Meeting the challenges of global expansion and collaboration

Technology companies are increasingly looking to go abroad to grow revenues, secure market share, and gain access to key talent. This borderless environment challenges companies to manage a global workforce, business partnerships, currency risks, technology transfers, and global supply chains, while being responsive and managing complex relationships with customers, suppliers, governments and regulators.

Offshore outsourcing to lower costs also makes technology companies vulnerable to supplier financial instability, intellectual property breaches, legal and regulatory risks, labour and social issues, insufficient and ineffective supply chain control procedures, and environmental issues. While collaboration with partners is the new imperative, the challenge is to manage the risks while capturing the opportunities for growth. Selecting the right model for your business objectives is critical.

Globalisation and increased connectivity also mean that both opportunities and risks need to be considered across both borders and an organisation’s extended supply chain. Despite the opportunities, globalisation is not about growth for growth’s sake. Defining business objectives and developing the operational support plan to match those objectives is critical. Leading global companies achieving success in emerging markets are selective about the right expansion opportunities to ensure the right strategic fit for their organisation. They perform the necessary due diligence, collaborate as required and then execute effectively.

Greg Unsworth, PwC’s technology industry leader for the Asia-Pacific region, notes that the following steps are essential to build a foundation for successful expansion and to capitalise on opportunities in new markets:

1. Determine a clearly defined strategy for growth and risk appetite as well as a consensus on the markets of most strategic interest for the organisation.

2. Define the level of support needed from the organisation and its operations.

   For example, a global provider of engineered electronic components wished to address operational issues around process and reporting line inconsistency and internal control issues, while also eliminating process duplication and improving business decision support. The company had significant business in China but was supporting these activities from outside the region and determined that establishment of a finance and accounting shared services centre in China to serve its Chinese and regional operations would benefit current activities and also serve as a platform for further regional growth. First, PwC defined the desired future-state operating model in order to develop the migration strategy. Next, the implementation blueprint, including organisational and operating requirements to meet a two-year transition objective, was developed. With a focus on knowledge transfer, PwC equipped the client’s project team with the skills to internally manage and drive the subsequent implementation.

3. Establish an appropriate balance between organic and inorganic expansion, using business partnering where required to access new markets.

4. Develop a thorough understanding of specific market conditions by conducting robust due diligence on the business opportunities and risks.

   For example, many companies have found it necessary to establish anticorruption compliance programmes to combat challenges with bribery and fraud. In addition to training programmes for staff, PwC has helped deliver significant benefits with web-based tools around tracking, monitoring and reporting as well as developing specific applications that ssess and manage corruption risks associated with government-related projects and “Business Partner Due Diligence” for thirdparty risk assessment and risk-based due diligence. As evidenced by several high-profile cases, the US Department of Justice, along with other regulators around the globe, has stepped up enforcement of Foreign Corrupt Practices Act (FCPA) violations.

5. Engage regulators, customers, suppliers and business partners early in the process to pave the way and ensure their buy-in.

6. Establish an efficient global operational structure at the outset to ensure access to market, supply chain effectiveness, a favourable worldwide structural tax rate and to provide the necessary platform for growth and expansion.

   For example, a global manufacturer of memory solutions facing declining profit undertook a global structural realignment to improve operational efficiencies and minimise US income and local country taxes through a tax structure that simplified intercompany pricing arrangements. The realignment involved establishment of a China-based entrepreneurial company to address the operating and tax needs as well as supporting the expected organic and acquisition-based growth.

7. Secure the right talent and execute diligently do not underestimate the local cultural, regulatory and operational challenges of entering emerging markets.

How PwC can help

challenge, PwC’ well integrated global network delivers tailored international solutions for our technology clients that encompass:

• Market entry feasibility
• Talent management and workforce issues
• Global supply chain controls and optimisation
• International tax structuring and compliance
• Business partner and channel management
• Value chain transformation and transfer pricing
• Risk management and controls optimisationricing
• Navigating country regulations
• Process improvement and profitability enhancement

Paying taxes 2010 – Reducing costs with a clearer global picture

In today’s business environment, reducing operating costs is a top priority. A focus on taxes can be a quick and quite effective hit. Susan Symons, a tax partner at PwC in London, explains: “Because taxation affects a number of business units, often operating in silos, many companies don’t have a full understanding of all of the taxes that they pay and of the full cost of tax compliance that they have to undertake.” In fact, according to a new study, Paying Taxes 2010, from PwC and the World Bank Group, the global average for a small to medium sized company is to pay 9.5 different taxes and for corporate income tax to account for only 38% of tax cost and 26% of the compliance time.

