December 2019

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
26 December 2019 Piyali Roy

Avoid these pitfalls on the road to digital transformation

While digital transformation is one of today’s most frequently-used buzzwords, the concept itself is constantly transforming. This is because every digital transformation journey is different for every company, and it can be difficult to have a single definition that applies to all. In general terms, we define digital transformation as the integration of digital technology into all areas of a business, resulting in fundamental changes to how businesses operate and how they deliver value to customers. Simply put, digital transformation should result in more efficient operations, optimized controls, and better customer service. With every industry getting disrupted by the “digital wave,” organizations have no choice but to transform. Many companies who are leaders in their industries do it by choice to seize opportunities brought about by new technology, innovation and trends, allowing them to stay ahead in the game. Other companies however, embark on transformation because disruption is impacting their business and they have no choice but to transform or risk falling behind or even becoming extinct. THE KEY PILLARS OF DIGITAL TRANSFORMATION For digital transformation to be successful, companies need to focus on six pillars beyond technology: experiences, people, change, innovation, leadership, and culture. Digital transformation is enabled by technology, but it is only possible if the organization embraces the possibilities that transformation offers. Over and over, it is reiterated that digital transformation is a business and cultural transformation rather than just a transformation driven by technology. PITFALLS TO AVOID Since digital transformation is an organizational transformation encompassing both business and cultural change aided by technology, each journey should be customized to the organization undergoing transformation for it to be successful. This is why it is so important for companies to have a digital transformation strategy. As new technology emerges, companies can avoid pitfalls such as embracing advancements too quickly, rolling them out in a way that could cause too much or too little disruption, and not properly tracking the changes within the organization. Outlined here are five pitfalls that any company undergoing digital transformation should address or manage: Not having a transformation strategy. Basic concepts involved in a digital transformation strategy include analyzing a company’s own needs as well as its company culture. However, transformation cannot only be driven by IT; it must be fully aligned with the organization’s overall path, goals, mission and planned future. The digital strategy must therefore support the corporate, functional and business strategy to align with the overall vision of the company, which entails analyzing the market, customizing the customer experience, and assessing the current standing and adjustment of the company’s infrastructure. Industry experts who can bring in industry-wide knowledge of the framework can be consulted to help build the overall strategy. In the agile digital world where everyone wants to fail fast and keep moving, it does not mean that failure is a necessity; there are learnings which can definitely be made available to minimize failures and increase the potential for success. Not setting up practical steps for change. An organization’s current state is the starting point of all transformations and cannot be forgotten while trying to embrace the trend. It is important to have a digital road map keeping in mind the state of the company as is, while outlining well-defined milestones will be key to driving change in a coordinated and effective way. Careful planning and a methodical process can help ensure actualization of goals, avoiding excessive detours and unnecessary costs. All projects, programs methods and framework (agile) should be aligned with that road map. This reduces the risk of misalignment, redundancies, or even projects that do not address a strategic objective. Costly projects that are at risk of being scrapped can be avoided. Not having the right leadership. Whoever will take charge of the digital transformation needs to have the right mandate for change and the influence to make it happen. This space requires great leadership, collaborative skills, and support to help leaders develop the right digital skills. This can come in the form of advice from peers, or from outsourcing expertise. Not investing in cultural change. If we address everything but culture, any progress made will eventually regress in time. Addressing culture will allow an organization’s investment into digital transformation to take care of itself automatically. However, culture is also the most difficult to change, and cannot be transformed by a simple memo from the top. Culture is omnipresent in any organization; it is what happens every single day, how leaders behave every single day, how decisions are made, how people work, and what is incentivized. INEFFECTIVE INTERNAL COMMUNICATION Digital transformation will inevitably involve continued change management and ensuring that people are aligned. Internal communication teams need to work hard on campaigns to motivate employees, celebrate successes and offer encouragement when going digital feels uncomfortable or difficult. While the road to digital transformation entails change on several levels throughout an organization and is unique for every business, the potential pitfalls are a common ground that can be anticipated. Several companies massively invest in developing new capabilities in Digital and Omni channel (a multichannel sales strategy used to provide a seamless customer experience across digital and brick-and-mortar locations) interfaces while building analytical capabilities, allowing them to upgrade and utilize technology to deliver a better customer experience. Many others run “business” or IT transformation programs that modernize their architecture and systems, while some have started simplifying their products and processes by reassessing their operating models. Whatever way each company decides to initiate its digital transformation journey, the end goal is the same — to enhance the organization’s business, culture and level of innovation to maintain its competitive edge by seamlessly and effectively integrating technology into every aspect of its operations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Any tax advice contained herein may be insufficient for US penalty protection. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Piyali RoY is a Senior Director of SGV & Co.

