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ABOUT SLANT Everyone has their own slant, yet we can all use expert insights. SLANT brings selected views and opinions from our brightest minds. Diverse perspectives across a single theme, designed to provoke thought and inspire action. So head inside for a new view on business and society today. Your views are important to us. If you have comments or questions regarding anything on this website, email the editor, Simon Griffiths. Simon.Griffiths@KPMG.co.uk

OUR CONTRIBUTORS

We'd like to introduce our editors and authors. These are the people who’ve contributed their expert views and opinions to SLANT. SIMON GRIFFITHS EDITOR, SLANTSimon is a firm believer in the value that opinion-based, thought-provoking content can generate for a people business such as KPMG. He has spent much of his 15-year career in media relations and corporate communications coaxing viewpoints from the firm’s subject matter experts on the business issues of today and in the future. Needless to say, he is delighted about the launch of SLANT to showcase these. CONNECT+44 121 2323760 simon.griffiths@kpmg.co.uk JAYNE VAUGHAN EDITOR, FUTURE OF WORKPARTNER, KPMG IN THE UK Jayne is a partner in the firm’s People Services, Employer Consulting and Compliance division. She specialises in employee remuneration and has expertise in the tax implications of the whole reward package, including pension planning, employee discounts and flexible working. Outside work, she enjoys sport, traveling to new places and a good book.CONNECT+44 20 76941381 jayne.vaughan@kpmg.co.uk DAVID FAIRS PARTNER, KPMG IN THE UKA respected commentator on UK pensions, David is a partner in KPMG’s Pensions team. In that role he has advised on pension strategy and design for public sector clients such as the NHS, Foreign Office and Jersey along with the likes of Lloyds Bank, IBM, Vodafone and Centrica in the private sector. Passionate about his subject, David is a member of numerous industry bodies, including a working group set up by the government to restore confidence in workplace pensions.CONNECT+44 20 73113103 david.fairs@kpmg.co.uk ROBERT BOLTON PARTNER, KPMG IN THE UKRobert is lead partner of KPMG’s global HR Transformation Centre of Excellence, a strategic investment for the firm aimed at bringing world-class HR solutions to companies around the world. As former head of HR at the Nationwide Building Society he won the Management Consultancies Association HR Consultant of the Year award in 2011. This was for the work he did transforming the HR model at Telefonica O2.CONNECT+44 20 73118347 robert.bolton@kpmg.co.uk KATE HOLT HR DIRECTOR, KPMG IN THE UKAfter years climbing the ranks in KPMG’s people function, Kate’s role changed in May from internal to client-facing. Having joined KPMG almost at the beginning of her career, Kate became Chief Operating Officer of the People function in April 2010, responsible for implementing the partnership’s HR strategy. Clients will now benefit from her expertise and insights in effective workforce management.CONNECT+44 121 335 2709 kate.holt@kpmg.co.uk CASSANDRA HANCOCK ANALYST, KPMG IN THE UKCassandra joined KPMG Management Consulting in 2009 as a graduate, one of the few who secured jobs in post-apocalyptic, recession-hit UK. She is an advisor in Financial Management, specialising in public sector projects.CONNECT+44 20 73116658 cassandra.hancock@kpmg.co.uk ROB HORTOPP DIRECTOR, KPMG IN THE UKA maverick thinker on the workplace of the future, Rob, is a director in Management Consulting. In this role, he’s spent 15 years advising companies worldwide on how to get the most from their finance and back office functions. It might have something to do with all the fresh air he gets from running along the Thames and biking in the Chilterns.CONNECT+44 20 7311 5806 rob.hortopp@kpmg.co.uk MARK WILLIAMSON PARTNER, KPMG IN THE UKHow do you keep a workforce of thousands committed, productive and engaged in today’s turbulent times? Mark might know. After all, he has specialised in HR optimisation, service delivery and performance for 25 years. A KPMG partner, he currently leads the UK and European People and Change practice, with a focus on managing the people aspects associated with transformational change.CONNECT+44 207 311 8693 mark.williamson@kpmg.co.uk

FROM THE EDITOR FUTURE OF WORK

CENTRAL TO THE FUTURE OF BUSINESS IS THE HUMAN QUESTION, SO THIS EDITION LOOKS AT TOMORROW'S WORKPLACE. DAVID FAIRS PARTNER, KPMG IN THE UKAs the pay gap between the talented few and the rest continues to grow, David Fairs examines the consequences in LIVING WITH UNEQUAL REWARD ROBERT BOLTON PARTNER, KPMG IN THE UKMeanwhile, Robert Bolton argues in UNLEASHING THE TALENT WITHIN that organisations should concentrate on developing their entire talent base, not just the C-Suite KATE HOLT HR DIRECTOR, KPMG IN THE UKFor some people, pay isn’t everything. So what else will tomorrow’s employees want? Kate Holt has a suggestion in BEYOND THE PAY CHEQUE - the new key to employee engagement. CASSANDRA HANCOCK ANALYST, KPMG IN THE UKWhile Cassandra Hancock believes that Generation Z will demand nothing short of complete control in LETTING GO TO GROW. ROB HORTOPP DIRECTOR, KPMG IN THE UKLooking beyond the immediate future, we foresee a dearth of both talent and capital. We then predict an intriguing new solution to both shortages in DOES CAPITAL HAVE A HUMAN FUTURE? MARK WILLIAMSON PARTNER, KPMG IN THE UKFinally, in the first of a regular series, BY THE NUMBERS, we take a statistical look at the future of work.

LIVING WITH UNEQUAL REWARD

DAVID FAIRS PARTNER, KPMG IN THE UK THREE IMPORTANT NEW TRENDS ALL POINT THE SAME WAY. Like many people my age I entered the work market with an ingrained belief that hard work brought rewards, which in turn brought status. My generation was brought up to work harder, longer, faster and to aspire constantly to climb the next rung on the ladder.However, more recent entrants to the workforce are questioning whether it’s really worth the effort to strive for more than ‘enough’. And this is just the first of three trends which could lead to a future workforce characterised, at least in developed markets, by an unprecedented inequality in the distribution of reward. The second trend relates to the first because winning the commitment of this new, less reward-focused generation will require a class of leadership capable of inspiring them and this will, in itself, bring rich rewards. The third trend relates to the rest of the workforce and will involve the continued automation of the unskilled job pool. When money isn't enough. There will always be individuals who are prepared to toil long and hard providing the rewards are suitably above and beyond the mean. However, an increasingly large proportion of the workforce has little interest in the idea of additional reward beyond what they need to sustain their lifestyle. These people care about work/life balance and are prepared to adjust their salary expectations accordingly. Unlike my generation, they do not equate salary to personal worth and they definitely don’t believe that entering the upper reaches of the salary league table is a goal worth striving for. However, what members of older generations may perceive, disparagingly, as a lack of ambition may actually indicate that their priorities are elsewhere and that they are just fine where they are. And if they have talent, employers will still be keen to get them on the payroll.AN INCREASINGLY LARGE PROPORTION OF THE WORKFORCE HAS LITTLE INTEREST IN THE IDEA OF ADDITIONAL REWARD BEYOND WHAT THEY NEED TO SUSTAIN THEIR LIFESTYLE.The workforce of the future will look very different to now I believe tomorrow’s organisations will become increasingly dispersed with fewer core employees but a larger overall workforce, supplemented by virtual, networked employees. You can see the first signs of this already in the more cerebral industry sectors such as IT or business services. Others will follow in time, though heavy manufacturing, which still requires manual, shop floor intervention, may be among the last to adopt such a structure. I should mention here that the so called war for talent will be all about recruiting the best, skilled workers. By comparison, the future for unskilled labour does not look encouraging. And even some traditionally white collar professions could look bleak for those who fail to keep their skills updated.58 Percent of Generation Y are content to earn 'enough', versus 48% of Baby Boomers. Source: World of Work Onepoll surweyREAD MOREA new breed of manager The challenge of maintaining a networked workforce will be significant – especially when a large part of the talent pool cannot be swayed by the offer of more money. This should herald the emergence of a new breed of senior leader who recognises that corporate charisma is as important as a smart business idea. They will paint a picture of their company’s vision, values and purpose that is compelling enough to inspire the newer generations of workers. This new type of leader is not too common right now, but in the near future, those individuals with the ability to enthuse and attract the best talent will reap phenomenal rewards. Of course, the job of constantly painting an attractive, values-driven picture will be no mean feat. It will also be at the mercy of external, societal factors. What makes a company’s ethos attractive can change fairly quickly - flavour of the month can easily become millstone around the neck two years later. Also, the moment one of these super-talented individuals leaves, they’ll probably take all the charisma with them. This rather validates the growing popularity of pop-up organisations which are better suited to the vagaries of shifting public sentiment.A newly divided working world. The rewards for those organisations that navigate these shifting sands will be considerable. The super charismatic leaders of these companies will certainly benefit, along with other members of the nano-corporate core and a select few in their wider networks. However, the contrast between this richly remunerated elite and the growing battalions of ‘enough reward’ workers strongly points towards a more unequal distribution of income. This will be further exacerbated by growing numbers of individuals who risk being locked out of the workforce altogether. The automation of unskilled labour is clearly the major factor here. As the battle for talent rages ever fiercer at the top end of the skilled labour market, we will see an increasingly large swathe of the population with neither the skills nor the talent to compete – or even to be of interest - to most employers. This could lead to social tensions. Then again, the shifting moral compass of the ‘enough reward’ camp may force those with money to assist those without. Pressure could be brought to bear (as we’re seeing in the banking sector now) to define an acceptable level of reward and give anything above that to those less fortunate. I suppose it could happen, but even with pay moderated to some degree, I expect to see a widening of the gap between the haves and the have-nots in the not-too-distant future.