“Once companies understand and benchmark their global tax footprint, they can strategise to reduce this very basic operating cost,” adds Symons.

Paying Taxes Paying Taxes 2010 compares tax systems in 183 economies, allowing companies to take an initial look on where they might want to do business. The report uses principles from PwC’s Total Tax Contribution (TTC) Framework to calculate each country’s total tax rate indicator.

PwC developed the Total Tax Contribution (TTC) framework to help companies identify and communicate their global tax contribution. TTC can evaluate all business taxes paid by an individual company, group of companies or an industry sector. It can also measure the costs incurred in complying with tax payment obligations. PwC uses the TTC data to help companies:

Manage tax liabilities – in identifying and analysing all the taxes companies pay and collect, TTC can help to identify previously unmeasured tax charges which can then be monitored and managed for the future.

Benchmark tax payments and compliance costs – TTC allows clients to see how much tax they are paying in specific areas compared to their peers, and assess their competitiveness.

Make strategic decisions – such as where to locate activities and assets.

Increase transparency – TTC enables companies to foster greater understanding among stakeholders of the overall economic contributions they make through the taxes they pay.

Communicate tax contributions – the TTC framework can help companies develop the economic dimension of their corporate responsibility or sustainability reporting and consider how to report their total tax contribution both internally and externally.

Make informed business decisions – TTC provides valuable management information which supports the complexity and value that the tax function delivers to the business. This can help in managing stakeholder expectations, and may even be useful in justifying additional resources.

“Undergoing a TTC evaluation and using the data found in Paying Taxes Paying Taxes 2010 are two steps companies can take to ensure their tax decisions are strategically advantageous,” concludes Symons.

To view or download the full Paying Taxes 2010 report, please visit www.pwc.com/payingtaxes.

Keys to successful shared service centres and outsourcing

Historically, many organisations have developed their own captive shared services operations, leading to a transfer of services to an outsource service provider several years later. The current economic downturn, coupled with increasing pressures on margins, is causing organisations inmature global technology markets to seek a step-change in their operating cost models, leading to an increase in firms turning to outsource service providers as a first step in creating shared service centres.

When used strategically, shared service centres and the use of outsource providers have the potential to make a material impact on the performance of an organisation. In a recent PwC global outsourcing survey, two-thirds of respondents reported that whilst their outsourcing deals did not completely deliver the benefits in the business case, 90% say they will continue to outsource.

Developing trends in shared services and outsourcing

Whether outsourcing for the first time or renewing an existing arrangement, organisations are increasingly questioning what services can be outsourced and how; recent trends include the outsourcing of several business processes such as finance and HR linked to combined technology and infrastructure contracts. Multi-function deals have the potential to transform an organisation, and many are using outsourcing strategically to transform their operating models.

“Our clients see complex alliance and partnering arrangements as vital to innovation, competitiveness and cost base management,” commented Tom Brooks, PwC director in London. “Getting these arrangements right and ensuring the appropriate access to skilled and global outsource providers is critical if the quality and responsiveness to their clients is to be achieved.” to out

How we can help

Whether advising a client, acting as a client, or working for an outsource service provider in previous organisations, PwC shared services and outsourcing teams have significant experience. We offer:

End-to-end deal support

Our shared services and outsource methodology enables us to advise clients on all aspects of the outsource lifecycle from initial feasibility and business case to contract negotiation, transition and transformation. Our team can give you access to subject matter experts across the firm including tax, corporate finance, human resources and change management. We act as a partnership bridge between you as our client and the outsource service providers whether it be first, second or third generation deals, supporting you on large complex deals and distressed contracts.

PwCs Contract Comparator

Contract Comparator draws on PwC’s knowledge of the outsource market and our access to significant contract data to rapidly assess your outsource contracts, right down to the responsibilities of each party to deliver the benefits. Contract Comparator provides comparative analysis across four key areas:

1. Market intelligence: Detailed analysis of your providers and their market position for each of the services they offer.
2. Service and price: A directional view of how service levels and price interact.
3. Retained organisation: Assessment against sector best practice.
4. Other terms and conditions: Detailed comparative analysis of the key terms in your contract against the market.

Many organisations still see the selection of an outsource service provider as just another procurement programme executed and managed by the purchasing department. Successful companies, however, treat both outsourcing and shared service centre delivery as strategic decisions that require a long-term partnership to be built with an external independent entity.

The advantages of a simplified business model

As technology companies have grown, so has the complexity in their business. Many companies have evolved through a combination of organic growth, mergers, acquisitions and divestments. The resulting management structures are fragmented, with costly back-office support functions and complex tax and legal structures.