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23 December 2019 J. Carlitos G. Cruz

On purpose, passion and possibilities

Whenever the calendar year winds down, many among us find it an opportune moment to reflect and reevaluate the last 12 months. We recall the challenges we faced, revisit the dramatic changes in the business landscape, and ponder how we, as individuals and organizations, have grown and evolved. We have seen how companies have shifted their focus to global trends and technologies, how people are taking on new jobs that didn’t even exist a few years ago, and how the challenges of sustainable development have become the top priority for organizations. At the start of 2019, I wrote about how the SGV team recommitted itself to the firm’s collective purpose to nurture leaders and enable businesses for a better Philippines. I described how purpose motivates people, becoming the primary driver of strategy and transformative development in every aspect of business. Purpose can empower individuals and teams by creating a deep sense of meaning that enhances personal commitment and energizes them with the power of positive action. Purpose is like having an internal compass, one that guides a person’s every action by never compromising values. At the same time, people who believe in and are proud to be part of an organization go the extra mile and tend to be at their creative best. Becoming a purpose-driven organization is one thing, however. Sustaining that purpose for the long term is another. How, then, can organizations ensure that its people and culture will remain steadfast in its chosen purpose? ALIGN YOUR PEOPLE TO YOUR PURPOSE For a purpose to work, it is vital for the organization’s people, culture, work practices and leadership behavior to be aligned with it. Think of your purpose as your road map — those travelling on the road will need to adjust their course if they wish to remain on track. The truth of your purpose needs to permeate every aspect of your business. Purpose has to be a living covenant. When SGV launched its purpose, we asked our people if they were willing to commit to the purpose and journey together to live it out. Each member wrote his or her commitment and placed it on a visual map as a symbolic reference. They were also encouraged to integrate our purpose with their own personal career journey, and internalize how such a purpose could energize and validate their progress, from initial recruitment to their continuing professional growth to their involvement in our CSR programs. Eventually, we see our people carrying our purpose with them even if they continue their journeys outside SGV as alumni. Speaking of recruitment, purpose-driven organizations also need to consider adjusting their metrics for hiring people. Most companies hire for talent, skill or potential. Purpose-driven companies also hire for values, taking into consideration whether a candidate’s values align with those of the organization. STEER YOUR PURPOSE Simply declaring a purpose is not enough. Organizations need to have leaders who will set the pace for positive change by transforming the organization’s culture and ways of working to become more purpose-led. Purpose should not be the sole responsibility of one leader in the organization, it needs to be supported by the collective will and wisdom of various stakeholders. In SGV, a steering committee (aptly named the Purpose Council) meets regularly to identify areas for improvement and design programs to continually ensure that our practices reflect our purpose. COMMUNICATE AND DEMONSTRATE PURPOSE-DRIVEN CONDUCT As with any transformative program, constant communication is key. An organization’s leaders need to actively and constantly communicate the company’s vision and encourage people to embrace the meaning behind the purpose on a personal level. Leaders not only have to “walk the talk” when it comes to purposeful behavior, but they also need to regularly keep the channels of dialogue open. We continue to sustain our purpose through regular, inspirational internal communications from leaders and partners to further strengthen our people’s collective resolve. HELP YOUR PEOPLE FIND THE PURPOSE ‘SWEET SPOT’ Leadership advisor Peter Fisk references an interesting duality between passion and purpose, which he attributes to Ha Nguyen of Omidyar Networks. Passion, he says, is about finding yourself. It’s about doing what you love and possibly building your life and career around it. Purpose is about losing yourself in something bigger than you. It’s about wanting to make a difference, to leave a lasting and meaningful legacy. Finding one’s passion may not always have purpose and finding one’s purpose may not necessarily fit one’s passion. However, for those individuals who can both do what they love while serving the greater good, that is where true fulfilment lies. I wish to take this opportunity to share with our readers how fortunate I had been — that in my 38 years of working with SGV — I had personally found deep fulfilment in the unique intersection between my passions and our purpose. As I turn over SGV’s leadership to Wilson P. Tan, the next SGV Country Managing Partner, I am excited about the limitless possibilities of a fresh, new decade with full confidence that SGV’s Purpose will thrive and endure for generations of SGV professionals yet to come. A Merry Christmas and a purposeful 2020 to all! This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. J. Carlitos G. Cruz is the Chairman and outgoing Country Managing Partner of SGV & Co.

