THE RADAR

#5
17 November, 2014

Selected insights joining the dots between SocioEconomics, Strategy, Transformation and Delivery
FINANCIAL SERVICES
domestic-facing businesses who have probably pulled every lever
The reporting season closed on Westpacs full-year 12% profit they can, unless they continue to do asset sales: eg Wesfarmers
jump to $7.56B. Cash earnings - the measure more closely (who sold its insurance business) and Telstras big capital releases
watched by analysts which strips out volatile items - were up 8% are from asset sales, not cash generation. A consequence would be
at $7.63B slightly above expectations. The big 4 banks have made a significant sell-off facing the big banks, Telstra, consumer staple
more than $28 billion in combined profits
stocks Woolworths and Wesfarmers, and the utilities. A so what?
> A lot has been written on Westpac, Gail Kelly, and Brian Hartzer: from this Equity lens is a clear reinforcement - if needs be - of the
a big picture insight maybe on the nature of the banks growth that imperative to have a growth strategy and a clear intent to resolve
comes after Westpac has been seeking to lift its rate of new this stretch between Yield (dividends) and Income (top-line).
lending aggressively over the last year in response to the recovery
OTHER INDUSTRIES
in mortgage lending and an anticipated bounce-back in business
Deloitte released a notable report Get out of your own way lending. Profits were also enhanced by a further decline in the
Unleashing productivity highlighting the cost and causes of red
charge for bad debts, which fell 23% to $197m. (To be noted: NAB
tape in business and its impact on productivity. (see deep drive)
is the only major bank that has not expanded earnings, due to
Serendipitously echoed by a McKinsey interview of Nobel Prize
problems in its British business.)
Robert Solow arguing that as the demographic transition takes
NAB new CEO Andrew Thorburn announced hes settling the
place across the world and population growth becomes slower,
class action on fees for $38m because it was the right thing to
growth with have to come from productivity (a worthwhile read)
do for customers and the business, leaving 8 other banks facing
> A question facing businesses is to truly understand the
272,593 accounts registered for the class action.
determinants of productivity increase within the service sector (as
> The class action, which is over types of "dishonour" fees for late
opposed to the goods-producing sector where it is more transparent
payments, is targeting all of the big 4 banks, with the case against
due to the supply chain aspect of it). An issue bricks and mortar
ANZ as a test case. Earlier this year, the Federal Court found ANZ's
businesses relying on customer services are scrambling to address
late credit card fees were unlawful, but several other types of fee
in the face of the current digital disruption.
were legal. ANZ and plaintiff law firm Maurice Blackburn are both
Pi-Top, the world's first 3D-printed laptop smashed its crowdfund
appealing the ruling: a decision is expected over the coming
campaign target: the aim of the project is to make "hardware as
months. NAB decided to move on, in line with its prior choice to
accessible as software" by combining a Raspberry Pi Circuit Board
be the first and only bank to abolish overwhelmed fees on credit
with a 3D printed structure.
cards. Since 2010, NAB's credit card late payment fee has been $5
> Beyond the fun revival of the homebrew DIY computer making (but
- ~$15 less than major competitors.
in mutated form) it is noticeable because it signals that 3D printing
International banking: US, UK and Swiss regulators ordered 6
