The Duality of Growth

Growing the business of today and the business of tomorrow

When credit tightened and revenue declined during the recession, companies worked to extract value from efficiency and austerity. In many cases, those sources of value have been wrung dry. Now, companies are once again turning to growth.

Companies often approach growth as one of two opposite extremes:

• Execute better and deliver more from the existing business
• Charter a team of big thinkers to look deep into the future

We believe both of these approaches to growth are likely to fall short of expectations. Instead, companies can apply the same discipline to growth that they have brought to the cost side of the equation. A new view of growth can help companies set better growth targets, identify new opportunities, balance investments and risk and carry strategies into action with a clear eye toward expectations.

The duality of growth demands that companies fortify and expand the business as it exists today while simultaneously creating the business as it will exist in the future. This is not simply a temporal difference. The business of today and business of tomorrow are separated by uncertainty as well. This uncertainty introduces risk, impedes decision making and often causes companies to mistake discussion for strategy. This duality requires companies to execute now and consider future risks and opportunities while anticipating changing needs in leadership and capabilities.

When a company plots an executable growth strategy, it must address four major questions:

• What is the appropriate growth target?
• Where and how should we look for growth?
• How should we align our growth portfolio?
• How can we execute on this plan?

Establishing the right growth target requires clarity and bold leadership

Generating sustainable growth is difficult and requires bold leadership. And leadership has a way of feeling and sounding bolder when it paints in broad strokes. That’s why company growth objectives are often simple and capricious: “We will double last year’s rate of growth,” or “we will achieve double-digit increases.”

Even when they move beyond inspirational pronouncements, leaders may choose arbitrary growth targets. They often benchmark against organizations they see as peers or try to use industry averages as a stalking horse.

There’s more science to it than that. To be realistic and workable, a growth target should emerge from the interplay between internal and external factors and expectations. Externalities may include the industry’s overall momentum, investor expectations, the state of the economy, the intensity of competition and wild cards such as regulation, innovation or disruption. From within, a company should take into account its state of lifecycle maturity, its culture and talent, the resources available, its risk tolerance and its own innovation capabilities. These inputs create the context that helps determine whether a company can produce superior performance to create additional value by surpassing investors’ growth expectations. One can readily determine how much of current share price is based on expected future growth. We don’t need to cover the science and math here – Mark Sirower, a Principal in Deloitte Consulting LLP’s strategy practice, has written extensively about value in his book The Synergy Trap

A sophisticated growth strategy departs from the orthodoxy of core, adjacent, new

Much has been written about growth in terms of the core and moving into adjacent or new spaces. There’s certainly nothing wrong with these classifications – in fact, we firmly believe in them as a useful way to think about some aspects of growth. But we find those perspectives insufficient because they fail to account for uncertainty. And they do not address the complexity of creating growth in current and future businesses.

As we outlined earlier, the duality of growth means finding ways to grow the business of today while also finding growth that will create the business of tomorrow – and to fit both together. Leaders need to figure out how to scale and integrate tomorrow’s potential business back into today’s existing operations.

A comprehensive view looks at growth options along a continuum: In building the business of today, companies will typically turn to key areas of focus such as customer retention, pricing optimization and improvements to existing offerings. Moving along the scale toward choices that carry higher uncertainty and lie farther from existing operations, companies will likely start building the business of tomorrow by designing new offerings, intruding into new markets and geographies and creating entirely new business lines for entirely new customer sets.

Figure 1 below depicts the growth levers as they progress from the greater certainty of today’s core business to the greater uncertainty of the new businesses of tomorrow.

Growth Levers
Figure 1

Click graph to enlarge

Few companies employ every one of these tactics at once. Yet in choosing from among them, many risk a cognitive dissonance. The greater opportunities may lie at the distant end of the uncertainty curve, yet comfort may induce a company to invest more heavily in familiar near-term growth strategies that may carry less overall potential.

It is useful to understand the range of levers to pull, but crafting the full strategy rests in knowing how to apply those choices to specific markets and offerings. As pictured in Figure 2, each axis measures a degree of “newness” – newness of customers and markets along one side and newness of products and business models along the other.

Where existing offerings meet existing customers at the lower left, companies are engaging in core growth with relatively little uncertainty. Where entirely new offerings meet non-consumers at the upper right, growth is more uncertain. In between lays the realm of adjacent offerings and markets that aren’t new to the world, but are new to a particular company.

Sources of Growth
Figure 2

Click graph to enlarge

Combining these two axes yields seven distinct boxes, each of which is a potential growth strategy. Where growth strategy may once have been a dartboard, this model turns it into a marksman’s target. Applying this discrete lens allows a company to employ Cell Based Growth^TM. Cell Based Growth^TM produces growth insights for individual “cells” where opportunities may lie (say a particular segment of the core business or application of a disruptive technology in brand new segment).