UNLEASHING THE TALENT WITHIN

ROBERT BOLTON PARTNER, KPMG IN THE UK WE FOCUS TOO MUCH ON LEADERS, NOT ENOUGH ON THE WORKFORCE AS A WHOLE 'Talent management’ strategies have focused far too much on so called high potential and senior leaders rather than creating a talent system within organisations as a whole. This is borne out by recent studies showing that talent management is the leading concern for CEOs.In the workforce of the future there’ll be no such thing as talented individuals. Instead we'll talk about talented organisations and talent ecosystems. Many CEOs already believe that the secret to creating a successful organisation lies in getting the best from employees. However prevailing people management practices do not meet the demands of today’s knowledge-based economies. Closer inspection reveals that they are alarmingly detached from the business environment within which it is hoped employees and organisations can thrive. My observation is that we have an irrational preoccupation with the role of the individual (certain individuals in particular) at the expense of the wider workforce. Current human resource tools – performance management, reward and recognition structures, organisational culture, leadership role modelling and information flows – need to be configured in a far more sophisticated way to deliver a talented workforce.Enlightened people management Executed well, I foresee organisations recognising their responsibility to tailor an individual relationship with every employee. This is a ‘must have’ rather than a ‘nice-to-have’ because the rules have changed. If employees are expected to have a greater commitment to the ambitions of the business and are required to innovate, think independently and interpret and respond to corporate strategy, then they need to be managed and motivated differently. For example, why are archaic rituals such as the annual performance appraisal still standard practice? And why should policies such as highly geared bonus schemes survive? Evidence strongly suggests that there are far more responsible and valuable alternative approaches. What’s more the technology already exists to support them. Most importantly, creating talented workforces means creating the right culture. I’m talking about an ecosystem that empowers employees to work collaboratively and generates successful leadership in every part of the business.The so called “war for talent” is a fool’s errand. It was founded on the myth of the individual, yet evidence (again) shows that the ability of any individual to make an impact on the wider enterprise is limited. Indeed, the average tenure of a chief executive currently stands under two years, due in part to the selfsame unrealistic expectations. In reality, the impact that a high performing individual can have on the success of any organisation when compared to a high performing workforce is so insignificant as to be almost irrelevant.The war for talent also fosters competition between employees This can be divisive and the evidence (yet again) has shown that it’s not conducive to creating a sustainably successful organisation. Common sense alone suggests that intense competition is unlikely to drive collaborative working. As you’ll gather from my numerous references to ‘evidence’, I believe HR functions rarely make evidence-based policies and decisions. If they did they would have to radically change how they operate. A consequence of this failure to underpin strategy with evidence is the vulnerability HR demonstrates in pandering to the preferences and preconceptions of the c-suite. This cannot be right for any business now or in the future. It leads to discredited people management approaches that stay on long past their sell-by date.

BEYOND THE PAY CHEQUE

KATE HOLT HR DIRECTOR, KPMG IN THE UK WHAT WILL IT TAKE TO INSPIRE TOMORROW'S WORKFORCE? The workforce of the future is likely to be more fragmented than today. I foresee a smaller core workforce, supplemented by seasonal, contract, temporary and freelance employees on a project basis. I also believe tomorrow’s employees will be choosier about who they work for and will be more proactive in seeking a good work-life balance.Financial reward may not be their only, or even their most important, consideration. The idea of the 'portfolio career' will be a reality as employees move around organisations with greater frequency, continually seeking to enhance the core skills that make them employable. Further fragmentation could result from the massive generational stretch that will characterise most future workforces. A five generation span could be a reality in the near future.So how will employers manage such a transient, disparate and diverse workforce? We are already seeing a decrease in employee engagement. In addition, the scale of financial reward (above a certain level) no longer seems as important to the typical employee as it was previously. As a result, the employer of the future may need to be more imaginative in how they attract those highly skilled and in demand employees. If the promise of personal reward no longer delivers employee 'stickiness' what will take its place in the future?I believe tomorrow’s employees will seek organisations with a sense of 'purpose.' In assessing a potential employer, their decision-making will be heavily influenced by how worthy a purpose that employer espouses – and how well it is communicated. By purpose, I mean something beyond mere corporate strategy and values; something which clarifies why an organisation exists and what its legacy will be. This definition of purpose should demonstrate integrity and sustainability and should be flexible enough to feel personal to a broad spectrum of people across different cultures and generations. Increasingly, I predict that people will actively seek out employers whose beliefs match their own. For these people, more money will not bring increased engagement. Instead, factors such as morality, ethics and community impact will be increasingly important. These will dictate whether tomorrow’s employees can feel proud of the organisation they work for. Conversely, if an employer’s purpose is insufficiently compelling, employees will likely vote with their feet.55 A potential employer's CSR record matters to 55% of Generation Y, but only 45% of Generation X. Source: World of Work Onepoll surweyREAD MORETHE IDEA OF THE 'PORTFOLIO CAREER' WILL BE A REALITY AS EMPLOYEES MOVE AROUND ORGANISATIONS WITH GREATER FREQUENCY, CONTINUALLY SEEKING TO ENHANCE THE CORE SKILLS THAT MAKE THEM EMPLOYABLE.So how does purpose look in practice? Herein lies the first challenge. Currently, most businesses looking to clarify their purpose are content simply to regurgitate corporate strategy and values. Typically this boils down to little more than a story around projected growth. A great deal extra will be required of tomorrow’s organisations if they are to differentiate themselves from their competitors. Of course, none of this matters if you don’t agree that future employees will be swayed by emotion and you think all that will matter to them is financial reward. Personally, I believe that’s a dangerous view. Generation Y will be the key. The oldest of them is now 33 so they’re well ensconced within the workforce. They have known recession – and felt it quite keenly - and they no longer believe in (or expect) a job for life. They are the game-changing generation who will challenge employers about their purpose and expect to see evidence of emotional ‘draw’.Determining the type of purpose that can attract tomorrow’s workers won’t be easy. It’s no wonder so many organisations put it on the back burner. Some recognise its importance but too many still think that a combination of their current strategy and future vision should be compelling enough. Whatever purpose businesses do eventually come up with, its communication will be key. Future workforces could potentially stretch across five generations so how do you explain it in a way that resonates across all those demographics? The trick will be to make the story as simple as possible so individual employees can retell it their own way. Currently too much internal communication, instead of empowering employees with relevant corporate messages, leaves them confused and unsure of their role within the organisation.In a future workforce where emotion and feeling is given more of a free rein, declarations of purpose must not fall into that trap. Employers may understand how the connection between purpose and strategy works but they cannot expect future employees to see it the same way. Employees who can’t articulate their employer’s purpose to others won’t stick around for long. Making this change will be hugely challenging and may not sit comfortably with hard-nosed corporate ideology. However, I believe that a sense of purpose will soon be the key differentiator when it comes to attracting both employees and customers. It’s a challenge that must be faced sooner rather than later.

