Middle East Point of ViewSummer 2014 - Deloitte · editorial team “Old age is not so bad when you consider the alternative.” So said famously Maurice Chevalier, French actor and

Middle EastPublished by Deloitte & Touche (M.E.)and distributed tothought leadersacross the region.

Summer 2014 PointofView

In the MiddleEast since

The alternative issue

Breaking the moldAuditing alternative investments

Mad worldTechnology in the public sector

Upgrade to the C-SuiteRise of the CHRO

Special insertMeasuring social progress

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A word from theeditorial team

“Old age is not so bad when you consider thealternative.” So said famously Maurice Chevalier, French actor and singer. Used to denote anything that is different, on the fringes, unorthodox andunconventional such as the “alternative arts scene,” or “alternative medicine” or a fallback plan (“what’s the alternative?”) the term has a more negative, ratherthan positive, connotation. Witness the alternativeoption that Maurice Chevalier notes!

Understandably, stepping out of one’s comfort zone to embrace that which is not the norm can be difficultfor even the most ardent adventurers among us. Butalternative also denotes change, options and withchange and options comes opportunity and progress.Just think of the alternative if Thomas Edison, forexample, chose to stay in his zone of comfort and not embrace the unconventional.

In the first of our series of articles, Badr El Hassanexplains how a growing appetite for alternativeinvestments can actually prove quite troublesome to audit and highlights these challenges in his articleBreaking the mold on page 6.

This issue of MEPoV is also about doing thingsdifferently. In the first instance, we have inserted aspecial report on the Social Progress Index (SPI) that has had us buzzing here at Deloitte since its release lastApril. Measuring basic human needs, the foundations of well-being and opportunity, the SPI is, in itself, analternative method to measure development. But whatdoes it all mean, especially for those of us in the MiddleEast North Africa region? Two of our authors, SteveAlmond, chairman of the Global Board at DeloitteTouche Tohmatsu and Rashid Bashir, partner, head ofStrategy Consulting at Deloitte Middle East, discuss the

importance and impact of the SPI for countries ingeneral, and businesses in particular. As Steve Almond,quoting Harvard professor Michael Porter, says: “Simplyput–business does better when society does better.”

In another of our featured articles, Technology gonemad?, it is the public sector that is going “alternative.” In wanting to provide consumer-centric and efficientservices, say authors Raid Shahin and Youmna Saloumi,“the public sector is adopting new technology servicesand implementing new IT solutions to achieve itsstrategic objectives. But,” they say, “challenges abound.”

Speaking of efficiency and challenges, Ben Hughesmakes a “compelling case” for capital efficiencies in the workplace on page 11. Similarly, Chris Digby,Muhammad Razeen and Syed Ammar Zaheer providesome solutions to the challenges of keeping spendingand schedule under control as companies invest heavilyagain in “bigger and better” projects.

No issue of Middle East Point of View would becomplete without our featured article from the DeloitteReview (we’re happy to go alternative but not that far.)The article “Disrupting the CHRO: Following in the CFO’sfootsteps” on page 40 discusses the rise in importanceof the Human Resources manager and what she canlearn from her trusted colleague who had, previously,also experienced a meteoric rise, the Chief FinancialOfficer.

As always, we hope that you enjoy reading this issue ofMEPoV and make sure to drop us a line if you have anycomments.

ME PoV editorial team


In this issue

Breaking the moldChallenge of auditing alternative investments Badr El Hassan

Capital Efficiencies in the workplaceA compelling caseBen Hughes

Technology gone mad?Implementing IT solutions in the public sectorRaid Shahin and Youmna Saloumi

6

10

14

Contents


22

28

36

40

Table of contents

Special insertThe quid pro quo between business and societySteve Almond

SPI: the alternative model to measure developmentRashid Bashir

Saving Private Project(and public ones too!)Chris Digby, Muhammad Razeen and Syed Ammar Zaheer

Disrupting the CHROFollowing in the CFO’s footstepsCathy Benko, Trish Gorman and Alexa Rose Steinberg


Breaking the moldChallenge of auditingalternative investments


Over the past five years investors have developedan increased appetite for alternative investments,due largely to their desire and eagerness to achievehigh returns with less vulnerability as to themarket risk and high volatility associated withquoted stocks. Accordingly, regulators andauditors are acknowledging the risks associatedwith such non-traditional investments thatpresent a challenge for both, the investor and the auditor alike.

Audit


Alternative investments are investments that do notbelong to the three traditional asset types, namelystocks, bonds and cash. Due to their complex nature,limited regulations and relative lack of liquidity, mostalternative investment assets are held by institutionalinvestors or by experienced high net-worth individuals.Alternative investments include equities in private andreal estate ventures as well as hedge funds. Accordingto Bloomberg Briefs dated 24 January 2014, non-traditional investments assets under management nowexceed US$6 trillion globally. In particular, private equityfirms were sitting on more than US$1 trillion in availablecapital at the end of 2013, according to a recent reportfrom Bain & Company.

Auditing interpretation on auditing alternativeinvestmentsIn 2005 the American Institute of Certified PublicAccountants (AICPA) issued an auditing interpretation onauditing alternative investments. In 2006 AICPA issued a practice aid which required auditors and managementto respond to the existence and valuation assertionsrelating to alternative investments. The practice aidprovides guidance not only to auditors, but also tomanagement monitoring those investments as part oftheir operations.

With respect to the existence assertion, severalquestions arise such as: does the investor’s entityinvestment exist as at financial statement date, and hasthe related transaction occurred during that period? Isthere evidence and understanding of the underlyinginvestments? Is it enough to obtain confirmation fromgeneral partners, fund managers, and third parties that a particular alternative investment exists?

The interpretation’s response is clear: it states thatconfirmation by itself does not constitute adequateaudit evidence but rather adds that once the existencerisk is deemed significant, an auditor has to performadditional procedures such as observing managementsite visits, correspondence, inspecting fund agreements,reviewing periodical fund statements, and vouchingcertain cash receipts and disbursements, in addition toconsider practicality of confirming the holdings of thealternative investments on a security-by-security basis.

As to the valuation assertion, one major question arises:is the alternative investment, measured at year-end,impartially at fair value? Companies often turn to theircustodians to provide analysis and data about fair valueby relying on the analysis and data provided by thegeneral partners “GP” or the fund managers, thoughrecently there has been an increasing shift away fromthis reliance on custodian statements, which arethought not to provide a reasonable estimate given theamount of information the custodians themselves mightlack. Accordingly, and given such an inherent limitationin the custodian’s role with respect to such complextypes of unquoted multi-level investments, it would beinsufficient for a custodian to ascertain whether thealternative asset price received from the fund manager is a fair price. Confirming the value from third partiesprovides one piece of evidence, yet the practice aidclearly states that additional evidence is obtainedthrough initially inquiring about the valuationprocedures applied by management, comparingunaudited net asset values – received by the investorentity at year-end – to audited financial statements,tracking the timeliness of net assets values provided bythe investee company manager during the year, obtainthe K-1 Schedule (in case of U.S.-based investments) andreview any federal and state tax liability, compare netasset value by the investee company fund with the netasset value as per the custodian.

Client management vs. auditorGiven the above, monitoring the existence and valuationsof alternative investments is initially the responsibility ofmanagement, and therefore management must have theproper control environment in place and have adequateunderstanding of its investments. Such an understanding

Non-traditional investments assetsunder management may have exceededUS$6 trillion globally


is obtained through initial due diligence performed beforethe investment, ongoing monitoring, and financialreporting controls relating to the accounting for, andreporting of, the investment.

It’s always worth reminding ourselves that the auditorcannot audit what management has not accounted for.Accordingly the design and implementation of theinternal control environment are critical because thenature, timing and extent of audit procedures aredetermined based on them. An important element indetermining the nature, timing and extent of auditprocedures is the auditor’s understanding of the reliabilityprocess that the investor’s management uses todetermine estimated fair value. In cases where the auditor is unable to audit the existence or valuationassertions of alternative investments as at the financialstatement date, the auditor should assess based oncircumstances and significance whether that wouldtrigger a scope limitation or disclaimer of opinion.Additionally, management representations relating to the appropriateness of the measurement methods and consistency in application of valuation methods,completeness and adequacy of the fair value disclosures,subsequent events affecting fair value measurementsetc… do not represent a comfort zone to the auditors in respect of entities with complex and sophisticatedalternative investments. Simply because theserepresentations are beyond management’s capacity orability to capture given their complexities and thereforewe expect these representations to be uncertain at times.Accordingly, relying too much on these representationsdoes not actually improve the quality of audits but rathermight increase the risks surrounding it.

A plethora of challengesEvidently, auditors will be facing many challenges whileauditing such non-traditional types of financialinstruments. To name a few:1. From satisfying themselves that there is sufficient

evidence to support the valuations used to whetheror not it is sufficient to rely on a General Partner orFund Manager valuation;

2. Assessing the point at which the size of alternativeinvestment portfolio that cannot be readily valuedtriggers a scope limitation;

3. Disclosing the material commitments along with their call date relating to these investments that areconsidered off-balance sheet commitments;

4. Obtaining full assurance in cases where the investorcompany is using the one-quarter lag method forvaluation and therefore how are the auditorsobtaining assurance on year-end valuations

5. Assessing the proper accounting treatment ofdistributions made by these investments and the basisof recognizing them as a return of invested capital(ROIC) or return on capital (ROC), meaning as adeduction of the invested cost or as income throughprofit or loss.

