model to determine the total shareholder value created by an investment. In the current period, the value added is the economic profit, but the total value added over the lifetime of the investment is the net present value of all of the future economic profits. Figure 1 overleaf sets out the possible value combinations that arise.

As demonstrated by Figure 1, managers face the challenge of balancing the need to deliver good short-term returns and the need to maintain the sustainability of these returns over the long term. The matrix shows that, in order to maximise long-term value, managers must identify investments with a high current period economic profit but with high net present value as well.

A strategy that creates value in both the short term and the long term is obviously beneficial to shareholders. On the other hand, there is little point in continuing with an investment that has both negative economic profits and negative long-term net present value.

The management challenges arise around those projects that • are short-term loss makers but will create longer-

term value;

• appear to be profitable in the short term, but may destroy longer-term value.

Action needs to be taken to correct these two positions that will impact on the short term and the long term, respectively, as shown in Figure 1.

The pressure to deliver high short-term returns, which is often wrongly perceived as being driven by investors, can lead management to cut costs and adopt other short-term strategies. Cuts in advertising, R&D, quality, and other discretionary costs are examples of these short-term value adding strategies.

Discretionary costs are defined as costs that are totally at the discretion of management, whereas engineered costs have a direct input (costs)/output (benefits) relationship.


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The difficulty in quantifying the benefits of discretionary costs is the main reason why managers and accountants often opt to slash these costs in the short term. It is unfortunate that these very same costs can often be the ones that reduce the market segment risks in the long term.

Strategic management accounting systems aim to help managers to develop systems that measure the benefit of discretionary expenses in the form of lower volatility and increased value.

A possible simple approach to this is the following: 1. Identify the key drivers of volatility (for example

customer awareness).

2. For each driver, determine the activities that are carried out to reduce the volatility (for example advertising).

3. Identify the quantifiable benefits of these activities (for example awareness measures from Nielsen and Milward Brown).

4. Compare the costs of carrying out these activities against the quantifiable benefits.

Creating Value Companies create value by achieving and maintaining a competitive advantage.

Strategic management accounting assists in the strategic planning process by focusing management on those areas of the business in which that value is created.

Figure 2 shows some possible value enhancing strategies. Figure 2 makes a fundamental point: although the traditional finance function can measure the value created, it is the competitive strategies that actually create that value.

Thus it is vital that the business understands where and how it is creating value.

The following are two examples of these value-creating strategies that explain where strategic management accounting fits into the strategy:


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• Higher sales revenue : It is possible to generate higher sales revenues through higher prices by creating barriers to entry to the distribution channel. Strategic alliances and contracts for category management could lead to this competitive advantage. Strategic management accounting systems assist managers to identify the true barriers to entry, both current and potential. They then help to provide information that quantifies the costs of developing or maintaining these barriers to entry and the benefits in the form of higher sales prices. For example, the price premium for a Heinz product in relation to an own-label product is the benefit of the organisation’s brand-led barrier. The cost of maintaining this barrier and thus the price premium by spending on advertising and marketing can be compared with other forms of barrier to entry through merchandising support or category management.

• Economies of scale: Economies of scale can be created through higher volume throughputs, and learning curve benefits may be the driver of lower costs, leading to better cash flows and thus a higher value to the shareholders. Whereas

traditional management accounting systems measure costs against standards and report variances on past periods, strategic management accounting systems aim to set target costs that take into account efficiency and economies of scale and drive performance to achieve these targets. Target cost pricing techniques take this approach a stage further by setting prices at competitive levels that will increase demand for the organisation’s products and thus drive down costs through economies of scale.

Conclusions Strategic management accounting provides information that can be used to devise and implement strategies that are appropriate to a company’s competitive position.

It helps to show where a company has a competitive advantage, and why, and it helps to identify how that advantage over competitors can be maintained.


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It enables businesses to devise relevant performance management systems that monitor progress against internal and external benchmarks.

Strategic management accounting moves the management accountant away from being a passive scorekeeper and into the driving seat, helping to formulate strategy.

References Management Accounting for Business Decisions,

Drury, C (2001) Thomson (2nd edn.)

