According to IMF predictions, by 2030, 56 % of global GDP growth is expected to come from the emerging markets. Kellie Goldstein, CFO, global emerging markets, Thomson Reuters markets division, talks to Ian Herbert and Keshav Champawat of the Loughborough University Business School about why the key to success in emerging markets is balancing global and local dimensions – and matching talent with opportunity.
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Emerging markets are countries where social and business activities are experiencing rapid growth and industrialisation. However, the definitions are fuzzy; one index specifies 19 classified countries, while another suggests a total of 351. According to the International Monetary Fund (IMF), by 2030 these markets will account for 56 % of global GDP growth.
Here, Kellie Goldstein, CFO, global emerging markets, Thomson Reuters markets division, talks to Ian Herbert and Keshav Champawat of the Loughborough University Business School about why matching talent with opportunity, and balancing global and local dimensions, are important success criteria within emerging markets.
What are the opportunities for Thomson Reuters to grow in emerging markets?
Kellie Goldstein: At Thomson Reuters, we are stepping up our game, and to grow we have to go where the growth is. Our revenues in emerging markets already account for 6% of total revenues generated. Look at it this way, developed countries are generally showing flat to 5% growth whereas in the emerging markets group our addressable market growth is in the range of 10-20%. Increased urbanisation, the growth of the middle class and increased professionalisation are driving the changes.
What is the significance of emerging markets?
The urban economic weight is shifting from North America and Europe towards Asian and other developing countries. As an example of the shifting demographic, by 2025, two billion people will live in 600 cities that will represent 60% of the world GDP2. For the next five years, annual GDP growth in emerging markets is estimated at 4-8%, while growth in mature markets is likely to be flat to 2%3.
What are the significant risks?
Emerging and developed economies are already part of a global system in which risks tend to be interconnected. Talent attraction and retention can be problematic as there tends to be a smaller portion of people with financial market expertise and good communication skills in each locality. Government interventions, regulatory changes, corruption, unstable economies, inflation concerns and acquisition cost are among the other challenges we face in emerging markets. For example, there are a few countries where the concepts of intellectual property are new or else outright ignored. Profit repatriation can be difficult from some places such as Brazil.
How do you balance risks and rewards?
We take a portfolio approach and optimising the portfolio is the key to balancing risk and rewards. Each country has a different risk and return profile so we need to look at new projects individually and collectively to determine whether the risk is appropriate. Sometimes risks in one part of the world can balance risks in other parts of the portfolio.
What is the importance of CFO leadership in emerging markets?
CFO leadership is the key to providing discipline in managing investments in emerging markets. Active participation means having effective two-way communication, collaboration and accountability. Ongoing and significant leadership from CFOs is vital. We have a continuous process that identifies, analyses, plans, mitigates, monitors and controls risk. We have to maintain a healthy dose of scepticism. We must continually monitor operational cost, particularly in high-volume and lower margin businesses, and continuously test payback as markets evolve constantly due to change in labour cost and regulations.
We put in a strong risk and controls environment, but we have to be flexible. Dollar denominated authority levels that might be normal in, say, North America may not be appropriate in some emerging markets. While successful operations are generally based on good forecasting and planning systems, emerging markets can be more unpredictable and have to be managed on an emergent basis. The CFO needs to see the connection between income and expenditure, both actual and potential.
Is there something to be learned from the experiences of other companies?
Yes, many other corporate giants are already going local and achieving impressive results. For example, IBM was losing out to local players until it repackaged its global offerings to look and feel more local. Now, 22% of IBM's revenues are coming from emerging markets and due to the creation of a dedicated division, growth markets4. HSBC has targeted growth markets where wealth is being created. It emphasises retail banking and global connectivity, and is consistently named the No 1 financial services organisation. But even HSBC has had to refine its approach; for example, it has just announced that it will do away with its existing tagline 'the world's local bank' in favour of no tagline at all5.
What are your strategic considerations when going local with global customers?
We have a framework to guide our strategy. The timing of market entry matters. As a company we started with a broad global footprint and we prefer to be early. Our customers tend to be global giants but with local needs. For example, we have traditionally sold global products to our global clients, but wherever we think there can be more growth, we go more local and sell our products to national and local customers. When making investments in new countries, we prefer to have 100% ownership, but there are sometimes limitations to full ownership and then we need to explore more local partnership opportunities to get to market faster.