ConclusionGoing forward, institutional investors are likely toallocate a higher percentage of their portfolio toalternative investments, yet the intricacy, illiquidity andopacity that characterize the alternative sector makes ita daunting task to audit alternatives. As it seems to uswhen auditing an area as non-traditional as alternativeinvestment, what is essential is more clarity in theguidance and base lesser reliance on judgment call onthe part of the auditors.

by Badr El Hassan, principal, Audit, Deloitte Middle East

The design and implementation of theinternal control environment arecritical to determine the nature,timing and extent of audit procedures

Audit

The global economic outlook over the last fiveyears has created a change in the spendingpatterns of clients and their prioritization ofcapital expenditure. Cash remains tight and thebusiness case for any capital investment has to be particularly robust for it to be considered. For projects already approved or even underconstruction, scrutiny on expenditure is evergreater and there is a new mindset of extracting as much as possible from the minimum level of investment: the Capital Efficiency process.


CapitalEfficiencies inthe workplace A compelling case

I&CP


The opportunityOrganizations are often subject to changes driven by economics, demographics, technology and theenvironment, let alone external scrutiny. Companiesrecognize the need to become more agile, flexible,resilient and responsive to change and identify thecompetitive advantages that can arise from workingsmarter:• Strengthened vision, values and brand strategy.• Reduced value leakage.• Enhanced performance metrics compared tocompetitors.

• Improved staff satisfaction, retention and recruitment.• Increased agility, creativity and flexibility.• Diversification.• Reduced environmental impact.

The challengeWhile most companies place great emphasis on drivingefficiency out of their business processes and their built assets, they tend to avoid the more complex,challenging and seemingly intangible aspects of peopleand culture. With staff costs equating to approximately80 percent of corporate expenditure, process costs 12percent and property costs 8 percent, it is clear that thegreatest investment impact is to be gained in creatingenvironments that benefit the organization’s criticalasset and cost, i.e. its people.

While the focus on reducing costs has been theprevailing mantra during the global downturn, there isnow a growing case for providing an effective workenvironment to improve employee performance.Delivering more for less is the new modus operandi.

The case for the peopleWhat exactly are workplace efficiencies? Are they staffheadcount reductions as a means to improve profitmargins, or is it a complex description for saving onconsumables? The reality is neither of these.

If you were a CEO, would you like each member of yourstaff to effectively work for free for two days per year?Similarly, would you like to reduce your rent bill by 25-50 percent per annum? Of course you would but thequestion is ‘how’?

“The answer is quite straightforward but the means toachieving these sorts of results requires commitmentand leadership and, more often than not, a degree oforganizational change and transformation. But evidenceclearly demonstrates that positive changes involvingpeople and place can deliver tangible and sustainablebusiness and shareholder value,” says Simon Dunstan ofPlus 3 Architecture–a workplace change architecturalpractice in the United Kingdom.

One of the more reliable indicators of peopleperformance in the workplace relates to productiveworking hours. One approach that has been developedquantified the average number of productive workingdays for an employee (excluding holidays, sick leave,training/administration) alongside the real cost to theorganization for each productive day (including salary,insurance, car allowance, housing allowance, gratuitypayments and other on-costs such as training/officeoverheads.) In this instance, the number of productivedays was determined to be 160 per annum and the realcost of each day was AED3,620 or about US$985. Whilethe amount of working time may appear to be low, it isbased on the following factors:• 25-day annual leave allowance;• 8-day sick leave (this could vary);• 10-day per annum training;• Allowance for general office admin;• A factored reduction of 20 percent for downtimebetween projects.

While most companies place greatemphasis on driving efficiency out oftheir business processes and their builtassets, they tend to avoid the morecomplex, challenging and seeminglyintangible aspects of people and culture


So in essence, taking into account the above workingdays reduction, this provides us with a figure of 160genuinely productive working days. Hence a 1 percentincrease in productivity would represent 1.6 additionaldays per year with a ‘value’ attributed to that 1 percentincrease of AED5,790 or around US$1,576. Whenextrapolated across an organization of say 500 people,the metrics become quite interesting–an additional 800 days of work with a value of AED2.9 million (orUS$780,000) for a given year. Clearly this will vary from organization to organization but the statistics are compelling.

Operational efficiency plays its partThe measurement of the cost of property is arguablymore straightforward. Reductions in property costsnormally accrue through the reduction in the quantumof space (through more efficient space planning) whichis facilitated by higher occupational densities (throughagile working and desk-sharing) and further enhancedthrough the reduction in backlog maintenance andrunning costs of outdated stock (by consolidating aproperty portfolio.)

So what is the economic case for CapitalEfficiencies in the workplace?Considering the two key metrics we have discussed–people and the built assets they occupy, we can quantifythe value created through applying Capital Efficiencies inthe workplace.

Illustration: let’s assume we have an organization of1,000 staff and, using the value of a productive day at AED3,620 (or US$985) per member of staff andapplying the 1.6 additional days that a 1 percentincrease in productivity would derive, we can easilyreach an extrapolated “added-value” of AED5.79 million(or circa US$1.57 million) of additional value extractionper year.

If we assume simplistically that that organizationoccupies around 6,250 sq.m. of leased office space, at a cost of AED1,500 (or circa US$400 per sq.m.) per

annum, then the annual rental bill would equate toAED9.37 million (or US$2.5 million.) Let us then assumethat as a result of capital efficiencies being applied tothis workspace, there is an area reduction of 25 percentthrough improved spatial planning and business processmapping, it could theoretically translate to a reducedannual rental bill of AED4.34 million or US$1.9 million.

To summarize, it could be suggested that the quantumof change through Capital Efficiencies applied to theworkplace is as follows:

So, if you are looking to save money, maximize theoutput of your workforce and generally operate in anefficient manner, then the Capital Efficiencies processmay well be the answer.

by Ben Hughes, director, Infrastructure & CapitalProjects, Deloitte Corporate Finance Limited (regulatedby the Dubai International Financial Center)

Staff Cost (A) x 1% increase in productivity (B) = Efficiency Factor (C), less Spatial and/or Business Process Savings (D) which equates to (E)

A x B = C – D = Efficiency Quotient

If you are looking to save money,maximize the output of your workforceand generally operate in an efficientmanner, then the Capital Efficienciesprocess may well be the answer

I&CP

In wanting to provide consumer-centric andefficient services, the public sector is adoptingnew technology services and implementing newIT solutions to achieve its strategic objectives. But the challenges abound.

Public Sector


Technologygone mad?Implementing IT solutionsin the Public Sector


First: the benefitsThe public sector faces the demanding challenge ofpromoting economic development and social welfarethrough the implementation of effective policies andefficient service delivery, which goes hand in hand with the growing need to provide the community with efficient, sustainable, consumer-centric andenvironmental-friendly services. Public sector entities,following in the footsteps of private sector companies,are adopting technology transformations in order toenhance the delivery of services and optimize theinternal processes that are in line with these strategicinitiatives. Investing in the right technologies andinnovative usage of these technologies would enablethe public sector to achieve economic and socialdevelopment as well as to improve their image. Thebenefits of this investment, at least in theory are clear: 1. Governments should benefit from IT systems tointegrate their data and offer more efficient, quickerand convenient services to the public through onlineplatforms (e-government systems.) The citizens couldthen be easily informed about new public sectorinitiatives. More importantly, by implementing suchservices, the public sector could encourage citizeninteraction and keep up with customers’ expectationsand habits that are already adapting to technology-driven private sector services.

2. IT solutions should constitute a key knowledge-sharing medium between different parties, such asgovernment entities, safety agencies, private sectororganizations, stakeholders and, most importantly,citizens, which in turn increases transparency andpublic trust.

3. Technology solutions could enable public sectorentities to optimize their internal functions. In fact,automated operations imply increased productivityand accuracy, decreased redundancy and cost-effectiveness in core as well as supporting functionsincluding Human Resources, Finance andProcurement. Additionally, automated processes allow more accurate and efficient exchange ofinformation, reporting and forecasting processesacross the organization, which would facilitate theidentification of key areas of improvement.

4. Technology transformation projects, depending ontheir scale, would require internal and externaloperations to be streamlined in order to achieve thetechnology initiatives. The private sector is mature as compared to the public sector in these areas oftechnology implementation and organizationtransformation for performance and productivityenhancement. But public sector agencies are nowdetermined to fill this gap driven by customer andstakeholder expectations.

In practice however, the challenges faced by the publicsector are considerable and different from those in theprivate sector, as many transformations in the publicsector have social and political impacts. Below wehighlight some of the major difficulties faced during IT implementation in the public sector.

Second: the challengesThe first key challenge is from the political forces andthe decision-making process within public sectorentities. Depending on the scale of implementation,technology transformations require the involvement of a range of stakeholders with different interests, which

IT solutions should constitute a keyknowledge-sharing medium betweendifferent parties, such as governmententities, safety agencies, private sectororganizations, stakeholders and, mostimportantly, citizens, which in turnincreases transparency and public trust


may create bottlenecks in the decision-making processand delays in the implementation and expectedoutcomes, especially if there is no strong projectleadership. When leadership and ownership are notclearly defined and centralized, projects may sometimesbe duplicated in different public sector entities, andwithout the proper communication dealing with thisoverlap will in turn add additional complexities to theimplementation process.