is maturing to the ability to produce digital objects.
banks (UBS, Citi, JPMorgan Chase, RBA, HSBC, BofA) to pay
$US4.3B to settle a probe into the manipulation of benchmark MACROECONOMICS
Following the Luxembourg Leaks, Tony Abbott calls for global
foreign-exchange rates by their traders.
> The insight is that trans-national regulation is progressing and action on profit shifting. Last week, a widespread tax minimisation
finding its foot - as also demonstrated by the global mood to crack scheme involving giants such as IKEA and Amazon was revealed. Eg
down on Tax evasion. However those penalty numbers are to be IKEA Australia earned ~$1B in profits since 2003; most of it was
put into perspective with the size of the FX market: $US5.3 trillion exported tax-free to Luxembourg/ Netherlands. It declared just
traded each day, the worlds biggest financial market, 40% of $103m profit and paid $31m in tax.
which is processed in London (by comparison, the global bond > In a nutshell, a typical structure involves a Luxembourg subsidiary
market is $US272B and the global equity market $US216B). This with the sole purpose of lending to its sister companies. Funds are
also means that the fine is ~8% of a daily global trade, which raised at interest rates reflecting the credit rating of the corporate
analysts say is too little to provide the incentive to comply: the group, eg 1%. The subsidiary then lends the money to its sisters in
misconduct ran in 2008-13, more than a year after US and UK high-tax countries (like Australia) at, say, 9%. As a result the interest
authorities had cracked on Libor rigging. And this, despite global payments made by the Australian company effectively erode its tax
banks paying $US50B in fines in 2013, and $US31B in 2012. This base in Australia. All the more annoying for the govt that Australia is
means that criminal investigations now being pursued are likely to more dependent on company tax than most other G20 countries.
A month marked by the APEC and G20 conferences, and China
lead to sanctions for individuals if regulators want to escalate.
Signals from the Equity Market: Analysts warn that with low President Xi Jinpings rise: in a grand reference to History, his
interest rates and sub-trend economic growth, the only real strategy is to rebuild a new inland and maritime silk road to link
interest in the market is for high yield dividend paying stocks: and China and the Mediterranean: 1) to boost inland domestic growth,
this season has been marked by companies returning an 2) to reduce dependence on freight lines dominated by European
extra-ordinary $15.9B to shareholders in dividends. However shippers and exposure to sea lanes patrolled by the US navy, and
behind this cash redistribution in dividends, top-line growth is 3) to counter Russias attempt to rebuild the sphere it had in the
shrinking across industries: meaning that companies are starting Soviet era. To do so China is creating a Silk Road Investment Bank
to stretch themselves. Dividends grew 7% while earnings grew and Fund, and forging ahead on international agreements such as
just 3.5% over the past financial year. And dividends cant keep the surprise deal with the US to limit greenhouse gas emissions:
> A key insight here is the real geostrategic play, creating US-Chinese
going up if the underlying earnings growth is slow.
future leverage on other countries by enforcing trade standards
> Analysts believe we are approaching a tipping point for
(and sanctions) if they dont join the effort - such as what they do
with EU Agri (the French cheeses!), cars etc. More in this Espresso Radar
Suggestion and feedback: xavier.n.rizos@gmail.com

