Are the robots coming to take your job?

In March 2017, a study published by consultancy firm PwC predicted that 30% of jobs in the UK were under threat because of breakthroughs in artificial intelligence (AI), with up to half the positions in some sectors, like wholesale and retail, for example, likely to disappear.

This is not the first such study which has painted a grim picture of the future of labour markets because of the impact of AI. A widely noted study by Carl Benedict Frey and Michael Osborne in 2013 found that 47% of all American jobs were at threat from potential automation, whilst a Citibank 2016 report, published in collaboration with Oxford University, put the figure at 77% in China, and 59% across the whole OECD (Organisation for Economic Co-operation and Development) region.

Even world-renowned physicist, Stephen Hawking has weighed in on the debate, claiming in an article in The Guardian that AI would lead to a decimation of middle class jobs, worsening economic inequality and greater political unrest.

So, are we all about to see robots taking over from us, millions made redundant as the robots take over in some kind of post- Huxleyian nightmare?

The likelihood is that the future will be more nuanced than that. Whilst undoubtedly some jobs will be lost to AI, others will be created. There are also some service positions that are hard to automate, such as education, health and social care, hospitality and sports, and which are all expected to see healthy growth in employment levels.

Most at risk are those involved in jobs involving manual and repetitive tasks, in sectors like manufacturing or distribution. Workers in transport and logistics, such as taxi and delivery drivers, and office support, for example, receptionists and security guards, are likely to be replaced by computer capital, whilst those employed in sales and services – counter and clerical staff, telemarketers and accountants – are also in danger.

It should briefly be noted that changes in job market fundamentals due to automation is nothing new. The industrial revolution of the 19th and early 20th centuries saw the destruction of many cottage industries and rural employment, as labour began to be organised around mass production lines in factories and industrial centres. Subsequent developments in assembly-line production and technological innovation then saw the elimination of many manual labour jobs, whilst the advent of computers and the internet again had a radical impact on the pattern of employment, accounting for the loss of millions of clerical and administrative roles.

Despite this there has been no jobs “Armageddon” across the world, although it is undoubtedly true that many traditional manufacturing heartlands, such as the Rust Belt in the US and the North-East of England, have become economically depressed as local jobs have disappeared. In fact, what happens is that labour markets reposition themselves in the wake of such radical shifts, with new jobs created, as a consequence, in different sectors.

It also should be emphasised that changes in job markets tend to happen slowly, and this is likely to be the case with AI as well. People in sectors of employment identified as “at risk” should not start looking over their shoulders just yet.

In fact, the increased implementation of AI is likely to create a whole new swathe of jobs, requiring completely different skills and knowledge than exist today. A recent Accenture study “How Companies are Reimaging Business Processes with IT” identified 3 categories of new AI-driven business and technology jobs, which they labelled “trainers”, “explainers” and “sustainers”.

Trainers will be required to teach AI systems how they should perform – for example, helping language translators and natural language processors to make fewer mistakes, or teaching AI algorithms how to mimic human behaviour. AI systems do not understand human emotions or expressions of thought like empathy or sarcasm – they have to be taught.

Explainers will be needed to bridge the gaps between systems and humans, particularly business leaders and managers. Many business executives are uneasy with the “black box” approach of machine learning algorithms, and need somebody to explain and interpret data for them. Explainers will need not only to understand how the technology works and how it produces results, they will also need to be able to translate that into normal “business speak”.

The final category of job identified, sustainers, will be responsible for ensuring that AI systems are operating as designed. Current studies indicate that, on average, less than a third of companies will AI systems believe in their fairness, whilst there are serious doubts about their safety as well. This is a clear threat to the long-term roll-out of AI technology. Sustainers will have a big role to play in building the necessary trust and reliance on such systems going forward.

Of course, such jobs will require staff with the necessary skills and talents to undertake them, which, in turn, may need a radical shift by schools and universities away from traditional curriculum to offer courses which teach these new disciplines.