Changes in political power and environment might alsocause further disruption and delays in implementation.In some cases, the initiatives for automation are basedon temporary strategies of existing arrangements ratherthan on long-term improvement visions, and are thusterminated and initiated whimsically with political shifts.

Therefore, strong government support andcommunication strategies are essential for IT solutionimplementations to proceed smoothly in terms offunding, leadership and involvement of other public and private sector stakeholders. The involvement oflegal and regulatory institutions is also vital to ensure the robustness of the legislations as to the change to be implemented.

A second key challenge is internal resistance toorganizational change implied by process automation.Unlike other process reengineering and automationinitiatives in the private sector, public sectororganizations may face more intensive cultural andpolitical resistance to transformation, mainly driven by a)the bureaucratic nature of public sector entities and b)the technical capabilities of available resources. In fact,the introduction of automated systems and organizationaltransformation normally imply changes in roles andresponsibilities, administrative mechanisms and workactivities and public sector agencies tend to avoidrelated bureaucratic changes.

Another hindering factor is that employees might nothave the required knowledge and operational skills for the new technologies and, as such, will requireawareness campaigns to decrease their resistance tochange as well as knowledge building to provide themwith the necessary skills to operate efficiently.

The third key complexity relates to the much greaternumbers of target customers for public sector services(in this case the general population) rendering thedegree of risk in the scale of transformation andinnovation accordingly greater. The public sector wouldbe less willing to invest in cutting edge technologies toavoid the possibility of failure and thus harm to its publicimage.

Depending on the scale ofimplementation, technologytransformations require theinvolvement of a range of stakeholderswith different interests, which maycreate bottlenecks in the decision-making process and delays in theimplementation and expectedoutcomes

Public Sector


Third: a possible way forwardA key success factor in an environment with variouspolitical forces and decision-making dynamics is a strongleadership capable of supporting the project throughpolitical changes and promoting and enforcing the use of technologies across the organization. Anindependent program/project management can alsoensure continuous communication with the differentstakeholders and alignment of initiatives together with continuous monitoring of progress and outcomes.Escalation of any problem or unexpected result at anystage of the process to the related stakeholders is critical to enable the appropriate action to be takenaccordingly. A smooth transition of operations andorganizational change also requires appropriate changemanagement strategies in place.

Development of an overall technology strategy for thepublic sector organization prior to its implementation isalso highly advisable. It is important to • Understand the organization, its operations,requirements and existing issues;

• Determine short-run and long-term objectives byidentifying relevant IT solutions that need to beimplemented as well as functional requirements;

• Conduct a gap analysis to assess the current state and plan the actions required to achieve the definedobjectives;

• Develop an implementation roadmap where strategyinitiatives are prioritized with: - Ownership of the initiatives clearly defined andcentralized;- Identification of key stakeholders and theirinvolvement from start to finish to avoid conflicts; - Technology strategies serving the long-term goal of creating sustainable public value rather than bytemporary fixes driven by political factors.

Technology implementation in the public sector isinherently risky because of its wide reach and impact.One way to mitigate such risks, especially in the case ofhighly innovative solutions, would be to conduct pilotprojects to test the implementation prior to deliveringthe solution to the entire population, or to follow aphased delivery process by module or service.

A key success factor in an environmentwith various political forces anddecision-making dynamics is a strongleadership capable of supporting theproject through political changes andpromoting and enforcing the use oftechnologies across the organization


Furthermore, since public sector employees do notnormally have the competencies and expertise requiredfor designing, delivering and maintaining the new ITsystems, it is advisable to outsource the work at first and progressively build in-house knowledge throughknowledge transfer sessions and trainings.

Finally, where the end-users of the services are thecitizens, it is important to communicate changes andinitiatives to the citizens/customers in order to developpublic awareness and trust.

In essence, for successful technology implementation, it is critical to understand the broader context andpossible outcomes, internal and external, to the publicsector organization. The public sector entities shouldconsider all aspects of human resources, processes,information requirements, political environment,stakeholders and impact on citizens. Hence, technologyshould be considered as ‘transformation’ rather thanmerely ‘implementation.’ It is about identifyingopportunities where technology can deliver value, have clear direction, and then use the right resources to make that happen.

by Raid Shahin, director, and Youmna Saloumi,consultant, Deloitte Middle East Technology Consulting

In essence, for successful technologyimplementation, it is critical tounderstand the broader context andpossible outcomes, internal andexternal, to the public sectororganization

Public Sector

Social Progress Index

The Social Progress Imperative, a collaborative effort from acrosscountries, disciplines and sectors has for mission “to improve thequality of lives of people around the world, particularly the least

well off, by advancing social progress.” They have recently launched the Social Progress Index (SPI) for the second year running in which they ranked 132 countries, including eight from the MENA region. So how does the region fare? In this insert, in which we have included the results of the survey,two of our authors, Steve Almond, chairman of the Global Board at Deloitte Touche Tohmatsu and a member of the board of the Social Progress Imperative and Rashid Bashir,partner, head of Strategy Consulting at Deloitte Middle East, discuss the importance of the SPI for countries

in general, and businesses in particular.

SocialprogressThe next buzzword



The quid pro quobetween businessand society


It is now widely accepted that business has afundamental role to play in building society. And in an effort to restore public trust in the aftermath of the global financial crisis, an increasing number of CEOs are endeavoring to articulate a societalpurpose for their enterprise that is distinct from, but does not conflict with, the profit motive. TheMillennial generation, projected to make up 75percent of the workforce by 2025 is accelerating this shift. Deloitte Global’s 3rd global survey ofmillennials tells us that they believe the success of abusiness should be measured in terms of more thanjust financial performance and a focus on improvingsociety should be among the most important goalsfor business leaders.


Harvard Business professor, Michael Porter, put iteloquently when he argued that connecting companyachievement to social progress creates a sense of sharedvalue that leads to economic success. Simply put–business does better when society does better.

But with so many competing issues and challenges–from resource scarcity and climate change to incomeinequality and access to education–where does abusiness begin making an impact beyond traditionalcorporate social responsibility programs? And, how dothey know where they might have the greatest impact?In simple terms, there are three key steps to finding out.

1. Use data to determine the issue that best alignswith the core business. Unilever’s commitment tomaking hand washing a habit for 1 billion peoplearound the globe was based on sound research andaligns directly with their business. Businesses shouldonly invest in a new market or a sector when researchtells them there is a match of need or opportunitywith their own skills and expertise.

The Social Progress Index (SPI) provides acomprehensive tool to help businesses to determinewhere to focus their efforts. Developed by the SocialProgress Imperative in collaboration with HarvardBusiness School, Deloitte Global and its member firms(Deloitte), The Skoll Foundation, among others, theIndex provides an authoritative view of a country’ssocial and environmental strengths and weaknessesbased on the issues that matter most. By identifyingthe areas that are hindering a particular country’sprogress relative to their peers, it can serve as acountry specific guide to help businesses determinewhere to leverage their skills and expertise to greatesteffect. Measuring social progress of over 130countries, covering more than 90 percent of theworld’s population, the Index considers three keyareas: Basic human needs–such as water and shelter;Wellbeing–such as health and secondary education;and Opportunity–the ability people have to improvetheir lives–such as through equality and personalrights.

2. Identify the right partners. The complexity of the big societal challenges demands collaboration. TheIndex can act as a catalyst in bringing different partiestogether to address a single issue, combining theauthority and policy making of government, theconvening power and subject matter expertise ofNGOs and the technical skills and creativity of theprivate sector. We have seen this first hand in Latin America where Deloitte leaders have beencollaborating with leaders from business, governmentand society to accelerate action. For example, theParaguay government issued a Presidential decree,making SPI an official measure of nationalperformance and committing the government to

Businesses should only invest in a newmarket or a sector when research tellsthem there is a match of need oropportunity with their own skills and expertise


work with the Social Progress Network Paraguay,comprised of 12 NGOs, foundations and businesses,including Deloitte, to support the implementation of the National Development Plan 2013-2018 withpriorities in water, nutrition and sanitation, the keyareas of need identified by the Index.

3. Measure impact. Businesses plan for and measure“Return on Investment” (ROI), and stakeholdersexpect nothing less. Corporate citizenship should beno different. There are ways to measure how a socialinvestment affects brand awareness and reputation.But stakeholders also want to know that their socialprograms have real impact. SPI can serve as ameasurement tool to guide business investmentefforts. For instance, in Brazil, Coca Cola incollaboration with their local partners have begun to apply the Social Progress Index to develop a way of assessing the impact of their investment efforts.Measurement can help businesses further refine theirprograms to have a bigger ROI in future years.

