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Meeting Summary

Key Takeaways from NeuGroup’s 2019 H1 Asia CFOs’ Peer Group Meeting

August 14, 2019
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AsiaCFO members discussed the implications of China's social credit system, the growing pressure on finance teams to gather and analyze data for business units, what multinational corporations need to know about robotic process automation and more at their spring meeting in Shanghai. 

AsiaCFO 2019New Credit Ratings to Manage

From China’s social credit system to ESG scores, corporates have new ratings to manage. Who will manage them and how?

The time to learn is now. The China-based CFO of a multinational corporation told members of the AsiaCFOs’ Peer Group that he’s working on a project to explore the implications of China’s so-called social credit system for his company. The full system is due to come together in 2020, and pilot efforts are already underway. Now is the time to get up to speed.

A holistic take on credit. Perhaps the best way to think about social credit is as a more holistic approach than the western focus purely on finance. The Chinese word for credit, ‘信用’ (xinyong), has its origins in Confucian ethics and morality and applies to the dignity and trustworthiness of an individual. The Chinese government has formulated its social credit system for rewarding trustworthiness and creditworthiness and punishing untrustworthiness and lack of creditworthiness based on this concept.

Enter big data. While the Chinese Communist Party ultimately decides the determinants of China’s social credit scores, there will be ample reliance on big data gathered from numerous sources, including surveillance cameras and social media. Research into social credit scoring has been ongoing, including via Chinese fintech pioneers such as Sesame Credit, part of Alibaba’s Ant Financial. These fintechs use online purchase history, social media interactions and countless other data points to determine creditworthiness. Their scoring systems also have a big financial inclusion benefit by offering credit to individual and small businesses that banks and other traditional credit providers ignore. Digital algorithms overcome credit assessment challenges found in legacy systems.

Upsides to scoring. While the media assessments have focused on the horrors of being blacklisted—including the inability to book trains, planes or hotels, and digital shaming posters—a good score could provide access to favorable financing terms, lower tax rates or even automatic approval to move money out of the country. A bureaucracy of yes or no could be replaced by the social credit scoring algo.

The new ratings management. Understanding how social credit scores come about, therefore, may be a bit like figuring out how the Google search algorithm ranks your webpage. There will also be countless advisory and consulting firms promising to improve your score. Hopefully the CCP will provide the transparency it promises on what drives the social credit scores it sanctions.

Connecting the dots to ESG. The other major attempt to make credit ratings more holistic is found in environmental, social and governance (ESG) scores. ESG scores so far are focused on companies and not individuals, and the targeted use case, for now, is guiding investors seeking to provide capital to businesses making positive ESG contributions. But other than the narrower scope and linkages to personal data, social credit scores and ESG scores are both seeking to influence behavior deemed positive by societal leaders.

New credit managers needed. While it’s still early days, the shift to more holistic credit assessments is real and not confined to China. So traditional managers of credit and credit ratings need to figure out how and who will help firms manage these new ratings. Is it the treasurer, who typically manages the old-school credit rating and rating agency relationships? Or someone outside of finance, given that these new credit assessments are so much wider in scope? It’s time to start asking these questions.

The Data Game: Finance, Business Units and Finger-Pointing

Growing pressure on finance teams to find and analyze data raises questions of responsibilities and relevance.

The preeminent power of data within today’s multinational corporations means that business units—often under pressure to meet ambitious growth targets—are increasingly demanding that finance teams gather, read and analyze more data at faster speeds to help the business achieve its goals.

In some companies, that dynamic is leading to finger-pointing and debate about which group is responsible for what. There are no easy answers that apply to all companies. What’s clear, though, is that improving the exchange of meaningful data is in the interest of both commercial and finance teams. That was among the takeaways from discussions at the recent Asia CFOs’ Peer Group meeting, where members shared the varied views of their organizations.

Defining the debate. Some of the key questions surfacing at member companies in this era of big data include:

  1. What data should be used for business planning?
  2. Who should gather what data?
  3. Who should analyze what data?
  4. What is each team’s role in managing data and ensuring action is taken in response to the insights it produces?

Dividing lines. One member said that business units at his company are responsible for gathering and analyzing data that produces strategic insights, while finance teams use budgeting and financial reporting data to make forecasts. Another said that in her organization, monitoring the return on investment for sales is a finance team responsibility, while monitoring the return on investment for marketing is the purview of their business insight team.

Some participants said that number crunching involving business scenario planning and its impact on financial reporting is well within the scope of the finance function, but analysis of data on consumer behavior and its impact on business forecasting is outside the scope of traditional finance activities.

For example, one member’s company is buying data from a telecommunication provider that shows the number of mobile phone subscribers who are from outside a given geographical area and how long they stay there. From this, the company hopes to observe patterns and trends to gauge tourist demand for hospitality services. The member said gathering the data and analyzing how it might be used to boost sales is the business unit’s job. But finance could then make use of that analysis for financial planning.

Wanted: data scientists. Many finance professionals fear becoming strategically irrelevant if they limit themselves to gathering and analyzing data based primarily on prior financial performance metrics. That’s one reason more finance departments want to hire data scientists with the technical skills and curiosity to plow through complex data and make actionable sense out of it. But not everyone needs a data scientist; it may be enough to foster a team culture that rewards anyone who delves into data to discover trends, patterns and anomalies that help the business grow and profit.

Data custodian? This term surfaced at the AsiaCFO meeting as a possible description for finance teams that oversee the stewardship of data and distill it into information that supports business decisions, promotes sound financial management, allocates scarce resources among competing business opportunities and aids in the implementation and monitoring of business strategies.

Whatever term you use, almost everyone agreed that the finance function is increasingly involved in a more inclusive business planning and forecasting process requiring broader visibility into corporate performance management to provide a clear view of where the company stands and where it is likely headed.