LETTING GO TO GROW

CASSANDRA HANCOCK ANALYST, KPMG IN THE UK GEN Z HAVE A LOT TO OFFER TOMORROW’S WORKPLACE. THEY’LL ALSO DEMAND MORE. A new generation of workers is set to demand full and equal voting rights in “their” companies - the businesses they both work for and invest in. This trend could eliminate the management power structures we know today. Real power will reside wherever management truly lets go.The 21st century will see the fight for equal rights take its most daring and revolutionary turn yet - this time in the workplace. And it all revolves around Generation Z. To the highest bidding CFOs they will bring astounding analytical minds, instant global networks and the kind of fresh foresight that companies will crave for and invest in.BETTER EDUCATED, MORE TRAVELLED AND FAR MORE TECHNOLOGICALLY ADEPT THAN THEIR PREDECESSORS, GEN Z WILL BURST INTO EMPLOYMENT WITH A SWAGGER AND CONFIDENCE FAR BEYOND THEIR PHYSICAL AGE.Gen Z's Price They will not tolerate the traditional restraints imposed by the conventions of capitalism as we practice it today. I believe that Gen Z’s entry into the workplace will eradicate conventional management authority and hierarchy. While not financially owning the business, Gen Z will demonstrate a new sense of loyalty to and ownership of their company. This will push them to demand the legal equal voting rights needed to set all future strategy targets and policies. As employees they will choose for themselves where they work, who they work with and what they do. There will be no closed doors, no private meetings or hidden agendas. Management information will be 100% transparent to all voting right employees. Decisions will no longer be made by elite cliques of detached directors. Instead, energetic round table debates among knowledgeable employees will be followed by democratic voting to set all future strategy, targets and policies. Gen Z will balance local on-the-job knowledge with a sharp understanding of the wider business world. In this way they will lead their companies to success.So, what’s to become of our redundant board and abandoned CFO? Most likely "the" CFO will not exist. All GenZ staff will fully participate in a new, multi-faceted CFO role. The responsibilities will be firmly embedded in the hearts and minds of all GenZ employees. Not only will they balance their own budgets - they’ll personally seek to identify, address and improve the cost drivers pushing their companies’ profit margins. They’ll know when to slash and when to stretch forecasts. They’ll be able to predict their competitors’ movements in the market and will know how to respond. The CFO will exist, but it won’t be a single person. Instead this function will live within the intellect, enthusiasm and responsibilities of individual GenZ employees and in their hunger for their companies to succeed.31 Percentage of Gen Z believe future employees will challenge their organisation's purpose as against 24% of Gen Y and 12% of Baby Boomers. Source: World of Work Onepoll surweyREAD MOREWhat will drive Gen Z to achieve all this? Not just money. Born during today’s devastating economic crash they will grow up learning the lessons of previous overspending and overlending. They will be driven instead by a sense of individual responsibility for their companies’ actions. Their companies’ success will be their own success.‘Staff empowerment’ will be no emptystrap-line. I believe that today’s CFOs will allow Gen Zers to grow in to an army of mini CFOs who will revolutionise traditional capitalist models, re-defining our century as the one of genuinely empowered employees. If you found this article interesting then you may wish to read the longer, more detailed study on which it was based.

DOES CAPITAL HAVE A HUMAN FUTURE?

ROB HORTOPP DIRECTOR, KPMG IN THE UK COULD 'TALENT FUTURES' CREATE A NEW, FAIRER FUTURE FOR CAPITALISM? If capitalism is to survive as a force in society, it must satisfy a growing public demand for rewards to more accurately reflect individual performance. One intriguing idea is the concept of 'return on employee capital' where individuals trade on their potential future earnings.By 2035 a number of issues affecting work and business could come to a head. In particular, can the shareholder return-based model on which western capitalism is based even survive? After all, there are already signs of disquiet, particularly in societies riven with instability following economic crises. Meanwhile, those traditional multinational corporations that survive further rounds of consolidation would continue to drive efficiencies. Their next target could be costly, non-value adding intermediaries such as pension funds and investment banks. By directly offering stakes in their own equity and commodity reserves they could become the new world powers for the 'responsible' brokering of funding.A NEW MARKET FOR 'TALENT-FUTURES' WOULD ALLOW YOUNG, TALENTED INDIVIDUALS TO TRADE THEIR LIFETIME EARNING POTENTIAL YEARS BEFORE ANY RETURN ON IT IS REALISED.The battle for capital could then take an intriguing turn. Today’s so called war for talent might, by 2035, have escalated into a truly global conflict, especially with traditional geographic boundaries breaking down still further. Businesses everywhere will be fighting over those talented individuals, communities and societies with the potential to create the most valuable ideas and innovations. A new market could open up for 'talent-futures'. These innovative instruments would enable young, talented individuals to trade their lifetime earning potential years before realisiing much return on it.The 'return on employee' capital model would transform every business's value chain. CFOs will need a new combination of talent, innovation, investment and capital management skills. Only then could they deliver the returns expected by the employees and societies with which they co-operate. Viewing the combined scarcity of capital and talent as an opportunity, by 2035 traditional banks could well lock into battle with the new mega corporates for ownership of this new asset class. The leading universities could also get in on the act, teaming up to create a unified rating standard that would convert academic achievements into investment grades. The outcome would be a completely transformed relationship between the work people do and its value to the corporations that profit from it. Employees could potentially reap the full benefit of their professional achievements. 'Power to the people', if you like, but not quite the way Karl Marx had in mind. If you found this article interesting then you may wish to read the longer, more detailed study on which it was based.

BY THE NUMBERS

CAN GENERATION Z AND THE BABY BOOMERS WORK TOGETHER?

FROM THE EDITOR THE PRICE ISN'T RIGHT

My name is Robert Browne and I'm a pricing specialist and partner in KPMG's Strategy Group. Since starting out in the early 1990s as an economist in telecoms, I've worked all over the world and across many sectors, helping businesses optimise their pricing. I believe it's the most important driver of long-term profitability and should be top of every board's agenda. My goal, with this editorship, is to raise the profile of pricing as a strategic issue within Britain's boardrooms. As well as setting out some of my ideas in the articles below, there are also responses from three of our sector experts and one of our business intelligence experts. I hope you enjoy reading about this fascinating and highly relevant topic.

THE 10% PROFIT OPPORTUNITY

ROBERT BROWNE PARTNER KPMG STRATEGY GROUP WHY BOARDROOMS CAN NO LONGER AFFORD TO IGNORE PRICING Companies that are thinking about pricing as a strategic capability will outperform their peers on sales and profit growth. But this requires a step-change in mindset for many companies, where pricing is traditionally viewed as a tactical lever to drive volume. Getting pricing right has the potential to transform a company’s performance but, as a discipline and function, it was largely ignored until the recent recession when life got much more difficult for sellers. Over the past five years, the importance of pricing has risen as companies struggled to grow profits in a lacklustre economy. CEOs are now talking about ‘better pricing’ and ‘getting paid for value’ but, in reality, pricing is still the elephant in the room at most companies. LOWER PRICES DO NOT DRIVE VOLUMES IF EVERYONE LOWERS THEIR PRICES (OR INCREASES PROMOTIONAL DISCOUNTS) AT THE SAME TIME. Getting past ‘volume-at-all-costs’ The recession forced many organisations to focus squarely on volume and fight for every point of market share. After several years of this, companies have been conditioned to think of pricing as a lever to drive volume and that by lowering prices volumes can increase or be maintained. The customer’s perception of value is the relationship between a product’s benefit and its price, relative to alternatives. We call this the value equation. Over the past five years, companies have focused in spades on adjusting prices, exacerbated by sophisticated procurement functions ready to take advantage of unstructured pricing. The need to focus on and invest in pricing is acute. Some businesses are waking up to the importance of the value equation and are looking to enhance their products, either through product innovation or bundled solutions, as a way to reposition their products and command a better price. Looking ahead, I firmly believe that the next big change for pricing will come when organisations start to apply sophisticated data analytics to pricing. There is a long way to go before companies in the UK are truly optimising their pricing and, in turn, their profitability.

PRICING: THE AUTOMOTIVE RESPONSE

JOHN LEECH PARTNER KPMG IN THE UK DESPITE FLAT PRICING, THE AUTOMOTIVE SECTOR HAS FOUND NUMEROUS WAYS TO INCREASE SALES. This cannot all be pent-up demand or the consumer’s burning desire for a new set of wheels. In fact, I believe it’s down to the clever way car companies price their products and arrange finance for their customers. Following the financial crisis, automotive firms identified bank finance and consumer credit as their biggest obstacles to sales. This was due to stricter loan availability criteria and the rising cost of credit. Their solution was to eliminate the middle man, the bank. As a result, sales of cars through manufacturer finance arrangement or personal car plan have soared. From 45 percent of sales seven years ago these arrangements have increased to 75 percent. This shift has also changed consumer buying behaviours. In the past, some people bought new cars and kept them for 3-4 years before selling them through AutoTrader magazine or a local dealership. Most kept them for longer. Today, after three years on a pay monthly car plan, the consumer gets a call from the manufacturer’s finance team. They’ll be offered a shiny new car and plan at a similar monthly rate, or a large balloon payment to take ownership of the car. This boosts brand loyalty and keeps the consumer locked in. The monthly rate allows car manufacturers to sell more optional extras and grow margins. After all, £19 per month for in-car satellite navigation sounds much better than adding £700 to the sticker price. CAR PRICES DON’T VARY MASSIVELY OVER TIME. A FORD FOCUS AS A PERCENTAGE OF ANNUAL HOUSEHOLD INCOME PER CAPITA HAS BEEN CONSTANT FOR A LONG TIME. IN RESPONSE, CAR COMPANIES HAVE IMPROVED THEIR PRODUCT SPECIFICATION IN ORDER TO KEEP PRICES FLAT AND MAINTAIN MARGINS. Specification-based pricing By and large, auto pricing strategies are market-based. Companies assess how their product lines up against their competitors and price accordingly. Ten years ago, Hyundai and Kia priced their vehicles at a significant discount to the likes of Ford and Vauxhall. As their brand and products become competitive and their market share grew they gradually increased their prices. Today they’re practically on a level footing. Generally, though, car prices don’t vary massively over time. For example, Ford Focus as a percentage of annual household income per capita has been constant for a long time. In response, car companies have improved their product specification in order to keep prices flat and maintain margins. For instance, the new Vauxhall Adam, released in February 2013, has over one million different specifications: a million prices for just one vehicle. Car companies have also segmented the market and tailored their products and prices to the needs of the consumer, much like the airlines and large supermarkets. For example, in-car connectivity is essential to the young demographic, not for the average Toyota or Hyundai customer. The latter prioritise safety and general reliability over built-in satellite navigation systems. So identical optional extras are priced differently according to each model’s market segments. Brand extensions An especially interesting feature of the UK car market is the ‘squeezed middle’ category. Traditional luxury carmakers BMW, Mercedes and Audi have recently brought out smaller models that encroach on the volume brand space, historically the preserve of Ford and Renault. New entrants, including Hyundai and Kia, are chipping away too. The middle’s solution has not involved pricing. They are fighting back by creating new luxury cars such as the Ford Mondeo Vignale. However, I believe that this strategy won’t work because it’s so hard to elevate an existing brand. Citroen’s upmarket DS range has succeeded precisely because it’s a new brand. Another pricing challenge for the auto industry is the long lead times. It often takes six months for a company to respond to market demand. Price is routinely used either to clear out surplus stock or slow down sales until volumes can be readjusted. As a consequence we often see sub-optimal pricing as supply and demand volumes go out of balance. Improving demand forecasts and reducing over-capacity remain critical to profitability. I also agree with Robert that more should be made of the seasonality of pricing. Twice a year the new registration plates create an entirely predictable sales rush, yet car companies seem almost reluctant to respond. More forecasting needed There is a different dynamic between manufacturers and suppliers. Here it’s all about price-downs. Since cars usually have a seven-year production life, contracts with suppliers are set at this length. Suppliers therefore need strong forecasting and pricing models to allow for price chippings each year over the contract and sub-component purchase price changes, if applicable. This is because, every year, there is the expectation that the supplier will produce the same volumes, but for 3 percent less. This of course puts a lot of pressure on the industry. Indeed, back in 2008 a number of US suppliers went bust due to thin margins at a time of falling volumes. Pricing is important within the automotive industry and there is clear ownership within each organisation. However, I believe that companies could get still more from it. Specifically, manufacturers should make use of the vast amounts of customer data they hold and do more forecasting. They should also capitalise on robust UK demand for new cars, which we expect to continue well into next year.