Businesses are becoming increasingly aware of asymbiotic relationship with social progress and are keen to collaborate with governments and NGOs toaddress societal challenges. Moreover, responsiblebusinesses know they must engage their stakeholderswho demand more value and more impact frombusiness, and demonstrate their contribution to society.After all, a sustainable and prosperous society needsthriving businesses–and for business to thrive over asustained period, it needs to operate in a prosperoussociety.

by Steve Almond, chairman of Deloitte ToucheTohmatsu Limited’s (Deloitte Global) Global Board ofDirectors

Businesses are becoming increasinglyaware of a symbiotic relationship withsocial progress and are keen tocollaborate with governments andNGOs to address societal challenges



35 Greece 52 Colombia

36 Croatia 53 Montenegro

37United ArabEmirates 54 Mexico

38 Panama 55 Peru

39 Israel 56 Philippines

40 Kuwait 57 Botswana

41 Serbia 58 Belarus

42 Argentina 59 Thailand

43 Jamaica 60 Armenia

44 Bulgaria 61Bosnia andHerzegovina

45 Malaysia 62 Ukraine

46 Brazil 63 El Salvador

47Trinidad and Tobago 64 Turkey

48 Albania 65 Saudi Arabia

49Macedonia,FYR 66 Georgia

50 Ecuador 67 Venezuela

51 Romania 68DominicanRepublic

The Social Progress Index 2014 Results

37TH

40TH

65TH

1 New Zealand 18 Slovenia

2 Switzerland 19 Estonia

3 Iceland 20 France

4 Netherlands 21 Spain

5 Norway 22 Portugal

6 Sweden 23CzechRepublic

7 Canada 24 Slovakia

8 Finland 25 Costa Rica

9 Denmark 26 Uruguay

10 Australia 27 Poland

11 Austria 28 Korea, Rep.

12 Germany 29 Italy

13UnitedKingdom 30 Chile

14 Japan 31 Latvia

15 Ireland 32 Hungary

16 United States 33 Lithuania

17 Belgium 34 Mauritius


101 Nepal 117 Mozambique

102 India 118 Iraq

103 Kenya 119 Madagascar

104 Zambia 120 Liberia

105 Rwanda 121 Mauritania

106 Benin 122 Togo

107 Lesotho 123 Nigeria

108 Swaziland 124 Pakistan

109 Malawi 125 Yemen, Rep.

110 Congo, Rep. 126 Niger

111 Uganda 127 Angola

112 Burkina Faso 128 Sudan

113 Mali 129 Guinea

114 Tanzania 130 Burundi

115 Djibouti 131Central AfricanRepublic

116 Cameroon 132 Chad

69 South Africa 85 Sri Lanka

70 Tunisia 86 Kazakhstan

71 Bolivia 87 Algeria

72 Paraguay 88 Indonesia

73 Azerbaijan 89 Mongolia

74 Nicaragua 90 China

75 Jordan 91 Morocco

76 Guatemala 92 Uzbekistan

77 Honduras 93KyrgyzRepublic

78 Namibia 94Iran, IslamicRepublic

79 Cuba 95 Tajikistan

80RussianFederation 96 Ghana

81 Moldova 97 Senegal

82 Japan 98 Lao PDR

83 Lebanon 99 Bangladesh

84Egypt, ArabRepublic 100 Cambodia

75TH

83RD

84TH

118TH

125TH

Source: Social Progress Imperative



SPI: the alternativemodel to measuredevelopment



The most widely accepted measures of developmentover the last half-century have been focused onnational economies, with Gross Domestic Product(GDP) and associated indicators being used asyardsticks for national performance. This isunderstandable, as economic growth has driven theimprovement in living standards for hundreds ofmillions across the world. But are these indicatorsenough? This author thinks they may be telling anincomplete story.


Economists and politicians have widely debated andcontested the often-cryptic notion of measuring anation’s welfare and they have done so over the last200 years. At the heart of this debate is the need forgovernments to determine how the utilization of acountry’s human and natural resources is impacting thestandards of living for its citizens and residents. Butwhile economic indicators remain the dominant andmost pervasive tools to assess national growth,development and wellbeing, it is increasingly evidentthat they do not tell the full story.

An incomplete storyEgypt provides a telling example. The country witnessedstrong growth in per capita GDP and purchasing powerparity (PPP) in the years leading up to the 2011revolution, yet citizens took to the streets with demandsfor better opportunities and a change of government.The example provided by Egypt is that all across the

world, it is ever more evident that economic growthalone cannot be a harbinger of a society’s wellbeing,and that policymakers need broader and more inclusivemodels to assess their progress. In this sense, economicgrowth must be measured alongside social andenvironmental indicators such as human needs, qualityof life, and opportunities for citizens in order to informand drive public policies.

The third model It is in response to this need for other measurements of progress that the Social Progress Index (SPI) wasdeveloped: a comprehensive measurement frameworkfor the social and environmental performance of anation. The SPI is intended to measure social progressindependent of economic development, with 54indicators rating outcomes across three dimensions:Basic Human Needs, Foundations of Wellbeing, andOpportunity. Indicators include health, sanitation, wateraccess, affordable housing, crime, access to information,sustainability, personal freedom and tolerance to name afew. Using all outcome-based indicators across socialand environmental dimensions allows for a betterevaluation of a nation’s ability to meet its people’s basic needs as well as the level of access and socialopportunities they are afforded. The SPI, developed by a team led by Harvard Business School’s Michael Porteramong other economists, strategists and professors, isnow in its second year, with 2014 results released for132 countries.

What can the SPI tell us?When areas such as personal safety, access toinformation and personal rights are considered, it is notalways the wealthiest countries that rank the highest insocial progress. In fact, some of the largest and richestcountries measured did not make it into the top 10 even.

Social progress is the capacity of asociety to meet the basic human needsof its citizens, establish the buildingblocks that allow citizens andcommunities to enhance and sustainthe quality of their lives, and create the conditions for all individuals toreach their full potential


The front leaders of the SPI rankings are relatively smallOECD (Organization for Economic Cooperation andDevelopment) countries, with New Zealand, Switzerland,and Iceland placed in the top three. New Zealand,ranked first, has a GDP per capita of US$25,857, wellbelow the United States that has a GDP per capita ofUS$45,336, but which ranks 16th and has relatively poor scores in areas such as health and ecosystemsustainability.

While social progress results are positively correlatedwith a country’s per capita GDP, the relationship is by nomeans linear and there are many notable deviations. Forthe poorest countries, even small gains in GDP amountto large improvements in social progress, primarily dueto spending on basic human needs such as health andsanitation. The opposite is true for the wealthiestcountries, where substantial gains in GDP per capita donot amount to considerable improvements in social

progress. For these countries (where basic needs haveby and large been met), a different and more complexset of challenges present themselves, such assustainability and tolerance. Of the three dimensions,opportunity (measured by personal rights, freedom,inclusion) has the highest variation from wealth.


Basic human needs Foundations of wellbeing Opportunity

- Nutition and basic medical care

- Water and sanitation

- Shelter

- Personal safety


- Access to basic knowledge

- Access to information and communications

- Health and wellness

- Ecosystem sustainability

- Personal rights

- Personal freedom and choice

- Tolerance and inclusion

- Access to advanced education

Does a country provide for its people’s mostessential needs?

Are the building blocks in place for individuals and communities to enhance

and sustain wellbeing?

Is there opportunity for all individuals to reach their full potential?

While social progress results arepositively correlated with a country’sper capita GDP, the relationship is byno means linear and there are manynotable deviations


SPI in the Middle EastFor the Middle Eastern countries included in the SPI, the greatest challenges observed are in providing socialopportunity for citizens and residents. A number offactors weigh in on this dimension, such as the uniquepolitical, religious and cultural characteristics whichinfluence some of the outcomes measured such asInclusion and Personal Freedom. Ecosystem sustainabilityis also an area of concern, particularly in the GulfCooperation Council (GCC) countries where fresh waterand biodiversity are more scarce, and high emissions area byproduct of extensive industrial development. TheGCC countries have made significant strides for theregion in providing basic needs such as housing,education, healthcare, and utilities.

As for the select Middle Eastern countries measured inthe SPI, the United Arab Emirates ranks 37th followed byKuwait (40th), Saudi Arabia (65th), Jordan (75th), Lebanon(83rd), Egypt (84th), Iraq (118th) and Yemen (125th).

So what can the SPI tell us about the Middle East basedon these rankings? For one thing, countries throughoutthe Middle East are extremely diverse, and represent awide range of both social and economic performance,making any blanket statements implausible. But whenconsidering social progress relative to economicperformance, there are a few pertinent takeaways for policymakers in this region.

The first is that many resource-rich countries do notperform as well on social and environmental indicatorswhen compared to countries of similar per capita wealthwhich are not dependent on natural resources as aprimary source of income. Saudi Arabia, the UAE,Kuwait, Iraq, Iran, Russia, Kazakhstan and Angola allhave a notable disparity between their SPI and GDP percapita rankings. In many cases, regional conflict hasplayed a role as has the fact that their political systemsare less established relative to their peer groups.Undoubtedly the abundance of resources has allowedfor substantial improvements in providing basic humanneeds, where gains for resource-abundant countries arethe highest.

Secondly, there is a weak correlation betweengovernment spending and SPI scores, which implies that governments inclined to improve their scores willneed to go beyond stimulus, spending and investmentprograms to improve social welfare. The GCC hasstarted to take heed in the area of sustainability, wherenew policies and programs aimed at conservation andsustainable development are increasingly popular.Masdar city, which aims to be a fully sustainable cleantech cluster in the UAE is an example of this.

2014 SPI Rankings for select Middle East countries(132 total countries ranked where 1 is the highest score and 132 is the lowest)

20

UAE Kuwait

Basic humanneeds

Foundations ofwellbeing

Opportunity Overall socialprogress score

30

40

50

60

70

80

90

100

110

Saudi Arabia Jordan Lebanon

Ultimately, the SPI is not meant to be a perfect measurement of socialwelfare or wellbeing, but to provide acomplimentary view to GDP and othertraditional economic developmentindicators


Lastly, the SPI is a measure of outcomes rather thaninputs, so the indicators do not capture public sectorspending or investment in any given dimension. This isrelevant for the Middle East, and particularly the GCC,where a considerable amount of public policy andspending has been devoted to inputs such asinfrastructure development, urban planning andinstitutional improvements. This suggests that currentgovernment investments aimed at improving literacy,health, wellness and safety, if effective, will yieldstronger SPI scores for the GCC in years to come. Thiswill require robust data to track progress in these areasand depict a realistic picture of gains achieved on theground.