What to Know Before Jumping On the Bot Bandwagon

Asia finance professionals discuss lessons learned in employing robotic process automation.

Finance teams at multinational corporations have, by now, heard a lot about the benefits of using robotic process automation (RPA) technology to help handle high-volume, repetitive tasks as the business pursues growth and scale. While some companies are well down the road to adopting RPA, others are just starting to consider it or have it on their to-do list. That spectrum of experience formed the backdrop at recent meetings of NeuGroup’s Asia CFOs’ Peer Group and Asia Treasury Peer Group, where members discussed their journeys in exploring and implementing RPA.

RPA is tactical, not a replacement for ERP. RPA should be used as a tactical tool to enhance automating cumbersome processes. One member used this analogy to describe the role of RPA in her company’s technology strategy: “If an ERP is like a subway network, then RPA is there to help in the last mile of the commute, like a shuttle bus service or a bike-share service.” One member talked about her company’s ERP implementation project and how RPA was used in data migration from the old legacy system to the new ERP system as part of the tedious phase of this project implementation.

Redesign business processes. Do not underestimate the importance of redesigning business processes before implementing RPA. If you use a robot to execute a process as humans would do it, the results will likely be suboptimal and will fail to leverage the full technology capabilities of the wider system infrastructure. To avoid such an outcome, one member’s company spent 18 months redesigning business processes in preparation for a robust RPA rollout.

Where to locate RPA teams. Several members said they have a centralized team within the region that focuses on RPA projects companywide. For one member, the driver was to have this centralized RPA project team in Hong Kong, where the company has its regional management office. That way, decisions on prioritizing the various RPA-related projects benefit from having regional management input and more resources from the bench strength of a regional office.

Consultant considerations. For another member, the critical factor in locating the regional RPA project team was being able to work closely with an external consulting firm in Shanghai that had expertise to cover projects for the region and offered the most cost-efficient service. And while you can start RPA projects by using external consulting firms that provide experience and know-how, one member recommended building RPA development skills internally so that your team becomes self-sufficient and can expand and maintain all RPA activities.

Progress report. This member started the RPA journey in 2016 with their first group of robots with the assistance of RPA vendors and a consulting firm executing on implementation. Today, they have their own internal automation center of excellence team that evaluates business requirements for RPA and develops RPA solutions. They use 20 RPA licenses to operate over 500 bot programs every month and have downsized average RPA development time to 10 hours of programming per bot.

Start small and scale up when ready. With each RPA software application license costing about $10,000 annually, the barrier to entry is low and you don’t have to consider a heavy capital expenditure investment. The recommendation from several members is to start small RPA projects as a proof of concept, focusing on easy cases with quantifiable justification for RPA; then progress from these quick wins to expand RPA deployment in targeted areas while establishing a framework and methodology for an efficient RPA rollout as a proof of ability. That’s followed ultimately by a proof-of-value phase in which you’re driving operation transformation with enterprise-wide implementation of automation initiatives.

Find your bot comfort level. Bots can be programmed to do any repetitive task that is logically sequenced. The bigger hurdle for humans is deciding what tasks we are willing to let go of and delegate to a bot. Members discussed their bot comfort level at the recent NeuGroup meetings. A few use bots for FX trading execution, with one using them for both execution and FX settlement. That led to the question of how to ensure adequate controls when RPA is used to execute financial transactions such as FX trades, revealing that some members only felt at ease with bots doing internal reporting tasks, like creating management reports that draw on information from various systems. Others are comfortable using bots to prepare tax filing reports and for central bank reporting. In this discussion, one member highlighted that her company uses an artificial intelligence (AI) tool to negotiate and administer legal contracts, which sparked surprise from others. We’ll look into that subject in greater depth at future meetings and in upcoming articles.

China’s VAT Rate Cuts: How Much Economic Value?

CFOs are skeptical that the cuts will filter through the economy to all consumers and boost demand.

China’s effort to spark economic growth by cutting value-added tax (VAT) rates may fail to significantly boost demand for goods sold through dealerships or distributor networks, limiting the effectiveness of the stimulus measure, according to members of the Asia CFOs’ Peer Group.

VAT cuts. China implemented the cuts in early April, reducing the VAT rate from 16% to 13% in manufacturing and from 10% to 9% in the construction and transportation sectors. VAT deductions for input costs were raised for some service industries.

Apple cuts. Industries and companies that sell directly to consumers are most likely to benefit from increased demand in the wake of the VAT rate cuts, according to some of the participants at the meeting. After the government announced the cuts, Apple and luxury brands including Gucci lowered prices. Apple CEO Tim Cook called the three-percentage-point cut in the manufacturing VAT rate “a very aggressive move” by the Chinese government.

Cars and planes. But some members of the AsiaCFO group said the effectiveness of the cuts in boosting demand growth may be muted or even nonexistent in industries like autos, where dealerships have the discretion to determine what, if any, cost reduction is passed on to consumers. And purchasing incentives that dealers typically give to consumers may be reduced, meaning the net price for car buyers might not budge, one member said.

That view came as car manufacturers including Mercedes-Benz, BMW, Audi, Lincoln and Volvo reportedly cut the suggested retail prices of cars as much as 80,000 yuan after China announced the VAT rate cut.

Beyond autos, one member gave the example of an aircraft manufacturer that sells to airlines, which will enjoy the benefit of the reduced VAT on their purchase of airplanes. But the airlines may choose not to reduce the ticket price for travelers by the same amount, thereby limiting growth in the demand for air travel.

The bottom line. Members agreed that VAT reform will cut costs for all industries, making it a welcome development for corporates. The question is how well the move alleviates downward economic pressure and whether it filters down through the entire Chinese economy.