THE ELEPHANT IN THE BOARDROOM

ROBERT BROWNE PARTNER KPMG STRATEGY GROUP WHY PRICING SHOULD BE TOP OF EVERY BOARD AGENDA. Today, most companies think all you need to know about pricing are two things: firstly that it’s a tactical lever to drive volume and secondly that by lowering prices, volumes will increase. As a consequence, most businesses have not invested in a clear pricing strategy and have not developed pricing roles, processes, controls, tools or training. However, CEOs are now increasingly talking about the need to protect or drive better pricing, yet inside boardrooms the topic very much remains the elephant in the room. A number of industries have effectively killed long-term profitability as a consequence of not being good at pricing (often as a result of price wars). Some companies are able to survive despite their lack of pricing capability (possibly because of a dominant market position), but for how long? For all others, where there is competition in their market, the only way out is to either innovate and achieve a premium for differentiation or reduce costs and compete for the price buyers. However, between these two positions, are those that invest in assets, such as manufacturing plants or distribution centres, who need to achieve target levels of utilisation to cover the costs of the assets, and often use price as a way to keep plants busy. Few organisations today have pricing roles and a pricing department or function is a truly rare find. It is often unclear who owns pricing, but it typically spans three different functions: firstly the brand or product owners, where the price is often set; next the sales team, where the price is discounted; and thirdly, finance, who recognise price as the biggest driver of profitability (so they therefore would like to have a say). It is precisely because these three functions have a role that pricing strategies are difficult to define and even harder to implement. By their very nature sales teams are entrepreneurial and typically reject rigid processes, rules or policies. They like to be able to negotiate and finalise prices and need this flexibility in order to be responsive to each client situation. Therefore, designing and implementing pricing strategies and policies is difficult and many companies end up simply making it up as they go along. I’m a firm believer this is the critical root cause of price wars and margin erosion for the majority of companies. On the other side of the deal, procurement has made vast improvements in their skills and capabilities over the last 20 years, whereas pricing has scarcely evolved. All of this started back in the seventies and eighties, when Japanese products (in particular, cars) were beginning to take off in a big way and the North American auto industry became one of the early adopters of disciplined and clear buying processes (later known as strategic sourcing), as a means to lower costs and compete. Advisory companies began to emerge and develop procurement as a strategic capability. FEW ORGANISATIONS TODAY HAVE PRICING ROLES AND A PRICING DEPARTMENT OR FUNCTION IS A TRULY RARE FIND. IT IS OFTEN UNCLEAR WHO OWNS PRICING. Meanwhile, although lots of people have written on the topic of sales and its capabilities, there have been very few innovations in the past hundred or maybe thousand years (it is still common to ‘haggle’ on price, even for deals denominated in millions). That said, sales is not as formulaic as procurement. When you’re buying, you know what you want, whereas in sales, it’s a bit murkier with more unanswered questions: ““How important is this product to my customer?” and “How do my customers perceive the value of my product versus competitors?” This information disadvantage cannot always be solved by metrics, processes and systems in the way that procurement capabilities can be. However, most sales teams recognise they could do better and be more disciplined, particularly on pricing, but even now, few are taking serious action. As a result of this lack of focus and investment in pricing, I believe many – and possibly most – pricing decisions are based on intuition and anecdote rather than on data and insights. In practice, I regularly come into contact with companies that confess to cost-plus pricing and poor price discipline. The downside is that most companies don’t actually know how price sensitive or insensitive their products are, and as a consequence are more likely to reduce – or at best maintain – prices and shy away from any thought of price increases. If we were discussing supply chain or manufacturing capabilities and the lack of strategy, process, capability and results, this would be top of every board's agenda. Despite all of the issues outlined above, pricing is still not on most boards' agendas. As we know, without a pricing capability or clear pricing metrics, boards are blind to whether they are succeeding or failing as far as pricing is concerned. The price many pay will be in terms of their company’s profitability and valuation.

PRICING: THE CONSUMER GOODS RESPONSE

TIM KELLY CONSUMER MARKETS SENIOR ADVISER SHORT-TERM THINKING STILL PREVAILS IN THIS SECTOR. Pricing is very important for consumer goods companies, but I believe there is enormous room for improvement in how it is managed. Its significance is revealed by the fact that promotions typically account for the biggest expense on profit and loss (P&L) statements. However, it isn’t always clear where to find this number. You won’t find it in a neat line under pricing. That’s because, as Robert observes, it’s extremely rare to find a consumer goods business with a pricing manager let alone a whole pricing department. In addition, limited governance regarding investment in promotions means companies have discretion over where to include it in the overall spend. For these reasons, this expense is typically either split into different buckets or buried in the difference between gross and net sales. Scattering it around like this suits many companies because there aren’t many tools around to measure this number. It is notoriously difficult to predict the effectiveness of a promotion, manage it and evaluate it afterwards. Usually it doesn’t deliver the anticipated benefits. Short-term expectations Many of Robert’s views on pricing are reflected in the consumer goods market. Few consumer-facing firms have a pricing function and most use pricing as a tactical lever to drive volume. Take the snacks market: in 2009, just over half of crisps sold involved some sort of deal. Today, it’s 70%. The depth of discount has also increased, typically to around 40% of list price — twice that of four years ago. Yet many chief executives understand that these tactics, over the long-term, are unlikely to add to the bottom line, or even the top line. That’s because volumes are flat, especially in developed markets like the UK. A discount can give a brand short-term uplift over a month or a quarter, but it usually evens out over the long term as competitors get involved. For example, when it comes to household goods, recent economic austerity and the resulting promotions culture have combined to erode brand loyalty. Now all consumers care about is price. In effect, firms are funding promotions that allow retailers to discount their brands only to see customer loyalty stand still or go down. IT IS NOTORIOUSLY DIFFICULT TO PREDICT THE EFFECTIVENESS OF A PROMOTION, MANAGE IT AND EVALUATE IT AFTERWARDS. USUALLY IT DOESN’T DELIVER THE ANTICIPATED BENEFITS. So, why are they still doing it? The reason, especially for PLCs, is to meet financial reporting deadlines and please shareholders. This particular audience is glued to short-term results even when these behaviours will inevitably result in a race to the bottom. It’s a tricky balancing act. Yes, they must compete in the short-term, but they must also invest in their brands; only through strong brands can they grow the value of their business and achieve sustainable profits. They also need to avoid becoming known as a business whose categories are only bought on deal. I’ve heard the UK bosses of multinationals cry about this, but they are getting knocked back by cynical, short-term stakeholders. WHAT THESE FIRMS REQUIRE IS AN INTELLIGENT AND ANALYTICAL APPROACH TO PRODUCT MIX, MARGIN AND CUSTOMER CHANNELS. UK CHIEF EXECUTIVES NEED ACCESS TO THIS SCIENCE WHEN DEFENDING THE BUSINESS Average realised price What these firms require is an intelligent and analytical approach to product mix, margin and customer channels. UK chief executives need access to this science when defending the business. Britvic have this and they do pricing really well as do the chocolate and biscuit firms. They create different pack sizes depending on the store or sell an individual chocolate in a High Street shop for the same price as a multipack in a supermarket. It sounds almost trite to say this, but different price points can grow average realised price. A pricing function, or at least a manager, is needed to close the gap between all the different pricing pressures: a. marketing the product, b. hanging on to brand equity, c. the sales team’s need to shift goods, d. production’s desire to see their factories fully utilised. There also needs to be clarity about how promotion spend is defined on the P&L. This is true of the multinationals, including Diageo, Unilever and Proctor and Gamble, which have great brands with dominant market positions. However, for lower margin businesses it’s much harder to afford the innovation and the deals at the same time. Starved of investment, these categories could become commoditised, as is already the case with foods like milk, bread and chilled foods. Something else we need to see happen in this sector is for procurement to be more joined-up with sales people. Especially now that we’re seeing huge inflation in raw materials such as wheat, cocoa and energy. Manufacturers try and recover these costs through pricing but they are pushed back by sales. They need to recover these costs by buying better and more efficiently. In addition, sales teams need to understand the category dynamic and cost structures of their competitors. A competitor may cut the price of pasta sauce because their supply chain is more efficient. I believe these changes in the way companies operate are the building blocks for successfully balancing short-term promotional needs with the longer-term health of the brand and category. In the consumer goods world, standing still can be very hard work.