Using the Cell Based view, a company can match its capabilities, opportunities and risk tolerance with specific levers – then allocate effort among those levers to balance “company of today” growth with “company of tomorrow” growth, control risk exposure and more closely achieve shareholder expectations.

Balancing a growth portfolio requires both a near- and long-term view

Look again at those seven boxes and imagine them empty. To construct the growth portfolio that most suits a company, its leaders must make clear choices about where to invest time, capital and other resources. A leader should take the overall growth target – for example 10 percent – and deconstruct it to identify which initiatives will produce the required growth.

Company A might walk a conservative line, targeting 5 percent growth from existing products and markets, then dividing the remaining 5 percent among the mid-range strategies in adjacent spaces. Alternatively, Company B might begin with the same 10 percent goal and weight its strategy more toward new products or new markets, inhabiting the upper right of the graph and embracing the higher potential upside – and higher risk – that come with the territory. This idea of a targeted growth portfolio isn’t new, but this “duality of growth” lens adds more specific rigor to the ways in which companies seek and achieve that balance.

Where should a company place its investments? Matching new offerings with new markets offers the potential of a high-energy combination. But trying to break into new markets with old offerings can make it harder to edge out well-entrenched incumbent competitors. And investing in a new business model without finding new customers invites the risk of an insufficient payoff. A solution to this “high risk, high reward” approach rests in strategic options.

We have seen that no one effectively predicts the future. Michael Raynor, a Director in Deloitte Consulting LLP’s strategy practice, has written extensively about uncertainty, risk and the value of options in his book The Strategy Paradox². He asserts the future is inherently unknowable and it’s likely most readers agree. Companies that embrace this view need Strategic Flexibility^TM to perform effectively in an uncertain future.

Strategic Flexibility allows a company to make commitments in the core business (perhaps building a new plant to increase capacity) and take strategic options to create the future business while managing risk (perhaps taking an equity position in a potentially disruptive new technology). This approach allows companies to adapt their core to changing regulations and market conditions without relying exclusively on long-term predictions. And if the new business part of the playing field is where a company wishes to end up, it controls for risk without strangling growth.

Managing a growth portfolio that spans both new and future businesses requires thoughtful governance and understanding of a company’s culture. A company may elect to treat its new growth plans – the ones that involve new offerings, new markets, or both – as separate from the rest of the business. In some cases, a “firewall” approach can benefit both the existing core business (by insulating it from new risks) and the growth-oriented operations (by freeing them from legacy structures that may not fit their mandates).

However a company chooses to structure its growth portfolio, the broader point remains – viewing it in a structured way enables not only a more rational identification of growth areas, but also a more effective way to assign priority to each of them. Companies can iterate and refine concept development and evaluation – meaning that their opportunities are not found over time but shaped.

Now go do it

Planning growth this way requires a diligent eye on the external world, but it’s largely an internal process. Moving from strategy planning to strategy execution does not eliminate the need to focus on the duality of today and tomorrow.

Where the growth plan focuses on core offerings and markets, the imperative is to enhance and extend what a company is already doing. In some cases, that can take as much creativity and innovation as creating something entirely new.

Where growth is aimed at new frontiers, it’s time to be a pioneer – willing to explore, disrupt, create and leave the familiar behind. Building the business of tomorrow may require consolidation to build scale, or divestiture to free capital for new uses. It may alter the pace with which a business phases in – or phases out – component operations for the most effective use of resources.

To take a growth plan from theory to execution, an organization must recognize the duality that both joins and separates today and tomorrow. First, a company must identify the capabilities it needs and either build or obtain them. For each growth lever a company has decided to pursue, there may be an entirely separate set of required capabilities. Organizations must then define the leadership and talent required to pursue these opportunities. Exploring uncharted territory requires different skills, experiences and inclinations from driving incremental improvements to the things an organization does already.

Finally, different metrics are required to measure success. While traditional metrics such as growth rate, market share and time to market may be appropriate for business-of-today initiatives, non-traditional metrics such as growth rate above market, percentage of revenue from first-to-market launches and time to break-even may be better predictors of success when entering new spaces. By taking what we call a Cell-Based approach to growth strategies, companies can identify the key opportunities and measures in each part of the business – whether today or tomorrow – and build the required capabilities to grow effectively.

Although many organizations have invested considerable resources in defining and improving processes around quality, cost, or efficiency, growth and innovation are too often viewed as a “black box.” This is a mistake. Setting a clear target, identifying the right growth levers, apportioning investments amongst them and managing growth with programmatic, repeatable rigor are the keys to opening this black box and building the foundation for sustainable, long-term growth.

Growth’s Triple Crown

When it comes to exceptional performance, the best companies don’t make trade-offs: They break them

Over the last two years, the general economy has righted itself and profits have rebounded strongly. Corporate cash balances are at an all-time high in many sectors, and shareholders have been rewarded for staying the course through the turbulence of the recent past. At long last, it seems, growth is back on the corporate agenda.