Undoubtedly AI is going to have an impact on the job market, but it is unlikely to be the doomsday scenario some have predicted. Those jobs which require a high degree of manual, repetitive tasks are likely to be replaced by computers or robots but, in their place, there are likely to arise a whole new range of jobs which are more highly skilled, challenging and crucial to long-term economic prosperity.  And there will continue to be jobs which computers just cannot do, or perform well.

AI will have a transformative effect on employment, but it need not be cataclysmic.

Another day in Paradise – for some

The Queen, Lewis Hamilton, the stars of Mrs Brown’s Boys, and the Indian aviation minister may seem, on the face of it, to have little in common with each other. However, all of them have been named in the latest leak of online information, called The Paradise Papers, as having invested in offshore tax havens.

These are, in fact, amongst the first names to appear, in what promises to be an ongoing expose of how multinationals, celebrities, politicians and high net-worth individuals have used complex offshore financial structures to protect their cash and other assets from higher taxes.

The ripples have already started to spread, with questions being raised about who owns Everton football club, the activities of former Conservative Party donor Lord Ashcroft, and politicians in Canada, India, the US and Russia all coming under scrutiny.

The Paradise Papers contain 13.4 million documents, many coming from offshore legal service provider Appleby and its former sister company Estera. There are also millions of documents compiled from corporate registers in some 19 jurisdictions, many of them located in the Caribbean, as well files obtained from the Singapore-based Asiaciti Trust.

Like last year’s Panama papers, the original material for the leaks was obtained by the German newspaper Suddeutsche Zeitung, which passed them on to a global network of investigative journalists, the International Consortium of Investigative Journalists, which includes the BBC Panorama programme, The Guardian and The New York Times, to work on them further.

Whilst the number of files released this time round is fewer, in number, than the Panama Papers, this leak has the potential to cause more damage because it focuses on well-known high net-worth individuals and celebrities, many with links to the UK.

Investing in offshore tax havens is not illegal – there are many offshore tax schemes and arrangements that are wholly legal and above board. However, there are many who question whether it is ethical to actively take measures to avoid tax.

Moreover, at a time when national governments and international authorities have been promoting a series of initiatives and measures to force individuals and companies to be more open and transparent with their tax affairs – with initiatives like BEPS, the Common Reporting Standard, and new CFC and transfer pricing rules – these latest revelations will come as a huge embarrassment for some, and lead to legal sanctions for others. Expect a series of high profile resignations, mea culpas, and public apologies in the next few days.

At the same time this will highlight, for some, the continued inequality of the tax system.

In September, a report co-authored by economist Gabriel Zucman estimated that 10% of all global GDP – about £6 trillion – is held offshore. The report also stated that 80% of all offshore cash is owned by 0.1% of the richest households, with 50% held by the top 0.01%.

Yet again, it seems that there is one rule for the overwhelming majority of us, and another for the super-rich.


Altcoin Review

Altcoin (the abbreviation for alternative coin) includes any coin created after Bitcoin. There are currently over 1,000 altcoins available, although many will prove short-lived and few can expect to compete with Bitcoin.

The following are the main current altcoins.


Although regarded as a major cryptocurrency in its own right, Ethereum is technically classified as an altcoin. Whilst Bitcoin primarily runs online peer to peer electronic cash system, the Ethereum platform supports any decentralised application. This means its potential uses expand far beyond digital currency, which is why so many multinationals are looking for ways of exploiting the potential of the Ethereum blockchain, particularly the concept of the “smart contract”, essentially a computer program that is executed when all its conditions have been met.

Instead of mining for Bitcoin, in the Ethereum blockchain miners work to earn Ether, a type of crypto token that underpins the network.