PRICING: THE INDUSTRIAL MANUFACTURING RESPONSE

KARL EDGE PARTNER KPMG IN THE UK THE EMPHASIS IS STILL ON VOLUME AND I.T. INVESTMENT IS NEEDED. I agree with Robert’s assertion that pricing has scarcely evolved over the past 100 years. This is especially true of IM where the procurement function drives a very hard, cost-based bargain. However, in this sector there are other factors to consider. Over the past five years the UK’s industrial manufacturing (IM) sector has faced a highly challenging operational environment. Cutbacks, austerity and a relentless focus on cash have become the norm and pricing policy has concentrated on volume, with an overall acceptance of price downs. When companies in this sector publicise their contract wins, it’s always about revenue rather than profitability. That’s because they have agreed lower prices in order to maintain cash flow and stay in business. IM COMPANIES ARE SEEING A SURGE IN DEMAND… HOWEVER, THIS PRESENTS THE CONUNDRUM OF GETTING CUSTOMERS TO ACCEPT THAT PRICES CAN GO UP AS WELL AS DOWN! Broader factors to consider But haggling isn’t always about price. Other negotiable factors include payment terms (especially the timing of cash flow), the capacity required to cover fixed costs and the positioning of other work resulting from the deal. From a B2B point of view, relationships are as important as understanding the customer as in a B2C environment. Successful industrial manufacturing companies need long-term relationships in order to secure future orders and bring certainty to their production planning. As we slowly emerge from the downturn, many IM companies are seeing a surge in demand and the challenge has flipped. Now it’s all about having the working capital to meet the growing demand. However, this presents the conundrum of getting customers to accept that prices can go up as well as down! MOST IM COMPANIES ARE INTERNATIONAL, IF NOT GLOBAL, SO DIFFERING CULTURAL APPROACHES TO NEGOTIATION MUST BE CONSIDERED AHEAD OF PRICING PRACTICES. Ten years away from efficient pricing Most IM companies are international, if not global, so differing cultural approaches to negotiation must be considered ahead of pricing practices. For example, in the Netherlands, they are very direct in pricing discussions. However, in Japan, it is far more subtle and largely hinges on indirect negotiations through multiple behind-the-scenes conversations. As for data analytics, I don’t expect the same level of benefits for B2B as for B2C. However, I agree with Robert that it will greatly enhance pricing’s status quo. [Link to ‘Analytics is the future’ IM is slowly waking up to the fact that they have far more data available than they typically use. However, they’re a million miles away from the likes of Tesco, Amazon and the airlines. Sadly, I think it will be another 10 years before we reach the functionality of those companies. The biggest blockage is the current IT infrastructure and the lack of IT investment over recent years. Only recently, a FTSE100 company realised that five parts of the organisation were interacting with the same top customers and separately invoicing them. Most businesses have now reached such a level of efficiency that it is challenging to go further without real, new innovation. In IM, we’re seeing the advent of 3D printing which could change the sector’s cost-base, and nanotechnology which could transform the structures of physical production. Despite these advances, people will still want to keep paying less for more. As a result, many companies are currently surviving on single digit margins.

ANALYTICS IS THE FUTURE FOR PRICING

ROBERT BROWNE PARTNER KPMG STRATEGY GROUP PRICING ANALYTICS WILL BECOME THE COMPETITIVE STANDARD FOR ALL BUSINESSES. Within the next five years, or sooner, pricing analytics will fundamentally transform pricing in the UK and other developed markets. Retailers and airlines have been masters of this for some time but others will follow. Airlines provide a good example of effective pricing analytics. For many years, they’ve been optimising prices on a real-time basis by combining consumer and market insights with transaction and capacity data. Through sophisticated modelling, they can uncover pricing and revenue opportunities based on a deep understanding of supply and demand dynamics. In a similar way, retailers have mined transaction data and loyalty card insights in combination to define the prices and promotions that will succeed with consumers. Meanwhile, online retailers have analytics in their DNA and optimise process using customer profile and click data. Of course, not every company with data knows how to use it but things are changing and new capabilities are emerging. We should expect that companies like Google and Facebook will move beyond engaging customers and towards delivering insights and analytics that define price and promotion strategies. Already we’re seeing more companies outsource pricing analytics to specialist providers. Pricing analytics will become a new frontier for competition I believe pricing analytics will become a competitive standard for all businesses, online and offline. For example, in financial services and telecoms today, we have traditional market players competing against online and other new entrants, including big retailers. The new entrants already out-compete traditional market players on analytics and will continue pressing them to think about their customers’ wants and needs and how to serve them better. As a result, banks, insurance firms and telecoms companies will all have to up their game to compete for this information advantage. I also think that what we as consumers are charged for will change. As more businesses build up their consumer understanding through data, prices will be set more dynamically. Rather than selling out of stock for examples, retailers will adjust prices or remove promotions in real-time, depending on demand. We already pay more for a taxi ride at night and for popular online grocery delivery slots. Soon we could start being charged more for petrol, clothes or paint at different times of the day or at weekends. SOON COMPANIES LIKE GOOGLE AND FACEBOOK WILL MOVE BEYOND ENGAGING THEIR CUSTOMERS AND TOWARDS DELIVERING INSIGHTS AND ANALYTICS THAT DEFINE PRICE AND PROMOTION STRATEGIES. Unpacking value Pricing analytics are equally relevant for business products but there are some short-term opportunities also. I believe many companies are not pricing all kinds of intangible and flexible sources of value. Right now, whenever a company buys from another company and needs an expedited delivery or needs to change the order quantity, they are rarely asked to pay a surcharge. This is assumed to be a part of broader ‘good customer service’. Contrast this approach with how airlines view the value of flexibility. The unbundling of sources of customer value is very evident in their pricing models. That’s why items such as checked bags, meals and seat locations are priced as optional extras. This is the principle of paying for what you value but only getting what you pay for. Retailers too will soon be seeking out sources of intangible value that can be priced and explicitly charged for, such as the ability to return or replace goods. Current practice is to include all this for free, giving away value and incurring cost in the hope it encourages customer loyalty. Similar to the principle of paying for what you value, I believe we’ll also see many more auction and bidding-based pricing models, particularly online. Aside from the obvious practitioners (such as eBay or Priceline), I expect to see this model applied to other ‘expiry products’ such as entertainment and sports and perhaps popular toys and fashion. For business products, procurement departments will increasingly use auctions in much the same way as Priceline gets buyers to bid for travel. Sellers to gain the upper hand Five years ago, the online world shifted the balance of power to consumers. They did this by creating pricing transparency across retailers ad channels while also providing peer-to-peer insights on products and services. As companies invest more in pricing analytics, power is shifting back to sellers, a trend that I believe will continue.