It is tempting, because it is easy, to succumb to the notion that as companies grow they will see a decline in either or both of their profitability and shareholder returns. But what if it were possible to avoid those trade-offs? What if we could find and learn from those companies that have delivered not only superior growth but also league-leading profitability and shareholder returns at the same time? In other words, what does it take to win growth’s “triple crown”?

Who would be king?

Baseball and horse racing provide two popular analogues. Baseball batters with the greatest number of home runs, runs batted in (RBIs) and highest batting average in a year are triple crown winners. In U.S. horse racing, the triple crown goes to the 3-year-old thoroughbred that wins the Kentucky Derby, the Preakness Stakes and the Belmont Stakes in the same year.

Triple crown winners are rare and, in fact, increasingly so. The last hitter to win a triple crown was Carl Yastrzemski with the 1967 Boston Red Sox, 45 years ago. (In the 45 years prior to The Yaz’s achievement there had been six triple crown winners.) Affirmed took the last horse racing triple crown in 1978. (In the previous 33 years there had been five.)

Part of what makes triple crown winners so special is that the events one must win to capture them demand not merely different, but often contradictory skills. Hitting home runs demands swinging for the fence, which often leads to strikeouts and a lower average; RBIs require putting the ball in play on demand—when runners are on base—in ways that get runners across the plate even if it gets you out, which reduces your home run total and your average; and a strong batting average might mean hard line drives (fewer home runs!) that result in the runner on first getting forced out at second (lower RBI total!). As for horse racing, for 3-year-old thoroughbreds the 1¼, 1 3/16 and 1½ miles of the Derby, the Preakness and the Belmont, respectively, are different enough that victory in any one of them often requires specialization at that distance.

Whether or not you’ve won the triple crown in baseball or horse racing is entirely unambiguous. But when it comes to corporate performance, as regular readers of this space will appreciate, identifying exceptional outcomes is not a straightforward undertaking. Unlike triple crowns in sports, we are not interested in performance over a single year. And when picking any particular period of time—five, ten, or some other number of years—we cannot help but make arbitrary choices that threaten to materially bias our results. If we want to find companies that have been truly remarkable on any measure of performance over time, we need to draw from the largest sample possible, which means making comparisons across different industries, different eras and different periods of time.

In the service of that objective, our sample consists of over 22,000 companies that traded on a U.S. exchange at any time between 1966 and 2008. However, when looking at so many companies over different lengths of time over more than four decades it turns out that systematic variance in company performance is very high and, at the same time, quite “sticky” at the high and low ends of the spectrum. This means that companies can deliver eye-popping results for a seemingly significant period of time even though it remains practically impossible to separate out the contribution of luck from that of company-level attributes.

To compare companies from such a diverse population we built a regression model for each performance measure. This regression allows us to predict what each company’s performance “should have been.” In each year, a company’s actual performance will typically deviate from this predicted value, falling either above it (a positive residual) or below it (a negative residual). The sum of these residuals is a company’s raw R-score (for “residual”).

We cannot, however, simply compare raw R-scores, since companies with longer life spans will have systematically higher R-scores simply by virtue of having more of them. To correct for this, we ran a series of simulations to determine what the expected R-score is for companies with different numbers of observations.

This allowed us to compute a “corrected R-score” for every company: a single measure for each of revenue growth, profitability (as measured by return on assets, or ROA), and total shareholders returns (TSR) that allows us to compare performance among all companies.

Given our particular interest in how to break the performance trade-offs that often accompany the pursuit of growth, we have focused first on those companies that fall into the top decile for growth, and then identified companies that also fall into the top decile along one or both of the other two performance measures. For convenience, we refer to the four categories as “G” (top decile for growth), “GR” (top decile for growth and ROA), “GT” (growth and total shareholder returns), and “GRT” (the triple crown winners).

In order to facilitate a more tractable examination of the profile and behaviors of firms with different performance profiles, consider for now only those that have at least ten years of data and that were going concerns in 2008 with at least $1 billion in revenue. This leaves us with 1,116 companies, of which 118 are at least great growers. (Statistical analysis suggests that this sample is representative of the full population.)

As shown in Figure 1, 55 percent of the great growers in that sample (66 of 118) delivered on more than just growth, consistent with the notion that, over the long run, growth cannot be an end in itself, but should drive, or at least be associated with, some form of value creation. At the same time, those firms that delivered on growth only are the single largest group, implying that delivering on more than one dimension is a genuine challenge

Some descriptive statistics shed light on the profile of the companies that fall within each of our four categories. Intriguingly, there is no meaningful difference in the age or size (in 2008) of the companies in each of our four categories. The bubble chart below provides a sense of the observed performance by category. Note that ROA, TSR and growth rates for the GRT firms are higher than for any of the other categories, suggesting that not only is it possible to do well on multiple dimensions of performance simultaneously, it is possible to do very well. For although all the companies in this sample are in the top decile for their relevant performance measures, once a company clears that top decile cutoff, there is literally no theoretical limit to how high they can go.