‘An international comparison of strategic management accounting practices,’ Guilding, C, Craven, K S and

Tayles, M, Management Accounting Research, Vol. 11 No 1 (2000) 113–136

‘Shareholder value,’ Minchington, C and Francis, G, Management Quarterly Part 6 (2000) 23–31

‘DCF and interest rates,’ Parker, K Management Quarterly Part 3 (1999) 14–18

Further Reading Strategic Management Accounting, Ward, K (1992)

Butterworth-Heinemann

Sri Srikanthan is a Senior Lecturer in Finance at the Cranfield School of Management. This article appeared in the Institute of Chartered Accountants in England and Wales published journal Management Quarterly in January 2002.


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E-COMMERCE: EVALUATING THE EXTERNAL BUSINESS ENVIRONMENT

61

Implementing E-Business Strategies (Part One)


Lucie Bégin and Hugues Boisvert

Factors outside your organization — the nature of products, purchasing culture, technology infrastructures, regulation and financing — must be considered in building an effective e-commerce strategy.

ne of the noteworthy findings of the CMA International Centre (CMAIC) study1 of the impact of electronic

commerce on business processes is that there is clearly more than one way to effectively engage in strategic deployment of electronic commerce. Apart from online sales activities, several uses of the Internet can enhance the value of a company. Electronic commerce encompasses all electronic exchanges between a company and its business partners (customers, suppliers, distributors, employees, shareholders, etc.) to facilitate business transactions, regardless of whether the transactions are completed online.

The success of electronic commerce hinges on systematic planning of online and offline activities, as well as the association of technological parameters with business processes. Strategic deployment of e-commerce cannot take place without a global understanding of internal and external business environments. To this end, executives must use basic strategic analytical tools such as the SWOT model,2

1 This article follows from an original study carried out in the year 2000–2001 by the CMA International Centre. The publications resulting from these projects are presented on the CMAIC web site (www.hec.ca/cicma).

2 The SWOT model refers to the analysis of Strengths and Weaknesses of a company along with Opportunities and Threats within the environment. This analytical model situates the environmental conditions in relation to the resources at a company’s disposal.

which is instrumental in assessing the business context and diagnosing a company. It’s also important that a company supplement its SWOT analysis by examining the potential of electronic commerce in its particular business context, specifically by identifying barriers and incentives associated with its operations in cyberspace.

Based on discussions with company executives and electronic commerce managers, the analytical model presented in Figure 1 is designed to help evaluate the business environment. The model differentiates barriers and incentives by whether the companies can act on the factors in question. It recommends that companies focus efforts and resources on elements that it can influence, and avoid investing in areas of low potential.

Inhibitors and inductors are factors that a company can control, or upon which it can act in the deployment of electronic commerce. These factors are part of its internal environment. In contrast, brakes and accelerators are factors in the external

O Strategic deployment of e-commerce cannot take place

without a global understanding of internal and

external business environments.


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environment over which a company has no control, but which it must take into account in the formulation of its electronic commerce strategy. Characterizing the business context of a given industry, these external factors structure business relations and delineate the universe of possible strategic choices. In some contexts, these factors can hinder deployment of electronic commerce, while in others they can accelerate adoption and development of e-commerce.

Brakes and accelerators of electronic commerce have a variable effect according to the sector of activity considered. As a result, the level of penetration of electronic commerce is not uniform between industries, and web sites are not identical. For instance, the web site of a company in the construction sector is generally quite different from that of a retailer or a manufacturer of industrial products, because each operates in its specific context. This context involves culture, the nature of a product, complexity of the business transaction, and existence of infrastructures or regulation. Following is an examination of how these factors1 affect deployment of electronic commerce.

Culture: Purchasing Customs and Clientele Culture refers to the purchasing customs in the environment in which the company operates, or the clientele with whom it does business. A culture oriented toward traditional approaches hinders the deployment of electronic commerce.

1 Factors can be represented as axes that structure the environment, and particular conditions of an industry as a position along each of these axes, between the positive pole (accelerator) and the negative pole (brake).

Therefore, when sales contracts are habitually concluded with a handshake, and when customers value direct contact or are not familiar with the use of the Internet, it is not worthwhile for a company to develop a fully transactional web site because demand for this distribution channel is too weak to justify the investment required. For example, a company whose clientele consists primarily of seniors would be less motivated to engage in e-commerce, because this segment of the population is the least connected to the Internet and the least likely to make online purchases.