Companies operating across the globe often have cultural and legacy issues which drive their operating model. For example:

• US companies have a history of implementing tax-effective business structures for sales and manufacturing, but still operate through multiple national legal entities.
• Asian, and particularly Japanese companies, have structures focused on optimising profit repatriation. Typically, they are based around divisions reporting back to HQ in the parent country, which leads to duplication of business and back-office activities and structures, and hence higher costs.
• European-parented companies are increasingly using centralised and tax efficient business models, again through multiple national legal entities.

During the last decade, this complexity was hidden by a benign business environment. However the global recession has challenged the operating models of companies. At the same time, strategic challenges have included:

• Global supply chain management optimisation
• An increasing focus for some on brand and services whilst others continue manufacturing and research led strategies
• Tax and tax planning being firmly on the business agenda.
• Consideration of the best location for Intellectual Property (IP) and brands, for tax planning and protection and exploitation of IP

In our view, there are three routes to simplification for technology companies:

1. Management model – Winning companies are those that consciously map the role of their corporate centre to the needs of the business. Simplifying the management model requires reviewing the business value chain to clarify and agree which decisions are owned centrally versus locally, and where activities should be executed to reduce duplication and costs.
2. Tax optimisation – The fundamental principle underpinning opportunities to move to a tax optimised model is that the centralisation of key decision makers and executives, functions, assets and risks allows for an associated consolidation of reward and profits. This provides a platform for moving profit to tax advantageous jurisdictions. Whilst some technology companies have implemented tax optimised sales and manufacturing models, there are emerging new models for tax optimisation in the areas of services, IP and functions such procurement which companies should consider.
3. Legal structure simplification – European companies are increasingly using a range of legal entity related simplification opportunities, including eliminating dormant entities, reducing the number of active companies, and using new legislation to: rationalise entities; align their legal and operational worlds; reduce internal costs such as administration costs, and reduce governance risks. They can also become more flexible organisations benefiting from a common corporate culture and approach across multiple regions, and offer a single face to regional customers and suppliers.

Technology companies need to examine these three routes to simplification and evaluate which one (or combination) would be most effective for them. While the changes outlined are not easy, companies that have addressed their complexity have found the effort well worth pursuing.

Euro-India Business Group – Your link between India and Europe

Today, trade between India and Europe is rapidly expanding as the Indian economy is amongst the fastest growing in the world. This vibrant country offers countless opportunities, both to Indian companies looking to expand overseas and to foreign players considering investing in this dynamic market. But, together with vast opportunities, numerous challenges arise which need to be addressed effectively. The need for a competent and experienced advisory partner hence becomes vital to ensure cross-border success.

The Euro-India Business Group (EIBG) combines the expertise of the various India Desks at PwC firms in Europe and PwC India. The EIBG acts as the first point of contact, providing advice and practical assistance to Indian companies entering Europe and guiding European companies on how best to enter the Indian market.

EIBG’s multidisciplinary teams have acquired the right combination of multi-cultural skills and business know-how needed for success in today’s globally competitive environment. We make connections that work in order to leverage expertise, skills and best practices from around the globe.

Randolph de Cuba, Tax Partner, PwC the Netherlands, explains: “The EIBG was created to provide one point of entry for our clients, either Indian companies or European companies, looking for assistance with their business needs. Our network of 16 countries and over 50 professionals is an extremely powerful tool to enable PwC to effectively mobilise competent resources that respond to our clients’ needs.”

Ketan Dalal, Tax Leader, PwC India, adds: “Given the continuing robustness of the Indian economy, relatively far less impacted by the global economic downturn, India continues to remain a compelling destination for European companies. Similarly, Indian companies continue to invest in Europe, partly as a derisking strategy against over-dependence on the US. Given this backdrop, the EIBG has played, and endeavours to continue playing, a catalyst role, by offering a wide range of services to investors from both ends of the spectrum.”

PwC’s EIBG offers practical solutions when addressing cross-border needs to:

• Meet challenges relating to tax, legal and regulatory compliance requirements.
• Take the right strategic investment decisions by identifying suitable market opportunities and performing feasibility studies for market entry and development strategies.
• Meet human capital challenges by supporting all aspects of immigration, social security, tax and employment law and providing comprehensive HR services.
• Identify suitable local partners and alliances that will be compatible with your business by leveraging our contacts.
• Advise on the day-to-day practicalities of doing business, with continuous support from our specialists across different industries and territories.
• Assist with due diligence, transaction structuring and valuation in order to identify the risks and opportunities related to the proposed investment.
• Keep abreast of the latest news and developments in Europe and India.