Statistical analysis reveals no significant differences among any of the categories on growth, which is to be expected since our sample is made up of companies that reached at least the ninth decile in growth for the total population. Intriguingly, neither is there any significant difference between GR and G firms on ROA or TSR. The GRT and GT firms, however, outperform the G firms on both ROA and TSR as indicated in the table below.

Other features of our sample are somewhat counterintuitive. For example, the average ROA of our GR firms is lower than the ROA for our GT firms. How can companies that have higher ROA on average (the GT companies) fail to meet the cutoff for top decile ROA when they perform better than the GR firms? We see the same effect on individual firms within categories: some G and GR firms have TSR values that are higher than some GT companies, yet they do not make the cutoff for top decile TSR performance.

The answer lies in the importance of our controls, especially industry effects, on company ROA and TSR. Some industries have systematically higher TSR and ROA, and so companies in those industries must deliver better absolute performance in order to achieve a similar relative ranking.

With this in mind, perhaps the two most fascinating observations about performance differences by category are these: First, GRT firms achieve the highest raw and corrected levels of performance across all three measures. In other words, our triple crown winners do not “just” clear the top decile hurdles, ceding highest honors to “specialists” in each category. Rather, they finish at the top.

Second, the firms that fail to achieve ninth decile performance on multiple measures do not “just miss” on the other measures, they miss by a mile. The G firms, for instance, do not achieve ninth decile on growth and then eighth decile on other measures; they are in the sixth and third deciles for TSR and ROA.

It is important to note that we cannot claim a causal relationship between being in the triple crown category (our GRT firms) and the magnitude of their performance along each dimension. To do that, we would have to show that superior performance along all three dimensions was a consequence of clearing the ninth decile hurdle in each. However, at the risk of mixing metaphors, these findings suggest that GRT firms are rather like an Olympic triathlon champion with times for each stage (swim, bike, run) that would have earned them the gold in those individual events.

With individual event champions (G, GR and GT firms) doing so poorly on other dimensions, and GRT firms doing so well on all three, it’s just possible that instead of trade-offs among multiple dimensions of performance there is instead a positive feedback loop. Could it be that, beyond market share and influence with customers and suppliers, growth can create self-perpetuating momentum, the kind that draws to a company the best people, the most promising opportunities, and enthusiastic customers? That enthusiasm in turn might drive profitability, making possible the sort of reinvestment in R&D and people that over time establishes a daunting lead over one’s competition. The resulting growth might drive strong shareholder returns, creating a currency for growth, starting the cycle anew. Call this the “performance synergy hypothesis.”

Elements of trade-off-free growth

In an attempt to identify some of the possible differences in behavior among our performance categories that might be associated with their performance over time, we looked at the total growth achieved by every firm in our sample that was generated through acquisition and through merger activity.

The box plots below illustrate the distribution of total growth driven by each of these behaviors. A regression analysis reveals what is not immediately evident in a visual representation of the data: that GRT and GT firms generate on average about 40 percent and 25 percent less, respectively, of their growth from M&A than the pure growth companies, despite, recall, having entirely comparable rates of lifetime growth. GR and G firms are not materially different from each other.

These findings are in many ways consistent with both the conventional wisdom and the academic research on M&A. It is not uncommon to hear the refrain that acquisitions—especially larger ones—are systematically associated with lower profitability and lower shareholder returns for the acquiring firm. What we observe is that triple crown winners generate a mere 7 percent, on average, of their lifetime growth from M&A, while pure growth firms—which fail to deliver exceptional TSR or ROA performance—derive on average 46 percent of their growth from dealmaking. GT firms—companies with strong shareholder returns but less impressive profitability—split the difference, with an average of 22 percent of their growth coming from such sources

There are any number of interpretations for these data, but in our view they are consistent with the view that merger activity does not necessarily improve profitability, and often erodes it. And although few executives are likely to go into a deal intending to sacrifice their firms’ profitability or their shareholders’ wealth, it is noteworthy that so many G firms manage to do so consistently.

(The relatively high percentage of growth from M&A by the GR firms warrants explanation: there are only four companies in this category, and the range of growth from M&A is from 0 percent to 148 percent, with the high end of that range driven by a very large and dominant company competing in a highly regulated industry.)

Geographic expansion shows the opposite trend, with GRT firms deriving on average 40 percent of their growth in this way, about 16 percent more than pure growth companies; the other three categories are no different from each other. This suggests to us that successful geographic expansion delivers growth that is surprising to shareholders (contributing to the superior TSR – the “T” in GRT) and can be done in ways that are consistently profitable (the “R”). GR, GT and G companies tend to exploit geographic growth far less, at 19 percent, 26 percent, 24 percent of their total growth, and apparently less effectively, given their lower levels of overall profitability.

