The engine to power the next generation of African miners which is flexible, scalable and affordable!

by Johan Theron, Director at Deloitte Consulting

The new mining environment in South Africa and Africa is all about entrepreneurial flair and fast reaction to volatile commodity markets. These miners want flexible, scalable and affordable back-office support.

This article was written by Johan Theron at Deloitte Consulting. If you have any questions or would like to arrange a more detailed discussion, contact Johan at jtheron@deloitte.co.za or +27 12 482 0514

It seems like there is a new scramble for Africa under way at the moment. Africa’s rapidly urbanising and increasingly affluent populations are certainly an attractive potential consumer market, but the real driver is global hunger for Africa’s mineral wealth. There’s also no doubt that Africa’s attractiveness as a market for goods and services also ultimately depends on the profits from mining Africa’s minerals.

The markets may be hungry for African minerals but they are also highly volatile—and look set to remain so. Long-term planning is thus much more difficult, but mining still requires significant long-term investment. Strong demand has also bred strong competition: it is now feasible to exploit smaller, less concentrated ore bodies. As a result, there are many more mining operations across the continent, and ownership is not nearly as concentrated as it once was. In part, at least, this trend is driven by Africa’s determination to participate much more actively in the mining value chain in order to ensure that more benefits remain on the continent.

In South Africa, in particular, the need for black economic empowerment has seen the birth of many junior miners, some of which have been hived off from larger entities. However they were formed, these ventures are primarily aimed at spreading South Africa’s economic wealth more broadly.

This changing mining landscape is driving the emergence of a new breed of entrepreneurial miners.

A new breed of miner

These new-generation miners are a far cry from the traditional mining houses with their impressive head offices and centralised, highly skilled finance, HR and IT teams. The new miners are building up their businesses—thus they are concentrated on exploration, followed by the creation of the infrastructure to support a mining operation and get the product to market.

All of this activity is, one should not forget, taking place at a time of severe fiscal constraint. Overheads thus need to be kept low, and fixed costs are much preferred because they make planning much easier. At the same time, as I noted earlier, demand has bred fierce competition: these companies definitely need to be run efficiently and to meet their delivery commitments.

These conditions place executives in a tight spot. Their main focus has to be entrepreneurial as they help to clinch new deals and partnerships, and generally create the strategy needed to prosper. They don’t have time to worry about day-to-day back-office operations although, at the same time, of course, they are dependent on them for cash flow.

A long established solution to challenges of this nature is, of course, to outsource some of the vital but non-core processes like payroll, HR or IT. Talking to these executives, it becomes apparent that payroll and IT are the processes most outsourced, but that other processes are rapidly catching up. The benefits include reduced risk and increased efficiencies—not to mention cost savings that, in our experience at Deloitte, can reach 30%. Benefits also include the flexibility to scale operations up or down according to business strategy, better regulatory compliance, a stronger control environment and access to global skills as needed.

Next-generation mining outsourcing for next-generation miners

Mining is one of the engines of our country’s and Africa’s future prosperity. I believe that this new breed of miner cries out for a new outsourcing model in which the key non-core back office processes are outsourced to a single vendor. The reason behind this thinking is, I think, compelling.

The first element of this thinking is that mining companies need to standardise on best practices appropriate to their sector. The days of extensive (and expensive) customisation are over. Both the systems and the back-office processes they enable should become background utilities comparable to water and electricity.

This is a welcome development because at one stroke it prevents companies from remaining hostage to the status quo—especially as the status quo might not have been optimal in the first place. It also means that software upgrades are easy and quick as there is no need to undergo the expensive customisation process each time.

Another key driver for today’s miners is the need to be able to predict costs accurately. This ability helps protect the bottom line and gives companies the flexibility to invest in their core activities.