Ripple is both a digital currency and an open source payment network, which connects banks, payment providers, digital asset exchanges and corporate entities via RippleNet. The aim of Ripple is to build and expand on the decentralised digital currency approach adopted by Bitcoin. Its settlement infrastructure technology is used by companies like UPS and Santander, who perceive its advantages over Bitcoin and other cryptocurrencies to include price and security.


Similar to Ripple, Litecoin is an open source, decentralised global payment network. The peer-to-peer internet currency facilitates instant, almost nil-cost payments to anyone in the world. One advantage of Litecoin compared to Bitcoin is that its blockchain is capable of handling higher transaction volumes. This is because blocks are generated more frequently, allowing the network to support more transactions. The Litecoin network is scheduled to produce 84 million Lite coins, which is 4 times more than the number of Bitcoins which will be mined.


Dash is a digital currency that allows for instant transactions to be made in complete privacy. Whilst it is based on the Bitcoin software, it has a two-tier network which improves on it, allowing users to remain anonymous.

Bitcoin requires all transactions to be published to the blockchain, meaning it is possible to trace who has made them and to whom. Dash gets around this problem by uses software which anonymises the data. In addition, Dash transactions use the Masternode network to confirm transactions which occurs almost instantly. This is a big improvement on Bitcoin, where confirmations can take a long time because all the work is being done by miners.



NEM (New Economic Movement) was created by a group of enthusiasts who wanted to create a community-orientated cryptocurrency from scratch, with one of their avowed aims being to address wealth inequality. Unlike the vast majority of other cryptocurrencies, NEM has its own source code. NEM introduced the concept of “proof of importance” whereby a user’s wealth and number of transactions are used to timestamp transactions. The NEM blockchain software is used in Mijn, a commercial blockchain currently being tested by banks and financial institutions in Japan and elsewhere.

Ethereum Classic

When a major theft of funds occurred, the Ethereum community fractured as to the best way to deal with it. A majority wanted to change the code to allow the funds to be recovered. However, a minority believed that it was against the spirit of the original project to change the code or allow third parties to interfere with it. This minority created the Classic version of Ethereum which continues to thrive.


Blockchain Review – the most popular blockchains

A blockchain has been defined as a distributed, decentralised ledger and peer-to-peer network which uses a defined, consensus mechanism to prevent modification of an ordered series of time-stamped records. From its initial introduction with Bitcoin in 2009, the potential of blockchain technology has continued to grow rapidly, and can be found in an increasing number of applications.

The most popular blockchain/distributed systems include:


The introduction and implementation of Bitcoin – and all the digital currencies that have since followed it – was made possible by blockchain, which was the ground-breaking technology behind the whole cryptocurrency boom.  Bitcoin focuses on one area of the blockchain technology, which is to run an electronic peer-to-peer electronic cash and payment system. Since 2009, the Bitcoin blockchain has operated without significant disruption, with any problems that have arisen being due to hacking or mismanagement, not with issues in the underlying system and code.


The second most popular cryptocurrency by market capitalisation, the Ethereum blockchain has much wider application than Bitcoin, in that is concerned not just with digital currency but with running the programming code of any decentralised application. Unlike most blockchains which limits the changes that developers can make, Ethereum allows them to create almost endless applications.

At the heart of the code is the “smart contract”, a legal agreement that a user and service provider, which acts like a computer program that is automatically executed when specific conditions are met, and which runs on the blockchain platform. Unlike Bitcoin, which is essentially passive, Ethereum is active with its own programming language, Solidity. The much wider possible applications of the Ethereum blockchain have got many major firms and governments interested in the technology.


Formerly known by the name Eris:db, Monax is an open-source platform which aims to extend the functionality of Bitcoin. Monax encourages developers to build, ship and run blockchain-based applications for business ecosystems. Deloittes, PWC and Accenture are among the firms who are running applications using Monax technology.

Chain Core

Chain Core is a blockchain platform which defines how assets are issued, transferred and controlled on a network. It uses a permissioned (meaning that the network is private and users have to apply to join) blockchain infrastructure), and can interface with existing core financial systems.