Ultimately, the SPI is not meant to be a perfectmeasurement of social welfare or wellbeing, but toprovide a complimentary view to GDP and othertraditional economic development indicators. While themeasurements used to determine social progress mightnot fully capture the myriad developments underway inthe Middle East or the progress it has witnessed, theunderlying message is relevant. Building a thriving andsustainable society requires the collaboration ofgovernment, institutions, businesses, and peopleinvesting in the region where they live and work. Thisrequires socially and environmentally stable markets,which cannot be built through economic developmentalone. Expanding the ways in which we measureprosperity and progress will require more inclusivemodels that address the wider facets of society.

by Rashid Bashir, partner, head of Strategy Consulting,Deloitte Middle East


About the Social Progress ImperativeThe Social Progress Imperative’s mission is to improve the lives of people around the world, particularly the least well off, byadvancing global social progress by: providing a robust, holisticand innovative measurement tool–the Social Progress Index (SPI);fostering research and knowledge- sharing on social progress; andequipping leaders and change-makers in business, governmentand civil society with new tools to guide policies and programs.

2014 ResultsThe full, interactive dataset from the Index is available at:www.socialprogressimperative.org/data/spi. Please note that dueto a variety of changes made to this year’s index including thenumber of countries covered, the 50-country 2013 Social ProgressIndex is not comparable to the 2014 Social Progress Index.

For more information on SPI: www.deloitte.com/social-progress



Saving Priva (and public ones t

With capital spending now at US$11-12 trillionannually, with a growth of 10 percent or moreexpected in the next few years1, it seems the lull inspending across the globe was short-lived. But as“bigger and better” becomes the new maxim, andcompanies are investing heavily in capital projectsagain, managers are facing significant challenges inkeeping spending and schedule under control.


Capital Projects

Recent studies show that 63 percent of projects are overbudget and 75 percent are not meeting their schedules.There is no clear explanation as to why project control is suffering as a result of the upturn in capital spending,though we believe it is because companies haveimproved their project controls processes in discreteareas and have yet to achieve the synergy that ispossible via integration to produce optimum results.

The project management fraternity advises the use ofdifferent structures to control the projects (and theclassical triple constraint of scope, cost and time in an

addition to risk, resources and quality), which has given rise to concepts such as work breakdownstructure (WBS), cost breakdown structure (CBS), asset breakdown structure (ABS) and organizationalbreakdown structure (OBS.) The objective behind thesestructures is to focus the attention of the project teammembers on specific areas of the project and providethem with the capability and specialization to effectivelymanage those areas. Although effective, this siloedapproach leads to disharmony within the projectcontrols domain and results in poor project performanceas described earlier.

ate Project too!)


Project control is most effective when management is based on an integrated WBS that harmonizes thedimensions for scope, time and cost. The integratedWBS represents the translation of the asset scope (the ultimate deliverable of the project) into discretecomponent deliverables (intermediate products requiredto affect the asset scope) for which work (both time and cost) can be planned and controlled effectively.

The WBS is further supplemented by the OBS, whichfocuses on translating the resource provisions andconstraints as to how, and by whom, the work will be performed with respect to the project’s objectives.Similar to WBS, the OBS assists in breaking down theorganizational responsibilities in a hierarchical mannerand its alignment with the lower level elements of WBSrepresent work packages that can be effectively plannedand managed. A work package describes the work to be performed by a specific organizational unit, andserves as a vehicle for monitoring and reporting onprogress, cost and schedule. The CBS forms thebackbone to integrate the WBS with the corporatefinancial management systems as it helps to manage

costs based on organization standards. Cost elementsare generally used at the work package level to add cost dimension to a WBS and help in segregating thenature of the associated costs.

The ABS is used in conjunction with the project WBS by the organizations for developing information models that support the early visualization of the assetthroughout the lifecycle of a project. It also facilitates in maintaining the asset after completion of the project.Recent trends on BIM (Building Information Modeling)is gaining adoption within the design and constructionprocesses for delivering asset scope and helping itintegrate with the lifecycle of the project WBS.

This advancement in the approach to manage capitalprojects has increased the complexity and resulted inpoor project performances. It has also provided anopportunity for technology to reduce this complexity by making the approach as seamless as possible. Currentproject management information systems (PMIS) havein-built capabilities to manage small to medium projectswith their varying structures and also provide features to seamlessly integrate with corporate ERP systems.However, these tools do not provide sufficientfunctionalities to cater to the complex requirements of mega projects. A growing trend in the industry is to use commercial-off-the-shelf (COTS) applications to manage the different areas of cost, time, and scope and integrate them for effective management. Vastsynergy can be achieved by integrating these systemsand alleviate the problems facing the industry from theproject controls perspective. Yet, integrating suchsystems is an enormous challenge and leads to thefollowing problems:1. Resistance to change – The resistance to change isvery significant in such integrations as we try to shiftfrom the traditional way of managing projects. Themost common issue raised by the project team is thatit will increase their workload.

This advancement in the approach tomanage capital projects has increasedthe complexity and resulted in poorproject performances. It has alsoprovided an opportunity for technologyto reduce this complexity by makingthe approach as seamless as possible.


2. Technical complexity – Managing the technicalcomplexity of integrating several systems togetherthat probably use different technology frameworks isvery difficult and leads to an un-manageable system.

3. IT vs. business – The requirements for both the ITand business from such integration is significantlydifferent and leads to conflicts which if not managedproperly can derail the entire exercise.

Some companies have achieved significant success indesigning a solution to integrate different best of breedproducts for project management that revolves around astandard WBS that manages all other aspects of projectcontrols effectively. By defining a common WBS acrossall other structures up to a certain level, they allow eachstructure to build upon a common hierarchy with theassociated details (for example, the cost managementsystem can use the lowest level of WBS and append the cost elements to manage cost effectively.) Thisapproach reduces the associated technical complexityand facilitates the integration of information comingfrom different systems onto a common point i.e. thelowest level of the common WBS. Typically, this lowestlevel is called the work package level and helps theproject team manage the project in a tiered approachwhereas allowing the project manager (and anyone with sufficient privileges) to manage the project as awhole. These tools further help to automate manylaborious processes and it is strongly recommended to use prototypes for convincing the organization onhow this automation reduces their work. It is alsoimperative that such integration efforts should be led by the business with IT leading the technology aspectsof integration based on business requirements.

WBS lifecycle management is critical towards thesuccessful delivery of any project and technology caneffectively act as an enabler to bring projects withinbudget and time. A sample WBS lifecycle of ourapproach is depicted below with associated systems:

Corporate level ERP system Cost management

Control account

CPI/SPI EV etc

Assets information

Plant data sheetsEngineering tagsPlant breakdown structure

Project scheduling

Progress reporting

Progress measurement

WBSmapping

WBSmapping

WBSmapping

WBS mapping

Progressroll-up

Contractor’s scheduling system

EPC contractor’s detailed WBS

Actual andcommitments

Owner operator level WBS

High level WBS/EBS

By Chris Digby, senior director, Consulting, Deloitte &Touche Bakr Abulkhair & Co., Muhammad Razeen,senior manager, Consulting, Deloitte Middle East andSyed Ammar Zaheer, senior consultant, Consulting,Deloitte & Touche Bakr Abulkhair & Co.

Endnotes1. A.T. Kearney Excellence in Capital Projects II study, 2012

Capital Projects


Disruptingthe CHROFollowing in the CFO’sfootsteps

Deloitte Review


If you are old enough to have known anyone incharge of a corporation’s finances in the 1970s, hemight not have worn a green eyeshade, but he wasassuredly relegated to the back office, focused onaccounting, controls, and preparing financial andtax statements. Fast-forward to today, and the role has evolved into something deserving of the high-ranking title of “chief financial officer,” soinfluential in major decision making that it is now considered among the most important in an organization’s C-suite. So how did the moneycounter transform into one of the CEO’s closestpartners in driving business strategy?


As scale became a competitive imperative, and asmanagers began seeing the company more as a systemof investment than a system of production, financecame to the fore. Financial capital was recognized as theprimary scarce and its shortage as the biggest constrainton growth. At the same time, alternative approaches toaccessing capital and funding projects proliferated,forcing financial decision making to become increasinglysophisticated. Financial moves that depended on a firm’sparticular situation and goals eclipsed generic, one-size-fits-all solutions, which drove a major transformation ofthe senior finance executive’s role into a positionrequiring new levels of strategic thinking.

There is another role that is just now embarking onwhat promises to be a similarly transformational journey.Again, it’s a role with administrative roots, but at itsheart, similarly focuses on an asset critical to success,the scarcity of which has now become among thebiggest constraints on corporate growth. Welcome tothe new world of the chief human resource officer(CHRO.)

No talent, no growthInsufficiency of talent is emerging as a critical inhibiter of growth strategies, and it operates at two levels. First,many companies lack sufficient levels of talent to deviserepeatable game-changing, next-generation offerings.Second, to execute any particular growth strategy,companies should retain and engage the people whoare critical to their current business while attracting andassimilating new talent with relevant skills to lead futureendeavors.