Pulling all of this thinking together, I would propose the creation of an integrated solution based on an enterprise system that is preconfigured with best-practice mining processes. I would argue that it makes sense to outsource the financial processes that are enabled by this preconfigured system to the same vendor—along with the necessary IT infrastructure. It’s a winning approach because it enables process efficiencies across what is essentially a tightly integrated ecosystem. Along with these process efficiencies come significant cost reductions, as well as an easy-to-manage relationship with a single vendor.

The benefits for the next-generation mining house are manifold. As I have made clear, these operators are entrepreneurial in nature and are heavily into the investment phase of their life cycles. This type of approach gives them the freedom to focus on their core business strategy, secure in the knowledge that their non-core business back office operations are taken care of—and are optimised for the mining environment. The fixed, “pay as you go” cost structure means that CFOs can plan better, and can focus their efforts on growth activities.

A solution constructed along these lines has the advantage of being quick to implement (anything from four to six months would be standard, in our experience)—and it gives the small or mid-sized mining house a Rolls-Royce engine that it does not need to own or manage, but that that will give it the power it needs to do great things. Deloitte makes pioneering on the world’s final investment frontier easy.

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Filed under: Executive Leadership, Mining, Energy & Resources, access to global skills, Africa, back-office support, best practice mining processes, business strategy, CFO, cio, control environment, core business, cost savings, Deloitte Consulting, energy, financial processes, flexibility, IT, IT infrastructure, mineral wealth, minerals, mining, mining outsourcing, outsourcing, outsourcing model, payroll, preconfigured system, predict costs, processes, regulatory compliance, resources, single vendor, South Africa

Babies, bathwater, and best practices – Rethinking planning, budgeting, and forecasting

If everyone is thinking alike, then somebody isn’t thinking – George S. Patton

If planning, budgeting, and forecasting isn’t delivering the value your business expects, it may be time for a good scrubbing. But don’t throw it out.

How we got here

The basic tools of accounting—double-entry bookkeeping, income statement, and balance sheet—can be traced to Venetian investors who funded trade expeditions to Asia during the 1400s. These were valuable tools for high-risk ventures, even by today’s standards.

The concept of planning and budgeting came centuries later. The word “budget” derives from the old French bougette, meaning a small purse. In the mid-1700s, Great Britain’s Chancellor of the Exchequer was said “to open the budget” when presenting his annual statement. The term was extended to private and commercial finances in the late 1800s.

At the beginning of the 20th century, business leaders made a defining choice that sowed the seeds of today’s frustration. With outside investors demanding audited financial statements, managers began to rely on external financial reports as measures of internal performance. They believed it was too time consuming and expensive to produce two sets of manual reports.

The voice of reason?

Most organizations don’t have to dig very deep to find people who don’t like planning, budgeting, and forecasting. You might even be one of them. The stress associated with these activities can be enough to wear down anyone’s resolve. With business units protesting in one ear and executive management grumbling in the other, it’s no wonder finance leaders may be tempted to listen to some pundits’ advice and abandon these activities altogether.

But while the complaining may be frustrating, it can also provide clues to what may not be working. Time-consuming manual processes. Endless budget iterations. Wasted technology. Conflicting goals. Poor decision-making. These are the things you could easily do without.

But don’t get carried away. Companies count on finance leaders to be their voices of reason—cool in the heat of battle, skeptical in the face of exuberance, and above all, focused on creating value. In the final analysis, planning, budgeting, and forecasting is a powerful tool – perhaps the most powerful tool—for informing and executing your business strategy.

Download the full article . . . .  Babies, bathwater, and best practices – Rethinking planning, budgeting, and forecasting

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Filed under: Executive Leadership, Finance, accounting, balance sheet, bookkeeping, budgeting, business, ceo, CFO, Deloitte, executive management, finance, financial reports, forecasting, income statement, leadership, management, planning

CFO Survey- Part 3

Access to capital and African Growth

 

Given the current low repo rate, capital and funding has become significantly cheaper. This trend appears to be consistent across industry sectors and business size, although the construction industry and the financial sector still view capital as being too expensive. Only 36% of the CFOs feel that the cost of capital is too high with 45% being of the opinion that the cost is fair.