This is an open source distributed ledger system for the issue and management of digital assets. It differs somewhat from traditional blockchain technology in that transactions are chained with one another, rather than grouped into blocks. Openchain provides instant confirmation of transactions, has no mining fees, and is highly scalable.


Hydrachain is an Ethereum extension for creating permissioned distributed ledgers, aimed at the private client market, with the concept of the smart contract in mind. Its customers are typically those who are looking to the Ethereum blockchain to save costs, make business processes more effective, and create new innovative products.


Multichain is an open-source blockchain platform for multi-asset financial transactions based on the Bitcoin blockchain. It is essentially a software tool for managing web assets and legal contracts, and is intended for banks and other financial institutions that previously have had concerns about the stability of the Bitcoin blockchain.

Process benchmarking

Many organisations turn to process benchmarking because, by focusing on specific critical processes and operations, it offers the best chance of quick wins in terms of performance improvement.

Process benchmarking, rather than focusing on the business as a whole, concentrates on specific operational or production processes. This makes it easier to identify areas of improvement, and limits the amount of time and resource devoted to a study.

By analysing their existing processes and comparing them to best practice, managers can identify performance gaps and implement actions to improve their overall process efficiency. Performance is improved by learning from others.

In short, process benchmarking consists of a mechanism for identifying specific work procedures that could be improved by copying, and appropriately adopting, external examples of excellence that can be regarded as the best standard in the industry.

Examples of process benchmarking might include the following:

  • A professional service firm which examines its client billing process to that of leading accounting, legal, consulting firms etc.
  • An ecommerce firm benchmarking its average fulfilment and delivery speed compared to key competitors;
  • An airline benchmarking operational metrics such as customer satisfaction against its major rivals;
  • A hotel seeking to compare its housekeeping service or customer care program against other hotels in the same city.

A key challenge in process benchmarking is finding similarity of processes, or identifying the means of making external processes comparable. This is critical if you are to translate best practice into a set of actionable recommendations that can be applied to your own processes or operations. Failure to do so will irrevocably undermine the entire benchmark exercise.

Context is key; without it a business practice may not transfer well. Toyota’s production system, for example, has been widely lauded, and its practices adopted successfully by many companies outside of manufacturing. But blindly copying Toyota without acknowledging the unique needs of your business and specific challenges of your industry will lead to failure.

Contextualisation is important then, as is the need to have a performance plan in place. Seeing how Company X performs and deciding to imitate them lock, stock and barrel is no recipe for success. Every firm has its own culture, core strengths and capabilities which it is impossible to replicate. It is a waste of time trying and, in doing so, will cause you to overlook the key values and competencies of your own organisation.

Instead, what you should be doing is compare processes and operations, identify and understand why and how they work better than your existing procedures or operations, and then translate that into a set of improvements which will work within your own organisational framework. You are trying to learn from the best, not imitate them.

Despite these reservations, process benchmarking offers a number of benefits to organisations looking for better performance, including:

  • A process benchmarking exercise often gives an organisation a better understanding of how its own internal processes currently work, a necessary starting point for any change initiative;
  • A process benchmark gives an organisation a measure as to how it rates in terms of operational performance compared to peers and industry leaders, and highlights those areas which offer the greatest potential for short and long term process improvement; and
  • A process benchmark provides empirical evidence that can be used to support a resource request or build a business case for process improvement initiatives.

Process benchmarking can be an effective means of delivering both short and longer term performance gains if approached correctly. This means learning from, but not imitating, the best, contextualising and adapting key teachings to your business and industry, and translating them into suitably actionable recommendations.

US Technology firms face further taxation threat

It is commonly known that European countries want US technology giants like Google Amazon and Amazon to pay more taxes than they currently do. For years, these companies have used creative accounting and taken advantage of incentives offered by countries such as Ireland to structure their businesses in Europe, so that they pay minimal tax in the countries in which they operate.