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09 December 2019 Jocelyn M. Magaway

Act fast before the FAST Act interferes with US Passports

This article applies to US citizens, US nationals and their employers, the latter to ensure US Federal tax compliance. “Seriously Delinquent” tax debts can cause suspension, denial, or nonrenewal of US Passports. The US passport is said to be one of the most powerful in the world. Its holders enjoy visa-free access or visa-on-arrival access to almost 200 countries. For an American who lives overseas, the US passport is even more important as it may be the only valid proof of identification in the host country. Furthermore, a US passport may be the only acceptable ID document when entering into any legal transactions, such as signing a lease agreement or an employment contract or opening a bank account. However, what if this powerful passport were rendered useless, revoked or refused renewal due to tax compliance issues? On Dec. 4, 2015, former President Barack Obama signed into law the Fixing America’s Surface Transportation (FAST) Act. The Act provides funds for Federal highways, highway safety and transit programs, and related needs. To help cover the costs involved, it added a new Internal Revenue Code (IRC) section (Section 7345) that allows the Internal Revenue Service (IRS) to work with the State Department to revoke, deny, or limit the passport of any taxpayer with a “seriously delinquent tax debt.” This procedure has raised an estimated $1 billion so far — considerably more than the anticipated $400 million. Given this level of success, we can expect the IRS to continue using passport suspensions, denials, and non-renewals to motivate taxpayers to settle tax compliance issues. WHO ARE THE FAST ACT’S TARGETS? The operative phrase here is “seriously delinquent tax debt.” Under the Act and the IRS’s implementing guidelines, this refers to an individual’s unpaid, legally enforceable Federal tax liability of at least $52,000, including interest and penalties, as formally assessed by the IRS. Also, IRS must have already filed a notice of lien, issued a levy on the taxpayer’s assets, or the taxpayer must have either exhausted administrative appeal rights or allowed them to lapse. So, when is a tax debt not considered seriously delinquent? The FAST Act clarifies that debts that are being paid in a timely manner in accordance with an IRS-approved offer in compromise or installment agreement are not considered seriously delinquent. Tax cases for which a due process hearing has been filed or is pending or that are subject to a claim that can result in a zero balance are also not included. IRS rules also have certain compassionate provisions that exempt taxpayers who have filed for innocent spouse relief or for personnel who are currently serving in a combat zone. IRS rules also allow for discretionary exemption (which means IRS may or may not allow an exemption) in cases involving financial hardship or identity theft, for taxpayers in federally-designated disaster zones, bankrupt individuals, or for deceased taxpayers. WHAT HAPPENS IF A TAXPAYER’S PASSPORT IS AT RISK? If the taxpayer’s debt is seriously delinquent and none of the exceptions or discretionary exclusions apply, the IRS will send a certification that the taxpayer’s passport is subject to suspension or non-renewal to the Treasury Secretary who then forwards that certification to the Secretary of State. Concurrently, the IRS will notify the taxpayer of this action at his or her last known address. To contest a certification, a taxpayer may file suit in a US district court or the US Tax court. Given the expense and time involved in litigation, a recent IRS Notice may provide a more attractive option for taxpayers who act fast. If the State Department receives a passport application from a certified delinquent taxpayer, it will now inform the taxpayer and hold the application for 90 calendar days instead of immediately rejecting it. This provides time for the taxpayer to contact the IRS and request a decertification by convincing the IRS that the certification is in error, by settling the tax liabilities in full, or by entering into an offer in compromise or installment payment agreement with the IRS. Affected taxpayers should bear in mind that the $52,000 threshold for 2019 is not difficult to breach. Under the general statute of limitations for federal taxes, the IRS usually has just three years from the due date of a return or, if later, from the actual filing date to assess additional taxes. However, this limit becomes six years in cases where there is a substantial understatement of income (i.e., omission of over 25% of gross income). The statute is unlimited in cases where the understatement is fraudulent or where the taxpayer has failed to file. The statute of limitations is also unlimited if the taxpayer fails to include certain forms related to foreign assets when required. Since the time frame to calculate liabilities can run from three to an unlimited number of years, the tax plus interest and penalties can easily add up to $52,000 or more. ACT FAST TO PROTECT YOUR US PASSPORT Anyone who receives a notice from the IRS or State Department of a seriously delinquent tax debt or who is certified for passport denial or limitation must act quickly. Affected US passport holders who have been identified as delinquent taxpayers should immediately consult a tax advisor and resolve any tax compliance issues before the FAST Act takes away their passport. It should be noted that an application to renew an expiring US passport can be submitted up to nine months before its expiration date. Passport holders who have any inkling of a pending tax problem should file their renewal as early as possible to give themselves and their advisor time to work out a solution. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Any tax advice contained herein may be insufficient for US penalty protection. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Jocelyn M. Magaway is a tax senior director and IRS enrolled agent of SGV & Co.