In addition to becoming cheaper it appears that capital has become a little easier to access for some, most notably large mining and retailing companies, with 77% of CFOs now believing that capital is readily available to their organisations. The construction sector is, however, still finding funding to be a real constraint to expansion and new projects, in spite of the overall better conditions reported by CFOs.

 

At the micro-economic level, concerns centred on industry regulation (46%), competitiveness (39%) and the skills shortage (50%). Larger companies (in excess of R20bn) find industry regulation consuming. The financial sector is overwhelmingly absorbed by the intensification of regulation which is threating to stymie the industry and could aggravate the rising the cost of doing business. For the mining industry, regulation is also a huge concern. This risk is supported by continuous discussion conducted mainly through the press on the subject of nationalisation with key stakeholders adopting seemingly different standpoints.

 

Expansion into Africa is seen as a key source of growth with 73% of companies indicating a move northwards and most of them planning to do so imminently. With its large, youthful population and forecast above-average growth rates, Africa is seen as the last frontier, particularly in the consumer sectors as well as infrastructure development. For some companies this is about achieving economies of scale and for others it means a dramatic extension to their markets. Within this trend there is a clear shift in attention to East and West Africa.

To download the full report, click here

Filed under: Executive Leadership, Finance, Capital, CFO, CFO Survey, expansion into Africa, Funding, regulation

CFO Survey- Part 2

Margin erosion is a growing concern

 

From having followed highly defensive strategies in 2009, CFOs are now opting for a balance of defensive and growth business strategies over the coming year. Not fully confident that the worst is over, CFOs are watching cash flows carefully. The primary business risk is considered to be margin deterioration due to input cost pressures, with 83% of CFOs citing it as a risk. This is especially important to the retail and wholesale industry, the mining sector, and technology, media and telecoms companies where 100% of the CFOs surveyed report higher electricity costs to be a risk. The larger companies, in particular, are concerned by margin erosion.

 With producer inflation rising at 8.9% for July 2011, further cost pressure on margins can be expected. Additional strain is likely to emanate from continued soaring electricity price hikes, above inflation wage settlements, a weaker rand and rising transport costs. The impact of continually rising electricity prices was rated fourth as a risk factor, driven by the heavy power users such as mining and manufacturing.

There has been a large swing in interest rate expectations from 2010, when businesses were looking to interest rates to remain largely unchanged. Now, 83% of CFOs are looking to a modest hike (up to 200 basis points) in short-term interest rates over the coming 12 months. While these expectations were uniform across all sectors, smaller businesses were more convinced that rates would remain unchanged than larger ones.

Filed under: Executive Leadership, Finance, cash flows, CFO, CFO Survey, Growth Strategies, interest rates

CFO Survey- Part 1

CFOs look to modest economic growth but remain cautious on business strategy

 

JOHANNESBURG, 7 September 2011 – South African CFOs are cautious about the future, perhaps wisely so. The 2011 Deloitte CFO Survey, reveals that while the 2009 recession may be over, CFOs are only dipping their toes into the growth pool, while keeping a careful eye on costs and margins. The aftermath of the financial crisis has brought with it an additional regulatory burden which is at risk of stifling growth.

This is the third annual Deloitte CFO Survey and, as a series, they have captured one of the most difficult South African business environments in which CFOs have had to operate. From the sharp, albeit short-lived, recession experienced during 2009, to the disruptions of the FIFA World Cup South Africa^TM in 2010, to the current nervous global markets and double-dip recessionary fears, CFOs have had much to contend with.

CFOs believe that modest economic growth is likely, but they are more circumspect regarding their own company outlook. Only 12% of CFOs expect company performance to be significantly better beyond 2013, even though 48% think that the economy will be operating at a much higher level at that stage.