In contrast, when a company operates in a sector with a strong technological culture, and its clientele uses the Internet intensively (which is notably the case for young people aged 15 to 25), the company has a greater incentive to develop a web site, transactional or not, that meets the expectations of this particular segment. In this case, not being present on the Internet would harm the image of the company, which may also cause it to lose sales to other companies that are more active in cyberspace. In addition, when a clientele is accustomed to purchasing by correspondence, the transition to the Internet is smoother because this channel is seen as an extension of their usual shopping habits.

Brakes and accelerators are factors in the external environment over

which a company has no control, but which it must take into account in the formulation of its electronic

commerce strategy... In some contexts, these factors can hinder

deployment of electronic commerce, while in others, they can accelerate

adoption and development of e-commerce.


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© CMA International Centre, 2001

Nature of the product While in theory everything can be sold online, some products or services lend themselves to this medium more than others. Made-to-measure products, such as industrial equipment, may require customer involvement in the definition of specifications, or customer interaction with the manufacturer before the item is produced. In this case, the transaction may begin with a visit via the Internet, but it cannot be completed without a physical meeting between the parties.

Some products associated with sensory experiences, i.e. touching, feeling, tasting,

trying or even physically seeing the items, pose obstacles to online sales, at least for the first purchase when the customer has no personal experience with the product. This is the case for the purchase of a musical instrument, fabric, sailboat or car. The customer usually goes to physically established stores or merchants to try out the desired product, and identify the brand or specifications. The purchase can subsequently take place online through a supplier that offers the product in the best possible conditions.

While some products do not lend themselves easily to online sales owing to


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an extremely high price, purchasers of such products can nonetheless use the Internet to perform comparison shopping and to identify the best suppliers. This may justify having an online presence for a company, albeit a non-transactional one.

In contrast, other types of products are particularly well suited to online sales, and their digital nature can spur the development of online transactions. Examples include software, music, concert tickets, hotel reservations, newspapers, plane tickets and other travel packages. For these products, all of the transaction-related information can be transmitted via the Internet, and in some cases the product itself can be downloaded. Companies operating in these sectors would therefore benefit from using the Internet to develop their business, because this distribution channel is adapted to the nature of the products they sell.

For non-digital but standardized products, with which customers have sufficient

experience so as not to require testing of the item, or for commonly used mature products, electronic commerce can represent a fine opportunity to expand the market. This is especially true if the product price is relatively low, so that the perceived risk of using the Internet is small.

Of course, other aspects of the nature of the product should be taken into account. Perishable or hazardous products, and large or very heavy products, raise particular difficulties during delivery. In these cases, the

company should limit the territory served, or direct web surfers to its distributors. In contrast, for small or light products, or non-perishable merchandise in widespread use, such as books, CDs or beauty products, delivery by mail or by specialized messenger would make online sales more advantageous.

Complexity of the Transaction In industrial sectors where sales prices tend to be very high and subject to negotiation, customers do not do business over the Internet. When the price of the product is a strategic element negotiated case-by-case, its public posting on a web site is not appropriate. If the transaction is very complex, calling for a financing package involving various parties, it is unlikely that it will take place online. When the sale is subject to long-term service contracts or prolonged responsibility that necessitates a guarantee before concluding the contract or

Table 1 — External factors affecting dynamics of e-commerce

BRAKE

• Traditional • Non-technological

FACTOR

Culture

ACCELERATOR

• Avant-garde • Technological

• Customized, necessitating customer involvement

• Sensory experience required • Product with very high price

Transaction • Standard contract • Generalized use of

standard payment tools

• Inaccessibility of high-speed Internet technologies (remote rural region)

Infrastructures • Accessibility at low cost to technologies

• Existence of affordable sector portals

• International legislation • National and provincial

regulation

Financing • Grant programs


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delivering the merchandise, online transactions are improbable. Similarly, very complex contracts that must be developed by legal advisors are not drafted online, although e-mail can be used to exchange information or preliminary versions of the contract. Transactions of this nature cannot be finalized on the Internet, but the operations of canvassing, comparison and information gathering may indeed take place online.

In contrast, conditions such as commonplace or standardized transactions, clearly stated terms of sale posted on the web site, and the use of standard payment tools (payment by credit card, for example) are amenable to online sales.

Existence of Infrastructures The use of the Internet depends on the existence of support infrastructures that are accessible and standardized between business partners. Reduced access to large bandwidth and high-speed Internet, not only in the company but also among customers, can enormously limit the type of multimedia that can be used in the e-commerce context. For instance, the geographic location of the company can limit its access to communication infrastructures.