To try to address this issue, the finance ministers of France, Germany, Italy and Spain have written a joint letter to the European Union presidency and Commission, calling for such technology giants to be taxed on the basis of their revenues, not just profits. They are proposing an “equalisation tax” of between 2% and 5% of revenue, to ensure such companies pay the equivalent of corporation tax in the countries where they earn revenue.

France, in particular, is incensed by how little tax revenue it receives, given the size of its population and the billions of dollars the tech companies earn in the country. With one of the highest corporate tax rates in Europe, the digital giants have looked to structure operations there to ensure profit is shifted to low tax jurisdictions. Google, for example, paid just €6.7m in French corporation tax in 2015.

French ire against Google was further stoked after they lost a 6 year legal battle to try to force the company to pay a massive €1.12 bn tax bill. Although Google has 700 employees in France, it has no permanent office there, so an administrative court in Paris ruled that, under existing rules, the company had no Permanent Establishment (PE) in the country. French advertising contracts are sold through Google Ireland, and according to the court, Google France did not have the people or technological ability to handle the advertising itself. Therefore, under existing PE regulations, Google’s activities in France were deemed auxillary in nature, and not an essential part of the company’s business.

Meanwhile, Apple and the EU are locked in a bitter battle over a €13 bn fine imposed on the technology group for what have been deemed illegal tax arrangements in Ireland, where the company has its European headquarters.

EU regulators claim that Apple have structured their operations in Ireland, so that they pay tax at an effective rate of only 1%, and that they have shifted profits away from other European countries, and, therefore, robbed local tax authorities of billions of euros of tax revenues.

Apple, for their part, feel that they have been unfairly singled out by the EU, and, as the largest taxpayer in the world, the argument is not so much about whether it pays tax, but where it pays that tax. They contend that because their products and services are “created, designed and engineered” in the US, that is where they pay the bulk of their tax.

Apple’s position is backed by the irish government who have argued that the EU’s action is an infringement of their national sovereignty; according to the country’s finance ministry, the European Commission have “misunderstood the facts and Irish law”.

The fact that Ireland are supporting Apple against the EU illustrates the major reason why it might be difficult to get the “equalisation tax” approved at a European level.

Such a proposal would need to be unanimously agreed by all member states, and this might be difficult to achieve since certain countries like Ireland and Luxembourg use low tax rates to attract international business.

Needless to say, the technology companies are implacably opposed to any equalisation tax, and will fight any such measures tooth and nail, as the potential additional tax they might have to pay for their European operations will be run to billions of euros. This battle could rumble on for years.


Thin Capitalisation

Thin capitalisation refers to a condition in which a company is financed with a high level of debt compared to its equity. This means it is highly leveraged. This method of financing is often used by multinational companies as a way of reducing tax; a lender in a low-tax country lends to a borrower in a country in which the borrowing cost can be deducted from profits for corporate tax purposes. As a consequence, profit can be shifted to a lower tax jurisdiction.

However, in the wake of wider initiatives such as BEPS and CRS, a number of national governments have been looking at the practice of thin capitalisation, and sought to impose limits on how much interest expense can be deducted for tax purposes.

Typically a thin capitalisation rule will prevent the complete deduction of interest if the ratio between debt and equity exceeds a certain level. There are two main categories of such rules – either the amount of interest which is deductible is restricted if the total debt-equity ratio exceeds a certain numerical value, or the internal debt-to-equity ratio is limited.

Recently, regimes from Australia and New Zealand, from Canada to Russia, and Indonesia to South Korea have all, in various ways, sought to introduce measures to counteract the use of thin capitalisation as a tax avoidance strategy.

In terms of Cyprus, current tax legislation does not provide for any rules when it comes to thin capitalisation, which makes it an ideal location in which to situate a holding company. However, caution needs to be exercised when it comes to interest deductions for loans which are not of a trading nature. Such interest payments are deemed non-deductible, whereas interest on a loan of a trading nature is treated as qualifying, and, therefore, eligible for deduction.