DIGGING FOR INSIGHTS WITH GEEKS AND PROPELLER-HEADS

JEN BOOTH DIRECTOR KPMG IN THE UK UNLESS COMPANIES BACK THEIR FINDINGS WITH RESOURCES, DATA CAN BE A POINTLESS INDULGENCE. If the future of pricing lies in data and analytics, as Robert says, then maybe we should look at where data and analytics is now. Plenty of companies are interested in it, but where is it leading them? I have been around the world of Data & Analytics (D&A) and Big Data for several years now and one question regularly crops up: does D&A have the scope to become a real competitive differentiator? I believe, for that to happen, D&A needs to become an agent of change within organisations. Its outcomes must drive fundamental alterations in business decision-making and be fully integrated into day-to-day operational processes. Very few businesses have been able to embed D&A sufficiently to achieve this. And that’s a missed opportunity because any D&A model, however flawless, that doesn’t drive change is no more than an academic exercise. Currently, D&A throws up plenty of interesting ‘stuff’. Observations, often initially counter-intuitive, surface from extensive data mining. The resulting correlations can inspire marketing campaigns or cause processes to be tweaked. But these are one-offs. Rarely do I see D&A observations transform an organisation’s customer-facing process; never have I seen them drive change to an organisation’s culture. Why? Because it’s scary. Senior leaders got to where they are through finely-honed business instinct. Passing that decision-making over to a machine may feel like criminal neglect. Also, D&A often throws up results that feel wrong — usually because they directly challenge ingrained thinking. So the default reaction is to assume the analysis is flawed, not the thinking. That’s why the findings are too often relegated to driving one-off as opposed to fundamental change. The truth is too hot to handle. Right now organisations are really struggling when it comes to focusing on what matters. There’s a lot of noise in the market right now, particularly the all-pervasive hype around Big Data, which is largely driven by software and hardware vendors (not to mention professional advisors!). As a result, organisations believe they must at least do something. Companies have actually been dealing with data for years, but these days there’s more of it available and it’s cheaper to store. So it’s that much harder for them to know what they’re looking at, or looking for. Distractions abound in this space and many companies are finding it hard to produce quality insight, particularly those that expanded through acquisition. Throw in all that vast, unstructured, external data from today’s ‘in vogue’ world of social media and it’s no surprise so many organisations are drowning in data. Realistically, though, if a company cannot join the dots regarding insights generated in-house, what’s the use of understanding a customer’s Facebook habits? D&A OFTEN THROWS UP RESULTS THAT FEEL WRONG — USUALLY BECAUSE THEY DIRECTLY CHALLENGE INGRAINED THINKING. SO THE DEFAULT REACTION IS TO ASSUME THE ANALYSIS IS FLAWED, NOT THE THINKING. Organisations need more than just whizzy technology to generate a return on D&A investment. They need to start asking “so what?” We’ve all heard the story of how supermarkets can predict a marital breakdown from customer data, six months before it happens. We gasp and roll our eyes in amazement – but so what? Unless those supermarkets use that insight to retain those customers or make them more profitable, it’s just a dinner table anecdote. This is where I believe the people behind D&A – the data scientists and analysts – could help their own cause somewhat. Currently, they are perceived (not always unfairly) as geeks and propeller-heads, engaged in deep number-crunching and mathematical brainstorming. It can certainly become an indulgent exercise: who has the most sophisticated propensity model, who unearthed the most incredible correlation? Of course this isn’t always fair. From what I’ve seen, the relationship between D&A and marketing is well-established and maturing. It can even drive change, albeit limited. However, a substantial disconnect still exists between D&A on one side, and business leaders, business analysts, process owners and product developers on the other. The latter have the ability to embed real operational and cultural change within an organisation yet they remain unconvinced of D&A’s merits. As long as this disconnect remains, I don’t see D&A realising its potential. Perhaps the message has been lost in translation. Then again, inbuilt resistance to D&A (“they think their models are cleverer than me!”) doesn’t help. Nor does all the distracting market hype around Big Data. Some organisations have undoubtedly cracked it. Amazon and Google, unencumbered by a pre-internet cultural legacy, are prime examples. And, while they are the exception rather than the rule, their existence will give organisations the appetite to continue tackling this issue, though the hurdles remain significant. Yes, I believe D&A can become a real competitive differentiator, but not for at least five years, maybe longer.

FROM THE EDITOR THE DIGITAL CROSSROADS

Technology is the broadest of churches. Virtual, online, cyber; these terms impact on us all as citizens of the internet era. But technology is as much about the industry sector, the components it produces and how they help enhance or protect our online existence as it is about the cyber experience itself. The risks those businesses face — and the funding they require to thrive — should be as important to us as our own online privacy or cyber identity.

UK TECH: MOVING BEYOND THE START-UP MINDSET

TIM KAY DIRECTOR KPMG IN THE UK THE PUBLIC AND PRIVATE SECTOR MUST TAKE ACTION NOW TO MOVE THE UK FROM A NATION OF START-UPS TO A MATURE TECH CENTRE OF EXCELLENCE Is the UK doing everything it can to create a vibrant and sustainable technology sector? Not in my opinion. I believe that if we are serious about improving the success, size and attractiveness of our tech sector, we will need to start placing much more focus on helping companies grow out of the start-up phase and into viable growth (or phase two) organisations. I firmly support the UK’s current focus of fostering UK ideas and technology through the start-up phase of the business. We have a strong heritage of generating ideas in the UK and we should – and must – continue to support UK innovators and entrepreneurs. But I think we have become overly preoccupied with the start-up phase. All public policies around this area are focused on supporting start-ups, while sensational media coverage about global players snapping up nascent ideas for heady sums and compelling growth stories like Instagram have also skewed the focus for entrepreneurs and investors. As a result, I believe that we are cultivating a sector that is overly focused on creating innovative products and achieving external funding. But a good idea or clever product isn’t the same as a good, long-term, viable business that creates employment and contributes to GDP. Should we not rather be focused on creating a group of world-class, industry-defining technology businesses that attract talent, investment, innovation and employment opportunities to the UK? Our ambition as a country and as a sector must aim higher than simply creating an abundance of technology start-ups. There are examples of successful UK tech businesses that continue to proudly brandish their PLC designation. ARM is one. The maker of microchips is one of the UK’s biggest success stories, employing more than 2,000 people and its products are used in most of the world’s smart phones and digital cameras. That, I believe, should be our ambition in the short-to-medium-term: to foster a raft of world-class multi-million pound tech companies with the support and potential to grow into multi-billion pound entities in the future. A GOOD IDEA OR CLEVER PRODUCT ISN’T THE SAME AS A GOOD, LONG-TERM, VIABLE BUSINESS THAT CREATES EMPLOYMENT AND CONTRIBUTES TO GDP. But that can’t, and won’t, happen without the right environment to nurture our start-ups as they get serious about growing up and becoming functional and contributing members of the national economy. Immediate action is needed from government, in terms of introducing the supportive tax, employment and trade policies required, in conjunction with private sector support, in terms of investment but also beyond that, if we have any hope of competing on the world stage within the next decade. We don’t have any time to lose. A short-term focus will only result in lost investment, talent, innovation and growth, which will condemn the UK to another cycle of innovation without commercialisation, as emerging and established economies build world-class companies in new industries on the back of ideas generated in the UK.

DO WE NEED AN INTERNET PRIVACY CHARTER?

JESSICA TAY ADVISOR FOR CYBER SECURITY, KPMG IN THE UK SUSAN SHARAWI EXECUTIVE ADVISOR FOR INFORMATION PROTECTION, KPMG IN THE UK JESSICA TAY BELIEVES IT’S TIME FOR A PRIVACY CHARTER FOR THE INTERNET. SUSAN SHARAWI REJECTS THE NOTION AS NAÏVE. In recent years the media has regularly promulgated a wide range of news stories about internet privacy crimes and misdemeanours, from the hacking of risqué celebrity photos to the tailoring of products and services based on your online activity. Many are demanding a call to action. Jessica Tay and Susan Sharawi, information security advisors in KPMG’s cyber security practice, had very strong views on whether a privacy charter should be created for the internet to protect our data from being misused. As you log into another website, have you considered how much trust you are putting in the website owner to not only protect your data, but also to use it in a way which you consider ethical? A potent mix of social media sites, websites which require you to register personal details for the most basic of services, opaque privacy guidelines and naive internet users is, sooner or later, going to become a recipe for disaster. Privacy, once considered a right, appears to now be more of a privilege, limited to those who understand how to protect themselves online. I believe that one way to reclaim this right is to create a privacy charter for the internet, which empowers consumers to be able to make a conscious choice to shop and interact only with companies which sign up to protecting customer data and share their customers’ ethical standards regarding the use of personal data. Brand suicide? It seems hard to imagine; no more long and complex legal statements about how your data may be used, no more wondering if your data will be sold on to a chain of third parties because of a complex clause that you have unwittingly agreed to. Imagine the appeal of a simple statement confirming that a company signed up to the charter will not sell any of your data, will do everything reasonable to protect it and will not buy data from sources where your self-published personal information has been analysed. It could be argued that such a privacy charter risks brand suicide for businesses involved as data will inevitably be leaked or stolen. However, to establish some perspective, no data is ever 100 percent safe and I believe that consumers understand that. The privacy charter does not purport to be a gold standard of data protection. Organic data Having said that, there remains a critical need for institutions to build and maintain the security of their information systems and this remains true whether or not a privacy charter exists. I believe there could be great rewards for the businesses that are forerunners in the privacy charter game and are able to use it as a point of differentiation. Surveys have focused in recent years on the ‘tribes’ people belong to, and how they determine our purchasing actions and choices that we make. There is a burgeoning class of consumers who want to make what they feel are the right choices - eating organic and buying British for example. I believe this type of consumer will be willing to pay a little more to shop with a business with an ethical privacy stance. PRIVACY, ONCE CONSIDERED A RIGHT, APPEARS TO NOW BE MORE OF A PRIVILEGE I believe that signing up to a privacy charter will be for firms like voluntarily installing a self-destruct button. Taking the lead in publically promoting data protection credentials will only set businesses up to have their data compromised. This could happen illegally, through cyber crime for example, or by minor incidents of accidental customer data loss or misuse, which I believe are inevitable, being seized on by the media and customers. Attempting to secure electronic data in the same way as personal documents are secured by being placed in a safe (hidden behind a picture frame) is destined to fail, as the cyber ‘safe breakers’ have too much of a head start in the sophistication of their methods and technologies. I also believe that it is a misconception that consumer privacy on the internet ever existed. From the moment we started using the internet and entering our name, address and date of birth into form fields the genie was out of the bottle. Consumer naivety Our generation is only now slowly realising this as organisations carve up opportunities to use our data for their benefit and ‘agencies’ who specialise in collecting and selling personal data spring up into existence. This consumer naivety is not new. It took time for the risks associated with door-to-door sales to be widely understood. In addition, let’s not forget the importance of balancing the risks associated with the privacy of consumer data with the benefits of the internet, which has undoubtedly enriched our lives in many ways. I believe that consumer data is forming a new currency on the internet, which will eventually change the way we make transactions in the future – it will become a commodity which is traded by ‘enlightened’ internet users who understand its value and how it may be used. ET’S NOT FORGET THE IMPORTANCE OF BALANCING THE RISKS ASSOCIATED WITH THE PRIVACY OF CONSUMER DATA WITH THE BENEFITS OF THE INTERNET