DEEP-DIVE: Red Tape in Australia: Get out of your own way Unleashing productivity
A reader's digest of the 4th report from the Deloitte series Building the Lucky Country (link to webpage)
1 - Deloitte starts with the macro context
Australia has a problem. A rising retirement rate among baby
boomers and falling export prices have Federal Treasury
warning that, unless things change, growth in the nations
Back-office workers
living standards will drop 50% compared with decades past.
In what it believes is the first assessment of Red Tape in both
Australia's public and private sectors Deloitte Access
Economics says it costs a total of $249 billion a year:
Compliance-centric workers
o Govt regulations cost about $27B/year to administer and
cost businesses $67B/year to comply with.
o Red tape imposed by businesses themselves costs $155B a
year - $21B to develop and administer and $134B a year to
comply with.
Zero-Sum game: Deloitte says the growth of Australia's compliance
workforce is so big that it has offset the decline in back-office workforce
This research shows that senior executives and middle managers each spend more than 8 hours per week complying with internal
rules. Even non-administrative staff each spend an average of more than 6 hours per week."

Those dollars are significant: a cost saving of just 10% of that total would equal 1.6% of national income, ranking its impact with
some of the largest reforms Australia has ever seen.
In the 1980s growth came from demography (labelled
participation in this chart), then in the 1990s the HawkeKeating reforms pushed a productivity boom (incl. floating of the
dollar, finance deregulation, end of tariffs)
Then in the 2000s, growth came from a housing and
consumption boom, financed by bank credit, itself funded
lending by borrowing on offshore wholesale capital markets.
Unlike the Productivity Boom, the Debt-Funded Housing Boom
was not sustainable, and would have ended without the timely
arrival of the China-led resources boom of the Howard ear
(Terms of trade in grey): a bonanza as coal and iron ore prices
surged and injected capital to fuel credit. And in fact the mining
boom led to a decrease in productivity (a measure of efficiency)
as we started digging in places that would not be economically
viable if coal and iron prices were not so high.
However we now face a challenge as there are only 3 drivers that can effect big changes in Australias living standards:
1. The world gives us a pay rise (the terms of trade): it is probably compromised by the global slowdown
2. A bigger share of our population works (participation): whilst there is definitely progress to be made notably with women participation
and the inclusion of Indigenous Australians in the workforce, we have probably reached a plateau
3. Our workers become more productive (productivity): this is definitely a key to boosting living standards and the area for improvement
3 - The picture per sector:
Firstly, and perhaps counter to clichs, Red Tape is not and Finance with it.
exclusive to the public sector that is affected by it due to its
nature, but the private sector is also catching up fast
Compliance workers share of workforce, 2011

2 - The nature of productivity and lessons from the past

Public Sector

Private Sector

Growth in compliance workers share of workforce 200611

The higher a sector is on the chart, the larger the share of compliance occupations in its total workforce. The further to the right on the
chart, the faster the growth in the share of compliance occupations. Bubble size reflects the size of the sector in terms of output.
2

4 - A more granular view from within the organisation

Surveyed Australian businesses reveal the time spent in response to selfimposed rules as opposed to rules imposed by government regulations.
Those results are revealing:
More than 80% of the time spent complying with IT regulation is due

Share of time spent on internal rules

(rather than government rules)

to self-imposed rules,
while governance-related compliance is split equally between selfimposed and public sector rules
Consequences have been well documented and are part of the corportate
popular culture: disenfranchised employees, false sense of security, lack of
flexibility, and eventually huge costs to businesses.

In the following graph Deloitte shows the break up of those costs adding-up to the $249m
Deloitte also surveyed increases in areas outside direct compliance-focused functions, such as HR, IT, Finance, Marketing,
executie affairs, legal and corporate governance. The chart depicts how the time spent on a variety of internal functions has
changed over time. It is set to an index score of zero equalling no change, while a score close to 2 means significantly more.
All the functions show up as positive, meaning that their burden has risen over time.
Annual cost of Australias rules and regulations

Change in impact of internal rules over the past decade

Annual cost (billions)

o Cost as share of national income

$134m
o8.4%

$249m
o15.6%

$67m
o 4.2%

$21m
o1.3%

$27m
o 1.7%

5 - What to do about it?

Deloittes Chief Edge Officer Peter Williams coined the phrase get out of your own way through 5 steps steps summarised in
the table below. In essence, the idea is to shift from a Risk-Based approach focused on everything that might go wrong and
generating a pelthora of rules based on speculations, to an Objective-Based approach focused on what must go right
This leads to the graph illustrating the trade-off between business objectives and rules highlighting 4 positions:
1) Exposed: Too few or inadequate rules 2) Red tape: Too many rules
3) Productivity: striking the right balance up to the limits of the existing risk appetite - 4) Potential: lifting the risk appetite
1

Capacity

Risk
Appetite

Obviously Deloitte does not advocate ambandoning risk management or compliance: that would be ironic for a firm known for its
Audit and Risk services. This report is a conversation starter bringing an original angle on an issue felt by anyone working in any
organisation. Distinctive to Australia is a decade of prosperity that has seen us reach for rules often without weighing up their
costs and benefits, and eventually diluting the impact of those that really matter. Notwithstanding that a balanced culture of risk and compliance
is critical to organisations trying to be agile and shirtfront their competitors (that one is just to see if you read up to there :).
3