The battle against thin capitalisation is part of the wider picture in which national and international authorities are cutting-down on aggressive tax planning strategies and moves to shift profits from higher to lower tax jurisdictions. International companies which find themselves affected by the tightening regulations may want to consider using Cyprus as a base for their holding companies as there are no thin capitalisation rules currently in place, and because of its attractive low corporate tax rate.

BEPS explained

The BEPS (Base Erosion and Profit Shifting) programme is an OECD initiative, endorsed and approved by the G20 group of leading nations, designed to identify ways of providing more standardised global tax rules.

BEPS is an umbrella term used describe tax planning strategies which exploit mismatches and discrepancies between the tax rules of different jurisdictions, allowing companies to minimise their overall corporation tax payable, either by making tax profits disappear, or by shifting them to low tax jurisdictions where there is little or no genuine activity. In general, BEPS strategies are not illegal; they just take advantage of the different tax rules which apply in different tax jurisdictions.

Examples of the practices that the BEPS initiative is attempting to eliminate include the practice of reducing the taxable base (base erosion) and the practice of shifting taxable profits from high to low tax countries (profit shifting). An example of the former is using large interest payments to reduce taxable profits, whilst the latter is exemplified by the transfer of IP (Intellectual Property) and income derived from it from the US (high tax) to Bermuda (low tax). It also covers the highly-publicised cases of multi-nationals like Starbucks, Google, Yahoo and Amazon who operate extensively in countries like the UK whilst paying little corporate tax there, and Apple and its tax arrangements.

BEPs is really an attempt to address one of the challenges of the current global and digital business environent – how to make sure that all companies, including large corporations, pay their fair share of tax.

Following the initial report on BEPS by the OECD in 2013, an action plan was drawn up to tackle “weaknesses” in existing taxation principles, which was endorsed by the G20 Finance Ministers and which spawned further  initiatives at the UN and EU level. These initiatives have resulted in a number of new policies which have been created at both the national and international level to prevent Base Erosion and Profit Shifting.

The extensive Action Plan on BEPS published by the OECD identified 15 separate action points which needed addressing. These included:

  • Addressing the tax challenges of the digital economy;
  • Neutralising the impact of hybrid mismatched tax agreements;
  • Strengthening CFC (Controlled Foreign Company) rules;
  • Limiting the extent to which interest deductions and other financial payments can reduce base taxation;
  • Countering harmful tax practices more effectively, and preventing treaty abuses;
  • Changes to transfer pricing arrangements; and
  • Requiring taxpayers to disclose aggressive tax planning arrangements.

In terms of Cyprus, the Minister of Finance issued a Decree on 30 December 2016, introducing mandatory country by country reporting requirements for multinational groups with a consolidated annual turnover in excess of €750 million (so-called “MNEs”). This Decree is in line with EU Directives as regards the mandatory automatic exchange of information as regards taxation and the OECD BEPS initiatives.

As a result, MNE Groups which have an ultimate parent that is tax resident in Cyprus are required to file annually a report which includes specific financial data such as income, taxes, and other measures of economic activity on a country by country basis. There can also be a reporting requirement, under certain circumstances, for a Cypriot tax resident entity which is part of an MNE Group.

BEPS can be regarded as one more element in the sea of global tax changes which are being brought to bear to prevent not only tax evasion but aggressive tax evasion as well, with the stated aim of promoting transparency, compliance and coherence. It, therefore, takes its place alongside such initiatives as FATCA, the Common Reporting Standard (CRS), AML, and changes to the EU Parent-Subsidiary Directive.