IS INTERNET SECURITY AND PRIVACY AN INDIVIDUAL RESPONSIBILITY?

JAMES HEALY DIRECTOR KPMG IN THE UK STEPHEN BONNER PARTNER KPMG IN THE UK IN OUR INCREASINGLY DIGITALISED WORLD, HARDLY A WEEK SEEMS TO GO BY WITHOUT A NEWS STORY ABOUT A CYBER SECURITY MISHAP. WHO SHOULD BE RESPONSIBLE FOR INDIVIDUALS’ SECURITY AND PRIVACY ONLINE? In our increasingly digitalised world, hardly a week seems to go by without a news story about a cyber security mishap. Despite this certainty, the jury is still out regarding one fundamental question: Should individuals be responsible for their own security and privacy online? KPMG’s James Healy, a Mobility and Resource Director, and Stephen Bonner, a Partner in Information Protection, took time to debate this issue. Regardless of the rights and wrongs of what an individual might reveal online and whether they thought they were doing it privately or not, I believe that the very notion of online privacy to be pretty much redundant, or at least impossible to realistically achieve. What that realisation brings with it is a requirement to take far greater responsibility for your online persona. However, I would go one step further and suggest that, in the near future, learning to mask your cyber identity will become a core life skill. I think that my generation - I’m 30 by the way- is the last naive generation when it comes to online privacy. Whereas today, some people may baulk at the idea of learning how to mask your true identity online, I can foresee that within one further generation, this will not only be an expectation for everyone, but even permeate school curriculums and parenting handbooks. That’s how important I think this single facet of modern day life will turn out to be. I therefore do not think it is unreasonable to expect governments to have a duty of care to educate their citizens on how to protect themselves and their personal assets in cyberspace as they do in their homes or out on the streets. In a time when the cyber world is becoming almost as important to us as the real world, I think we can expect to see errors of judgement online being treated as seriously as they would offline. But the problem is that you may not even know when online information is being used against you. As a result, we could see more people attempting to manage their online persona in much the same way as keeping a CV up to date. Even if you’ve done nothing wrong online, who’s to say how the public information you put on there may be interpreted? In my mind, hoping that some authority may be able to legislate for how your online information is used seems a long shot. Far better it seems to take ownership of the situation yourself. IN THE NEAR FUTURE, LEARNING TO MASK YOUR CYBER IDENTITY WILL BECOME A CORE LIFE SKILL. The idea that it’s the responsibility of individuals to look after their privacy and safety online, while widespread, is of concern to me as it sounds very much like an admission of defeat. As a society, we should be thinking differently about how to protect privacy. I believe a society is measured by how it treats the vulnerable, not how easily the strongest can avoid suffering. While taking an approach where everyone is responsible for their own privacy is fine for those who are economically-advantaged and tech-savy, it punishes those with the most to be exploited in privacy invasions. Privacy should be ‘baked’ into the online experience, not something which has to be requested – especially when requesting privacy could be seen as an indicator of an intention to act illegally. The potential risks are too great for any other approach. Flawed argument For example, cyber tools created for legitimate law enforcement purposes and shared between nations with shared interests may be used later to oppress citizens or be passed on again to individuals who may use such tools recklessly. This is happening now. To suggest that it is the responsibility of individuals to manage the risks associated with online privacy is flawed, for the simple reason that it is not possible for them to do so. In a world where alleged nation-state sponsored hacking teams like “Comment Crew” and leaders of Hacktivist groups such as “Anonymous” have been unable to successfully protect their identity against investigators with medium-level resources, it is hard to argue that any individuals can outclass those determined to invade their privacy. But it is also important that this debate is shaped by an understanding that our online reputation will increasingly become a distinguishing factor in social, economic and personal success. Anyone who is forced to run multiple personas or remain anonymous will find it increasingly hard to get a date, find a job or feel included on society more broadly. I believe that these parts of life are critical to a vibrant and free society and asking people to sacrifice them in order to protect privacy is to miss the point of rights to privacy. Regulating privacy online is the only practical sol TO SUGGEST THAT IT IS THE RESPONSIBILITY OF INDIVIDUALS TO MANAGE THE RISKS ASSOCIATED WITH ONLINE PRIVACY IS FLAWED, FOR THE SIMPLE REASON THAT IT IS NOT POSSIBLE FOR THEM TO DO SO.

WHEN ONLINE GOES OFFLINE - TOTAL INTERNET FAILURE

STEPHEN BONNER PARTNER KPMG IN THE UK COMPLACENCY ABOUT THE INTERNET’S STRONG RELIABILITY IS NO EXCUSE FOR THE LACK OF A CONTINGENCY PLAN. In our increasingly digitalised world, hardly a week seems to go by without a news story about a cyber security mishap. Despite this certainty, the jury is still out regarding one fundamental question: Should individuals be responsible for their own security and privacy The subject of internet blackout risk receives relatively little attention. It is often drowned out by tales of the risks associated with state-sponsored cyber crime and sophisticated malware. As a consequence companies could be in for a shock, at any point in the near future. I think that we have experienced an extremely unlikely and unusual period of stability of core internet services like routing tables and name lookups. This good luck has meant most organisations don’t take the threat of long term internet outage seriously enough. I think one of the biggest IT risks that we face is the combination of capacity and complexity issues causing internet failures. Who pays for the internet’s utility bill? Organisations should be surprised that the internet works so well, rather than be surprised when it fails – given that no one body is responsible for making it work. This is only an issue because it has become normal to think of the internet as a utility such as power, telecommunications or water, where a service is paid for with contractually agreed service levels. Organisations do protect their connection to the internet, for example by using ‘dual pipes’ from two providers, but out of sight, the internet is cobbled together in a whole series of insecure, outdated technologies which are lashed together with the sweat and tears of network engineers. Spiraling out of our control The internet is also dependent on numerous other factors which cannot be controlled by end users. For example, reliable power and access to cooling is needed and a global network of cables needs to be protected from being cut by construction machinery or damaged by fishing trawler nets. Then of course, there are risks caused by those acting maliciously – which has happened in the past. ‘Worms’ for example have spread rapidly across the internet, causing significant disruption. It represents a giant leap of faith for so many organisations to bet their business model on the internet, which is managed with so few formal controls. Ironically, it is also an endorsement for this ‘unregulated’ approach, as it appears to be more robust than highly regulated systems such as power or financial networks which have rare, but very significant outages. IT REPRESENTS A GIANT LEAP OF FAITH FOR SO MANY ORGANISATIONS TO BET THEIR BUSINESS MODEL ON THE INTERNET, WHICH IS MANAGED WITH SO FEW FORMAL CONTROLS Exponential growth versus linear growth The loads and complexity of internet usage is growing exponentially while the skills and capability to manage the systems is growing (at best) in a linear fashion. Last year, we passed the point where more than half of all internet traffic was created by machine-to-machine communication – the number and criticality of connections facilitated by the internet is far outpacing the resources dedicated to maintaining it. More and more data is being transferred by an ever more exotic collection of devices, from fridges to pacemakers. I believe that we will see substantial disruption to organisations and entire businesses failing through not appreciating that relying on the internet means relying on third party services for which there are no contracts and not even a clear owner. Quantifying the impact I take no pleasure in suggesting that another item be added to the already daunting list of IT risks which need to be considered. However, heavily internet-dependent businesses which have processes and procedures in place to respond to the internet failing for a number of days are currently likely to be in the minority. Have you taken the time to consider the impact on your business of an extended Internet outage beyond your (or your ISPs) control? It could be argued that organisations should celebrate the miracle that is the internet proving to be so robust for so long and press ahead with business as usual, but having contingency plans in place to survive a sustained loss of internet access is probably wise – from maintaining access to business-critical information to interacting with customers and having appropriate insurance to cover losses. The internet is incredible, but this shouldn’t blind us to the fact that it isn’t a traditional utility and its prolonged failure is an IT risk.