Beyond their standalone impact, are there any synergies between these two growth levers? That is, is there any relationship between the degree of geographic expansion and M&A activity within firms by performance category? Statistically, the answer is “no”: firms within each category appear to pursue their geographic expansion and M&A-driven strategies largely independently of each other. Consequently, while definitive conclusions are elusive, it would appear that among companies achieving significant growth, there is little evidence that their international expansion is fueled by cross-border acquisitions. Again, this is at least consistent with credible academic research that while M&A generally is fraught with risk, cross-border M&A is an entirely different sort of difficult – one that the top performing firms do not appear actively to seek out, and might even avoid.

Cisco Systems: An archetypal triple crown winner

Averages and general tendencies are helpful but can be somewhat blood-less. To bring to life the contours of a triple crown winner, consider Cisco Systems. Founded in 1984 and going public on the Nasdaq exchange in 1990, Cisco is widely regarded as having enjoyed a dynamic and highly successful quarter century.

Cisco provides a useful starting point for understanding the defining attributes of a company that has performed well over time because not only does it clear our statistically defined benchmarks for superior performance, its performance has been impressive by even merely intuitive standards of excellence.

So how did Cisco do it? The definitive explanation remains to be written, but we can offer a few observations that illustrate some common features of a triple crown winner.

First, Cisco has generated 46 percent of its growth from geographic expansion, very near the average for the GRT category and higher than in the other great grower categories. Cisco has pursued its geographic expansion in a systematic manner by capturing significant (>25 percent) market share in the markets it has entered. A perhaps defining element of its success has been its tendency to expand the geographic footprint of its R&D and manufacturing functions as well. In effect, Cisco has globalized as a company, rather than merely seeking customers beyond its home base in the United States. And, consistent with our observation that geographic expansion and M&A strategies seem to be independent of each other, Cisco’s geographic expansion seems to have been largely organic: rarely has an acquisition been a driver of growth in new regions.

New products, however, are another story. Much has been written about Cisco’s M&A prowess, and with good reason. However, for all the attention Cisco’s deal-making gets, the company has generated about 6 percent of its growth from M&A, despite having done over 150 deals between 1993 and 2008. The acquired companies were generally small compared to Cisco’s revenue at the time of acquisition and tended to be privately held companies built around a single technology. This implies rather strongly that the success of its acquisitions seems to be in what it does with them, not what they are upon being acquired.

Finally, perhaps one of the most well-documented findings on corporate performance is the negative impact of diversification. Clearly, when viewed from the perspective of its products and markets in the early 1990s, Cisco has diversified significantly: new products, new geographies, even entirely new businesses. Yet it seems to have avoided the “diversification discount.” How?

One possible answer is the gradual nature of its transformation over the years. The company’s primary focus for growth seems always to have been on strengthening and expanding its core business, both domestically, by targeting new customers for its existing products, and in new geographies.

The company has simultaneously stayed ahead or abreast of the rapidly advancing innovation curves in its various product markets by spotting trends and, where necessary, making relevant acquisitions. The result has often been an astute move into adjacent markets that have had clear linkages to its core business, often where the company has had brand permission and could easily leverage its core capabilities.

Ascending the throne: A CoDE for growth

It is always worth exploring whether there are any meaningful commonalities among firms that have a shared and remarkable performance profile. The value of identifying the specific actions or even general rules that increase one’s chances of performing similarly would be extraordinary.

As is seemingly unavoidably the case, however, the unifying themes that emerge tend to be rather high level. For even though Cisco’s experience is representative of triple crown winners generally, there are many more unique aspects to each triple crown winner’s story than there are shared ones. The dynamic nature of the challenges and opportunities faced by different companies at different times makes it challenging to have a formula-based approach to growth.

Within these constraints, our efforts to identify useful common characteristics has surfaced three recurring, if not universal, themes.

First, clarity in vision seems essential, if not in jump-starting growth, then certainly in avoiding the many distractions that can derail long-term success. Firms that grow profitability while creating shareholder value rarely pursue a single-minded dedication to one market, one segment or one technology. These firms can enjoy material growth but typically end up seeing their growth stall and their profitability erode. At the other extreme, firms that press growth but sacrifice value or profits have frequently diversified too much. The triple crown winners, in classic Goldilocks fashion, very often end up diversifying in material ways, and the sorts of transformations that characterize Cisco are far from uncommon.

One characteristic that allows these companies to strike the right balance seems to be a clear and compelling vision that is communicated broadly and shared widely across levels and functions. This vision helps triple crown winners to look beyond the constraints of their existing business without being distracted by every passing flashy bauble.

Second, disciplined resource allocation is a defining feature of triple crown winners. This discipline manifests itself in some unsurprising ways: a rigorous and multidimensional assessment of the merits of each new opportunity. At the same time, part of this rigor serves to compartmentalize resources in ways that ensure resources flow to strategically differentiated opportunities. In other words, not all dollars are created equal: triple crown winners invest consistently in the business of today and the businesses of tomorrow – both those that are extensions of current capabilities and those that expand the company’s competency footprint.