Such initiatives, will, inevitably, lead to a huge increase in the compliance cost for business, because the extent of information that requires reporting for an international group is so much greater than it used to be. BEPS will have a major change on the international business landscape. Policies adopted and practices followed will need to change and improve, and there needs to be a corresponding alteration, for some, in the corporate mentality. The need for compliance and transparency will now trump the use of planning strategies aimed at exploiting loopholes and treaty provisions so as to reduce the tax burden.

For Cyprus, it will have an impact on the corporate sector because certain existing tax arrangements will no longer be attractive or even valid. There will, as a consequence, be a reduction in the number of legal entities registered in the country, whilst, at the other end of the spectrum, increased compliance costs for international businesses headquartered her.

The BEPS programme will be rolled-out in a number of phases, and there will be transitional arrangements in place to cover a number of the “action points”, before finally becoming enshrined in national and international law. However, it is clear that businesses must now expect a degree of scrutiny, and reporting of their tax position and arrangements which goes way beyond what they have been used to in the past, and they need to adapt accordingly.

Internal Benchmarking

Companies looking to carry out benchmarking studies will often turn internally and compare the performance and processes of business units from within their own organisation. There are a number of reasons why they might take this approach, including the ease of access to data and information, the availability of standardised data, and cost -it is usually less expensive and time consuming than benchmarking a competitor or firm from another industry.

There is, of course, one principal drawback. Operations from within the same organisation tend to be more heterogenous in terms of functionality, performance and corporate framework than those of an industry peer or rival. Potential insights are curtailed by breadth of the organisation itself.

However, provided these limitations are understood and acknowledged, then internal benchmarking can still yield some valuable results.

Through internal benchmarking, a company attempts to learn from their own structure. Similar operations within an organisation that can be defined and measured are compared. This is especially true for medium or large companies with multiple divisions, production facilities or business units. Examples of this in practice might mean, for example, comparing the warehousing and shipping of products at one site with those at another, or assessing the relative performance and processes of an accounting and finance team in Country A with those in Country B.

The idea behind internal benchmarking is not only to promote efficiency but to foster a culture of continuous organisational improvement. That is why it is important that senior management both endorse the process and underline the importance of the exercise as a learning opportunity. Failure to do so risks a “silo” mentality taking hold, whereby different parts of an organisation can, either directly or covertly, refuse to cooperate with the benchmarking exercise, or ignore the teachings from another department, team or business unit whose performance or methods has been judged superior to theirs.

Communication is obviously a key element. The reason for the benchmarking exercise needs to be communicated to all those impacted – and potentially wider within a company – and the perceived advantages clearly spelled-out. The message also needs to be sent that this is a positive, sharing experience, and not a stick which will be used to beat a particular part of an organisation over the head.

One other benefit to internal benchmarking that should be highlighted is that it provides the opportunity to stand back and examine some of the reasons why an operation, business unit or department handles a particular process in the way it does. Often internal ways of doing things evolve over time, until they become accepted practice. There is no recognised methodology, as such, it is just the way “we do things round here”. Benchmarking gives you the opportunity to stand back, look at a process objectively and critically, and ask whether it is the most effective way of delivering the desired outcome or performance.

An effective benchmarking exercise comprises the following main steps:

  • Firstly, identify which processes to benchmark. It is recommended that a company starts with only one, or perhaps, two processes to examine at the same time – perhaps order fulfilment or customer service. To do otherwise, risks focus being lost, internal competition for scarce resources, and, possibly, contradictory results.
  • Then organise the benchmarking efforts, Identify who will take part in the effort, try and ensure, as much as possible, that team members are dedicated to the task, and are not trying to benchmark “around the day job”. Also decide how the benchmarking will take place – for example, organising a small team to visit the company’s major warehouses to learn effective tactics and strategies in place at each.
  • Organise and prioritise the ideas that the team has found, and turn them into a discrete project, which can then implement the best processes and practices on a wider basis. This is a more structured approach to achieve lasting performance gains than adopting a scattergun approach.
  • Finally implement and begin to achieve results.