What are the major cultural considerations when entering a local market?
The cultural dimension definitely cannot be ignored. Assessing local partners' attitude towards risk, whether it is high or low, is important. Short-term vs long-term focus is particularly challenging for us as a publicly traded company. Furthermore, we realise that we need to leverage local empowerment and autonomy rather than being too centralised. Customer focus and local content is more and more important. In many cases we have learned the hard way when we assumed that what is done in one place will translate to another. To promote diversity and understanding, one of our techniques is to pair a local business leader with a finance lead from headquarters or alternatively to pair a local finance lead with expat management 'flown in' to groom a successor.
How important is it to adapt to the local culture?
When going global to local, culture is fundamental. Having local knowledge means creating a strong and clear sense of communication within local markets. For example, in 2004 United Airlines announced direct flights to Vietnam to tap into a big market of American citizens travelling there. Promoting the route as 'Flight to Saigon' could have generated strong appeal among Vietnamese-Americans, but the Vietnamese Government would likely have retaliated. On the other hand, if the company selected 'Flight to Ho Chi Minh City' it would appease the government but wouldn't resonate with Vietnamese-Americans. The solution was to not mention the destination city by name and instead to promote the more generic slogan 'Flight to Vietnam'6.
What are other major considerations when going local?
In normal set-up situations, we first consider the business model, then the market place and finally who is going to run it. But in emerging markets, this is reversed. Choosing a trustworthy local partner is a priority because you have to work with them and you rely on their knowledge of local conditions. Our approach is not to be too theoretical in modelling but to spend time on the ground, because business context and thus forecast scenarios can change rapidly in emerging markets.
My advice is, do not be afraid to opt out of being a globally pushed provider. Make sure you are being understood by asking the other side to tell you what they heard, as some phrases even in the same language mean different things. There should be a mix of global and local talent and you need to carefully pick your areas and focus. Give ownership and autonomy to the local unit and give proper incubation time to new operations before integrating them into the larger organisation. Above all, think big, but do not rush. It is easier to impose global standards later than to risk disrupting a local business.
When you send people from your company to set up a unit in emerging markets, they have to start from scratch and the job is exciting. A few years down the line, as the business matures and the rate of growth levels out, it may become harder to keep things fresh. Any thoughts?
In Thomson Reuters we have different people for different phases of growth. I consider myself to be a growth-specific CFO. I do well when I am pushing things in new directions rather than maintaining them. I think emerging markets are still exciting for us; however things are not always straightforward and individuals have to be prepared to adapt their style. For instance, when I was placed in Hong Kong to look after Asia, I was working with developed economies like Hong Kong, Tokyo and Sydney, and at the same time emerging markets like China and India. While performing both the roles I could not focus enough on the growth areas as I was already preoccupied with the developed economies. As a company we decided that we need different kinds of management teams for developed markets and emerging markets. As a result, we are now more successful in managing both types of markets.
As a CFO, where do you draw the line between local empowerment and the role of shared services in driving standardisation and central control?
Shared services have worked really well for us by providing a strong global platform. The model has brought a new visibility and transparency in the organisation and we have cut down our hidden costs. It has provided better business support services so that the talents of the front line workers are optimised. Standardisation through the shared services enables more direct understanding and comparison of individual divisions, with less opportunity for political posturing based on asymmetric information.
A decade back, less than 10% of shared services were centralised and that did not work out so well for us. We are now centralised up to 80%, which has given us more control. However, as growth in developed countries is flatlining at present and emerging markets are becoming more important, the pendulum is swinging back a little way towards local empowerment. There is an optimum balance of power between the global and local units and we need to continually attune our business support services to a dynamic rather than a static situation. This ability to continually adjust structures, systems and processes to business needs through mutually negotiated service level agreements (SLAs) is a key advantage of the shared service model in comparison to outsourcing.
1 Standard and Poor's classifies 19 countries as emerging markets, while the Dow Jones Emerging Markets Total Stock Market Index covers 35 countries.
2 'Urban world: mapping the economic power of cities', McKinsey Global Institute, March 2011
3 'Are emerging markets the next developed markets?', Blackrock Investment Institute, August 2011
4 The Wall Street Journal - Spencer E. Ante
5 Marketing-interactive.com - by Rayana Pandey, Global
6 Galaxy Newsletter, Leon Lee, Lehrmach