Finally, there is a common emphasis on excellence in execution across all functions. There is little evidence that strengths in any one area can compensate for weaknesses in others. It would appear that breaking trade-offs among growth, profitability and shareholder returns also requires breaking trade-offs in execution: triple crown companies are typically nimble and committed, efficient and effective, long-term thinkers and short-term obsessed.

In the end, triple crown companies share the following attributes:

• Clarity of vision
• Disciplined resource allocation
• Excellence in execution

And that is our growth CoDE. It might not win you the Derby, Preakness and Belmont, but it just might get your company that much closer to exceptional value creation. 

Source: Deloitte

The boardroom tax gap

Narrowing the gap between Tax and the Boardroom Tax plays an increasingly significant role in the alignment of commercial and fiscal strategy. So, asks Tom McFarlane, is it time your organisation had a chief tax officer on the board?

UNTIL RECENTLY many tax directors did not register highly on the radar of their boards. In fact, the tax function was somewhat far removed from the business, often reporting into a financial controller rather than directly to a finance director.

This could have been due to the fact that the FD was primarily focused on pre-tax measures, therefore crediting little importance to the tax function. Or it may have been because the Tax Director felt somewhat removed from the business, resulting in a reluctance to put his or her head above the parapet.

But let’s not dwell on the past. Now is the time to look forward and appreciate what is a new era in the relationship between tax and the boardroom. There has undoubtedly been a radical change in the way the board views tax as a strategic partner with key events resulting in tax gaining prominence within organisations.

Initially this step up was a result of the rather unfortunate corporate scandals in the “noughties” that raised public scrutiny and as a consequence, compliance and regulation. The demand by the public and markets for good corporate citizenship was in full swing and FDs viewed tax as a critical element in achieving this.

Recognising their growing status within the organisation and building on their new found relationship with the FDs, the savvy tax director then began to focus on developing strategy consistent with the group’s commercial objectives, most notably the corporate push for globalisation. As the corporate world embraced globalisation, it was clear that tax would play an even larger part in business strategy.

Globalisation meant a change in operating models and supply chains both of which created significant tax issues and challenges. From the FD’s perspective, tax was transitioning from the back office to playing a significant role in the alignment of the commercial and fiscal strategy. The new role of tax - supporting above the line savings, returning a sustainable reduction in the group’s effective tax rate and maintaining its compliance and regulatory role - resonated loudly with FDs.

The strategic importance of tax was at last acknowledged – the wheel was well and truly in motion. But there was still some way to go. At this point in time, many within the operations of a multinational had key performance indicators (KPIs) based on pre-tax measures tied to EBITDA, thus ignoring the relevance of tax. This was counterintuitive given taxes such as VAT and Customs Duties hit above the line and new investment opportunities were evaluated on a post tax basis.

As a result, tax planning ideas would not get the support of the business – this in turn resulted in projects not being implemented. Importantly this impacted both shareholders’ returns and the tax directors’ performance measurements – neither ideal situations.

However, there was more to come in the evolution of tax and the FD. On 15 September 2008, Lehman Brothers collapsed, resulting in shockwaves throughout the global economy which continue today. During the recession which followed we have seen changes in the way boards manage their business which have further highlighted the strategic importance of tax.

Cash is now well and truly king. Tax, in all its forms, is a cash cost that must be managed efficiently to meet the demands of today’s working capital management crusade. Post tax measures are now increasingly used to assess performance, thereby further enabling the “stepping up” of the tax function. In addition, multinationals are under increasing pressure to maximise shareholders’ returns, while governments are being scrutinised to maintain their revenue base, resulting in inevitable tension among stakeholders.

Now there is no hiding the strategic importance of tax to the FD. The role of tax and its relationship with the FD has clearly undergone radical change over the last ten years. There is no doubt that today’s tax director faces greater challenges than ever before now that their heads are well and truly above the parapet. While we should be enthusiastic about recent developments, it would be foolhardy to suggest that the metamorphosis of the tax and FD relationship is complete. There is still work to be done but the fact that tax has moved from the shadows to the forefront of business strategy, driving shareholder return, is a development that should warm the hearts of every FD.

Mapping It Out: Using Technology as a Strategic Advantage in Litigation

It's difficult to ignore that we are living in the information age. Just 10 years ago, it would have taken weeks or months to manually gather data at a great expense, but that same data is now available for download instantly on the Internet. The breadth and depth of the information literally at your fingertips can quickly become overwhelming. For litigation experts, helping clients make sense of the onslaught of digital details is a pivotal factor in the outcome of their cases. With Geographic Information Systems (GIS), this once-complex task is being simplified.

By definition, GIS is specialized software that allows users to visually display and analyze information in real time fashion on an interactive map or, ultimately, in the form of a static map. Data stored in large databases, sometimes containing hundreds of thousands or even millions of records, can be readily viewed and explored in ways that were unattainable in the past. When information such as plaintiff properties, soil sampling results and land use are plotted on a map, patterns are quickly illuminated and the facts become much more meaningful than they are in a tabular format.