Once this methodology has been adopted with one key process, the same approach can be used for the next and subsequent processes, until all the major parts of an organisation have been benchmarked. This creates a cycle of continuous improvement, so that a company is always looking to learn and improve its internal processes, with the same exercise repeated every few years or so.

The advantage of internal benchmarking is that it is much easier to get data and information from within one’s own organisation than from a key competitor or industry peer. It is also easier to understand that information because much internal reporting will be standardised, even if the processes or operations which provides that data is different. There are also cost advantages. However, if senior management are not seen to support such initiatives, or fail to communicate the positive benefits of carrying out such exercises, internal politics and resistance can undermine improvement efforts.

Despite this, many organisations would benefit from some form of benchmarking of their internal processes and methodologies, just to give them an objective view of what has often evolved by practice and the passage of time rather than with any applied forethought. Even small changes can lead to increased efficiency, greater employee satisfaction and improvements to the bottom-line.




Sales, Revenue, Gross and Net Profit explained

The terms sales, revenues and profit are often used by the uninitiated as if they were synonymous, whereas there are important differences between them, particularly when it comes to profit and the other two terms. Some basic understanding of financial terms and concepts can be very useful for the small business owner, because a company’s success or failure is often dependent on them, even if they don’t realise it. Knowing and understanding what are the important signs when it comes to the financial health of your business can be critical.

The easiest term to define is sales which, put simply, is the income you get from selling your products and services. This figure is usually calculated net – that is to say, taking account of any customer returns or discounts that may be offered.

Sales and revenue can be the same thing if all the income generated by a company comes from what it sells. However, many companies have many other sources of income – interest, royalties, fees and dividends – which do not fall under the definition of sales, but which can still represent important sources of cash flow for a business. Although sales are sometimes referred to operating revenue and revenue as total revenue, the same differentiation applies.

Profit, on the other hand, reflects the money left over from your revenue after you have deducted the costs of running your business. Again, there is an important distinction to be made – between gross and net profit.

Gross profit is the revenue that you earn from selling a product or service, less the direct costs of producing it. These include, for example, materials consumed, advertising and marketing costs, staff involved in the production or selling activity, and other expenses involved in getting the goods or services to market. Net profit, on the other hand, takes account of all the costs associated with a company doing business, including overheads such as administrative costs, depreciation, bank and loan interest.

Not only are the differences between these terms not always understood, but their relative significance can be missed as well. High sales may be a good thing, for example, but if the cost of producing your goods or services is such that your gross profit is negative, or too low to cover your overheads, then your business is in trouble. Conversely, you may have modest sales, but if your production costs and overheads are also low, you may have a successful operation.

Once you have identified these key metrics, it is important to apply them to your own business. For example, if you forecast, based on current and forecast sales, your gross profit for the month, you should be able to estimate if you are going to generate enough money to cover your operating expenses. If you project your gross profit is not going to be enough, then you either need to promote your product or services more heavily, or offer some form of promotion to build sales.

Of course, at least in the short-term, it is often easier to cut costs than increase sales. But it is important to know which costs can be easily reduced. Accountants will often talk about variable and fixed costs, for example. A variable cost is one that changes with the level of production or sales, whilst a fixed cost is relatively constant, staying the same if one unit is sold in a month or a thousand. Whilst somewhat of a simplification, a variable costs can be reduced quickly if there is a need to cut expenses, whilst it is difficult to reduce fixed costs. For example, land and buildings usually represent long-term investments which it is hard to sell, or otherwise get off the books (via a sale and leaseback transaction, for example). On the other hand, variable costs such a advertising, promotion and travel costs can be easily cut or adjusted as demand and performance dictates.

Sales, Revenue, Gross and Net Profit are terms that entrepreneurs and small businesses should understand, as well as appreciate the difference between them. They are all related, so know what they are for your business, understand how the change in one can impact the others, and always keep these in mind before embarking on any new project or investment.