Harmonization of computer infrastructures is another element that can hinder the development of e-commerce, particularly for small to medium-sized enterprises (SMEs). One example is order givers opting for a private network (EDI, for example) whose cost is prohibitive. In

contrast, the presence of sectoral portals enhances the accessibility to cyberspace for companies with limited resources.

Regulation Although cyberspace is undoubtedly global, national regulations may hinder commerce between countries. Legislation can also impede or even prohibit the circulation of some goods, which must be taken into account in the evaluation of the potential of e-commerce for a given sector of activity. The sale of liquor, for example, is both subject to provincial regulations and is prohibited to minors. In terms of overseas sales, legislative brakes can take

several forms: rules on the transit of merchandise, customs procedures, prohibition of specific products, particular taxes, or restrictions on the exporting of currencies.

Financing Another obstacle is limited accessibility of risk capital, an essential element for development

of advanced electronic commerce functions. Lending institutions sometimes adopt policies that slow deployment of the integration of new information and communications technologies, especially for SMEs. Unless the government steps in to guarantee such loans, or lending institutions ease their policies, companies may face delays in fully developing their e-commerce solutions.

On the other hand, subsidies that facilitate accessibility to portals and development of transactional web sites can act as an incentive to deployment of e-commerce. Since these programs often originate at the provincial level, they may vary between regions.

Reduced access to large bandwidth and high-

speed Internet, not only in the company but also among customers, can enormously limit the

type of multimedia that can be used in the e-commerce context.


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Conclusion Brakes and accelerators are factors in the external environment over which a company has no control. Brakes act as barriers that hinder companies and block the development of practices grounded in the use of the Internet. Some brakes block online payment, others hinder sales, and still others do not allow effective promotion, product development or efficient customer support. In contrast, accelerators represent opportunities or

avenues that favour the adoption of e-commerce. These two types of factors jointly contribute to determining the potential of Internet applications. Furthermore, a profile of a company’s internal environment and its capacity to put in place an e-commerce solution should be produced; one that is profitable and adapted to its context. An analysis of internal inhibitors and inductors of e-commerce must also be undertaken.

THE INTERNAL FACTORS THAT CAN MAKE OR BREAK E-COMMERCE IMPLEMENTATION

67

Implementing e-business strategies (Part Two)


Assessing the environment of your organization — the people, structure, systems and resources — is vital to the formulation of a successful e-commerce strategy.

trategic analysis of electronic commerce must consider the business context as a whole, as well as the dynamics of the barriers and incentives

within this context. Certainly evaluation of factors in the external environment, i.e. brakes and accelerators, is essential in determining adoption of Internet technologies and the potential use of electronic commerce in a given sector of activity or industry. However, companies must also assess their own internal capabilities and resources in the deployment of online activities. Identification of what are called inhibitors and inductors, which characterize the internal environment of a company, is a vital prerequisite for formulation of an Internet strategy.

Asked why they have not developed their e-commerce activities, or why these activities are at a very rudimentary level or are not integrated with other company activities, executives cite a number of reasons: security problems, lack of resources, skepticism concerning the profitability of e-commerce, resistance among personnel, obsolescence of computer systems, prohibitive costs of transactional sites, and a lack of technological skills, to name a few.

Surprisingly, the reasons cited do not seem to pose problems for other similar companies. This shows that, like strengths and weaknesses, internal factors that influence the implementation of electronic commerce activities vary between companies. When these internal factors

favour the adoption of Internet technologies and their deployment within business processes, they are referred to as inductors. On the other hand, if they hinder or block the introduction of online activities, they can be described as inhibitors. Some of these factors are found at the individual level, while others exist at the organizational level.

Factors at the Individual Level Influencing E-Commerce Activities Influencing the introduction of electronic commerce or, more generally, new information and communications technologies (NICT) are individuals who react according to their perceptions of changes, together with their training, competencies and experience. Their reactions, which may be positive or negative, must be anticipated and managed, encouraged or appeased.

Perceptions In general, people act in keeping with their perception of anticipated consequences following a new situation or change in their habitual work framework. If they perceive a threat to their current situation, they will have reactions of opposition and resistance.