GIS gives users the ability to view, interpret and visualize geographic data to uncover patterns and trends in the form of maps and charts. Understanding the spatial relationship of this information lets litigation experts perform analyses and test theories that are impossible to do otherwise. Such map-based analyses can be pivotal for clients in a broad range of industries such as healthcare, manufacturing, retail, real estate, energy, construction materials and utilities.

Increasing Efficiency and Effectiveness

GIS is a crucial component of an effective litigation strategy throughout the lifecycle of a case – from processing information and crafting an expert's opinions during discovery to preparing exhibits that will be shared throughout trial or submitted to opponents during settlement negotiations. As a web-based tool, GIS is also an invaluable form of communication between experts, counsel and other team members.

In the discovery phase of a lawsuit, an expert must immediately determine what data is available and how it can be obtained and utilized to evaluate the case. Employing GIS can dramatically increase the efficiency and effectiveness of these efforts. For example, the location of residential property damage plaintiffs can be mapped to determine the location and potential magnitude of the alleged affected area, allowing the expert to quickly prioritize and make the most of data-gathering. As soil sampling is performed, or sales information is gathered, this data can be incorporated into GIS to reveal relationships or patterns that steer the discovery and direct the future analyses to be performed.

Similarly, GIS is the most effective way to identify the relevant properties within a plume, affected area or class boundary. Once an area of interest is determined, the software can quickly display the locations of thousands of residential property owners, along with overlays of property transactions or other strategic data. GIS enables the user to efficiently model various potential class boundaries and the effectiveness of different settlement strategies.

In addition, to understand changes in a geographic region over time, demographic figures such as median household income, land use or population size may be mapped at different dates, quickly illuminating trends or areas of unexpected results. GIS can analyze a wide variety of information – population trends, demographics, housing statistics, traffic counts and business competitor data – to obtain a comprehensive view of those changes.

Finally, incorporating graphs, photographs and maps into a thorough analysis of a real estate market or geographic region allows the expert to maximize the client's understanding of the forces at work in that market and the possible impact on the ongoing litigation.

In one case, a client was sued by property owners, alleging loss of use and enjoyment due to odor emitted from a wastewater treatment facility. Using GIS, experts were able to identify the parcels within quarter-mile increments of the facility and modeled settlement alternatives based on geographic distance and parcel eligibility. With a combination of effective maps and flexible models, the GIS findings enabled the client to reach a favorable, cost-effective settlement.

Telling a Story

One fundamental use of GIS is to create powerful visual displays for expert reports, settlement negotiations or trial. When complex data is visually displayed, it tells a commanding story and makes dry, difficult to understand statistics much more meaningful. It can also be a significant advantage in an adversarial environment when keeping the attention of the judge, jury or mediator is crucial.

Each aspect of the map is fully customizable and tailored to the client's specific needs. A single map can display simple concepts, such as the location of a new plaintiff relative to an existing settlement boundary, as well as intricate concepts like wind direction, alternative source emitters, traffic volume, rail traffic, population density and the location of potential class representative properties. In addition, animated maps are extremely useful in deposition or live testimony to convey trends in property data, migration of contaminants or other critical variables. Multimedia maps, incorporating aerial photography, pictures and animation can make an expert's testimony and presentation even more compelling.

In a recent residential class action lawsuit alleging property value diminution against a major oil and gas company, due to release of waste oil into a local waterway, thousands of transactions were analyzed, utilizing appraisal methodology and statistical models. GIS was able to facilitate the analysis and presentation of outcomes, first to the client and later during expert testimony, resulting in a favorable defense verdict for the client.

Enlisting Online Communication

Besides static maps, dynamic web-based maps can be created and delivered through a secure, fully customized website. After logging in, the user has real-time access to strategic maps and reports generated by a few simple mouse clicks. GIS allows critical team members to access and share all relevant tools, analysis and visual displays, and users can print the maps they create, save them as an image for insertion into reports or download information to an Excel file for future analysis.

When a major oil company needed to track individual property damage claims brought by 350 individuals living on the site of a former petroleum storage facility, and simultaneously needed to track the status and results of environmental testing pursuant to ongoing state and federal regulatory oversight at its site, web-based GIS enabled legal counsel, real estate experts, environmental consultants and engineers to successfully share data and analyses. As a result, the residential property value claims were dismissed and the client continued to utilize the site as regulatory actions continued post-litigation.

As a final point, GIS has broad applications beyond litigation consulting that can benefit counsel's current and future clients, and the table below highlights select ways this technology can be deployed by almost any organization. A basic understanding of GIS will help every practitioner deliver better, more effective services.