What some see as a paradox, corporate managers knowas their painful reality: despite persistent high levels ofunemployment, growing numbers of jobs are goingunfilled. Latest reports in the United States show somethree million positions vacant, even as over 7 percent ofthose wishing to work find no one willing to hire them.California is a case in point. Unemployment in the stateas we write this is at 8.9 percent–yet there are 840,000jobs available1.

For reasons from changing demographics and alteringfamily structures to shifts in generational attitudes andthe impacts of public policy, companies can no longerassume they can draw on an ample, let alone abundant,pool of skilled talent to achieve their growth objectives.Unlike previous tight talent markets where shortfalls incritical skills reflected overall low unemployment, today’scritical talent shortage is the result of a major mismatchbetween available skills and needed ones. And thismismatch is far-reaching. Of the 312 CFOs and otherexecutives at large companies in a recent survey, 39percent said that they were either “barely able” or“unable” to meet the demand for the talent required to run their organizations2.

Now add to this talent scarcity the fact that informationand communications technologies have enabled wholenew work arrangements by allowing knowledgeworkers to connect with employers and projectscontractually, remotely, and asynchronously. We arenow in the midst of what we call the “open talenteconomy,” in which people move more freely than everfrom role to role and across organizational andgeographic boundaries3. The term is a nod to the opensource movement in software development. What thatmodel did for access to applications, the open talenteconomy is doing for access to work. What this meansis that the role of the executives focused on the peopleaspects of the business takes on new contours, andtheir decisions must become more creative andstrategic.

What some see as a paradox, corporatemanagers know as their painful reality:despite persistent high levels ofunemployment, growing numbers ofjobs are going unfilled


To be sure, HR has been moving toward a greater focuson strategy over the three eras delineated by Cornell’sPatrick Wright. In the 1980s, personnel directors realized they needed to do more to align their largelyadministrative work to the strategy of the business. Bythe 1990s, these executives, now styled “humanresource” officers, believed they should have “a seat at the table” where business strategy was beingformulated4.

Now we’re entering an era in which firms compete onknowledge and intangible assets (figure 1), and accessto and management of critical talent is of strategicimportance. The CHRO must step up to the implicationsof the new world of work. That’s easier said than done.As Matthew Burkley, CEO of Genscape and former CFOof ThomsonReuters Sales and Trading puts it, “HR usedto be about processes and controls. Now, they need tobe about driving business results. The challenge of thetransition is that a lot of HR people try to “talk the talk”about building talent strategies, but they inevitablyretreat back to their comfort zone and want toimplement some new system or process5.”

How can the transformation to a more strategic,growth-focused kind of leader really happen? Thesuccess story of the CFO role may be especiallyinstructive for tomorrow’s CHRO.

Learning by analogyWhat could be more of a commodity resource, utterlyundifferentiated and nonstrategic, than monetarycurrency? That’s why, in the first century of thecorporation, other managers dismissed the financialfunction as doing little more than counting beans. Backin 1922, Henry Ford had this to say: “Nothing can bemade except by makers, nothing can be managedexcept by managers. Money cannot make anything andmoney cannot manage anything7.”

For reasons from changingdemographics and altering familystructures to shifts in generationalattitudes and the impacts of publicpolicy, companies can no longer assumethey can draw on an ample, let aloneabundant, pool of skilled talent toachieve their growth objectives

Deloitte Review

Figure 1. The source of U.S. corporate value creation has changed

40%

60%

85%

15%

c. 2010

c. 1982

Tangible assets

Intangible assets

Source: Juergen Daum; Ocean Tomo6


The original work of top financial executives fit squarelyinto the finance conception of control. CFOs focused onclose management of cash flow, costs, and risk. Theirmain responsibilities were financial reporting, audit andcompliance, planning, treasury, and capital structure.But the role evolved in response to a number of newimperatives. Princeton sociologist Dirk Zorn, who hasresearched the history of the CFO role, pegs itsbeginnings to the days of “the conglomerate ideal,”when companies needed senior finance people tohandle the funding of those diversifying acquisitions.

Zorn notes, however, that the CFO role really took offafter 1979, when savvy financial managers found waysto protect corporate earnings from ambiguous changesin accounting rules. “The CFO’s popularity quicklysurged as a result,” Zorn reports, “and the role keptexpanding in the following years to focus on managingshareholders and stock prices8.”

Since then, external forces, from stringent new rules forcompliance and regulatory oversight to new practices by Wall Street analysts, have continued to reshape theCFO’s agenda and role. Among these forces:• More types and sophistication of financial instrumentsalong with increased attention to the impulses of thefinancial markets

• Technology advances in real-time information accessand trading with corresponding complexities

• Access to global capital markets• More complex and involved regulatory requirements• Greater (and often more critical) external scrutiny• Burgeoning expectations related to innovations infinancial structuring

• Fallout from the late 2000s financial crisis

As the CFO function shifted to a shareholder/stakeholdervalue and institutional management role, it increased inprominence. Today, the professional who is hired orpromoted into a multinational’s CFO role helps to setthe course of the business. That means being able toadvance an organization’s growth or improve itscompetitive position by identifying the key constraintsholding it back and then using finance to free it fromthose constraints9.

Transformations of roles, in any realm, take time to play out. For CFOs, it has involved both displacements of incumbents operating in outdated modes andemergence of new feeder career roles. But a glancebackward reveals how radically firms’ expectations have changed with regard to the CFO’s breadth ofbackground and the caliber of talent the positionattracts. Baseline financial skills are still essential, but international experience, industry knowledge,technology expertise, and strategic acumen carry the day.

A glance backward reveals how radicallyfirms’ expectations have changed withregard to the CFO’s breadth ofbackground. Baseline financial skills are still essential, but internationalexperience, industry knowledge,technology expertise, and strategicacumen carry the day.


Source: Heidrick & Struggles, Korn/Ferry,and Russell Reynolds Associates

• Oversee accounting and audit functions• Demonstrate technical and functional financial expertise• Respond to capital and liquidity needs• Lead finance function• Provide direction on public reporting• Drive efficiency and cost reduction• Ensure compliance and participate in corporate governance• Focus on controls, internal risk management, financial planning and analyses• Develop and execute enterprise-wide financial processes and policies

• Accountable for creating and executing operating HR processes and policies• Demonstrate HR technical and functional expertise• Work with admin functions and support top management team • Responsive to hiring needs and building talent pipeline • Evaluate employee performance • Develop competitive compensation and benefits offerings• Develop, communicate, and implement policies • Ensure process control • Execute change processes

•

CFO past

CHRO past to present

Figure 2. History repeats itself: parallels between the CFO and the CHRO

Deloitte Review

This graphic summarizes key changes in the CFO andCHRO roles to date, based on a collection of jobdescriptions from several leading executive search firmsover a period of 15 years and interviews with currentand former CFOs and CHROs.

• Ensure technical and functional financial expertise across the enterprise• Work with line management, leadership, and board• Drive enhanced top- and bottom-line results; enable business expansion while managing risk, tax, and timing issues• Identify and remove growth and profitability constraints• Represent leadership decisions internally and externally; actively participate in corporate governance and contribute to board meetings• Ensure strategic allocation of capital across investments• Ensure alignment of financial, operating, and planning decisions with overall business strategy• Identify and interpret data and trends (social, regulatory political, economic) and translate into opportunities• Provide strategic problem solving; Build skills as potential CEO successor

• Ensure effective operational HR delivery• Align organizational talent capabilities with overall business strategy• Work with line management, leadership and board; advocate for employees at the executive table• Interpret talent trends–social, regulatory, demographic, economic–and translate into opportunities • Ensure rewarding environment; improve employee engagement • Implement aligned end-to-end global talent management architecture • Design and implement competitive, compliant, and market-sensitive variable compensation schemes globally • Drive organizational change initiatives• Provide strategic, innovative problem solving • Be steward of organizational culture and values

CFO today

CHRO evolving


CHRO is nextThough no one today would refer to peoplemanagement in pure commodity terms, the humanresources organization started out as a back-office,administrative function in the mold of the 1970s financefunction. The very term “resources” suggested that thewarm bodies who showed up to workplaces were justanother undifferentiated input to production. But thingshave changed dramatically. Corporate strategies haveshifted to emphasize the necessity of growth andinnovation–and with that change, human resourcesreveal themselves to be highly differentiated in terms of skills, engagement, and adaptive capacity.

We now find ourselves in a situation where, just as themanagement of differentiated critical talent comes tothe fore, the talent to manage it strategically is itself inshort supply. The next several years will likely bring theimperative for transformational change to the role of theCHRO.

But, just like some CFOs of times past, not all incumbentHR executives are likely to make the change. Many are primarily focused on the plethora of concerns–operational, regulatory, and tactical–that can so easilyconsume their capacity and result in gaps betweenstrategic demands for talent and the CHRO’s ability todeliver. A recent survey of CEOs reveals that, among alldirect reports, HR is overwhelmingly viewed as the leastagile function10. In our own conversations with CFOsabout the need to form effective C-suite partnerships,we consistently hear that their attempts to workstrategically with HR are the most trying.

As companies begin to feel the pain of this talentleadership crisis, they will find ways to address it, and itis likely no single recipe will emerge. Some HR leaderswill make major contributions to the companies theygrew up in. But many firms will look outside for a freshunderstanding of talent. This is happening already: while in 2011, 54 percent of CFOs were groomed andpromoted internally, the story was different for CHROs.From 2008 to 2011, only 34 to 38 percent of newlyappointed CHROs came up from inside. Similarly, theaverage tenure of CHROs has declined over the past 10 years11.