S Identification of what are called inhibitors and inductors, which

characterize the internal environment of a company, is a vital

prerequisite for formulation of an Internet strategy.


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Table 1 — Internal factors affecting dynamics of electronic commerce

INHIBITOR INDUCTOR

Fears and insecurity PERCEPTION Challenges and opportunities

Inexperience KNOWLEDGE Appropriate training, experience with NICT and Internet

IND

IVID

UA

L

Disinterest of executives Lack of time

LEADERSHIP Involvement of executives Positive attitude and support

Bureaucracy CULTURE Innovation, creativity

Hierarchical, rigid, prizing continuity

STRUCTURES AND SYSTEMS

Flexible, teamwork, valuing initiative, resourcefulness

Obsolete or ill-adapted to the Internet, limited access TECHNOLOGY Integrated, accessible to all employees

Nonexistent in electronic commerce EXPERTISE Multi-disciplinarity, experience acquired O

RG

AN

IZAT

ION

Lack of money RESOURCES Growing company

Therefore, when employees are afraid of losing their jobs because a number of tasks previously performed will be automated on the Internet, or carried out by customers themselves, they will show little enthusiasm for implementation of electronic commerce.

In contrast, if employees perceive NICT as a way of easing their routine tasks, or as an opportunity to perform more interesting activities, they will more readily give their support and contribute positively to the changes. The same is true of employees who believe that growth generated by electronic commerce is a guarantee of being able to keep their jobs. For others, it is a challenging opportunity to reorient their career, familiarize themselves with a new field, or even obtain promotions.

Training and Competencies Internet technologies have yet to become customary, so navigation in cyberspace remains a stressful activity for employees who do not feel comfortable in this environment. The transition to the electronic era is not uniformly easy for all employees. Some feel overwhelmed by NICT and by computers in general. They may have the impression that their knowledge is obsolete, and feel inadequate because they do not possess the necessary competencies.

In contrast, young graduates, employees who are familiar with computers, and seasoned Internet users often spearhead the adoption of e-commerce. Some may even act as initiators. An example is a small print shop that owes the establishment of its successful web site to a newly hired


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computer technician who was enamoured with cyberspace.

Leadership Employees are not the only stakeholders who can be reluctant to engage in electronic commerce. Some company executives still refuse to use the Internet, and delegate online tasks, even managing their e-mail, to their secretaries. In our study, a number of electronic commerce managers said they deplored senior management’s lack of interest in establishing a web site or implementing NICT. The cause may be either a lack of time, or a poor understanding of the possible uses and potential value of online activities.

Conversely, all companies that have succeeded in e-commerce activities stand out because of senior management’s commitment to developing Internet activities. These activities have been made a necessary component of the business strategy. Consequently, leadership by executives is an essential inductor for deployment of electronic commerce.

Factors at the Organizational Level Influencing E-Commerce Activities Several difficulties encountered during introduction of electronic commerce originate in the organization itself, notably in terms of culture, structures and systems, technology, expertise and resources.

Culture Organizational culture and the values it conveys impart standards of behaviour that govern individuals and influence their attitudes toward change. In companies where innovation and creativity are the

cornerstones of the culture, the introduction of electronic commerce activities will be facilitated because it takes place in a context that welcomes change. Conversely, because they demand respect for the established order and continuity, traditional bureaucratic cultures do not give rise to initiatives that depart from the routine, nor do they encourage innovations that involve change.

Structure and Systems The organizational structure controls distribution of power and resources, which can be dramatically disrupted by the introduction of online activities, especially when these activities become the focus of the company. However, when a company has flexible structures in which multidisciplinary teamwork is the norm, and when cooperation is encouraged, the introduction of e-commerce can be seen as a collective challenge and not as a danger for individuals or departments.

In hierarchical structures, where promotions hinge on individual performance and where departments are partitioned, the transition to e-commerce may ignite clan wars, with each party intent on preserving its power within the operation. The same situation occurs if systems that control and evaluate individual performance remain unchanged with the arrival of online activities, resulting in losses for employees.

For example, employees may see their income and commissions being reduced by electronic transactions, because their customers no longer use their services and instead place their orders directly online.

Technology A highly developed computer infrastructure that is in place before a company enters


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cyberspace may constitute an inhibitor to integration of Internet technologies if the equipment is obsolete or poorly adapted to new requirements. At times, the transfer from one technology to another incurs costs that justify deferring initiatives to enter cyberspace.