For:	GIS Can Provide:
Underperforming or Troubled Companies	Location of supply chain and major supply routes, including infrastructure dependencies Thematic maps depicting profitability or productivity across regions or business units Insight into competitors, including market share and strategic direction Customer demographics, including location and profile of existing customers vs. target customers
Public Sector Organizations	Insight into population characteristics including historic trends and predicted values Understanding of the utilization of existing facilities (e.g., schools, hospitals, public transportation) and areas of the community that are under- or over-served Evaluation of key variables in strategic decisions
M&A Transactions	Assistance with site selection by evaluating geographic criteria such as proximity to transportation routes, required infrastructure, key suppliers or competitors and target customer base Insight into impact of potential acquisition candidates by evaluating: Location of existing facilities vs. target's facilities Overlap in existing customer base and growth opportunities vs. target's supply route Existing vs. target's key competition
Hospitals and Healthcare Entities	A deeper understanding of the diverse operations of a decentralized organization by preparing a straightforward map of locations and operations Further insight by mapping: facility type, patient load, utilization and profitability Identification of growth opportunities by mapping the demographics of existing markets or target markets

Summing it Up

Deployed as an analytical tool, static maps, or a web-based interactive tool, GIS can provide significant benefits:

• Illustrate geographic relationships in a way unlike any spreadsheet or formula;
• Create static maps that transform complex information into simple visuals that effectively highlight themes integral to a client's position; this is not as effective if text-only reports, graphs or spreadsheets are used; and
• Provide a secure web-based channel for users to perform their own analyses in an efficient, cost-effective manner. The technology is only limited by the integrated data and the development team's imagination.

In short, GIS is a powerful tool, offering an alternate method of expressing complex and voluminous data in an understandable format and a strategic advantage over those who do not use this technology.

The CIO's role in a private equity transaction

Increasingly, the role of the CIO has become pivotal to private equity transactions and this trend looks set to continue. Here are three things CIOs can do to add value in a private equity transaction:

1.     Enable the deal
The CIO needs to understand fully the financial reporting requirements and other new requirements of the funding model, such as new debt reporting requirements, investment thesis and planning horizon:

o   As a CIO, you may need to string together multiple reporting systems to get a helicopter view of the business

o   Frequently, this must be in place at deal closing (or at next reporting period post-close), so ensure you understand and prioritise this investment

o   Focus on master data management and ensure one version of the truth across the business. Getting the numbers right is critical to building investor confidence

o   Accept that Day 1 operational and IT services that will not be provided by the seller's Transition Services Agreement (TSA)

Carve-outs are becoming common as corporates shed non-core assets, and tend to be more complex than straightforward acquisitions. As a CIO, you should get involved early to shape the transaction; you will likely have a key role to play in the actual separation process:

o   Work with key business leaders to map the target operating model and identify what has to change, such as new back-office service centres or new legal entity structure. Establish what the IT implications are likely to be

o   Design a series of IT solutions that satisfies key requirements for Day 1 and the near term (get the business operational, focus on first 100 days or the first year of operations), and defer decisions on process improvements or new capabilities until later

o   Ensure a robust TSA is defined and in place with the seller, so your business doesn't experience any discontinuities in service

2.     Keep the business safe
Focus on IT operations and ensure continuity of IT services during a challenging transition period:

o   Measure services from a business standpoint. Ensure key executives are aware of seller TSAs and related service level agreements. Trust in your capability to manage and deliver

o   Based on the investment thesis and planning horizon, define the roadmap for building new operational and IT infrastructure to support the standalone business

o   Ensure key suppliers buy in to the transition and are capable. Replace incumbents with new contracts or suppliers, if necessary

Manage risk by carrying out a top-down risk assessment across all IT functions:

o   Develop Day 1, 100-day, and long-term plans to ensure the most challenging risks are mitigated at the right time

o   Communicate this process early to key stakeholders, so they understand the overall business risk picture

o   Ensure there are no budget surprises in your plan, and that seller TSA services are wound down as quickly as possible within acceptable risk levels

Keep your team on side:

o   Transactions can carry uncertainty for staff, whether real or imagined

o   Ensure you have an open communications process in place, and staff fears are addressed wherever possible

3.      Think Exit

After you secure the basics, focus on the exit:

o   The private equity investor will exit the business, probably within 5 years of the deal - this is a fact

o   Support EBITDA improvements. Understand deal value drivers and performance improvement plans and focus IT efforts on enabling these

o   Opportunistically shed legacy systems and complex processes - earn your seat at the board table by demonstrating what you can bring to bear on business value

o   Don't over-invest but don't under-invest in IT either. Keep IT operations running, but don't leave a mess for future buyers, it destroys value on exit

o   Understand investment appetite and private equity firm value levers as this will inform whether you should buy, build or rent IT capabilities

Multi-generation plans — push back on that which can be done in future generations but do plan for it, as future buyers will look to see that a credible IT strategy exists:

o   Be an essential part of the value story on exit. Credible roadmaps with clear action plans can help assure buyers and improve valuations

o   Be part of the exit process and help sell the story to potential investors

A private equity transaction is a perfect opportunity for CIOs to act strategically and demonstrate their ability to add value to a business undergoing a challenging period of change.