EY - The Master CFO Series: What lies beneath?

High Performing CFO

10 lessons for CFOs

The Master CFO Series - What lies beneath?

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An awareness of the real costs of investment is essential, and a healthy dose of skepticism can play an important role in tempering unchecked enthusiasm for rapid-growth markets.

Every rapid-growth market has its unique opportunities and challenges. And although this makes it difficult to generalize about the practical implications of our research for CFOs, we believe they should bear in mind the following when considering an investment in any rapid-growth market:

1. Place investment strategies for rapid-growth markets under the microscope.

CEOs on the hunt for growth and under pressure from investors are becoming increasingly excited about the prospects within rapid-growth markets. But while the opportunities are undeniable, CFOs have a key responsibility to evaluate rapid-growth market strategies and make sure that they stack up.

An awareness of the real costs of investment is essential, and a healthy dose of skepticism can play an important role in tempering unchecked enthusiasm for rapid-growth markets.

2. Pay close attention to operational costs.

Investment in these markets typically relies on a high-volume, low-margin business model. This can be extremely profitable, but problems quickly arise if operational costs prove higher than expected. In some cases, the profitability of the investment can be quickly eroded altogether. CFOs must ensure that they scrutinize operational costs carefully on a regular basis to ensure that the investment remains viable over the long term.

3. Stay involved (or at least informed) throughout the process.

Our research suggests that the involvement of CFOs in rapid-growth investment is skewed towards the pre-entry stages. Once the deal is done, some CFOs take a back seat. But with rapid-growth markets evolving and changing rapidly, this can be a risky approach.

CFOs should either remain closely involved throughout the entire investment life-cycle, or be able to build strong teams around them that can feed back accurate, honest information about the investment on an ongoing basis.

4. Strike a balance between local and global knowledge.

Investments in rapid-growth markets rely on local knowledge for their success. But local knowledge alone is not enough. CFOs should ensure that there is a balance struck between local managers with a deep understanding of the business environment and strong oversight from the headquarters.

Global talent management programs that give local and headquartered employees exposure to other markets can help to improve the mix of skills across local and global environments.

5. Future-proof your investment.

The pace of change in rapid-growth markets is so rapid that the business environment at the time of the deal is unlikely to remain the same for long. Markets continue to open up, regulatory environments are developing, and labor costs are on the rise. As well as considering the viability of their investment at the time of the deal, CFOs also need to test it against a range of future scenarios based on their expectations of future growth and development in the market.

6. Carry out “integrity due diligence” on potential partners or acquisition targets.

The selection of partner or target is critical to the success of the investment. In addition to carrying out financial due diligence, CFOs should ensure that they conduct “integrity due diligence”. This should include ensuring that there is a good cultural fit between the two organizations, and obtaining information about the local company from a broad range of sources, including customers, regulators and suppliers.

This process helps potential investors gain confidence that the partner or target has a good credit history, is ethical in its dealings and adheres to values that match those of the investor organization.

7. Become an employer of choice.

With competition for talent in rapid-growth markets unlikely to abate in the near future, CFOs need to consider how they will continue to attract and retain the best employees. They should take a long-term view, invest in training (even if this makes their employees more marketable to other companies), build strong relationships with local communities and ensure that their compensation packages remain competitive, particularly when compared with local companies.

8. Put in place a strong risk and controls environment.

Managers in rapid-growth markets must have some degree of autonomy to make decisions locally, but this should be granted in the context of a strong risk and controls environment. This means that all decisions happen within agreed parameters, thereby preventing excessive variation across markets.

Strong risk and controls also helps to influence the behavior of employees in local markets, deter unethical business practices and impose a strong “tone from the top”.

9. Accept that some costs will be high.

There should also be an understanding that some costs will be high, as this is an inevitable part of the investment process in rapid-growth markets. For example, as companies re-allocate resources to take advantage of rapid-growth markets, investment in local R&D centers is often a key aspect of the overall strategy. While the costs of this may be high in the short term, this decentralization of R&D will be an important determinant of future success in these markets.

10. Take a long-term view.

Much of this report has focused on the hidden costs and risks that can surprise multinationals when investing in rapid-growth markets. And while CFOs have a responsibility to be aware of these and, where appropriate, minimize them, they should also take a long-term view to assessing these costs and risks.

With some rapid-growth markets experiencing GDP growth approaching double digits, the long-term outlook for these economies is extremely bright. But growth at this rate inevitably means there will be bumps along the way, including currency volatility, the possibility of asset price bubbles and political unrest.

Accepting that these will happen is part of investing in rapid-growth markets. Yet in most cases, they will not affect the overall viability of the investment. Vigilance is crucial but the costs and risks should not deter investment in these markets.