Uncertainty regarding the security of transactions is another major deterrent for companies, especially small businesses that are considering a web presence. Fears concerning security include the risk of a company’s computer system being infected by a virus, which often stems from a lack of information on existing solutions in this domain (encryption, firewalls, digital signatures, etc.).

A company that does not provide all of its employees with Internet access does not encourage the development of experience in cyberspace. In fact, the more familiar individuals are with the Internet, the easier it is for them to discover new possible applications of online activities. To summarize, the way in which a company manages technology can have a significant impact on the attitudes of the personnel toward the introduction of NICT and electronic commerce.

Expertise Problems of badly designed web sites that are ill-adapted to users’ requirements, are inadequately referenced in search engines, and are bloated with useless animation originate in a company’s lack of expertise and experience in possible uses of e-commerce, particularly in navigation on the Internet. Since the Internet is a relatively new distribution channel and a fledgling communication mode in the business world, expertise is still poorly developed. Learning takes place by trial and error. The absence of

solid expertise can prove to be an inhibitor to the development of e-commerce activities. However, a company can hire consultants to provide assistance in this area, at least until it acquires sufficient knowledge and expertise to operate independently.

Resources Most of the companies questioned, regardless of size, agree that the cost of developing a web site is high. This is especially true from the standpoint of achieving security and establishing integration of a search engine and online catalogue, together with online payment functions. Several companies hesitate to venture into this area owing to the investment required and the difficulty of anticipating the return on investment. Provision of customer support 24 hours a day, 7 days a week, 365 days a year demands resources that are not justifiable without a high volume of transactions.

Some companies complain of the difficulty in recruiting personnel who are competent in electronic commerce. When a company

Figure 1

INHIBITORS INDUCTORS

IND

IVID

UA

L

Communicate

Train

Support

Involve

OR

GA

NIZ

ATIO

N

Restructure

Outsource

Recruit

Consult

Reward

Reinforce


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president finds these technologies beyond his or her capabilities, the lack of competent internal human resources may constitute a formidable obstacle to deployment of electronic commerce.

While not exhaustive, Table 1 summarizes the internal factors that can affect the deployment of e-commerce. An honest appraisal of individuals’ attitudes should allow for identification of potential pockets of resistance and formulation of an action plan to reduce inhibitors. At the same time, this examination can bring to light allies, competencies and dynamic energies to mobilize around deployment of e-commerce. On the organizational level, this summary should lead to an assessment of a company’s strengths, as well as an inventory of the elements that must be reviewed and corrected.

Solutions to Overcome Inhibitors Similar to the case of brakes and accelerators in the external environment, inhibitors and inductors to deployment of e-commerce are relative to each company and its specific business context. However, there is one important difference: unlike brakes, inhibitors are not insurmountable. This is not to say that they are easy to solve. To succeed, a company must often draw on

creativity to find an imaginative solution adapted to its context. That being said, several avenues exist to eliminate inhibitors, such as outsourcing, use of external consultants, training, restructuring, communication and recruitment (see Figure 1).

Furthermore, inductors must be preserved, and actions must be taken to ensure that they continue to facilitate the adoption of e-commerce. Introduction of rewards for incentives leading to improvement of online activities, involvement of senior management in the e-commerce project, and creation of a climate of co-operation are a few of the elements that will reinforce positive attitudes toward changes created by electronic commerce.

Conclusion Understanding the internal dynamics surrounding the deployment of e-commerce enables companies to focus their efforts on inhibitors that should be eliminated or diminished because they hinder the deployment of e-commerce. At the same time, executives would benefit from supporting and reinforcing inductors because they facilitate the adoption and integration of e-commerce activities.


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Implementing e-business strategies (Part Three)

DEPLOYMENT OF E-COMMERCE: MEETING THE NEEDS OF THE CYBERCONSUMER

There are three key elements in launching a successful e-commerce strategy: determining Internet usage profiles, effectively deploying online activities, and updating your e-commerce positioning.

nce a company analyzes its business context and identifies the specific dynamics of the sector in which it operates, it can focus on deployment

of electronic commerce activities. In undertaking this exercise, three key activities must be meticulously managed: determining proper positioning, implementing targeted deployment, and following up on online activities.

Proper Positioning in Cyberspace To quote Seneca, “If one does not know to which port one is sailing, no wind is favourable.”