Another trend underscores the difficulty HR executivesseem to be having with the transformation. In a recentHarvard Business Review article, Harvard Business Schoolprofessor Boris Groysberg, along with Kevin Kelly andBryan MacDonald, observe that, “Instead of turning tocareer HR practitioners, companies are increasingly filling the CHRO role with leaders from functions on the business side, such as operations, marketing, orcorporate law.” The authors postulate:

If companies continue to award top HR jobs to non-HRexecutives, the CHROs of the future will be more likelyto have an understanding of commercial models, as wellas experience with change management and findingpragmatic solutions to complex issues. And they will putextra pressure on HR specialists in functions like talentmanagement to shift their focus from theory to businessmanagement12.

We see more frequent instances of this type of hiringmove by CEOs including at Liberty Mutual, Credit Suisse,and Yahoo, to name a few.

Whatever professional background and trainingexecutives bring to human resources leadership, theCHRO of the future will find the role steeped in fourdominant themes:• Recalibrating the CHRO role• Embracing open talent models• Going long on analytics• Curating the talent experience

Corporate strategies have shifted toemphasize the necessity of growth andinnovation–and with that change,human resources reveal themselves to behighly differentiated in terms of skills,engagement, and adaptive capacity


RecalibrationSpecifically, what needs to be recalibrated by the CHROis the role itself. Our model of an effective leader hasfour “faces”: Catalyst, Strategist, Steward, and Operator.In the case of the CHRO, this model helps to clarify theneed to “dial up” from steward and operator activitiesto focus more sharply on the strategist and catalyst“faces.”

According to Lauren Doliva, managing partner ofHeidrick & Struggles’ Global HR Officer practice, “TheCHRO role must be reinvented. There are no longer“best practices” in human resources. Instead, the CHROmust be an executive who, like top CEOs, can envisionand shape the talent strategy and architecture to alignwith transformational business objectives13.” To do that,however, will likely require CHROs to find ways to tendto today’s “table stakes” while delivering on the broader(and intensifying) demands of CEOs and boards.

Doliva goes on to say that, “In a marketplace wheretalent is scarce, boards are taking note of theopportunities for getting the talent agenda right–alongwith the risks of being left behind.” Witness, for example,the decision by Qualcomm’s board to form a “talent riskcommittee” and the growing movement in the UnitedKingdom to account for talent on companies’ balancesheets14.

Talent leaders should recalibrate not only their ownfocus and time, but also those of the resources theydirect. One way to gauge the current and futuretrajectory of an organization’s talent platform is toevaluate HR’s project/program portfolio: how well doeseach directly align with the strategy of the business? The portfolio of investments will yield the organiza tion’sfuture currency.

This is precisely what the CHRO of a Fortune 100 SiliconValley-based technology company managed to pull offrecently. New to the organization, the CHRO asked herleadership team to step back from HR’s several hundredline items of projects and initiatives to answer thefollowing question: what strategic purpose andcollective set of outcomes do we expect this portfolio to deliver for the business? The answers she heard wereneither consistent nor clear. So the leadership groupsequestered themselves in a two-day “lab” session.

One way to gauge the current andfuture trajectory of an organization’stalent platform is to evaluate HR’sproject/program portfolio: how welldoes each directly align with thestrategy of the business?

Deloitte Review


When they emerged, they had crafted a talent agendathat was strategic, actionable, and measurable. Theagenda represents HR’s areas of focus and mutuallyreinforces the talent-related system of change that thebusiness is predicated on. While the leaders still run theirown shops day-to-day, they now do so with a strategicmindset, a consistent view, and a set of supportingguideposts. This model for strategic alignment leaveslittle room for veering off course. In the process, theteam infused an esprit de corps within HR that ispermeating the entire business.

This CHRO, an example of a recent high-profileappointment into a blue-chip firm, stressed that many of her HR leaders had the right ideas. It was a matter of bringing it all together through a strategic frame and finding the right mechanism to measure and holdthem accountable. Melanie Foley, EVP and Chief HR and Administration Officer at Liberty Mutual InsuranceGroup, followed a very different path to Liberty’s top HR job. She grew up on the business side and, beforebecoming CHRO, held the role of EVP, general managerof the personal markets distribution organization. Herperspective, however, parallels the tech CHRO’s. Foleystates that her proven track record enhanced thecredibility of the HR function, opened doors, and gave a platform to HR professionals to advance the functionin a more strategic direction15.

Open talent modelsOne well-documented change: the traditional model ofnine-to-five job holders clocking in to assigned officeworkspaces is waning. The open talent model is a

significant departure from dabbling with flexibility and remote work around the edges of the traditionalparadigm. The CHRO should be equipped to thinkbeyond the “corporate ladder” way to hold a job andembrace the new “corporate lattice” world of work16.

John Hagel and John Seely Brown have spent the pastseveral years tracking what they call the “Big Shift” inthe global business environment as a result of digitaltechnology. One set of changes they describe is the riseof creative talent, its growing role as a source of value,and its increasing mobility. Hagel explains:

The Big Shift is creating mounting performance pressurefor companies. In responding, companies need to bemore aggressive and creative in reaching out to, andconnecting with, relevant talent wherever it resides.More importantly, companies need to find ways to buildrelationships with relevant talent outside the firm thatwill help all participants to learn faster and achieve ever higher levels of performance. If we can do thiseffectively, we will be able to drive leveraged growth for companies–delivering more and more value to themarketplace with limited internal resources17.

Just as CFOs today engage on behalf of their firms inglobal financial markets–wielding tools ranging fromforeign currency exchange models to risk hedges–theCHRO increasingly should make use of a suite ofcomplementary mechanisms to engage with thesedynamic global talent markets. Capitalizing on the BigShift will likely entail trading off the benefits of stableand flexible workers, setting criteria for “buy, build,borrow” talent decisions, and finding ways to anticipatelarge-scale changes and their implications for talentneeds.

Talent now comes in many forms–full-time or part-timeemployees, seasonal or situational workers, independentcontractors, and other extended ecosystem members.With more variety in the offerings in the talentmarketplace, more options for how to structureemployment arrangements, and different types ofattendant risks, the CHRO should rethink investments in talent in terms of their placement, expected futurebenefits, and duration.

Talent now comes in many forms–full-time or part-time employees,seasonal or situational workers,independent contractors, and otherextended ecosystem members


Redefining work, jobs, and competition for ideas anddesigns is part of the CHRO’s new challenge and willemphasize composition of “off-balance sheet” talentnetworks. This will involve new collaborations amongCHROs, business unit leaders, functional leaders, andprocurement. CEOs expect that the CHRO will be able to articulate how a company will navigate this dynamictalent market and find the most reliable path to growth.As CEO Burkley told us, “CHROs need a plan forattracting the right talent, not some generic concept oftop talent” to fuel growth and competitive advantage18.

AnalyticsFor an executive like the CFO, coming from aquantitative background, analytics is a native language.Beth Axelrod, former investment banker and strategyconsultant, and now CHRO for eBay, makes thecontrasting observation that, traditionally, HR has relied more on qualitative strengths and shied awayfrom quantitative analytical tools. Going forward, the effective future CHRO’s investment priorities will need to include fact-based, predictive insights19.

Today’s analytic capabilities provide great opportunitiesto expose underlying trends and the relationshipsamong any number of empirical variables. There is a risk in this, of course. Matt Tabor, Cisco’s organizationaleffectiveness leader, cautions that the overwhelmingavailability of data can make it easy to get distracted20.Working backward from desired outcomes, rather thandata mining in the hope of unearthing some unexpectedgem of insight, is often the more effective way to applyanalytics to targets. CHROs should generate andsyndicate clear problem statements specific to theirindustry and company situation, then deploy analytics to tease out the root causes and their dynamics. The use of analytics to design, defend, and activate agrowth-oriented agenda will be a key source ofnewfound credibility and a hallmark of great HR leaders.

The case of a large financial services organization that needed to double the size of its sales force is onesuch example. It assumed the deepest talent pool forsuccessful sales recruits would be the existing employeebase. To test that theory, the company put both internaland external candidates through its hiring process andtracked all the hired individuals’ subsequent success.

The effort yielded two models with real predictivepower: one to predict which applicants were most likelyto make it through the interview process and be hired, and the other to predict which salespeople would excelin their first year. But the results were surprising. Itturned out that, while existing employees were in factmore likely to make it through the rigorous sales hiringprocess, they were less likely to succeed as salespeople.Based on this insight, the company changed its hiringprocess, not by denying internal candidates theopportunity of a transfer, but by finding ways toevaluate them based on potential for future success in sales rather than past success in other parts of theorganization.

Similarly, some leading HR teams are using predictivemodels to identify precisely where interventions shouldbe targeted, down to the level of a particular person ata particular time, thereby getting greater impact fromtheir limited resources. Consider how valuable this canbe for a company trying to protect the gains it has madein diversity and inclusion, for example. Being able todirect highly focused interventions toward small cohortsor individuals who are at particular risk at specific timesin their careers can make all the difference to retention.

CurationAs information, opinions, and experiences about what it is like to work at a given organization proliferatethrough formal and informal channels, the CHRO rolebecomes a node in a complex, multifaceted network of impressions and communications. Attracting andretaining critical talent and developing valuable culturalcollateral rely not only on offering challenging jobs andattractive salaries, but on cultivating a rich context ofmeaning, values, and connections21. Today’s CHRO isthe curator of enormous potential intangible andtangible value.