TECH RISK - TACKLING REACTIVITY AND UNDER-INVESTMENT

JON DOWIE PARTNER KPMG IN THE UK YEARS OF UNDER-INVESTMENT IN SYSTEMS AND REACTIVE APPROACHES TO MANAGING TECHNOLOGY RISK ARE LEADING TO LARGE SCALE IT FAILURES. Years of under-investment in systems and reactive approaches to managing technology risk are leading to large scale IT failures. In my opinion it’s inevitable that every organisation will face an IT failure in the short to medium term which disrupts ‘business as usual’ operations Virtually all businesses today have a critical level of dependency on technology. The trust placed in systems is constantly under threat from a complex landscape of technology risks. The media headlines of cyber attack, system and project failure, regulatory and compliance breaches and fraud bear witness to how often this trust is broken usually with huge financial and reputational impact So given the ever-increasing complexity of IT environment and the dynamic nature of technology risk we are likely to witness (another) major UK business have its technology outage or failure unfold in the media spotlight. We are witnessing major technology failures impacting critical services and operations, This is causing businesses untold reputational damage and incurring significant costs to resolve. The cause of this is two fold – years of under-investment in technology systems and an ineffective approach to IT risk management Facing up to the risks and the media scrutiny Cyber crime and cyber risks in particular are now very much in the corporate consciousness. In fact, managing cyber risk is in danger of becoming synonymous with managing technology risk more broadly but robust cyber security does not equal robust technology risk management. Other, less high profile risks may be being neglected, such as complexity and legacy, lack of resilience, project failure, regulatory change and unauthorized system access I anticipate that media scrutiny and reporting of cyber crime will continue and this will cause perceived levels of technology risk exposure to grow. More and more emotive headlines in the papers should be expected. Overcoming the hard sell Dealing with the root causes and remedying years of under-investment in systems won’t be quick or easy, and it won’t be cheap. It will require vision, innovation and strong execution capabilities – and above all must place the customer at the heart of everything. To be truly transformational businesses will also need to vastly improve the customer experience while minimising the cost of ownership, and seek to leverage new technologies. All of this is much easier said than done. The reality is that most organisations only act once a serious breach or failure occurs. While this may not be a wise approach, it is understandable. It can be a hard sell to argue investing significant sums to mitigate technology risk. However, effective technology risk management should be all about making technology play its part in delivering business goals and driving improved performance. Most executives would buy into this. What may be more achievable in the short term is for businesses to promote better awareness of technology risk and to invest in better IT risk capabilities. This requires a shift in mindset and a more proactive approach. TIME AFTER TIME, MOST ORGANISATIONS ONLY ACT ONCE A SERIOUS BREACH OR FAILURE OCCURS. Enter: The Chief Tech Risk Officer My view is that a practical way to approach the technology risk challenge is through introducing or enhancing the role of the ‘Chief Technology Risk Officer’– this role is already gaining greater recognition and power within IT functions. In turn, technology risk will get greater exposure to boards and risk committees. However, the right people with the rights skills and the right mandate are needed in order to do the role effectively. This role needs to evolve from being compliance-focused to fulfill a consultancy role too, which is forward looking and helps the business to make better risk-based decisions on how best to allocate limited resources. It is not feasible to protect against and mitigate all risks. However, Chief Technology Risk Officers should help the business to focus and prioritise in protecting against the most significant risks for their organisation. Face up to the inevitable reality that a major IT failure will impact your business in the short to medium term. Tackle technology risk head on. Adopt a proactive approach and understand the key risks affecting your business. Prioritise and put improvement plans in place. Promoting better awareness of technology risk from the top of the house starting at Board level and driving right through the organisation. Invest in better IT risk capabilities and introduce / enhance the role of the Chief Technology Risk Officer. All of these will play a part in delivering business goals and driving improved performance.

SILICON UK - WHAT'S NOT TO LIKE?

TUDOR AW PARTNER KPMG IN THE UK THE UK’S EDUCATION, CREATIVITY, CULTURE, FINANCE AND GOVERNMENT IS WHAT MAKES IT SO ATTRACTIVE TO TECHNOLOGY INVESTORS. Is there a more important industry sector nowadays than the technology sector? Arguably not. Other sectors, such as utilities, finance and healthcare may be seen as contributing more directly to a citizen’s standard of living. Yet, in the modern age, these and other sectors are increasingly underpinned by, and dependent upon, technology. To think of technology as the ‘gadgets and gizmos’ industry is to do it a great disservice. To think of it as the industry which helps keep planes in the air, to save lives, to run modern banking systems or to make possible new forms of power generation gives it the credit it really deserves. It is now a fundamental enabler of virtually all other industries. Governments know this and appreciate the importance of a vibrant technology sector in terms of growing a strong economy and being able to compete on the global scene. An attractive technology sector is crucial to any leading economy The UK is no different in that a successful and attractive technology sector is crucial if the country is to maintain its position as a leading economy. But why should any technology organisation choose to invest in the UK, when other countries are all pushing the same message about being such a great place to come to? I think there are plenty of reasons, but it would be too easy to come across as the rose-tinted propagandist on such a topic and there are other factors that we must be mindful of - and which must be confronted. To that end, it is worth considering some of the key questions about what the UK currently has in its favour. Which factors make the UK an attractive investment location – but which of those are coming under threat? What single thing could we do to improve the UK’s attractiveness? And when looking at our global competitors, what do we envy most? The UK has a long history of innovation and creativity The UK has a long history of innovation and creativity embedded into its very core. From Isaac Newton to Formula 1, there is a commitment to innovative excellence which cannot simply be created from scratch. Cutting edge engineering stems from this culture – but so too does our global reputation in creative areas such as fashion, music, advertising and media. This is the result of years of nurturing a careful balance between education, creativity and freedom. A stable legal system where investors can rely on the rule of law and where intellectual property is properly protected are also important factors. The same point applies to the presence of one of the world’s great capital cities. In London, we have a city which people still aspire to come and work in – encompassing everything from arts to restaurants, a real creative culture and, not least, a melting pot of cultures. These things do matter and can make the difference in choosing a location to invest in. WE MUST STOP BEING OUR OWN WORST CRITICS. INSTEAD OF ASKING ‘WHY WOULD A TECHNOLOGY BUSINESS WANT TO COME HERE?’ WE SHOULD BE ASKING ‘WHY WOULDN’T THEY?’ Typical British restraint and self-deprecation have no place here London also provides access to global capital flows and that huge eco-system of financiers, lawyers and other professional services required to make everything work smoothly. And that’s before we even consider our educational establishments, which are the envy of the world. The way all these elements come together in a fusion of education, creativity, culture, finance and government is what makes this country such an attractive proposition to technology investors. As I said though, it is all about balance. There is an argument for saying that we should do a lot more to shout about our successes in the same way other countries do. Typical British restraint and self-deprecation have no place here. I would also like to see us talking up the achievements of technology businesses engaged in industrial or B2B technology development, not just those in the consumer space. On the education front, there are concerns about whether our curriculum will provide the skill-sets that modern technology firms require. This may no longer be about teaching children about how to use technology – but using technology to deliver completely different learning pathways as well as developing that technology itself. For those talented entrepreneurs who do subsequently carve out a niche for themselves in the industry, are we supporting them adequately? That there is support for technology start-ups is beyond question. But it could be argued that such support needs to be extended longer into the new company’s life, lest we risk becoming known as a nation of start-ups who do not grow up. Our domestic technology businesses could also help themselves by learning exactly what makes the investor community tick. A slightly better appreciation of the need to put more effort into educating people how their organisations work and the way they generate value would strengthen working relationships. Helping build a strong ecosystem between technology enterprises, fund managers and analysts requires a two-way effort. Despite these things I believe that none of the problems mentioned are insurmountable. Sure, we might cast envious glances across the Atlantic, where the results of a more open-minded approach to risk-taking are evident. We may also envy the Germanic respect for engineering professionals. Yet I still place the UK in the upper echelons of attractive technology investment locations. For new entrants, the welcome and support they receive could not be warmer. For employees, you would be hard pressed to find a country easier to adapt to. Why wouldn’t a technology business want to come here? If I could wave a magic wand to improve our attractiveness still further, I would want to focus on making our education and financial institutions the best possible fit they can be for the technology sector. But we must stop being our own worst critics. Instead of asking ‘why would a technology business want to come here?’ we should be asking ‘why wouldn’t they?’ There are far more positives than negatives in this particular debate – we just need to get out there and tell the world and be relentless in our quest to make the UK the premier destination for tech companies.

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