Similarly, there can be no proper positioning in cyberspace for a company that does not have clear electronic commerce objectives. To determine appropriate positioning, a

company must set realistic strategic objectives in line with the resources at its disposal and with the potential use of the Internet in its particular business context. Effective deployment reflects coherence between the business context, the strategic objectives, and internal processes affected by the adoption of the Internet and related information technologies.

The first success factor is linked to the company’s capability of understanding the dynamics of its business context and to plan Internet deployment that is coherent with this context. As Figure 1 illustrates, several Internet usage profiles are possible. A company must determine which profile suits it best, or which combination of profiles is best adapted to its e-commerce objectives. Following is an examination of each of the five typical user profiles identified in the study undertaken by the CMAIC.

Profiles of Typical Internet Use Promoter is the profile most frequently adopted by companies. It entails using the Internet to market and promote products and services. Specifically, promoters invite Internet users to contact or visit the company to carry out a purchase. The web site is consequently an advertising channel that serves to describe products and services, in addition to supplying comprehensive information on product safety, storage, use, applications, etc. The

O

PR Officer Promoter

Integrator

Developer

Figure 1 — Internet usage profiles1

Vendor


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site may also advertise new items, promotions and the list of distributors.

In addition, Promoters use the Internet to better understand a company’s clientele. This is done, for example, through surveys, questionnaire games, free samples, or contests. If it is highly developed, the web site can also indicate inventory availability, prices and conditions related to the sales contract, such as the currency used for billing, shipping costs, applicable taxes, conditions related to delivery, payment mode, financing and guarantees, together with cancellation of the sale and the exchange policy. These features enable Internet users to perform comparison shopping1. Evidently, the Promoter profile is concentrated on marketing activities, while sales and distribution continue to take place through the traditional network of offline sales.

Companies with a Developer profile use transactional Internet capacities to develop new markets, design new products, improve existing products, and provide technical support. Companies in this profile — software designers or specialized industrial equipment manufacturers are two examples — target a global market because they occupy a narrow niche. The products of companies with a Developer profile are often at the beginning of their life cycle, so a special effort must be made to publicize the characteristics of these products along with possible applications. As a result, the company’s web site is often supplemented by generic information on the

1 Ekos Research found that in 2001, 45% of Canadian Internet users used the Internet to perform comparison shopping, whereas only 34% of survey respondents used the Internet to make online purchases.

products or industry, and often includes a portfolio of achievements. Referral to a virtual community of customers, or to a network of authorized distributors, can provide support to new consumers of a product.

A web site of the Vendor profile type, when fully developed, lets users carry out online sales, from placing orders to payment. It corresponds to a virtual store, and can even generate revenues equivalent to those of a physical store. The site acts as a substitute store by offering all connected services online, including customer service and technical support for products. A Vendor site can include the same functions as Promoter and Developer sites, but differs in that all the other activated components are

secondary to the ultimate goal of online sales.

Although fairly rare owing to prohibitive costs, the Integrator usage profile specializes in integration of a company’s management

systems with Internet technologies. The processes associated with “internal logistics” are reconfigured and automated with online functions to enhance their efficiency and effectiveness. This allows for elimination of duplication, reduction of processing times, and real-time management of orders, purchases, deliveries, etc.

Lastly, a company that opts for a PR Officer profile sees its Internet presence as a preferred means of communicating with various stakeholders, even if it does not wish to engage in online sales. Consequently, its web site is designed to support its relationships not only with customers, but with suppliers, members of the company’s board of directors, shareholders, investors, employees,

Processes affected by online activities must be examined

and, if necessary, reorganized to adhere to technological

parameters.


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government, lobby groups, and the general public. By integrating Internet technology into these public relations activities, the company can personalize its interfaces with each type of stakeholder, and transmit targeted content adapted to particular interests. It can also solicit requests or comments online and in real time, more quickly and efficiently than through traditional means.

The web site of the PR Officer profile is often characterized by the presence of an intranet, extranet, or sections dedicated to members, shareholders or partners. This profile may be appropriate for companies in sectors where products are not adaptable to online sales, but must nonetheless maintain rich and sustained relationships with business partners. Construction, mining, industrial equipment, and specialized professional services are a few examples.