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02 December 2019 Narciso T. Torres, Jr.

Cars, not horses: Creating a sustainable growth advantage

Realizing growth is a challenge for all entrepreneurs who dream of creating and scaling their startups into tomorrow’s multinational corporations. However, early successes in the fast-paced initial phase of development do not necessarily guarantee an enduring competitive advantage and business sustainability. What then sets apart market-leading entrepreneurs from those who failed? In Daring to Compete, a new EY book exploring studies based on interactions with winning entrepreneurs of the EY Entrepreneur of the Year program, it was established that despite their differences in size and industry, leading entrepreneurs share a disciplined framework for growth. Such a framework helps companies align their capabilities with their growth strategies and find gaps by focusing on the seven drivers of growth: customer, people, behavior and culture, technology, operations, transactions and alliances, finance and funding, and risk. This framework, which the book identified as the EY 7 Drivers of Growth, discovers what all businesses will need to manage and evolve as they progress through their various stages of development. PRIORITIZING CUSTOMER-FOCUSED DIGITAL TRANSFORMATION Most companies service their customers directly in the early stages of business, equipping them with the ability to build direct relationships. However, competing operational priorities can easily cause a business to lose focus on its customers. Successful entrepreneurs know that to become market leaders, they must not only meet their customers’ expectations – they must exceed them. It should be noted, however, that this does not always mean giving the customer what they want, such as the case with Henry Ford. The father of the automobile industry famously said that if he’d asked what his customers wanted, they would have asked for faster horses. By finding an alternative perspective of the customer’s needs and wants, a company can disrupt the market, and create a truly sustainable advantage. Moreover, by challenging traditional business models and continuously raising the bar, today’s companies are bound to seek digital innovation. Evolving businesses do not initiate digital transformation out of a simple interest in technology; they do so to focus on customer agility and business change. Digital technologies such as data analytics allow them to make faster, smarter decisions to improve business performance, manage risk, and enhance operations. While this potential value is recognized, businesses still find it difficult to successfully utilize information technology to deliver business change. This means business leaders need to ask themselves the question of how to adapt their business model to create new opportunities, roles, and skills in light of new technologies, and effectively integrate these new technologies into the relevant aspects of their business. BALANCING SPEED AND SUSTAINABILITY A modernized workforce is key to leveraging new technologies, but companies, particularly those in their nascent stages, face their own challenges in attracting and retaining skilled individuals. For this reason, market-leading entrepreneurs prioritize attitude over skills when recruiting talent and make it a point to invest in training their workforce to meet the evolving demands of their business. As businesses scale from start-ups into multinational corporations, they also face the need to adapt their performance and reward structures to recognize behaviors that contribute to their long-term growth. Investing in both people and technology requires the right amount of funding at the right time. Leading entrepreneurs time their capital needs by planning their cash flow, setting key milestones, and sourcing for appropriate types of financing. Both human and financial capital can only grow at a certain rate, requiring a consistency that produces the highest likelihood of sustainable progress by strategically planning ahead instead of being opportunistic when it comes to growth. This poses the question to entrepreneurs of how to balance sustainability and speed in their businesses. EMBRACING CALCULATED RISKS New technologies and business processes lead to new risks. But while stereotypical entrepreneurship introduces the idea of risking everything, it is neither a useful nor healthy mindset in terms of effective risk management. It is true that market-leading entrepreneurs embrace the positive forces of risk, but they also employ a discipline that leads to taking only calculated risks. This involves weighing any potential disadvantages and assessing their ability to absorb the potentially negative impact of their decisions. Leadership plays the role of gatekeeping risks in the early stages of a company’s growth, but as the business grows, company leaders will need to formalize or refresh procedures and internal controls. Business risk increases and diversifies with growth and can come from both inorganic and organic expansions. Entrepreneurs can mitigate the risks from accessing product segments and new markets through strategic acquisitions, alliances, and partnerships. Evaluating these risks and performing thorough assessments are key components of the structuring and deal negotiation process. Circumstances may evolve at any point through this development, resulting in adjustments in price, revisions of terms and conditions, or the decision to simply let it go and walk away. Even as the customer remains the focus of growth strategies, entrepreneurs must effectively pace the growth of their business by balancing their investments and attention across the seven growth drivers. This not only provides an increased potential for sustainable growth, but an enduring advantage in the competitive businesses landscape. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Narciso T. Torres, Jr. is a Partner and a Market Group Leader of SGV & Co.

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