Today’s pervasive and universal technologyadvancements may help define our future workforces,but they also ensure that all of our corporate housesare, to borrow from Fortune journalist David Kirkpatrick,“built of glass.” There is no longer the singularity of top-down (and top-out) communications defining acompany. A company’s professionals can, and oftenalready are, serving as its ambassadors–its brand

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advocates–walking and talking and texting and tweetingexpressions of the company’s brand on its behalf. Andwhat’s more, what they say is deemed trustworthy.Research shows that people trust their friends andneighbors–people “like them”–significantly more thanthey trust the heads of companies as to what acompany’s culture is like22.

If today’s employees are serving as ambassadors for the brand, they’re also expecting the companies theywork for to better align with their own beliefs. Providingemployees with a sense of purpose and contribution tothe greater good is becoming a necessary requirementfor attracting and retaining desirable candidates and will require CHROs to collaborate with leaders frommarketing, community relations, corporate responsibility,philanthropy initiatives, and the like.

More CHROs should join forces with chief marketingofficers, seeking increasing crossover betweenmarketing and recruitment23. When a prospectiveemployee weighs two competing offers based not onlyon salary, health benefits, and location, but on theirsense of affinity to the brand, passion for the product,and respect for their future co-workers, it is vital that allthese attributes can be communicated, measured, anddemonstrated. CHROs can assimilate marketing tools tosegment employees and to curate an appealing andauthentic set of offerings. Providing professionals with specific, credible, meaningful data points about a company can give them news to share with othersthat can improve the company’s standing and create a virtuous cycle of positive feelings in current andpotential employees who share similar values.As the bounds of the traditional organization are

expanding to accommodate a new blend of balancesheet and open source talent, the bounds of whatworkers want from an employer in return for theirloyalty and commitment–and the voice they have(through social networks) to express theirthoughts–expand as well. Any company that wants the creativity and commitment of what Hagel andBrown call “passionate workers” needs to learn moreabout the means through which companies canenhance engagement24. Engaged workers tend to be more resilient and more open to learning fromsetbacks; they’re also more likely to share their positive(or negative) professional experiences with others. And with many large companies pushing to have 50 percentof their new hires come from referrals25, it’s today’sworkers who will help define tomorrow’s workforce.

Create your own future, or someone else willProfessor Groysberg sums up the transformation of the chief financial officer in this way: “Many CFOs sawthemselves as great stewards viewing the businessthrough an accounting versus a strategy and value-creation lens. The top finance job now is far more of a strategist, involved in helping the CEO and businessheads find new opportunities and assess their strategicand financial merits and risks26.”

The same strategic shift in mindset is required to excel at the CHRO role today. Inevitably, the misalignment ofexpectations between the CEO and the CHRO will berectified by those HR leaders who are able to developand deploy strategic, relationship, operational, andtechnical HR capabilities at scale. The change, whichmay well transform everything from the position’spower base to its performance metrics, may disorientnot only the CHRO, but the other members of theexecutive leadership team. All will have to adjust todifferent expectations, fact-driven solutions, measurableand measured outcomes, and an altered influence base.The path to today’s CFO was not linear–and left to itsown devices, the transformation of the CHRO could alsoproceed in a haphazard way. But while the CFO role wasreinvented over the course of some decades, the CHROwill not be afforded nearly the same runway. The rapidpace of change in talent markets, technology, and social norms and mechanisms demands a more timely,systemic, and strategic response. Rather than build up,

Seeing the necessity, and applyingingenuity, CHROs who can surmountthe disruption of the role may well seetheir internal effectiveness, externalmarket value, and overall stature climb


or onto, the existing role description, CHROs shouldwork from a clean slate to envision what thisincreasingly vital role will require, using the currentmodel of the CFO as a guide and gap analysis results to plot a transformative path.

The global economy is poised for a growth cycle withboth cash reserves and CEO confidence trendingupward. A limiting factor will be the increasing scarcityof talent, which will only intensify the need for CHROsto find the way forward. Drawing from analogy, seeingthe necessity, and applying ingenuity, CHROs who cansurmount the disruption of the role may well see theirinternal effectiveness, external market value, and overallstature climb.

Reprinted from Deloitte Review, issue #14: 2014

by Cathy Benko, chairman and managing principalwith Deloitte LLP, Trish Gorman, director with DeloitteServices LP and Alexa Rose Steinberg, manager withDeloitte Services LP

Endnotes1. <http://www.caeconomy.org/reporting/entry/california-bill-requires-state-to-attack-skills-gap>

2. “Business Partners Needed: Results of the Deloitte’s 2013 GlobalFinance Talent Survey,” Deloitte Development LLC, 2013,<http://www.deloitte.com/view/en_US/us/Services/additional-services/finance-transformation/9e87f2734c0ff310VgnVCM2000003356f70aRCRD.htm>

3. Jeff Schwartz, Andrew Liakopoulos, and Lisa Barry, “The OpenTalent Economy,” Deloitte Review Issue 13, July 2013,<http://dupress.com/articles/the-open-talent-economy/>

4. Patrick M. Wright et al., “The Evolving Chief Human ResourceOfficer Role,” The Chief HR Officer: Defining the New Role ofHuman Resource Leaders (San Francisco, CA: John Wiley & Sons,Inc., 2011.)

5. Matthew Burkley (CEO at Genscape), telephone interview byCathy Benko, October 2013.

6. Juergen Daum, “The Dominance of Intangible Assets”<http://www.juergendaum.com/news/11_14_2004.htm>;“Intangible Asset Market Value”<http://www.oceantomo.com/productsandservices/investments/intangible-marketvalue>

7. The Henry Ford, “Benson Ford research center: Popular researchtopics–Henry Ford quotations,”<http://www.thehenryford.org/research/henryFordQuotes.aspx>,accessed October 16, 2013.

8. Dirk M. Zorn, “Here a Chief, There a Chief: The Rise of the CFO inthe American Firm,” American Sociological Review 69, No. 3 (June2004): pp. 345–364,

<http://www.chicagobooth.edu/research/workshops/orgs-markets/archive/Zorn.pdf>

9. Dr. Ajit Kambil, “Are You a Strategic CFO? Seven EssentialQuestions,” Deloitte Development LLC, September 2013,<http://www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/Board%20Governance/Roles%20and%20Responsibilities/CFO-Insights_Strategic-CFOs_September2013.pdf>

10. Bersin by Deloitte (Deloitte Consulting LLP), “How Do You MakeYour Organization More Agile? Is HR in the Way?,”<http://www.bersin.com/News/Details.aspx?id=15204>

11. Deloitte Consulting LLP internal analysis, September 2013.12. Boris Groysberg, L. Kevin Kelly, and Bryan MacDonald, “The New

Path to the C-Suite,” Harvard Business Review, November 2011,<http://hbr.org/2011/03/the-new-path-to-the-c-suite/ar/1>

13. Lauren Doliva (managing partner, Heidrick & Struggles Global HROfficer practice.) Interview, 2013.

14. Leon Kaye, “Time to start Valuing Human Capital as an Asset onthe Balance Sheet,” theguardian.com, August 2, 2012,<http://www.theguardian.com/sustainable-business/valuing-human-capital-asset-balance-sheet>

15. Melanie Foley (EVP and Chief HR and Administration Officer atLiberty Mutual Insurance Group.) Telephone interview by CathyBenko, October, 2013.

16. Cathleen Benko and Molly Anderson, The Corporate Lattice(Harvard Business Review Press, 2010, Cambridge,MA.)

17. John Hagel (co-chairman, Center for the Edge), interview byCathy Benko, October 2013.

18. Matthew Burkley (CEO at Genscape), telephone interview byCathy Benko, October 2013.

19. Beth Axelrod (CHRO at eBay), interview, October 2013.20. Matt Tabor (organizational effectiveness leader at Cisco),

interview, October 2013.21. Corporate Leadership Council, “Driving Performance and

Retention through Employee Engagement,” 2004: 10.<http://www.stcloudstate.edu/humanresources/trainingDev/supvBrownBag/documents/CLC-Employee-Engagement.pdf>

22. Edelman Berland, “Global deck: 2013 Edelman Trust Barometer,”January 20, 2013,<http://www.slideshare.net/EdelmanInsights/global-deck-2013-edelman-trust-barometer-16086761>

23. Sarah Halzack, “At Marriott and Other Firms, HR BecomesIncreasingly Strategic,” Washington Post, August 25,2013,<http://www.washingtonpost.com/business/capitalbusiness/at-marriott-and-other-firms-hr-becomes-increasinglystrategic/2013/08/23/63f0856c-05c0-11e3-9259-e2aafe5a5f84_story.html>

24. John Hagel III, John Seely Brown, and Tamara Samoylova,“Unlocking the Passion of the Explorer,” Deloitte DevelopmentLLP, 2013, <http://dupress.com/articles/unlocking-the-passion-of-the-explorer/>

25. Nelson D. Schwartz, “In Hiring, A Friend in Need is a Prospect,Indeed,” New York Times, January 27, 2013,<http://www.nytimes.com/2013/01/28/business/employers-increasingly-rely-on-internal-referrals-in-hiring.html>

26. Boris Groysberg (professor, Harvard Business School), interview,2013.

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