The 2011 Deloitte CFO Survey is based on research conducted on an anonymous and confidential basis, from mid-June 2011 to early July 2011, from a sample of CFOs selected from 447 of South Africa’s top organisations nationally, spanning listed and unlisted entities in the private sector as well as major state owned enterprises. A growing awareness and gravitas of the report is reflected in the growth in the number of respondents. After rising in 2010, the number of CFO responses increased by a further 32% in 2011.

Filed under: Executive Leadership, Finance, business environments, CFO, economic growth, Economic Survey, financial crisis, survey

CFO insights: Social analytics – Tapping prediction markets for foresight

 

In the coming year, CFOs can be expected to hear a lot about the value of analytics – to convert corporate data and information from hindsight to insight and then, ideally, valuable and actionable foresight. Generally, the two most common approaches to generating foresights are the use of statistics and mathematical models, and the use of machine learning tools such as neural nets and genetic algorithms software to mine existing data and generate predictions.

While we may explore these approaches and their business applications to finance in future articles, this paper features an emerging third approach to generating predictions: the use of “social analytics” through prediction markets. Instead of fancy statistics and software, prediction markets tap into the “wisdom of crowds” and the capacity of markets to aggregate beliefs to generate predictions. This article explores how CFOs can use prediction markets as part of their portfolio of decision support tools.

Read the full article . . . . CFO insights: Social analytics – Tapping prediction markets for foresight

Visit the Deloitte Consulting home page

Filed under: Finance, business analytics, CFO, Deloitte

The changing role of internal audit in dealing with financial fraud

As the mandate and role of Internal Audit continues to evolve and grow, management are increasingly depending on Internal Audit functions to monitor, detect and investigate incidences of fraud as and when they arise.

Has the recent recession had impact on organisations’ approach to fraud risk management? Do management increasingly expect that Internal Audit have a wider role to play in this area? Are today’s Internal Auditors suitably equipped to respond to these increased expectations and assess incidences of suspected fraud which occur?

Deloitte’s inaugural Internal Audit Survey sought to ascertain how businesses are being impacted by fraud and explores how the position of Internal Audit may have changed over the past 18 months. We examine the role of the Internal Audit function in preventing and detecting fraud, as well as their appetite and ability to fulfil this role.

The results of this cross-industry survey are based on responses to a number of quantitive questions answered by 75 Heads of Internal Audit during May and June 2010.

Read the full article . . . . The changing role of internal audit in dealing with financial fraud (891.17 KB)

Visit the Deloitte  Risk Advisory home page

Filed under: Risk Management, CFO, Deloitte, financial fraud, internal audit, risk management, survey

Positioning for a new financial landscape – Sustainable cost management through energy efficiency

As institutions begin to emerge from the financial crisis and global economic downturn, their thoughts are turning towards preparations for the recovery.

They are reconfiguring business models to suit the new financial landscape, re-aligning their workforce to meet the new levels of demand, and re-building customer relationships that have been unsettled during the crisis. There is also urgency in these efforts, as institutions recognise that their preparations must be complete before the recovery is complete if they are to make the most of the opportunities to come.

Throughout the market turbulence, institutions have been faced with increased pressures to restructure their business models and control costs. This area, typically considered part of a corporate responsibility program, can also play a key part of sustainable cost reduction.

This Deloitte report discusses the needs and benefits for financial institutions to have a strategy around energy and paper efficiency, and examines how institutions can save costs through energy and paper management, answering the question on how to get started on improving your company’s resource efficiency.

As the financial landscape continues to transform, Deloitte’s Global Financial Services Industry network is committed to providing continued thought leadership, surveys and studies on the issues most important to global financial institutions. Deloitte’s aim is to help guide clients through these challenging times and provide them with insights useful in preparing for a new financial landscape.

Read the full article . . . . Positioning for a new financial landscape – Sustainable cost management through energy efficiency

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Filed under: Financial Services, banking, CFO, cost management, cost reduction, Deloitte, financial services