Even if companies pick and choose among Internet functions associated with several profiles, the principal objectives of their web sites correspond by and large to a typical profile. This is because the site is harmonized with a predetermined strategic positioning. In contrast, companies that simply post a virtual business card cannot claim to harness the full potential of the Internet, and would benefit from reviewing their e-commerce positioning.

Implementing Targeted Deployment of Online Activities Regardless of the Internet usage profile adopted, effective implementation of online activities is crucial. Processes affected by

online activities must be examined and, if necessary, reorganized to adhere to technological parameters. Effective deployment reflects the coherence between business processes and technological parameters. Therefore, efficient deployment involves “systematic planning of online and offline activities and the association of technological parameters with business processes.”

For example, the management of a company that manufactures steel beams realizes their product does not lend itself to Internet sales. As well, online promotion is not worthwhile because prices are negotiated per item as a function of the customer’s purchase volume.

There would be no point in investing in development of transactional functions via the Internet because transactions cannot be completed online.

However, the company can maximize the potential of the Internet by reducing its communication costs with shareholders, by disclosing

technical specifications that enable potential purchasers to obtain product information, or by recruiting online. Replacing offline activities with online activities can improve the profitability of the company and enhance its value. Management therefore decides that the PR Officer Internet usage profile is best suited to its needs and focuses on implementation of public relations components.

Conversely, a micro-company (less than five employees) can position itself in a highly specialized niche through Internet sales. It therefore adopts a Vendor profile. Having very limited financial means, this company would probably not exist without the

To determine appropriate positioning in cyberspace, a company must set realistic

strategic objectives in line with the resources at its disposal and

with the potential use of the Internet in its particular

business context.


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Internet. Its virtual store enables it to avoid the costs of investing in expensive physical facilities. In contrast to the company that manufactures steel beams, it would not be appropriate for the micro-company to adopt a PR Officer profile. It does not need to develop relationships with a board of directors, shareholders, investors, employees, lobby groups, etc. The Integrator profile is also not suitable, owing to a low sales volume that does not justify establishing a sophisticated inventory management system.

In summary, effective deployment of e-commerce entails reconsideration of each of the activities of a company’s internal value chain to determine whether it can be replaced by an online activity. At the same time, each activity must be reviewed by weighing the merits of outsourcing externalization to Internet users (for example, having users complete an order form), or continuation of traditional value-chain processes in parallel with online activities.

Following up on Online Activities Deployment of online activities merely marks the start of the adventure. Cyberspace is constantly evolving. Changes take place at a hectic pace and the winners of yesterday may be the losers of tomorrow. Just because a web site is in place, it doesn’t mean a company can rest on its laurels! Sound management of e-commerce activities includes not only evaluation of the performance of reconfigured processes, but also periodic review of the company’s positioning and systematic updating of its web site.

Connection to the Internet is constantly accelerating, and statistics show that electronic commerce is growing sharply.

However, most small businesses do not formally plan their activities in this area. At the majority of companies, executives are advancing prudently, by intuition, one step at a time, often by trial and error. When the results appear poor or insufficient, they either add new applications, revamp the design of their site, or lose interest entirely.

Companies that do not integrate e-commerce into their business strategy tend to forget to follow up on online activities in their strategy watch. Without clear e-commerce objectives, performance indicators will be lacking, leading to a waste of resources and mitigated results.

In contrast, successful companies know where they are going. They adopt an Internet usage profile appropriate for their business context. Coherence between the business context, strategic objectives and internal processes dictates the practices these companies choose to implement and their use of technology. Above all, they follow the day-to-day evolution of cyberspace, constantly verifying the relevance of their positioning. Their sights are reset based on a rigorous evaluation of results, not merely on the number of visitors to their web site.

Yet this exercise is not easy to perform. In effect, how can one measure the dollar value of developing better relationships with a board of directors, shareholders, investors, customers, suppliers, lobby groups and society as a whole? How does one quantify the benefits of developing new products and improving existing products? How does one evaluate the return on investment to ensure 24/7 technical support? How does one evaluate the profitability of a promotional web site? Companies must respond to each of these questions, because the success of Internet deployment in business processes will depend on the answers.


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Hugues Boisvert is head of the CMA International Centre for Studies of Business Processes, and a full professor at École des HEC. Lucie Bégin is a researcher at the CMA International Centre. This article appeared in the CMA Canada published journal CMA Management Magazine in April 2002.

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